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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1995
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _________ to _________
Commission File No. 33-91142
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PAGEMART WIRELESS, INC.
(FORMERLY PAGEMART NATIONWIDE, INC.)
(Exact name of registrant as specified in charter)
DELAWARE 75-2575229
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6688 NORTH CENTRAL EXPRESSWAY, SUITE 800
DALLAS, TEXAS 75206
(Address of principal executive offices)
(Registrant's telephone number, including area code): (214) 750-5809
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
There is no established market for the registrant's common stock.
Accordingly, the registrant is unable to estimate the value of shares held by
non-affiliates. See Item 5 entitled "Market for the Registrant's Common Equity
and Related Stockholder Matters" for additional information concerning the
market for the registrant's common stock.
As of March 1, 1996, 33,711,269 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is one of the fastest growing providers of wireless messaging
services in the United States. The Company has grown to become the fifth
largest paging carrier in the United States, based on 1,240,024 subscribers at
December 31, 1995. The Company's number of subscribers has increased at annual
growth rates of 180%, 136% and 60% in 1993, 1994 and 1995, respectively, as
compared to an average annual growth rate of approximately 31% for 1993 through
1995 for the paging industry. The Company has made no acquisitions, and all
subscriber growth has been internally generated.
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 and the Bahamas, and has recently initiated
nationwide services in Canada. The Company employs a digital, state of the art
transmission network that is 100% FLEX[Registered] enabled, allowing the use of
high speed messaging technology thereby providing increased transmission
capacity.
The Company was incorporated in Delaware on November 29, 1994 as a
wholly-owned subsidiary of PageMart, Inc. ("PageMart"). Effective January 19,
1995, PageMart merged with a wholly-owned subsidiary of the Company, pursuant
to which PageMart was the surviving corporation (the "Reorganization"). As
part of the Reorganization, each share of outstanding common stock of PageMart
was converted into the right to receive one share of common stock of the
Company. Upon consummation of the Reorganization, the stockholders of PageMart
had the same ownership interest in the Company as they had in PageMart, and the
Company owned all of the capital stock of PageMart. On December 28, 1995, the
name of the Company was changed from PageMart Nationwide, Inc. to PageMart
Wireless, Inc. ("Wireless").
OPERATING STRATEGY
The Company attributes the significant growth of its paging business to
the successful implementation of its six operating principles: (i) diversified
distribution channels, (ii) nationwide common frequency, (iii) efficient
network architecture, (iv) spectrum-rich frequency position, (v) centralized
administration, and (vi) customer service capabilities.
DIVERSIFIED DISTRIBUTION CHANNELS. The Company utilizes a number of
distribution channels to market its products and services, including retail
marketing, private brand strategic alliances and national sales offices.
Retail Marketing. The Company believes that it is the leading
supplier of paging units to consumers through retail distribution channels.
The Company has been selected as the pager supplier for a number of leading
retail chains, including Office Depot Inc., Comp USA, Inc., Montgomery Ward
Company, Inc., Target Stores, Inc. and Best Buy, Inc.
Private Brand Strategic Alliances. The Company was one of the first
paging companies to broaden its distribution reach by establishing
strategic relationships with large communications providers. The Company
has established strategic relationships with GTE Corporation, Southwestern
Bell Mobile Systems, AT&T Wireless Services, Ameritech Mobile Services,
Inc. and long distance reseller EXCEL Telecommunications, Inc.
National Sales Offices. The Company's national sales offices sell
equipment and services through three distribution channels: direct sales,
third-party resellers and local retailers. The Company has a direct sales
force presence in over 75 Metropolitan Statistical Areas ("MSAs") through
63 offices.
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Management believes that a diversified approach to distribution is
important to sustain growth as paging services more deeply penetrate the United
States population, especially the consumer market. This diversification is
a key element of the Company's strategy of expanding its subscriber base as
rapidly as possible to increase cash flow through greater utilization of its
nationwide wireless communication network. A diversified distribution strategy
also provides a cost effective method for managing disconnection rates. The
Company's average monthly disconnection rates for the twelve months ended
December 31, 1994 and 1995 were 3.4% and 2.5%, respectively.
NATIONWIDE COMMON FREQUENCY. The Company has constructed its nationwide
messaging network on a common frequency. Use of a common frequency provides
the Company with a number of important strategic advantages not available to
many of its competitors which operate on multiple frequencies across markets.
The use of a common frequency enables the Company's customers to travel
throughout the United States, Canada and the Bahamas while continuing to use
the same messaging device. As a result, the Company is able to provide
multi-city coverage customized to accommodate the customer's needs ("coverage
on demand"). The common frequency also provides a competitive advantage to the
Company when marketing its services to regional and national retailers and
private brand strategic alliance partners. These distributors are able to buy
the paging unit without being limited by where they can distribute the product
or by the service they sell with the unit. This allows retailers and strategic
partners to offer customers all service options while minimizing the number of
Stock Keeping Units ("SKUs") that the distributor must carry, thus reducing
inventory carrying costs.
EFFICIENT NETWORK ARCHITECTURE. The Company is an industry leader in the
implementation of advanced telecommunications technologies, including
pioneering the use of direct broadcast satellite ("DBS") technology for paging.
The Company's nationwide wireless transmission network is 100% controlled by
DBS technology, which gives the Company a flexible, highly reliable and
efficient network architecture. The use of DBS technology eliminates the need
for expensive terrestrial Rf control links and repeater equipment while
enabling the Company to provide a wide range of coverage options. The
Company's network covers the top 300 MSAs across the United States, or
approximately 90% of the total population in the United States and is designed
to serve a significantly larger subscriber base than the one currently served
by the Company. The Company's wireless transmission network is 100% FLEX
enabled, allowing the use of the high speed FLEX protocol to transmit messages
and maximize system capacity.
SPECTRUM-RICH FREQUENCY POSITION. The Company ranks among the top four
paging carriers in the United States in licensed nationwide frequencies. The
Company's exclusive frequency licenses include two nationwide paging
frequencies and 150 kHz of nationwide Narrowband Personal Communications
Service ("NPCS") frequency (the "NPCS Licenses"). The Company believes that
this frequency has important strategic value because it may enable the Company
to grow significantly its one-way subscriber base and to provide two-way
messaging and other value-added services to its subscribers. As a result, the
Company believes its spectrum-rich frequency position enables it to attract
private brand strategic alliance partners.
CENTRALIZED ADMINISTRATION. The Company has centralized customer service,
information systems, inventory control and distribution, credit and
collections, accounting and marketing functions. This centralized
administration has enabled the Company to become one of the lowest cost
providers of paging and other one-way wireless communications services in the
United States. In addition, the administrative infrastructure is designed to
support a significantly larger customer base than that currently served by the
Company, which will allow it to realize additional operating efficiency as the
Company continues to grow.
CUSTOMER SERVICE CAPABILITIES. Management has focused on developing
industry-leading customer service capabilities. The Company employs over 600
highly trained customer service personnel operating in state of the art call
center facilities. Management believes that these services are an important
factor in supporting and retaining its strategic partners, retailers and
subscribers.
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TWO-WAY MESSAGING STRATEGY
One of the Company's principal strategies is to become a leading provider
of two-way messaging services in the United States. Management believes that
the introduction of two-way messaging services may present significant future
growth opportunities to the Company by enabling it to provide a new generation
of advanced messaging services, including data messaging, stored voice
messaging and other services, to new and existing subscribers.
The Company's two-way messaging strategy is founded on four principal
competitive advantages: (i) nationwide spectrum, (ii) incremental introduction
of technology, (iii) established diversified distribution channels, and (iv)
operating efficiency.
NATIONWIDE SPECTRUM. With the acquisition of the NPCS Licenses, the
Company became one of four companies with 150 kHz or more of nationwide NPCS
frequency. As a result, the Company is positioned to create a high capacity
nationwide network capable of delivering local, multi-city, regional, or
nationwide data and stored voice messaging services to a large number of
subscribers.
INCREMENTAL INTRODUCTION OF TECHNOLOGY. The Company intends to introduce
two-way messaging technology by initially building upon its one-way
transmission network, enabling the Company to minimize the level of capital
expenditures and investments. The Company plans to introduce two-way stored
voice service paced to the availability of infrastructure equipment, subscriber
devices and to meet the market demand for such services.
ESTABLISHED DIVERSIFIED DISTRIBUTION CHANNELS. The Company plans to
leverage its established diversified distribution channels to achieve
efficient, rapid market penetration of its two-way services.
OPERATING EFFICIENCY. The Company expects to utilize its existing one-way
network and centralized administration to minimize incremental costs of product
and service expansion. Management believes that the Company's centralized
customer service, information systems, inventory control and distribution,
credit and collections, accounting and marketing organizations will be capable
of supporting the Company's two-way strategy.
As a result of these operating advantages, the Company plans to provide a
complete array of two-way services at affordable prices, including stored voice
and data services, that should appeal to a large number of potential
subscribers.
The Company expects to begin testing two-way data and stored voice
services in the second quarter of 1996. Upon completion of testing, two-way
data services are expected to be marketed on a city-by-city basis beginning in
late 1996. Two-way data services may include guaranteed alphanumeric message
delivery with acknowledgment and message with response capabilities. In 1997,
the Company plans to introduce its VoiceMart[Trademark] service which should
provide subscribers with the ability to receive stored voice messages directly
to their messaging devices. Introduction of the VoiceMart service will be paced
to the availability of infrastructure equipment, subscriber devices and market
demand.
COAM STRATEGY
The Company's operating model is unique in the industry in that it follows
a strategy of selling rather than leasing messaging equipment to subscribers.
The selling expenses of the Company, which include advertising, compensation
paid to its sales force and the loss on pagers sold, associated with the
Company's Customer Owned and Maintained ("COAM") strategy, are substantial for
each messaging unit. As of December 31, 1995, approximately 99% of the
Company's messaging units were COAM, which compares to an industry average of
approximately 56%. The Company believes that by following a COAM strategy it
can achieve significantly better capital efficiency than if it were to follow a
lease strategy, which is reflected in its relatively low capital employed per
subscriber of $40 at December 31, 1995. Capital employed per subscriber
represents total assets,
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less NPCS Licenses, cash, non-debt current liabilities and international
investments divided by units in service. The Company believes that its COAM
strategy provides additional benefits, including reduced risk of technological
obsolescence and avoidance of the credit risk associated with leasing pagers to
end-users. In addition, management believes that this strategy minimizes its
disconnection rates in the retail channel. See Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
SALES AND MARKETING
The Company's customers include individuals, corporations and other
organizations that desire affordable communication services offering
substantial mobility, accessibility and the ability to receive timely
information. The Company utilizes a number of distribution channels to market
its products and services, including retail marketing, private brand strategic
alliances and national sales offices. Management believes that a diversified
approach to distribution is important to sustain growth as demand for paging
services more deeply penetrates the United States population, especially the
consumer market. This diversification is a key element of the Company's
strategy of expanding its subscriber base as rapidly as possible to increase
cash flow through greater utilization of its nationwide wireless communication
network. The Company is not dependent on any single customer or a few
customers, the loss of one or more of whom would have a material adverse effect
on the Company.
RETAIL MARKETING
Since early 1993, the Company has been an industry pioneer in developing
the retail distribution channel through sales arrangements with regional and
national retail chains that sell electronic and business equipment or consumer
goods. The Company provides equipment to a retailer who then sells the
equipment to potential users. Once the unit is purchased, the customer can
activate it and subscribe for local, regional or nationwide paging coverage
with the Company by simply calling the toll-free number identified on the unit.
Because the Company's pagers operate on a common nationwide frequency, they can
be sold in any retail store located in the Company's nationwide coverage area.
By contrast, competitors that use multiple frequencies across markets require
retailers to maintain many more SKUs to serve each local market that utilizes a
different frequency.
The Company has entered into sales arrangements with a number of large
retail chains such as Office Depot, Inc., Comp USA, Inc., Montgomery Ward
Company, Inc., Target Stores, Inc. and Best Buy, Inc. Retail distribution also
allows the Company to sell pagers in markets that would not support a direct
sales office but in which it has installed the necessary equipment required for
providing paging services. The Company can thus enter new markets by
capitalizing on its existing infrastructure of transmitters with the only
incremental expense being the procurement of local access phone lines. The
Company expects retail sales to become an increasingly important channel of
distribution for pagers. The number of national retail store locations has
increased to 3,411 stores from 2,200 stores and 840 stores at December 31,
1995, 1994 and 1993, respectively. Approximately 25% of the Company's sales are
made through the retail channel.
PRIVATE BRAND STRATEGIC ALLIANCES
The Company has established numerous strategic relationships with large
communications providers. These companies utilize their brand awareness and
billing efficiencies to market private brand pagers and services using the
Company's transmission network. Approximately 10% of the Company's sales are
made through private brand strategic alliances, and the Company expects this
proportion to increase over the next several years.
GTE CORPORATION ("GTE"). During 1993 and 1994, the Company and GTE signed
a series of agreements providing for the sale and marketing through GTE of
GTE-labeled services throughout the United States. In addition, several of
these agreements provide for joint cooperation in the deployment of paging
network facilities for the provision of wireless messaging and data
transmission in the United States. Pursuant to the terms of one of the
agreements, GTE will purchase up to 250 new transmitters to be deployed
throughout the Company's nationwide network. The Company will lease, operate
and maintain the transmitters and will provide wireless services to GTE
customers, as well as customers of the Company via the Company's nationwide
network. The
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Company's services are sold across the United States through GTE Telephone
Operations, GTE Phone Mart Stores and GTE Mobilnet.
SOUTHWESTERN BELL MOBILE SYSTEMS ("SBMS"). In May 1995, the Company and
SBMS signed an agreement for the sale and marketing through SBMS of
SBMS-labeled services. After a successful test in several Texas markets in the
third quarter of 1995, SBMS has expanded marketing of the service into its
other major markets including Chicago, Kansas City, St. Louis, Boston and
Washington, D.C.
AT&T WIRELESS SERVICES ("AT&T WIRELESS"). In November 1995, the Company
and AT&T Wireless entered into a three-year agreement for the sale and
marketing through AT&T Wireless of AT&T Wireless-labeled services. In March
1996, AT&T Business Communications commenced controlled introduction of its
Personal Reach Service, which utilizes the Company's network.
AMERITECH MOBILE SERVICES, INC. ("AMERITECH"). In February 1996, the
Company and Ameritech signed an agreement for the sale and marketing through
Ameritech of Ameritech-labeled services.
EXCEL TELECOMMUNICATIONS, INC. ("EXCEL"). In March 1996, the Company and
Excel, a long distance reseller, signed an agreement for the sale and marketing
through Excel of Excel-labeled services.
NATIONAL SALES OFFICES
The Company's national sales offices sell equipment and services through
three distribution channels: direct sales, third party resellers and local
retailers. The Company has a direct sales force of 445 personnel located in
over 75 MSAs through 63 offices.
DIRECT SALES. The Company markets its equipment through its direct sales
force and related marketing activities such as telemarketing and advertisements
in radio, print media and telephone company yellow pages. Direct sales
representatives are paid by commission (which varies depending on the type of
service subscribed for and other factors) for each unit sold or placed in
service. Approximately 30% of the Company's sales are generated through its
direct sales force.
THIRD PARTY RESELLERS. In addition to offering paging and messaging
services directly to end-users, the Company also provides services under
marketing agreements with third party resellers. Typically, the Company offers
third party resellers paging services in bulk quantities at a wholesale monthly
rate that is lower than the Company's regular retail rates. Approximately 35%
of the Company's sales are made through third party resellers.
LOCAL RETAILERS. The Company markets its services under sales
arrangements with local retailers located in the MSAs where national sales
offices are present.
MESSAGING SERVICES
PAGING SERVICES
The Company charges subscribers a monthly fee which covers the paging and
messaging services subscribed for and any additional services purchased by the
subscriber. The amount of the monthly fee varies primarily based on the type of
service provided and the geographic area covered. The Company charges higher
rates for multi-city and nationwide service options.
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The Company currently offers the following three basic types of one-way
paging and messaging services.
<TABLE>
<CAPTION>
Service Functions
------- ---------
<S> <C>
Numeric paging . . . . . . . . Provides the subscriber with the telephone
number of the person who is seeking to
contact the subscriber. Numeric pagers can
store and retrieve up to 40 numeric
messages, which are displayed on a liquid
crystal display.
Alphanumeric paging . . . . . Offers the subscriber the ability to receive
a text message rather than simply a numeric
message. Alphanumeric pagers can store and
retrieve up to 40 messages of up to 80
characters each, which are displayed on a
liquid crystal display.
Wireless messaging . . . . . . Offers subscribers the ability to receive
detailed text messages and information
services through "message ready" electronic
organizers and PCMCIA cards. Wireless
messaging devices are capable of receiving
messages of several thousand characters in
length.
</TABLE>
NUMERIC PAGING. Among the Company's subscribers who use a numeric display
pager, a high percentage select local coverage, although the percentage of
subscribers who select multi-city coverage has been increasing. Monthly fees
for regional and national paging coverage are substantially higher than the
fees charged for single local area coverage. The Company's revenues from
multi-city coverage increased to approximately 28% of airtime revenues for the
month ended December 31, 1995 from approximately 23% during the month ended
December 31, 1994.
ALPHANUMERIC PAGING. The Company launched its alphanumeric paging
services in July 1993 under the tradenames InfoPage [Registered] and
InfoNow [Registered], and the number of subscribers utilizing this service
represented approximately 1.4% of the Company's total subscribers as of
December 31, 1995. The percentage of paging industry subscribers utilizing
alphanumeric pagers at the end of 1995 was reported to be approximately 9%.
The Company has not focused a significant portion of its selling and marketing
efforts on alphanumeric paging service, primarily because technology has
inhibited the Company's ability to deliver the service in a cost effective
manner. With the Company's introduction of high speed FLEX protocols, the
Company anticipates alphanumeric paging service becoming a larger portion of
its selling and marketing efforts. The ability of alphanumeric pagers to
deliver longer text messages, including the ability to store messages received
for playback when desired by the subscriber, allows the Company to charge
significantly higher monthly fees for its InfoPage and InfoNow services than
for numeric display paging services.
WIRELESS MESSAGING. The Company began offering one-way wireless messaging
services to subscribers with electronic organizers at the end of the first
quarter of 1994. The Company has developed strategic relationships with
computer manufacturers that are integrating advanced wireless messaging
capabilities into their applications software and a new generation of personal
digital assistants and portable computers. Handheld computers featuring PCMCIA
slots can accommodate PCMCIA pager cards to provide office professionals with
"message ready" devices that allow them to be in touch while away from their
offices. The Company's wireless services to PCMCIA pager cards is being
marketed under the service mark InfoAdvantage(SM).
The Company has established the following strategic relationships for the
marketing and provision of wireless data transmission. The market for the
one-way delivery of extended length messages is small in comparison to
traditional numeric and alphanumeric services, and the Company has not realized
significant
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revenues from these relationships to date. However, management believes these
relationships will be valuable for distribution of its two-way messaging
services.
International Business Machines, Inc. ("IBM"). In December 1993, IBM
selected PageMart to be a ThinkPad Proven Vendor to provide one-way
wireless messaging services to IBM portable computer customers. PageMart
markets its wireless services to existing owners of ThinkPads through a
direct mail program and to new owners through a pre-installed computer
slide show that IBM includes on selected new ThinkPad models.
Mitsui Comtek Corporation ("Mitsui"). The Company has worked with Mitsui
in the design of the industry's first electronic organizer with a built in
wireless messaging receiver and now provides one-way messaging services for
electronic organizers manufactured by Casio Computer Company Limited.
CompuServe, Inc. ("CompuServe"). In May 1995, the Company was one of
several paging carriers selected by CompuServe for the wireless delivery of
electronic mail (or notice thereof) to CompuServe subscribers.
ADDITIONAL VALUE-ADDED SERVICES
In addition to paging services, the Company offers subscribers a number of
additional value-added services, including voicemail services that allow
subscribers to retrieve voice messages from persons attempting to contact the
subscriber. In addition, the Company offers a numeric message retrieval service
which allows a subscriber to retrieve messages that were sent at a time when
the subscriber was outside of his or her service area. Other optional services
include a nationwide toll-free 800 access number for paging subscribers, a
customized voice prompt that allows subscribers to record a personal greeting,
maintenance agreements and loss protection programs. Approximately 21% of the
Company's recurring revenues during the fiscal quarter ended December 31, 1995
were derived from these additional services.
The Company also plans to offer wireless connectivity to the Internet for
message transfer and information requests through the "PageMart Wireless Web"
service utilizing the Company's wireless communications network. These services
will include electronic mail, news and other information delivered to messaging
devices as well as guaranteed message delivery with acknowledgement using the
Company's wireless network for transmissions and response.
TWO-WAY SERVICES
One of the Company's principal strategies is to become a leading provider
of two-way messaging services in the United States. Management believes that
the introduction of two-way messaging services may present significant future
growth opportunities to the Company by enabling it to provide a new generation
of advanced messaging services, including data messaging, stored voice
messaging and other services, to new and existing subscribers.
The Company expects to begin testing two-way data and stored voice
services in the second quarter of 1996. Upon completion of testing, two-way
data services are expected to be marketed on a city-by-city basis beginning in
late 1996. Two-way data services may include guaranteed alphanumeric message
delivery with acknowledgment and message with response capabilities. In 1997,
the Company plans to introduce its VoiceMart service, which will provide
subscribers with the ability to receive stored voice messages directly to their
messaging devices. Introduction of the VoiceMart service will be paced to the
availability of infrastructure equipment, subscriber devices and market demand.
The Company's planned service offerings are expected to be delivered
to a pocket-sized subscriber unit containing a transmitter, enabling it to send
a signal identifying its location to the Company's network. Management
estimates that the Company's enhanced alphanumeric services and stored voice
messaging services will be offered to
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customers at monthly prices competitive with current one-way alphanumeric
paging services in similar service areas. The Company's service offerings are
expected to include:
ENHANCED ALPHANUMERIC MESSAGING. The Company's enhanced alphanumeric
messaging service will enable the subscriber to receive alphanumeric
messages up to several thousand characters in length (compared to the
approximately 80 characters in traditional one-way alphanumeric messaging)
which will be input by either (i) a computer or other software-enabled
device with the proper software and a modem that can access the Company's
network or (ii) a dispatch operator. The service is expected to be based
on Motorola Inc.'s ("Motorola") state of the art ReFLEX25 (TM) technology.
This technology will permit the network to locate the subscriber before
sending the message and verify that the subscriber unit has obtained the
message ("guaranteed delivery").
The Company believes that penetration of alphanumeric service on a
regional and nationwide basis has been limited to date due to the
reluctance of many one-way paging operators to promote the service because
of its relatively high use of system capacity during transmission. The NPCS
Licenses and the ReFLEX25 and InFLEXion[Trademark] technologies should offer
significant increases in capacity and delivery speed over the spectrum and
technology currently delivering alphanumeric messaging services. The
Company expects that its enhanced alphanumeric service will improve upon
traditional service by permitting longer messages, by guaranteeing and
acknowledging delivery and, eventually, by permitting the subscriber to
initiate limited data responses. Management believes that these service
enhancements, along with its competitive pricing, will appeal to
subscribers of traditional alphanumeric messaging services and to cost
conscious customers who have not previously subscribed to such services.
VOICEMART SERVICE. The Company's VoiceMart service will be an entirely
new generation of messaging service. The service may utilize Motorola's
state of the art InFLEXion compressed stored voice technology to deliver a
high quality transmission of the sender's voice to the wireless stored
voice messaging product. The unit will store up to four minutes of voice
messages, which the subscriber will be able to play, fast-forward, rewind
and delete, much like an answering machine or voice mailbox. If the
subscriber unit is full, the sender's message will be stored in a network
server. The network will then transmit a "message waiting" notification to
the subscriber unit. The subscriber can delete old messages to enable the
unit to immediately receive messages stored by the network. While the
subscriber will not be able to respond directly to the caller by speaking
into the unit, the subscriber unit will acknowledge receipt of the voice
message to the network. The subscriber unit will have a volume control to
allow the subscriber to listen to messages privately, or to play them aloud
for others to hear.
OTHER SERVICES. Over time, the Company intends to participate in the
growth of wireless data messaging services through new and existing
strategic alliances, wireless data alliances with software companies and
electronic equipment manufacturers to develop additional data
messaging services. In addition to pocket-sized pagers, the Company expects
that wireless data transmissions will be received by computers, organizers
or PDAs equipped with two-way Rf modems or built-in Rf capability. It is
anticipated that a limited response by the device will be possible.
pACT[TRADEMARK] SERVICES. The Company anticipates that its two-way
messaging network will also be capable of broadcasting the pACT protocol,
a high speed NPCS protocol developed by AT&T. However, the Company has not
yet received a commitment from its suppliers to provide such capability and
there can be no assurance that such capability will be made available
to the Company. Messaging services provided on the pACT protocol are
expected to be very similar to enhanced alphanumeric messaging, voice
messaging services and other services described above.
ONE-WAY TRANSMISSION NETWORK
The Company utilizes DBS technology exclusively in its one-way
transmission network. Although the Company's one-way transmission network
is substantially built out, the Company continues to make expenditures
to improve and expand its coverage into new areas. The Company's use of the
DBS system
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has certain cost and performance advantages over traditional
paging systems and traditional satellite paging systems.
Traditional Paging Systems. The traditional method of controlling
paging transmitters in local and regional simulcasting systems is to use
terrestrial Rf control links that originate from one broadcast transmitter
that is controlled by a local paging terminal. At the paging terminal, the
messages are received and assembled for transmission via Rf or wireline
control link to each transmitter. Once a message is received by each
transmitter in a simulcast market, it in turn broadcasts the paging
information using the paging broadcast frequency. The Rf control link
frequency is different from the paging broadcast frequency.
In order to simulcast the paging signal, a traditional system must be
fine-tuned (optimized) so that each transmitter broadcasts the paging
signal at the same time. Optimization becomes more complex and expensive as
the service area expands. In addition, since a traditional system requires
line-of-site transmission of the Rf control link signal, repeater stations
must be used to re-broadcast this Rf signal in a large system such as the
New York or Los Angeles metropolitan areas. The more distant the
transmitter sites are from the central Rf control link transmitter, the
more repeaters are necessary. Repeater stations make optimization more
difficult and increase equipment and recurring tower rental costs. For
non-contiguous regional coverage either telephone lines or microwave
communication links are typically used in lieu of Rf control links.
Traditional Satellite Paging Systems. Some paging system operators
have adopted an alternative approach using satellites, rather than
telephone lines, to communicate between the paging terminal and the
traditional Rf control link systems. Numeric and alphanumeric messages are
processed by a central paging terminal that uplinks the messages to a
satellite, which then broadcasts the messages to the destination cities.
The satellite signal is received by one central Rf radio control
transmitter paging dish in each city and broadcast via traditional Rf
control link transmitters to the paging transmitters in that city.
With this infrastructure, the satellite is used only in place of other
long-distance communication options. Both an Rf control link frequency and
a paging signal frequency must be employed as with a traditional system.
The current broadcast configuration employed by many other leading
nationwide carriers has the added inefficiency of satellite transmissions
that address their entire nationwide system or entire regions whenever a
page transmission is sent, thus limiting the total number of subscribers on
the system.
The Company's Direct Broadcast Satellite Paging System. The Company
has developed an innovative satellite-based transmission network that gives
the Company a flexible, highly reliable network architecture and an
efficient operating structure. The Company's network is comprised of three
primary components: network access, a nationwide network linking the
Company's paging terminals and a satellite network which controls the
Company's transmitters.
The Company's numeric and alphanumeric paging services can be accessed
via local telephone numbers or 800 numbers using a touch-tone key pad or
personal computer messaging software. Local numbers are provided by
regional telephone companies and 800 number service is provided by
long-distance telecommunications services providers. The Company uses a
nationwide data network to carry all paging traffic from local telephone
markets to its satellite uplink facilities in Illinois. This network
configuration allows the Company to add new lines quickly and efficiently
and provides the Company with back-up power, fire protection and diverse
routing capabilities.
The Company began using DBS technology in 1990 and was the first
one-way wireless communications carrier to use DBS technology to control
all of its transmitters. Currently, the Company is one of only three
carriers that employ DBS technology in a nationwide paging system. With a
DBS paging system, the satellite can broadcast messages directly to each
transmitter in the Company's paging system, which then broadcasts the
message to pagers on the Company's nationwide broadcast frequency. DBS
eliminates the expensive terrestrial radio link and repeater equipment that
many paging companies have
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employed to control simulcast transmissions in large metropolitan
markets. In addition, the Company's satellite system can selectively
address one or any combination of its transmitters, thereby providing a
wide range of coverage options and permitting efficient use of paging
frequencies in each market. The Company leases its satellite services
pursuant to the Satellite Service and Space Segment Lease Agreement, dated
January 2, 1995, with SpaceCom Systems, Inc. ("SpaceCom"). The agreement
subjects the Company to monthly service charges based on the amount and
types of services used and expires on January 31, 2002. The agreement may
be terminated by SpaceCom upon certain failures of the Company to pay
monthly service fees. The agreement does not include any renewal
provisions. Although the Company is currently party to only one satellite
service agreement, management believes that the services provided by
SpaceCom are sufficient to meet the Company's foreseeable needs and that
there are numerous alternate satellite sources available to the Company on
comparable terms and conditions. As a result, the Company does not believe
the loss of its relationship with its current satellite supplier would
have a material adverse effect on its business and operations.
The Company does not manufacture any of the pagers used in its paging
operations. The Company buys pagers primarily from Motorola as well as
other manufacturers and therefore is dependent on such manufacturers to
obtain sufficient pager inventory for new subscriber units and replacement
needs.
Benefits of the Direct Broadcast Satellite . The use of a DBS
broadcast system provides a number of benefits to the Company including:
o Selectively addresses one or all markets to provide a wide range of local,
multi-city, regional or nationwide coverage options. The Company's system
configuration employs a high degree of spectrum efficiency with regard to
the paging frequency because only the coverage area the customer has
elected will be activated with each page.
o Replaces terrestrial Rf control link equipment with satellite based
equipment and signaling. This eliminates capital expenditures associated
with terrestrial RF control link equipment and the associated
telecommunications expenses, utilities and ongoing site rent and requires
much lower expenditures for satellite receivers and satellite service.
o Suffers significantly less degradation in performance due to building
reflection and simulcasting problems, such as the overlapping of two
independently controlled markets.
o Allows for rapid deployment of the network system because the transmitters
are operational immediately upon installation, while terrestrial Rf
control links need to be optimized, which can take up to three months in
some large urban markets.
o Supports the high data rates that will be required in order to effectively
provide enhanced services such as two-way messaging services. Management
believes that this will allow the Company to implement higher speed
signal technologies quickly and in a cost effective manner.
TWO-WAY MESSAGING
NARROWBAND PCS PROTOCOLS
Paging networks use various "protocols" to provide seamless
communications between the various components which make up a paging
network. Protocols regulate the format and flow of messages which are
transmitted over the network. As such, protocols facilitate the orderly and
efficient flow of message traffic over the network. Motorola has developed,
and licensed to Glenayre, several protocols, including FLEX, ReFLEX25,
ReFLEX 50(TM) and InFLEXion. Of these four protocols, the Company believes
that ReFLEX25, ReFLEXE50 and InFLEXion permit two-way alphanumeric
messaging, but only InFLEXion currently has the capability to offer cost-
efficient stored voice messaging, very high-speed data delivery and the
transmission of data to the subscriber unit. The company believes that
AT&T has also developed a
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proprietary protocol "Personal Air Communications Technology," or pACT,
for two-way wireless transmission of data and alphanumeric messages.
These various protocols have different transmission speeds and capacity
characteristics. Consequently, the ability to deliver various types of
wireless messaging services, including stored voice messaging, on a
cost-efficient basis is dependent upon the protocol used. The following
table illustrates certain characteristics of various protocols based on
current publicly available information.
<TABLE>
<CAPTION>
InFLEXion ReFLEX50 ReFLEX25 pACT
<S> <C> <C> <C> <C>
Outbound Transmission Speed
per Channel................. 16,000 bits per 6,400 bits per 6,400 bits per 8,000 bits per
second second second second
Number of Channels(1)......... 7 4 3 4
Outbound Throughput(1)........ 112,000 bps per 25,600 bps per 19,200 bps per 32,000 bps per
cluster area area cluster
Frequency Reuse............... Some No (2) Yes
Message Acknowledgement....... Yes Yes Yes Yes
Limited Alphanumeric
Message Response............ Yes Yes Yes Yes
Stored Voice Messaging(3)..... Yes No No (4)
</TABLE>
- -------------
(1) Bits per second (bps) gross rate including message overhead. Based on
NPCS networks with 50 kHz outbound frequency.
(2) REFLEX25 protocol will support cellular-like frequency reuse if the
Company requires it for additional capacity.
(3) Although the ReFLEX50 and ReFLEX25 protocols technically have the
ability to support these service offerings, management believes that
neither of these protocols can cost-effectively support these service
offerings.
(4) Not currently available.
TWO-WAY NETWORK BUILDOUT
The Company expects to design and construct its nationwide NPCS network
to provide stored voice and data services and currently expects to complete
substantially its network buildout by the end of 1998. The key elements of
the network buildout are as follows:
Design. The design of the Company's nationwide NPCS network is
expected to be based upon Motorola's ReFLEX25 and InFLEXion technologies in
order to achieve efficient use of the Company's spectrum and to accommodate
a greater number of subscribers. The Company may also incorporate AT&T's
proprietory messaging protocol pACT into its network. The design process
requires extensive Rf planning, which involves the selection of specific
sites for the placement of transmitters and receivers as well as functioning
infrastructure equipment from manufacturers. As part of the design process,
the Company's engineers are identifying sites using the Company's
proprietary database (as well as other sources), which contains specific
information about available sites throughout the nation. Sites are chosen
on the basis of their coverage and on frequency propagation characteristics,
such as terrain, topography, building penetration and population density.
The Company's engineers are currently projecting that the Company's
nationwide NPCS network will consist of approximately 2,300
transmitter/receiver sites and approximately 1,700 stand-alone receivers
when the network is substantially completed.
Equipment. The infrastructure of the Company's network will consist
of radio transmitters and receivers, switches, Rf controllers and ancillary
equipment, such as coaxial cable and antennas. The Company plans to
purchase this infrastructure equipment (other than the ancillary equipment)
from industry leading equipment suppliers, Motorola and Glenayre
Technologies, Inc. ("Glenayre").
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Development of Technology. While the terminals and transmitters will be
similar to the equipment used in the Company's one-way messaging network,
the Company believes that Motorola is conducting over-the-air testing of
its InFLEXion technology, infrastructure equipment and subscriber units in
its factory in Fort Worth, Texas. While the tests do not take into account
certain factors prevalent in the design of the Company's two-way network
buildout such as terrain topography, building penetration and population
density, the Company believes that Motorola expects to establish that the
technology and equipment can deliver a wireless voice message to subscriber
unit under controlled circumstances. The Company also believes that
Motorola's ReFlex technology has recently been introduced and has been used
commercially by another paging company. However, there can be no assurance
that two-way service will be commercially viable, and the success of
two-way service could be affected by matters beyond the Company's control.
The Company plans to purchase subscriber messaging units from Motorola
and other manufacturers. The Company understands that Motorola has licensed
to other wireless equipment manufacturers the relevant signaling system
technology, as Motorola has done with signaling system technology for its
other FLEX protocols. Although the Company believes that sufficient
alternative sources of two-way messaging units will exist, the Company
would be adversely affected if it were unable to obtain the units on
satisfactory terms. The Company currently has no agreements to purchase
equipment or messaging units for its two-way services.
As the Company begins development and implementation of two-way
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 build-out requirements of the FCC. See "--Government
Regulation." The Company anticipates investing $75 to $100 million through
fiscal 1997 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 substantially complete the
network buildout. The Company expects to require additional financing to
complete the buildout, which may include entering into joint venture
arrangements, however there can be no assurance that sufficient financing
will be available to the Company. See Item 7. Management's Discussion of
Financial Condition and Results of Operations--Liquidity and Capital
Resources.
INTERNATIONAL EXPANSION
The Company plans to provide messaging services in selected countries on a
seamless international network. Management believes that its technology,
operational structure and distribution strategies can be replicated in foreign
countries to establish nationwide wireless networks. In each country in which
the Company plans to offer paging and messaging services, the Company will seek
to obtain a nationwide frequency common to at least one of the nationwide
frequencies it holds in the United States in order to allow a single messaging
device to be used in multiple countries. The Company expects to pursue
international opportunities through minority interests in joint venture
arrangements whereby the Company would contribute its expertise in designing
and managing messaging services with minimal incremental capital investments.
The Company's international strategy is initially to pursue opportunities
in North America, Latin America, and South America. One of the Company's
affiliates, PageMart Canada Limited ("PageMart Canada"), has obtained a
nationwide license in Canada based on a frequency common to one of its
frequencies in the United States. PageMart Canada began providing service in
the largest metropolitan areas in Canada to U.S. subscribers in March 1996 and
to Canadian subscribers in April 1996. The Company also provides paging
coverage in the Bahamas.
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In 1994, PageMart Canada purchased the Canadian network facilities of
Motorola EMBARC Canada for approximately $1.7 million and entered into an
agreement with Motorola to sell transmission time to Motorola for five years.
In 1995, Toronto Dominion Capital Group Ltd. ("TD Capital") and Working
Ventures Canadian Fund, Inc. ("Working Ventures") purchased a majority interest
of PageMart Canada Holding ("Canada Holding") for $5 million. In January 1996,
PageMart Canada was awarded one of the same nationwide frequencies the Company
uses in the United States. The Company's cash investment in Canada Holding and
PageMart Canada totals approximately $3.7 million. Through PageMart
International, Inc. the Company owns 20% of the voting common stock of PageMart
Canada. Additionally, PageMart International, Inc. owns 33% of the voting common
stock of Canada Holding which owns the remaining 80% of the voting common stock
of PageMart Canada.
The common frequency allows the Company's affiliates in each country to
provide customized coverage that extends beyond the borders of the serving
country, using the same pager. For example, a subscriber in New York could
choose New York and Toronto coverage.
COMPETITION
The Company competes primarily on the basis of the price of its equipment
and wireless services as well as its coverage capability. Its competitors
include both companies which provide paging or other mobile communications
services in local markets in which the Company operates and regional and
nationwide paging service providers. These include both large and small paging
service providers and regional telephone companies, such as Paging Network,
Inc., MobileMedia Corporation, Inc., AirTouch Communications, Inc. and Arch
Communications Group, Inc. Certain of these companies have substantially
greater financial, technical and other resources than the Company. In addition,
a number of paging carriers have constructed or are in the process of
constructing nationwide wireless networks that will compete with the Company's
services, including the provision of two-way messaging. Management believes
that its low cost base and service offerings will enable it to continue to
compete effectively in all markets.
A number of competing technologies, including cellular telephone service,
broadband and narrowband personal communications services, specialized mobile
radio, low speed data networks and mobile satellite services, are used in, or
projected to be used for, two-way wireless messaging services. Cellular
telephone technology provides an alternative communications system for
customers who are frequently away from fixed-wire communications systems (i.e.,
ordinary telephones). Compared to cellular telephone service, paging service is
generally less expensive, offers longer battery life, provides better
in-building penetration, extends over wider coverage areas, and is more
transportable. For those cellular customers for whom convenience and price are
considerations, paging can compete successfully by complementing their cellular
usage. Management believes that paging will remain one of the lowest-cost forms
of wireless messaging due to the low-cost infrastructure associated with paging
systems, as well as advances in technology that will reduce paging costs.
Broadband personal communications services technologies are currently under
development and will be similar to cellular technology. When offered
commercially, this technology will offer greater capacity for two-way wireless
messaging services and, accordingly, is expected to result in greater
competition.
Technological advances in the telecommunications industry have created,
and are expected to continue to create, new services and products competitive
with the wireless services currently provided by the Company. In addition,
certain companies are developing one-way and two-way wireless messaging
services which may compete with the one-way and two-way wireless messaging
services which the Company expects to provide. There can be no assurance that
the Company will not be adversely affected as new competitive technologies
become available and are implemented in the future. In addition, the Company
may be adversely affected if cellular telephone companies or broadband personal
communications service providers begin to provide other wireless services or
enter into partnerships with other companies to provide wireless services that
complement cellular or broadband PCS services.
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GOVERNMENT REGULATION
Wireless messaging operations are subject to regulation by the FCC under
the Communications Act of 1934, as amended (the "Communications Act") including
recent amendments contained in the Telecommunications Act of 1996. At the
present time, wireless messaging services are primarily offered over radio
frequencies that the FCC has allocated for either common carriage (the
licensees for which are known as radio common carriers ("RCCs")), or private
carriage (the licensees for which are known as private carrier paging operators
("PCPs")). RCCs are granted an exclusive license to a particular radio
frequency in a particular locality or region. Certain qualified PCPs have been
granted such exclusive use of their frequencies as well. In addition, the FCC
has recently granted, by auction, regional and nationwide NPCS licenses that
can be used for advanced paging services, such as two-way paging.
The Company provides one-way paging services directly to subscribers over
its own transmission facilities and is currently regulated as a PCP for most of
its services. The Company (through subsidiaries) holds certain RCC licenses
(the "RCC Licenses") and two exclusive nationwide PCP licenses, as well as
exclusive licenses on various PCP frequencies in certain metropolitan areas,
including New York, Los Angeles and Chicago (the "PCP Licenses").
Additionally, the Company holds a 50 kHz unpaired nationwide NPCS license (the
"Nationwide Narrowband License") and five 50/50 kHz paired regional NPCS
licenses (the "Regional Narrowband Licenses"); the latter five licenses
authorize the Company to operate regional narrowband systems on the same
frequencies throughout the continental United States. The Nationwide Narrowband
License was granted on September 29, 1994, and the Regional Narrowband Licenses
were granted on January 27, 1995. The Nationwide Narrowband License and the
Regional Narrowband Licenses may be utilized in connection with various two-way
NPCS services or to expand the Company's existing one-way transmission network.
The Omnibus Budget Reconciliation Act of 1993 (the "Budget Act") amended
the Communications Act by creating a new consolidated category of
communications services called Commercial Mobile Radio Services ("CMRS") in
order to more uniformly regulate mobile wireless service providers. RCCs, PCPs,
and NPCS providers are included in the new CMRS category. The FCC has
promulgated regulations to implement these new statutory requirements. In
general, regulatory changes caused by the creation of the CMRS category are
scheduled to become effective in August 1996. Under the amended Communications
Act, differential regulation of providers of CMRS is permitted only under
limited circumstances. If there is no change in the recently adopted rules,
PCPs, RCCs, NPCS licensees and other CMRS providers will have substantially
similar obligations under the Communications Act beginning in August 1996. All
of these licensees will be prohibited from engaging in any unreasonable
discriminatory practices, will be subject to complaints regarding any unlawful
practices and will be subject to provisions that authorize the FCC to provide
remedial relief to an aggrieved party upon a finding of a violation of the
Communications Act and related consumer protection provisions. It is expected
that further rulemaking proceedings may be commenced by the FCC in its efforts
to reconcile its regulation of RCCs, PCPs, and NPCS licensees.
The Company's PCP, RCC and NPCS Licenses (collectively, the "Licenses")
authorize the Company to use the radio frequencies necessary to conduct its
paging operations. The Licenses prescribe the technical parameters, such as
power output and tower height, under which the Company is authorized to use
those frequencies. The Licenses are for varying terms of up to 10 years, at the
end of which time renewal applications must be submitted to the FCC for
approval. Most of the Company's PCP and RCC Licenses expire between 1996 and
1999. In order to be granted the exclusive use of a frequency, the Company is
required to construct and maintain a specified minimum number of transmission
sites, depending upon the breadth of the exclusivity, each of which is licensed
by the FCC (the "Operating Licenses"). Of the Company's over 1,400 Operating
Licenses, 90 require renewal in 1996 and 318 require renewal in 1997. The
Nationwide Narrowband License will expire on September 29, 2004 unless renewed
by the Company. The Regional Narrowband Licenses will expire on January 27,
2005 unless otherwise renewed. FCC renewals are routinely granted in most cases
upon a demonstration of compliance with FCC regulations and adequate service to
the public. Although the Company is unaware of the existence of any
circumstances which would prevent the grant of any pending or future renewal
applications, no
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assurance can be given that the Licenses will be renewed by the FCC in the
future. Furthermore, although revocation and involuntary modification of
licenses are extraordinary regulatory measures, the FCC has the authority to
restrict the operation of licensed facilities or to revoke or modify licenses.
No License of the Company has ever been revoked or modified involuntarily.
The Company has complied with FCC requirements with respect to the buildout
of its existing one-way paging network. There are separate FCC buildout
requirements with respect to the Company's NPCS Licenses. As a nationwide NPCS
licensee, the Company must construct base stations that provide coverage to a
composite area of 750,000 square kilometers or serve 37.5% of the U.S.
population within five years of the initial license grant date and must
construct base stations that provide coverage to a composite area of 1,500,000
square kilometers or serve 75% of the U.S. population within ten years of the
initial license grant date. Additionally, as a regional NPCS licensee, the
Company must construct base stations that provide coverage to a composite area
of 150,000 square kilometers or serve 37.5% of the population of the service
area within five years of its initial license grant date and must construct base
stations that provide coverage to a composite area of 300,000 square kilometers
or serve 75% of its service area population within ten years of the initial
license grant date. Failure to meet the construction requirements will result in
forfeiture of the license and ineligibility to regain it.
The Communications Act requires licensees such as the Company to obtain
prior approval from the FCC for the assignment of any station license or the
transfer of control of any entity holding such licenses. The FCC has approved
each transfer of control for which the Company has sought approval. The
Communications Act also requires prior approval by the FCC of acquisitions of
paging companies. The Company also regularly applies for FCC authority to use
frequencies, modify the technical parameters of existing licenses, expand its
service territory and provide new services. Although there can be no assurance
that any requests for approval or applications filed by the Company will be
approved or acted upon in a timely manner by the FCC, or that the FCC will
grant the relief requested, the Company has no reason to believe any such
requests, applications or relief will not be approved or granted.
The Communications Act limits foreign ownership of entities that hold
certain licenses from the FCC, including licenses of the type held by the
Company. Because of this limitation, except pursuant to FCC discretion, no more
than 25% of the Company's 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. Based on currently available
information, the Company 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 the Company's Common Stock. If the
Company obtains knowledge that the foreign ownership of its stock exceeds 25%,
it would be forced to either seek approval from the FCC for the additional
foreign ownership or redeem common stock at their current market value
(determined as set forth in the Company's certificate of incorporation) from
foreign shareholders in an amount sufficient to reduce such ownership to below
25% (as permitted by the Company's certificate of incorporation).
The Budget Act imposed a structure of regulatory fees which the Company is
required to pay with respect to its Licenses. The FCC increased these fees for
fiscal year 1995. The FCC did not impose any increase in these fees for fiscal
year 1996. The Company believes that these new regulatory fees will not have
any material adverse effect on the Company's business.
On February 9, 1996, the FCC released a Notice of Proposed Rule Making
("NPRM"), which proposed a system of competitive bidding ("auctions") to issue
licenses for frequencies for which there are mutually exclusive applications.
Under the FCC proposal, licenses for individual paging channels for which there
are mutually exclusive applications would be auctioned on a geographic basis.
In defining the area within which existing users would be protected from
interference from the auction winners or neighboring licensees (an area known
as an "interference contour"), the FCC proposed a new methodology that in many
instances would reduce the size of the area within existing licensees'
interference contours. This change, however, would not
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<PAGE> 17
have any impact on licensees with nationwide exclusivity (such as the Company),
because no other operator has the right to apply for such licensees' exclusive
frequencies.
While the rulemaking proceeding is pending, the FCC proposed only to
process applications for which the relevant period for filing competing
applications had expired as of the date of the NPRM and which were not mutually
exclusive with other applications. Under the FCC's proposal, licensees with
nationwide exclusivity on a particular frequency (such as the Company),
however, would be permitted to expand their systems. In April 1996, the FCC
issued a Report and Order modifying the NPRM to, among other things, allow
incumbent licensees to file applications for additional transmission sites that
are within 40 miles of an authorized transmission site that was licensed to the
same applicant on the same channel on or before February 8, 1996 and which is
operational as of the date the application for the additional transmission site
is filed. It is not clear when the rulemaking proceeding will be completed or
what, if any, new rules the FCC will issue as a result of the rulemaking
proceeding.
In another ongoing rulemaking pertaining to interconnection between local
exchange carriers ("LECs") and CMRS providers, the FCC has proposed that
interconnection rates should be based on a "bill and keep" model (i.e., the LEC
and the CMRS provider charge each other a rate of zero for the termination of
the other's traffic). Under the current arrangement, LECs are required to
compensate CMRS providers for the reasonable costs incurred by such providers
in terminating traffic that originates at LEC facilities, and vice versa. The
Company believes that the FCC's "bill and keep" proposal, if applied to paging
services, would not have any material adverse effect on the Company's business.
Some paging services are subject to state regulation as well as regulation
by the FCC. Prior to the amendment of the Communications Act by the Budget Act,
states were permitted to regulate entry into the RCC paging business. States
were not, however, permitted to regulate the provision of paging services by
PCPs. While the Communications Act prohibits states generally from regulating
the entry of or the rates charged by any CMRS provider, whether RCC or PCP, the
new law will not prohibit a state from regulating the other terms and
conditions of CMRS. Several states petitioned the FCC for authority to continue
pre-existing rate regulation over all CMRS providers. In August 1995, the FCC
denied all of the petitions filed by the states.
From time to time, legislation and regulations which could potentially
affect the Company, either beneficially or adversely, are proposed by federal
and state legislators and regulators. In May 1995, the Texas Legislature
created the Telecommunications InfraStructure Fund (the "TIF") as part of the
Telecommunications Act of 1995 (the "Act"). The TIF was established to collect
$150 million annually from the telecommunications providers in Texas. The TIF
is composed of two separate accounts, a "telecommunications utilities account"
which includes telephone companies and long distance providers, and a
"commercial mobile service providers" ("CMSP") account which includes cellular
providers and paging companies. The accounts are financed by annual assessments
totaling $75 million each on the telecommunications utilities and the CMSPs
doing business in Texas. The fraction that is to be paid by each CMSP is
determined by such provider's portion of the total telecommunications receipts
reported by all CMSPs for the purpose of payment of state sales taxes. The TIF
is to be used for grants and loans for equipment, infrastructure, curricula and
training in education and medicine. The Act was signed into law effective
September 1, 1995.
The Company is not required to contribute to the CMSP account until August
1996, when the Company becomes a commercial mobile radio service provider under
federal communications law. However, the Company joined an ad hoc coalition
made up of the largest paging companies to fight the TIF assessment based on
its unfair and disparate treatment of the CMSPs. The coalition filed a lawsuit
in federal court on November 22, 1995, challenging the TIF on constitutional
grounds. The lawsuit, among other things, requested an injunction prohibiting
the state from collecting the assessment until the Texas Legislature has had an
opportunity to rectify the disparity in treatment of the telecommunications
utilities and the CMSPs. The Texas Legislature does not reconvene until January
1997.
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On February 5, 1996, the District Court for the 261st Judicial District,
Travis County, Texas, entered a final judgment declaring that the assessment on
CMSP providers as proposed violated the "equal and uniform taxation" clause of
the Texas Constitution. The court further concluded that CMSPs could be taxed
only on a percentage of taxable telecommunications receipts that does not
exceed the percentage assessed against the telephone utilities. After August
10, 1996, the Company will be assessed based on the lower rate applicable to
telecommunications utilities. Management is not aware of proposed or pending
state legislation imposing a similar assessment or creating a similar fund.
TRADEMARKS
The Company owns certain intellectual property, including without
limitation, trademark and service mark rights associated with certain federal
and foreign trademark registrations and applications, common law trademark,
trade name and service mark rights, and other legal and equitable rights
connected with the Company's voice and data communication products and services
and, in particular, one-way and two-way paging systems and technologies and
related services. The Company markets its multiple city wireless service under
the name Pick-Your-Cities [Registered] and its nationwide service under the
name Page-Me-USA [Registered], both of which are federally registered service
marks. The Company has filed applications with the United States Patent and
Trademark Office as well as certain foreign trademark offices to register
approximately 85 additional service and trademarks. The Company also has full
use of the name PageMart, as a mark.
EMPLOYEES
At December 31, 1995, the Company had 1,556 full-time employees,
approximately 1,288 of whom were engaged in sales and customer service.
No employees of the Company are covered by a collective bargaining
agreement, and management believes the Company's relationship with its
employees is good.
ITEM 2. PROPERTIES
The principal tangible assets of the Company are its paging network
equipment. Paging network equipment utilized by the Company includes paging
switching terminals, paging transmitters and a host of related equipment such
as satellite and digital link controllers, satellite dishes, antennas, cable,
etc. The Company continues to add equipment as it expands to new service areas.
To date, it has not experienced any difficulty or delay in obtaining equipment
as needed.
The Company acquired the NPCS Licenses in auctions held by the FCC. The
NPCS Licenses permit the nationwide operation of NPCS networks with 100 kHz of
outbound capacity and 50 kHz of response capacity.
The Company generally leases the locations used for its transmission
facilities under operating leases. These leases, which are generally for five
years or less, currently provide for aggregate annual rental charges of
approximately $4.7 million. The Company does not anticipate difficulty in
renewing these leases or finding equally suitable alternate facilities on
acceptable terms. The Company also leases approximately 130,238 square feet of
office space for its corporate headquarters in Dallas, Texas, at an annual cost
of approximately $1.1 million and varying lesser amounts for local offices at
other locations. Aggregate annual rental charges under the Company's local
office leases are approximately $1.8 million.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the normal course
of business. In management's opinion, the ultimate outcome of these lawsuits
will not have a material adverse effect on the results of operations or
financial condition of the Company.
On July 8, 1994, an action against the Company was filed in the United
States District Court for the Eastern District of New York by Universal Contact
Communications Inc., a former reseller of the Company's wireless messaging
devices. The Company terminated the reseller relationship due to a monetary
default by plaintiff. The Company subsequently contacted plaintiff's
customers in an effort to provide continued service directly through the
Company and discontinued plaintiff's paging services. In the complaint,
plaintiff alleges, among other things, that the Company violated federal law by
making unsolicited advertisements, breached its contract with plaintiff,
slandered plaintiff, converted certain confidential information and trade
secrets, tortiously interfered with plaintiff's business and contractual
relations, and engaged in unfair competition. Plaintiff seeks, among other
things, compensatory damages of $500,000 with respect to each of the nine
causes of action included in the complaint, punitive damages of $5,000,000, and
various forms of injunctive relief. The Company is vigorously defending the
action. In management's opinion, the ultimate outcome of this lawsuit is not
expected to have a material adverse effect on the results of operations or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Consent of Stockholders dated as of December 19, 1995 was executed by
certain stockholders holding an aggregate of 13,241,543 shares of the voting
common stock (representing 57% of the voting common stock of PageMart Wireless,
Inc.) approving the corporate name change from PageMart Nationwide Inc. to
PageMart Wireless, Inc., and approving an increase in the number of common
shares authorized to be issued pursuant to the Company's 1991 Stock Option Plan
by 1,000,000 shares.
18
<PAGE> 20
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
There is currently no public market for any class of the Company's common
stock. As of March 1, 1996, the Company's common stock was held by
approximately 100 holders of record.
The Company has not paid dividends on the common stock since its
organization in 1989. The Company currently intends to retain future earnings
for the development of its business and does not anticipate paying cash
dividends on its common stock in the foreseeable future. The Company's future
dividend policy will be determined by its Board of Directors on the basis of
various factors, including the Company's results of operations, financial
condition, capital requirements and investment opportunities. In addition, the
Company's debt instruments substantially restrict (and currently prohibit) the
payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary historical financial information
and operating data for each of the five fiscal years ended December 31, 1995.
The financial information and operating data 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 included elsewhere in this report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT UNIT, ARPU, PER SUBSCRIBER AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Recurring revenues ................... $ 3,298 $ 6,668 $ 24,184 $ 56,648 $ 101,503
Equipment sales and activation fees .. 5,380 9,837 26,483 53,185 57,688
----------- ----------- ----------- ----------- -----------
Total revenues ....................... 8,678 16,505 50,667 109,833 159,191
Cost of equipment sold ............... 6,436 10,044 28,230 57,835 63,982
Operating expenses ................... 10,844 25,584 47,448 85,322 118,557
----------- ----------- ----------- ----------- -----------
Operating loss ....................... (8,602) (19,123) (25,011) (33,324) (23,348)
Interest expense ..................... (1,486) (2,456) (6,538) (12,933) (30,720)
Interest income ...................... 97 529 428 858 1,997
Other ................................ -- -- -- (414) (1,042)
----------- ----------- ----------- ----------- -----------
Net loss ............................. (9,991) (21,050) (31,121) (45,813) (53,113)
=========== =========== =========== =========== ===========
Net loss per common share ............ $ (1.93) $ (1.71) $ (1.95) $ (2.09) $ (1.64)
Weighted average number of
common shares and share
equivalents outstanding ............ 5,185 12,333 15,998 21,944 32,341
BALANCE SHEET DATA
(at period end):
Current assets ....................... $ 23,607 $ 13,365 $ 51,279 $ 44,397 $ 62,535
Total assets ......................... 28,979 30,772 78,773 142,059 263,829
Current liabilities .................. 5,112 14,754 20,198 37,966 56,508
Long-term debt, less
current maturities ................. 11,956 25,059 78,359 92,632 219,364
Stockholders' equity
(deficit) .......................... 11,911 (9,041) (19,784) 11,461 (12,043)
OTHER DATA:
Units in service (at period end) ..... 52,125 117,034 327,303 772,730 1,240,024
Net subscriber additions ............. 37,812 64,909 210,269 445,427 467,294
ARPU(1) .............................. $ 8.27 $ 8.66 $ 9.81 $ 8.64 $ 8.62
Operating profit (loss) before selling
expenses per subscriber
per month(2) ....................... (7.78) (12.69) (.98) .90 2.11
Selling expenses per net
subscriber addition(3) ............. 146 157 91 81 91
EBITDA(4) ............................ (7,378) (16,499) (19,930) (25,219) (10,076)
Capital expenditures ................. 1,741 13,729 10,810 16,719 33,503
NPCS Licenses acquired(5) ............ -- -- -- 58,885 74,079
Depreciation and amortization ........ 1,224 2,624 5,081 8,105 13,272
</TABLE>
19
<PAGE> 21
- -------------
(1) Average monthly revenue per unit ("ARPU") is calculated by dividing (i)
recurring revenues, consisting of fees for airtime, voicemail, 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 units in service for the quarter. ARPU is stated 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 by (ii) the average number of units in service for the final
quarter of the period. Stated as the monthly average for the final quarter
of the period.
(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 year by (ii) the net subscriber additions
for the year.
(4) EBITDA represents 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 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 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 Item 7.
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) Reflects the acquisition of the NPCS Licenses in the FCC NPCS auctions.
See Item 1. Business--Government Regulation.
ITEM 7. 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 included elsewhere in
this report.
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. It 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 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 as rapidly as
possible to increase cash flow through greater utilization of its nationwide
wireless communications network. From January 1, 1992 to December 31, 1995, the
number of units in service increased from 52,125 to 1,240,024. None of the
Company's growth is attributable
20
<PAGE> 22
to acquisitions. Given its growth strategy and the substantial associated
selling and marketing expenses, the Company expects to continue to generate
operating losses in 1996 from its one-way wireless communications business. In
addition, the Company plans to begin development and implementation of two-way
wireless messaging services during 1996, 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 1996 or
1997, however it expects to generate revenues with respect to two-way services
in 1998. 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 Telecommunications, 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, depreciation and amortization 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 subscribers. However,
the Company expects to lease rather than sell a portion of its two-way
messaging units. 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. In
general, the Company anticipates that, based on its recent experience, 90% of
its units sold through retail distribution channels will be activated and in
service within 75 days of shipment.
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, 1993, 1994 and 1995 were 3.7%, 3.4% and 2.5%,
respectively.
More than 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.
21
<PAGE> 23
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.
FISCAL YEARS 1993, 1994 AND 1995
Units in Service
Units in service were 327,303, 772,730 and 1,240,024 as of December 31,
1993, 1994 and 1995, respectively. This represents a growth rate of 136% and
60% in 1994 and 1995, respectively. 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. According
to industry sources, the paging industry in general has experienced growth
rates of 29%, 38% and 25% for 1993, 1994 and 1995, respectively.
Revenues
Revenues for the fiscal years 1993, 1994 and 1995 were $50.7 million,
$109.8 million and $159.2 million, respectively. Recurring revenues for
airtime, voicemail and other services for the same periods were $24.2 million,
$56.6 million and $101.5 million, respectively. Revenues from equipment sales
and activation fees for 1993, 1994 and 1995 were $26.5 million, $53.2 million
and $57.7 million, respectively. The increases in recurring revenues and
revenues from equipment sales and activation fees were primarily due to rapid
growth in the number of units in service. The increase in equipment sales
during 1995 was somewhat offset by a decline in the average price per unit
sold.
The Company's ARPU was $9.81, $8.64 and $8.62 in the final quarter of
1993, 1994 and 1995, respectively. The Company's ARPU declined in 1994 and 1995
primarily as a result of an increase in subscribers added through third-party
resellers and distribution through private brand strategic alliance programs,
both of 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 reduced airtime rates.
However, because third-party resellers and private brand strategic alliance
partners are responsible for selling and marketing costs, and billing,
collection and other administrative costs associated with end-users, the
Company does not incur these costs with respect to such subscribers. The
decrease in 1995 was slightly offset by a higher mix of multi-city, regional
and nationwide services as well as increased sales of other value-added
services such as voicemail and toll free numbers.
Cost of Equipment Sold
The cost of equipment sold in 1993, 1994 and 1995 was $28.2 million, $57.8
million and $64.0 million, respectively. The increase was directly related to
the increase in the number of units sold partially offset by lower average
pager prices paid to suppliers.
22
<PAGE> 24
Operating Expenses
Technical expenses were $9.5 million, $16.2 million and $25.7 million in
1993, 1994 and 1995, respectively. The increase resulted primarily from the
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 $3.55,
$2.45 and $2.13 in 1993, 1994 and 1995, 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. During 1995, the
Company incurred $222,000 in technical expenses associated with the development
of its two-way wireless messaging services.
Selling expenses in 1993, 1994 and 1995 were $17.3 million, $31.3 million
and $36.1 million, respectively. This increase resulted from greater marketing
and advertising costs related to the significant 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,
1993, 1994 and 1995, the Company added 210,269, 445,427 and 467,294 net new
units in service, respectively. Sales and marketing employees increased from
305 at December 31, 1993 to 450 at December 31, 1994 and then decreased to 445
at December 31, 1995. Management believes 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 $91, $81 and $91 for the years ended December 31, 1993, 1994 and
1995, respectively. The increase in 1995 was due to the addition of new sales
offices, expansion of existing sales offices and an increase in the number of
retail stores supported by the Company's marketing organization.
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) in 1993,
1994 and 1995 were $15.6 million, $29.8 million and $43.5 million,
respectively. This increase was attributable to the Company's expansion of its
customer service call centers and continued expansion into new markets to
support the growing subscriber base which required additional office space,
administrative personnel and customer service representatives. The Company
increased the number of representatives in its customer service call centers
from 69 on December 31, 1993 to 389 on December 31, 1994 and to 600 on December
31, 1995, and believes it operates one of the most extensive of such facilities
in the paging industry. On an average cost per month per unit in service basis,
general and administrative expenses were $5.84, $4.52 and $3.60 in 1993, 1994
and 1995, 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. During 1995, the Company incurred $154,000 in
general and administrative expenses associated with the development of its
two-way wireless messaging services.
Depreciation and amortization in 1993, 1994 and 1995 was $5.1 million,
$8.1 million and $13.3 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. As an average cost per month per
unit in service, depreciation and amortization was $1.91, $1.23 and $1.10 for
the years ended December 31, 1993, 1994 and 1995, respectively.
Interest Expense
Interest expense increased from $6.5 million in 1993 to $12.9 million in
1994 and $30.7 million in 1995. The increase in 1994 was due to interest
related to the 12 1/4% Senior Discount Notes due 2003 (the "12 1/4% Notes")
issued by PageMart, partially offset by decreased borrowings under vendor
financing agreements. The increase in 1995 was primarily the result of the
issuance of the the Company's 15% Senior Discount Notes due 2005 (the "15%
Notes") in January 1995, increased interest related to the 12 1/4% Notes, as
well as increased
23
<PAGE> 25
borrowings under vendor financing agreements. Interest expense related to the 12
1/4% Notes was $2.0 million, $10.8 million and $11.8 million in 1993, 1994 and
1995, respectively. Interest expense related to the 15% Notes was $15.3 million
in 1995.
Net Loss
The Company sustained net losses in 1993, 1994 and 1995 of $31.1 million,
$45.8 million and $53.1 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, 1993, 1994 and 1995, included elsewhere in this report, 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
$(.46) during the first quarter of 1994 to $2.11 during the fourth quarter of
1995 due primarily to the Company's increase in subscribers, operating
efficiency and resulting benefits in economies of scale.
Separately, 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, voicemail, 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.
Service Expenses. Service expenses under the management presentation
include technical, customer service, general and administrative and
headquarters expenses, but do not include selling and marketing expenses,
depreciation or amortization.
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 service expenses and depreciation and amortization.
Operating profit before selling expenses is not derived pursuant to GAAP.
24
<PAGE> 26
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
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. In the fourth quarter of 1995, the
Company's EBITDA from its one-way operations became positive for the first
time.
25
<PAGE> 27
SELECTED QUARTERLY RESULTS OF OPERATIONS
The table below sets forth management's presentation of results of domestic
one-way 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 included
elsewhere in this report, and should not be considered in isolation or as an
alternative to results of operations that are presented in accordance with GAAP.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Recurring revenues ............ $ 10,639 $ 12,946 $ 15,161 $ 17,902
Service expenses .............. 9,485 10,632 12,160 13,688
Depreciation and amortization . 1,658 1,876 2,217 2,354
----------- ----------- ----------- -----------
Operating profit before
selling expenses ............ (504) 438 784 1,860
Selling expenses(1) ........... 7,047 7,543 9,580 11,732
----------- ----------- ----------- -----------
Operating income (loss) ....... $ (7,551) $ (7,105) $ (8,796) $ (9,872)
=========== =========== =========== ===========
EBITDA ........................ $ (5,893) $ (5,229) $ (6,579) $ (7,518)
=========== =========== =========== ===========
OTHER DATA:
Units in service(2) ........... 402,017 495,605 608,427 772,730
Net subscriber additions ...... 74,314 93,588 112,822 164,303
ARPU(3) ....................... $ 9.73 $ 9.62 $ 9.15 $ 8.64
Operating profit before selling
expenses per subscriber
per month(4) ................ (.46) .33 .47 .90
Selling expenses per net
subscriber addition(1)(5) ... 95 81 85 71
Capital employed per unit in
service(6) .................. 84 69 53 42
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Recurring revenues ............ $ 20,464 $ 23,387 $ 26,994 $ 30,658
Service expenses .............. 15,157 16,208 18,192 19,258
Depreciation and amortization . 2,802 3,091 3,469 3,910
----------- ----------- ----------- -----------
Operating profit before
selling expenses ............ 2,505 4,088 5,333 7,490
Selling expenses(1) ........... 9,704 10,614 10,889 11,181
----------- ----------- ----------- -----------
Operating income (loss) ....... $ (7,199) $ (6,526) $ (5,556) $ (3,691)
=========== =========== =========== ===========
EBITDA ........................ $ (4,397) $ (3,435) $ (2,087) $ 219
=========== =========== =========== ===========
OTHER DATA:
Units in service(2) ........... 874,944 1,008,683 1,131,464 1,240,024
Net subscriber additions ...... 102,214 133,739 122,781 108,560
ARPU(3) ....................... $ 8.28 $ 8.28 $ 8.41 $ 8.62
Operating profit before selling
expenses per subscriber
per month(4) ................ 1.01 1.45 1.66 2.11
Selling expenses per net
subscriber addition(1)(5) ... 95 79 89 103
Capital employed per unit in
service(6) .................. 45 39 39 40
</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.
(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, NPCS Licenses 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.
26
<PAGE> 28
SUPPLEMENTARY INFORMATION
The following table sets forth supplementary financial information related
to the Company's various operations:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------
PAGEMART PAGEMART PAGEMART THE COMPANY
ONE-WAY TWO-WAY INTERNATIONAL CONSOLIDATED
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Revenues ................. $ 109,833 $ -- $ -- $ 109,833
Operating loss ........... (33,324) -- -- (33,324)
EBITDA ................... (25,219) -- -- (25,219)
Total assets ............. 81,470 58,885 1,704 142,059
Capital expenditures ..... 16,719 -- -- 16,719
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------
PAGEMART PAGEMART PAGEMART THE COMPANY
ONE-WAY TWO-WAY INTERNATIONAL CONSOLIDATED
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Revenues .................... $ 159,191 $ -- $ -- $ 159,191
Operating loss .............. (22,972) (376) -- (23,348)
EBITDA ...................... (9,700) (376) -- (10,076)
Total assets ................ 120,004 140,235 3,590 263,829
Capital expenditures ........ 32,486 1,017 -- 33,503
</TABLE>
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require 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, the 12 1/4% Notes and the 15% Notes,
as well as borrowings under vendor financing agreements.
Capital expenditures were $10.8 million, $16.7 million and $33.5 million
for the years ended December 31, 1993, 1994 and 1995, respectively. Capital
expenditures for 1995 include approximately $8.7 million for the development of
the Company's new administrative system and approximately $1.0 million related
to the development of two-way messaging services. The Company's expansion of
its one-way wireless communications network and related administrative
facilities will require capital expenditures currently estimated to be
$25 million in 1996. 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 (the "Vendor Commitment").
The Company's net cash used in operating activities was $23.2 million,
$25.5 million and $2.9 million for the years ended December 31, 1993, 1994 and
1995, respectively. The decrease in 1995 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 $18.6 million, $69.1
million and $110.2 million for the years ended December 31, 1993, 1994 and
1995, respectively. The increase in 1994 over 1993 was primarily due to the
$58.9 million used for the acquisition of the NPCS Licenses. Of the $110.2
million used in investing activities in 1995, $74.1 million was for the
acquisition of the NPCS Licenses and the remainder was primarily for capital
expenditures. Net cash provided by financing activities, including proceeds
from borrowings and issuances of common and preferred stock was $61.8 million,
$83.5 million and $125.5 million for the years ended December 31, 1993, 1994
and 1995,
27
<PAGE> 29
respectively. The increase in 1994 resulted from the $76.9 million of net
proceeds from the sale of stock (the "1994 Stock Offerings"). The increase in
1995 resulted primarily from the $100.1 million of net proceeds from the sale of
units, consisting in the aggregate of $207.3 million principal amount at
maturity of the 15% Notes and 725,445 shares of common stock, and $24.5 million
of net proceeds from the sale of common stock (the "1995 Private Stock
Offerings"). Long-term obligations, less current maturities, increased by
approximately $126.7 million during 1995 and $14.3 million during 1994. Net
increases in borrowings were $47.3 million, $16.5 million and $128.7 million for
the years ended 1993, 1994 and 1995, respectively. The net increase in 1994
resulted primarily from the accretion of the 12 1/4% Notes and borrowings under
vendor financing agreements. The increase in 1995 resulted from the issuance of
the 15% Notes, the accretion of the 12 1/4% Notes and borrowings under vendor
financing agreements.
As of December 31, 1995, the Company's indebtedness under vendor financing
arrangements was $15.0 million, its indebtedness under the 12 1/4% Notes was
$94.9 million and its indebtedness under the 15% Notes was $114.9 million.
The 12 1/4% 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 12 1/4%
Notes will cause an increase in indebtedness from December 31, 1995 to November
1, 1998 of $41.6 million. From and after November 1, 1998, interest on the 12
1/4% Notes will be payable semiannually, in cash.
The 15% Notes, which are unsecured senior obligations of Wireless, mature
in 2005 and were issued at a substantial discount from their principal amount
at maturity. The accretion of original issue discount on the 15% Notes will
cause an increase in indebtedness from December 31, 1995 to February 1, 2000 of
$92.4 million. From and after February 1, 2000, interest on the 15% Notes will
be payable semiannually, in cash.
In 1992, PageMart entered into an equipment lease agreement with Glenayre
(the "Vendor Lease Financing Agreement"), providing for the financing of
transmitter equipment up to a maximum aggregate amount of $15 million, pursuant
to lease term schedules mutually agreed upon for lease terms not exceeding 60
months. The Vendor Lease Financing Agreement is not a revolving line of credit
and the vendor's commitment expired on December 31, 1995. PageMart has an
option, at the expiration of any schedule to purchase all of the equipment
leased under that schedule at a nominal purchase price. The weighted average
interest rate in effect on December 31, 1995 with respect to the Vendor Lease
Financing Agreement was 13.46%. All outstanding indebtedness under the Vendor
Lease Financing Agreement will be repaid with a portion of the net proceeds
from the Offering.
In May 1994, PageMart entered into a vendor purchase financing agreement
with Motorola (the "Vendor Purchase Financing Agreement"), providing for the
financing of transmitter equipment over a period of up to 36 months after the
acquisition of such equipment up to a maximum aggregate amount of $8 million.
The Vendor Purchase Financing Agreement is not a revolving line of credit. The
interest rate applicable to such financing is 4% above the prime rate quoted in
The Wall Street Journal from time to time. The weighted average interest rate
in effect on December 31, 1995 with respect to the Vendor Purchase Financing
Agreement was 12.75%.
In May 1995, the Company entered into a four year Revolving Credit
Agreement (the "Revolving Credit Agreement") with BT Commercial Corporation, as
Agent, and Bankers Trust Company, as Issuing Bank, which provides for a $50
million revolving line of credit. Currently there are no loans outstanding
under the Revolving Credit Agreement. The maximum amount available under the
Revolving Credit Agreement at any time is limited to a borrowing base amount
equal to the lesser of (i) 80% of eligible accounts receivable plus 50%
eligible
28
<PAGE> 30
inventory owned by Wireless, and (ii) an amount equal to the service
contribution as defined in the Revolving Credit Agreement of Wireless and its
subsidiaries for the immediately preceding three-month period times 4.0. As of
December 31, 1995, the amount available under the Revolving Credit Agreement is
$28.2 million.
The Vendor Purchase Financing Agreement, the indenture pursuant to which
the 12 1/4% Notes were issued (the "12 1/4% Indenture"), the indenture pursuant
to which the 15% Notes were issued (the "15% Indenture") and the Revolving
Credit Agreement contain 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, and the Revolving Credit Agreement requires the Company to
maintain certain financial ratios and limits the ability of the Company to make
capital expenditures. In addition, the 12 1/4% 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 other requirements. PageMart may,
however, sell assets to Wireless in transactions that are arm's-length in
nature. Wireless is currently a holding company with no business or operations
of its own. Because all of Wireless's operations are conducted through its
subsidiaries, Wireless's cash flow and consequently its ability to service debt,
is almost entirely dependent upon the earnings of its subsidiaries and the
distribution of those earnings or upon loans or other payment of funds by those
subsidiaries to Wireless. Wireless's subsidiaries are separate and distinct
legal entities and have no obligation, contingent or otherwise, to pay any
amounts due pursuant to Wireless's obligations or to make any funds available
therefor, whether by dividends, loans or other payments. Until the maturity of
the 12 1/4% Notes, which mature on November 1, 2003, and the indebtedness under
the Vendor Purchase Financing Agreement, earlier repayment of such indebtedness
or compliance with the requirements of such debt instruments, Wireless will be
unable to use any amount of cash generated by the operations of PageMart and its
subsidiaries. However, currently Wireless does not have significant cash
requirements until August 2000 when interest on the 15% Notes must be paid in
cash.
On November 15, 1995, the Company purchased through PageMart International,
Inc., 200,000 voting shares of 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 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 December 31, 1995, the Company had approximately $27.0 million in
cash and cash equivalents. The Company's cash balances, existing vendor
financing arrangements and borrowings under the Revolving Credit Agreement are
expected to be sufficient to fund the Company's one-way operations and related
capital and debt service requirements through 1997.
Significant additional financing will be required to fund the construction
of a transmission network for two-way services and other start-up costs and
selling and marketing expenses associated with the development and
implementation of two-way services. The Company anticipates investing $75 to
$100 million through fiscal 1997 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 substantially complete
the network buildout. The Company expects to require additional financing to
complete the buildout, which may include 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 15% Indenture, the 12 1/4% Indenture,
the Revolving Credit Agreement and the Vendor Purchase Financing Agreement, and
as a result any additional financing may need to be equity financing.
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 the Company's
strategy will be implemented as currently planned or that the Company's
operations will generate positive cash flows.
29
<PAGE> 31
On May 6, 1996, the Company filed a registration statement for the proposed
offering of $96,600,000 maximum amount of Class A Common Stock, par value $.0001
per share. The Company expects that the net proceeds of the offering will be
used as follows; approximately $50 million to fund the initial construction of
the Company's Narrowband Personal Communications Services transmissions network;
approximately $13 million for the retirement of the Company's vendor debt; with
the balance to be used to repay approximately $8 million of outstanding loans
under the Company's revolving credit facility and for other general corporate
purposes.
------------------------
PageMart Wireless, Inc. cautions readers that any forward-looking
statements contained in this Form 10-K or made by management of the Company
involve risks 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 1996 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; changes in regulation
by the FCC and various state regulatory agencies; and the ability of the
Company to obtain financing to construct the transmission network for two-way
services.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are included in this
report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company, their ages as of
March 1, 1996 and positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John D. Beletic ............ 44 Chairman, President and Chief Executive Officer
Kenneth L. Hilton .......... 43 Executive V.P., Strategic Business Units
Homer L. Huddleston ........ 59 Executive V.P., Technical Operations
Sandra D. Neal ............. 48 Executive V.P., Administration
G. Clay Myers .............. 36 V.P., Finance, Chief Financial Officer and Treasurer
Richard S. Nelson .......... 47 V.P., International
Frances W. Hopkins ......... 55 V.P., Customer Advocacy
Douglas S. Glen ............ 38 V.P., Strategic Alliances Business Unit
Douglas H. Kramp ........... 34 V.P., National Retail Business Unit
Paul L. Turner ............. 37 V.P., Customer Service
Jack D. Hanson ............. 52 V.P., Network Operations
Daniel W. Hay .............. 54 V.P., Information Systems
Thomas C. Keys ............. 37 V.P., Sales, Market Business Unit
N. Ross Buckenham .......... 38 V.P., PCS Strategy
Vick T. Cox ................ 46 V.P., PCS Development
Lawrence H. Wecsler ........ 48 V.P., Field Marketing
Todd A. Bergwall ........... 32 Corporate Counsel and Secretary
Roger D. Linquist (2) ...... 57 Director
Frank V. Sica (1) .......... 44 Director
Guy L. de Chazal (1) ....... 48 Director
Arthur Patterson (1) ....... 52 Director
Andrew C. Cooper (2) ....... 34 Director
Alejandro Perez Elizondo (2) 47 Director
Leigh J. Abramson (2) ...... 27 Director
Pamela D.A. Reeve .......... 47 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
John D. Beletic, Chairman, President and Chief Executive Officer. Mr.
Beletic was named Chairman of the Company's Board of Directors in August 1994.
Mr. Beletic has been Chief Executive Officer of the Company since February
1994. Mr. Beletic joined the Company as President and director in March 1992
after spending a year in venture capital. Prior to that, Mr. Beletic served for
five years as President and Chief Executive Officer of The Tigon Corporation
("Tigon"), a leading voicemail service provider. Tigon was acquired by
Ameritech Development Corporation, a wholly-owned subsidiary of American
Information Technologies Corporation in 1988. Before joining Tigon, Mr. Beletic
was Senior Vice President of Operations and Chief Financial Officer for five
years with VMX, Inc. ("VMX"), a manufacturer of voicemail systems. Mr. Beletic
earned his bachelor's degree in finance from Cincinnati's Xavier University and
his master's degree in business administration from the Harvard Business
School. Mr. Beletic currently serves as a director of Digital Sound Corporation
and Teloquent Communications Corporation. Within the paging industry, Mr.
Beletic currently serves as a director of PCIA, the industry trade association
and President of the Paging Leadership Association.
Kenneth L. Hilton, Executive Vice President, Strategic Business Units.
Mr. Hilton joined the Company in October 1994. Previously, Mr. Hilton spent
five years as Vice President, Sales and Marketing for Visual Information
Technologies, a manufacturer and distributor of high-end graphics cards for the
UNIX marketplace.
31
<PAGE> 33
Before joining Visual Information Technologies, Mr. Hilton
spent fourteen years with IBM in various sales and marketing positions, the
last being Branch Manager. Mr. Hilton also serves as a Director of PageMart
Canada.
Homer L. Huddleston, Executive Vice President, Technical Operations. Mr.
Huddleston has been a Vice President since joining the Company in February
1994. Before joining the Company, he served as Vice President of Communications
Operations for American Airlines from 1987 to 1993. Previously, Mr. Huddleston
served as President and General Manager of Action Communication Systems,
Honeywell's Network Communications Division and a provider of nationwide
network systems, from 1979 to 1986. Prior to 1979, he held various engineering
management, sales management and general management positions with Motorola for
eighteen years.
Sandra D. Neal, Executive Vice President, Administration. Ms. Neal has
been a Vice President since joining the Company in July 1992. Prior to joining
the Company, Ms. Neal was Vice President of Customer Service for Tigon from
1989 to 1992. Previously, Ms. Neal held the positions of Vice President of
Finance and Controller at Tigon from 1986 to 1989. Before joining Tigon, Ms.
Neal was a practicing certified public accountant from 1979 to 1986.
G. Clay Myers, Vice President, Finance, Chief Financial Officer and
Treasurer. Mr. Myers joined the Company in April 1993 as Vice President of
Finance and Chief Financial Officer. Prior to joining the Company, Mr. Myers
was Senior Operations Manager for Dell Computer Corporation from 1991 to 1993.
Prior to joining Dell Computer Corporation, Mr. Myers was with Ernst & Young
from 1982 to 1991. Mr. Myers is a certified public accountant.
Richard S. Nelson, Vice President, International. Mr. Nelson was named
Vice President, International on March 1, 1996. Formerly, Mr. Nelson was Vice
President, Marketing of the Company since June 1992. Mr. Nelson also serves as
President of PageMart International. Before joining the Company, Mr. Nelson was
Vice President of Marketing for American Eagle, at American Airlines, where he
held various staff positions from 1972 to May 1992.
Frances W. Hopkins, Co-founder, Vice President, Customer Advocacy. Ms.
Hopkins co-founded the Company in 1989 and was Vice President of Operations
until she left the Company in September 1990 to pursue other business
interests. Upon returning in July 1991, she was named Vice President,
Operations. In 1995, Ms. Hopkins became Vice President, Customer Advocacy.
Before co-founding the Company, Ms. Hopkins was President of Multicom, Inc., a
subsidiary of PacTel Personal Communications for six years; President of
Gencell, the cellular subsidiary of Communications Industries; and founded
TelPage, a regional paging company.
Douglas S. Glen, Vice President, Strategic Alliances Business Unit. Mr.
Glen has been a Vice President since July 1989. Formerly, Mr. Glen was Regional
Manager and Director of Finance and Administration for Multicom, Inc., a
subsidiary of PacTel Personal Communications for three years. Additionally,
Mr. Glen was manager of financial control with PepsiCola Bottling Group and a
consultant with Arthur Andersen & Co. Mr. Glen serves as a director of PCIA,
the industry trade association and chairman of the Paging and Narrowband PCS
Alliance.
Douglas H. Kramp, Vice President, National Retail Business Unit. Mr.
Kramp joined the Company as a Vice President in August 1993. Before joining
PageMart, Mr. Kramp was President and co-founder of Artificial Linguistics Inc.
("ALI"), a text management software company from 1988 to 1993. Before
co-founding ALI, Mr. Kramp was responsible for starting up and managing high
technology companies for the Hart Group from 1984 to 1988.
Paul L. Turner, Vice President, Customer Service. Mr. Turner has been Vice
President, Customer Service of the Company since March 1994. Before joining the
Company, Mr. Turner was with MCI from 1984 to 1994 in positions of increasing
responsibility. From 1990 to 1994 he held various management positions, the
most recent being Senior Manager, MCI Consumer Markets.
32
<PAGE> 34
Jack D. Hanson, Vice President, Network Operations. Mr. Hanson joined the
Company in October 1993. Prior to joining the Company in October 1993, Mr.
Hanson was Director of Engineering for Spectradyne, Inc. from June 1992 to
October 1993. Previously, he held senior engineering positions with VMX from
December 1984 to June 1992, the most recent being Vice President of National
Account Support.
Daniel W. Hay, Vice President, Information Systems. Mr. Hay joined the
Company in March 1995. Prior to joining the Company, Mr. Hay was a Vice
President and Business Unit Manager for Affiliated Computer Services from
August 1994 to March 1995. Previously, Mr. Hay operated a management consulting
practice from November 1992 to August 1994. Additionally, Mr. Hay was Vice
President of Systems for Southwest Airlines from February 1988 to November
1992.
Thomas C. Keys, Vice President, Sales, Market Business Unit. Mr. Keys was
named Vice President in September 1994. Previously, Mr. Keys was Sales Director
and General Manager from April 1994 to August 1994. Previously, Mr. Keys was
the Area Manager for the Company's largest West Coast market for over one year.
Before joining the Company, Mr. Keys held the position of Vice President of
Sales at S.I.P., Inc., a welding equipment manufacturer, from December 1991 to
December 1992. Previously, Mr. Keys held several key management positions at
Metromedia Corporation from August 1990 to December 1991. Additionally, Mr.
Keys was Regional Sales Manager at Savin, Inc. from April 1988 to August 1990.
N. Ross Buckenham, Vice President, PCS Strategy. Mr. Buckenham assumed
this role on January 15, 1996. Prior to joining the Company, Mr. Buckenham was
President of Touchtone Solutions, Inc., a telecommunications and interactive
voice response software and services company from 1992 to 1996. From 1984 to
1991, Mr. Buckenham was with Aquanautics Corporation, initially as Vice
President of Development then as its President. From 1981 to 1984, Mr.
Buckenham was with Bain & Co. as a senior consultant to companies in the voice
processing, technology, finance and health care industries. Mr. Buckenham holds
an MBA degree from Harvard Graduate School of Business Administration and a BS
degree in Chemical Engineering from Canterbury University, New Zealand.
Vick T. Cox, Vice President, PCS Development. Mr. Cox has been a Vice
President since April 1993. Previously, he had been Director of Network
Operations since January 1993. Before joining the Company he held engineering
management positions with VMX from 1979 to 1991, where he helped develop the
world's first voicemail system, and with Interphase, a manufacturer of
intelligent network controllers from 1991 to January 1993.
Lawrence H. Wecsler, Vice President, Field Marketing. Mr. Wecsler was
named Vice President of Field Marketing in April 1994. Previously, he was Vice
President of Human Resources and Sales Training for two years. Mr. Wecsler was
Vice President, Western Region of the Company, from March 1990 to March 1992.
Before joining the Company, Mr. Wecsler held positions in operations, sales,
marketing and human resources with PacTel Paging for nine years. Previously, he
held management positions with Texas Instruments and Braniff International.
Todd A. Bergwall, Corporate Counsel. Mr. Bergwall has been Corporate
Counsel since joining the Company in June 1994. Mr. Bergwall has also been
Secretary of the Company since April of 1995. From August 1989 until joining
the Company, Mr. Bergwall was engaged in private practice with the Dallas,
Texas law firm Winstead Sechrest & Minick specializing in corporate and
securities law.
Roger D. Linquist, Director. Mr. Linquist has been a Director of the
Company since co-founding it in 1989. He served as Chairman of the Company's
Board of Directors from 1989 until April 1994. Prior to launching the Company,
Mr. Linquist served for three years as President and Chief Executive Officer of
PacTel Personal Communications, the cellular and paging division of Pacific
Telesis Group ("PacTel"), the Regional Bell Operating Company that provides
service to California and Nevada. Mr. Linquist served as Chief Executive
Officer of Communications Industries before joining PacTel.
33
<PAGE> 35
Frank V. Sica, Director. Mr. Sica has been a Director of the Company since
December 1991. He is currently a Managing Director of Morgan Stanley & Co.
Incorporated ("MS & Co."), and has been with MS & Co. since 1981, originally in
the Mergers and Acquisitions Department and, since 1988, with the Merchant
Banking Division. He serves as a director of numerous companies including ARM
Financial Group, Inc., Consolidated Hydro, Inc., Fort Howard Corporation,
Kohl's Corporation, Southern Pacific Rail Corporation and Sullivan
Communications Inc. He is a director of the general partner of The Morgan
Stanley Leveraged Equity Fund II, L.P. ("MSLEF II") and of the respective
managing general partners of the general partner of Morgan Stanley Venture
Capital Fund, L.P. ("MSVCF"), Morgan Stanley Venture Capital Fund II, L.P.
("MSVCF II") and Morgan Stanley Capital Partners III, L.P. ("MSCP III"). Mr.
Sica was designated by MSLEF II pursuant to the Stockholders Agreement. See Item
13. Certain Relationships and Related Transactions--Election of Directors.
Guy L. de Chazal, Director. Mr. de Chazal has been a Director of the
Company since June 1989. Mr. de Chazal is President and a Director of the
managing general partner of the general partner of MSVCF and MSVCF II and is a
Managing Director of MS & Co. Mr. de Chazal is also a director of SPSS, Inc.
and several private companies. From 1986 to 1990, Mr. de Chazal was a Vice
President, and from 1991 to 1994 a Principal of MS & Co. Mr. de Chazal was
designated by MSVCF pursuant to the Stockholders Agreement. See Item 13.
Certain Relationships and Related Transactions -- Election of Directors.
Arthur Patterson, Director. Mr. Patterson has been a Director of the
Company since June 1989 and a Managing Partner of Accel Partners, a venture
capital company since 1984. Mr. Patterson is also a director of UUNET, VIASOFT,
Axent and the G.T. Global Group of Investment Companies as well as several
private software and telecommunications companies. Mr. Patterson was designated
by Accel Partners pursuant to the Stockholders Agreement. See Item 13. Certain
Relationships and Related Transactions--Election of Directors.
Andrew C. Cooper, Director. Mr. Cooper has been a Director of the Company
since October 1990. Mr. Cooper is a Principal of MS & Co., an officer of the
managing general partner of the general partner of MSVCF and MSVCF II, and has
been with MS & Co. since 1984. Mr. Cooper was designated by MSVCF II pursuant
to the Stockholders Agreement. See Item 13. Certain Relationships and Related
Transactions--Election of Directors.
Alejandro Perez Elizondo, Director. Mr. Perez has been a Director of the
Company since August 1994. Since 1987, Mr. Perez has been associated with
Pulsar, a diversified Mexican company with interests in the tobacco, insurance,
agriculture, telecommunications, finance and other industries, and is currently
Vice President of Diversification of Pulsar Internacional, S.A. de C.V. Mr.
Perez is also a director of Ionica L3 Ltd. (a public telephone services company
located in U.K.), Novalink (a California modem manufacturing company), Fomento
Empresarial Regiomontano, S.A. de C.V. (a Mexico-based telecommunications
company), and Kb/tel Telecommunications S.A. de C.V. (a Mexico-based
communications engineering company). Mr. Perez was designated by Pulsar
pursuant to the Stockholders Agreement. See Item 13. Certain Relationships and
Related Transactions--Election of Directors.
Leigh J. Abramson, Director. Mr. Abramson has been a Director of the
Company since August 1994. He is currently an Associate of MS & Co. and an
officer of the general partner of MSLEF II and of the general partner of the
general partner of MSCP III. Mr. Abramson has been with MS & Co. since 1990,
first in the Corporate Finance Division and, since 1992, in the Merchant
Banking Division. Mr. Abramson was designated by MSCP III pursuant to the
Stockholders Agreement. See Item 13. Certain Relationships and Related
Transactions--Election of Directors.
Pamela D. A. Reeve, Director. Ms. Reeve was elected Director of the
Company in April 1996. Ms. Reeve is currently President, Chief Executive
Officer and Director of Lightbridge, Inc. ("Lightbridge") and has been with
Lightbridge since 1989. Lightbridge develops and manages software used by
wireless telecommunications companies across the United States to support sales
and marketing applications. Prior to joining Lightbridge, Ms. Reeve spent
eleven years at The Boston Consulting Group, with senior operating
responsibility for the firm's Boston office. Prior to joining The Boston
Consulting Group, Ms. Reeve worked with the National Endowment for the
Humanities managing educational projects and with real estate development and
manufacturing firms, primarily in operations and marketing.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation information for the Chief
Executive Officer of the Company and its four most highly compensated executive
officers, other than the Chief Executive Officer (collectively, the "Named
Executive Officers"), for services rendered in the fiscal years ending December
31, 1995, 1994 and 1993.
34
<PAGE> 36
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL SECURITIES
COMPENSATION (1) UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(2) COMPENSATION(3)
- --------------------------- ---- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
John D. Beletic (4) ......... 1995 $200,000 $150,000 100,000 $ 10,755
Chairman, President and 1994 200,000 187,500 100,000 11,220
Chief Executive Officer ..... 1993 200,000 73,640 200,000 17,141
Kenneth L. Hilton ........... 1995 150,000 46,500 40,000 7,998
Executive Vice President, 1994 27,885 12,250 125,000 711
Strategic Business Units 1993 -- -- -- --
Homer L. Huddleston ......... 1995 116,667 32,845 45,000 5,808
Executive Vice President, 1994 89,808 31,650 55,000 4,619
Technical Operations 1993 -- -- -- --
Sandra D. Neal .............. 1995 115,000 39,675 50,000 7,569
Executive Vice President, 1994 104,269 33,538 25,000 8,121
Administration 1993 99,000 28,063 25,000 13,238
Carol W. Dickson (5) ........ 1995 120,000 29,760 -- 2,922
Vice President, 1994 60,923 23,010 50,000 1,406
International Operations 1993 -- -- -- --
</TABLE>
- ---------------
(1) The amount of cash compensation does not include the value of personal
benefits or securities, property or other non-cash compensation paid or
distributed other than pursuant to a plan, which, with respect to any named
executive officer, was less than the lesser of $50,000 and 10% of the cash
compensation received by such officer.
(2) Each of these options is exercisable for shares of the Company's Class A
Convertible Common Stock (the "Class A Common Stock").
(3) The amounts shown represent one below-market loan made by the Company to
Mr. Beletic in 1994, the compensatory value of which was $2,200 in 1994 and
$2,400 in 1995, and insurance payments made by the Company on behalf of
each named executive. In 1995, the Company made payments on behalf of
Messrs. Beletic, Hilton and Huddleston, Ms. Neal and Ms. Dickson,
respectively, of $648, $486, $356, $373 and $389 for life and accident
insurance, of $780, $585, $429, $449 and $468 for long-term disability
insurance and of $6,927, $6,927, $5,023, $6,747 and $2,065 for health
insurance.
(4) As of December 31, 1995, Mr. Beletic owned 12,500 shares of restricted
Class A Common Stock subject to a vesting period ending March 17, 1996. At
December 31, 1995, the stock had an aggregate market value of $125,000
based upon an estimated market value of $10.00 per share. No dividends on
such shares have been paid or are expected to be paid in the future.
(5) Ms. Dickson resigned from the Company effective February 29, 1996.
35
<PAGE> 37
OPTION EXERCISES AND VALUATION
The following table sets forth grants of stock options, during fiscal year
1995, to each Named Executive Officer.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZATION VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL
SECURITIES TOTAL OPTIONS RATES OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------------
GRANTED(1) FISCAL 1995 PER SHARE DATE 5% 10%
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John D. Beletic ............... 100,000 8.3% $ 10.00 11/17/2005 $ 628,890 $1,593,739
Kenneth L. Hilton ............. 40,000 3.3% 10.00 11/17/2005 251,555 637,495
Homer L. Huddleston ........... 10,000 .8% 7.00 05/23/2005 44,022 111,561
35,000 2.9% 10.00 11/17/2005 220,110 557,808
Sandra D. Neal ................ 10,000 .8% 7.00 01/01/2005 44,022 111,561
40,000 3.3% 10.00 11/17/2005 251,555 637,495
Carol W. Dickson .............. -- -- -- -- -- --
</TABLE>
- ---------------
(1) Each of these options is exercisable for shares of Class A Common Stock.
Each of these options is immediately exercisable; however, the underlying
option shares are unvested and remain subject to repurchase by the Company
at the option price paid per share. The optionee acquires a vested interest
in, and the Company's repurchase right accordingly lapses with respect to,
(i) 20% of the option shares one year after the date of grant and (ii) the
balance of the option shares in equal successive monthly installments over
each of the next forty-eight (48) months of service thereafter.
The following table sets forth stock options exercised during fiscal year
1995 and the fiscal year-end value of unexercised options for each Named
Executive Officer.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Underlying Unexercised
Unexercised Options In-the-Money Options
Shares at December 31, 1995(1) at December 31, 1995(2)
Acquired Value ---------------------------- ------------------------------
on Exercise Realized Exercisable Unexercisable(3) Exercisable Unexercisable(3)
----------- -------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John D. Beletic .................... -- $ -- 103,334 266,666 $596,739 $849,059
Kenneth L. Hilton .................. 14,285 42,855 14,881 135,834 44,643 287,502
Homer L. Huddleston ................ -- -- 18,666 81,334 85,330 189,670
Sandra D. Neal ..................... -- -- 32,499 97,501 223,687 317,312
Carol W. Dickson ................... -- -- 13,333 36,667 39,999 110,001
</TABLE>
- ---------------
(1) Each of these options is exercisable for shares of Class A Common Stock.
(2) The fair market value at December 31, 1995 was estimated to be $10.00 per
share.
(3) Each of these options is immediately exercisable; however, the underlying
option shares are unvested and remain subject to repurchase by the Company
at the option price paid per share. The optionee acquires a vested interest
in, and the Company's repurchase right accordingly lapses with respect to,
(i) 20% of the option shares one year after the date of grant and (ii) the
balance of the option shares in equal successive monthly installments over
each of the next forty-eight (48) months of service thereafter.
36
<PAGE> 38
DIRECTORS' COMPENSATION
Directors of the Company currently receive no compensation for their
services in such capacity.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the Company consists of Frank V. Sica, Guy
L. de Chazal, and Arthur Patterson. No executive officer of the Company serves
as a member of the compensation committee of the Company, or on the
compensation committee of another corporation, an executive officer of which
serves as a director of the Company or on the Company's compensation committee,
and no executive officer of the Company serves as a director of another
corporation, an executive officer of which serves as a member of the Company's
compensation committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Class A Common Stock as of March 1, 1996 (i) by each person known
by the Company to own beneficially more than 5% of the outstanding Class A
Common Stock, (ii) by each director of the Company, (iii) by each of the most
highly compensated executive officers of the Company, and (iv) by all executive
officers and directors of the Company as a group. Except as otherwise
indicated, each named person has voting and investment power over the listed
shares, and such voting and investment power is exercised solely by the named
person or shared with a spouse.
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
CLASS A CLASS A
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK
- ------------------------------------ ------------ ------------
<S> <C> <C>
The Morgan Stanley Leveraged Equity Fund II, L.P.(1) ....... 5,829,919 25.0%
1221 Avenue of the Americas
New York, NY 10020
Morgan Stanley Capital Partners III, L.P.(1) ............... 3,488,846 15.0%
1221 Avenue of the Americas
New York, NY 10020
Morgan Stanley Venture Capital Fund, L.P.(2) ............... 1,481,511 6.4%
1221 Avenue of the Americas
New York, NY 10020
Other Morgan Stanley-sponsored limited partnerships(3) ..... 579,598 2.5%
Mellon Bank, N.A., as Trustee for First Plaza Group
Trust(4) .................................................. 3,214,286 13.8%
One Mellon Plaza
Pittsburgh, PA 15258
Accel Telecom L.P.(5) ...................................... 1,542,300 6.6%
One Embarcadero Center, Ste. 3820
San Francisco, CA 94111
Accel III L.P.(5) .......................................... 1,416,200 6.1%
One Embarcadero Center, Ste. 3820
San Francisco, CA 94111
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
CLASS A CLASS A
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK COMMON STOCK
- ------------------------------------ ------------ ------------
<S> <C> <C>
Accel Investors `89 L.P.(5) ................................ 91,500 *
One Embarcadero Center, Ste. 3820
San Francisco, CA 94111
Pulsar ..................................................... 2,142,857 9.2%
Av. Roble, No. 300. Mezzanine
Edifino Torra Alta
Garza Garcia, N.L
Mexico C.P. 66265
Directors and Most Highly Compensated Executive Officers:
John D. Beletic(6) ....................................... 460,003 2.0%
Roger D. Linquist(7) ..................................... 1,525,000 6.6%
Kenneth L. Hilton(8) ..................................... 55,500 *
Homer L. Huddleston(9) ................................... 22,333 *
Sandra D. Neal(10) ....................................... 64,734 *
Carol W. Dickson(11) ..................................... 15,000 *
Frank V. Sica(1)(2) ...................................... -- *
Guy L. de Chazal(2) ...................................... -- *
Arthur Patterson(5)(12) .................................. 3,050,000 13.1%
Andrew C. Cooper(2) ...................................... -- *
Alejandro Perez Elizondo ................................. -- *
Leigh J. Abramson(1) ..................................... -- *
All directors and executive officers as a group(13) ........ 5,642,983 24.2%
</TABLE>
- ---------------
* Denotes less than 1%.
(1) Each of these entities is an investment partnership for which Frank V.
Sica, a director of the Company, is a director of the entity controlling
such partnership. Each of these entities (other than MSVCF) is also an
investment partnership for which Leigh J. Abramson is an officer of the
entity controlling such partnership. The general partner of MSLEF II and
the managing general partners of the respective general partners of MSCP
III and each of the investment partnerships referred to in footnotes (2)
and (3) below are each wholly owned subsidiaries of Morgan Stanley Group,
Inc. ("MS Group").
(2) This entity is an investment partnership for which Frank V. Sica and Guy
L. de Chazal, directors of the Company, are directors of the entity
controlling such partnership and, in the case of Mr. de Chazal, a general
partner of the general partner of such partnership and for which Andrew C.
Cooper, a director of the Company, is an officer of the entity controlling
such partnership.
(3) Includes 256,307 shares owned by MSVCF II, 118,688 shares owned by Morgan
Stanley Capital Investors, L.P. ("MSCI"), 73,676 shares owned by Morgan
Stanley Venture Investors, L.P. ("MSVI"), 69,345 shares owned by Morgan
Stanley Venture Capital Fund II, C.V. ("MSVC II") and 61,582 shares owned
by MSCP III 892 Investors, L.P. ("MSCP 892"). Each of MSCI and MSCP 892 is
an investment partnership for which the relationships described in
footnote (1) above are applicable. Each of MSVCF II, MSVI and MSVC II is
an investment partnership for which the relationships described in
footnote (2) above are applicable.
(4) Mellon Bank, N.A., acts as the trustee ("Mellon") for First Plaza Group
Trust ("First Plaza"), a trust under and for the benefit of certain
employee benefit plans of General Motors Corporation ("GM") and its
subsidiaries. These shares may be deemed to be owned beneficially by
General Motors Investment
38
<PAGE> 40
Management Corporation ("GMIMCo"), a wholly owned subsidiary of GM.
GMIMCo's principal business is providing investment advice and investment
management services with respect to the assets of certain employee benefit
plans of GM and its subsidiaries and with respect to the assets of certain
direct and indirect subsidiaries of GM and associated entities. GMIMCo's
business address is 767 Fifth Avenue, New York, New York. GMIMCo is serving
as First Plaza's investment manager with respect to these shares and in
that capacity it has the sole power to direct the trustee as to the voting
and disposition of these shares. Because of Mellon's limited role,
beneficial ownership of the shares by Mellon is disclaimed.
(5) Each of these entities is an investment partnership for which Arthur
Patterson, a director of the Company, is a general partner.
(6) Includes 328,000 shares of common stock issued pursuant to the Stock
Option Plan and Stock Issuance Plan. Includes 123,334 stock options which
are exercisable within the 60-day period commencing March 1, 1996 pursuant
to the Stock Option Plan.
(7) Includes 125,000 shares of common stock issued pursuant to the Stock
Option Plan and Stock Issuance Plan.
(8) Includes 23,215 stock options which are exercisable within the 60-day
period commencing March 1, 1996 pursuant to the Stock Option Plan.
(9) Includes 22,333 stock options which are exercisable within the 60-day
period commencing March 1, 1996 pursuant to the Stock Option Plan.
(10) Includes 41,666 stock options which are exercisable within the 60-day
period commencing March 1, 1996 pursuant to the Stock Option Plan.
(11) Includes 15,000 stock options which are exercisable within the 60-day
period commencing March 1, 1996 pursuant to the Stock Option Plan. Ms.
Dickson resigned from the Company effective February 29, 1996.
(12) Includes shares of common stock held by the entities described in note 5
in which Arthur Patterson, a director of the Company, may be deemed to have
beneficial ownership. Mr. Patterson disclaims beneficial ownership of
such shares except to the extent of his pecuniary interest therein.
(13) Includes 511,907 stock options which are exercisable within the 60-day
period commencing March 1, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RELATED PARTY TRANSACTIONS
The Company was organized in 1989 by Roger D. Linquist, MSVCF, Accel
Telecom L.P., Accel Partners L.P. and Frances W. Hopkins. Through the
acquisition of preferred stock in 1991 and 1993, MSLEF II became the owner of
capital stock representing a majority of the voting power in the Company. The
general partner of MSLEF II and the managing general partner of the general
partner of MSVCF are both wholly-owned subsidiaries of MS Group. Four of the
eight directors of the Company are employees of MS & Co. MS & Co. acted as
placement agent for the offering of the 12 1/4% Notes and the offering of the
15% Notes and received compensation from the Company in the amount of $2.6
million and $3.8 million, respectively, for acting in such capacity.
In two transactions consummated in March and May of 1993, the Company
issued a total of 5,277,611 shares of the Company's Series C Preferred Stock,
having an aggregate purchase price of $17,205,011, of which 5,214,724 shares
were issued to MSLEFII. During the fiscal quarter ended September 30, 1994, the
Company issued an aggregate of 11,242,857 shares of common stock in the 1994
Stock Offerings at a purchase price of $7.00 per share. The aggregate net
proceeds (after expenses) of the 1994 Stock Offerings were approximately $76.9
million. Of the shares issued in the 1994 Stock Offerings, 5,000,000 shares of
common stock were issued to MSCP III, MSCI, MSVCF II, MSVC II, and MSVI,
2,857,143 shares were issued to First Plaza Group Trust and 1,242,857 shares to
certain other institutional investors. The remaining 2,142,857 shares of the
common stock issued in the 1994 Stock Offerings were acquired by an affiliate
of Pulsar pursuant to a private placement.
39
<PAGE> 41
On May 11, 1995, the Company completed the issuance of 3,598,429 shares of
common stock in the 1995 Private Stock Offering at a purchase price of $7.00
per share. The net proceeds (after expenses) of the 1995 Private Stock Offering
were approximately $24.5 million. Of the shares issued in the 1995 Private
Stock Offering, 2,277,286 were issued to the MS Merchant Banking Funds (as
defined herein), other than MSLEF II, and 357,143 shares were issued to First
Plaza Group Trust. The remaining 964,000 shares of common stock were issued to
other institutional investors and officers of the Company consisting of John D.
Beletic, Danial W. Hay, G. Clay Myers, Todd A Bergwell, Lawrence H. Wecsler,
Paul L. Turner, Kenneth L. Hilton and Douglas H. Kramp.
In October 1995, MSLEF II, MSCP III, MSCI, MSVCF, MSVCF II, MSVC II, MSCP
892 Investors, L.P. ("MSCP 892"), and MSVI (collectively, the "Morgan Stanley
Shareholders") exchanged a portion of their Class A Common Stock of the Company
for Class B Common Stock in a share-for-share exchange without payment of any
additional consideration.
As of December 31, 1995, John D. Beletic, President of the Company, was
indebted to the Company in the amount of $118,800 under three promissory notes.
The first promissory note (the "First Note") was issued in January 1994 for
$97,800 in connection with a stock option exercise by Mr. Beletic and bears
interest at the rate of 3.55% per annum. Interest on the outstanding balance is
due and payable annually beginning on January 28, 1995. The outstanding
principal balance on the First Note is due and payable on January 28, 1999. The
second promissory note (the "Second Note") was issued in November 1994 and
bears interest at the rate of 7% per annum. Under the terms of the Second Note,
Mr. Beletic may receive loans in various amounts, the total of which may not
exceed $200,000. There were no amounts outstanding under the Second Note at
March 31, 1996. The third promissory note (the "Third Note") was issued in May
1995 for $21,000 in connection with the purchase of Class A Common Stock by Mr.
Beletic and bears interest at the rate of 6.9% per annum. Interest on the
outstanding principal is due and payable annually beginning on May 11, 1996.
The outstanding principal balance on the Third Note is due and payable on May
11, 1999. The First Note, the Second Note and the Third Note are all secured by
the Class A Common Stock owned by Mr. Beletic.
ELECTION OF DIRECTORS
Pursuant to the Stockholders Agreement among certain Stockholders dated as
of September 19, 1995, as amended (the "Stockholders Agreement"), the Morgan
Stanley Shareholders have the right to designate and have elected one-half of
the members of the Board of Directors of the Company for so long as the total
number of shares of Common Stock of the Company owned by the Morgan Stanley
Shareholders constitutes at least 50% of the outstanding Common Stock of the
Company. If such ownership falls below 50%, the number of directors that the
Morgan Stanley Shareholders will have the right to designate and have elected
will be reduced to the number of directors which constitutes a percentage
representation on the Board equal to the Morgan Stanley Shareholders' aggregate
percentage ownership of the outstanding Common Stock of the Company. The rights
of each of MSLEF II, MSCP III, MSVCF and MSVCF II to designate and have elected
one member of the Board of Directors terminates once the total number of shares
of common stock of the Company owned by such investor falls below 7.5%.
Accel Telecom L.P., Accel III, L.P. and Accel Investors 89, L.P.
(collectively, "Accel") also has the right to designate one director for
election to the Board of Directors so long as Accel owns at least 7.5% of the
outstanding common stock of the Company. So long as Pulsar owns at least 5% of
the outstanding capital stock of the Company (or until the expiration of the
Pulsar Exclusivity Period, as defined in the Stockholders Agreement), it will
have the right to designate one member of the Board of Directors.
So long as J.P. Morgan Capital Corporation owns no less than 4% of the
Common Stock of the Company, the Company will permit a representative of such
holder to attend as an observer all meetings of the Board of Directors of the
Company and all committees thereof. Such representative is entitled to receive
all written materials and other information given to directors in connection
with such meetings.
40
<PAGE> 42
So long as the Morgan Stanley Shareholders hold securities representing at
least 10% of the outstanding Common Stock, the Company is required to maintain
compensation and audit committees of its Board of Directors, each consisting of
up to four directors. Accel and those members of the Board of Directors who are
not designated by the Morgan Stanley Shareholders are each entitled to
designate one director on each such committee and the Morgan Stanley
Shareholders is entitled to designate up to two directors on each such
committee.
The Company will not amend the Company's Restated Certificate of
Incorporation or By-laws to eliminate the right of stockholders of the Company
to take action upon written consent without a meeting, without prior notice and
without a vote as provided in the Company's By-laws, so long as the MS Merchant
Banking Funds (as defined below) hold at least 7.5% of the Company's Common
Stock.
REGISTRATION RIGHTS
The Stockholders Agreement provides that the parties thereto, which
include substantially all of the current stockholders of the Company
(collectively, the "Holders"), collectively have the right to "demand" an
unlimited number of registrations at any time at least six months after an
initial public offering. Pursuant to these "demand" rights, Holders of common
stock (the "Registrable Securities") may request in writing that the Company
file a registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), covering the registration of a number of shares equal to at
least three million shares of common stock or a lesser number if such number
represents a majority of the Registrable Securities then outstanding. The
Company is obligated within ten days of the receipt thereof to give written
notice of such request to all Holders and to use its best efforts to effect as
soon as practicable the registration under the Securities Act of all
Registrable Securities that the Holders request to be registered within 20 days
of such notice by the Company. Unless the Holders of a majority of the
Registrable Securities to be registered shall consent in writing, no other
party (including the Company) will be permitted to offer securities under such
demand registration. Under certain circumstances, Pulsar may also request that
the Company file a registration under the Securities Act covering the
registration of all of the Registrable Securities Pulsar owns. Pulsar may make
no more than two such requests. The Company is not obligated to effect more
than one demand registration in any six-month period.
In the event the managing underwriter advises the Holders that the size of
the offering is such that the success of the offering would be materially and
adversely affected by inclusion of all Registrable Securities requested to be
included, then the number of shares of Registrable Securities to be included in
the underwriting will be reduced on a pro rata basis, provided that the Company
will first reduce entirely all securities other than Registrable Securities to
be included in such underwriting.
The Stockholders Agreement also provides that, if the Company proposes to
register any of its stock or other securities under the Securities Act in
connection with the public offering of such securities solely for cash (other
than an initial public offering), the Company shall, at such time, promptly
(but in no event less than 30 days before the filing date) give each Holder
written notice of such registration, and such notice shall offer the Holders
the opportunity to register such number of shares of Registrable Securities as
such Holder may request. Subject to certain restrictions, upon the written
request of each Holder given within 20 days after delivery of such notice by
the Company, the Company shall cause to be registered under the Securities Act
all of the Registrable Securities that each such Holder has requested to be
registered.
If the underwriters determine that the total amount of securities
requested to be included in any such offering would materially and adversely
affect the success of such offering, the Company will be required to include in
the offering, in addition to any shares to be registered by the Company, only
that number of such Registrable Securities that the underwriters determine in
their sole discretion would not affect the success of such offering.
41
<PAGE> 43
PREEMPTIVE RIGHTS
Pursuant to the Stockholders Agreement, the Company has agreed that
Holders of at least 1,000,000 shares of common stock will have preemptive
rights with respect to any new offering of capital stock by the Company, with
certain exceptions.
RESTRICTIONS ON TRANSFER
Under the Stockholders Agreement, if MSLEF II, MSCI, MSCP 892 and MSCP III
(collectively, the "MS Merchant Banking Funds") propose to transfer (other than
in a sale to the public) shares which, taken together with any prior transfers
by the MS Merchant Banking Funds, represent more than 10% of the shares owned
by them on the date of the Stockholders Agreement, the Holders have a right to
require the transferee to purchase their shares on a pro rata basis. The
Holders who own at least 67% of the voting common stock (the "Compelling
Holders") also have the right to require all Holders to sell their shares to
any third party that buys all of the shares owned by the Compelling Holders.
The Stockholders Agreement further provides for certain restrictions on
the amount of common stock which may be transferred by the parties to the
Stockholders Agreement for a period of one year following any public offering
of the Company's common stock, based on, with certain exceptions, the
percentage of shares of common stock sold in any such offering by certain
institutional investors party to the Stockholders Agreement. These restrictions
on transfer, and the right of the Compelling Holders described above, will
terminate, subject to certain extensions, approximately one year following the
consummation of an initial public offering. The Stockholders Agreement also
provides for certain restrictions on the transfer of shares of common stock by
holders thereof subject to Regulation Y of the Board of Governors of the
Federal Reserve System.
RESTRICTIONS ON AMENDMENT OF CERTIFICATE OF INCORPORATION
The Company will not amend the Company's Amended and Restated Certificate
of Incorporation or By-laws to eliminate the right of stockholders of the
Company to take action upon written consent of the holders of a majority of the
outstanding shares of Class A Common Stock without a meeting, without prior
notice and without a vote as provided in the Company's Bylaws, so long as the
MS Merchant Banking Funds hold at least 7.5% of the Company's common stock.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this 10-K:
(1) Financial Statements. See Index to Consolidated Financial
Statements and Financial Statement Schedule on Page F-1 hereof.
(2) Financial Statement Schedules. See Index to Consolidated Financial
Statements and Financial Statement Schedule on Page F-1 hereof.
(3) Exhibits Required by Item 601 of Regulation S-K.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<S> <C>
3(i)*** Restated Certificate of Incorporation of PageMart Wireless,
Inc.
3(ii)* By-laws of PageMart Wireless, Inc.
3(iii)*** Certificate of Amendment to Restated Certificate of
Incorporation of PageMart Wireless, Inc.
</TABLE>
42
<PAGE> 44
<TABLE>
<S> <C>
4.1** Indenture, dated as of October 19, 1993, between PageMart,
Inc. and United States Trust Company of New York, as
Trustee, relating to the 12 1/4% Senior Discount Notes due
2003
4.2** Indenture dated as of January 17, 1995 between PageMart
Nationwide, Inc. and United States Trust Company of New
York, as Trustee, relating to the 15% Senior Discount Notes
due 2005
10.1** Warrant Agreement, dated as of October 19, 1993, between
PageMart, Inc. and United States Trust Company of New York,
as Warrant Agent, relating to the Warrants to purchase
Common Stock of the Company.
10.2** Telecommunications Service Agreement, dated May 29, 1992,
between PageMart, Inc. and WilTel, Inc.
10.3** Equipment Lease Agreement, dated May 20, 1992, between
PageMart, Inc. and Glenayre Electronics, Inc.
10.4** First Addendum to Equipment Lease Agreement, dated May 20,
1992, between PageMart, Inc. and Glenayre Electronics, Inc.
10.5** Amendment No. 2 to Equipment Lease Agreement, dated October
18, 1993, between PageMart, Inc. and Glenayre Electronics,
Inc.
10.6** Lease Agreement and Addendum, dated January 10, 1990,
between Kingston Houston Partners I, Ltd. and PageMart,
Inc.
10.7** Expansion and Extension of Lease Agreement, dated April 7,
1993, between Kingston Houston Partners I, Ltd. and
PageMart, Inc.
10.8** Office Lease Agreement, dated January 29, 1992, between
Dallas Central Development Corp. and PageMart, Inc.
10.9** First Amendment to Office Lease Agreement, dated July 29,
1992, between Fulcrum Central Ltd., as successor in
interest to Dallas Central Development Corp., and PageMart,
Inc.
10.10** Second Amendment to Office Lease Agreement, dated December
1, 1992, between Fulcrum Central Ltd., as successor in
interest to Dallas Central Development Corp., and PageMart,
Inc.
10.11** Third Amendment to Office Lease Agreement, dated December
29, 1992, between Fulcrum Central Ltd., as successor in
interest to Dallas Central Development Corp., and PageMart,
Inc.
10.12** Fourth Amendment to Office Lease Agreement, dated July 21,
1993, between Fulcrum Central Ltd., as successor in
interest to Dallas Central Development Corp., and PageMart,
Inc.
10.13** License Agreement, dated May 12, 1994, between PageMart,
Inc., licensee, and International Business Machines
Corporation, licensor
10.14** Sales Contract, dated January 21, 1994, between PageMart,
Inc., buyer, and Mitsui Comtek Corporation, seller
10.15** Resale Agreement, dated November 1, 1993, between PageMart,
Inc., licensor, and GTE Service Corporation, licensee
</TABLE>
43
<PAGE> 45
<TABLE>
<S> <C>
10.16** Financing and Security Agreement between Motorola and
Pagemart, Inc. dated May 18, 1994
10.17** Subscription Agreement, dated June 9, 1994, between
PageMart, Inc. and Fomento Empresarial Regiomontano, S.A.
de C.V.
10.18** Letter of Intent, dated June 9, 1994, between PageMart,
Inc. and Fomento Empresarial Regiomontano, S.A. de C.V.
10.19* Strategic Alliance Agreement No. 1, dated September 15,
1994, between GTE Service Corporation and PageMart, Inc.
10.20* Strategic Alliance Agreement No. 2, dated October 13, 1994,
between GTE Service Corporation and PageMart, Inc.
10.21* Secured promissory note of John D. Beletic, as Maker, in
favor of PageMart, Inc. dated January 28, 1994, in the
amount of $97,800
10.22* Secured promissory note of John D. Beletic, as Maker, in
favor of PageMart, Inc. dated November 29, 1994, in the
amount of $200,000
10.23* Agreement of Reorganization and Plan of Merger, dated as of
December 5, 1994, between PageMart, Inc., PageMart
Nationwide, Inc. and PM Merger Corp.
10.24* Registration Rights Agreement dated as of January 17, 1995
between PageMart Nationwide, Inc. and Morgan Stanley & Co.
Incorporated
10.25++ PageMart Nationwide, Inc. Third Amended and Restated 1991
Stock Option Plan and Third Amended and Restated 1991 Stock
Issuance Plan(1)
10.26** Satellite Services and Space Segment Lease Agreement, dated
January 2, 1995, between PageMart, Inc. and SpaceCom
Systems, Inc.
10.27** Credit Agreement, dated as of May 11, 1995, by and among
PageMart Nationwide, Inc., the Lenders named therein, BT
Commercial Corporation, as Agent, and Bankers Trust
Company, as Issuing Bank
10.28** Subscription Agreement, dated as of May 11, 1995, by and
among PageMart Nationwide, Inc. and the investors named
therein
10.29+ Amended and Restated Agreement Among Certain Stockholders
of PageMart Nationwide, Inc. dated as of September 19, 1995
10.30*** Secured promissory note of John D. Beletic, as Maker, in
favor of PageMart Nationwide, Inc. dated May 11, 1995, in
the amount of $21,000.
10.31*** Subscription Agreement dated as of July 7, 1995 among
PageMart Nationwide, Inc., PageMart Canada Holding
Corporation and TD Capital Group Ltd.
10.32*** Agreement Among Stockholders among PageMart Nationwide,
Inc., PageMart International, Inc., TD Capital Group Ltd.,
PageMart Canada Holding Corporation and PageMart Canada
Limited.
10.33*** Equipment Purchase Agreement between Motorola, Inc. and
PageMart Wireless, Inc. (2)
10.34*** Technology Asset Agreement dated as of December 1, 1995
between Motorola, Inc. and PageMart Wireless, Inc. (2)
</TABLE>
44
<PAGE> 46
<TABLE>
<S> <C>
10.35*** PageMart Wireless, Inc. Employee Stock Purchase Plan(1)
10.36*** PageMart Wireless, Inc. Nonqualified Formula Stock Option
Plan for Non-Employee Directors(1)
11.1**** Computation of earnings (loss) per share
21.1*** PageMart Wireless, Inc. Subsidiaries
27.1**** Financial Data Schedule for the year ended December 31,
1995.
</TABLE>
* Each of these exhibits is hereby incorporated by reference to the
Form 10-K of the Company for the fiscal year ended December 31, 1994.
** Each of these exhibits is hereby incorporated by reference to the
Registration Statement on Form S-1 of the Company (Reg. No.
33-91142).
*** Previously filed.
**** Filed herewith.
+ Each of these exhibits is hereby incorporated by reference to the
Form 8-K of the Company dated October 6, 1995.
++ Each of these exhibits is hereby incorporated by reference to the
Registration Statement on Form S-8 of the Company (Reg. No.
33-98116).
(1) This exhibit is a "management contract or compensatory plan or
arrangement" required to be filed as an exhibit to this report
pursuant to Item 14(c) of Form 10-K.
(2) The Company has requested confidential treatment for certain
portions of this agreement.
(B) REPORTS ON FORM 8-K
A current report on Form 8-K dated October 6, 1995 was filed with the
Securities and Exchange Commission on October 17, 1995 and disclosed that
the Certificate of Incorporation of the Company had been amended. No
financial statements were filed therewith.
45
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: May 6, 1996 PAGEMART WIRELESS, INC.
(Registrant)
By: /s/ JOHN D. BELETIC
-----------------------------------------------
John D. Beletic
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C>
/s/ JOHN D. BELETIC Chairman, President and Chief
- ---------------------------- Executive Officer
John D. Beletic (Principal Executive Officer) May 6, 1996
/s/ G. CLAY MYERS Vice President, Finance,
- ---------------------------- Chief Financial Officer
G. Clay Myers and Treasurer (Principal
Financial and
Accounting Officer) May 6, 1996
/s/ FRANK V. SICA Director May 6, 1996
- ----------------------------
Frank V. Sica
/s/ GUY L. DE CHAZAL Director May 6, 1996
- ----------------------------
Guy L. de Chazal
/s/ ARTHUR PATTERSON Director May 6, 1996
- ----------------------------
Arthur Patterson
/s/ ANDREW C. COOPER Director May 6, 1996
- ----------------------------
Andrew C. Cooper
/s/ ROGER D. LINQUIST Director May 6, 1996
- ----------------------------
Roger D. Linquist
/s/ LEIGH J. ABRAMSON Director May 6, 1996
- ----------------------------
Leigh J. Abramson
/s/ ALEJANDRO PEREZ ELIZONDO Director May 6, 1996
- ----------------------------
Alejandro Perez Elizondo
Director
- ----------------------------
Pamela D.A. Reeve
</TABLE>
<PAGE> 48
PAGEMART WIRELESS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants ............................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 ........... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1993, 1994 and 1995...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1993, 1994 and 1995 ................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995...................................... F-6
Notes to Consolidated Financial Statements ............................. F-7
Report of Independent Public Accountants on Financial
Statement Schedule ................................................... S-1
Schedule I--Condensed Financial Information of Registrant
for the Year Ended December 31, 1995 ................................. S-2
Schedule II--Valuation and Qualifying Accounts for the
Years Ended December 31, 1993, 1994 and 1995 ......................... S-6
</TABLE>
F-1
<PAGE> 49
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of PageMart Wireless, Inc.:
We have audited the accompanying consolidated balance sheets of PageMart
Wireless, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1994 and 1995, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PageMart Wireless, Inc. and
subsidiaries as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 12, 1996
(except with respect to the matter
discussed in Note 13, as to which
the date is April 1, 1996)
F-2
<PAGE> 50
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 14,507 $ 26,973
Accounts receivable (net of allowance for doubtful accounts of
$1,388 and $4,534 in 1994 and 1995, respectively) ................ 15,584 21,503
Inventories ........................................................ 12,809 11,179
Prepaid expenses and other current assets .......................... 1,497 2,880
--------- ---------
Total current assets .......................................... 44,397 62,535
RESTRICTED INVESTMENTS ............................................... 500 500
PROPERTY AND EQUIPMENT (net of accumulated depreciation
of $16,491 and $29,163 in 1994 and 1995, respectively) ............. 31,697 52,827
NARROWBAND LICENSES .................................................. 58,885 133,065
DEFERRED DEBT ISSUANCE COSTS (net of accumulated
amortization of $959 and $2,011 in 1994 and 1995, respectively) .... 3,041 8,436
OTHER ASSETS ......................................................... 3,539 6,466
--------- ---------
Total assets .................................................. $ 142,059 $ 263,829
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ................................................... $ 16,451 $ 23,094
Deferred revenue ................................................... 13,962 21,409
Current maturities of long-term debt ............................... 3,513 5,479
Other current liabilities .......................................... 4,040 6,526
--------- ---------
Total current liabilities ..................................... 37,966 56,508
LONG-TERM DEBT ....................................................... 92,632 219,364
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.0001 par value per share;
10,000,000 shares authorized and none issued and outstanding at
December 31, 1994 and December 31, 1995 .......................... -- --
Common stock, $.0001 par value per share, 92,000,000 shares
authorized and 29,529,525 shares issued at December 31, 1994;
no shares authorized and none issued at December 31,1995 ......... 3 --
Common stock, $.0001 par value per share, 60,000,000 shares
authorized:
Class A Convertible Common Stock, 23,277,293 shares issued at
December 31, 1995 ............................................... -- 2
Class B Convertible Non-Voting Common Stock, 8,975,469 shares
issued at December 31, 1995 ..................................... -- 1
Class C Convertible Non-Voting Common Stock, 731,846 shares
issued at December 31, 1995 ..................................... -- --
Class D Convertible Non-Voting Common Stock, 725,445 shares
issued at December 31, 1995 ..................................... -- --
Additional paid-in capital ......................................... 124,694 154,601
Accumulated deficit ................................................ (112,977) (166,090)
Stock subscriptions receivable ..................................... (243) (557)
Treasury stock, 200,000 shares of common stock at December 31, 1994,
and none at December 31, 1995, at cost ........................... (16) --
--------- ---------
Total stockholders' equity (deficit) .......................... 11,461 (12,043)
--------- ---------
Total liabilities and stockholders' equity (deficit) .......... $ 142,059 $ 263,829
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-3
<PAGE> 51
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Recurring revenue ......................... $ 24,184 $ 56,648 $ 101,503
Equipment sales and activation fees ....... 26,483 53,185 57,688
--------- --------- ---------
Total revenues ....................... 50,667 109,833 159,191
COST OF EQUIPMENT SOLD ...................... 28,230 57,835 63,982
OPERATING EXPENSES:
Technical ................................. 9,470 16,155 25,679
Selling ................................... 17,319 31,252 36,094
General and administrative ................ 15,578 29,810 43,512
Depreciation and amortization ............. 5,081 8,105 13,272
--------- --------- ---------
Total operating expenses ............. 47,448 85,322 118,557
--------- --------- ---------
Operating loss ....................... (25,011) (33,324) (23,348)
OTHER (INCOME) EXPENSE:
Interest expense .......................... 6,538 12,933 30,720
Interest income ........................... (428) (858) (1,997)
Other ..................................... -- 414 1,042
--------- --------- ---------
Total other (income) expense ......... 6,110 12,489 29,765
--------- --------- ---------
NET LOSS .................................... $ (31,121) $ (45,813) $ (53,113)
========= ========= =========
NET LOSS PER SHARE
(Primary and Fully Diluted) ............... $ (1.51) $ (1.72) $ (1.53)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
(Primary and Fully Diluted) ............... 20,627 26,574 34,653
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-4
<PAGE> 52
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
---------------------------- ---------------------------- ADDITIONAL
NUMBER OF NUMBER OF PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 ..... 10,033,332 $ 1 2,500,000 $ -- $ 27,017
Issuance of 5,277,611 shares of
Series C Preferred
Stock at $3.26 per share ... 5,277,611 1 -- -- 17,034
Issuance of 627,900 common
stock warrants at $5.50 per
warrant .................... -- -- -- -- 3,453
171,074 shares of common
stock issued under the stock
option/stock issuance plan . -- -- 171,074 -- 19
Net loss ..................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1993 ..... 15,310,943 2 2,671,074 -- 47,523
11,242,857 shares of common
stock issued in the
1994 Stock Offerings ....... -- -- 11,242,857 1 76,902
Conversion of convertible
preferred stock to common
stock ...................... (15,310,943) (2) 15,310,943 2 --
304,651 shares of common stock
issued under the stock
option/stock issuance plan . -- -- 304,651 -- 269
Repayment of stock
subscriptions receivable ... -- -- -- -- --
Net loss ..................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1994 ..... -- -- 29,529,525 3 124,694
Retirement of treasury stock . -- -- (200,000) -- (16)
725,445 shares of non-voting
common stock issued
in the Unit Offering ....... -- -- 725,445 -- 5,078
56,654 shares of common
stock issued under the
stock option/
stock issuance plan ........ -- -- 56,654 -- 156
3,598,429 shares of common
stock issued in the
1995 Stock Offering ........ -- -- 3,598,429 -- 24,689
Net loss ..................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1995 ..... -- $ -- 33,710,053 $ 3 $ 154,601
============ ============ ============ ============ ============
<CAPTION>
STOCK
ACCUMULATED SUBSCRIPTIONS TREASURY
DEFICIT RECEIVABLE STOCK TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992 ..... $ (36,043) $ -- $ (16) $ (9,041)
Issuance of 5,277,611 shares of
Series C Preferred
Stock at $3.26 per share ... -- (125) -- 16,910
Issuance of 627,900 common
stock warrants at $5.50 per
warrant .................... -- -- -- 3,453
171,074 shares of common
stock issued under the stock
option/stock issuance plan . -- (4) -- 15
Net loss ..................... (31,121) -- -- (31,121)
------------ ------------ ------------ ------------
BALANCE, December 31, 1993 ..... (67,164) (129) (16) (19,784)
11,242,857 shares of common
stock issued in the
1994 Stock Offerings ....... -- -- -- 76,903
Conversion of convertible
preferred stock to common
stock ...................... -- -- -- --
304,651 shares of common stock
issued under the stock
option/stock issuance plan . -- (216) -- 53
Repayment of stock
subscriptions receivable ... -- 102 -- 102
Net loss ..................... (45,813) -- -- (45,813)
------------ ------------ ------------ ------------
BALANCE, December 31, 1994 ..... (112,977) (243) (16) 11,461
Retirement of treasury stock . -- -- 16 --
725,445 shares of non-voting
common stock issued
in the Unit Offering ....... -- -- -- 5,078
56,654 shares of common
stock issued under the
Stock option/
Stock issuance plan ........ -- (125) -- 31
3,598,429 shares of common
stock issued in the
1995 Stock Offering ........ -- (189) -- 24,500
Net loss ..................... (53,113) -- -- (53,113)
------------ ------------ ------------ ------------
BALANCE, December 31, 1995 ..... $ (166,090) $ (557) $ -- $ (12,043)
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-5
<PAGE> 53
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $ (31,121) $ (45,813) $ (53,113)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ......................... 5,081 8,105 13,272
Provision for bad debt ................................ 1,273 6,590 6,135
Accretion of discount on Senior Discount Exchange Notes 1,885 10,034 26,322
Changes in certain assets and liabilities:
Increase in accounts receivable ...................... (6,541) (14,629) (12,054)
(Increase) decrease in inventories ................... (5,024) (4,497) 1,630
Increase in prepaid expenses and other current assets (58) (1,091) (1,383)
(Increase) decrease in other assets, net ............. (134) 254 (298)
Increase in accounts payable ......................... 6,860 8,491 6,643
Increase in deferred revenue ......................... 2,602 6,780 7,447
Increase in other current liabilities ................ 1,992 248 2,486
--------- --------- ---------
Net cash used in operating activities .............. (23,185) (25,528) (2,913)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments ..................... (8,616) (2,480) --
Proceeds from sales of short-term investments ........... 1,044 11,096 --
Purchases of Narrowband Licenses ........................ -- (58,885) (74,079)
Purchases of property and equipment ..................... (10,810) (16,719) (33,503)
Investment in international ventures .................... -- (1,902) (2,174)
Purchases of intangible assets .......................... (224) (195) (403)
--------- --------- ---------
Net cash used in investing activities .............. (18,606) (69,085) (110,159)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock ............... 16,910 -- --
Proceeds from issuance of common stock .................. -- 76,903 29,578
Proceeds from issuance of common stock under the
stock option/stock issuance plan ....................... 15 53 31
Proceeds from issuance of Senior Discount Notes, net .... 67,575 -- 95,001
Payment of stock subscriptions receivable ............... -- 102 --
Proceeds from issuance of common stock warrants ......... 3,453 -- --
Deferred debt issuance costs incurred for
Revolving Credit Agreement ............................. -- -- (1,447)
Borrowings from vendor credit facilities ................ 20,111 8,540 6,777
Payments on vendor credit facilities .................... (46,281) (2,052) (4,402)
--------- --------- ---------
Net cash provided by financing activities .......... 61,783 83,546 125,538
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...... 19,992 (11,067) 12,466
CASH AND CASH EQUIVALENTS, beginning of period ............ 5,582 25,574 14,507
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period .................. $ 25,574 $ 14,507 $ 26,973
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .............................................. $ 3,886 $ 998 $ 2,146
Income taxes .......................................... $ -- $ -- $ --
NONCASH TRANSACTIONS:
Series C Preferred Stock issued in exchange for
stock subscriptions receivable ........................ $ 125 $ -- $ --
Common stock issued in exchange for stock subscriptions
receivable ............................................ $ 4 $ 216 $ 314
In August 1994, 15,310,943 shares of preferred stock
were converted into 15,310,943 shares of common stock . $ -- $ -- $ --
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-6
<PAGE> 54
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
PageMart, Inc. ("PageMart") was incorporated as a Delaware corporation on
May 8, 1989, to provide wireless messaging products and services. In January
1995, PageMart effected a corporate reorganization pursuant to which PageMart
Nationwide, Inc., a Delaware corporation, became the holding company parent of
PageMart. In December 1995, the corporate name was changed from PageMart
Nationwide, Inc. to PageMart Wireless, Inc. ("Wireless"). Wireless and its
subsidiaries are referred to herein as the "Company." The consolidated
financial statements of the Company include the accounts of PageMart and
PageMart PCS, Inc. ("PageMart PCS"). PageMart PCS holds one of the NPCS
Licenses (defined herein) and certain other assets to be used in two-way
wireless messaging. The consolidated financial statements of PageMart include
the accounts of PageMart II, Inc., PageMart Operations, Inc., PageMart of
California, Inc., PageMart of Virginia, Inc. and PageMart International, Inc.
Each of these companies is a wholly-owned subsidiary of PageMart. PageMart II,
Inc. and PageMart Operations, Inc. hold certain Federal Communications
Commission ("FCC") licenses. PageMart International, Inc., which has had no
significant operations to date, holds certain investments in an international
venture in Canada. Other than these licenses and international investments,
the subsidiaries of PageMart have no significant assets or liabilities.
The Company has incurred substantial losses from operations and negative
cash flows from operations since inception and is highly leveraged. Management
expects to continue to incur operating losses in 1996. These losses are driven
by the Company's investment in the growth of its subscriber base and continued
expansion into additional markets. The Company's business plan calls for
substantial growth in its subscriber base in order for the Company to achieve
operating profitability and positive cash flows from operations. There can be
no assurance that the Company will meet its business plan, achieve operating
profitability, or achieve positive cash flows from operations. If the Company
cannot achieve operating profitability, it may not be able to make the required
payments on existing or future obligations.
The Company has made significant investments in Narrowband Personal
Communications Services ("NPCS") licenses through participation in auctions
conducted by the FCC. The Company plans to utilize these assets in connection
with two-way wireless messaging services. The Company's success in
implementing two-way services is dependent primarily upon market acceptance of
proposed two-way services and the ability of the Company to successfully
develop and construct a transmission network and market its two-way services.
There can be no assurance that two-way services offered will be accepted by the
market or that the Company will be successful in developing and constructing a
transmission network or marketing its two-way services.
During 1993, the Company received net proceeds of approximately $17
million from the issuance of Series C Preferred Stock and net proceeds of
approximately $71 million from the issuance of 12 1/4% Senior Discount Notes
due 2003 and common stock warrants (see Note 5). During 1994, the Company
received net proceeds of approximately $76.9 million from the issuance of
common stock (the "1994 Stock Offerings"). In conjunction with the 1994 Stock
Offerings, each outstanding share of preferred stock was converted into one
share of common stock (see Note 8).
During 1995, the Company received net proceeds of approximately $100
million in connection with the issuance of 15% Senior Discount Notes due 2005
and non-voting common stock (see Note 5 and Note 8) and net proceeds of
approximately $24.5 million from the issuance of common stock (see Note 8).
Additionally, the Company entered into a revolving credit agreement with BT
Commercial Corporation, as Agent, and Bankers Trust Company, as Issuing Bank,
which provides for a $50 million revolving line of credit (the "Revolving
Credit Agreement") (see Note 5).
In management's opinion, the Company's current working capital combined
with borrowings expected to be available from the Revolving Credit Agreement
will be sufficient to support the planned growth for its one-way wireless
communications operations through 1996. As the Company begins implementation
and development of
F-7
<PAGE> 55
two-way services, the Company anticipates requiring additional sources of
capital to fund the construction and operation of a two-way messaging network.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying financial statements include the accounts of Wireless and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company includes as cash and cash equivalents cash on hand, cash in
banks and highly liquid investments with original maturities of three months or
less.
SHORT-TERM INVESTMENTS
Short-term investments consist of investments in high-grade commercial
paper with original maturities of more than three months for which market value
approximates cost. The Company's short-term investments are made in reputable,
creditworthy companies and government issues and do not generate significant
credit risk to the Company.
INVENTORIES
Inventories consist of pagers held for resale and are stated at the lower
of cost or market. Cost is determined by using the specific identification
method, which approximates the first-in, first-out method. The Company
purchases a majority of its pagers from Motorola, Inc.
RESTRICTED INVESTMENTS
Restricted investments represent certificates of deposit in the amount of
$500,000 pledged as collateral on the Company's notes payable to a vendor.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method for financial reporting purposes and accelerated methods
for tax reporting purposes over estimated useful lives ranging from three to
seven years. Depreciation expense totaled approximately $4,860,000, $7,824,000
and $12,683,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. The Company purchases a majority of its network equipment from
Motorola, Inc. and Glenayre Technologies, Inc. Maintenance and repair costs are
charged to expense as incurred.
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1995
-------- --------
<S> <C> <C>
Network equipment ............................ $ 40,224 $ 58,404
Computer equipment ........................... 5,067 16,829
Furniture and equipment ...................... 2,897 6,757
-------- --------
48,188 81,990
Less: Accumulated depreciation .............. (16,491) (29,163)
-------- --------
$ 31,697 $ 52,827
======== ========
</TABLE>
F-8
<PAGE> 56
REVENUE RECOGNITION
The Company recognizes equipment revenue immediately upon the shipment of
pagers adjusted by allowances for normal returns. Recurring revenue, including
revenue from airtime charges and fees for other services such as voicemail,
customized coverage options and toll-free numbers are recognized in the month
in which the service is provided. All expenses related to the sale of
equipment are recognized at the time of sale. Deferred revenue represents
advance billings for services not yet performed. Such revenue is deferred and
recognized in the month in which the service is provided. Patent licensing
revenues are recognized on a straight-line basis over the term of the related
agreement (see Note 6). Patent licensing revenues of $383,000 are included in
recurring revenues in fiscal 1995.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ADVERTISING EXPENSES
Advertising expenses are expensed as incurred.
EARNINGS PER SHARE
Net loss per share amounts as reflected on the statements of operations
are based upon the weighted average number of common shares outstanding. The
weighted average number of common shares outstanding assumes that the preferred
shares were converted into common shares at January 1, 1993 (see Note 8). As
required by the Securities and Exchange Commission rules, all warrants, options
and shares issued during the year immediately preceding the initial public
offering are assumed to be outstanding for all periods presented. Shares
issuable upon the exercise of stock options and warrants granted before the
year immediately preceding the initial public offering were not included in the
net loss per share calculation as the effect from the exercise of those options
would be antidilutive.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform with the current year presentation.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The Company will adopt SFAS
121 for the fiscal year ending December 31, 1996. SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. SFAS 121 requires that those assets to be held and used be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable through future cash
flows. SFAS 121 requires that those assets to be disposed of be reported at the
lower of the carrying amount or the fair value less cost to sell. Adoption of
SFAS 121 is not expected to have a material effect on the financial statements
of the Company.
3. NARROWBAND PERSONAL COMMUNICATIONS SERVICES LICENSES
During July and December 1994, the Company participated in auctions of
NPCS frequencies conducted by the FCC. As a result of the auctions, the Company
was awarded two nationwide NPCS licenses for a total
F-9
<PAGE> 57
purchase price of approximately $133 million. Amortization of the NPCS licenses
will commence when placed in service.
4. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
Effective November 15, 1995, PageMart International, Inc. owns 200,000
shares of common stock of PageMart Canada Limited ("PageMart Canada") which
represents 20% of the ownership of PageMart Canada. The remaining 800,000
shares (representing 80% of the ownership) is held by PageMart Canada Holding
Corporation ("Canada Holding"). Canada Holding is owned 50% (1,000,000 shares
of Class A Common Stock) by third-party Canadian investors unrelated to
PageMart and 50% (1,000,000 shares of Class B Common Stock) by PageMart
International, Inc. The common shares have identical economic rights. However,
voting control of Canada Holding is held by the Class A Common Stockholders as
the Class A shares have two votes per share. The Company accounts for its
investments in PageMart Canada and Canada Holding under the equity method.
Such investments are included in Other Assets in the Consolidated Balance
Sheet.
The agreement among stockholders contains provisions which restrict the
transfer of Canada Holding shares and PageMart Canada shares for periods
ranging from three to five years. During the two years following the third
anniversary of the transactions, the third-party Canadian investors may
exchange the 1,000,000 Class A common shares they hold in Canada Holding for
714,286 shares of voting common stock of Wireless, subject to certain U.S. and
Canadian ownership requirements. Wireless is ultimately responsible for
effectuating the exchange within the U.S. and Canadian ownership regulations.
Such exchange may be accelerated in the event Wireless enters into an agreement
to be acquired. After the third anniversary of the transactions, Wireless will
have the right to purchase the shares held by the third-party Canadian
investors at their fair market value provided regulatory ownership requirements
permit such purchase.
5. LONG-TERM DEBT
Long-term debt, including capital lease obligations, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1994 1995
--------- ---------
<S> <C> <C>
12 1/4% Senior Discount Notes due November 1,
2003, at accreted value .......................... $ 83,494 $ 94,952
15% Senior Discount Exchange Notes due February
1, 2005, at accreted value ....................... -- 114,865
Vendor Purchase Financing Facility of $8
million, bearing interest at prime plus 4%
based upon the rate quoted by The Wall Street
Journal from time to time (rates on existing
indebtedness were 12.5% at December 31, 1994,
and 12.75% at December 31, 1995), secured by
equipment purchased. Principal and interest is
payable over 36 months from date of purchase ..... 4,756 5,138
Capital lease obligations to a vendor up to $15
million, bearing interest at 7 1/2% plus the
weekly average U.S. Treasury Constant
Maturities for 3-year Treasury Notes for the
calendar week immediately preceding funding of
the equipment financing (rates on existing
indebtedness ranged from 11.84% -- 15.13% at
December 31, 1994 and 1995), secured by
equipment and cash with principal and interest
payable over 60 months from date of financing .... 7,895 9,888
--------- ---------
Total debt .................................... 96,145 224,843
Less: Current maturities .................... (3,513) (5,479)
--------- ---------
Long-term debt ................................ $ 92,632 $ 219,364
========= =========
</TABLE>
F-10
<PAGE> 58
During the fourth quarter of 1993, the Company completed an offering in
which it issued $136.5 million principal amount (at maturity) of 12 1/4% Senior
Discount Notes due 2003 (the "12 1/4% Notes") with an initial accreted value of
$71.6 million together with warrants to purchase 627,900 shares of its common
stock for $3.26 per share. From and after May 1, 1999, interest on the 12 1/4%
Notes will be payable semiannually in cash at the rate of 12 1/4% per annum.
The 12 1/4% Notes represent senior indebtedness of the Company and are
redeemable at the option of the Company, in whole or in part, at any time after
November 1, 1998, at $136.5 million plus accrued interest. In addition, at any
time prior to November 1, 1996, up to 35% of the accreted value of the 12 1/4%
Notes are redeemable at the option of the Company with the proceeds of a Public
Equity Offering (as defined) at 111% of accreted value plus accrued and unpaid
interest, if any.
In July 1994, the Company commenced an exchange offer pursuant to an
effective registration statement whereby all outstanding 12 1/4% Notes were
exchanged for the Company's 12 1/4% Senior Discount Exchange Notes due 2003.
In January 1995, the Company completed an offering of 15% Senior Discount
Notes due 2005 and 725,445 shares of non-voting common stock, par value $.0001
per share (the "Unit Offering"). Net proceeds from the Unit Offering were
approximately $100 million, of which approximately $5.1 million was allocated
to the non-voting common stock. The 15% Senior Discount Notes due 2005 (the
"15% Notes") have a principal amount at maturity of $207.3 million with an
initial accreted value of $100 million. The 15% Notes mature on February 1,
2005. From and after August 1, 2000, interest on the 15% Notes will be payable
semiannually in cash at the rate of 15% per annum. The 15% Notes are redeemable
at any time on or after February 1, 2000, at the option of the Company in whole
or in part, at 105% of their principal amount at maturity, plus accrued and
unpaid interest, declining to 100% of their principal amount at maturity plus
accrued interest on and after February 1, 2002. In addition, at any time prior
to February 1, 1998, up to 35% of the accreted value of the 15% Notes may be
redeemed at a redemption price of 112.5% of their accreted value on the
redemption date at the option of the Company in connection with a public
offering of its common stock.
In June 1995, the Company commenced an exchange offer pursuant to an
effective registration statement whereby all outstanding 15% Notes were
exchanged for the Company's 15% Senior Discount Exchange Notes due 2005.
The 12 1/4% Notes and the 15% Notes carry certain restrictive covenants
that, among other things, limit the ability of the Company to incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, create liens, sell assets, engage in mergers and consolidations,
and enter into transactions with any holder of 5% or more of any capital stock
of the Company or any of its affiliates. The Company is in compliance with all
such restrictive covenants.
On May 11, 1995, the Company entered into the Revolving Credit Agreement
which provides for a $50 million revolving line of credit. As of December 31,
1995, there were no loans outstanding under the Revolving Credit Agreement. The
maximum amount available under the Revolving Credit Agreement at any time is
limited to a borrowing base amount equal to the lesser of (i) a specified
percentage of eligible accounts receivable and inventory owned by Wireless, and
(ii) an amount equal to the service contribution of the Company as defined in
the Revolving Credit Agreement for the immediately preceding three-month period
times 4.0 (or 4.5, at all times prior to December 31, 1995). The interest rate
applicable to loans under the Revolving Credit Agreement is, at the option of
Wireless, either at a prime rate plus 1 1/4% or a Eurodollar rate plus 2 1/2%.
Commitments under the Revolving Credit Agreement expire and all loans thereunder
will be due and payable on March 31, 1999.
The Revolving Credit Agreement contains certain covenants that, among
other things, limit the ability of the Company to incur indebtedness, make
capital expenditures and investments, pay dividends, repurchase capital stock,
engage in transactions with affiliates, create liens, sell assets, or engage in
mergers and consolidations, and also requires the Company to maintain certain
financial ratios.
F-11
<PAGE> 59
The Revolving Credit Agreement is secured by all trade receivables and
inventory owned by Wireless from time to time and by all of the capital stock
of PageMart owned by Wireless. As of December 31, 1995, the maximum amount
available under the Revolving Credit Agreement was $28.2 million.
Maturities of long-term debt and capital lease obligations are as follows
(in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDING
DECEMBER 31,
- -------------------
<S> <C>
1996 ........................................... $ 5,479
1997 ........................................... 5,047
1998 ........................................... 2,359
1999 ........................................... 1,719
2000 ........................................... 422
Thereafter ..................................... 209,817
--------
$224,843
========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements for office
space, office equipment and transmission equipment sites. Total rent expense
for 1993, 1994 and 1995 was $4,246,000, $6,084,000 and $8,471,000,
respectively.
Included in network equipment is equipment held under capital leases with
capitalized costs of $10,357,000 and $14,617,000 less accumulated depreciation
of $2,632,000 and $5,054,000 at December 31, 1994 and 1995, respectively.
Future minimum lease payments related to the Company's capital and
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR CAPITAL OPERATING
ENDING DECEMBER 31, LEASES LEASES
- ------------------- ------- ---------
<S> <C> <C>
1996 .............................................. $ 3,989 $ 7,093
1997 .............................................. 3,626 6,169
1998 .............................................. 2,533 4,175
1999 .............................................. 1,902 2,936
2000 .............................................. 438 1,911
Thereafter ........................................ -- 1,726
------- -------
Total minimum lease payments ...................... 12,488 $24,010
=======
Less: Amounts representing interest ............... 2,600
-------
Present value of future minimum lease payments..... $ 9,888
=======
</TABLE>
The Company is party to various legal proceedings arising out of the
ordinary course of business. The Company believes, based on the advice of
legal counsel, that there is no proceeding, either threatening or pending,
against the Company that could result in a material adverse effect on the
results of operations or financial condition of the Company.
F-12
<PAGE> 60
In December 1995, the Company transferred certain intellectual property to
a significant vendor in exchange for certain benefits which will be recognized
over a forty-seven month period. The Company also committed to purchase $40
million in network infrastructure equipment over a forty-seven month period as
part of this transaction.
7. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair value disclosures for its financial instruments. For cash
and cash equivalents, the carrying amounts reported in the Consolidated Balance
Sheets are equal to fair value. For debt, management estimated the fair value
based upon quoted market prices for publicly traded debt and based on the
appropriate interest rate at year-end for all other debt.
The carrying amounts and fair values of the Company's financial
instruments at December 31, 1994 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1995
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents ...... $ 14,507 $ 14,507 $ 26,973 $ 26,973
Long-term debt ................. $ 96,145 $ 95,548 $224,843 $241,621
</TABLE>
8. STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK
On August 5, 1994, in conjunction with the 1994 Stock Offerings and the
related stockholders' agreement, each outstanding share of preferred stock
converted into one share of common stock. In September 1994, the Company's
Certificate of Incorporation was amended to reduce the number of authorized
shares of preferred stock to 10,000,000. At December 31, 1994 and 1995, none of
the authorized shares of preferred stock were issued and outstanding.
Under the Company's Certificate of Incorporation, the board of directors
has the power to authorize the issuance of one or more classes or series of
preferred stock and to fix the designations, powers, preferences and relative,
participating, optional or other rights, if any, and the qualifications,
limitations or restrictions thereof, if any, with respect to each such class or
series of preferred stock.
COMMON STOCK
During the fourth quarter 1993 in connection with issuance of the 12 1/4%
Notes (see Note 5), the Company issued warrants to purchase 627,900 shares of
its common stock for $3.26 per share. The warrants were valued at $5.50 per
share at the date issued. The warrants may be exercised at any time prior to
December 31, 2003. Warrants that are not exercised by such date will expire.
During the third quarter of 1994, the Company issued an aggregate of
11,242,857 shares of common stock in the 1994 Stock Offerings at a purchase
price of $7.00 per share. The aggregate net proceeds (after expenses) of the
1994 Stock Offerings were approximately $76.9 million. Of the total shares
issued, 714,287 shares were convertible non-voting common stock and the
remaining 10,528,570 shares were common stock. At the request of the holder,
the non-voting common stock was converted to common stock in January 1995.
During the first quarter of 1995 in connection with the Unit Offering (see
Note 5), the Company issued 725,445 shares of non-voting common stock at a
purchase price of $7.00 per share. During the second quarter of 1995, the
Company completed a private offering of common stock to a group of
institutional investors and certain officers of the Company (the "1995 Stock
Offering"). In the 1995 Stock Offering, the Company sold 3,598,429 shares of
common stock for net proceeds (after expenses) of approximately $24.5 million.
In October 1995, the Company's Certificate of Incorporation was amended
(the "Amended Certificate") and at that time the Amended and Restated Agreement
Among Certain Stockholders of PageMart Nationwide, Inc. dated September 19,
1995 (the "Stockholders' Agreement"), became effective. The Amended Certificate
provides that the Company will have four classes of outstanding common stock,
summarized as follows:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
-----------------------------
SHARES DECEMBER 31,
AUTHORIZED 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Class A Convertible Common Stock, $.0001
par value per share (the "Class A Common Stock") 45,000,000 -- 23,277,293
Class B Convertible Non-Voting Common Stock, $.0001
par value per share (the "Class B Common Stock") 12,000,000 -- 8,975,469
Class C Convertible Non-Voting Common Stock, $.0001
par value per share (the "Class C Common Stock") 2,000,000 -- 731,846
Class D Convertible Non-Voting Common Stock, $.0001
par value per share (the "Class D Common Stock") 1,000,000 -- 725,445
---------- ---------- ----------
60,000,000 -- 33,710,053
========== ========== ==========
</TABLE>
Upon filing of the Amended Certificate, all shares of previously
outstanding common stock were automatically converted into shares of Class A
Common Stock, and all shares of previously outstanding non-voting common stock
issued in the Unit Offering were converted into shares of Class D Common Stock.
Additionally, pursuant to the Stockholders' Agreement, a number of shares of
Class A Common Stock owned by certain institutional investors were
automatically converted into shares of Class B Common Stock and Class C Common
Stock, such that voting control of the Company lies with the stockholders
generally.
Class A Common Stock, Class B Common Stock and Class C Common Stock are
convertible by certain institutional investors subject to voting control and
regulatory restrictions at any time at the option of the holder, in accordance
with the terms of the Stockholders' Agreement. Class D Common Stock is
convertible, at the option of the holder, at any time after the occurrence of
an initial public offering following which the common stock of the Company is
publicly traded.
The Stockholders' Agreement provides that the parties thereto ("Holders")
shall collectively have the right to "demand" registrations at any time at
least six months after an initial public offering following which the common
stock of the Company is publicly traded. Pursuant to these "demand" rights,
Holders of common stock (the "Registrable Securities") may request in writing
that the Company file a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), covering the registration of a number
of shares equal to at least three million shares or a lesser number if such
number represents a majority of the Registrable Securities then outstanding.
On March 20, 1995, the Company granted to a strategic partner warrants to
purchase a total of 206,748 shares of the Company's common stock at an exercise
price of $10.00. Management determined that the issuance of the warrants did
not have a significant impact on the financial position or results of
operations of the Company.
Following is a schedule of common stock reserved at December 31, 1995:
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Exercise of common stock warrants .......................... 834,648
Stock option/stock issuance plan ........................... 3,737,621
---------
4,572,269
=========
</TABLE>
F-14
<PAGE> 61
9. STOCK OPTION/STOCK ISSUANCE PLAN
The Company has a stock option/stock issuance plan (the "Plan") under
which it grants common stock or options to purchase common stock. As of
December 31, 1995, the number of shares of common stock issuable under the Plan
may not exceed 4,550,000 shares. The Plan is administered by the board of
directors.
The stock options vest over 60 months and are exercisable for periods not
to exceed 10 years from the date of grant. Vested options outstanding at
December 31, 1993, 1994 and 1995, were approximately 268,000, 237,000 and
583,289, respectively, with exercise prices ranging from $.08 to $1.50 at
December 31, 1993, $.08 to $3.26 at December 31, 1994 and $.08 to $9.00 at
December 31, 1995. As of December 31, 1995, 3,737,621 shares of common stock
are reserved for the Plan (see Note 8). The stock option activity was as
follows:
<TABLE>
<CAPTION>
SHARES PRICE PER SHARE
---------- ---------------
<S> <C> <C>
Options outstanding at December 31, 1992 ...... 886,500 $ .08-1.50
Options granted .............................. 646,250 1.50-3.26
Options exercised ............................ (171,074) .08-1.00
Options canceled ............................. (214,458) .08-3.26
---------
Options outstanding at December 31, 1993 ...... 1,147,218 .08-3.26
Options granted .............................. 866,300 5.00-9.00
Options exercised ............................ (304,651) .08-3.26
Options canceled ............................. (112,158) .08-9.00
---------
Options outstanding at December 31, 1994 ...... 1,596,709 .08-9.00
Options granted .............................. 1,204,950 7.00-10.00
Options exercised ............................ (36,654) .08-7.00
Options canceled ............................. (95,872) 1.50-10.00
---------
Options outstanding at December 31, 1995....... 2,669,133 $ .08-10.00
=========
</TABLE>
Under the provisions of the Plan, the Company may also issue stock to
employees. The stock vests over a period not to exceed forty-eight months.
Additional vesting occurs upon death or disability. Upon the termination of an
officer, the Company can repurchase the unvested stock at cost. Under the Plan,
the Company issued 300,000 shares to an officer during 1992, at $.326 per
share. All awards under the Plan have been made at a price at or above the
estimated fair value of the Company's common stock at the date of grant.
In the second quarter of 1992, a non-employee consultant was granted
options to purchase 20,000 shares of stock at an exercise price of $.33 per
share. The options were exercised during 1995.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). The Company will adopt SFAS 123 for
the fiscal year ending December 31, 1996. SFAS 123 establishes financial
accounting and reporting standards for stock-based employee compensation plans
and for transactions in which an entity issues its equity instruments to
acquire goods or services from nonemployees. SFAS 123 recommends, but does not
require, that companies account for all stock-based transactions as
compensatory at the fair value of the equity instrument. However, since SFAS
123 does not require that the accounting be adopted, it allows companies to
continue to account for such stock-based transactions under the provision of
Accounting Principles Board Opinion No. 25 (the Company's current method), and
disclose what the pro forma impact of adopting SFAS 123 would have been to net
income and earnings per share had the Company elected to adopt the recommended
accounting. The Company anticipates that it will not adopt the recommended
accounting of SFAS 123, but will disclose the pro forma impact in the footnotes
to the financial statements.
10. FEDERAL INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS
109 requires an asset and liability approach which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events which have been recognized in the Company's financial statements. The
Company had approximately $104.7 million and $126.8 million of net operating
loss carryforwards for federal income tax purposes at December 31,
F-15
<PAGE> 62
1994 and 1995, respectively. The net operating loss carryforwards will expire in
the years 2004 through 2010 if not previously utilized. The utilization of these
carryforwards is subject to certain limitations. Of the net operating loss
carryforwards at December 31, 1995, management has estimated that approximately
$34.1 million is subject to an annual utilization limit of $4.8 million.
In connection with the adoption of SFAS 109, the Company has recorded a
valuation reserve equal to its net deferred tax asset at each reporting period,
due to historical and anticipated future operating losses. Accordingly, the
adoption of SFAS 109 did not have an effect on the Company's financial position
or results of operations. Management will evaluate the appropriateness of the
reserve in the future based upon historical and operating results of the
Company.
Deferred income taxes reflect the tax consequences on future years of
temporary differences between the tax basis of assets and liabilities and their
financial reporting basis and the potential benefits of certain tax
carryforwards. The significant deferred tax assets and liabilities, as
determined under the provisions of SFAS 109, and the change in those assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1994 CHANGE DECEMBER 31, 1995
----------------- ------ -----------------
<S> <C> <C> <C>
Gross deferred tax asset:
Net operating loss carryforwards ...... $ 35,593 $ 7,535 $ 43,128
Bad debt reserve ...................... 472 1,626 2,098
Inventory reserve ..................... 542 286 828
Accretion of Senior Discount Notes .... 4,052 8,950 13,002
Other ................................. 341 602 943
-------- -------- --------
41,000 18,999 59,999
Gross deferred tax liability:
Depreciation .......................... (2,647) (1,047) (3,694)
-------- -------- --------
38,353 17,952 56,305
Valuation allowance ................. (38,353) (17,952) (56,305)
-------- -------- --------
Net deferred tax asset .............. $ 0 $ 0 $ 0
======== ======== ========
</TABLE>
11. RELATED PARTY TRANSACTIONS
In connection with the offering of the 12 1/4% Notes completed in 1993
(see Note 5), the Company incurred $2,626,000 in fees to an affiliate of a
shareholder. In connection with the Unit Offering completed in 1995 (see Note
5), the Company incurred $3,805,000 in fees to an affiliate of a shareholder.
As of December 31, 1995, the president and certain other officers of the
Company are indebted to the Company in the aggregate amount of $557,000 under
promissory notes issued in connection with the purchase of the Company's common
stock (the "Notes"). The Notes have terms ranging from three to four years and
are secured by common stock owned by the officers. The Notes bear interest at
the Applicable Federal Rate in effect on the date of issuance as published by
the Internal Revenue Service. Interest rates on the Notes range from 3.55% to
7.00%. Interest is due and payable annually beginning on the first anniversary
of the date of each Note. All Notes are included in Stock Subscriptions
Receivable in the Consolidated Balance Sheet.
Wireless has entered into a receivables purchase agreement with PageMart
pursuant to which PageMart may sell receivables to Wireless from time to time
at book value less a reserve for normal bad debt. As of December 31, 1995,
Wireless owned $11.4 million in receivables purchased from PageMart.
PageMart is obligated to provide certain managerial and administrative
services to PageMart Canada at PageMart Canada's request at agreed-upon rates.
Under a technology license agreement, PageMart licenses PageMart Canada to
use, in Canada, the intellectual property used by PageMart in its business in
the U.S. The license is perpetual, irrevocable, and royalty-free. The
agreement also permits PageMart Canada to purchase the license of new
technology developed by PageMart for a royalty. The royalty is a portion of
the cost of developing the technology, with the amount to
F-16
<PAGE> 63
be paid by PageMart Canada to be the portion of these costs equal to the ratio
of PageMart Canada's revenue stream to that of PageMart.
Under an intercompany rate agreement, the rates which the U.S. and
Canadian companies will charge each other when customers of one travel into the
other's jurisdiction are specified. Such rates approximate fair market value.
12. SUPPLEMENTARY INFORMATION
The following table sets forth supplementary financial information related
to the Company's various operations (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1993
---------------------------------------------------
PAGEMART PAGEMART PAGEMART
ONE-WAY TWO-WAY INTERNATIONAL CONSOLIDATED
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues ..................... $ 50,667 $ -- $ -- $ 50,667
Operating loss ............... (25,011) -- -- (25,011)
Total assets ................. 78,773 -- -- 78,773
Capital expenditures ......... 10,810 -- -- 10,810
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------
PAGEMART PAGEMART PAGEMART
ONE-WAY TWO-WAY INTERNATIONAL CONSOLIDATED
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues ..................... $ 109,833 $ -- $ -- $ 109,833
Operating loss ............... (33,324) -- -- (33,324)
Total assets ................. 81,470 58,885 1,704 142,059
Capital expenditures ......... 16,719 -- -- 16,719
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------
PAGEMART PAGEMART PAGEMART
ONE-WAY TWO-WAY INTERNATIONAL CONSOLIDATED
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues ..................... $ 159,191 $ -- $ -- $ 159,191
Operating loss ............... (22,972) (376) -- (23,348)
Total assets ................. 120,004 140,235 3,590 263,829
Capital expenditures ........ 32,486 1,017 -- 33,503
</TABLE>
13. SUBSEQUENT EVENT
The Company has filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission in the contemplation of an initial public
offering of the Company's Class A Common Stock.
F-17
<PAGE> 64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of
PageMart Wireless, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of PageMart Wireless, Inc. and subsidiaries
included in this Form 10-K and have issued our report thereon dated February
12, 1996 (except with respect to the matter discussed in Note 13, as to which
the date is April 1, 1996). Our audit was made for the purpose of forming an
opinion on those financial statements taken as a whole. Schedules I and II are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 12, 1996
S-1
<PAGE> 65
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PAGEMART WIRELESS, INC.
(PARENT COMPANY)
CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 17,075
Accounts receivable, net...................................................... 11,424
Prepaid expenses and other current assets..................................... 52
----------
Total current assets....................................................... 28,551
Investment in PageMart PCS, Inc................................................. 95,912
Investment in PageMart, Inc..................................................... (27,022)
Deferred debt issuance costs, net............................................... 5,741
----------
Total assets.......................................................... $ 103,182
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Other current liabilities....................................................... $ 360
Long-term debt.................................................................. 114,865
Stockholders' deficit:
Common stock $.0001 par value per share, 60,000,000 shares authorized,
33,710,053 shares issued at December 31, 1995.............................. 3
Additional paid-in capital.................................................... 154,601
Accumulated deficit........................................................... (166,090)
Stock subscription receivable................................................. (557)
----------
Total stockholders' deficit................................................ (12,043)
----------
Total liabilities and stockholders' deficit........................... $ 103,182
==========
</TABLE>
See accompanying notes
S-2
<PAGE> 66
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
PAGEMART WIRELESS, INC.
(PARENT COMPANY)
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Operating loss.................................................................. $ 0
Other (income) expense:
Equity in net loss of subsidiaries............................................ 38,858
Interest expense.............................................................. 15,521
Interest income............................................................... (1,266)
--------
Total other (income) expense.......................................... 53,113
--------
Net loss........................................................................ $(53,113)
========
</TABLE>
See accompanying notes
S-3
<PAGE> 67
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
PAGEMART WIRELESS, INC.
(PARENT COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net cash provided by operating activities....................................... $ 1,623
--------
Cash flows from investing activities:
Investment in PageMart, PCS, Inc.............................................. (96,287)
--------
Net cash used in investing activities...................................... (96,287)
--------
Cash flows from financing activities:
Proceeds from issuance of senior discount notes, net.......................... 95,001
Proceeds from issuance of common stock........................................ 29,578
Proceeds from issuance of common stock under the stock option/stock issuance
plan....................................................................... 31
Purchase of accounts receivable from subsidiary............................... (11,424)
Deferred debt issuance costs incurred for Revolving Credit Agreement.......... (1,447)
--------
Net cash provided by financing activities.................................. 111,739
--------
Net increase in cash and cash equivalents....................................... 17,075
Cash and cash equivalents, beginning of period.................................. --
--------
Cash and cash equivalents, end of period........................................ $ 17,075
========
</TABLE>
See accompanying notes
S-4
<PAGE> 68
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
PAGEMART WIRELESS, INC.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
PageMart, Inc. ("PageMart") was incorporated as a Delaware corporation on
May 8, 1989, to provide wireless messaging products and services. In January
1995, PageMart effected a corporate reorganization pursuant to which PageMart
Nationwide, Inc., a Delaware corporation, became the holding company parent of
PageMart. In December 1995, the corporate name was changed from PageMart
Nationwide, Inc. to PageMart Wireless, Inc. (the "Company").
In the parent-company-only financial statements, the Company's investment
in subsidiaries is stated at cost less equity in losses of subsidiaries since
date of inception. The Company's share of net losses of its unconsolidated
subsidiaries is included in consolidated net loss using the equity method.
Parent-company-only financial statements should read in conjunction with the
Company's consolidated financial statements.
2. LONG-TERM DEBT
In January 1995, the Company completed an offering of 15% Senior Discount
Notes due 2005 and 725,445 shares of non-voting common stock, par value $.0001
per share (the "Unit Offering"). Net proceeds from the Unit Offering were
approximately $100 million, of which approximately $5.1 million was allocated to
the non-voting common stock. The amount of 15% Senior Discount Notes outstanding
at December 31, 1995, was $114,865. The 15% Senior Discount Notes due 2005 (the
"15% Notes") have a principal amount at maturity of $207.3 million with an
initial accreted value of $100 million. The 15% Notes mature on February 1,
2005. From and after August 1, 2000, interest on the 15% Notes will be payable
semiannually in cash at the rate of 15% per annum. The 15% Notes are redeemable
at any time on or after February 1, 2000, at the option of the Company in whole
or in part, at 105% of their principal amount at maturity, plus accrued and
unpaid interest, declining to 100% of their principal amount at maturity plus
accrued interest on and after February 1, 2002. In addition, at any time prior
to February 1, 1998, up to 35% of the accreted value of the 15% Notes may be
redeemed at a redemption price of 112.5% of their accreted value on the
redemption date at the option of the Company in connection with a public
offering of its common stock.
In June 1995, the Company commenced an exchange offer pursuant to an
effective registration statement whereby all outstanding 15% Notes were
exchanged for the Company's 15% Senior Discount Exchange Notes.
On May 11, 1995, the Company entered into the Revolving Credit Agreement
which provides for a $50 million revolving line of credit. As of December 31,
1995, there were no loans outstanding under the Revolving Credit Agreement. The
maximum amount available under the Revolving Credit Agreement at any time is
limited to a borrowing base amount equal to the lesser of (i) a specified
percentage of eligible accounts receivable and inventory owned by the Company,
and (ii) an amount equal to the service contribution (as defined in the
Revolving Credit Agreement) of the Company for the immediately preceding
three-month period times 4.0 (or 4.5, at times prior to December 31, 1995). The
interest rate applicable to loans under the Revolving Credit Agreements is, at
the option of the Company, either at a prime rate plus 1 1/4% or a Eurodollar
rate plus 2 1/2%. Commitments under the Revolving Credit Agreement expire and
all loans will be due and payable on March 31, 1999.
The Revolving Credit Agreement contains certain covenants that, among other
things, limit the ability of the Company to incur indebtedness, make capital
expenditures and investments, pay dividends, repurchase capital stock, engage in
transactions with affiliates, create liens, sell assets, or engage in mergers or
consolidations, and also requires the Company to maintain certain financial
ratios.
The Revolving Credit Agreement is secured by all trade receivables and
inventory owned by the Company from time to time and by all of the capital stock
of PageMart owned by the Company. As of December 31, 1995, the maximum amount
available under the Revolving Credit Agreement was $28.2 million.
S-5
<PAGE> 69
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- -------------------------------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended December 31, 1995 ......... $1,388 $6,135 $ 0 $2,989(a) $4,534
Year Ended December 31, 1994 ......... $1,172 $6,590 $ 0 $6,374(a) $1,388
Year Ended December 31, 1993 ......... $ 708 $1,273 $ 0 $ 809(a) $1,172
</TABLE>
- ---------------
(a) Accounts written off as uncollectible, net of recoveries.
S-6
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibit Page No.
- ------- ---------------------- ----------
<S> <C> <C>
3(i)*** Restated Certificate of Incorporation of PageMart
Wireless, Inc.
3(ii)* By-laws of PageMart Wireless, Inc.
3(iii)*** Certificate of Amendment to Restated Certificate
of Incorporation of PageMart Wireless, Inc.
4.1** Indenture, dated as of October 19, 1993, between
PageMart, Inc. and United States Trust Company of
New York, as Trustee, relating to the 12 1/4%
Senior Discount Notes due 2003
4.2** Indenture dated as of January 17, 1995 between
PageMart Nationwide, Inc. and United States Trust
Company of New York, as Trustee, relating to the
15% Senior Discount Notes due 2005
10.1** Warrant Agreement, dated as of October 19, 1993,
between PageMart, Inc. and United States Trust
Company of New York, as Warrant Agent, relating to
the Warrants to purchase Common Stock of the
Company.
10.2** Telecommunications Service Agreement, dated May
29, 1992, between PageMart, Inc. and WilTel, Inc.
10.3** Equipment Lease Agreement, dated May 20, 1992,
between PageMart, Inc. and Glenayre Electronics,
Inc.
10.4** First Addendum to Equipment Lease Agreement, dated
May 20, 1992, between PageMart, Inc. and Glenayre
Electronics, Inc.
10.5** Amendment No. 2 to Equipment Lease Agreement,
dated October 18, 1993, between PageMart, Inc. and
Glenayre Electronics, Inc.
10.6** Lease Agreement and Addendum, dated January 10,
1990, between Kingston Houston Partners I, Ltd.
and PageMart, Inc.
10.7** Expansion and Extension of Lease Agreement, dated
April 7, 1993, between Kingston Houston Partners
I, Ltd. and PageMart, Inc.
10.8** Office Lease Agreement, dated January 29, 1992,
between Dallas Central Development Corp. and
PageMart, Inc.
10.9** First Amendment to Office Lease Agreement, dated
July 29, 1992, between Fulcrum Central Ltd., as
successor in interest to Dallas Central
Development Corp., and PageMart, Inc.
10.10** Second Amendment to Office Lease Agreement, dated
December 1, 1992, between Fulcrum Central Ltd., as
successor in interest to Dallas Central
Development Corp., and PageMart, Inc.
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibit Page No.
- ------- ---------------------- ----------
<S> <C> <C>
10.11** Third Amendment to Office Lease Agreement, dated
December 29, 1992, between Fulcrum Central Ltd.,
as successor in interest to Dallas Central
Development Corp., and PageMart, Inc.
10.12** Fourth Amendment to Office Lease Agreement, dated
July 21, 1993, between Fulcrum Central Ltd., as
successor in interest to Dallas Central
Development Corp., and PageMart, Inc.
10.13** License Agreement, dated May 12, 1994, between
PageMart, Inc., licensee, and International
Business Machines Corporation, licensor
10.14** Sales Contract, dated January 21, 1994, between
PageMart, Inc., buyer, and Mitsui Comtek
Corporation, seller
10.15** Resale Agreement, dated November 1, 1993, between
PageMart, Inc., licensor, and GTE Service
Corporation, licensee
10.16** Financing and Security Agreement between Motorola
and Pagemart, Inc. dated May 18, 1994
10.17** Subscription Agreement, dated June 9, 1994,
between PageMart, Inc. and Fomento Empresarial
Regiomontano, S.A. de C.V.
10.18** Letter of Intent, dated June 9, 1994, between
PageMart, Inc. and Fomento Empresarial
Regiomontano, S.A. de C.V.
10.19* Strategic Alliance Agreement No. 1, dated
September 15, 1994, between GTE Service
Corporation and PageMart, Inc.
10.20* Strategic Alliance Agreement No. 2, dated October
13, 1994, between GTE Service Corporation and
PageMart, Inc.
10.21* Secured promissory note of John D. Beletic, as
Maker, in favor of PageMart, Inc. dated January
28, 1994, in the amount of $97,800
10.22* Secured promissory note of John D. Beletic, as
Maker, in favor of PageMart, Inc. dated November
29, 1994, in the amount of $200,000
10.23* Agreement of Reorganization and Plan of Merger,
dated as of December 5, 1994, between PageMart,
Inc., PageMart Nationwide, Inc. and PM Merger
Corp.
10.24* Registration Rights Agreement dated as of January
17, 1995 between PageMart Nationwide, Inc. and
Morgan Stanley & Co. Incorporated
10.25++ PageMart Nationwide, Inc. Third Amended and
Restated 1991 Stock Option Plan and Third Amended
and Restated 1991 Stock Issuance Plan(1)
10.26** Satellite Services and Space Segment Lease
Agreement, dated January 2, 1995, between
PageMart, Inc. and SpaceCom Systems, Inc.
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description of Exhibit Page No.
- ------- ---------------------- ----------
<S> <C> <C>
10.27** Credit Agreement, dated as of May 11, 1995, by and
among PageMart Nationwide, Inc., the Lenders named
therein, BT Commercial Corporation, as Agent, and
Bankers Trust Company, as Issuing Bank
10.28** Subscription Agreement, dated as of May 11, 1995,
by and among PageMart Nationwide, Inc. and the
investors named therein
10.29+ Amended and Restated Agreement Among Certain
Stockholders of PageMart Nationwide, Inc. dated as
of September 19, 1995
10.30*** Secured promissory note of John D. Beletic, as
Maker, in favor of PageMart Nationwide, Inc. dated
May 11, 1995, in the amount of $21,000.
10.31*** Subscription Agreement dated as of July 7, 1995
among PageMart Nationwide, Inc., PageMart Canada
Holding Corporation and TD Capital Group Ltd.
10.32*** Agreement Among Stockholders among PageMart
Nationwide, Inc., PageMart International, Inc., TD
Capital Group Ltd., PageMart Canada Holding
Corporation and PageMart Canada Limited.
10.33*** Equipment Purchase Agreement between Motorola,
Inc. and PageMart Wireless, Inc. (2)
10.34*** Technology Asset Agreement dated as of December 1,
1995 between Motorola, Inc. and PageMart Wireless,
Inc. (2)
10.35*** PageMart Wireless, Inc. Employee Stock Purchase
Plan(1)
10.36*** PageMart Wireless, Inc. Nonqualified Formula Stock
Option Plan for Non-Employee Directors(1)
11.1**** Computation of earnings (loss) per share
21.1*** PageMart Wireless, Inc. Subsidiaries
27.1**** Financial Data Schedule for the year ended December
31, 1995
</TABLE>
* Each of these exhibits is hereby incorporated by reference to the Form
10-K of the Company for the fiscal year ended December 31, 1994.
** Each of these exhibits is hereby incorporated by reference to the
Registration Statement on Form S-1 of the Company (Reg. No. 33-91142).
*** Previously filed.
**** Filed herewith.
+ Each of these exhibits is hereby incorporated by reference to the Form
8-K of the Company dated October 6, 1995.
++ Each of these exhibits is hereby incorporated by reference to the
Registration Statement on Form S-8 of the Company (Reg. No. 33-98116).
(1) This exhibit is a "management contract or compensatory plan or
arrangement" required to be filed as an exhibit to this report
pursuant to Item 14(c) of Form 10-K.
(2) The Company has requested confidential treatment for certain portions
of this agreement.
<PAGE> 1
Exhibit 11.1
PAGEMART WIRELESS, INC.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1993
------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
---------- ------------ ------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 171,074 42.25% 72,276
Preferred Stock 15,310,943 89.00% 13,626,043
Impact of Warrants, Options and Shares Issued During
the Year Preceding the Initial Filing of the Form S-1
Registration Statement 4,629,468 100.00% 4,629,468
---------- ------------
22,411,485 20,627,787
WEIGHTED AVERAGE SHARES OUTSTANDING
(Primary and Fully Diluted) 20,627,787
NET LOSS FOR NET LOSS PER SHARE
(Primary and Fully Diluted) ($31,121,000)
NET LOSS PER SHARE
(Primary and Fully Diluted) ($1.51)
============
</TABLE>
<PAGE> 2
PAGEMART WIRELESS, INC.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
---------- ------------ ------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 475,725 91.09% 433,340
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 34.69% 3,900,186
Impact of Warrants, Options and Shares Issued During
the Year Preceding the Initial Filing of the Form S-1
Registration Statement 4,629,468 100.00% 4,629,468
---------- ------------
33,958,993 26,573,937
WEIGHTED AVERAGE SHARES OUTSTANDING
(Primary and Fully Diluted) 26,573,937
NET LOSS FOR NET LOSS PER SHARE
(Primary and Fully Diluted) ($45,813,000)
NET LOSS PER SHARE
(Primary and Fully Diluted) ($1.72)
============
</TABLE>
<PAGE> 3
PAGEMART WIRELESS, INC.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995
--------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
----------- ------------ -------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 532,379 90.83% 483,546
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 100.00% 11,242,857
1995 Common Stock Offerings 4,323,874 100.00% 4,323,874
Impact of Warrants, Options and Shares Issued During
the Year Preceding the Initial Filing of the Form S-1
Registration Statement 2,312,671 100.00% 2,312,671
---------- ------------
36,022,724 35,973,891
WEIGHTED AVERAGE SHARES OUTSTANDING
(Primary and Fully Diluted) 35,973,891
NET LOSS FOR NET LOSS PER SHARE
(Primary and Fully Diluted) ($12,025,000)
NET LOSS PER SHARE
(Primary and Fully Diluted) ($0.33)
============
</TABLE>
<PAGE> 4
PAGEMART WIRELESS, INC.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
--------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
----------- ------------ -------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 532,379 90.62% 482,464
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 100.00% 11,242,857
1995 Common Stock Offerings 4,323,874 69.49% 3,004,479
Impact of Warrants, Options and Shares Issued During
the Year Preceding the Initial Filing of the Form S-1
Registration Statement 2,312,671 100.00% 2,312,671
---------- ------------
36,022,724 34,653,414
WEIGHTED AVERAGE SHARES OUTSTANDING
(Primary and Fully Diluted) 34,653,414
NET LOSS FOR NET LOSS PER SHARE
(Primary and Fully Diluted) ($53,113,000)
NET LOSS PER SHARE
(Primary and Fully Diluted) ($1.53)
============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S DECEMBER 31, 1995 CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 26,973
<SECURITIES> 0
<RECEIVABLES> 26,037
<ALLOWANCES> 4,534
<INVENTORY> 11,179
<CURRENT-ASSETS> 62,535
<PP&E> 81,990
<DEPRECIATION> 29,163
<TOTAL-ASSETS> 263,829
<CURRENT-LIABILITIES> 56,508
<BONDS> 219,364
<COMMON> 3
0
0
<OTHER-SE> (12,046)
<TOTAL-LIABILITY-AND-EQUITY> 263,829
<SALES> 57,688
<TOTAL-REVENUES> 159,191
<CGS> 63,982
<TOTAL-COSTS> 63,982
<OTHER-EXPENSES> 118,557
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,720
<INCOME-PRETAX> (53,113)
<INCOME-TAX> 0
<INCOME-CONTINUING> (53,113)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (53,113)
<EPS-PRIMARY> (1.53)
<EPS-DILUTED> (1.53)
</TABLE>
