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Filed Pursuant to Rule 424(b)(1)
Registration Number 33-81084
PROSPECTUS
PageMart, Inc.
12 1/4% Senior Discount Exchange Notes
Due 2003
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There will not be any payment of interest on the Notes prior to May 1, 1999.
From and after November 1, 1998, the Notes will bear interest, which will be
payable in cash, at a rate of 12 1/4% per annum on each May 1 and November 1,
commencing May 1, 1999. At any time prior to November 1, 1996, up to 35% of the
accreted value of the Notes may be redeemed at the option of the Company in
connection with a public offering of its common stock at a redemption price of
111% of their accreted value. In addition, at any time on or after November 1,
1998, the Notes may be redeemed at the option of the Company, in whole or in
part, at 100% of their principal amount at maturity plus accrued interest. See
"Description of the Notes."
The Notes are unsecured senior indebtedness of the Company, ranking pari passu
with the Company's unsubordinated indebtedness and senior in right of payment to
all of its existing and future subordinated indebtedness. At March 31, 1997, the
Company had $111.4 million of unsubordinated indebtedness, none of which
(representing all of such indebtedness other than the Notes) is secured by liens
on leased equipment and pledged certificates of deposit. At March 31, 1997, the
Company had no subordinated indebtedness. Holders of such secured indebtedness
will be entitled to payment out of the proceeds of their collateral prior to any
holders of general unsecured indebtedness, including the Notes and will rank
pari passu with the Notes with respect to any claims not so satisfied. The Notes
are effectively subordinated to such secured indebtedness to the extent of such
collateral. The Company currently has no arrangements to issue indebtedness
subordinate to the Notes.
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SEE "RISK FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE OFFERING AND AN INVESTMENT IN THE
NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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This Prospectus is to be used by Morgan Stanley & Co. Incorporated
("MS&Co."), in connection with offers and sales of the Notes in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale. MS&Co. may act as principal or as agent in such transactions. The
Company will receive no portion of the proceeds of the sales of such Notes and
will bear the expenses incident to the registration thereof. If MS&Co. conducts
any market-making activities, it may be required to deliver a "market-making
prospectus" when effecting offers and sales in the Notes because of the equity
ownership of The Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II"),
Morgan Stanley Capital Partners, III, L.P. ("MSCP III"), Morgan Stanley Venture
Capital Fund, L.P. ("MSVCF") and certain other investment partnerships, all of
which are affiliates of MS&Co. These investment partnerships own in the
aggregate approximately 49% of the outstanding voting common stock of the parent
company of Pagemart, Inc., Pagemart Wireless, Inc. ("Wireless"). For as long as
a market-making prospectus is required to be delivered, the ability of MS&Co. to
make a market in the Notes may, in part, be dependent on the ability of the
Company to maintain a current market-making prospectus.
July 22, 1997
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information....................................... 2
Incorporation of Certain Documents.......................... 2
The Company................................................. 4
Risk Factors................................................ 4
Selected Historical Financial and Operating Data............ 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Description of the Notes.................................... 23
ERISA Considerations........................................ 44
Plan of Distribution........................................ 45
Legal Matters............................................... 46
Experts..................................................... 46
</TABLE>
AVAILABLE INFORMATION
PageMart has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (together with any amendments
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the securities offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all the information contained in the Registration Statement and the
exhibits and the schedule thereto, certain items of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. For further information with respect to PageMart and the
securities offered hereby, reference is made to the Registration Statement and
the exhibits and the financial statements, notes and the schedules filed as a
part thereof, which may be inspected at the public reference facilities of the
Commission, at the addresses set forth below.
PageMart is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Commission. The
indenture under which the 12 1/4% Senior Discount Exchange Notes due 2003 (the
"Notes") are issued (the "Indenture") requires PageMart to provide to holders of
the Notes annual reports that include audited annual consolidated financial
statements and an opinion thereon expressed by independent public accountants
and quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year. The Registration Statement, as well as
such reports and other information filed with the Commission can be examined
without charge at, or copies obtained upon payment of prescribed fees from, the
Commission's Public Reference Section at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, 13th Floor, New York, New York 10048. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS
The following documents or portions of documents filed by the Company (File
No. 0-81084) with the Commission are incorporated herein by reference: (a)
Annual Report on Form 10-K for the fiscal year ended December 31, 1996; and (b)
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, including
any amendments or reports filed for the purpose of updating such description.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act since December 31, 1996, prior to
the termination of the offering of the securities offered hereby, shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing
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of such reports and documents. Any statement contained in a document
incorporated by reference herein shall be deemed modified or superseded for
purposes of this Prospectus to the extent that a statement contained or
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered a copy of any or all of such documents which are
incorporated herein by reference (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into the documents that
this Prospectus incorporates). Written or oral requests for copies should be
directed to Kelly Prentiss, PageMart, Inc., at the Company's executive offices
located at 6688 North Central Expressway, Suite 800, Dallas, TX 75206, (214)
750-5809.
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As used in this Prospectus, unless the context otherwise requires, (i) the
term "Company" or "PageMart" refers to the operating company PageMart, Inc., and
(ii) the term "Wireless" refers to the holding company parent PageMart Wireless,
Inc. All of PageMart's common stock is owned by Wireless. Wireless has four
classes of common stock outstanding. As used herein, "Common Stock" collectively
refers to Wireless' Class A Convertible Common Stock (the "Class A Common
Stock"), Class B Convertible Non-Voting Common Stock (the "Class B Common
Stock"), Class C Convertible Non-Voting Common Stock (the "Class C Common
Stock") and Class D Convertible Non-Voting Common Stock (the "Class D Common
Stock"), each class having a par value of $.0001 per share. Certain of the
information contained in this summary and elsewhere in this Prospectus,
including information with respect to the Company's plans and strategy for its
two-way messaging business and related financing, are forward-looking
statements. For a discussion of important factors that could cause actual
results to differ materially from the forward-looking statements, see "Risk
Factors" below.
THE COMPANY
The Company is one of the fastest growing providers of wireless messaging
services in the United States. The Company has grown to become the sixth largest
paging carrier in the United States, based on 2,013,142 subscribers at March 31,
1997. The Company's number of subscribers has increased at annual growth rates
of 136%, 60% and 50% in 1994, 1995 and 1996, respectively. The Company has made
no acquisitions, and all subscriber growth has been internally generated. The
Company has invested heavily in order to achieve rapid growth in its subscriber
base and, as a result, the Company has sustained net losses of $45.8 million,
$38.5 million, $30.0 million and $7.5 million for 1994, 1995, 1996 and the three
months ended March 31, 1997.
The Company offers local, multi-city, regional and nationwide paging and
other one-way wireless services in all 50 states, covering 90% of the population
of the United States. The Company also provides services in Puerto Rico, the
U.S. Virgin Islands, the Bahamas and Canada. On February 25, 1997, the Company
announced an expansion of services into Mexico and most of Central America
through its affiliation with Buscatel, a subsidiary of Telefonos de Mexico,
Mexico's largest telecommunications company, as well as other firms in Central
America. The Company employs a digital, state of the art transmission network
that is 100% FLEX(R) enabled, allowing the use of high speed messaging
technology, thereby providing increased transmission capacity.
RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider, along with the other matters referred to in this Prospectus,
the specific factors set forth below.
HISTORY OF OPERATING LOSSES
The Company has sustained losses from operating activities in each year of
operations since its organization in 1989, including an operating loss of $2.4
million for the three months ended March 31, 1997 and an aggregate of $68.2
million of operating losses for the three-year period ended December 31, 1996.
The Company expects to continue to incur operating losses for the next several
years. In addition, management anticipates that the Company's average monthly
revenue per unit ("ARPU") will decline in the foreseeable future principally due
to a higher mix of subscribers added through private brand strategic alliance
programs and third-party resellers, both of which yield lower ARPU. Although the
Company had positive earnings before interest, taxes, depreciation and
amortization ("EBITDA") of $9.7 million for the year ended December 31, 1996,
prior to 1996 the Company had negative EBITDA in each year of its operations.
EBITDA is not derived pursuant to generally accepted accounting principles
("GAAP") and therefore should not be construed as an alternative to operating
income, as an alternative to cash flows from operating activities (as determined
in accordance with GAAP) or as a measure of liquidity. The calculation of EBITDA
resulted principally from expenditures associated with the establishment of the
Company's one-way operations infrastructure and the growth of its subscriber
base. Although the Company expects that its one-way
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operations will continue to generate positive EBITDA, as the Company begins
development and implementation of two-way messaging services, the Company will
incur substantial additional operating losses and negative EBITDA during the
start-up phase for two-way services. Any positive cash flow from the Company's
one-way operations will be used primarily to fund the Company's two-way
operations for the next several years. There can be no assurance that the
Company's consolidated operations will become profitable or continue to have
positive EBITDA or that its one-way operations will continue to generate
positive EBITDA. If the Company cannot achieve operating profitability or
continue to generate positive EBITDA, it may not be able to make required debt
service payments, and the Common Stock may have little or no value. See
"Selected Historical Financial and Operating Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
HIGH LEVERAGE; DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES; RESTRICTIVE
COVENANTS
The Company is highly leveraged, primarily as a result of debt financing
incurred to fund the construction of the Company's nationwide operations
infrastructure, the growth of its subscriber base and to finance the acquisition
of certain of the Narrowband Personal Communications Service Licenses ("NPCS
Licenses"). At March 31, 1997, the Company's long-term debt was $111.4 million
and its stockholders' deficit was $64.6 million. In addition, the accretion of
original issue discount on the Company's outstanding indebtedness under the
Notes will cause an increase in indebtedness of $25.1 million by 1998. The
Company's deficiency of earnings before fixed charges to cover fixed charges for
the three months ended March 31, 1997 was $7.5 million and for each of the three
years ended December 31, 1994, 1995 and 1996, was $45.8 million, $38.5 million
and $30.0 million, respectively. See "Selected Historical Financial and
Operating Data."
The Indenture contains certain restrictive covenants. Such restrictions
affect, and in many respects significantly limit or prohibit, among other
things, the ability of the Company to incur additional indebtedness, make
prepayments of certain indebtedness, pay dividends, make investments, engage in
transactions with stockholders and affiliates, issue capital stock of restricted
subsidiaries, create liens, sell assets and engage in mergers and
consolidations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and "Description
of the Notes -- Covenants."
NO ASSURANCE THAT GROWTH STRATEGY WILL BE ACHIEVED
The successful implementation of the Company's one-way messaging services
strategy to increase cash flow through the expansion of its subscriber base is
necessary for the Company to meet its capital expenditures, working capital and
debt service requirements. The Company expects to continue to incur operating
losses for the next several years. The Company's strategy assumes that the
paging and one-way wireless messaging industry will continue to grow rapidly,
and that the Company will continue to grow substantially faster than the
industry. The Company does not expect to continue to grow at its historical
rate, and there can be no assurance that the Company will be able to achieve the
growth contemplated by its business strategy. If such growth is not achieved,
the Company may not be able to make required payments on its outstanding
indebtedness and may have to refinance its outstanding indebtedness in order to
repay such obligations. No assurance can be given that the Company will be able
to refinance its outstanding indebtedness. In addition, as the Company begins
development and implementation of two-way services, the Company expects to make
substantial additional capital expenditures and sustain significant operating
losses, which will require additional debt or equity financing from sources
which may include joint venture arrangements. There can be no assurance that
such financing will be available to the Company on reasonable terms, or at all.
The Company will incur significant expenses and make substantial investments
associated with its two-way services prior to the time any significant revenues
from such services are generated. See "-- Risks of Implementation and Financing
of Two-Way Services" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
ASSETS PLEDGED TO SECURE OTHER DEBT
The Indenture does not limit the amount of indebtedness of PageMart owed to
vendors that is related to financing purchases of inventory or equipment nor the
extent of liens that may be granted to such vendors to secure such indebtedness.
In the event of a default on the Notes, or a bankruptcy, liquidation or
reorganization
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of the Company, such assets will be available to satisfy obligations of the
secured debt before any payment could be made on the Notes. Accordingly, there
may only be a limited amount of assets available to satisfy any claims of the
holders of the Notes upon an acceleration of the Notes. In addition, to the
extent that the value of such collateral is insufficient to satisfy such secured
indebtedness, amounts remaining outstanding on such secured indebtedness would
be entitled to share pari passu with the Notes with respect to any other assets
of the Company.
COMPETITIVE MARKET
The Company faces significant competition in all of its markets. Many of
the Company's competitors, which include regional and national paging companies
and certain regional telephone companies, possess significantly greater
financial, technical and other resources than the Company. If any of such
companies were to devote additional resources to the paging or other wireless
messaging businesses or focus its strategy on the Company's marketing and
product niches, the Company's results of operations could be adversely affected.
Some of these larger competitors may also be able to use their substantial
financial resources to increase the already substantial pricing competition in
the markets in which the Company operates, which may have an adverse effect on
the Company's results of operations. For competitive and marketing reasons, the
Company generally sells each new unit for less than its acquisition cost. In
addition, a number of paging carriers have constructed or are in the process of
constructing nationwide paging networks that offer services similar to the
Company's services, including the provision of two-way messaging.
Industry reports indicate, and the Company believes, that the retail
distribution of pagers has become increasingly common in the paging industry.
Retail distribution is a key element of the Company's business strategy. Retail
distributors have typically selected only one paging carrier for their stores,
and the Company faces competition in its efforts to place units through retail
distributors. If the Company is unable to maintain its current sales
relationships with retail distributors or obtain new sales relationships with
other retail distributors, it may not be able to achieve the growth contemplated
by its business strategy. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General."
ADVERSE EFFECT OF SUBSCRIBER DISCONNECTIONS
The results of operations of paging service providers such as the Company
are significantly affected by subscriber disconnections. In order to realize net
growth in units in service, disconnected users must be replaced, and additional
users must be added. However, the sales and marketing costs associated with
attracting new subscribers are substantial relative to the costs of providing
service to existing customers, and expenses associated with each new unit
placement exceed the sales price and service initiation fee received by the
Company. Because the paging business is characterized by high fixed costs,
disconnections directly and adversely affect operating income. In addition,
because the Company plans to sell an increasing number of its units through
retail distribution channels, the Company's overall rate of disconnections may
increase since the Company expects that subscribers who purchase pagers through
retail outlets will tend to cancel their subscriptions at a higher rate than
subscribers obtained through other distribution channels. The Company's average
monthly disconnection rates for the twelve months ended December 31, 1995,
December 31, 1996 and the three months ended March 31, 1997 were 2.5%, 2.4% and
2.3% per month, respectively. An increase in its rate of disconnections would
adversely affect the Company's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- General."
RISKS OF IMPLEMENTATION AND FINANCING OF TWO-WAY SERVICES
In the Federal Communications Commission ("FCC") NPCS auctions, the Company
and Wireless acquired a total of 100 kHz of forward frequency and 50 kHz of
return frequency nationwide. Specifically, the Company acquired a 50 kHz
unpaired nationwide NPCS license (the "Nationwide Narrowband License") and
Wireless acquired five 50/50 kHz paired regional NPCS licenses (the "Regional
Narrowband Licenses" or collectively, with the Nationwide Narrowband License,
the NPCS Licenses). These acquired licenses could be utilized to offer two-way
messaging services or, if two-way messaging services are not fully implemented,
to expand the Company's existing one-way transmission capacity.
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The development and implementation of two-way services will require the
application of new technology and the construction of a transmission network, in
addition to the network used in the Company's existing one-way messaging
business. In addition, the Company would need to enter into an agreement or
other arrangement with Wireless to include the frequencies covered by the
Regional Narrowband Licenses within the Company's PCS networks, subject to the
ultimate control of PageMart PCS, a wholly-owned subsidiary of Wireless, as the
FCC licensee. Other business matters may affect the financial or other terms of
any such agreement, and no assurances can be provided regarding the terms of
such an agreement or whether the Company would be able to obtain such an
agreement. Existing two-way wireless data services have had only limited market
acceptance. There can be no assurance that two-way services will be commercially
viable, and the success of two-way services could be affected by matters beyond
the Company's control such as the future cost of infrastructure and subscriber
equipment, technological changes in wireless messaging services, marketing and
pricing strategies of competitors, regulatory developments and general economic
conditions.
As the Company begins development and implementation of NPCS services, the
Company expects to incur significant additional operating losses during the
start-up phase for such services, and it will be necessary for the Company to
make substantial investments. The Company anticipates requiring additional
sources of capital to fund the construction of a two-way messaging network,
including expenditures relating to the buildout requirements of the FCC. The
Company anticipates investing $75 to $100 million to test and construct a
two-way transmission network. Thereafter, the Company anticipates that its
two-way operations may require up to $100 million of additional investment to
fund operations, marketing and to add capacity to the network as the Company's
two-way customer base grows. The Company expects to require additional financing
to complete the buildout, which may include entering joint venture arrangements,
however there can be no assurance that sufficient financing will be available to
the Company. The Company's ability to incur indebtedness is limited by the
covenants contained in the Indenture, and as a result, any additional financing
may need to be in the form of equity capital by Wireless. The Company does not
anticipate any significant revenues from two-way services during 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be dependent, to a significant extent, upon
the continued services of the key executive officers of the Company. The Company
does not have employment agreements with any of its current executive officers,
although all current executive officers have entered into non-competition
agreements with the Company. The loss or unavailability of one or more of its
executive officers or the inability to attract or retain key employees in the
future could have an adverse effect upon the Company's operations.
TECHNOLOGICAL CHANGES
The telecommunications industry is characterized by rapid technological
change. Future technology advances in the industry may result in the
availability of new services or products that could compete directly with the
paging and other wireless messaging services that are currently provided or are
being developed by the Company. Changes in technology could also lower the cost
of competitive products and services to a level where the Company's products and
services become less competitive or the Company is required to reduce the prices
of its services. The Company expects to respond to technological changes by
continuing to make investments in new and improved systems and related service
capability.
Several wireless two-way communication technologies, including cellular
telephone service, broadband personal communications services, specialized
mobile radio, low-speed data networks and mobile satellite services, are
currently in use or under development. Although these technologies are currently
more expensive than paging services or are not yet broadly available, future
implementation and technological improvements could result in increased capacity
and efficiency for wireless two-way communication and, accordingly, could result
in increased competition for the Company. Some of these service providers are
bundling paging services
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with two-way voice service in a combined handset. Large manufacturers dominate
technological development in the wireless communications industry, and changes
in their methods of distributing one-way wireless messaging products could
reduce the Company's access to technology and may have an adverse effect on the
Company's operations. There can be no assurance that the Company will not be
adversely affected by such technological change. See "-- Dependence on Key
Suppliers."
DEPENDENCE ON KEY SUPPLIERS
The Company does not manufacture any of the pagers used in its paging
operations. The Company buys pagers primarily from Motorola, Inc. ("Motorola")
as well as some other manufacturers and therefore is dependent on such
manufacturers to obtain sufficient pager inventory for new subscriber and
replacement needs. In addition, the Company has acquired terminals and
transmitters primarily through vendor financing agreements with Motorola and
Glenayre Technologies, Inc. ("Glenayre") and thus is dependent on such
manufacturers for sufficient terminals and transmitters to meet its expansion
and replacement requirements. There can be no assurance that the Company will
not experience significant delays in obtaining pagers, terminals or transmitters
in the future. The Company has never had a pager supply agreement with Motorola
or any other pager manufacturer and there can be no assurance that either
Motorola or Glenayre will enter into any new vendor financing agreements with
the Company or that the terms and conditions of any new agreement will be as
favorable to the Company as under past agreements. Although the Company believes
that sufficient alternative sources of pagers, terminals and transmitters exist,
there can be no assurance that the Company would not be adversely affected if it
were unable to obtain these items from current supply sources or on terms
comparable to existing terms.
POTENTIAL FOR CHANGE IN REGULATORY ENVIRONMENT
The Company and the wireless communications industry are subject to
regulation by the FCC and various state regulatory agencies. Under prior law and
regulations, in situations involving mutually exclusive applications, FCC
licenses were issued through a system of lotteries and comparative hearings. The
Omnibus Budget Reconciliation Act of 1993 (the "Budget Act") amended the
Communications Act of 1934, as amended (the "Communications Act"), to authorize
the FCC to utilize a system of competitive auctions to issue licenses for the
use of frequencies for which there are mutually exclusive applications, where
the principal use of the license will be to offer service in return for
compensation from subscribers. Implementation of the auction procedures has made
expansion of the Company's operations more costly.
The Budget Act also amended the Communications Act by eliminating many of
the regulatory distinctions governing mobile service providers. The FCC
implemented the new law by creating a new regulatory category called "commercial
mobile radio services" ("CMRS"), which includes most paging providers previously
operating as either radio common carriers ("RCCs") or private carrier paging
operators ("PCPs"), including the Company. The FCC adopted new rules to govern
regulation of this new category, which became effective in August 1996. As a
result of the new rules, PCP licensees such as the Company have additional
obligations. For example, these licensees must provide connection upon
reasonable request, must not engage in any unreasonably discriminatory practices
and will be subject to complaints regarding any unlawful practices. PCP
licensees will also be subject to provisions that authorize the FCC to provide
remedial relief to an aggrieved party upon finding of a violation of the
Communications Act and related consumer protection provisions.
From time to time, legislation and regulations which could potentially
adversely affect the Company are proposed by federal and state legislators and
regulators. Legislation is currently in effect in Texas requiring paging
companies to contribute a portion of their taxable revenues to a
Telecommunications Infrastructure Fund created by the state legislature.
Management does not believe that the Texas law will have a material adverse
affect on the Company's operations. The FCC recently released regulations
implementing the universal service fund provisions of the Communications Act.
Beginning January 1, 1998, paging companies will be required to contribute to
this fund on the basis of interstate and intrastate telecommunications revenues
from end-users; additional obligations, based on interstate revenues, will
commence on January 1, 1999. The size of the fund and the percentage assessments
that will be levied on telecommunications carriers are being
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determined in an ongoing FCC proceeding. Petitions for review of the FCC's
universal service order have been filed with federal appellate courts. In
addition, FCC regulations requiring long-distance carriers to compensate pay
telephone providers for 800 number and access code calls are currently being
reviewed by the U.S. Court of Appeals for the District of Columbia Circuit; the
Company is among those that have petitioned for review by the court. If the
court allows these FCC regulations to stand, it is likely that long-distance
companies will pass along a portion of their costs for these calls to paging
company subscribers. Management does not believe that either of these FCC
actions, if and when they take effect, will have an adverse effect on the
Company's operations. In connection with an ongoing dispute with various local
exchange carriers ("LECs") over the interpretation of FCC regulations governing
compensation for interconnection, the Company has made certain payments to the
LECs under protest or withheld payment entirely pending resolution by the FCC.
One LEC has asked the FCC to "clarify" the disputed regulations, and the Company
has filed comments in support of its position that no compensation is due to the
LECs for such interconnection. The Company has maintained reserves for payments
that the LECs claim are due, but that the Company is presently withholding.
However, there can be no assurance that Federal or other state legislation will
not be adopted, or that the FCC or the various state agencies will not adopt
regulations or take other actions, that would adversely affect the business of
the Company.
RESTRICTIONS ON FOREIGN OWNERSHIP
Under existing law, except in extraordinary circumstances, no more than 25%
of Wireless' or the Company's capital stock may be owned, directly or
indirectly, or voted by non-U.S. citizens or their representatives, a foreign
government or its representatives, or a foreign corporation. If the foreign
ownership of Wireless or the Company were to exceed 25%, the FCC could revoke
the FCC licenses of Wireless or the Company if the FCC found the public interest
would be served by such revocation, although Wireless or the Company could seek
approval from the FCC for the additional foreign ownership or take other actions
to reduce Wireless' or the Company's percentage of foreign ownership in order to
avoid the loss of its licenses. Wireless' and the Company's certificates of
incorporation authorize the Board of Directors to cause Wireless or the Company
to redeem its equity securities owned by foreigners at their then current market
value (determined as set forth in the certificate of incorporation) in order to
ensure compliance with the rules, regulations and policies of the FCC. Based on
currently available information, Wireless estimates that its foreign ownership
is approximately 22%. However, this percentage is subject to change at any time
upon any transfer of direct or indirect ownership of Wireless' Common Stock.
These restrictions on foreign ownership could also adversely affect the ability
of Wireless or the Company to attract additional equity financing from entities
that are, or are owned by, non-U.S. persons.
RISKS OF INTERNATIONAL OPERATIONS
The Company intends to continue to expand internationally. Recently, the
Company was successful in obtaining licenses for frequencies with its foreign
partners in Canada and the Bahamas. The Company has also signed network
affiliation agreements with leading paging providers in Mexico, El Salvador,
Guatemala, Honduras, Costa Rica, and Panama. The Company may seek joint venture
partners in certain countries, in particular where domestic regulations prohibit
foreign control of telecommunications companies. The Company will need to obtain
licenses for frequencies in any foreign country in which it seeks to expand and,
if the licenses are obtained, to construct or acquire a transmission network and
thereafter to begin sales and marketing efforts. However, there can be no
assurance that the Company will be able to obtain licenses in foreign countries,
that it will be successful in finding joint venture partners or that its foreign
operations, if established, will be profitable. Acquiring licenses, constructing
or acquiring a transmission network and commencing operations could require the
Company to provide funding for such operations and could require the Company to
seek additional debt or equity capital. In countries where the Company is or may
become a minority holder in a joint venture controlled by another party, such as
the Company's existing joint venture in Canada, the success of such joint
venture's operations will depend substantially on the efforts of the Company's
venture partner and may be impeded if disputes arise between the parties.
International operations are subject to various risks not present in domestic
operations such as fluctuations in currency exchange ratios, nationalization or
expropriation of assets, import/export controls, political instability,
variations in the
9
<PAGE> 10
protection of intellectual property rights, limitations on foreign investment,
restrictions on the ability to convert currency and the additional expenses and
risks inherent in conducting operations in geographically distant locations,
with customers speaking different languages and having different cultural
approaches to the conduct of business. To mitigate the effects of foreign
currency fluctuations on the results of its foreign operations, the Company
anticipates utilizing forward exchange contracts and engaging in other efforts
to hedge foreign currency transactions. However, there can be no assurance as to
the effectiveness of such mitigation efforts in limiting any adverse effects of
foreign currency fluctuations on the Company's foreign operations and on the
Company's overall results of operations.
SIGNIFICANT OWNERSHIP
The MSLEF II, MSCP III, Morgan Stanley Capital Investors, L.P., MSVCF,
Morgan Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Capital
Fund II, C.V., MSCP 892 Investors, L.P. and Morgan Stanley Venture Investors,
L.P. (collectively, the "Morgan Stanley Shareholders") currently own
approximately 51.0% of the outstanding Common Stock and 48.7% of the outstanding
voting Common Stock of Wireless. The general partner and/or the managing general
partner of each of the general partner of the Morgan Stanley Shareholders is a
wholly-owned subsidiary of Morgan Stanley, Dean Witter, Discover & Co.
("MSDWD"). Three of the eight directors of Wireless and the Company are
employees of a wholly-owned subsidiary of MSDWD. As a result of its ownership
interest in Wireless and certain rights pursuant to the Amended and Restated
Agreement among certain Stockholders dated as of May 10, 1996, among the Morgan
Stanley Shareholders, Wireless and certain other stockholders, the Morgan
Stanley Shareholders have a significant influence over the affairs of Wireless
and the Company.
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between Wireless or the owners of
Wireless' existing capital stock, on the one hand, and the holders of the Notes
on the other. For example, if the Company encounters financial difficulties, or
is unable to pay its debts as they mature, the interests of Wireless and of
Wireless' existing equity investors might conflict with those of the holders of
the Notes. In addition, the existing equity investors may have an interest in
pursuing acquisitions, divestitures, financings or other transactions that, in
their judgment, could enhance their equity investment, even though such
transactions might involve risk to the holders of the Notes.
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
A holder of a Note will be required to include in such holder's income, for
Federal income tax purposes, the original issue discount with respect to the
Note as it accrues, although no cash payments of interest on the Notes are
expected to be made until May 1, 1999. Nevertheless, the Company's deductions
with respect to part of such original issue discount will be deferred until the
related payments are made by the Company and the remainder of such original
issue discount will not be deductible. If a bankruptcy case is commenced by or
against the Company under the United States Bankruptcy Code after the issuance
of the Notes, the claim of a holder of Notes may be limited to an amount equal
to the sum of the issue price as determined by the bankruptcy court and that
portion of the original issue discount which is deemed to accrue from the issue
date to the date of any such bankruptcy filing.
LACK OF PUBLIC MARKET FOR THE NOTES
The Company does not intend to list the Notes on any securities exchange.
MS&Co. has indicated to the Company that it intends to make a market in the
Notes, but it is under no obligation to do so and such market-making could be
discontinued at any time. No assurance can be given that an active trading
market for the Notes will develop. If MS&Co. conducts any market-making
activities, it may be required to deliver a "market-making prospectus" when
effecting offers and sales in the Notes because of the beneficial ownership of
the capital stock of Wireless by affiliates of MS&Co. For so long as a
market-making prospectus is required to be delivered, the ability of MS&Co. to
make a market in the Notes may, in part, be dependent on the ability of the
Company to maintain a current market-making prospectus.
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<PAGE> 11
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth summary historical financial information and
operating data for each of the five fiscal years ended December 31, 1996 and for
the three months ended March 31, 1996 and 1997. The financial information and
operating data for each of the five fiscal years ended December 31, 1996 were
derived from, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements of the Company and the notes thereto incorporated herein by
reference. The financial information and operating data for the three months
ended March 31, 1996 and 1997 were derived from the unaudited consolidated
financial statements of the Company and, in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such data. Interim results are not necessarily indicative
of results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT UNIT, ARPU, PER SUBSCRIBER AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Recurring revenues................... $ 6,668 $ 24,184 $ 56,648 $ 101,503 $ 153,041 $ 33,743 $ 46,475
Equipment sales and activation
fees............................... 9,837 26,483 53,185 57,688 68,551 14,802 15,248
-------- -------- -------- ---------- ---------- ---------- ----------
Total revenues....................... 16,505 50,667 109,833 159,191 221,592 48,545 61,723
Cost of equipment sold............... 10,044 28,230 57,835 63,982 78,896 17,082 18,119
Operating expenses................... 25,584 47,448 85,322 118,181 154,608 34,704 46,002
-------- -------- -------- ---------- ---------- ---------- ----------
Operating loss....................... (19,123) (25,011) (33,324) (22,972) (11,912) (3,241) (2,398)
Interest expense..................... (2,456) (6,538) (12,933) (15,199) (16,137) (4,043) (4,430)
Interest income...................... 529 428 858 731 153 92 29
Other................................ -- -- (414) (1,042) (2,128) (195) (737)
-------- -------- -------- ---------- ---------- ---------- ----------
Net loss............................. $(21,050) $(31,121) $(45,813) $ (38,482) $ (30,024) $ (7,387) $ (7,536)
======== ======== ======== ========== ========== ========== ==========
BALANCE SHEET DATA (AT PERIOD END):
Current assets....................... $ 13,365 $ 51,279 $ 44,397 $ 34,357 $ 3,211 $ 24,361 $ 11,427
Total assets......................... 30,772 78,773 142,059 133,626 132,467 133,657 138,203
Current liabilities.................. 14,754 20,198 37,966 56,148 81,565 61,976 91,340
Long-term debt, less current
maturities......................... 25,059 78,359 92,632 104,499 107,947 106,089 111,444
Stockholders' equity (deficit)....... (9,041) (19,784) 11,461 (27,021) (57,045) (34,408) (64,581)
OTHER DATA:
Units in service (at period end)..... 117,034 327,303 772,730 1,240,024 1,859,407 1,374,146 2,013,142
Net subscriber additions............. 64,909 210,269 445,427 467,294 619,383 134,122 153,735
ARPU(1).............................. $ 8.66 $ 9.81 $ 8.64 $ 8.62 $ 8.04 $ 8.61 $ 8.04
Operating profit (loss) before
selling expenses per subscriber per
month(2)........................... (12.69) (.98) .90 2.11 2.25 2.23 2.27
Selling expenses per net subscriber
addition(3)........................ 157 91 81 91 87 86 103
EBITDA(4)............................ (16,499) (19,930) (25,219) (9,700) 9,727 1,407 4,504
Capital expenditures................. 13,729 10,810 16,719 32,486 50,838 12,796 4,434
Depreciation and amortization........ 2,624 5,081 8,105 13,272 21,192 4,248 6,808
Deficiency of earnings to fixed
charges(5)......................... (21,050) (31,121) (45,813) (38,482) (30,024) (7,387) (7,536)
</TABLE>
(Footnotes appear on the following page)
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<PAGE> 12
- ---------------
(1) ARPU is calculated by dividing (i) recurring revenues, consisting of fees
for airtime, voice mail, customized coverage options, excess usage fees and
other recurring revenues and fees associated with the subscriber base for
the quarter by (ii) the average number of domestic units in service for the
quarter. For the fiscal year periods, ARPU is stated as the monthly average
for the final quarter of the year.
(2) Operating profit (loss) before selling expenses (selling expenses include
loss on sale of equipment) per subscriber for the Company's one-way
operations is calculated by dividing (i) recurring revenues less technical
expenses, general and administrative expenses and depreciation and
amortization for the quarter by (ii) the average number of domestic units
in service for the quarter. Stated as the monthly average for the final
quarter of the year for the fiscal year periods.
(3) Selling expenses per net subscriber addition for the Company's domestic
one-way operations is calculated by dividing (i) selling expenses,
including loss on sale of equipment, for the period by (ii) the net
domestic subscriber additions for the period.
(4) EBITDA represents domestic one-way earnings (loss) before interest, taxes,
depreciation and amortization. EBITDA is a financial measure commonly used
in the paging industry. EBITDA is not derived pursuant to GAAP and
therefore should not be construed as an alternative to operating income, as
an alternative to cash flows from operating activities (as determined in
accordance with GAAP) or as a measure of liquidity. The calculation of
EBITDA does not include the commitments of the Company for capital
expenditures and payment of debt and should not be deemed to represent
funds available to the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for a discussion of the
financial operations and liquidity of the Company as determined in
accordance with GAAP.
(5) For purposes of calculating the deficiency of earnings to fixed charges, (i)
earnings is defined as net loss plus fixed charges and (ii) fixed charges
is defined as interest expense plus amortization of debt expense plus the
interest portion of rental and lease expense.
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<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto incorporated herein by
reference.
When used in this discussion, the words "estimate," "project," "plan,"
"expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof.
GENERAL
The Company has constructed and operates a wireless messaging and
communications network and provides paging and other one-way wireless messaging
services to its subscribers. In addition, the Company sells and distributes
wireless messaging equipment to subscribers, retailers and resellers. The
Company earns recurring revenues from each subscriber in the form of fixed
periodic fees and incurs substantial operating expenses in offering its
services, including technical, customer service and general and administrative
expenses. See "-- Management's Presentation of Results of Operations."
Since commencing operations in 1990, the Company has invested heavily in
its one-way wireless communications network and administrative infrastructure in
order to establish nationwide coverage, sales offices in major metropolitan
areas, customer service call centers and centralized administrative support
functions. The Company incurs substantial fixed operating costs related to its
one-way wireless communications infrastructure, which is designed to serve a
much larger subscriber base than the Company currently serves in order to
accommodate growth. In addition, the Company incurs substantial costs associated
with new subscriber additions. As a result, the Company has generated
significant net operating losses for each year of its operations. See
"-- Management's Presentation of Results of Operations."
The Company's strategy is to expand its subscriber base to increase
profitability and cash flow through greater utilization of its nationwide
wireless communications network. From January 1, 1992 to March 31, 1997, the
number of units in service increased from 52,125 to 2,013,142. None of the
Company's growth is attributable to acquisitions. Given its growth strategy and
the substantial associated selling and marketing expenses, the Company expects
to continue to generate operating losses in 1997 from its one-way wireless
communications business. In addition, the Company began testing and development
of two-way wireless messaging services during 1996 and plans to continue the
development and implementation in 1997 and 1998, and expects to incur additional
operating losses during the start-up phase for such services. The Company does
not anticipate any significant revenues from two-way services during 1997,
however it expects to generate revenues with respect to two-way services in
1998. See "Risk Factors -- Risks of Implementation and Financing of Two-Way
Services." The Company's ability to generate operating income is primarily
dependent on its ability to attain a sufficiently large installed subscriber
base that generates recurring revenues which offset the fixed operating costs of
its wireless networks, administration and selling and marketing expenses. The
Company intends to achieve this growth by promoting its customized paging and
other wireless messaging services through its national sales offices, retail
distribution channels, private brand strategic alliances with GTE Corporation,
Southwestern Bell Mobile Systems, AT&T Wireless Services, Ameritech Mobile
Services, Inc. and long distance reseller EXCEL Communications, Inc., and
international expansion.
Unlike most other paging carriers, the Company sells, rather than leases,
substantially all of the messaging equipment used by its subscribers. As a
result, the Company has much less capital invested in messaging equipment than
other paging carriers since it recoups a substantial portion of messaging
equipment costs upon sale to retailers and subscribers. This results in
significantly lower capital expenditures and depreciation expense than if the
Company leased such equipment to its subscribers. In addition, the Company's
financial results are much different than other paging carriers that lease
messaging equipment to subscribers because the Company recognizes the cost of
messaging equipment sold in connection with adding new subscribers at the time
of sale rather than capitalizing and depreciating the cost of messaging
equipment over periods ranging from three to five years as occurs with paging
carriers that lease messaging equipment to
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<PAGE> 14
subscribers. In addition, the Company's retail distribution strategy results in
the recognition of expenses associated with messaging equipment sales and other
sales and marketing expenses in advance of new subscribers being added to the
base and generating revenues (as retailers carry inventory).
The Company sells its messaging equipment through multiple distribution
channels including direct sales, third-party resellers, private brand strategic
alliances and local and national retail stores. Selling and marketing expenses
are primarily attributable to compensation paid to the Company's sales force,
advertising and marketing costs and to losses resulting from the fact that, for
competitive and marketing reasons, the Company generally sells each new unit for
less than its acquisition cost. The Company's accounting practices result in
selling and marketing expenses, including loss on sale of equipment, being
recorded at the time a unit is sold. Units sold by the Company during a given
month may exceed units activated and in service due to inventory stocking and
distribution strategies of the retailers. As a result, selling and marketing
expenses per net subscriber addition may fluctuate from period to period.
The Company derives its recurring revenue primarily from fixed periodic
fees for services that are not generally dependent on usage. Consequently, the
Company's ability to recoup its initial selling and marketing costs, to meet
operating expenses and to achieve profitability is dependent on the average
length of each customer's subscription period. As long as a subscriber continues
to utilize the Company's service, operating results benefit from the recurring
payments of the fixed fees without the incurrence of additional selling expenses
by the Company. Conversely, operating results are adversely affected by customer
disconnections. Each month a percentage of the Company's existing customers have
their service terminated for a variety of reasons, including failure to pay,
dissatisfaction with service and switching to a competing service provider. The
Company's average monthly disconnection rates for the years ended December 31,
1994, 1995, and 1996 and the three months ended March 31, 1997 were 3.4%, 2.5%,
2.4% and 2.3%, respectively.
Approximately 90% of the Company's ARPU is attributable to fixed fees for
airtime, coverage options and features. A portion of the remainder of additional
ARPU is dependent on usage.
RESULTS OF OPERATIONS
The Company's principal operations to date are its domestic one-way
wireless messaging division. The following discussion of results of operations
analyzes the results of the Company's one-way wireless messaging operations,
unless otherwise indicated.
Certain of the following financial information is presented on a per unit
basis. Management of the Company believes that such a presentation is useful in
understanding the Company's results because it is a meaningful comparison period
to period given the Company's growth rate and the significant differences in the
number of subscribers of other paging companies.
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
Units in Service
Units in service from domestic operations were 1,374,146 and 2,001,525 as
of March 31, 1996 and 1997, respectively, representing an annual growth rate of
46%. In addition, during the quarter ended March 31, 1997, PageMart Canada
Limited ("PageMart Canada") added 6,092 subscribers. As a result of its
ownership interest in PageMart Canada, the Company's proportional share of net
subscriber additions from PageMart Canada was 3,655 units for the three months
ended March 31, 1997. The Company has experienced strong growth in units in
service due primarily to the success of its sales and marketing strategies in
the direct sales, national retail and private brand strategic alliance programs.
Revenues
Revenues for the three months ended March 31, 1996 and 1997 were $48.5
million and $61.7 million, respectively. Recurring revenues for airtime, voice
mail, and other services for the same periods were $33.7 million and $46.5
million, respectively. Revenues from equipment sales and activation fees for the
three months ended March 31, 1996 and 1997 were $14.8 million and $15.2 million,
respectively. The increases in
14
<PAGE> 15
recurring revenues and revenues from equipment sales and activation fees were
primarily due to the rapid growth in the number of units in service. The
increase in equipment sales during the first quarter of 1997 was somewhat offset
by a decline in the average price per unit sold. The Company expects equipment
prices per unit generally to remain constant or decline only slightly as sales
volumes increase.
The Company's ARPU was $8.61 and $8.04 in the first quarter of 1996 and
1997, respectively. Over the past year, the Company's ARPU has decreased
primarily as a result of an increase in subscribers added through third-party
resellers and private brand strategic alliance channels. This decrease in ARPU
has been offset somewhat by a higher mix of multi-city, regional and nationwide
services as well as increased sales of other value-added services such as voice
mail and toll-free numbers. Management anticipates that the Company's ARPU will
decline in the foreseeable future due to a continued higher mix of subscribers
added through private brand strategic alliance programs which yield lower ARPU.
ARPU is lower for subscribers added through third-party resellers and private
brand strategic alliances because these are generally high volume customers that
are charged wholesale airtime rates. However, because private brand strategic
alliance partners and third-party resellers are responsible for selling and
marketing costs, billing, collection and other administrative costs associated
with end-users, the Company incurs substantially lower marketing and
administrative costs with respect to such subscribers.
Cost of Equipment Sold
The cost of equipment sold for the three months ended March 31, 1996 and
1997 was $17.1 million and $18.1 million, respectively. The change in 1997 was
primarily due to an increase in the number of units sold. The Company expects
pager costs generally to remain constant with modest reductions in cost to the
Company as a result of volume purchases. Management anticipates that loss on
equipment sold will generally remain constant on a per unit basis for the
foreseeable future.
Operating Expenses
Technical expenses were $8.1 million and $10.8 million for the three months
ended March 31, 1996, and 1997, respectively. The increase was primarily due to
increased telecommunications and site expenses associated with servicing the
Company's expanded network and larger subscriber base. On an average monthly
cost per unit in service basis, technical expenses were $2.06 and $1.86 in the
first quarter of 1996 and 1997, respectively. The per unit decrease was the
result of increased operating efficiencies and economies of scale experienced
with the growth of the Company's subscriber base.
Selling expenses for the three months ended March 31, 1996 and 1997 were
$9.4 million and $12.7 million respectively. This increase resulted from greater
marketing and advertising costs related to the growth in units sold, as well as
from increased sales compensation because of the addition of sales personnel in
new and existing operating markets. During the first quarter of 1996 and 1997,
the Company added 134,122 and 150,080 net new domestic units in service,
respectively. Sales and marketing employees increased from 486 at March 31, 1996
to 530 at March 31, 1997. Management views the net loss on equipment sold to be
a component of selling and marketing expenses incurred to add new subscribers.
See "-- Management's Presentation of Results of Operations." Selling and
marketing expenses per net subscriber addition (including loss on equipment
sales) were $86 and $103 for the three months ended March 31, 1996 and 1997,
respectively. This increase was due to losses recognized on the sale of pagers
due to stocking a large number of new retail outlets in first quarter 1997
including 1,858 new outlets for RadioShack(R). The losses are recognized when
pagers are shipped to retailers, usually before the units are placed into
service; thus, increasing selling expenses per net subscriber addition. Selling
expenses are also expected to be higher than average during the second quarter
of 1997 due to stocking the remainder of the RadioShack(R) outlets. During the
three months ended March 31, 1997, the Company incurred $94,000 in selling
expenses associated with its international operations (including loss on
equipment sales).
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) in the first
quarter of 1996 and 1997 were $12.9 million and $15.8 million,
15
<PAGE> 16
respectively. This increase was attributable to the Company's expansion of its
customer service call centers and continued expansion into new and existing
markets to support the growing subscriber base which required additional office
space, administrative personnel and customer service representatives. On an
average cost per month per unit in service basis, general and administrative
expenses were $3.29 and $2.73 in the first quarter of 1996 and 1997,
respectively. The per unit decrease was a result of increased operating
efficiencies and economies of scale achieved through the growth of the Company's
subscriber base.
Depreciation and amortization for the three months ended March 31, 1996 and
1997 were $4.2 million and $6.8 million, respectively. The increase resulted
from the expansion of the Company's network infrastructure including transmitter
and terminal equipment, as well as the purchase and development of a new
centralized administrative system during 1996 and the first three months of
1997. As an average cost per month per unit in service, depreciation and
amortization was $1.08 and $1.19 for the three months ended March 31, 1996 and
1997, respectively.
Interest Expense
Interest expense increased from $4.0 million in the first quarter of 1996
to $4.4 million in the first quarter of 1997. The increase in 1997 was primarily
the result of increased interest expense related to the Notes. Interest expense
related to the Notes was $3.2 million and $3.6 million in the first quarter of
1996 and 1997, respectively.
Net Loss
The Company sustained net losses in the first quarter of 1996 and 1997 of
$7.4 million and $7.5 million, respectively, principally due to the cost of
funding the growth rate of the Company's subscriber base which resulted in an
increase in units sold, selling and marketing expenses, operating expenses and
interest expense.
FISCAL YEARS 1994, 1995 AND 1996
Units in Service
Units in service were 772,730, 1,240,024 and 1,851,445 as of December 31,
1994, 1995 and 1996, respectively. This represents an annual growth rate of 60%
and 49% in 1995 and 1996, respectively. In addition, for the year ended December
31, 1996, PageMart Canada added 13,270 subscribers. As a result of its ownership
interest in PageMart Canada, the Company's proportional share of the units in
service of PageMart Canada was 7,962 units at December 31, 1996. The Company has
experienced strong growth in units in service due primarily to the success of
its sales and marketing strategies in the direct sales, national retail and
third-party reseller channels, as well as from private brand strategic alliance
programs.
Revenues
Revenues for the fiscal years 1994, 1995 and 1996 were $109.8 million,
$159.2 million and $221.6 million respectively. Recurring revenues for airtime,
voice mail and other services for the same periods were $56.6 million, $101.5
million and $153.0 million respectively. Revenues from equipment sales and
activation fees for 1994, 1995 and 1996 were $53.2 million, $57.7 million, and
$68.6 million respectively. The increases in recurring revenues and revenues
from equipment sales and activation fees were primarily due to the rapid growth
in the number of units in service. The increase in equipment sales during 1996
was somewhat offset by a decline in the average price per unit sold. The Company
expects equipment prices per unit generally to remain constant or decline only
slightly as sales volumes increase.
The Company's ARPU was $8.64, $8.62 and $8.04 in the final quarter of 1994,
1995 and 1996, respectively. Over the past twelve months, the Company's ARPU has
decreased primarily as a result of an increase in subscribers added through
third-party reseller and private brand strategic alliance channels. This
decrease in ARPU has been offset somewhat by a higher mix of multi-city,
regional and nationwide services as well as increased sales of other value added
services such as voice mail and toll-free numbers. Management anticipates that
the Company's ARPU will decline in the foreseeable future due to a continued
higher mix of
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<PAGE> 17
subscribers added through private brand strategic alliance programs which yield
lower ARPU. ARPU is lower for subscribers added through third-party resellers
and private brand strategic alliances because these are generally high volume
customers that are charged wholesale airtime rates. However, because third-party
resellers and private brand strategic alliance partners are responsible for
selling and marketing costs, billing, collection and other administrative costs
associated with end-users, the Company incurs substantially lower marketing and
administrative costs with respect to such subscribers.
Cost of Equipment Sold
The cost of equipment sold in 1994, 1995 and 1996 was $57.8 million, $64.0
million and $78.9 million respectively. The change in 1996 was a combination of
an increase in the number of units sold and slightly lower average pager prices
paid to suppliers. The Company expects pager costs generally to remain constant
with modest reductions in cost to the Company as a result of volume purchases.
Management anticipates that loss on equipment sold will increase on a per unit
basis for the foreseeable future due to increased competition, especially in the
national retail channel.
Operating Expenses
Technical expenses were $16.2 million, $25.5 million and $36.7 million in
1994, 1995 and 1996, respectively. The increase resulted primarily from the
continued expansion of the Company's nationwide network infrastructure, which
resulted in greater expenses associated with the addition of new transmitter
sites, transmitter and terminal equipment and telecommunications expenses. On an
average monthly cost per unit in service basis, technical expenses were $2.45,
$2.11 and $1.98 in 1994, 1995 and 1996, respectively. The per unit decreases
were the result of increased operating efficiencies and economies of scale
experienced with the growth of the Company's subscriber base.
Selling expenses in 1994, 1995 and 1996 were $31.3 million, $36.1 million
and $42.6 million, respectively. This increase resulted from greater marketing
and advertising costs related to the growth in units sold as well as from
increased sales compensation because of the addition of sales personnel in new
and existing operating markets. During the years ended December 31, 1994, 1995
and 1996, the Company added 445,427, 467,294 and 611,421 net new domestic units
in service, respectively. Sales and marketing employees decreased from 450 at
December 31, 1994 to 445 at December 31, 1995 then increased to 552 at December
31, 1996. Management views the net loss on equipment sold to be a component of
selling and marketing expenses incurred to add new subscribers. See "--
Management's Presentation of Results of Operations." Selling and marketing
expenses per net subscriber addition (including loss on equipment sales) were
$81, $91 and $87 for the years ended December 31, 1994, 1995 and 1996,
respectively. During the twelve months ended December 31, 1996, the Company
incurred $447,000 in selling expenses associated with its international
operations (including loss on equipment sales).
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) in 1994, 1995
and 1996 were $29.8 million, $43.4 million and $53.7 million, respectively. This
increase was attributable to the Company's expansion of its customer service
call centers and continued expansion in new and existing markets to support the
growing subscriber base which required additional office space, administrative
personnel and customer service representatives. On an average cost per month per
unit in service basis, general and administrative expenses were $4.52, $3.59 and
$2.89 for fiscal years 1994, 1995 and 1996, respectively. The per unit decreases
were a result of increased operating efficiencies and economies of scale
achieved through the growth of the Company's subscriber base.
Depreciation and amortization in 1994, 1995 and 1996 was $8.1 million,
$13.3 million and $21.2 million, respectively. The increases resulted from the
expansion of the Company's network infrastructure including transmitter and
terminal equipment, as well as the purchase and development of a new centralized
administrative system in 1995 and 1996. As an average cost per month per unit in
service, depreciation and amortization was $1.23, $1.10 and $1.14 for the years
ended December 31, 1994, 1995 and 1996, respectively.
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Interest Expense
Interest expense increased from $12.9 million in 1994 to $15.2 million in
1995 and $16.1 million in 1996. The increase in 1995 was primarily the result of
increased interest related to the Notes as well as increased borrowings under
vendor financing agreements. The increase in 1996 was primarily the result of
increased interest expense related to the Notes. Interest expense related to the
Notes was $10.8 million, $11.8 million and $13.3 million in 1994, 1995 and 1996,
respectively.
Net Loss
The Company sustained net losses in 1994, 1995 and 1996 of $45.8 million,
$38.5 million and $30.0 million, respectively, principally due to the cost of
funding the growth rate of the Company's subscriber base which resulted in an
increase in units sold, selling and marketing expenses, operating expenses and
interest expense.
MANAGEMENT'S PRESENTATION OF RESULTS OF OPERATIONS
COMPARISON WITH GAAP PRESENTATION
The Company's audited Consolidated Financial Statements for the years ended
December 31, 1994, 1995 and 1996, included elsewhere in this Prospectus, have
been prepared in accordance with GAAP. For internal management purposes the
Company prepares statements of operations that are derived from the Company's
GAAP financial statements but are reordered in a format that management uses for
its internal review of the Company's performance and that management believes
are useful in understanding the Company's results.
Management believes that operating profit before selling expenses is a
meaningful indicator of the profitability of the Company's installed base of
units in service because it measures the recurring revenues received for
services less the costs (including depreciation and amortization) associated
with servicing that installed base. Operating profit before selling expenses per
subscriber per month for the Company's one-way operations has grown from $1.45
during the second quarter of 1995 to $2.27 during the first quarter of 1997 due
primarily to the Company's increase in subscribers and resulting benefits in
economies of scale.
In addition, selling and marketing expenses (including loss on equipment
sold) provide a measure of the costs associated with obtaining new subscribers
that the Company needs to generate the incremental recurring revenue necessary
to achieve profitability. Under the GAAP presentation, recurring revenues and
equipment and activation revenues are aggregated and are not separately compared
to the costs associated with each.
The items included in Management's Presentation of the Results of
Operations and their derivation from financial information presented in
accordance with GAAP are described below.
Recurring Revenues. Recurring revenues include periodic fees for
airtime, voice mail, customized coverage options, toll-free numbers, excess
usage fees and other recurring revenues and fees associated with the
subscriber base. Recurring revenues do not include equipment sales revenues
or initial activation fees. Recurring revenues are the same under both the
management and GAAP presentations.
Technical Expenses. This item is the same under the management and
GAAP presentations.
General and Administrative Expenses. This item is the same under the
management and GAAP presentations.
Depreciation and Amortization. This item is the same under the
management and GAAP presentations.
Operating Profit Before Selling Expenses. Operating profit before
selling expenses under the management presentation is equal to recurring
revenues less technical expenses, general and administrative expenses and
depreciation and amortization. Operating profit before selling expenses is
not derived pursuant to GAAP.
18
<PAGE> 19
Selling Expenses. Selling expenses under the management presentation
represent the cost to the Company of selling pagers and other messaging
units to a customer, and are equal to selling costs (sales compensation,
advertising, marketing, etc.) plus costs of units sold less revenues from
equipment sales and activation fees. As described above, the Company sells
rather than leases substantially all of the one-way messaging equipment
used by subscribers. Selling expenses under the management presentation are
not derived pursuant to GAAP. Net loss on equipment sales is not included
in the GAAP presentation of selling expenses.
Operating Income (Loss). This item is the same under the management
and GAAP presentations.
EBITDA. EBITDA represents earnings (loss) before interest, taxes,
depreciation and amortization. EBITDA is a financial measure commonly used
the paging industry. EBITDA is not derived pursuant to GAAP and therefore
should not be construed as an alternative to operating income, as an
alternative to cash flows from operating activities (as determined in
accordance with GAAP) or as a measure of liquidity. The calculation of
EBITDA does not include the commitments of the Company for capital
expenditures and payment of debt and should not be deemed to represent
funds available to the Company. In the fourth quarter of 1995, the
Company's EBITDA from its one-way operations became positive for the first
time.
19
<PAGE> 20
Selected Quarterly Results of Operations
The table below sets forth management's presentation of results of one-way
domestic operations and other data on a quarterly basis for the eight most
recent fiscal quarters. This presentation should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto
incorporated herein by reference, and should not be considered in isolation or
as an alternative to results of operations that are presented in accordance with
GAAP (in thousands, except other data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1995 1996 1996 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Recurring revenues....... $ 23,387 $ 26,994 $ 30,658 $ 33,743 $ 36,964 $ 39,697 $ 42,637 $ 46,475
Technical expenses....... 6,141 6,842 7,015 7,943 8,783 9,725 10,273 10,765
General and
administrative
expenses............... 10,067 11,350 12,243 12,792 13,043 13,668 14,162 15,763
Depreciation and
amortization........... 3,091 3,469 3,910 4,248 4,942 5,714 6,288 6,808
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating profit before
selling expenses....... 4,088 5,333 7,490 8,760 10,196 10,590 11,914 13,139
Selling expenses(1)...... 10,614 10,889 11,181 11,601 12,836 13,588 14,900 15,443
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss)................. $ (6,526) $ (5,556) $ (3,691) $ (2,841) $ (2,640) $ (2,998) $ (2,986) $ (2,304)
========== ========== ========== ========== ========== ========== ========== ==========
EBITDA................... $ (3,435) $ (2,087) $ 219 $ 1,407 $ 2,302 $ 2,716 $ 3,302 $ 4,504
========== ========== ========== ========== ========== ========== ========== ==========
OTHER DATA:
Units in service(2)...... 1,008,683 1,131,464 1,240,024 1,374,146 1,524,297 1,684,937 1,851,445 2,001,525
Net subscriber
additions.............. 133,739 122,781 108,560 134,122 150,151 160,640 166,508 150,080
ARPU(3).................. $ 8.28 $ 8.41 $ 8.62 $ 8.61 $ 8.50 $ 8.25 $ 8.04 $ 8.04
National retail
outlets................ 2,900 3,408 3,411 3,690 4,286 5,025 5,530 7,388
Operating profit before
selling expenses per
subscriber per
month(4)............... $ 1.45 $ 1.66 $ 2.11 $ 2.23 $ 2.35 $ 2.20 $ 2.25 $ 2.27
Selling expenses per net
subscriber
addition(1)(5)......... $ 79 $ 89 $ 103 $ 86 $ 85 $ 85 $ 89 $ 103
Capital employed per unit
in service(6).......... $ 39 $ 39 $ 40 $ 41 $ 49 $ 49 $ 43 $ 41
</TABLE>
- ---------------
(1) Includes loss on sale of equipment.
(2) Stated as of the end of each period.
(3) Calculated by dividing recurring revenues for the quarter by the average
number of units in service during that quarter. Stated as the monthly
average for the quarter.
(4) Calculated by dividing operating profit before selling expenses (selling
expenses include loss on sale of equipment) for the quarter by the average
number of units in service during that quarter. Stated as the monthly
average for the quarter.
(5) Calculated by dividing selling expenses, including loss on sale of
equipment, for the quarter by the net subscriber additions for the quarter.
(6) Calculated by dividing total assets (excluding cash, narrowband personal
communications services assets and international investments) minus current
liabilities (excluding current maturities of long-term debt) at the end of
the period, by units in service at the end of the period.
SEASONALITY
Pager usage is slightly higher during the spring and summer months, which
is reflected in higher incremental usage fees earned by the Company. The
Company's retail sales are subject to seasonal fluctuations that affect retail
sales generally. Otherwise, the Company's results are generally not
significantly affected by seasonal factors.
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have historically required substantial capital
investment for the development and installation of its wireless communications
network, the procurement of messaging equipment and expansion into new markets.
To date, these investments by the Company have been funded by the proceeds from
the issuance of common stock, preferred stock, and the Notes, as well as
borrowings under vendor financing agreements.
Capital expenditures were $16.7 million, $32.5 million and $50.8 million
for the years ended December 31, 1994, 1995 and 1996, respectively and $4.4
million for the three months ended March 31, 1997. Capital expenditures for 1996
include approximately $34.4 million for the expansion and enhancement of the
Company's one-way messaging network and $6.4 million for the development of the
Company's new administrative system. Capital expenditures for the first quarter
of 1997 include $2.5 million for the Company's one-way messaging network and
$1.9 million for the development of the Company's new administrative system.
During December 1995, the Company committed to purchase $40 million in network
infrastructure equipment from a significant vendor from December 1, 1995 to
October 31, 1999. Through March 31, 1997, the Company has purchased $20.8
million of network infrastructure under this purchase commitment.
The Company's net cash used in operating activities for the year ended
December 31, 1994 and provided by operating activities for the years ended
December 31, 1995 and 1996 was $25.5 million, $7.3 million and $56.2 million,
respectively, and the Company's net cash provided by operating activities for
the three months ended March 31, 1997 was $5.1 million. The improvement in 1996
and in the first quarter of 1997 was a result of improved operating results from
a larger subscriber base and higher efficiencies in working capital achieved
through improved collections procedures and improved inventory management. Net
cash used in investing activities was $69.1 million, $14.3 million and $51.0
million for the years ended December 31, 1994, 1995 and 1996 respectively, and
$5.2 million for the three months ended March 31, 1997. Of the $51.0 million and
$5.2 million used in investing activities in 1996 and the first quarter ended
March 31, 1997, $50.8 million and $4.4 million, respectively, were for capital
expenditures. Net cash provided by financing activities, including proceeds from
borrowings and issuances of common and preferred stock was $83.5 million and
$2.4 million for the years ended December 31, 1994 and 1995, respectively. Net
cash used in financing activities was $15.0 million for the year ended December
31, 1996. There was no cash used by financing activities for the three months
ended March 31, 1997. Cash provided in 1995 resulted solely from borrowings
under vendor credit facilities. Long-term obligations, less current maturities,
increased by approximately $3.5 million during the three months ended March 31,
1997, $3.4 million during 1996 and $11.9 million during 1995. Net increases in
borrowings were $16.5 million, $13.8 million for the years ended 1994 and 1995,
respectively and the net decrease in borrowings was $2.0 million for the year
ended 1996. The net increase in borrowings was $3.5 million for the three months
ended March 31, 1997. The net increase in 1995 and the first quarter of 1997
resulted primarily from the accretion of the Notes and borrowings under vendor
financing agreements. The net decrease in 1996 resulted primarily from the
payment of vendor financing agreements offset by the accretion of the Notes.
As of March 31, 1997, the Company had no amounts outstanding under vendor
financing agreements and its indebtedness under the Notes was $111.4 million.
The Notes, which are unsecured senior obligations of PageMart, mature in
2003 and were issued at a substantial discount from their principal amount at
maturity. The accretion of original issue discount on the Notes will cause an
increase in indebtedness from March 31, 1997 to November 1, 1998 of $25.1
million. From and after November 1, 1998, interest on the Notes will be payable
semiannually, in cash.
The Indenture contains certain restrictive covenants that, among other
things, limit the ability of the Company to incur indebtedness, pay dividends,
repurchase capital stock, engage in transactions with stockholders and
affiliates, create liens, sell assets, enter into leases and engage in mergers
and consolidations. In addition, the Indenture prohibits PageMart from paying
any dividends or making other distributions on its capital stock, making loans
to Wireless, merging or consolidating with Wireless or assuming or guaranteeing
any obligations of Wireless unless PageMart is in compliance with certain
interest coverage ratios and certain
21
<PAGE> 22
other requirements. PageMart may, however, sell assets to Wireless in
transactions that are arm's-length in nature. See "Risk Factors -- High
Leverage; Deficiency of Earnings to Cover Fixed Charges; Restrictive Covenants."
On November 15, 1995, the Company purchased through PageMart International,
Inc., 200,000 shares of voting common stock of PageMart Canada, which represents
20% of the ownership of PageMart Canada. PageMart International, Inc. also owns
33% of the voting common stock of the holding company parent of PageMart Canada
("Canada Holding"), which owns the remaining 80% of the voting common stock of
PageMart Canada. The Company's investment in Canada Holding and PageMart Canada
totals approximately $3.7 million.
As of March 31, 1997, the Company had approximately $5,000 in cash and cash
equivalents. The Company's cash balances and anticipated financing available
from Wireless are expected to be sufficient to fund the Company's one-way
operations and related capital and debt service requirements through 1997. See
"Risk Factors -- No Assurance that Growth Strategy will be Achieved."
As the Company begins development and implementation of NPCS services, the
Company expects to incur significant additional operating losses during the
start-up phase for such services, and it will be necessary for the Company to
make substantial investments. The Company anticipates requiring additional
sources of capital to fund the construction of a two-way messaging network,
including expenditures relating to the buildout requirements of the FCC. The
Company anticipates investing $75 to $100 million through fiscal 1998 to test
and construct a two-way transmission network. Thereafter, the Company
anticipates that the two-way operations may require up to $100 million of
additional investment to fund operations, marketing, and to add capacity to the
network as the Company's two-way customer base grows. The Company expects to
lease rather than sell a portion of its two-way messaging units. The Company
expects to require additional financing to complete the buildout, which may
include new vendor financing or entering into joint venture arrangements,
however, there can be no assurance that sufficient financing will be available
to the Company. The Company's ability to incur indebtedness is limited by the
covenants contained in the Indenture and as a result any additional financing
may need to be equity financing by Wireless. See "Risk Factors -- Risks of
Implementation and Financing of Two-Way Services."
Future revenues, costs, product mix and new product acceptance are all
influenced by a number of factors which are inherently uncertain and difficult
to predict. Therefore, no assurance can be given that financing for such
investments will be available. No assurance can be given that financing for such
investments will be available. No assurance can be given that the Company's
strategy will be implemented as currently planned or that the Company's
operations will generate positive cash flows.
This Prospectus contains statements that constitute forward-looking
statements. Readers are cautioned that such forward looking statements involve
risk and uncertainties, and are subject to change based on various important
factors. The following factors, among others, in some cases have affected and in
the future could affect the Company's financial performance and actual results
and could cause actual results for 1997 and beyond to differ materially from
those expressed in any such forward-looking statements -- economic conditions
generally in the United States and consumer confidence; the ability of the
Company to manage its high debt levels; the impact of technological change in
the telecommunications industry; the future cost of network infrastructure and
subscriber equipment; the impact of competition and pricing of paging and
wireless services; the timely development and acceptance of new products;
changes in regulation by the FCC and various state regulatory agencies and the
ability of the Company to obtain financing to construct, operate and market the
transmission network for two-way services.
22
<PAGE> 23
DESCRIPTION OF THE NOTES
The Notes were issued under an Indenture (the "Indenture") dated as of
October 19, 1993, between the Company and United States Trust Company of New
York, as Trustee (the "Trustee"), a copy of the form of which has been filed as
an exhibit to the registration statement of which this Prospectus forms a part
(the "Registration Statement"). The following summary of the material provisions
of the Notes and the Indenture is subject to, and is qualified in its entirety
by reference to, all the provisions of the Indenture, including the definitions
of certain terms therein and those terms made a part thereof by the Trust
Indenture Act of 1939, as amended. Whenever particular sections or defined terms
of the Indenture not otherwise defined herein are referred to, such sections or
defined terms are incorporated herein by reference.
GENERAL
The Notes are unsecured senior obligations of the Company, limited to
$136,500,000 aggregate principal amount at maturity, and will mature on November
1, 2003. Although for federal income tax purposes a significant amount of
original issue discount, taxable as ordinary income, will be recognized by a
Holder as such discount accrues from the issue date of the Notes, no interest
will be payable on the Notes prior to May 1, 1999. From and after November 1,
1998, interest on the Notes will accrue at the rate shown on the front cover of
this Prospectus from November 1, 1998 or from the most recent Interest Payment
Date to which interest has been paid or provided for, payable semiannually (to
Holders of record at the close of business on April 15 or October 15 immediately
preceding the Interest Payment Date) on May 1 and November 1, of each year,
commencing May 1, 1999.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially will
be the corporate trust office of the Trustee at 114 W. 47th Street, New York,
N.Y. 10036); provided that, at the option of the Company, payment of interest
may be made by check mailed to the address of the Holders as such address
appears in the Security Register. (Sections 2.01, 2.04 and 2.06)
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity and any integral
multiple thereof.(Section 2.03) See "-- Book-Entry; Delivery and Form." No
service charge will be made for any registration of transfer or exchange of
Notes, but the Company may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in connection
therewith. (Section 2.06)
OPTIONAL REDEMPTION
The Notes are redeemable, at the Company's option, in whole or in part, at
any time on or after November 1, 1998 and prior to maturity, upon not less than
30 nor more than 60 days' prior notice mailed by first class mail to each
Holders' last address as it appears in the Security Register, at a redemption
price of 100% of principal amount at maturity, plus accrued and unpaid interest,
if any, to the redemption date (subject to the right of Holders of record on the
relevant Regular Record Date to receive interest due on an Interest Payment Date
that is on or prior to the redemption date).
In addition, at any time prior to November 1, 1996, the Company may redeem
up to 35% of the Accreted Value (as defined below) of the Notes with the
proceeds of one or more Public Equity Offerings following which a Public Market
occurs, at any time as a whole or from time to time in part, at a redemption
price (expressed as a percentage of Accreted Value) of 111%, plus accrued and
unpaid interest, if any, to the redemption date (subject to the right of Holders
of record on the relevant Regular Record Date to receive interest due on an
Interest Payment Date that is on or prior to the redemption date). (Section
3.01)
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, on a
pro rata basis, by lot or by such other method as the Trustee in its sole
discretion shall deem to be fair and appropriate; provided that no Note of
$1,000 in principal amount at maturity or less shall be redeemed in part. If any
Note is to be redeemed in
23
<PAGE> 24
part only, the notice of redemption relating to such Note shall state the
portion of the principal amount at maturity thereof to be redeemed. A new Note
in principal amount equal to the unredeemed portion thereof will be issued in
the name of the Holder thereof upon cancellation of the original Note. (Sections
3.03, 3.04 and 3.08)
RANKING
The Indebtedness evidenced by the Notes will rank pari passu in right of
payment with all other unsubordinated indebtedness of the Company. The Notes
will be effectively subordinated to such secured obligations to the extent of
such security interests. See "Risk Factors -- Priority of Secured Debt." As of
March 31, 1997, the Company had no outstanding secured indebtedness. See
"Selected Historical Financial and Operating Data."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used herein for which no definition is provided.
"Accreted Value" is defined to mean, for any Specified Date, the amount
provided below for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
- ------------------------ --------------
<S> <C> <C>
May 1, 1994......................................................... $ 585.65
November 1, 1994.................................................... $ 621.52
May 1, 1995......................................................... $ 659.59
November 1, 1995.................................................... $ 699.99
May 1, 1996......................................................... $ 742.86
November 1, 1996.................................................... $ 788.36
May 1, 1997......................................................... $ 836.65
November 1, 1997.................................................... $ 887.90
May 1, 1998......................................................... $ 942.28
November 1, 1998.................................................... $1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) the original issue price
and (b) an amount equal to the product of (1) the Accreted Value for the
first Semi-Annual Accrual Date less the original issue price multiplied by
(2) a fraction, the numerator of which is the number of days from the issue
date of the Notes to the Specified Date, using a 360-day year of twelve
30-day months, and the denominator of which is the number of days elapsed
from the issue date of the Notes to the first Semi-Annual Accrual Date,
using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
24
<PAGE> 25
"Acquired Indebtedness" is defined to mean Indebtedness of a Person
existing at the time such Person became a Restricted Subsidiary and not Incurred
in connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary.
"Adjusted Consolidated Net Income" is defined to mean, for any period, the
aggregate net income (or loss) of the Company and its consolidated Restricted
Subsidiaries for such period determined in conformity with GAAP; provided that
the following items shall be excluded in computing Adjusted Consolidated Net
Income (without duplication): (i) the net income (or loss) of any Person (other
than net income (or loss) attributable to a Restricted Subsidiary) in which any
Person (other than the Company or any of its Restricted Subsidiaries) has a
joint interest, except to the extent of the amount of dividends or other
distributions actually paid to the Company or any of its Restricted Subsidiaries
by such other Person during such period, (ii) solely for the purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below (and in such case, except to the extent includible
pursuant to clause (i) above), the net income (or loss) of any Person accrued
prior to the date it becomes a Restricted Subsidiary or is merged into or
consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Company or any of its Restricted Subsidiaries, (iii) the net income (or loss) of
any Restricted Subsidiary to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary of such net
income is not at the time permitted by the operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Restricted Subsidiary; (iv) any gains
or losses (on an after-tax basis) attributable to Asset Sales; (v) except for
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below, any amount paid as dividends on Preferred
Stock of the Company or Preferred Stock of any Restricted Subsidiary owned by
Persons other than the Company and any of its Restricted Subsidiaries; and (vi)
all extraordinary gains and extraordinary losses; provided that, solely for the
purposes of calculating the Interest Coverage Ratio (and in such case, except to
the extent it is already included pursuant to clause (i) above), "Adjusted
Consolidated Net Income" shall include the amount of all cash dividends received
by the Company or any Restricted Subsidiary from an Unrestricted Subsidiary.
"Adjusted Consolidated Net Tangible Assets" is defined to mean the total
amount of assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP.
"Affiliate" is defined to mean, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, is defined to mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" is defined to mean (i) an investment by the Company or
any of its Restricted Subsidiaries in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or shall be merged
into or consolidated with the Company or any of its Restricted Subsidiaries or
(ii) an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person.
"Asset Disposition" is defined to mean the sale or other disposition by the
Company or any of its Restricted Subsidiaries (other than to the Company or
another Restricted Subsidiary of the Company) of
25
<PAGE> 26
(i) all or substantially all of the Capital Stock of any Restricted Subsidiary
of the Company or (ii) all or substantially all of the assets that constitute a
division or line of business of the Company or any of its Restricted
Subsidiaries.
"Asset Sale" is defined to mean any sale, transfer or other disposition
(including by way of merger, consolidation or sale-leaseback transactions) in
one transaction or a series of related transactions by the Company or any of its
Restricted Subsidiaries to any Person other than the Company or any of its
Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary and, in each case, that is not governed by the provisions
of the Indenture applicable to Mergers, Consolidations and Sales of Assets;
provided that sales or other dispositions of inventory, receivables and other
current assets shall not be included within the meaning of "Asset Sale."
"Average Life" is defined to mean, at any date of determination with
respect to any debt security, the quotient obtained by dividing (i) the sum of
the products of (a) the number of years from such date of determination to the
dates of each successive scheduled principal payment of such debt security and
(b) the amount of such principal payment by (ii) the sum of all such principal
payments.
"Capital Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's capital stock, whether now
outstanding or issued after the date of the Indenture, including, without
limitation, all Common Stock and Preferred Stock.
"Capitalized Lease" is defined to mean, as applied to any Person, any lease
of any property (whether real, personal or mixed) of which the discounted
present value of the rental obligations of such Person as lessee, in conformity
with GAAP, is required to be capitalized on the balance sheet of such Person;
and "Capitalized Lease Obligation" is defined to mean the rental obligations, as
aforesaid, under such lease.
"Change of Control" is defined to mean such time as (i) (a) prior to the
occurrence of a Public Market, a "person" or "group" (within the meaning of
Section 13(d) or 14(d)(2) of the Exchange Act) becomes the "beneficial owner"
(as defined in Rule 13d-3 of the Exchange Act) of a greater percentage of the
total Voting Stock, on a fully diluted basis, of the Company than is held by the
Existing Stockholders and their Affiliates on such date and (b) after the
occurrence of a Public Market, a "person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act) of more than 30% of the total
Voting Stock of the Company on a fully diluted basis and such ownership is
greater than the amount of Voting Stock, on a fully diluted basis, held by the
Existing Stockholders and their Affiliates on such date; or (ii) individuals who
at the beginning of any period of two consecutive calendar years constituted the
Board of Directors (together with any new directors whose election by the Board
of Directors or whose nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the members of the Board of
Directors then still in office who either were members of the Board of Directors
at the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of such board of directors then in office.
"Closing Date" is defined to mean the date on which the Notes were
originally issued under the Indenture.
"Consolidated EBITDA" is defined to mean, for any period, the sum of the
amounts for such period of (i) Adjusted Consolidated Net Income, (ii)
Consolidated Interest Expense, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income, (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income,
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less all non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; provided that, if any Subsidiary is not a
Wholly Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the
extent not otherwise reduced in accordance with GAAP) by an amount equal to (A)
the amount of the Adjusted Consolidated Net Income attributable to such
Restricted Subsidiary multiplied by (B) the quotient of (1) the number of shares
of outstanding Common Stock of such Restricted Subsidiary not owned on the last
day of such period by the Company or any of its Restricted Subsidiaries divided
by (2) the total number of shares of outstanding Common Stock of such Restricted
Subsidiary on the last day of such period.
"Consolidated Interest Expense" is defined to mean, for any period, the
aggregate amount of interest in respect of Indebtedness (including amortization
of original issue discount on any Indebtedness and the interest portion of any
deferred payment obligation, calculated in accordance with the effective
interest method of accounting; all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed by the Company or any of its Restricted
Subsidiaries) and all but the principal component of rentals in respect of
Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be
accrued by the Company and its Restricted Subsidiaries during such period;
excluding, however, (i) any amount of such interest of any Restricted Subsidiary
if the net income (or loss) of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income (or loss)
of such Restricted Subsidiary is excluded from the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof) and
(ii) any premiums, fees and expenses (and any amortization thereof) payable in
connection with the offering of the Notes, all as determined on a consolidated
basis in conformity with GAAP.
"Consolidated Net Worth" is defined to mean, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation), less any amounts attributable to Redeemable Stock or any equity
security convertible into or exchangeable for Indebtedness, the cost of treasury
stock and the principal amount of any promissory notes receivable from the sale
of the Capital Stock of the Company or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of foreign
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Default" is defined to mean any event that is, or after notice or passage
of time or both would be, an Event of Default.
"Existing Stockholders" is defined to mean The Morgan Stanley Leveraged
Equity Fund II, L.P., Morgan Stanley Venture Capital Fund, L.P., Accel Telecom
L.P., Accel III L.P. and Accel Investors '89 L.P.
"GAAP" is defined to mean generally accepted accounting principles in the
United States of America as in effect as of the date of the Indenture,
including, without limitation, those set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as
approved by a significant segment of the accounting profession. All ratios and
computations based on GAAP contained in the Indenture shall be computed in
conformity with GAAP applied on a consistent basis, except that calculations
made for purposes of determining compliance with the terms of the covenants and
with other provisions of the Indenture shall be made without giving effect to
(i) the amortization of any expenses incurred in connection with the offering of
the Notes, (ii) except as otherwise provided, the amortization of any amounts
required or permitted by Accounting Principles Board Opinion Nos. 16 and 17 and
(iii) any non-recurring charges associated with the adoption, after the Closing
Date, of Financial Accounting Standard Nos. 106 and 109.
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other
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<PAGE> 28
obligation of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Incur" is defined to mean, with respect to any Indebtedness, to incur,
create, issue, assume, Guarantee or otherwise become liable for or with respect
to, or become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an Incurrence of Acquired Indebtedness by reason of the
acquisition of more than 50% of the Capital Stock of any Person; provided that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness.
"Indebtedness" is defined to mean, with respect to any Person at any date
of determination (without duplication), (i) all Indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except Trade Payables, (v) all obligations of such Person as
lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, provided (i)
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at such
time as determined in conformity with GAAP and (ii) that Indebtedness shall not
include any liability for federal, state, local or other taxes.
"Interest Coverage Ratio" is defined to mean, on any Transaction Date, the
ratio of (i) the aggregate amount of Consolidated EBITDA for the four fiscal
quarters for which financial information in respect thereof is available
immediately prior to such Transaction Date (the "Reference Period") to (ii) the
aggregate Consolidated Interest Expense during such Reference Period. In making
the foregoing calculation, (A) pro forma effect shall be given to (1) any
Indebtedness Incurred subsequent to the end of the Reference Period and prior to
the Transaction Date (other than Indebtedness Incurred under a revolving credit
or similar arrangement to the extent of the commitment thereunder (or under any
predecessor revolving credit or similar arrangement) in effect on the last day
of such Reference Period), (2) any Indebtedness Incurred during such period to
the extent such Indebtedness is outstanding at the Transaction Date and (3) any
Indebtedness to be Incurred on the Transaction Date, in each case as if such
Indebtedness had been Incurred on the first day of such Reference Period and
after giving pro forma effect to the application of the proceeds thereof as if
such application had occurred on such first day; (B) Consolidated Interest
Expense attributable to interest on any Indebtedness (whether existing or being
Incurred) computed on a pro forma basis and bearing a floating interest rate
shall be computed as if the rate in effect on the Transaction Date (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months) had been
the applicable rate for the entire period; (C) there shall be excluded from
Consolidated Interest Expense any Consolidated Interest Expense related to any
amount of Indebtedness that was outstanding during such Reference Period or
thereafter but that is not outstanding or is to be repaid on the Transaction
Date, except for Consolidated Interest Expense accrued (as adjusted pursuant to
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<PAGE> 29
clause (B)) during such Reference Period under a revolving credit or similar
arrangement to the extent of the commitment thereunder (or under any successor
revolving credit or similar arrangement) in effect on the Transaction Date; (D)
pro forma effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving pro forma effect to the application of proceeds of any Asset
Disposition) that occur during such Reference Period or thereafter and prior to
the Transaction Date as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; (E) with respect to any such
Reference Period commencing prior to the Closing Date, the issuance of the Notes
shall be deemed to have taken place on the first day of such period; and (F) pro
forma effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving pro forma effect to the application of proceeds of any Asset
Disposition) that have been made by any Person that has become a Restricted
Subsidiary of the Company or has been merged with or into the Company or any
Restricted Subsidiary of the Company during such Reference Period or subsequent
to such period and prior to the Transaction Date and that would have constituted
Asset Dispositions or Asset Acquisitions had such transactions occurred when
such Person was a Restricted Subsidiary of the Company as if such Asset
Dispositions or Asset Acquisitions were Asset Dispositions or Asset Acquisitions
that occurred on the first day of such Reference Period; provided that to the
extent that clause (D) or (F) of this sentence requires that pro forma effect be
given to an Asset Acquisition or Asset Disposition, such pro forma calculation
shall be based upon the four full fiscal quarters immediately preceding the
Transaction Date of the Person, or division or line of business of the Person,
that is acquired or disposed for which financial information is available.
"Investment" is defined to mean any direct or indirect advance, loan or
other extension of credit (other than advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of the Company or its Restricted Subsidiaries)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by any other Person. For purposes
of the definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described below, (i) "Investment" shall include the fair
market value of the assets (net of liabilities) of any Restricted Subsidiary of
the Company at the time that such Restricted Subsidiary of the Company is
designated an Unrestricted Subsidiary and shall exclude the fair market value of
the assets (net of liabilities) of any Unrestricted Subsidiary at the time that
such Unrestricted Subsidiary is designated a Restricted Subsidiary of the
Company and (ii) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer, in each
case as determined by the Board of Directors in good faith.
"Lien" is defined to mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof, any sale with recourse against the seller or any Affiliate of the
seller, or any agreement to give any security interest).
"Net Cash Proceeds" is defined to mean, with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary of the
Company) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of (i) brokerage commissions and
other fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Company and
its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Company or any Restricted Subsidiary of the Company as a reserve
against any liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters
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and liabilities under any indemnification obligations associated with such Asset
Sale, all as determined in conformity with GAAP.
"Permitted Liens" is defined to mean (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made; (ii) statutory Liens of landlords
and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or
other similar Liens arising in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made; (iii) Liens incurred or deposits made
in the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (iv) Liens incurred
or deposits made to secure the performance of tenders, bids, leases, statutory
or regulatory obligations, bankers' acceptances, surety and appeal bonds,
government contracts, performance and return-of-money bonds and other
obligations of a similar nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (v) easements,
rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof)
upon real or personal property acquired after the Closing Date; provided that
(a) such Lien is created solely for the purpose of securing Indebtedness
Incurred (1) to finance the cost (including the cost of improvement or
construction) of the item of property or assets subject thereto and such Lien is
created prior to, at the time of or within six months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property or (2) to refinance any Indebtedness previously so
secured, (b) the principal amount of the Indebtedness secured by such Lien does
not exceed 100% of such cost and (c) any such Lien shall not extend to or cover
any property or assets other than such item of property or assets and any
improvements on such item; (vii) leases or subleases granted to others that do
not materially interfere with the ordinary course of business of the Company and
its Restricted Subsidiaries, taken as a whole; (viii) Liens encumbering property
or assets under construction arising from progress or partial payments by a
customer of the Company or its Restricted Subsidiaries relating to such property
or assets; (ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of stock or Indebtedness of, any corporation existing at the
time such corporation becomes, or becomes a part of, any Restricted Subsidiary;
(xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary of the Company that does not give rise to an Event of
Default; (xiv) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such letters of
credit and the products and proceeds thereof; (xv) Liens in favor of customs and
revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (xvi) Liens encumbering
customary initial deposits and margin deposits, and other Liens that are either
within the general parameters customary in the industry and incurred in the
ordinary course of business, in each case, securing Indebtedness under Interest
Rate Agreements and Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements designed to
protect the Company or any of its Restricted Subsidiaries from fluctuations in
the price of commodities; (xvii) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by the Company or any of its Restricted Subsidiaries in the ordinary course
of business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date; and (xviii) Liens on or sales
of receivables.
"Public Equity Offering" is defined to mean an underwritten primary public
offering of common stock of the Company pursuant to an effective registration
statement under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
common stock of the Company has been distributed by
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means of an effective registration statement under the Securities Act or sales
pursuant to Rule 144 under the Securities Act.
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms or otherwise is (i) required to be redeemed
prior to the Stated Maturity of the Notes, (ii) redeemable at the option of the
holder of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Redeemable Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes Upon a Change of Control" covenants described below and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes Upon a Change of Control"
covenants described below.
"Restricted Subsidiary" is defined to mean any Subsidiary of the Company
other than an Unrestricted Subsidiary.
"Significant Subsidiary" is defined to mean, at any date of determination,
any Restricted Subsidiary of the Company that, together with its Subsidiaries,
(i) for the most recent fiscal year of the Company, accounted for more than 10%
of the consolidated revenues of the Company and its Restricted Subsidiaries or
(ii) as of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"Specified Date" is defined to mean any Redemption Date, any date of
purchase for any purchase of Notes pursuant to the "Limitation on Asset Sales"
or "Repurchase of Notes upon a Change of Control" covenants described below or
any date on which the Notes first become due and payable after an event of
default.
"Stated Maturity" is defined to mean, (i) with respect to any debt
security, the date specified in such debt security as the fixed date on which
the final installment of principal of such debt security is due and payable and
(ii) with respect to any scheduled installment of principal of or interest on
any debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Subsidiary" is defined to mean, with respect to any Person, any
corporation, association or other business entity of which more than 50% of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Transaction Date" is defined to mean, with respect to the Incurrence of
any Indebtedness by the Company or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" is defined to mean (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Restricted Subsidiary of the Company (including any newly acquired or newly
formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, the Company or any Restricted Subsidiary; provided that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, that such designation would be
permitted under the "Limitation on Restricted Payments" covenant described
below. The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary of the Company; provided that immediately after giving
effect to such designation
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(x) the Company could Incur $1.00 of additional Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant described below and (y)
no Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" is defined to mean with respect to any Person, Capital Stock
of any class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.
"Wholly Owned" is defined to mean, with respect to any Subsidiary of any
Person, such Subsidiary if all of the outstanding common stock or other similar
equity ownership interests (but not including Preferred Stock) in such
Subsidiary (other than any director's qualifying shares or Investments by
foreign nationals mandated by applicable law) is owned directly or indirectly by
such Person.
COVENANTS
Limitation on Indebtedness
(a) Under the terms of the Indenture, the Company will not, and will not
permit any of its Restricted Subsidiaries to, Incur any Indebtedness (other than
the Notes and Indebtedness existing on the Closing Date); provided that the
Company may Incur Indebtedness if, after giving effect to the Incurrence of such
Indebtedness and the receipt and application of the proceeds therefrom, the
Interest Coverage Ratio would be for the period beginning on the Closing Date
through October 19, 1995 greater than 1.50:1 and thereafter greater than 1.75:1.
All of the Company's subsidiaries are Restricted Subsidiaries.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness of the Company outstanding at any time in an aggregate principal
amount not to exceed $10 million, less any amount of Indebtedness permanently
repaid as provided under the "Limitation on Asset Sale" covenant described
below; provided that (A) such Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such Indebtedness is issued, is
expressly made subordinate in right of payment to the Notes, (B) such
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such Indebtedness is issued, provides that no payments of
principal of such Indebtedness by way of sinking fund, mandatory redemption or
otherwise (including defeasance) may be made by the Company at any time prior to
the Stated Maturity of the Notes and (C) the scheduled maturity of all principal
of such Indebtedness is beyond the Stated Maturity of the Notes; (ii)
Indebtedness to the Company or any of its Wholly Owned Restricted Subsidiaries
as long as such Indebtedness continues to be owed to the Company or any of its
Wholly Owned Restricted Subsidiaries; (iii) Indebtedness issued in exchange for,
or the net proceeds of which are used to refinance or refund, then outstanding
Indebtedness, other than Indebtedness Incurred under clause (i) or clause (vii)
of this paragraph and any refinancings thereof in an amount not to exceed the
amount so refinanced or refunded (plus premiums, accrued interest, fees and
expenses); provided that Indebtedness the proceeds of which are used to
refinance or refund the Notes or Indebtedness that is pari passu with, or
subordinated in right of payment to, the Notes shall only be permitted under
this clause (iii) if (A) in case the Notes are refinanced in part or the
Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced or refunded; and provided further that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness of any
Restricted
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Subsidiary of the Company pursuant to this clause (iii) unless the new
Indebtedness could, at the time of the refinancing, have been Incurred by such
Restricted Subsidiary; (iv) Indebtedness (A) in respect of performance, surety
or appeal bonds provided in the ordinary course of business, (B) under Currency
Agreements and Interest Rate Agreements; provided that, in the case of Currency
Agreements that relate to other Indebtedness, such Currency Agreements do not
increase the Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder; and (C) arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted Subsidiary
of the Company (other than Guarantees of Indebtedness Incurred by any Person
acquiring all or any portion of such business, assets or Restricted Subsidiary
of the Company for the purpose of financing such acquisition), in a principal
amount not to exceed the gross proceeds actually received by the Company or any
Restricted Subsidiary in connection with such disposition; (v) Indebtedness
under letters of credit and bankers' acceptances issued in the ordinary course
of business; (vi) Acquired Indebtedness; provided that, with respect to this
clause (vi), after giving effect to the Incurrence thereof, the Company's
Interest Coverage Ratio is not less than it was immediately prior to the
Incurrence of such Acquired Indebtedness; (vii) Indebtedness, in an amount not
to exceed $2 million at any one time outstanding, Incurred by the Company in
connection with the purchase, redemption, acquisition, cancellation or other
retirement for value of shares of Capital Stock of the Company, options on any
such shares or related stock appreciation rights or similar securities held by
officers or employees or former officers or employees (or their estates or
beneficiaries under their estates), upon death, disability, retirement,
termination of employment or pursuant to any agreement under which such shares
of stock or related rights were issued; provided that (A) such Indebtedness, by
its terms or by the terms of any agreement or instrument pursuant to which such
Indebtedness is issued, is expressly made subordinate in right of payment to the
Notes, (B) such Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, provides that no
payments of principal of such Indebtedness by way of sinking fund, mandatory
redemption or otherwise (including defeasance) may be made by the Company at any
time prior to the Stated Maturity of the Notes and (C) the scheduled maturity of
all principal of such Indebtedness is beyond the Stated Maturity of the Notes;
and (viii) Indebtedness to the extent such Indebtedness is secured by Liens
permitted under clause (i) of the second paragraph of the "Limitation on Liens"
covenant described below.
(b) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included. For purposes
of determining compliance with this "Limitation on Indebtedness" covenant, (A)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the above clauses, the Company, in its
sole discretion, shall classify such item of Indebtedness and only be required
to include the amount and type of such Indebtedness in one of such clauses and
(B) the amount of Indebtedness issued at a price that is less than the principal
amount thereof shall be equal to the amount of the liability in respect thereof
determined in conformity with GAAP and (C) any Liens granted pursuant to the
equal and ratable provisions referred to in the first paragraph of the
"Limitation on Liens" covenant shall not be treated as Indebtedness. (Section
4.03)
Limitation on Restricted Payments
So long as any of the Notes are outstanding, the Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or
pay any dividend or make any distribution on its Capital Stock (other than
dividends or distributions payable solely in shares of its or such Restricted
Subsidiary's Capital Stock (other than Redeemable Stock) of the same class held
by such holders or in options, warrants or other rights to acquire such shares
of Capital Stock) held by Persons other than the Company or any of its Wholly
Owned Restricted Subsidiaries, (ii) purchase, redeem, retire or otherwise
acquire for value any shares of Capital Stock of the Company or any Restricted
Subsidiary (including options, warrants or other rights to
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acquire such shares of Capital Stock) held by Persons other than the Company or
any of its Wholly Owned Restricted Subsidiaries, (iii) make any involuntary or
optional principal payment, or voluntary or optional redemption, repurchase,
defeasance, or other acquisition or retirement for value, of Indebtedness of the
Company that is subordinated in right of payment to the Notes, or (iv) make any
Investment in any Affiliate of the Company (other than the Company or a
Restricted Subsidiary of the Company) or any Unrestricted Subsidiary (such
payments or any other actions described in clauses (i) through (iv) being
collectively "Restricted Payments") if, at the time of, and after giving effect
to, the proposed Restricted Payment: (A) a Default or Event of Default shall
have occurred and be continuing, (B) the Company could not Incur at least $1.00
of Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant or (C) the aggregate amount expended for all Restricted Payments (the
amount so expended, if other than in cash, to be determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) after the date of the Indenture shall exceed the sum of (1)
50% of the aggregate amount of the Adjusted Consolidated Net Income (or, if the
Adjusted Consolidated Net Income is a loss, minus 100% of such amount)
(determined by excluding income resulting from transfers of assets received by
the Company or a Restricted Subsidiary from an Unrestricted Subsidiary) accrued
on a cumulative basis during the period (taken as one accounting period)
beginning on the first day of the month immediately following the Closing Date
and ending on the last day of the last fiscal quarter preceding the Transaction
Date plus (2) the aggregate net proceeds (including the fair market value of
non-cash proceeds as determined in good faith by the Board of Directors)
received by the Company from the issuance and sale permitted by the Indenture of
its Capital Stock (other than Redeemable Stock) to a Person who is not a
Subsidiary of the Company, including an issuance or sale permitted by the
Indenture for cash or other property upon the conversion of any Indebtedness of
the Company subsequent to the Closing Date, or from the issuance of any options,
warrants or other rights to acquire Capital Stock of the Company (in each case,
exclusive of any Redeemable Stock or any options, warrants or other rights that
are redeemable at the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the Notes) plus (3) an amount equal to the net
reduction in Investments in Unrestricted Subsidiaries resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted Subsidiary
from Unrestricted Subsidiaries, or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously made by the Company and any
Restricted Subsidiary in such Unrestricted Subsidiary. (Section 4.04)
The foregoing provision shall not take into account, and shall not be
violated by reason of: (i) the payment of any dividend within 60 days after the
date of declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph; (ii) the redemption, repurchase, defeasance
or other acquisition or retirement for value of Indebtedness that is
subordinated in right of payment to the Notes including premium, if any, and
accrued and unpaid interest, with the proceeds of, or in exchange for,
Indebtedness Incurred under clause (iii) of the second paragraph of part (a) of
the "Limitation on Indebtedness" covenant; (iii) the declaration or payment of
dividends on the Common Stock of the Company, following a Public Equity Offering
of such Common Stock, of up to 6% per annum of the net proceeds received by the
Company, in such Public Equity Offering; (iv) the repurchase, redemption or
other acquisition of Capital Stock of the Company (including the Series B and
Series C Preferred Stock) in exchange for, or out of the proceeds of a
substantially concurrent offering of, shares of Capital Stock (other than
Redeemable Stock) of the Company; (v) the acquisition of Indebtedness of the
Company which is subordinated in right of payment to the Notes in exchange for,
or out of the proceeds of, a substantially concurrent offering of, shares of the
Capital Stock of the Company (other than Redeemable Stock); (vi) the repurchase
of Warrants pursuant to a Repurchase Offer (as defined in the Warrant
Agreement); (vii) the making of up to an aggregate amount of $5 million of
Investments in Unrestricted Subsidiaries; (viii) the purchase, redemption,
acquisition, cancellation or other retirement for value of shares of Capital
Stock of the Company, options on any such shares or related stock appreciation
rights or similar securities held by officers or employees or former officers or
employees (or their estates or beneficiaries under their estates), upon death,
disability, retirement, termination of employment or pursuant to any agreement
under which such shares of stock or related rights were issued; provided that
the aggregate cash consideration paid for such purchase,
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redemption, acquisition, cancellation or other retirement of such shares of
Capital Stock or related rights after the Closing Date does not exceed an
aggregate amount of $2 million and that any consideration in excess of such $2
million is in the form of Indebtedness that would be permitted to be Incurred
under clause (vii) of the second paragraph of the "Limitation on Indebtedness"
covenant; (ix) payments or distributions pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; and (x) the
purchase, redemption, acquisition, cancellation or other retirement for value of
shares of Capital Stock of the Company to the extent necessary, in the judgment
of the Board of Directors, to prevent the loss or secure the renewal or
reinstatement of any license or franchise held by the Company or any of its
subsidiaries from any governmental agency; provided that, except in the case of
clauses (i) and (iv), no Default or Event of Default shall have occurred and be
continuing or occur as a consequence of the actions or payments set forth
therein. (Section 4.04)
Notwithstanding the foregoing, in the event of an issuance of Capital Stock
of the Company and (1) the repurchase, redemption or other acquisition of
Capital Stock out of the proceeds of such issuance or (2) the acquisition of
Notes or Indebtedness that is subordinated in right of payment to the Notes out
of the proceeds of such issuance, as permitted by clauses (iv) and (v) above,
then, in calculating whether the conditions of clause (C) of the first paragraph
of this "Limitation on Restricted Payments" covenant have been met with respect
to any subsequent Restricted Payments, both the proceeds of such issuance and
the application of such proceeds shall be included under such clause (C).
(Section 4.04)
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
So long as any of the Notes are outstanding, the Company will not, and will
not permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to the Company or any other Restricted
Subsidiary, (iii) make loans or advances to the Company or any other Restricted
Subsidiary or (iv) transfer any of its property or assets to the Company or any
other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary and existing at the time of
such acquisition, which encumbrances or restrictions are not applicable to any
Person or the property or assets of any Person other than such Person or the
property or assets of such Person so acquired; (iv) in the case of clause (iv)
of the first paragraph of this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; or (v) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing
contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent the Company or any
Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of the
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Company or any of its Restricted Subsidiaries that secure Indebtedness of the
Company or any of its Restricted Subsidiaries. (Section 4.05)
Limitation on the Issuance of Capital Stock of Restricted Subsidiaries
Under the terms of the Indenture, the Company will not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell any shares of
its Capital Stock (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or another Restricted
Subsidiary that is a Wholly Owned Subsidiary of the Company, (ii) issuances or
sales to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law, (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary or (iv) if the Net Cash Proceeds
from such issuance or sale are applied, to the extent required to be applied,
pursuant to the "Limitation on Asset Sales" covenant described below. (Section
4.06)
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; provided that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary that (x) existed at the
time such Person became a Restricted Subsidiary and (y) was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee. (Section 4.07)
Limitation on Transactions with Shareholders and Affiliates
Under the terms of the Indenture, the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, enter into, renew or
extend any transaction (including, without limitation, the purchase, sale, lease
or exchange of property or assets, or the rendering of any service) with any
holder (or any Affiliate of such holder) of 5% or more of any class of Capital
Stock of the Company or with any Affiliate of the Company or any Restricted
Subsidiary, except upon fair and reasonable terms no less favorable to the
Company or such Restricted Subsidiary than could be obtained, at the time of
such transaction or at the time of the execution of the agreement providing
therefor, in a comparable arm's-length transaction with a Person that is not
such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view;
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(ii) any transaction between the Company and any of its Wholly Owned Restricted
Subsidiaries or between Wholly Owned Restricted Subsidiaries of the Company;
(iii) the payment of reasonable and customary regular fees to directors of the
Company who are not employees of the Company; (iv) any payments or other
transactions pursuant to any tax-sharing agreement between the Company and any
other Person with which the Company is required or permitted to file a
consolidated tax return or with which the Company is or could be part of a
consolidated group for tax purposes; (v) the payment of amounts to Morgan
Stanley & Co. Incorporated or its Affiliates pursuant to underwriting or
placement agreements; (vi) any loans or advances to officers or employees of the
Company or any Restricted Subsidiary in the ordinary course of business; (vii)
any Restricted Payments not prohibited by the "Limitation on Restricted
Payments" covenant; or (viii) the sale, lease, transfer or other disposition by
the Company or any Restricted Subsidiary of Capital Stock or assets of any
Unrestricted Subsidiary having a fair market value of less than $5 million as
determined by the Board of Directors. (Section 4.08)
Limitation on Liens
Under the terms of the Indenture, the Company will not, and will not permit
any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien
on any of its assets or properties of any character (including, without
limitation, licenses), or any shares of Capital Stock or Indebtedness of any
Restricted Subsidiary, without making effective provision for all of the Notes
and all other amounts due under the Indenture to be directly secured equally and
ratably with (or prior to) the obligation or liability secured by such Lien
unless, after giving effect thereto, the aggregate amount of any Indebtedness so
secured does not exceed 10% of Adjusted Consolidated Net Tangible Assets.
The foregoing limitation does not apply to (i) purchase money Liens upon or
in inventory or equipment acquired or held by the Company or any of its
Restricted Subsidiaries taken or retained by the seller of such inventory or
equipment to secure all or a part of the purchase price therefor; provided that
such Liens do not extend to or cover any property or assets of the Company or
any Restricted Subsidiary other than the inventory or equipment acquired; (ii)
other Liens existing on the Closing Date; (iii) Liens granted after the Closing
Date on any assets or Capital Stock of the Company or its Restricted
Subsidiaries created in favor of the Holders; (iv) Liens with respect to
Acquired Indebtedness permitted under the "Limitation on Indebtedness" covenant
and permitted refinancings thereof; provided that such Liens do not extend to or
cover any property or assets of the Company or any Restricted Subsidiary other
than the property or assets acquired; (v) Liens with respect to the assets of a
Restricted Subsidiary granted by such Restricted Subsidiary to the Company or a
Wholly Owned Restricted Subsidiary to secure Indebtedness owing to the Company
or such other Restricted Subsidiary; (vi) Liens securing Indebtedness which is
Incurred to refinance secured Indebtedness and which is permitted to be Incurred
under clause (i) or (iii) of the second paragraph of the "Limitation on
Indebtedness" covenant; provided that such Liens do not extend to or cover any
property or assets of the Company or any Restricted Subsidiary other than the
property or assets securing the Indebtedness being refinanced; or (vii)
Permitted Liens. (Section 4.09)
Limitation on Asset Sales
Under the terms of the Indenture, in the event and to the extent that the
Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries
from one or more Asset Sales occurring on or after the Closing Date in any
period of 12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible
Assets in any one fiscal year (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
the Company and its Subsidiaries has been prepared), then the Company shall or
shall cause the relevant Restricted Subsidiary to (i) within 12 months after the
date Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net
Tangible Assets in any one fiscal year (determined as of the date closest to the
commencement of such 12-month period for which a balance sheet of the Company
and its Subsidiaries has been prepared) (A) apply an amount equal to such excess
Net Cash Proceeds to permanently repay unsubordinated Indebtedness of the
Company or of any Restricted Subsidiary providing a Subsidiary Guarantee
pursuant to the "Limitation on Issuances of Guarantees by Restricted
Subsidiaries" covenant described above or Indebtedness of any other Restricted
Subsidiary, in each case
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owing to a Person other than the Company or any of its Restricted Subsidiaries
or (B) invest an equal amount, or the amount not so applied pursuant to clause
(A) (or enter into a definitive agreement committing to so invest within 12
months after the date of such agreement), in property or assets of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply (no later than the end of
the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to
the extent not applied pursuant to clause (i)) as provided in the following
paragraphs of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
below) totals at least $5 million, the Company must, not later than the
fifteenth Business Day of such month, make an offer (an "Excess Proceeds Offer")
to purchase from the Holders on a pro rata basis an aggregate Accreted Value of
Notes equal to the Excess Proceeds on such date, at a purchase price equal to
101% of the Accreted Value of the Notes, plus, in each case, accrued interest
(if any) to the date of purchase (the "Excess Proceeds Payment").
The Company shall commence an Excess Proceeds Offer by mailing a notice to
the Trustee and each Holder stating: (i) that the Excess Proceeds Offer is being
made pursuant to this "Limitation on Asset Sales" covenant and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Excess Proceeds Payment Date"); (iii) that any Note not tendered will
continue to accrue interest pursuant to its terms; (iv) that, unless the Company
defaults in the payment of the Excess Proceeds Payment, any Note accepted for
payment pursuant to the Excess Proceeds Offer shall cease to accrue interest on
and after the Excess Proceeds Payment Date; (v) that Holders electing to have a
Note purchased pursuant to the Excess Proceeds Offer will be required to
surrender the Note, together with the form entitled "Option of the Holder to
Elect Purchase" on the reverse side of the Note completed, to the Paying Agent
at the address specified in the notice prior to the close of business on the
Business Day immediately preceding the Excess Proceeds Payment Date; (vi) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding the Excess Proceeds Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount at maturity to the unpurchased portion of the Notes
surrendered; provided that each Note purchased and each new Note issued shall be
in a principal amount at maturity of $1,000 or integral multiples thereof.
On the Excess Proceeds Payment Date, the Company shall (i) accept for
payment on a pro rata basis Notes or portions thereof tendered pursuant to the
Excess Proceeds Offer; (ii) deposit with the Paying Agent money sufficient to
pay the purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Notes or portions thereof
so accepted together with an Officers' Certificate specifying the Notes or
portions thereof accepted for payment by the Company. The Paying Agent shall
promptly mail to the Holders of Notes so accepted payment in an amount equal to
the purchase price, and the Trustee shall promptly authenticate and mail to such
Holders a new Note equal in principal amount at maturity to any unpurchased
portion of the Note surrendered; provided that each Note purchased and each new
Note issued shall be in a principal amount at maturity of $1,000 or integral
multiples thereof. The Company will publicly announce the results of the Excess
Proceeds Offer as soon as practicable after the Excess Proceeds Payment Date.
For purposes of this "Limitation on Asset Sales" covenant, the Trustee shall act
as the Paying Agent.
The Company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that such Excess
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Proceeds are received by the Company under this "Limitation on Asset Sales"
covenant and the Company is required to repurchase Notes as described above and
the Company may modify any of the foregoing provisions of this "Limitation on
Asset Sales" covenant to the extent it is advised by independent counsel that
such modification is necessary or appropriate in order to ensure such
compliance. (Section 4.10)
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the
right to require the repurchase of its Notes by the Company in cash pursuant to
the offer described below (the "Change of Control Offer") at a purchase price
equal to 101% of the Accreted Value thereof, plus accrued interest (if any) to
the date of purchase (the "Change of Control Payment"). Prior to the mailing of
the notice to Holders provided for in the succeeding paragraph, but in any event
within 30 days following any Change of Control, the Company covenants to (i)
repay in full all indebtedness of the Company that would prohibit the repurchase
of the Notes as provided for in the succeeding paragraph or (ii) obtain any
requisite consents under instruments governing any such indebtedness of the
Company to permit the repurchase of the Notes as provided for in the succeeding
paragraph. The Company shall first comply with the covenant in the preceding
sentence before it shall be required to repurchase Notes pursuant to this
"Repurchase of Notes upon a Change of Control" covenant.
Within 30 days of the Change of Control, the Company shall mail a notice to
the Trustee and each Holder stating: (i) that a Change of Control has occurred,
that the Change of Control Offer is being made pursuant to this "Repurchase of
Notes Upon a Change of Control" covenant and that all Notes validly tendered
will be accepted for payment; (ii) the purchase price and the date of purchase
(which shall be a Business Day no earlier than 30 days nor later than 60 days
from the date such notice is mailed) (the "Change of Control Payment Date");
(iii) that any Note not tendered will continue to accrue interest pursuant to
its terms; (iv) that, unless the Company defaults in the payment of the Change
of Control Payment, any Note accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest on and after the Change of Control
Payment Date; (v) that Holders electing to have any Note or portion thereof
purchased pursuant to the Change of Control Offer will be required to surrender
such Note, together with the form entitled "Option of the Holder to Elect
Purchase" on the reverse side of such Note completed, to the Paying Agent at the
address specified in the notice prior to the close of business on the Business
Day immediately preceding the Change of Control Payment Date; (vi) that Holders
will be entitled to withdraw their election if the Paying Agent receives, not
later than the close of business on the third Business Day immediately preceding
the Change of Control Payment Date, a telegram, telex, facsimile transmission or
letter setting forth the name of such Holder, the principal amount of Notes
delivered for purchase and a statement that such Holder is withdrawing his
election to have such Notes purchased; and (vii) that Holders whose Notes are
being purchased only in part will be issued new Notes equal in principal amount
at maturity to the unpurchased portion of the Notes surrendered; provided that
each Note purchased and each new Note issued shall be in a principal amount at
maturity of $1,000 or integral multiples thereof.
On the Change of Control Payment Date, the Company shall: (i) accept for
payment Notes or portions thereof tendered pursuant to the Change of Control
Offer; (ii) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted; and (iii) deliver, or cause
to be delivered, to the Trustee, all Notes or portions thereof so accepted
together with an Officers' Certificate specifying the Notes or portions thereof
accepted for payment by the Company. The Paying Agent shall promptly mail, to
the Holders of Notes so accepted, payment in an amount equal to the purchase
price, and the Trustee shall promptly authenticate and mail to such Holders a
new Note equal in principal amount at maturity to any unpurchased portion of the
Notes surrendered; provided that each Note purchased and each new Note issued
shall be in a principal amount at maturity of $1,000 or integral multiples
thereof. The Company will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date. For
purposes of this "Repurchase of Notes Upon a Change of Control" covenant, the
Trustee shall act as Paying Agent.
The Company will comply with Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in the event that a Change of Control occurs under
this "Repurchase of Notes Upon a Change of Control" covenant and the Company is
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required to repurchase the Notes as described above and the Company may modify
any of the foregoing provisions of this "Repurchase of Notes upon a Change of
Control" covenant to the extent it is advised by independent counsel that such
modification is necessary or appropriate in order to ensure such compliance.
(Section 4.11)
If the Company is unable to repay all of its indebtedness that would
prohibit repurchase of the Notes or is unable to obtain the consents of the
holders of indebtedness, if any, of the Company outstanding at the time of a
Change of Control whose consent would be so required to permit the repurchase of
Notes, then the Company will have breached such covenant. This breach will
constitute an Event of Default under the Indenture if its continues for a period
of 30 consecutive days after written notice is given to the Company by the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Notes outstanding. In addition, the failure by the Company to repurchase Notes
at the conclusion of the Change of Control Offer will constitute an Event of
Default without any waiting period or notice requirements.
There can be no assurances that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless the consents referred to above are obtained, require the Company to
repay all indebtedness then outstanding which by its terms would prohibit such
Note repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times from and after the earlier of (i) the date of the commencement
of a registered exchange offer for the Notes by the Company or other
registration of the Notes (the "Registration") and (ii) the date that is nine
months after the Closing Date, in either case, whether or not the Company is
then required to file reports with the Commission, the Company shall file with
the Commission all such reports and other information as would be required to be
filed with the Commission by the Exchange Act. The Company shall supply the
Trustee and each holder of Notes, or shall supply to the Trustee for forwarding
to each Holder of Notes, without cost to such Holder, copies of such reports or
other information. In addition, at all times prior to the earlier of the date of
the Registration or the date that is nine months after the Closing Date, as
applicable, the Company shall, at its cost, deliver to each Holder of the Notes
quarterly and annual reports substantially equivalent to those which would be
required by the Exchange Act. (Section 4.17)
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days; (c)
the Company defaults in the performance of or breaches any other covenant or
agreement of the Company in the Indenture or under the Notes and such default or
breach continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
Notes; (d) there occurs with respect to any issue or issues of Indebtedness of
the Company or any of its Significant Subsidiaries having an outstanding
principal amount of $5 million or more in the aggregate for all such issues of
all such Persons, whether such Indebtedness now exists or shall hereafter be
created, an event of default that has caused the holder thereof to declare such
Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 30 days of such acceleration; (e) any final
judgment or order (not covered by insurance) for the payment of money in excess
of $5 million in the aggregate for all such final judgments or orders against
all such Persons (treating any deductibles, self-insurance or retention as not
so covered) shall be rendered against the Company or any of its Significant
Subsidiaries and shall not be paid or discharged, and there shall be any period
of 60 consecutive days following entry of the final judgment or order that
causes the aggregate amount for all such final judgments or orders outstanding
and not paid or discharged against all such Persons to exceed $5 million during
which a stay of enforcement of such final judgment or order, by reason of a
pending appeal
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or otherwise, shall not be in effect; (f) a court having jurisdiction in the
premises enters a decree or order for (A) relief in respect of the Company or
any of its Significant Subsidiaries in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any of its Significant
Subsidiaries or for all or substantially all of the property and assets of the
Company or any of its Significant Subsidiaries or (C) the winding up or
liquidation of the affairs of the Company or any of its Significant Subsidiaries
and, in each case, such decree or order shall remain unstayed and in effect for
a period of 60 consecutive days; (g) the Company or any of its Significant
Subsidiaries (A) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company or
any of its Significant Subsidiaries or for all or substantially all of the
property and assets of the Company or any of its Significant Subsidiaries or (C)
effects any general assignment for the benefit of creditors; (h) the Company
and/or one or more of its Significant Subsidiaries fails to make at the final
(but not any interim) fixed maturity of any Indebtedness principal payments
aggregating $5 million or more and all such defaulted payments shall not have
been made, waived or extended within 30 days of the payment default that causes
the amount to exceed $5 million; or (i) the nonpayment or acceleration upon
default of any three or more items of Indebtedness that would constitute at the
time of such nonpayments, but for the individual amounts of such Indebtedness,
an Event of Default under clause (d) or clause (h) above, or both, and which
items of Indebtedness aggregate $5 million or more. (Section 6.01)
If an Event of Default (other than an Event of Default specified in clause
(f) or (g) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount at maturity of the Notes, then outstanding, by
written notice to the Company (and to the Trustee if such notice is given by the
Holders (the "Acceleration Notice")), may, and the Trustee at the request of
such Holders shall, declare the Accreted Value of, premium, if any, and accrued
interest on the Notes to be immediately due and payable. Upon a declaration of
acceleration, such Accreted Value of, premium, if any, and accrued interest
shall be immediately due and payable. In the event of a declaration of
acceleration because an Event of Default set forth in clause (d), (h) or (i)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (d), (h) or (i) shall be remedied or cured
by the Company and/or the relevant Significant Subsidiaries or waived by the
holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(f) or (g) above occurs with respect to the Company, the Accreted Value of,
premium, if any, and accrued interest on the Notes then outstanding shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder. The Holders of at least a majority
in principal amount of the outstanding Notes by written notice to the Company
and to the Trustee, may waive all past defaults and rescind and annul a
declaration of acceleration and its consequences if (i) all existing Events of
Default, other than the nonpayment of the Accreted Value of, premium, if any,
and interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived and (ii) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction.
(Sections 6.02 and 6.04) For information as to the waiver of defaults, see
"-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. (Section
6.05) A Holder may not pursue any remedy with respect to the Indenture or the
Notes unless: (i) the Holder gives the Trustee written notice of a continuing
Event of Default; (ii) the Holders of at least 25% in aggregate principal amount
of outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense; (iv) the Trustee does not
comply with the
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request within 60 days after receipt of the request and the offer of indemnity;
and (v) during such 60-day period, the Holders of a majority in aggregate
principal amount of the outstanding Notes do not give the Trustee a direction
that is inconsistent with the request. (Section 6.06) However, such limitations
do not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder. (Section 6.07)
The Indenture will require certain officers of the Company to certify, on
or before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof.
(Section 4.16) The Company will also be obligated to notify the Trustee of any
default or defaults in the performance of any covenants or agreements under the
Indenture. (Section 4.15)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company shall not consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person (other than the
Company or a Wholly Owned Restricted Subsidiary of the Company with a positive
net worth; provided that, in connection with any such merger of the Company with
a Wholly Owned Restricted Subsidiary of the Company, no consideration (other
than Common Stock in the surviving Person or the Company) shall be issued or
distributed to the stockholders of the Company) or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, (A) the Company or
any Person becoming the successor obligor of the Notes, as the case may be,
shall have a Consolidated Net Worth equal to or greater than the Consolidated
Net Worth of the Company immediately prior to such transaction or (B) the
Interest Coverage Ratio of the Company or any Person becoming the successor
obligor of the Notes, as the case may be, is at least equal to the lesser of (I)
3.00:1 and (II) the Interest Coverage Ratio of the Company immediately prior to
such transaction; and (iv) the Company delivers to the Trustee an Officers'
Certificate (attaching the arithmetic computations to demonstrate compliance
with clause (iii)) and Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture complies with
this provision and that all conditions precedent provided for herein relating to
such transaction have been complied with; provided, however, that clause (iii)
above does not apply if, in the good faith determination of the Board of
Directors of the Company, whose determination shall be evidenced by a Board
Resolution, the principal purpose of such transaction is to change the state of
incorporation of the Company; and provided further that any such transaction
shall not have as one of its purposes the evasion of the foregoing limitations.
(Section 5.01)
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that the Company will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance
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with their terms will provide money in an amount sufficient to pay the principal
of, premium, if any, and accrued interest on the Notes on the Stated Maturity of
such payments in accordance with the terms of the Indenture and the Notes, (B)
the Company has delivered to the Trustee (i) either (x) an Opinion of Counsel to
the effect that Holders will not recognize income, gain or loss for federal
income tax purposes as a result of the Company's exercise of its option under
this "Defeasance" provision and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred, which Opinion
of Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the date of the Indenture such that a
ruling is no longer required or (y) a ruling directed to the Trustee received
from the Internal Revenue Service to the same effect as the aforementioned
Opinion of Counsel and (ii) an Opinion of Counsel to the effect that the
creation of the defeasance trust does not violate the Investment Company Act of
1940 and after the passage of 123 days following the deposit, the trust fund
will not be subject to the effect of Section 547 of the United States Bankruptcy
Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately
after giving effect to such deposit on a pro forma basis, no Event of Default,
or event that after the giving of notice or lapse of time or both would become
an Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company is a party or by which the Company is bound, and (D) if at such time the
Notes are listed on a national securities exchange, the Company has delivered to
the Trustee an Opinion of Counsel to the effect that the Notes will not be
delisted as a result of such deposit, defeasance and discharge. (Section 8.02)
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further will provide that the provisions of the Indenture will no
longer be in effect with respect to clauses (iii) and (iv) under "Consolidation,
Merger and Sale of Assets" and all the covenants described herein under
"Covenants," clause (iii) under "Events of Default" with respect to such
covenants and clauses (iii) and (iv) under "Consolidation, Merger and Sale of
Assets," and clauses (d), (e), (h) and (i) under "Events of Default" shall be
deemed not to be Events of Default, upon, among other things, the deposit with
the Trustee, in trust, of money and/or U.S. Government Obligations that through
the payment of interest and principal in respect thereof in accordance with
their terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the Notes on the Stated Maturity of
such payments in accordance with the terms of the Indenture and the Notes, the
satisfaction of the provisions described in clauses (B)(ii), (C) and (D) of the
preceding paragraph and the delivery by the Company to the Trustee of an Opinion
of Counsel to the effect that, among other things, the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and defeasance of certain covenants and Events of Default and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred. (Section 8.03)
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal amount of, or premium, if
any, or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to
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institute suit for the enforcement of any payment on or after the Stated
Maturity (or, in the case of a redemption, on or after the Redemption Date) of
any Note, (v) reduce the above-stated percentage of outstanding Notes the
consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults. (Section 9.02)
NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, shareholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability. (Section
10.09)
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if its acquires any
conflicting interest, it must eliminate such conflict or resign.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement, or other employee
benefit plan subject to Title 1 of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") ("Plan") should consider the fiduciary standards
under ERISA in the context of the Plan's particular circumstances before
authorizing an investment of a portion of such Plan's assets in the Notes.
Accordingly, such fiduciary should consider (i) whether the investment satisfies
the diversification requirements of Section 404(a)(1)(C) of ERISA, (ii) whether
the investment is in accordance with the documents and instruments governing the
Plan as required by Section 404(a)(1)(D) of ERISA, and (iii) whether the
investment is prudent under ERISA.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), prohibit a wide range of
transactions involving the assets of a Plan or a plan subject to Section 4975 of
the Code (hereinafter a Plan and such plan are collectively referred to as an
"ERISA Plan") and persons who have certain specified relationships to the ERISA
Plan ("parties in interest" within the meaning of ERISA, "disqualified persons"
within the meaning of the Code). A prohibited transaction described in Section
406 of ERISA or Section 4975 of the Code could arise if the Company were, or
were to become, a party in interest or a disqualified person with respect to an
ERISA Plan purchasing the Notes during the offering or any time thereafter.
Certain exemptions from the prohibited transaction rules could be applicable to
the purchase of the Notes by an ERISA Plan depending on the type and
circumstances of the fiduciary of the ERISA Plan making the decision to acquire
the Notes. Included among these exemptions are: Prohibited Transaction Class
Exemption ("PTCE") 90-1, regarding investments by insurance company pooled
separate accounts; PTCE 91-38, regarding investments by bank collective
investment funds; or PTCE 84-14, regarding transactions effected by a qualified
professional asset manager. Thus, a fiduciary of an ERISA Plan considering an
investment in the Notes also should consider whether the acquisition or the
continued holding of the Notes might constitute or give rise to a non-exempt
prohibited transaction. During the Offering, no
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ERISA Plan with respect to which the Company is a party in interest or a
disqualified person may purchase the Notes unless a statutory or administrative
exemption from the prohibited transaction rules under ERISA and the Code is
available for such purchase. Subsequent to the offering, no ERISA Plan with
respect to which the Company is a party in interest or a disqualified person may
purchase the Notes, unless a statutory or administrative exemption is available.
Certain employee benefit plans, such as governmental plans and church plans
(if no election has been made under Section 410(d) of the Code), are not subject
to the restrictions of ERISA, and assets of such plans may be invested in the
Notes without regard to the ERISA considerations described above. The investment
in the Notes by such employee benefit plans may, however, be subject to other
applicable federal and state laws, which should be carefully considered by such
employee benefit plans before investing in the Notes.
The Department of Labor (the "DOL") has issued final regulations (the
"Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under the Regulations, if an ERISA Plan acquires an equity interest in an
entity, which interest is neither a "publicly offered security" nor a security
issued by an investment company registered under the Investment Company Act of
1940, as amended, the ERISA Plan's assets would include, for purposes of the
fiduciary responsibility provisions of ERISA, both the equity interest and an
undivided interest in each of the entity's underlying assets unless one of
certain specified exceptions applies. One such exception is the "operating
company" exception. An entity will qualify as an "operating company" if it is
primarily engaged, directly or through a majority owned subsidiary or
subsidiaries, in the production or sale of a product or service other than the
investment of capital. The Company has determined that it qualifies as an
"operating company" within the meaning of the Regulations. Accordingly, the
Company believes that an investment by an ERISA Plan in the Notes should not
cause any of the underlying assets of the Company to be "plan assets" within the
meaning of the Regulations.
The Regulations define an "equity interest" as "any interest in an entity
other than an instrument that is treated as indebtedness under applicable local
law and which has no substantial equity features." The Company believes that the
Notes should be treated as indebtedness under Ohio law, which the Company
believes is the "applicable local law" for purposes of the Regulations. In the
preamble to the Regulations, the DOL has stated that "whether any particular
investment has substantial equity features is an inherently factual question
that must be resolved on a case by case basis" and that in making such
determination "it would be appropriate . . . to take into account whether the
equity features of an instrument are such that a plan's investment in the
instrument would be a practical vehicle for the indirect provision of investment
management services." The Company does not believe that the Notes constitute an
"equity interest" in the Company for purposes of the Regulations. Even if the
Notes were so characterized, however, the Company believes, based upon its
determination that the Company qualifies as an "operating company" within the
meaning of the Regulations, that an investment by an ERISA Plan in the Notes
should not cause any of the underlying assets of the Company to be "plan assets"
within the meaning of the Regulations.
Every investor considering the acquisition of the Notes should consult with
its counsel with respect to the potential applicability of ERISA and Section
4975 of the Code to such investment.
PLAN OF DISTRIBUTION
This Prospectus is to be used by MS&Co. in connection with offers and sales
of the Notes in market-making transactions at negotiated prices relating to
prevailing market prices at the time of sale. MS&Co. may act as principal or
agent in such transactions. MS&Co. has no obligation to make a market in the
Notes, and may discontinue its market-making activities at any time without
notice, at its sole discretion.
There is currently no established public market for the Notes. The Company
does not currently intend to apply for listing of the Notes on any securities
exchange. Therefore, any trading that does develop will occur on the
over-the-counter market. The Company has been advised by MS&Co. that it intends
to make a market in the Notes but it has no obligation to do so and any
market-making may be discontinued at any time. No assurance can be given that an
active public market for the Notes will develop.
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MS&Co. acted as placement agent in connection with the original private
placement of the Notes and received a placement fee of $2,626,000 in connection
therewith. MS&Co. also acted as the lead managing underwriter in connection with
the initial public offering of Wireless' Class A Common Stock, in which the
underwriters received underwriting discounts and commissions of approximately
$5,460,000 in the aggregate. MS&Co. is affiliated with entities that
beneficially own approximately 51% of the outstanding Common Stock of Wireless.
Although there are no agreements to do so, MS&Co., as well as others, may
act as broker or dealer in connection with the sale of Notes contemplated by
this Prospectus and may receive fees or commissions in connection therewith.
The Company has agreed to indemnify MS&Co. against certain liabilities
under the Securities Act or to contribute to payments that MS&Co. may be
required to make in respect of such liabilities.
LEGAL MATTERS
Certain matters with respect to the legality of the issuance of the
securities offered hereby are being passed upon for the Company by Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York 10017. Davis Polk & Wardwell
has performed, and will continue to perform, legal services for MSVCF, MSLEF II
and MSCP III, companies controlled by MSLEF II, MSCP III and MS & Co. and acted
as counsel to MSLEF II and MSCP III in connection with its investments in the
Company.
EXPERTS
The Consolidated Financial Statements of the Company at December 31, 1995
and 1996, and for each of the three years in the period ended December 31, 1996,
incorporated by reference herein, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto and are incorporated by reference herein, in reliance upon the authority
of said firm as experts in giving said reports.
46
<PAGE> 47
PageMart, Inc.
