<PAGE> 1
Filed Pursuant to Rule 424(b)(3)
Registration No. 33-91142
PROSPECTUS
PageMart Wireless, Inc.
15% Senior Discount Exchange Notes Due 2005
There will not be any payment of interest on the Notes prior to August 1, 2000.
From and after February 1, 2000, the Notes will bear interest, which will be
payable in cash at a rate of 15% per annum on each February 1 and August 1,
commencing August 1, 2000. At any time prior to February 1, 1998, up to
35% of the accreted value of the Notes may be redeemed at the option of
PageMart Wireless, Inc. ("Wireless") in connection with a public
offering of its or PageMart, Inc.'s common stock at a redemption
price of 112.5% of the accreted value of the Notes. In addition,
at any time on or after February 1, 2000, the Notes may be
redeemed at the option of Wireless, in whole or in part, at
105% of their principal amount at maturity, plus accrued
interest, declining to 100% of their principal amount at
maturity plus accrued interest on or after February 1,
2002. See "Description of Notes."
The Notes are unsecured senior indebtedness of Wireless, ranking pari passu with
Wireless' unsubordinated indebtedness and senior in right of payment to all
of its future subordinated indebtedness. At March 31, 1996, Wireless had
no indebtedness outstanding other than the Notes and Wireless'
subsidiaries had $111.7 million of indebtedness ($13.7 million
of which was secured) all of which would have effectively
ranked senior to the Notes. Wireless currently has no
arrangements to issue indebtedness subordinate to the
Notes.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE OFFERING
AND AN INVESTMENT IN THE
NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
This Prospectus is to be used by Morgan Stanley & Co. Incorporated
("MS&Co."), in connection with offers and sales of the Notes in market-making
transactions at negotiated prices related to prevailing market prices at the
time of sale. MS&Co. may act as principal or as agent in such transactions.
Wireless will receive no portion of the proceeds of the sales of such Notes and
will bear the expenses incident to the registration thereof. If MS&Co. conducts
any market-making activities, it may be required to deliver a "market-making
prospectus" when effecting offers and sales in the Notes because of the equity
ownership of Wireless by The Morgan Stanley Leveraged Equity Fund II, L.P.
("MSLEF II"), Morgan Stanley Capital Partners, III, L.P. ("MSCP III"), Morgan
Stanley Venture Capital Fund, L.P. ("MSVCF") and certain other investment
partnerships, all of which are affiliates of MS&Co. These investment
partnerships own in the aggregate approximately 49% of the outstanding voting
common stock of Wireless. For as long as a market-making prospectus is required
to be delivered, the ability of MS&Co. to make a market in the Notes may, in
part, be dependent on the ability of Wireless to maintain a current
market-making prospectus. See "Principal Stockholders" for a description of the
ownership of capital stock of Wireless by affiliates of MS&Co.
July 19, 1996
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information................................................................. 2
Prospectus Summary.................................................................... 3
Risk Factors.......................................................................... 10
The Company........................................................................... 17
Capitalization........................................................................ 18
Selected Historical Financial and Operating Data...................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 22
Business.............................................................................. 32
Management............................................................................ 50
Certain Transactions.................................................................. 63
Principal Stockholders................................................................ 67
Description of Certain Indebtedness................................................... 70
Description of the Notes.............................................................. 71
ERISA Considerations.................................................................. 93
Plan of Distribution.................................................................. 94
Legal Matters......................................................................... 95
Experts............................................................................... 95
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
AVAILABLE INFORMATION
Wireless has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with any amendments
thereto, the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act") with respect to the securities offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all the information contained in the Registration Statement and the
exhibits and the schedule thereto, certain items of which are omitted in
accordance with the rules and regulations of the Commission. Statements made in
this Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference. For further information with respect to Wireless and the
securities offered hereby, reference is made to the Registration Statement and
the exhibits and the financial statements, notes and the schedules filed as a
part thereof, which may be inspected at the public reference facilities of the
Commission, at the addresses set forth below.
Wireless is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Commission. The
indenture under which the 15% Senior Discount Exchange Notes due 2005 (the
"Notes") are issued requires Wireless to provide to holders of the Notes annual
reports that include audited annual consolidated financial statements and an
opinion thereon expressed by independent public accountants and quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year. The Registration Statement, as well as such
reports and other information filed with the Commission can be examined without
charge at, or copies obtained upon payment of prescribed fees from, the
Commission's Public Reference Section at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, 13th Floor, New York, New York 10048. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless the context otherwise requires,
(i) the term "Company" refers to PageMart, Inc. and its consolidated
subsidiaries prior to the Reorganization (as defined herein) and PageMart
Wireless, Inc. and its consolidated subsidiaries after such Reorganization, (ii)
the term "Wireless" refers to the holding company parent PageMart Wireless,
Inc., and (iii) the term "PageMart" refers to the operating company PageMart,
Inc. The Company has four classes of common stock outstanding. As used herein,
"Common Stock" collectively refers to the Company's Class A Convertible Common
Stock (the "Class A Common Stock"), Class B Convertible Non-Voting Common Stock
(the "Class B Common Stock"), Class C Convertible Non-Voting Common Stock (the
"Class C Common Stock") and Class D Convertible Non-Voting Common Stock (the
"Class D Common Stock"), each class having a par value of $.0001 per share.
Certain of the information contained in this summary and elsewhere in this
Prospectus, including information with respect to the Company's plans and
strategy for its two-way messaging business and related financing, are
forward-looking statements. For a discussion of important factors that could
cause actual results to differ materially from the forward-looking statements,
see "Risk Factors."
THE COMPANY
The Company is one of the fastest growing providers of wireless messaging
services in the United States. The Company has grown to become the fifth largest
paging carrier in the United States, based on 1,374,146 subscribers at March 31,
1996. 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 has invested heavily in order to
achieve rapid growth in its subscriber base and, as a result, the Company has
sustained net losses of $31.1 million, $45.8 million, $53.1 million and $11.6
million for 1993, 1994, 1995 and the three months ended March 31, 1996,
respectively.
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(R) enabled, allowing the use of high speed messaging
technology thereby providing increased transmission capacity.
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 a 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, Southwest-
3
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ern 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 65 offices.
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 communications 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, December 31, 1995 and
March 31, 1996 were 3.4%, 2.5% and 2.4% per month, 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 radio frequency ("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.
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CUSTOMER SERVICE CAPABILITIES. Management has focused on developing
industry-leading customer service capabilities. The Company employs over
575 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.
FINANCIAL STRATEGY
The Company's principal financial objectives are to (i) maximize
profitability with respect to its existing subscriber base, as measured by
operating profit before selling expenses per subscriber and (ii) grow the
subscriber base on a cost efficient basis, as measured by selling expenses
(including loss on equipment sales) per net subscriber addition. See footnotes
(3) and (4) to "-- Summary Financial Information." The Company achieves
operating efficiency through its efficient transmission network, its nationwide
common frequency and its centralized administration. The Company's operating
profit before selling expenses per subscriber per month for the Company's
one-way operations was $1.01, $1.45, $1.66 and $2.11 during each quarter of
1995, and was $2.23 during the quarter ended March 31, 1996, although on an
overall basis the Company has sustained increasing net losses for each year of
its operations. See "Risk Factors -- History of Operating Losses." The Company's
selling expenses per net subscriber addition were $91, $81, and $91 in the years
ended 1993, 1994 and 1995, respectively and were $86 for the quarter ended March
31, 1996.
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. As
of March 31, 1996, approximately 99% of the Company's units were Customer Owned
and Maintained ("COAM"). This COAM strategy results in the Company having much
less capital invested in messaging equipment than other paging carriers, which
lease messaging equipment to a majority of their subscribers. The Company
believes that its COAM strategy, coupled with its network design, enables it to
incur significantly lower capital expenditures, depreciation and amortization,
and interest expense associated with serving subscribers than other companies.
Management measures capital efficiency by the amount of capital employed per
subscriber and believes capital efficiency is an important indicator of its
financial performance. The Company's capital employed per subscriber was $42 and
$40 at December 31, 1994 and 1995, respectively and was $41 at March 31, 1996.
The Company's strategy is to expand its subscriber base as rapidly as
possible and, through a combination of scale, operating efficiency and capital
efficiency, to provide a significant return on capital employed.
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.
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ESTABLISHED DIVERSIFIED DISTRIBUTION CHANNELS. The Company plans to
leverage its established diversified distribution channels to achieve efficient
marketing 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 data and
stored voice services, that the Company believes 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(TM) 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.
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. 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 PageMart
Canada Holding ("Canada Holding") which owns the remaining 80% of the voting
common stock of PageMart Canada. The Company also provides paging coverage in
the Bahamas.
As a result of its business strategy, the Company has structured its
business into three operating divisions: PageMart One-Way, PageMart Two-Way and
PageMart International.
The Morgan Stanley Shareholders (as defined herein) currently own
approximately 51.2% of the outstanding Common Stock and 49.0% of the outstanding
voting Common Stock. See "Principal Stockholders."
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SUMMARY DESCRIPTION OF THE NOTES
The form and terms of the Notes are identical in all material respects to
the form and terms of certain notes of the same class (the "Old Notes") that
were originally issued under the Indenture (as defined herein) and were not
registered under the Securities Act and, therefore, bear legends restricting the
transfer thereof. The Notes were issued in exchange for the Old Notes and are
deemed the same class of notes under the Indenture and are entitled to the same
benefits thereunder. Unless the context otherwise requires, references herein to
the Notes include Old Notes.
ISSUER..................... The Notes have been issued by PageMart Wireless,
Inc.
NEW NOTES.................. $207,270,000 principal amount at maturity
($116,215,811 Accreted Value as of February 1,
1996) of 15% Senior Discount Exchange Notes due
2005
MATURITY................... February 1, 2005
YIELD AND INTEREST......... The Notes were issued at a substantial discount
from their principal amount at maturity, and there
will not be any payment of interest on the Notes
prior to August 1, 2000. From and after February 1,
2000, the Notes will bear interest, which will be
payable in cash, at a rate of 15% per annum on each
February 1 and August 1, commencing August 1, 2000.
ORIGINAL ISSUE DISCOUNT.... The Notes have original issue discount for Federal
income tax purposes. Although cash interest will
not accrue on the Notes prior to February 1, 2000,
and there will be no payments of interest on the
Notes prior to August 1, 2000, original issue
discount should accrue from the respective issue
dates of the Notes and will be includible as
interest income periodically in a holder's gross
income for Federal income tax purposes in advance
of receipt of the cash payments to which the income
is attributable.
OPTIONAL REDEMPTION........ The Notes may be redeemed at any time on or after
February 1, 2000 at the option of Wireless, 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 and unpaid interest, on or
after February 1, 2002. In addition, at any time
prior to February 1, 1998, up to 35% of the
Accreted Value (as defined herein) of the Notes may
be redeemed at the option of Wireless, in
connection with a public offering of either the
Common Stock or PageMart's common stock, at a
redemption price of 112.5% of their Accreted Value
on the redemption date.
RANKING.................... The Notes are senior indebtedness of Wireless,
ranking pari passu with Wireless' obligations under
all other unsubordinated unsecured indebtedness and
senior in right of payment to all existing and
future subordinated indebtedness of Wireless. The
Notes are effectively subordinated to existing and
future liabilities of Wireless' subsidiaries,
including trade payables. At March 31, 1996,
Wireless had no indebtedness outstanding other than
the Notes and Wireless' subsidiaries had $168.1
million of liabilities, including $111.7 million of
indebtedness ($13.7 million of which was secured),
all of which were effectively ranked senior to the
Notes. Wireless currently has no arrangements to
issue indebtedness subordinate to the Notes. See
"Risk Factors -- Holding Company Structure,"
"-- High Leverage; Deficiency of Earnings to Cover
Fixed
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Charges; Restrictive Covenants" and "-- Inability
of PageMart to Provide Financial Support to
Wireless."
COVENANTS.................. The indenture pursuant to which the Notes are
issued (the "Indenture") contains certain covenants
that, among other things, limit the ability of
Wireless to incur indebtedness, pay dividends,
prepay subordinated indebtedness, repurchase
capital stock, engage in transactions with
stockholders and affiliates, create liens, sell
assets and engage in mergers and consolidations.
See "Description of the Notes -- Covenants."
CHANGE OF CONTROL.......... Upon a Change of Control (as defined herein),
Wireless is required to make an offer to purchase
the Notes at a purchase price equal to 101% of
their Accreted Value, plus accrued interest, if
any. See "Description of the Notes -- Repurchase of
Notes upon a Change of Control."
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SUMMARY FINANCIAL INFORMATION
The following table sets forth summary historical financial information and
operating data of the Company for each of the five fiscal years ended December
31, 1995 and for the three months ended March 31, 1995 and 1996. The financial
information and operating data for each of the five fiscal years ended December
31, 1995 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 Prospectus. The financial information and
operating data for the three months ended March 31, 1995 and 1996 were derived
from the unaudited consolidated financial statements of the Company and, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such data. Interim
results are not necessarily indicative of results to be expected for the full
fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
------- -------- -------- -------- ---------- -------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT UNIT, ARPU, PER SUBSCRIBER AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Recurring revenues....................... $ 3,298 $ 6,668 $ 24,184 $ 56,648 $ 101,503 $ 20,464 $ 33,743
Equipment sales and activation fees...... 5,380 9,837 26,483 53,185 57,688 12,239 14,802
------- -------- -------- -------- ---------- -------- ----------
Total revenues........................... 8,678 16,505 50,667 109,833 159,191 32,703 48,545
Cost of equipment sold................... 6,436 10,044 28,230 57,835 63,982 13,378 17,082
Operating expenses....................... 10,844 25,584 47,448 85,322 118,557 26,524 34,704
------- -------- -------- -------- ---------- -------- ----------
Operating loss........................... (8,602) (19,123) (25,011) (33,324) (23,348) (7,199) (3,241)
Interest expense......................... (1,486) (2,456) (6,538) (12,933) (30,720) (6,660) (8,401)
Interest income.......................... 97 529 428 858 1,997 498 219
Other.................................... -- -- -- (414) (1,042) (337) (195)
------- -------- -------- -------- ---------- -------- ----------
Net loss................................. $(9,991) $(21,050) $(31,121) $(45,813) $ (53,113) $(13,698) $ (11,618)
======= ======== ======== ======== ========== ======== ==========
Net loss per common share................ $ (1.02) $ (1.24) $ (1.51) $ (1.72) $ (1.53) $ (0.40) $ (0.33)
Weighted average number of common shares
and share equivalents outstanding...... 9,814 16,962 20,627 26,574 34,653 34,532 34,688
BALANCE SHEET DATA (AT PERIOD END):
Current assets........................... $23,607 $ 13,365 $ 51,279 $ 44,397 $ 62,535 $ 59,011 $ 53,165
Total assets............................. 28,979 30,772 78,773 142,059 263,829 243,336 262,848
Current liabilities...................... 5,112 14,754 20,198 37,966 56,508 39,861 61,288
Long-term debt, less current
maturities............................. 11,956 25,059 78,359 92,632 219,364 200,630 225,210
Stockholders' equity (deficit)........... 11,911 (9,041) (19,784) 11,461 (12,043) 2,845 (23,650)
OTHER DATA:
Units in service (at period end)......... 52,125 117,034 327,303 772,730 1,240,024 874,944 1,374,146
Net subscriber additions................. 37,812 64,909 210,269 445,427 467,294 102,214 134,122
ARPU(1).................................. $ 8.27 $ 8.66 $ 9.81 $ 8.64 $ 8.62 $ 8.28 $ 8.61
Operating profit (loss) before selling
expenses per subscriber per month(2)... (7.78) (12.69) (.98) .90 2.11 1.01 2.23
Selling expenses per net subscriber
addition(3)............................ 146 157 91 81 91 95 86
EBITDA(4)................................ (7,378) (16,499) (19,930) (25,219) (10,076) (4,397) 1,007
Capital expenditures..................... 1,741 13,729 10,810 16,719 33,503 10,376 11,779
NPCS Licenses acquired(5)................ -- -- -- 58,885 74,079 74,079 --
Depreciation and amortization............ 1,224 2,624 5,081 8,105 13,272 2,802 4,248
Deficiency of earnings to fixed
charges(6)............................. 9,991 21,050 31,121 45,813 53,113 13,698 11,618
</TABLE>
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(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. For the fiscal year periods,
ARPU is stated as the monthly average for the final quarter of the year.
(2) Operating profit (loss) before selling expenses (selling expenses include
loss on sale of equipment) per subscriber for the Company's one-way
operations is calculated by dividing (i) recurring revenues less technical
expenses, general and administrative expenses and depreciation and
amortization for the quarter by (ii) the average number of units in service
for the quarter. Stated as the monthly average for the final quarter of the
year for the fiscal year periods.
(3) Selling expenses per net subscriber addition for the Company's one-way
domestic operations is calculated by dividing (i) selling expenses,
including loss on sale of equipment, for the period by (ii) the net
subscriber additions for the period.
(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 "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 Federal Communications
Commission ("FCC") NPCS auctions. See "Business -- Government Regulation."
(6) For purposes of calculating the deficiency of earnings to fixed charges, (i)
earnings is defined as net loss plus fixed charges and (ii) fixed charges is
defined as interest expense plus amortization of debt expense plus the
interest portion of rental and lease expense.
9
<PAGE> 10
RISK FACTORS
Prior to making an investment decision, prospective investors should
carefully consider, along with the other matters referred to in this Prospectus,
the specific factors set forth below.
HISTORY OF OPERATING LOSSES
The Company has sustained losses from operating activities in each year of
operations since its organization in 1989, including an operating loss of $3.2
million for the three months ended March 31, 1996 and an aggregate of $81.7
million of operating losses for the three-year period ended December 31, 1995.
The Company expects to continue to incur operating losses for the next several
years. In addition, management anticipates that the Company's average monthly
revenue per unit ("ARPU") will decline in the foreseeable future due to
increased competition and a higher mix of subscribers added through private
brand strategic alliance programs and third-party resellers, both of which yield
lower ARPU. Although the Company's one-way operations generated $1.4 million of
positive EBITDA for the first quarter of 1996, the Company has had negative
EBITDA in each year of its operations, and negative EBITDA of $10.1 million for
the year ended December 31, 1995. 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. The
Company's operating losses and negative EBITDA have resulted principally from
expenditures associated with the establishment of the Company's one-way
operations infrastructure and the growth of its subscriber base. Although the
Company expects that its one-way operations will continue to generate positive
EBITDA, as the Company begins development and implementation of two-way
messaging services, the Company will incur substantial additional operating
losses and negative EBITDA during the start-up phase for two-way services. Any
positive cash flow from the Company's one-way operations will be used primarily
to fund the Company's two-way operations for the next several years. There can
be no assurance that the Company's consolidated operations will become
profitable or have positive EBITDA or that its one-way operations will continue
to generate positive EBITDA. If the Company cannot achieve operating
profitability or positive EBITDA, it may not be able to make required debt
service payments, and the Common Stock may have little or no value. See
"Selected Historical Financial and Operating Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
HOLDING COMPANY STRUCTURE
As a result of the Reorganization, Wireless is a holding company with no
business or operations of its own (other than all the outstanding shares of
capital stock of its operating subsidiaries). The Notes are obligations
exclusively of Wireless. Because all of Wireless' operations are conducted
through its subsidiaries (which consist primarily of PageMart and its
subsidiaries), Wireless' cash flow and consequently its ability to service debt,
including its ability to pay cash interest on the Notes beginning in 2000 and to
pay the principal of the Notes, 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' subsidiaries
are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the Notes or to make any funds
available therefor, whether by dividends, loans or other payments. See
"-- Inability of PageMart to Provide Financial Support to Wireless."
Because Wireless' subsidiaries have not guaranteed the payment of principal
of or interest on the Notes, any right of Wireless to receive assets of any of
its subsidiaries upon its liquidation or reorganization (and the consequent
right of the holders of the Notes to participate in the distribution of or
realize proceeds from those assets) will be effectively subordinated to the
claims of such subsidiary's creditors (including trade creditors and holders of
debt issued by such subsidiary), except to the extent that Wireless is itself a
creditor of such subsidiary, in which case the claims of Wireless would still be
subordinated to any security interest in the assets of such subsidiary and
indebtedness of such subsidiary senior to that held by Wireless. At March 31,
1996, the subsidiaries of Wireless had approximately $168.1 million of
indebtedness and other liabilities
10
<PAGE> 11
effectively senior to the Notes (including the 12 1/4% Senior Discount Exchange
Notes due 2003 of PageMart (the "12 1/4% Notes")), approximately $13.7 million
of which is secured. Although the Indenture and the indenture relating to the
12 1/4% Notes (the "12 1/4% Indenture") impose certain limitations on the
ability of PageMart and its subsidiaries to incur additional indebtedness,
neither the Indenture nor the 12 1/4% Indenture limits the amount of
indebtedness of PageMart owed to vendors that is related to financing purchases
of inventory or equipment, nor the extent of liens that may be granted to such
vendors to secure such indebtedness.
INABILITY OF PAGEMART TO PROVIDE FINANCIAL SUPPORT TO WIRELESS
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. The 12 1/4% Indenture currently
does not permit dividends or distributions to be paid on PageMart's capital
stock owned by Wireless. See "Description of Certain Indebtedness." Accordingly,
until the maturity of the indebtedness under the 12 1/4% Notes (the last payment
of which is scheduled to occur on November 1, 2003), 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. Cash interest on the Notes will not be payable
until August 1, 2000. The ability of Wireless to pay principal of, or interest
on, the Notes may depend upon the ability of PageMart to pay dividends, or
otherwise loan, advance or transfer funds, to Wireless or, if PageMart is then
unable to provide sufficient funds to Wireless, the ability of Wireless to
refinance the 12 1/4% Notes or the Notes, obtain additional debt or equity
financing or obtain amendments to such debt instruments. Wireless' ability to
refinance the 12 1/4% Notes or the Notes will depend, in part, on its financial
condition at the time and the covenants and other provisions in its debt
agreements. See "-- High Leverage; Deficiency of Earnings to Cover Fixed
Charges; Restrictive Covenants" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." No assurance can be given that Wireless will be able to refinance
the 12 1/4% Notes or the Notes on terms acceptable to it or at all. Further, the
terms of any indebtedness incurred in connection with any such refinancing may
be less favorable to Wireless than those of the 12 1/4% Notes or the Notes and
may also limit Wireless' operating flexibility or liquidity.
HIGH LEVERAGE; DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES; RESTRICTIVE
COVENANTS
The Company is highly leveraged, primarily as a result of debt financing
incurred to fund the construction of the Company's nationwide operations
infrastructure, the growth of its subscriber base and to finance the acquisition
of the NPCS Licenses. At March 31, 1996, the Company's long-term debt was $225.2
million and its stockholders' deficit was $23.7 million. In addition, the
accretion of original issue discount on the Company's outstanding indebtedness
will cause an increase in indebtedness of $126.6 million by 2001. The Company's
deficiency of earnings before fixed charges to cover fixed charges for the three
months ended March 31, 1996 was $11.6 million and for each of the three years
ended December 31, 1993, 1994 and 1995, was $31.1 million, $45.8 million and
$53.1 million, respectively. See "Capitalization" and "Selected Historical
Financial and Operating Data."
The Indenture and the 12 1/4% Indenture contain certain restrictive
covenants. Such restrictions affect, and in many respects significantly limit or
prohibit, among other things, the ability of the Company to incur additional
indebtedness, make prepayments of certain indebtedness, pay dividends, make
investments, engage in transactions with stockholders and affiliates, issue
capital stock of restricted subsidiaries, create liens, sell assets and engage
in mergers and consolidations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources", "Description of Certain Indebtedness -- 12 1/4% Notes" and
"Description of the Notes -- Covenants."
11
<PAGE> 12
NO ASSURANCE THAT GROWTH STRATEGY WILL BE ACHIEVED
The successful implementation of the Company's one-way messaging services
strategy to increase cash flow through the expansion of its subscriber base is
necessary for the Company to meet its capital expenditures, working capital and
debt service requirements. The Company expects to continue to incur operating
losses for the next several years. The Company's strategy assumes that the
paging and one-way wireless messaging industry will continue to grow rapidly,
and that the Company will continue to grow substantially faster than the
industry. The Company does not expect to continue to grow at its historical
rate, and there can be no assurance that the Company will be able to achieve the
growth contemplated by its business strategy. If such growth is not achieved,
the Company may not be able to make required payments on its outstanding
indebtedness and may have to refinance its outstanding indebtedness in order to
repay such obligations. No assurance can be given that the Company will be able
to refinance its outstanding indebtedness. In addition, as the Company begins
development and implementation of two-way services, the Company expects to make
substantial additional capital expenditures and sustain significant operating
losses, which will require additional debt or equity financing from sources
which may include joint venture arrangements. There can be no assurance that
such financing will be available to the Company on reasonable terms, or at all.
The Company will incur significant expenses and make substantial investments
associated with its two-way services prior to the time any significant revenues
from such services are generated. See "-- Risks of Implementation and Financing
of Two-Way Services" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
ASSETS PLEDGED TO SECURE OTHER DEBT
Neither the Indenture nor the 12 1/4% Indenture limits the amount of
indebtedness of PageMart owed to vendors that is related to financing purchases
of inventory or equipment nor the extent of liens that may be granted to such
vendors to secure such indebtedness. The Indenture also permits Wireless to
grant liens to secure up to $50 million of indebtedness under working capital or
revolving credit facilities. In the event of a default on the Notes, or a
bankruptcy, liquidation or reorganization of the Company, such assets will be
available to satisfy obligations of the secured debt before any payment could be
made on the Notes. Accordingly, there may only be a limited amount of assets
available to satisfy any claims of the holders of the Notes upon an acceleration
of the Notes. In addition, to the extent that the value of such collateral is
insufficient to satisfy such secured indebtedness, amounts remaining outstanding
on such secured indebtedness would be entitled to share pari passu with the
Notes with respect to any other assets of Wireless.
COMPETITIVE MARKET
The Company faces significant competition in all of its markets. Many of
the Company's competitors, which include regional and national paging companies
and certain regional telephone companies, possess significantly greater
financial, technical and other resources than the Company. If any of such
companies were to devote additional resources to the paging or other wireless
messaging businesses or focus its strategy on the Company's marketing and
product niches, the Company's results of operations could be adversely affected.
Some of these larger competitors may also be able to use their substantial
financial resources to increase the already substantial pricing competition in
the markets in which the Company operates, which may have an adverse effect on
the Company's results of operations. For competitive and marketing reasons, the
Company generally sells each new unit for less than its acquisition cost. In
addition, a number of paging carriers have constructed or are in the process of
constructing nationwide paging networks that offer services similar to the
Company's services, including the provision of two-way messaging. See
"Business -- Competition."
Industry reports indicate, and the Company believes, that the retail
distribution of pagers has become increasingly common in the paging industry.
Retail distribution is a key element of the Company's business strategy. Retail
distributors have typically selected only one paging carrier for their stores,
and the Company faces competition in its efforts to place units through retail
distributors. If the Company is unable to maintain its current sales
relationships with retail distributors or obtain new sales relationships with
other retail distributors, it may not be able to achieve the growth contemplated
by its business strategy. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- General."
12
<PAGE> 13
ADVERSE EFFECT OF SUBSCRIBER DISCONNECTIONS
The results of operations of paging service providers such as the Company
are significantly affected by subscriber disconnections. In order to realize net
growth in units in service, disconnected users must be replaced, and additional
users must be added. However, the sales and marketing costs associated with
attracting new subscribers are substantial relative to the costs of providing
service to existing customers, and expenses associated with each new unit
placement exceed the sales price and service initiation fee received by the
Company. Because the paging business is characterized by high fixed costs,
disconnections directly and adversely affect operating income. In addition,
because the Company plans to sell an increasing number of its units through
retail distribution channels, the Company's overall rate of disconnections may
increase since the Company expects that subscribers who purchase pagers through
retail outlets will tend to cancel their subscriptions at a higher rate than
subscribers obtained through other distribution channels. The Company's average
monthly disconnection rates for the twelve months ended December 31, 1994,
December 31, 1995 and March 31, 1996 were 3.4%, 2.5% and 2.4% per month,
respectively. An increase in its rate of disconnections would adversely affect
the Company's results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General."
RISKS OF IMPLEMENTATION AND FINANCING OF TWO-WAY SERVICES
In the FCC NPCS auctions, the Company acquired a total of 100 kHz of
forward frequency and 50 kHz of return frequency nationwide. Specifically, the
Company acquired a 50 kHz unpaired nationwide NPCS license (the "Nationwide
Narrowband License") and five 50/50 kHz paired regional NPCS licenses (the
"Regional Narrowband Licenses" or collectively, with the Nationwide Narrowband
License, the NPCS Licenses). These acquired licenses could be utilized to offer
two-way messaging services or, if two-way messaging services are not fully
implemented, to expand the Company's existing one-way transmission capacity.
The development and implementation of two-way services will require the
application of new technology and the construction of a transmission network, in
addition to the network used in the Company's existing one-way messaging
business. Existing two-way wireless data services have had only limited market
acceptance. There can be no assurance that two-way services will be commercially
viable, and the success of two-way services could be affected by matters beyond
the Company's control such as the future cost of infrastructure and subscriber
equipment, technological changes in wireless messaging services, marketing and
pricing strategies of competitors, regulatory developments and general economic
conditions.
Significant additional financing will be required to fund the construction
of a transmission network for two-way services, other start-up costs and selling
expenses. 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 joint venture arrangements, however there can be no
assurance that sufficient financing will be available to the Company. The
Company's ability to incur indebtedness is limited by the covenants contained in
the Indenture, the 12 1/4% Indenture and the Revolving Credit Agreement (as
defined herein) and as a result, any additional financing may need to be equity
financing. The Company does not anticipate any significant revenues from two-way
services during 1996 or 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be dependent, to a significant extent, upon
the continued services of the key executive officers of the Company. The Company
does not have employment agreements with any of its current executive officers,
although all current executive officers have entered into non-competition
agreements with the Company. The loss or unavailability of one or more of its
executive officers or the inability to
13
<PAGE> 14
attract or retain key employees in the future could have an adverse effect upon
the Company's operations. See "Management -- Directors and Executive Officers."
TECHNOLOGICAL CHANGES
The telecommunications industry is characterized by rapid technological
change. Future technology advances in the industry may result in the
availability of new services or products that could compete directly with the
paging and other wireless messaging services that are currently provided or are
being developed by the Company. Changes in technology could also lower the cost
of competitive products and services to a level where the Company's products and
services become less competitive or the Company is required to reduce the prices
of its services. The Company expects to respond to technological changes by
continuing to make investments in new and improved systems and related service
capability.
Several wireless two-way communication technologies, including cellular
telephone service, broadband personal communications services, specialized
mobile radio, low-speed data networks and mobile satellite services, are
currently in use or under development. Although these technologies are currently
more expensive than paging services or are not yet broadly available, future
implementation and technological improvements could result in increased capacity
and efficiency for wireless two-way communication and, accordingly, could result
in increased competition for the Company. Some of these service providers are
bundling paging services with two-way voice service in a combined handset. Large
manufacturers dominate technological development in the wireless communications
industry, and changes in their methods of distributing one-way wireless
messaging products could reduce the Company's access to technology and may have
an adverse effect on the Company's operations. There can be no assurance that
the Company will not be adversely affected by such technological change. See
"-- Dependence on Key Suppliers" and "Business -- Competition."
DEPENDENCE ON KEY SUPPLIERS
The Company does not manufacture any of the pagers used in its paging
operations. The Company buys pagers primarily from Motorola, Inc. ("Motorola")
as well as some other manufacturers and therefore is dependent on such
manufacturers to obtain sufficient pager inventory for new subscriber and
replacement needs. In addition, the Company has acquired terminals and
transmitters primarily through vendor financing agreements with Motorola and
Glenayre Technologies, Inc. ("Glenayre") and thus is dependent on such
manufacturers for sufficient terminals and transmitters to meet its expansion
and replacement requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." There can be no assurance that the Company will not experience
significant delays in obtaining pagers, terminals or transmitters in the future.
The Company has never had a pager supply agreement with Motorola or any other
pager manufacturer and there can be no assurance that either Motorola or
Glenayre will enter into any new vendor financing agreements with the Company or
that the terms and conditions of any new agreement will be as favorable to the
Company as under past agreements. Although the Company believes that sufficient
alternative sources of pagers, terminals and transmitters exist, there can be no
assurance that the Company would not be adversely affected if it were unable to
obtain these items from current supply sources or on terms comparable to
existing terms.
POTENTIAL FOR CHANGE IN REGULATORY ENVIRONMENT
The Company and the wireless communications industry are subject to
regulation by the FCC and various state regulatory agencies. Under prior law and
regulations, in situations involving mutually exclusive applications, FCC
licenses were issued through a system of lotteries and comparative hearings. The
Omnibus Budget Reconciliation Act of 1993 (the "Budget Act") amended the
Communications Act of 1934, as amended (the "Communications Act"), to authorize
the FCC to utilize a system of competitive auctions to issue licenses for the
use of frequencies for which there are mutually exclusive applications, where
the principal use of the license will be to offer service in return for
compensation from subscribers. Implementation of the auction procedures has made
expansion of the Company's operations more costly.
The Budget Act also amended the Communications Act by eliminating many of
the regulatory distinctions governing mobile service providers. The FCC
implemented the new law by creating a new
14
<PAGE> 15
regulatory category called "commercial mobile radio services" ("CMRS"), which
includes most paging providers currently operating as either radio common
carriers ("RCCs") or private carrier paging operators ("PCPs"), including the
Company. The FCC has adopted new rules to govern regulation of this new
category, which will become effective in August 1996. As a result of the new
rules, PCP licensees (such as the Company) will have additional obligations
beginning in August 1996. For example, these licensees must provide connection
upon reasonable request, must not engage in any unreasonably discriminatory
practices and will be subject to complaints regarding any unlawful practices.
PCP licensees will also be subject to provisions that authorize the FCC to
provide remedial relief to an aggrieved party upon finding of a violation of the
Communications Act and related consumer protection provisions. In this regard,
the FCC is currently considering certain significant changes with respect to how
paging is licensed and the ways in which rates are determined for
interconnection between local exchange carriers and paging operators. See
"Business -- Government Regulation."
From time to time, legislation and regulations which could potentially
adversely affect the Company are proposed by federal and state legislators and
regulators. Legislation is currently in effect in Texas requiring paging
companies to contribute a portion of their taxable revenues to a
Telecommunications Infrastructure Fund created by the state legislature. See
"Business -- Government Regulation." Management does not believe that the Texas
law will have a material adverse affect on the Company's operations and is not
aware of any other currently pending legislation or regulations which will have
a material adverse impact on the Company's operations. However, there can be no
assurance that Federal or other state legislation will not be adopted, or that
the FCC or the various state agencies will not adopt regulations or take other
actions, that would adversely affect the business of the Company. See
"Business -- Government Regulation."
RESTRICTIONS ON FOREIGN OWNERSHIP
Under existing law, except in extraordinary circumstances, no more than 25%
of the Company's capital stock may be owned, directly or indirectly, or voted by
non-U.S. citizens or their representatives, a foreign government or its
representatives, or a foreign corporation. See "Business -- Government
Regulation." If the foreign ownership of the Company were to exceed 25%, the FCC
could revoke the Company's FCC licenses if the FCC found the public interest
would be served by such revocation, although the Company could seek approval
from the FCC for the additional foreign ownership or take other actions to
reduce the Company's percentage of foreign ownership in order to avoid the loss
of its licenses. The Company's certificate of incorporation authorizes the Board
of Directors to cause the Company to redeem its equity securities owned by
foreigners at their then current market value (determined as set forth in the
certificate of incorporation) in order to ensure compliance with the rules,
regulations and policies of the FCC (the "FCC Rules"). 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.
These restrictions on foreign ownership could also adversely affect the ability
of the Company to attract additional equity financing from entities that are, or
are owned by, non-U.S. persons.
RISKS OF INTERNATIONAL OPERATIONS
The Company intends to continue to expand internationally. Recently, the
Company was successful in obtaining licenses for frequencies with its foreign
partners in Canada and the Bahamas. The Company may seek joint venture partners
in certain other countries, in particular where domestic regulations prohibit
foreign control of telecommunications companies. The Company will need to obtain
licenses for frequencies in any foreign country in which it seeks to expand and,
if the licenses are obtained, to construct or acquire a transmission network and
thereafter to begin sales and marketing efforts. However, there can be no
assurance that the Company will be able to obtain licenses in foreign countries,
that it will be successful in finding joint venture partners or that its foreign
operations, if established, will be profitable. Acquiring licenses, constructing
or acquiring a transmission network and commencing operations could require the
Company to provide funding for such operations and could require the Company to
seek additional debt or equity capital. In countries where the Company is or may
become a minority holder in a joint venture controlled by another party, such as
the Company's existing joint venture in Canada, the success of such joint
venture's operations
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<PAGE> 16
will depend substantially on the efforts of the Company's venture partner and
may be impeded if disputes arise between the parties. International operations
are subject to various risks not present in domestic operations such as
fluctuations in currency exchange ratios, nationalization or expropriation of
assets, import/export controls, political instability, variations in the
protection of intellectual property rights, limitations on foreign investment,
restrictions on the ability to convert currency and the additional expenses and
risks inherent in conducting operations in geographically distant locations,
with customers speaking different languages and having different cultural
approaches to the conduct of business. To mitigate the effects of foreign
currency fluctuations on the results of its foreign operations, the Company
anticipates utilizing forward exchange contracts and engaging in other efforts
to hedge foreign currency transactions. However, there can be no assurance as to
the effectiveness of such mitigation efforts in limiting any adverse effects of
foreign currency fluctuations on the Company's foreign operations and on the
Company's overall results of operations. See "Business -- International
Expansion."
SIGNIFICANT OWNERSHIP
The Morgan Stanley Shareholders currently own approximately 51.2% of the
outstanding Common Stock and 49.0% of the outstanding voting Common Stock. See
"Principal Stockholders." The general partner and/or the managing general
partner of each of the general partner of the Morgan Stanley Shareholders is a
wholly-owned subsidiary of Morgan Stanley Group Inc. ("MS Group"). Four of the
nine directors of the Company are employees of a wholly-owned subsidiary of MS
Group. As a result of its ownership interest in the Company and certain rights
pursuant to the Amended and Restated Agreement among certain Stockholders dated
as of May 10, 1996 (the "Stockholders Agreement"), among the Morgan Stanley
Shareholders, the Company and certain other stockholders, the Morgan Stanley
Shareholders have a significant influence over the affairs of the Company. See
"Certain Transactions."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
A holder of a Note will be required to include in such holder's income, for
Federal income tax purposes, the original issue discount with respect to the
Note as it accrues, although no cash payments of interest on the Notes are
expected to be made until August 1, 2000. Nevertheless, the Company's deductions
with respect to part of such original issue discount will be deferred until the
related payments are made by the Company and the remainder of such original
issue discount will not be deductible. If a bankruptcy case is commenced by or
against the Company under the United States Bankruptcy Code after the issuance
of the Notes, the claim of a holder of Notes may be limited to an amount equal
to the sum of the issue price as determined by the bankruptcy court and that
portion of the original issue discount which is deemed to accrue from the issue
date to the date of any such bankruptcy filing.
LACK OF PUBLIC MARKET FOR THE NOTES
Wireless does not intend to list the Notes on any securities exchange.
MS&Co. has indicated to Wireless that it intends to make a market in the Notes,
but it is under no obligation to do so and such market-making could be
discontinued at any time. No assurance can be given that an active trading
market for the Notes will develop. If MS&Co. conducts any market-making
activities, it may be required to deliver a "market-making prospectus" when
effecting offers and sales in the Notes because of the beneficial ownership of
the capital stock of Wireless by affiliates of MS&Co. For so long as a
market-making prospectus is required to be delivered, the ability of MS&Co. to
make a market in the Notes may, in part, be dependent on the ability of Wireless
to maintain a current market-making prospectus.
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<PAGE> 17
THE COMPANY
Wireless was incorporated in Delaware on November 29, 1994 as a
wholly-owned subsidiary of PageMart. Effective January 19, 1995, PageMart merged
with a wholly-owned subsidiary of Wireless, pursuant to which PageMart was the
surviving corporation (the "Reorganization"). As part of the Reorgani-
zation, each share of outstanding common stock of PageMart was converted into
the right to receive one share of Common Stock of Wireless. Upon consummation of
the Reorganization, the stockholders of PageMart had the same ownership interest
in Wireless as they had in PageMart, and Wireless 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.
The Company's executive offices are located at 6688 North Central
Expressway, Suite 800, Dallas, Texas 75206, its telephone number is (214)
750-5809 and its fax number is (214) 987-2029.
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<PAGE> 18
CAPITALIZATION
The following table sets forth the current maturities of long-term debt and
capitalization of the Company as of March 31, 1996. The following table does not
reflect the conversion of certain shares of Common Stock into Class A Common
Stock after March 31, 1996. See "Principal Stockholders." This information
should be read in conjunction with the Consolidated Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------
(UNAUDITED)
<S> <C>
(IN THOUSANDS,
EXCEPT SHARE
INFORMATION)
Current maturities of long-term debt........................................ $ 5,660
=========
Long-term debt, excluding current maturities:
12 1/4% Notes, at accreted value(1)....................................... $ 98,029
Notes, at accreted value.................................................. 119,121
Vendor notes payable(2)................................................... 8,060
---------
Total long-term debt(3)..................................................... 225,210
Stockholders' equity (deficit)(4)(5):
Preferred Stock, $.0001 par value per share,
10,000,000 shares authorized, none issued and outstanding.............. --
Class A Convertible Common Stock, $.0001 par value per share,
60,000,000 shares authorized, 23,278,915 shares issued
and outstanding........................................................ 2
Class B Convertible Non-Voting Common Stock, $.0001 par
value per share, 12,000,000 shares authorized,
8,975,469 shares issued and outstanding................................ 1
Class C Convertible Non-Voting Common Stock, $.0001 par
value per share, 2,000,000 shares authorized,
731,846 shares issued and outstanding.................................. --
Class D Convertible Non-Voting Common Stock, $.0001 par
value per share, 1,000,000 shares authorized,
725,445 shares issued and outstanding.................................. --
Additional paid-in capital................................................ 154,612
Stock subscriptions receivable............................................ (557)
Accumulated deficit....................................................... (177,708)
---------
Total stockholders' equity (deficit)........................................ (23,650)
---------
Total capitalization........................................................ $ 201,560
=========
</TABLE>
- ---------------
(1) See "Description of Certain Indebtedness -- 12 1/4% Notes."
(2) On June 19, 1996, the Company completed an initial public offering of its
Class A Common Stock resulting in net proceeds of approximately $70 million.
The proceeds were used to repay current maturities of long-term debt, the
vendor notes payable and amounts outstanding under the Company's revolving
credit facility, with the remainder to be used to fund the initial
construction of the Company's NPCS transmission network and for other
general corporate purposes.
(3) Subsequent to March 31, 1996, the Company borrowed approximately $11.9
million under the Company's revolving credit facility to fund working
capital requirements and capital expenditures associated with the Company's
one-way messaging operations. Such borrowings were repaid in full with
proceeds received from the initial public offering.
(4) Excludes (i) 2,793,274 shares issuable upon exercise of outstanding stock
options at exercise prices ranging from $0.08 to $12.00 per share, (ii)
627,900 shares issuable upon exercise of outstanding warrants
18
<PAGE> 19
to purchase Class A Common Stock at an exercise price of $3.26 per share,
(iii) 714,286 shares issuable upon conversion of securities held by
unaffiliated third-party Canadian stockholders of Canada Holding, and (iv)
206,748 shares issuable upon exercise of outstanding warrants to purchase
Class A Common Stock at an exercise price of $10.00 per share.
(5) As a result of the initial public offering, the Company's stockholders'
equity increased by approximately $70 million.
19
<PAGE> 20
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth summary historical financial information and
operating data for each of the five fiscal years ended December 31, 1995 and for
the three months ended March 31, 1995 and 1996. The financial information and
operating data for each of the five fiscal years ended December 31, 1995 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 Prospectus. The financial information and operating data for the three
months ended March 31, 1995 and 1996 were derived from the unaudited
consolidated financial statements of the Company and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data. Interim results are
not necessarily indicative of results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
(IN THOUSANDS, EXCEPT UNIT, ARPU, PER SUBSCRIBER AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Recurring revenues........................ $ 3,298 $ 6,668 $ 24,184 $ 56,648 $101,503 $ 20,464 $ 33,743
Equipment sales and activation fees....... 5,380 9,837 26,483 53,185 57,688 12,239 14,802
------- -------- -------- -------- -------- -------- ----------
Total revenues............................ 8,678 16,505 50,667 109,833 159,191 32,703 48,545
Cost of equipment sold.................... 6,436 10,044 28,230 57,835 63,982 13,378 17,082
Operating expenses........................ 10,844 25,584 47,448 85,322 118,557 26,524 34,704
------- -------- -------- -------- -------- -------- ----------
Operating loss............................ (8,602) (19,123) (25,011) (33,324) (23,348) (7,199) (3,241)
Interest expense.......................... (1,486) (2,456) (6,538) (12,933) (30,720) (6,660) (8,401)
Interest income........................... 97 529 428 858 1,997 498 219
Other..................................... -- -- -- (414) (1,042) (337) (195)
------- -------- -------- -------- -------- -------- ----------
Net loss.................................. $(9,991) $(21,050) $(31,121) $(45,813) $(53,113) $(13,698) $ (11,618)
======= ======== ======== ======== ======== ======== =========
Net loss per common share................. $ (1.02) $ (1.24) $ (1.51) $ (1.72) $ (1.53) $ (0.40) $ (0.33)
Weighted average number of common shares
and share equivalents outstanding....... 9,814 16,962 20,627 26,574 34,653 34,532 34,688
BALANCE SHEET DATA (AT PERIOD END):
Current assets............................ $23,607 $ 13,365 $ 51,279 $ 44,397 $ 62,535 $ 59,011 $ 53,165
Total assets.............................. 28,979 30,772 78,773 142,059 263,829 243,336 262,848
Current liabilities....................... 5,112 14,754 20,198 37,966 56,508 39,861 61,288
Long-term debt, less current maturities... 11,956 25,059 78,359 92,632 219,364 200,630 225,210
Stockholders' equity (deficit)............ 11,911 (9,041) (19,784) 11,461 (12,043) 2,845 (23,650)
OTHER DATA:
Units in service (at period end).......... 52,125 117,034 327,303 772,730 1,240,024 874,944 1,374,146
Net subscriber additions.................. 37,812 64,909 210,269 445,427 467,294 102,214 134,122
ARPU(1)................................... $ 8.27 $ 8.66 $ 9.81 $ 8.64 $ 8.62 $ 8.28 $ 8.61
Operating profit (loss) before selling
expenses per subscriber per month(2).... (7.78) (12.69) (.98) .90 2.11 1.01 2.23
Selling expenses per net subscriber
addition(3)............................. 146 157 91 81 91 95 86
EBITDA(4)................................. (7,378) (16,499) (19,930) (25,219) (10,076) (4,397) 1,007
Capital expenditures...................... 1,741 13,729 10,810 16,719 33,503 10,376 11,779
NPCS Licenses acquired(5)................. -- -- -- 58,885 74,079 74,079 --
Depreciation and amortization............. 1,224 2,624 5,081 8,105 13,272 2,802 4,248
Deficiency of earnings to fixed
charges(6).............................. 9,991 21,050 31,121 45,813 53,113 13,698 11,618
</TABLE>
(Footnotes appear on the following page)
20
<PAGE> 21
- ---------------
(1) 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.
For the fiscal year periods, ARPU is stated as the monthly average for the
final quarter of the year.
(2) Operating profit (loss) before selling expenses (selling expenses include
loss on sale of equipment) per subscriber for the Company's one-way
operations is calculated by dividing (i) recurring revenues less technical
expenses, general and administrative expenses and depreciation and
amortization for the quarter by (ii) the average number of units in service
for the quarter. Stated as the monthly average for the final quarter of the
year for the fiscal year periods.
(3) Selling expenses per net subscriber addition for the Company's one-way
domestic operations is calculated by dividing (i) selling expenses,
including loss on sale of equipment, for the period by (ii) the net
subscriber additions for the period.
(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 GAAP and therefore should not
be construed as an alternative to operating income, as an alternative to
cash flows from operating activities (as determined in accordance with
GAAP) or as a measure of liquidity. The calculation of EBITDA does not
include the commitments of the Company for capital expenditures and payment
of debt and should not be deemed to represent funds available to the
Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of the financial operations and
liquidity of the Company as determined in accordance with GAAP.
(5) Reflects the acquisition of the NPCS Licenses in the FCC NPCS auctions. See
"Business -- Government Regulation."
(6) For purposes of calculating the deficiency of earnings to fixed charges,
(i) earnings is defined as net loss plus fixed charges and (ii) fixed
charges is defined as interest expense plus amortization of debt expense
plus the interest portion of rental and lease expense.
21
<PAGE> 22
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 Prospectus.
GENERAL
The Company has constructed and operates a wireless messaging and
communications network and provides paging and other one-way wireless messaging
services to its subscribers. In addition, the Company sells and distributes
wireless messaging equipment to subscribers, retailers and resellers. The
Company earns recurring revenues from each subscriber in the form of fixed
periodic fees and incurs substantial operating expenses in offering its
services, including technical, customer service and general and administrative
expenses. See "-- Management's Presentation of Results of Operations."
Since commencing operations in 1990, the Company has invested heavily in
its 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 March 31, 1996, the
number of units in service increased from 52,125 to 1,374,146. None of the
Company's growth is attributable to acquisitions. Given its growth strategy and
the substantial associated selling and marketing expenses, the Company expects
to continue to generate operating losses in 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 significant
revenues with respect to two-way services in 1998. See "Risk Factors -- Risks of
Implementation and Financing of Two-Way Services." The Company's ability to
generate operating income is primarily dependent on its ability to attain a
sufficiently large installed subscriber base that generates recurring revenues
which offset the fixed operating costs of its wireless networks, administration
and selling and marketing expenses. The Company intends to achieve this growth
by promoting its customized paging and other wireless messaging services through
its national sales offices, retail distribution channels, private brand
strategic alliances with GTE Corporation ("GTE"), Southwestern Bell Mobile
Systems ("SBMS"), AT&T Wireless Services ("AT&T Wireless"), Ameritech Mobile
Services, Inc. ("Ameritech") and long distance reseller EXCEL
Telecommunications, Inc. ("Excel"), 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
22
<PAGE> 23
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 twelve months ended
December 31, 1993, 1994, 1995 and March 31, 1996 were 3.7%, 3.4%, 2.5% and 2.4%,
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.
RESULTS OF OPERATIONS
The Company's principal operations to date are its domestic one-way
wireless messaging division. The following discussion of results of operations
analyzes the results of the Company's one-way wireless messaging operations,
unless otherwise indicated.
Certain of the following financial information is presented on a per unit
basis. Management of the Company believes that such a presentation is useful in
understanding the Company's results because it is a meaningful comparison period
to period given the Company's growth rate and the significant differences in the
number of subscribers of other paging companies.
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Units in Service
Units in service were 874,944 and 1,374,146 as of March 31, 1995 and 1996,
respectively, representing an annual growth rate of 57%. The Company has
experienced strong growth in units in service due primarily to the success of
its sales and marketing strategies in the direct sales, national retail and
third-party reseller channels, as well as from private brand strategic alliance
programs.
Revenues
Revenues for the three months ended March 31, 1995 and 1996 were $32.7
million and $48.5 million, respectively. Recurring revenues for airtime,
voicemail and other services for the same periods were $20.5 million and $33.7
million, respectively. Revenues from equipment sales and activation fees for the
three months ended March 31, 1995 and 1996 were $12.2 million and $14.8 million,
respectively. The increases in recurring revenues and revenues from equipment
sales and activation fees were primarily due to the rapid growth in the number
of units in service. The increase in equipment sales during the first quarter of
1996 was
23
<PAGE> 24
somewhat offset by a decline in the average price per unit sold. The Company
expects equipment prices per unit generally to remain constant or decline only
slightly as sales volumes increase.
The Company's ARPU was $8.28 and $8.61 in the first quarter of 1995 and
1996, respectively. In general, over the past twelve months the Company's ARPU
has increased primarily as a result of an increase in subscribers added through
retail and direct sales channels. In addition, a portion of the increase in ARPU
from the first quarter of 1995 to the first quarter of 1996 was due to 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.
Management anticipates that the Company's ARPU will decline in the foreseeable
future due to increased competition and a higher mix of subscribers added
through private brand strategic alliance programs and third-party resellers,
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, billing, collection and other
administrative costs associated with end-users, the Company does not incur these
costs with respect to such subscribers.
Cost of Equipment Sold
The cost of equipment sold for the three months ended March 31, 1995 and
1996 was $13.4 million and $17.1 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. The Company expects pager costs
generally to remain constant, with only modest reductions in cost to the Company
as a result of volume purchases. Management anticipates that loss on equipment
sold will increase on a per unit basis for the foreseeable future due to
increased competition.
Operating Expenses
Technical expenses were $5.5 million and $8.1 million for the three months
ended March 31, 1995 and 1996, 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 $2.21
and $2.06 in the first quarter of 1995 and 1996, respectively. The per unit
decrease was the result of increased operating efficiencies and economies of
scale experienced with the growth of the Company's subscriber base. During the
three months ended March 31, 1996, the Company incurred $147,000 in technical
expenses associated with the development of its two-way wireless messaging
services.
Selling expenses for the three months ended March 31, 1995 and 1996 were
$8.6 million and $9.4 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 first quarter of
1995 and 1996, the Company added 102,214 and 134,122 net new units in service,
respectively. Sales and marketing employees increased from 338 at March 31, 1995
to 486 at March 31, 1996. Management believes the net loss on equipment sold to
be a component of selling and marketing expenses incurred to add new subscribers
because the Company sells, rather than leases units to new subscribers. See
"-- Management's Presentation of Results of Operations." Selling and marketing
expenses per net subscriber addition (including loss on equipment sales) were
$95 and $86 for the three months ended March 31, 1995 and 1996, respectively.
During the three months ended March 31, 1996 the Company incurred $126,000 in
selling expenses associated with its international operations.
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) in the first
quarter of 1995 and 1996 were $9.7 million and $12.9 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
24
<PAGE> 25
number of representatives in its customer service call centers from 389 on March
31, 1995 to over 575 on March 31, 1996, 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 $3.92
and $3.29 in the first quarter of 1995 and 1996, respectively. The per unit
decrease was a result of increased operating efficiencies and economies of scale
achieved through the growth of the Company's subscriber base. During the three
months ended March 31, 1996, the Company incurred $127,000 in general and
administrative expenses associated with the development of its two-way wireless
messaging services.
Depreciation and amortization for the three months ended March 31, 1995 and
1996 was $2.8 million and $4.2 million, respectively. The increase resulted from
the expansion of the Company's network infrastructure including transmitter and
terminal equipment, as well as the purchase and development of a new centralized
administrative system during 1995 and the first three months of 1996. As an
average cost per month per unit in service, depreciation and amortization was
$1.13 and $1.08 for the three months ended March 31, 1995 and 1996,
respectively.
Interest Expense
Interest expense increased from $6.7 million in the first quarter of 1995
to $8.4 million in the first quarter of 1996. The increase in 1996 was primarily
the result of increased interest expense related to the Notes and the 12 1/4%
Notes. Interest expense related to the 12 1/4% Notes was $2.8 million and $3.2
million in the first quarter of 1995 and 1996, respectively. Interest expense
related to the Notes was $3.2 million and $4.4 million in the first quarter of
1995 and 1996, respectively.
Net Loss
The Company sustained net losses in the first quarter of 1995 and 1996 of
$13.7 million and $11.6 million, respectively, principally due to the cost of
funding the growth rate of the Company's subscriber base which resulted in an
increase in units sold, selling and marketing expenses, operating expenses and
interest expense.
FISCAL YEARS 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.
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.
25
<PAGE> 26
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.
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% Notes, partially offset by decreased borrowings under vendor
financing agreements. The increase in 1995 was primarily the result of the
issuance of the Notes in January 1995, increased interest related to the 12 1/4%
Notes, as well as increased borrowings under vendor financing agreements.
Interest expense related to the 12 1/4% Notes was $2.0 million, $10.8 million
and
26
<PAGE> 27
$11.8 million in 1993, 1994 and 1995, respectively. Interest expense related to
the 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 Prospectus, have
been prepared in accordance with GAAP. For internal management purposes the
Company prepares statements of operations that are derived from the Company's
GAAP financial statements but are reordered in a format that management uses for
its internal review of the Company's performance and that management believes
are useful in understanding the Company's results.
Management believes that operating profit before selling expenses is a
meaningful indicator of the profitability of the Company's installed base of
units in service because it measures the recurring revenues received for
services less the costs (including depreciation and amortization) associated
with servicing that installed base. Operating profit before selling expenses per
subscriber per month for the Company's one-way operations has grown from $.33
during the second quarter of 1994 to $2.23 during the first quarter of 1996 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.
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.
27
<PAGE> 28
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.
Selected Quarterly Results of Operations
The table below sets forth management's presentation of results of one-way
domestic operations and other data on a quarterly basis for the eight most
recent fiscal quarters. This presentation should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere in this Prospectus, 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
------------------------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- ------------- ------------ --------- -------- ------------- ------------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Recurring
revenues.......... $ 12,946 $15,161 $ 17,902 $20,464 $ 23,387 $26,994 $30,658 $33,743
Service expenses.... 10,632 12,160 13,688 15,157 16,208 18,192 19,258 20,735
Depreciation and
amortization...... 1,876 2,217 2,354 2,802 3,091 3,469 3,910 4,248
-------- ------------- ------------ --------- -------- ------------- ------------- ---------
Operating profit
before selling
expenses.......... 438 784 1,860 2,505 4,088 5,333 7,490 8,760
Selling
expenses(1)....... 7,543 9,580 11,732 9,704 10,614 10,889 11,181 11,601
-------- ------------- ------------ --------- -------- ------------- ------------- ---------
Operating income
(loss)............ $ (7,105) $(8,796) $ (9,872) $(7,199) $ (6,526) $(5,556) $(3,691) $(2,841)
======= =========== ========== ======== ======= =========== =========== ========
EBITDA.............. $ (5,229) $(6,579) $ (7,518) $(4,397) $ (3,435) $(2,087) $ 219 $ 1,407
======= =========== ========== ======== ======= =========== =========== ========
OTHER DATA:
Units in
service(2)........ 495,605 608,427 772,730 874,944 1,008,683 1,131,464 1,240,024 1,374,146
Net subscriber
additions......... 93,588 112,822 164,303 102,214 133,739 122,781 108,560 134,122
ARPU(3)............. $ 9.62 $ 9.15 $ 8.64 $ 8.28 $ 8.28 $ 8.41 $ 8.62 $ 8.61
Operating profit
before selling
expenses per
subscriber per
month(4).......... .33 .47 .90 1.01 1.45 1.66 2.11 2.23
Selling expenses per
net subscriber
addition(1)(5).... 81 85 71 95 79 89 103 86
Capital employed per
unit in
service(6)........ 69 53 42 45 39 39 40 41
</TABLE>
- ---------------
(1) Includes loss on sale of equipment.
(2) Stated as of the end of each period.
(3) Calculated by dividing recurring revenues for the quarter by the average
number of units in service during that quarter. Stated as the monthly
average for the quarter.
(4) Calculated by dividing operating profit before selling expenses (selling
expenses include loss on sale of equipment) for the quarter by the average
number of units in service during that quarter. Stated as the monthly
average for the quarter.
(5) Calculated by dividing selling expenses, including loss on sale of
equipment, for the quarter by the net subscriber additions for the quarter.
(6) Calculated by dividing total assets (excluding cash, 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.
28
<PAGE> 29
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>
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED MARCH 31, 1996
-------------------------------------------------------
PAGEMART PAGEMART PAGEMART THE COMPANY
ONE-WAY TWO-WAY INTERNATIONAL CONSOLIDATED
-------- -------- ------------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.................................... $ 48,545 $ -- $ -- $ 48,545
Operating loss.............................. (2,841) (274) (126) (3,241)
EBITDA...................................... 1,407 (274) (126) 1,007
Total assets................................ 119,186 140,251 3,411 262,848
Capital expenditures........................ 11,556 223 -- 11,779
</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 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 and $11.8
million for the three months ended March 31, 1996. 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. Capital expenditures for the first quarter of
1996 include approximately $223,000 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 an
29
<PAGE> 30
additional $18 million during 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, and the Company's operating activities provided net cash of
$366,000 for the three months ended March 31, 1996. The decrease in 1995 and the
improvement for the first quarter of 1996 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, and $11.8 million for the three months ended March 31, 1996. 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, respectively, and net cash used by
financing activities was $1.3 million for the three months ended March 31, 1996.
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 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 Offering"). Long-term
obligations, less current maturities, increased by approximately $5.8 million
during the three months ended March 31, 1996, $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
increases in 1995 and the first quarter of 1996 resulted from the issuance of
the Notes, the accretion of the 12 1/4% Notes and borrowings under vendor
financing agreements.
As of March 31, 1996, the Company's indebtedness under vendor financing
agreements was $13.7 million, its indebtedness under the 12 1/4% Notes was $98.0
million and its indebtedness under the Notes was $119.1 million. In June 1996,
indebtedness under the vendor financing agreements was repaid with the proceeds
of the initial public offering.
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 March 31, 1996 to November 1,
1998 of $38.5 million. From and after November 1, 1998, interest on the 12 1/4%
Notes will be payable semiannually, in cash.
The 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 Notes will cause an
increase in indebtedness from March 31, 1996 to February 1, 2000 of $88.1
million. From and after February 1, 2000, interest on the Notes will be payable
semiannually, in cash.
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 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 March 31, 1996,
the amount available under the Revolving Credit Agreement was $22.7 million.
30
<PAGE> 31
The 12 1/4% Indenture, the 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, 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 Notes must be paid in cash.
See "Risk Factors -- High Leverage; Deficiency of Earnings to Cover Fixed
Charges; Restrictive Covenants."
On November 15, 1995, the Company purchased through PageMart International,
Inc., 200,000 shares of voting common stock of PageMart Canada, which represents
20% of the ownership of PageMart Canada. PageMart International, Inc. also owns
33% of the voting common stock of Canada Holding, which owns the remaining 80%
of the voting common stock of PageMart Canada. The Company's investment in
Canada Holding and PageMart Canada totals approximately $3.7 million.
As of March 31, 1996, the Company had approximately $14.2 million in cash
and cash equivalents. The Company's cash balances 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. See "Risk Factors -- No Assurance that Growth Strategy will be Achieved."
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 Indenture, the 12 1/4% Indenture and
the Revolving Credit Agreement, and as a result any additional financing may
need to be equity financing. See "Risk Factors -- Risks of Implementation and
Financing of Two-Way Services."
Future revenues, costs, product mix and new product acceptance are all
influenced by a number of factors which are inherently uncertain and difficult
to predict. Therefore, no assurance can be given that financing for such
investments will be available. No assurance can be given that the Company's
strategy will be implemented as currently planned or that the Company's
operations will generate positive cash flows.
31
<PAGE> 32
BUSINESS
GENERAL
The Company is one of the fastest growing providers of wireless messaging
services in the United States. Since commencing operations in 1990, the Company
has grown to become the fifth largest paging carrier in the United States, based
on 1,374,146 subscribers at March 31, 1996. 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 has invested heavily in order to achieve rapid growth in its
subscriber base and, as a result, the Company has sustained net losses of $31.1
million, $45.8 million, $53.1 million and $11.6 million for 1993, 1994, 1995 and
the three months ended March 31, 1996, respectively.
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 enabled, allowing the use of high speed messaging
technology, thereby providing increased transmission capacity.
PAGING AND MESSAGING INDUSTRY
Industry sources indicate that, as of December 31, 1995, there were over 34
million pagers in service in the United States, which represents a penetration
rate in excess of 13% of the population. The number of pagers in service in the
United States has grown at an annual rate of approximately 28% since 1989.
Factors that have driven subscriber growth include: (i) a continuing shift
toward a service-based economy; (ii) increasing awareness of the benefits of
mobile communication among the population at large, (iii) decreasing equipment
and service prices contrasting with higher priced wireless communication
services such as cellular telephone; (iv) significant productivity, reliability
and coverage area improvements in paging services; (v) improved paging product
functionality; and (vi) expansion of distribution into the mass consumer markets
(e.g. national retail chains and direct sales).
INDUSTRY BACKGROUND/TRADITIONAL SERVICES. Historically, the industry has
been highly fragmented, characterized by a large number of small, local
operators. During the 1990s, however, consolidation increased significantly as
some paging companies grew rapidly, either internally or by acquisition. As a
result, industry sources have reported that over 45% of the estimated number of
pagers in service in the United States are now provided by the five largest
companies by subscriber level.
Over the past decade, traditional paging services have evolved rapidly from
tone-only, digital pagers to sophisticated alphanumeric devices that store
messages with up to 240 characters. Paralleling this product evolution and
concurrent with the reduction in related service and product costs, the market
for paging services has grown from a base of largely specialized users, such as
doctors and business people having time sensitive communication needs, to the
mass consumer market.
Although the paging and messaging industry continues to be characterized by
technological advances, certain basic characteristics are common to most one-way
wireless messaging services. Paging is a one-way wireless messaging technology
that uses an assigned frequency to contact a paging customer within a geographic
service area. Each customer who subscribes to a paging service is assigned a
specific telephone number (or a personal information number). The subscriber is
contacted through this telephone number (or a personal information number) when
the caller is connected, through the public-switched telephone network, with the
paging service.
INDUSTRY EVOLUTION/NEW SERVICES. While paging has been historically a
one-way communications service, technology advances are now providing a two-way
capability for wireless messaging. In 1994, the FCC enhanced the potential for
two-way messaging by allocating and auctioning new frequencies for two-way
paging services. By the end of 1994, the FCC had successfully auctioned
frequencies for both nationwide and
32
<PAGE> 33
regional two-way services. With the advent of two-way NPCS technology, the
opportunity exists for the development of two-way messaging products and
services that will include inexpensive stored voice and data acknowledgment
paging services that complement the cellular and broadband PCS service
offerings.
The newly-auctioned NPCS spectrum is expected to allow greater
functionality than traditional paging spectrum because it has broader bandwidth
and offers "inbound" and "outbound" spectrum, allowing efficient two-way
communication. With two-way transmission capability, a subscriber unit will be
able to indicate its location to the network. As a result, the message can be
broadcast from the closest transmission site, rather than from all transmission
sites in the entire national, regional or local network, as is the case with
existing paging systems. This should enable more efficient use of the spectrum
in a given geographic area and should greatly increase overall system capacity.
Advanced messaging services may be delivered through several kinds of
subscriber equipment and technology such as Motorola's stored voice messaging
product (which will allow delivery and storage of voice messages to a
pocket-sized pager-like device), enhanced alphanumeric subscriber units, PC
plug-in cards for laptop computers, palmtop computers and Personal Digital
Assistants ("PDAs"), allowing these devices to receive and acknowledge data
messages. Eventually these capabilities may be "built in" obviating the need to
purchase add-on devices such as PC cards. In addition, it is expected that the
enhanced functionality of two-way messaging will attract new subscribers through
value-added services such as voice messaging, wireless origination and delivery
of e-mail, integration of wireless devices into corporate wide area and local
area networks, database access and transaction services.
INDUSTRY OUTLOOK. Future technology developments in the wireless messaging
industry are expected to evolve and drive subscriber growth as users demand more
sophisticated services and devices. The penetration into the mass markets will
continue as retail distribution expands and as non-paging telecommunication
service providers seek to private-label pagers and bundle these services with
their own product offerings. Major telecommunication providers such as AT&T
Wireless, Sprint Corporation and MCI Communications Corporation have all
recently entered into paging service agreements with major messaging service
providers, and this trend is expected to continue.
The wireless industry in general and wireless messaging in particular are
expected to experience robust subscriber growth into the next decade. The
Company believes that its distinct business model positions it well to benefit
from the growth opportunities prevailing in the wireless messaging market today.
Specifically, the Company believes that the combination of its common frequency
nationwide network, centralized administration, diversified distribution
channels and strong spectrum position represents a competitive advantage that
will enable the Company to benefit from the ongoing industry developments.
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 a 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, Southwest-
33
<PAGE> 34
ern 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 MSAs through 65 offices.
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, December 31, 1995 and
March 31, 1996 were 3.4%, 2.5% and 2.4% per month, 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 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 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 NPCS frequency. 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
575 highly trained customer service personnel operating
34
<PAGE> 35
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.
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 the Company believes 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 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 COAM strategy, are substantial for each messaging unit. As of March
31, 1996, 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 $41 at March 31, 1996. Capital
employed per subscriber represents total assets, less NPCS Licenses, cash,
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<PAGE> 36
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 "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 3,690 stores at March 31, 1996, from 3,411 stores, 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. 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
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<PAGE> 37
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 Company's
services are sold across the United States through GTE Telephone Operations, GTE
Phone Mart Stores and GTE Mobilnet.
SOUTHWESTERN BELL MOBILE SYSTEMS. 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. 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. In February 1996, the Company and Ameritech
signed an agreement for the sale and marketing through Ameritech of
Ameritech-labeled services.
EXCEL TELECOMMUNICATIONS, INC. 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 65 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.
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<PAGE> 38
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.
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 29% of airtime revenues for the month ended
March 31, 1996 from approximately 28% during the month ended December 31, 1995.
ALPHANUMERIC PAGING. The Company launched its alphanumeric paging services
in July 1993 under the tradenames InfoPage(R) and InfoNow(SM), and the number of
subscribers utilizing this service represented approximately 1.6% of the
Company's total subscribers as of March 31, 1996. 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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<PAGE> 39
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 22% of the
Company's recurring revenues during the fiscal quarter ended March 31, 1996 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 acknowledgment using the
Company's wireless network for transmission 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 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.
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
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<PAGE> 40
services will be offered to 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's 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(TM) 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(TM) 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 has certain cost
and performance advantages over traditional paging systems and traditional
satellite paging systems.
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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 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
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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. Currently, the Company buys approximately 60% of its pagers from
Motorola with the remainder purchased from other manufacturers. The Company is
dependent on such manufacturers to obtain sufficient pager inventory for new
subscriber units and replacement needs. See "Risk Factors -- Dependence on Key
Suppliers."
BENEFITS OF THE DIRECT BROADCAST SATELLITE. The use of a DBS broadcast
system provides a number of benefits to the Company including:
- 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.
- 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.
- Suffers significantly less degradation in performance due to building
reflection and simulcasting problems, such as the overlapping of two
independently controlled markets.
- 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.
- 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, ReFLEX50(TM) and InFLEXion. Of these four
protocols, the Company believes that ReFLEX25, ReFLEX50 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 also believes
that AT&T has also developed a proprietary protocol "Personal Air Communications
Technology," or pACT, for two-way wireless transmission of data and alphanumeric
messages.
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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 6,400 bits 6,400 bits 8,000 bits
per second per second per second per second
Number of Channels(1)........................ 7 4 3 3
Outbound Throughput(1)....................... 112,000 bps 25,600 bps 19,200 bps 24,000 bps
per cluster per area per area per 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 currently project 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. The
Company believes that currently there is only a limited number of suppliers
of terminals and transmitters and as a result the Company is dependent on
such suppliers for its infrastructure equipment needs. The Company
currently has no
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agreements that require it to purchase infrastructure equipment or
messaging units for its two-way services. See "Risk Factors -- Dependence
on Key Suppliers."
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 services will be
commercially viable, and the success of two-way services could be affected
by matters beyond the Company's control. See "Risk Factors -- Risks of
Implementation and Financing of Two-Way Services."
The Company expects to purchase a significant portion of its subscriber
messaging units from Motorola, with the remainder expected to be purchased from
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. See "Risk
Factors -- Dependence on Key Suppliers." The Company currently has no agreements
that require it to purchase infrastructure 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 joint venture arrangements, however
there can be no assurance that sufficient financing will be available to the
Company. See "Risk Factors -- Risks Related to Implementation and Financing of
Two-Way Services" and "Management's Discussion and Analysis 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, 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 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, 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 RCCs), or private
carriage (the licensees for which are known as 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 Nationwide Narrowband License and five 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 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
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.
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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 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 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
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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 (except that,
pursuant to a June 1996 reconsideration order affecting solely 931 MHz licenses,
an application need only have been filed as of September 30, 1995, regardless of
whether such application was granted prior to 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.
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 any other proposed or
pending state legislation imposing a similar assessment or creating a similar
fund.
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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(R) and its nationwide service under the name
Page-Me-USA(R), 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 March 31, 1996, the Company had 1,610 full-time employees, approximately
1,314 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.
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.
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors currently consists of nine members, which
number may be increased or decreased from time to time so long as there are no
fewer than three nor more than twelve members. The directors (substantially all
of whom were elected pursuant to the arrangements described under the caption
"Certain Transactions -- Election of Directors") and executive officers of the
Company, their ages as of May 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..................... 48 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..................... 39 V.P., PCS Strategy
Vick T. Cox........................... 46 V.P., PCS Development
Lawrence H. Wecsler................... 48 V.P., Field Marketing
Todd A. Bergwall...................... 33 Corporate Counsel and Secretary
Roger D. Linquist(2).................. 57 Director
Frank V. Sica(1)...................... 45 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.
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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. 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 Executive Vice President, Chief
Operations Officer until she left the Company in September 1990 to pursue other
business interests. Upon returning in July 1991, she was named Vice President,
Division General Manager. 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
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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.
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.
52
<PAGE> 53
Frank V. Sica, Director. Mr. Sica has been a Director of the Company since
December 1991. He is currently a Managing Director of 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 MSLEF II and of the respective managing general partners of the
general partner of MSVCF, Morgan Stanley Venture Capital Fund II, L.P. ("MSVCF
II") and MSCP III. Mr. Sica was designated by MSLEF II pursuant to the
Stockholders Agreement. See "Certain 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 "Certain
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, Unify Corporation 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
"Certain 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 "Certain 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 Technologies, Inc. (a California modem manufacturing
company), Fomento Empresarial Regiomontano, S.A. de C.V. (a Mexico-based holding
company with investments in telecommunications companies), 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 "Certain 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 "Certain 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.
53
<PAGE> 54
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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION(1) SECURITIES
-------------------- 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
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.
54
<PAGE> 55
OPTION EXERCISES AND VALUATION
The following table sets forth grants of stock options, during fiscal year
1995, to each Named Executive Officer.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZATION
VALUE
AT ASSUMED ANNUAL
NUMBER OF PERCENTAGE OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
GRANTED(1) FISCAL 1995 PER SHARE DATE 5% 10%
---------- -------------- --------- ---------- -------- ---------
<S> <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. The fair market value was determined by the compensation committee of
the Company's Board of Directors based on relative market values per share
of other paging companies of comparable size and characteristics.
(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.
DIRECTORS' COMPENSATION
Directors of the Company currently receive no compensation for their
services in such capacity.
55
<PAGE> 56
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.
STOCK OPTION PLAN
The Company's Third Amended and Restated 1991 Stock Option Plan (the "Stock
Option Plan") authorizes the grant of non-qualified options ("NSOs") to purchase
shares of Class A Common Stock to key employees, directors and others deemed to
provide valuable services to the Company as additional compensation and to
encourage them to continue to provide service to the Company. In addition,
options qualifying as incentive stock options ("ISOs") under Section 422 of the
Internal Revenue Code of 1986, as amended, (the "Code") may be granted to
employees of the Company.
The stock issuable under the Stock Option Plan includes shares of the
authorized but unissued or reacquired Class A Common Stock. The number of shares
for which options may be granted under the Stock Option Plan (together with the
number of shares issued under the Stock Issuance Plan described below) may not
exceed 4,550,000 shares. Shares underlying any options that are not exercised
prior to expiration or termination or are canceled are available for subsequent
option grants under the Stock Option Plan.
The option exercise price per share will be fixed by the committee of the
Board responsible for administration of the Stock Option Plan (the "Stock Option
Plan Committee"), but in no event may the option price per share be less than
85%, with respect to options other than ISOs, or 100%, with respect to ISOs, of
the fair market value of a share of Class A Common Stock on the grant date. If
the individual to whom the ISO is granted is at the time the holder of at least
10% of the capital stock of the Company (a "Significant Stockholder"), then the
option price per share may not be less than 110% of the fair market value of the
Class A Common Stock on the grant date. Options are exercisable over such period
as may be determined by the Stock Option Plan Committee, but no option may
remain exercisable more than ten years from the grant date, and no ISO granted
to a Significant Stockholder may remain exercisable more than five years from
the grant date.
If a participant ceases to perform services for the Company due to death or
permanent disability while holding one or more outstanding options under the
Stock Option Plan, then each such option will remain exercisable for the limited
period of time (not to exceed twelve months after the date of such cessation of
service) specified by the Stock Option Plan Committee in the option agreement.
In the event a participant is terminated for cause, all outstanding options of
such participant automatically terminate on the participant's termination date.
If a participant ceases to perform services for the Company for any reason other
than death, permanent disability or termination for cause, any outstanding
option will remain exercisable for the limited period of time (not to exceed
three months after the date of such cessation of service) specified by the Stock
Option Plan Committee in the option agreement.
Shares of Class A Common Stock that are issued upon exercise of options
granted under the Stock Option Plan are subject to certain repurchase rights of
the Company. If a participant ceases to perform services for the Company while
holding unvested shares, the Company has the right to repurchase, at the option
price paid per share, all or (at the discretion of the Company and with the
written consent of the participant) less than all of those unvested shares.
In the event of (i) a merger or consolidation in which the Company is not
the surviving entity and in which securities possessing fifty percent (50%) or
more of the total combined voting power of the Company's outstanding voting
securities are transferred to a person or persons different from those who held
such securities immediately prior to such transaction, (ii) the sale, transfer
or other disposition of all or substantially all of the Company's assets other
than in the ordinary course of business, or (iii) any reverse
56
<PAGE> 57
merger in which the Company is the surviving entity but in which securities
possessing fifty percent (50%) or more of the total combined voting power of the
Company's outstanding voting securities are transferred to a person or persons
different from those who held such securities immediately prior to such
transaction, the vesting of each option outstanding under the Stock Option Plan
will automatically accelerate so that each such option will become fully
exercisable immediately prior to the effective date of such corporate
reorganization.
As of March 31, 1996, 2,793,274 options were outstanding at exercise prices
ranging from $0.08 to $12.00 per share.
OPTIONS GRANTED IN FISCAL 1995
<TABLE>
<CAPTION>
NUMBER OF
GROUP OPTIONS
---------------------------------------------------------- ---------
<S> <C>
John D. Beletic, Chairman, President and
Chief Executive Officer................................. 100,000
Kenneth L. Hilton, Executive Vice President,
Strategic Business Units................................ 40,000
Homer L. Huddleston, Executive Vice President,
Technical Operations.................................... 45,000
Sandra D. Neal, Executive Vice President,
Administration.......................................... 50,000
Carol W. Dickson, Vice President,
International Operations................................ 0
All Executive Officers as a Group......................... 545,000
All Current Directors Who are not
Executive Officers as a Group........................... 0
All Employees Other than Executive Officers as a Group.... 659,950
---------
Total Options Granted in Fiscal 1995............ 1,204,950
=========
</TABLE>
FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATION IN THE STOCK OPTION PLAN
There will be no federal income tax consequences to the employee or the
Company upon the grant of either an ISO or an NSO under the Stock Option Plan.
Upon exercise of an NSO, an employee will recognize ordinary income in an amount
equal to (i) the fair market value, on the date of exercise, of the acquired
shares of Class A Common Stock; less (ii) the exercise price of the NSO. Subject
to Section 162(m) of the Code and the employee including such compensation in
income or the Company satisfying applicable reporting requirements, the Company
will be entitled to a tax deduction in the same amount.
If any profits associated with a sale of Class A Common Stock acquired
pursuant to the exercise of an NSO under the Stock Option Plan could subject the
optionee to liability under Section 16(b) of the Exchange Act, there will be no
concurrent federal income tax consequences to either the optionee or the Company
as a result of the exercise of such NSO. The inclusion of such profits as income
to the optionee is generally deferred until the date on which the Section 16(b)
restrictions terminate. However, if the optionee makes a timely and proper 83(b)
election to be taxed at the time such Class A Common Stock is transferred to
him, then the excess of the fair market value of the shares of Class A Common
Stock on the exercise date over the exercise price will be taxed as ordinary
income. An 83(b) election must be made within thirty days of the date of
exercise of the NSO. In the absence of such an election, the excess of the fair
market value of the shares of Class A Common Stock on the date the Section 16(b)
restrictions expire over the exercise price will be considered compensation
taxable as ordinary income to the optionee. The Company will be entitled to a
tax deduction in an amount equal to the amount required to be recognized as
ordinary income by the optionee at the time the optionee is subject to tax.
Upon the exercise of an ISO, an employee recognizes no immediate taxable
income. Income recognition is deferred until the employee sells the shares of
Class A Common Stock. If the ISO is exercised no later than
57
<PAGE> 58
three months after the termination of the employee's employment, and the
employee does not dispose of the shares acquired pursuant to the exercise of the
ISO within two years from the date the ISO was granted and within one year after
the exercise of the ISO, the gain on the sale will be treated as long-term
capital gain. Certain of these holding periods and employment requirements are
liberalized in the event of an employee's death or disability while employed by
the Company. The Company is not entitled to any tax deduction with respect to
the grant or exercise of ISOs, except that if the Class A Common Stock is not
held for the full term of the holding period outlined above, the gain on the
sale of such Class A Common Stock, being the lesser of: (i) the fair market
value of the Class A Common Stock on the date of exercise minus the option
price; or (ii) the amount realized on disposition minus the exercise price, will
be taxed to the employee as ordinary income and, subject to Section 162(m) of
the Code and the employee including such compensation in income or the Company
satisfying applicable reporting requirements, the Company will be entitled to a
deduction in the same amount. The excess of the fair market value of the Class A
Common Stock acquired upon exercise of an ISO over the exercise price therefor
constitutes a tax preference item for purposes of computing the "alternative
minimum tax" under the Code.
STOCK ISSUANCE PLAN
The Company's Third Amended and Restated 1991 Stock Issuance Plan (the
"Stock Issuance Plan") authorizes the issuance of Class A Common Stock to key
employees and directors and others deemed to provide valuable services to the
Company as additional compensation and to encourage them to continue to provide
service to the Company.
The number of shares that may be issued over the term of the Stock Issuance
Plan (together with any shares for which options have been granted under the
Stock Option Plan) may not exceed 4,550,000 shares.
Shares may, in the absolute discretion of the committee of the Board
responsible for administration of the Stock Issuance Plan (the "Stock Issuance
Plan Committee"), be issued for consideration with a value less than 100% of the
fair market value of the issued shares. Under no circumstances, however, may any
shares be issued for consideration valued by the Stock Issuance Plan Committee
at less than 85% of the fair market value of such shares at the time of
issuance.
The interest of a participant in the shares of Class A Common Stock issued
under the Stock Issuance Plan may, in the absolute discretion of the Stock
Issuance Plan Committee, be fully vested upon issuance or may vest in one or
more installments. The participant, however, has all the rights of a shareholder
with respect to the shares of Class A Common Stock issued thereunder, whether or
not such participant's interest in such shares is vested. Accordingly, the
participant has the right to vote the shares and to receive any cash dividends
or other distributions paid or made with respect to the shares.
If the participant ceases to perform services for the Company for any
reason while such participant's interest in the shares of Class A Common Stock
issued under the Stock Issuance Plan remains unvested, then the Company has the
right to repurchase, at the original purchase price paid by the participant, all
or (at the discretion of the Company and with the written consent of the
participant) less than all shares in which the participant is not at the time
vested. In the event of (i) a merger or consolidation in which the Company is
not the surviving entity and in which securities possessing fifty percent (50%)
or more of the total combined voting power of the Company's outstanding voting
securities are transferred to a person or persons different from those who held
such securities immediately prior to such transaction, (ii) the sale, transfer
or other disposition of all or substantially all of the Company's assets other
than in the ordinary course of business, or (iii) any reverse merger in which
the Company is the surviving entity but in which securities possessing fifty
percent (50%) or more of the total combined voting power of the Company's
outstanding voting securities are transferred to a person or persons different
from those who held such securities immediately prior to such transaction, all
of the Company's repurchase rights will automatically terminate and all shares
subject to such repurchase rights will become immediately vested in full.
The Stock Issuance Plan Committee may also require as a condition of the
issuance of one or more shares of Class A Common Stock under the Stock Issuance
Plan that the Company shall have a right of first
58
<PAGE> 59
refusal with respect to any proposed disposition by the participant (or any
successor in interest by reason of purchase, gift or other mode of transfer) of
one or more shares of such Class A Common Stock.
As of March 31, 1996, 300,000 shares of Class A Common Stock had been
issued pursuant to the Stock Issuance Plan, all of which were vested.
STOCK PURCHASE PLAN
On March 28, 1996, the Board of Directors adopted, and the Company's
stockholders subsequently approved, the Company's Employee Stock Purchase Plan
(the "Stock Purchase Plan"). Under the Stock Purchase Plan, the Company will
grant to each eligible employee of the Company and affiliated companies options
to purchase shares of Class A Common Stock at not less than 90% of the fair
market value of such stock on the purchase date or the grant date, whichever is
less.
PURPOSE
The purpose of the Stock Purchase Plan is to provide an opportunity by
which all eligible employees may purchase shares of Class A Common Stock through
voluntary, systematic payroll deductions. By this means such employees are
provided with an opportunity to acquire an interest in the economic progress of
the Company and a further incentive to promote its best interests. The Stock
Purchase Plan, which is intended to qualify under Section 423 of the Code, is
not subject to any provisions of ERISA.
AVAILABLE SHARES AND ELIGIBILITY
The maximum aggregate number of shares of Class A Common Stock that may be
issued under the Stock Purchase Plan is 500,000. All individuals who have 6
months of continuous service with the Company or an affiliate with a regularly
scheduled work week of 20 hours or more, including officers and employee
directors (except for any employee owning 5% or more of the combined voting
power or value of all classes of the stock of the Company), are eligible to
participate in the Stock Purchase Plan.
GRANT OF OPTIONS
On each January 1 and July 1 of a plan year, each eligible employee will be
granted an option to purchase that number of shares of Class A Common Stock with
an aggregate fair market value that does not exceed $25,000 for such plan year.
Each option will be exercised, in its entirety, on June 30 or December 31 (or
immediately preceding business day if such day is not a business day) depending
on the date of grant, and only while the holder is an employee of the Company or
an affiliate. Options must be exercised on such June 30 or December 31, after
which time the option will expire. The initial grant date is July 1, 1996. The
initial purchase date is December 31, 1996. Thereafter, grant dates will be
January 1 and July 1, and purchase dates will be June 30 and December 31,
respectively, of any year. For employees who become eligible after January 1 of
any plan year but prior to July 1 of such year, the first grant date will be
July 1 of such plan year. For employees who become eligible after July 1 of a
plan year, the first grant date will be January 1 of the subsequent plan year.
Options are not transferable except by will or by the laws of descent and
distribution and may be exercised during the employee option-holder's lifetime
only by him or her.
PAYMENT AND PAYROLL DEDUCTIONS
Payment for shares is made through elective payroll deductions. The minimum
payroll deduction is $10 per pay period. Amounts deducted are accumulated in a
payroll deduction account, without interest. A participant may revoke or
decrease at any time his or her contribution to the payroll deduction account.
However, increases in a participant's contribution to his or her payroll
deduction account may not be made more than twice during any plan year and only
in January and July of such plan year.
59
<PAGE> 60
HOLDING PERIOD
Participants in the Stock Purchase Plan will not sell, transfer or
otherwise dispose of any shares of Class A Common Stock purchased pursuant to an
exercise of an option to purchase granted under the Stock Purchase Plan for a
period of 180 days from the date such shares are purchased.
NEW STOCK PURCHASE PLAN BENEFITS
Since participation in the Stock Purchase Plan is voluntary, it is not
possible to estimate the actual dollar value and number of shares of Class A
Common Stock that will be purchased under the Stock Purchase Plan by the
executive officers named in the Summary Compensation Table, all executive
officers as a group and all employees as a group.
FEDERAL INCOME TAX CONSEQUENCES OF PARTICIPATION IN THE STOCK PURCHASE PLAN
The following briefly summarizes the federal income tax consequences under
the Code of participation in the Stock Purchase Plan.
An employee will not realize taxable income upon the grant of a right to
purchase shares or upon the purchase of shares pursuant to the terms of the
Stock Purchase Plan even though the price paid for the shares is less than their
fair market value. If an employee disposes of shares acquired under the Stock
Purchase Plan, the amount of ordinary income, capital gain or capital loss
realized will depend on the holding period of the shares.
If the employee disposes of shares more than one year after the shares have
been transferred and more than two years after the date of grant, the employee
will realize ordinary income in the year of disposition equal to the lesser of
(i) 10% of the fair market value of the shares on the date of grant or (ii) the
amount by which the fair market value of the shares on the date of disposition
exceeds the purchase price. Any additional gain from the sale will be long-term
capital gain.
If the shares are disposed of within either of the holding periods
described above (a disqualifying disposition), the employee will realize
ordinary income equal to the excess of the fair market value of the shares on
the date of purchase pursuant to the Stock Purchase Plan over the purchase
price. This excess is taxed as ordinary income even if the shares are sold at a
loss. In addition, the employee will have capital gain or loss measured by the
difference between (i) the sale price and (ii) the purchase price plus the
amount of ordinary income recognized.
The Company generally is not entitled to an income tax deduction when an
employee exercises an option to purchase a share under the Stock Purchase Plan
or upon the subsequent disposition of any such share. If the disposition is a
disqualifying disposition, the Company will be entitled to an income tax
deduction in the year of such disposition in an amount equal to the amount of
ordinary income recognized by the employee as a result of such disposition.
DIRECTORS PLAN
On March 28, 1996, the Board of Directors adopted, and the Company's
stockholders approved, the Non-Employee Directors Stock Option Plan (the
"Directors Plan"). The following is a summary of the material terms of the
Directors Plan, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The following summary does not
purport to be complete and is qualified in its entirety by the terms of the
Directors Plan.
PURPOSE
The purpose of the Directors Plan is to attract and retain competent
non-employee personnel to serve on the Company's Board of Directors and to
increase their identification with the interests of the Company's stockholders.
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ADMINISTRATION
The Directors Plan is administered by the Compensation Committee. Subject
to the provisions of the Directors Plan, the Compensation Committee has powers
and authorities which are exclusively ministerial in nature, including the
authority to construe and interpret the Directors Plan, to define the terms used
therein, to prescribe, amend and rescind rules and regulations relating to the
administration of the Directors Plan, and to make all other determinations
deemed necessary or advisable for the administration of the Directors Plan.
AVAILABLE SHARES AND ELIGIBILITY
The aggregate number of shares of Class A Common Stock of the Company that
may be issued upon the exercise of all options granted under the Directors Plan
may not exceed 100,000, subject to adjustment pursuant to certain corporate
transactions, such as recapitalizations, mergers or changes in control. Shares
of Class A Common Stock subject to options which terminate without having been
exercised in full may again be made available for purposes of the Directors
Plan. Each member of the Board of Directors who is not an employee of the
Company or any of its affiliates and does not own more than 1% of the Common
Stock of the Company (a "Non-Employee Director") is entitled to receive options
under the Directors Plan.
TERMS AND CONDITIONS OF OPTIONS
Each option granted under the Directors Plan will be a NSO. On the day a
Non-Employee Director is first elected and duly qualified as a member of the
Board (a "New Director") such New Director will receive an option to purchase
25,000 shares of Class A Common Stock. On each subsequent third anniversary of
the date of grant, each Non-Employee Director who was previously elected to the
Board and who continues to serve in such capacity, shall be granted an option to
purchase an additional 25,000 shares of Class A Common Stock.
The exercise price of the Class A Common Stock covered by each option is
the fair market value of such shares on the date of grant of the option, subject
to any adjustments as described in the Directors Plan. Options are exercisable
as to 1/12 of the shares subject thereto on the last day of each calendar
quarter following the date of the grant, with an additional 1/12 of such grant
exercisable as of the last day of each calendar quarter subsequent thereto. An
option is exercisable for a period of ten years from the date of grant of the
option, subject to earlier termination as described in the Directors Plan.
An optionee may exercise an option by giving written notice to the
Compensation Committee together with payment in full of the exercise price. Such
payment may be made in certified or bank check or cash or in the form of such
other compensation as approved by the Compensation Committee. Options may be
exercised, during the lifetime of the optionee, only by the optionee or by his
guardian or legal representative.
Except as otherwise provided below, an option may not be exercised unless
the optionee is then a director of the Company and unless he has remained
continuously in the Company's service as a director since the date of the grant
of the option. Notwithstanding the foregoing, upon termination of a director's
service for any reason other than death, disability or cause (as described in
the Directors Plan), options will be exercisable, to the extent otherwise
exercisable on such date, for 60 days after such termination, unless earlier
terminated in accordance with their terms. Upon termination of service for
cause, unexercised options terminate immediately. Upon termination of service by
reason of death or disability, options will be exercisable, to the extent
otherwise exercisable on such date, at any time within one year after the date
of death or disability, unless earlier terminated in accordance with their
terms. In the event of death or disability of the optionee, options may be
exercised by the optionee's estate or by a person who acquired the right to
exercise such option by bequest or inheritance or otherwise by reason of the
death or disability of the optionee.
AMENDMENT AND TERMINATION
The Board of Directors may at any time and from time to time, suspend,
terminate, modify or amend the Directors Plan; provided, however, that the
Directors Plan shall not be amended more than once during any six-month period
other than to comply with applicable law. Further, certain amendments shall be
subject to
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approval by the stockholders of the Company. Except as otherwise provided in the
Directors Plan, no suspension, termination, modification or amendment of the
Directors Plan may adversely affect any option previously granted, unless the
written consent of the optionee is obtained. The Directors Plan is not subject
to any provision of ERISA and is not qualified under Section 401(a) of the Code.
NEW DIRECTORS PLAN BENEFITS
Grants of options under the Directors Plan are determined by formula as set
forth therein. Currently, no director of the Company is eligible to participate
in the Directors Plan.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Under present law, an optionee who is granted an NSO under the Directors
Plan will not be subject to federal income tax upon the grant, and the Company
will not be entitled to a tax deduction by reason of such grant. When the
optionee exercises the NSO, the excess of the fair market value of the shares
acquired on the exercise date over the exercise price will be considered
compensation taxable as ordinary income to the optionee, and the Company may
claim a tax deduction at that time equal to the amount of taxable income
realized by the optionee.
If any profits associated with a sale of Class A Common Stock acquired
pursuant to the exercise of an NSO under the Directors Plan could subject the
optionee to liability under Section 16(b) of the Exchange Act, there will be no
concurrent federal income tax consequences to either the optionee or the Company
as a result of the exercise of such NSO. The inclusion of such profits as income
to the optionee is generally deferred until the date on which the Section 16(b)
restrictions terminate. However, if the optionee makes a timely and proper 83(b)
election to be taxed at the time such Class A Common Stock is transferred to
him, then the excess of the fair market value of the shares of Common Stock on
the exercise date over the exercise price will be taxed as ordinary income. An
83(b) election must be made within thirty days of the date of exercise of the
NSO. In the absence of such an election, the excess of the fair market value of
the shares of Common Stock on the date the Section 16(b) restrictions expire
over the exercise price will be considered compensation taxable as ordinary
income to the optionee. The Company will be entitled to a tax deduction in an
amount equal to the amount required to be recognized as ordinary income by the
optionee at the time the optionee is subject to tax.
Upon the sale of any shares acquired pursuant to the exercise of an NSO
granted under the Directors Plan, an optionee will recognize gain in an amount
equal to the difference between the sales price and the optionee's tax basis in
such shares, which tax basis will include the exercise price paid plus the
amount required to be recognized as income by the optionee as a result of the
exercise of the NSO. Such gain will be short-term capital gain if the shares
have been held for twelve months or less and long-term capital gain if the
shares have been held for more than twelve months.
The above tax information is only a brief summary of the federal income tax
consequences resulting from the receipt and/or exercise of NSOs. It is based on
present federal tax laws and regulations and does not purport to be a complete
description of such federal income tax consequences. The foregoing summary of
federal income tax consequences may change if the Code or regulations
promulgated thereunder are changed.
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CERTAIN 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
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 liquidation preference of $17,205,011, for an aggregate
purchase price of $17,205,011, of which 5,214,724 shares were issued to MSLEF
II. 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, Morgan Stanley Capital Investors, L.P. ("MSCI"), MSVCF II, Morgan
Stanley Venture Capital Fund II, C.V. ("MSVC II"), and Morgan Stanley Venture
Investors, L.P. ("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.
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 purchased by the MS Merchant Banking Funds (as defined
herein), other than MSLEF II, and 357,143 shares were purchased by First Plaza
Group Trust. The remaining 964,000 shares of Common Stock were purchased by
other institutional investors and the following officers of the Company: John D.
Beletic (3,000 shares), Daniel W. Hay (1,000 shares), G. Clay Myers (5,000
shares), Todd A. Bergwall (1,000 shares), Lawrence H. Wecsler (1,000 shares),
Paul L. Turner (1,000 shares), Kenneth L. Hilton (18,000 shares) and Douglas H.
Kramp (15,000 shares).
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. See "Risk Factors -- Significant Ownership."
As of March 31, 1996, 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.
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<PAGE> 64
ELECTION OF DIRECTORS
Pursuant to 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%. However, each such stockholder
will continue to have such rights if its ownership of Common Stock exceeds 2%
and such stockholder has determined that the continued possession of such rights
is necessary or desirable in order for such stockholder to qualify as a "venture
capital operating company" within the meaning of Department of Labor Regulation
Section 2510.3-101. MSVCF has made such a determination and continues,
therefore, to have the right to designate and have elected one director. The
Morgan Stanley Shareholders own 51.2% of the Common Stock of the Company and
49.0% of the voting Common Stock.
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 ("Morgan Capital") 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.
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 are
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 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 after December 19, 1996. The Company will bear the
costs and expenses of such "demand" registrations. 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,
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
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<PAGE> 65
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, 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.
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
(other than Morgan Capital) who own at least 67% of the voting Common Stock (the
"Compelling Holders") also have the right to require all Holders (other than
Morgan Capital) 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 (the "Transfer Restrictions").
These restrictions on transfer, and the right of the Compelling Holders
described above, will terminate, subject to certain extensions, on June 19,
1997. 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 (the "Regulation Y
Restriction"). None of the foregoing provisions of the Stockholders' Agreement
apply to Morgan Capital. Morgan Capital has, however, entered into a separate
agreement with the Company pursuant to which Morgan Capital is subject to
restrictions which are nearly identical to the Transfer Restrictions and the
Regulation Y Restriction.
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<PAGE> 66
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 By-laws, so long as the
MS Merchant Banking Funds hold at least 7.5% of the Company's Common Stock.
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<PAGE> 67
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Class A Common Stock and Class B, C and D Common Stock as of July
19, 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>
TOTAL
CLASS A COMMON CLASS B, C AND D COMMON
STOCK(1) COMMON STOCK(2) STOCK
-------------------- --------------------- ------
NUMBER % NUMBER % %
---------- ------ --------- ------ ------
<S> <C> <C> <C> <C> <C>
The Morgan Stanley Leveraged
Equity Fund II, L.P.(3)
1221 Avenue of the Americas
New York, NY 10020........................ 8,476,517 25.1% 1,951,539(4) 32.7% 26.2%
Morgan Stanley Capital
Partners III, L.P.(3)
1221 Avenue of the Americas
New York, NY 10020........................ 5,072,671 15.0% 1,167,876(5) 19.6% 15.7%
Morgan Stanley Venture
Capital Fund, L.P.(6)
1221 Avenue of the Americas
New York, NY 10020........................ 2,154,070 6.4% 495,930(7) 8.3% 6.7%
Other Morgan Stanley-sponsored
limited partnerships(8)................ 842,719 2.5% 194,021(9) 3.3% 2.6%
Mellon Bank, N.A., as Trustee for
First Plaza Group Trust(10)
One Mellon Plaza
Pittsburgh, PA 15258...................... 3,214,286 9.5% -- -- 8.1%
Accel Telecom L.P.(11)
One Embarcadero Center,
Ste. 3820
San Francisco, CA 94111................... 1,542,300 4.6% -- -- 3.9%
Accel III L.P.(11)
One Embarcadero Center,
Ste. 3820
San Francisco, CA 94111................... 1,416,200 4.2% -- -- 3.6%
Accel Investors '89 L.P.(11)
One Embarcadero Center,
Ste. 3820
San Francisco, CA 94111................... 91,500 * -- -- *
Pulsar
Av. Roble, No. 300. Mezzanine
Edificio Torre Alta
Garza Garcia, N.L.
Mexico C.P. 66265......................... 2,142,857 6.4% -- -- 5.4%
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
TOTAL
CLASS A COMMON CLASS B, C AND D COMMON
STOCK(1) COMMON STOCK(2) STOCK
-------------------- --------------------- ------
NUMBER % NUMBER % %
---------- ------ --------- ------ ------
<S> <C> <C> <C> <C> <C>
Directors and Named
Executive Officers:
John D. Beletic(12).................... 485,205 1.4% -- -- 1.2%
Roger D. Linquist(13).................. 1,525,000 4.5% -- -- 3.8%
Kenneth L. Hilton(14).................. 63,833 * -- -- *
Homer L. Huddleston(15)................ 29,416 * -- -- *
Sandra D. Neal(16)..................... 73,900 * -- -- *
Carol W. Dickson(17)................... 5,000 * -- -- *
Frank V. Sica(3)(6)(8)................. 16,545,977 49.0% 3,309,366 63.9% 51.2%
Guy L. de Chazal(6)(8)................. 2,734,681 8.1% 629,605 10.6% 8.5%
Arthur Patterson(18)................... 3,050,000 9.0% -- -- 7.7%
Andrew C. Cooper(6)(8)................. 2,734,681 8.1% 629,605 10.6% 8.5%
Alejandro Perez Elizondo............... -- -- -- -- --
Leigh J. Abramson(3)(8)................ 13,811,296 40.9% 3,179,761 53.3% 42.8%
Pamela D.A. Reeve...................... -- -- -- -- --
All directors and executive
officers as a group(19)................... 22,304,094 64.9% 3,809,366 63.9% 64.7%
</TABLE>
- ---------------
* Denotes less than 1%.
(1) Each share of Class B and C Common Stock is convertible by certain
institutional investors subject to certain voting control and regulatory
restrictions at the option of the holder into one share of Class A Common
Stock. Each share of Class D Common Stock is convertible, at the option of
the holder, at any time, into one share of Class A Common Stock. The number
of shares of Class A Common Stock and percentages under this heading do not
account for such conversion rights.
(2) Holders of Class B, C and D Common Stock have no voting power except under
certain limited exceptions.
(3) 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 is also an investment partnership
for which Leigh J. Abramson, a director of the Company, 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 footnote
(8) below are each wholly owned subsidiaries of MS Group. Frank V. Sica and
Leigh J. Abramson each disclaim beneficial ownership of such shares.
(4) All of such shares represent shares of Class B Common Stock owned by MSLEF
II.
(5) All of such shares represent shares of Class B Common Stock owned by MSCP
III.
(6) 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. Frank V. Sica, Guy L. de Chazal and Andrew C. Cooper each
disclaim beneficial ownership of such shares.
(7) All of such shares represent shares of Class B Common Stock owned by MSVCF.
(8) Includes 372,662 shares owned by MSVCF II, 172,569 shares owned by MSCI,
107,123 shares owned by MSVI, 100,826 shares owned by MSVC II and 89,539
shares owned by MSCP 892. Each of MSCI and MSCP 892 is an investment
partnership for which the relationships described in footnote (3) above are
applicable and Frank V. Sica and Leigh J. Abramson each disclaim beneficial
ownership of shares held by such entities. Each of MSVCF II, MSVI and MSVC
II is an investment partnership for which the relationships described in
footnote (6) above are applicable and Frank V. Sica, Guy L. de Chazal and
Andrew C. Cooper each disclaim beneficial ownership of shares held by such
entities.
(9) Includes 85,798 shares of Class B Common Stock owned by MSVCF II, 39,731
shares of Class B Common Stock owned by MSCI, 24,663 shares of Class B
Common Stock owned by MSVI, 23,214
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<PAGE> 69
shares of Class B Common Stock owned by MSVC II and 20,615 shares of Class
B Common Stock owned by MSCP 892.
(10) 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 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.
(11) Each of these entities is an investment partnership for which Arthur
Patterson, a director of the Company, is a general partner or a general
partner of the general partner of such entity.
(12) Includes 328,000 shares of common stock issued pursuant to the Stock Option
Plan and Stock Issuance Plan. Includes 145,002 stock options which are
exercisable within the 60-day period commencing July 19, 1996 pursuant to
the Stock Option Plan.
(13) Includes 125,000 shares of common stock issued pursuant to the Stock Option
Plan and Stock Issuance Plan.
(14) Includes 31,548 stock options which are exercisable within the 60-day
period commencing July 19, 1996 pursuant to the Stock Option Plan.
(15) Includes 29,416 stock options which are exercisable within the 60-day
period commencing July 19, 1996 pursuant to the Stock Option Plan.
(16) Includes 50,832 stock options which are exercisable within the 60-day
period commencing July 19, 1996 pursuant to the Stock Option Plan.
(17) Ms. Dickson resigned from the Company effective February 29, 1996.
(18) Includes shares of common stock held by the entities described in note 11
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.
(19) Includes 602,937 stock options which are exercisable within the 60-day
period commencing July 19, 1996.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
12 1/4% NOTES
The 12 1/4% Notes were issued under the 12 1/4% Indenture between PageMart
and United States Trust Company of New York, as Trustee. The 12 1/4% Notes are
unsecured senior obligations of PageMart, limited to $136.5 million aggregate
principal amount at maturity, and will mature on November 1, 2003. From and
after November 1, 1998, interest on the 12 1/4% Notes will be payable in cash at
the rate of 12 1/4% per annum.
The 12 1/4% Indenture contains certain covenants that, among other things,
limit the ability of PageMart to incur indebtedness, pay dividends, prepay
subordinated indebtedness, repurchase capital stock, engage in transactions with
stockholders and affiliates, create liens, sell assets and engage in mergers and
consolidations.
The 12 1/4% Notes are redeemable, at PageMart's option, in whole or in
part, at any time on or after November 1, 1998 and prior to maturity, upon not
less than 30 nor more than 60 days' prior notice, at a redemption price of 100%
of principal amount at maturity, plus accrued and unpaid interest, if any, to
the redemption date.
In addition, at any time prior to November 1, 1996, PageMart may redeem up
to 35% of the accreted value of the 12 1/4% Notes with the proceeds of one or
more public equity offerings, at any time as a whole or from time to time in
part, at a redemption price (expressed as a percentage of accreted value) of
111%, plus accrued and unpaid interest, if any, to the redemption date.
REVOLVING CREDIT AGREEMENT
The Revolving Credit Agreement among Wireless, the lenders named therein,
Bankers Trust Company, as issuing bank, and BTCC, as agent, provides for a
revolving line of credit of up to $50 million, of which $5 million may be used
for the issuance of letters of credit. 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% of
eligible 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. 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%. The 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, including a current ratio, a ratio of consolidated total debt divided by
paging units in service, a minimum service contribution and a maximum placement
cost with respect to the placement of additional units.
The Revolving Credit Agreement is secured by all receivables and inventory
owned by Wireless from time to time and by all of the capital stock of PageMart
owned by Wireless. The following are events of default under the Revolving
Credit Agreement: (i) failure to pay any principal when due or any interest on
other amounts within three business days after the due date thereof; (ii) any
material misrepresentation by Wireless; (iii) default in the performance of any
obligation under the Revolving Credit Agreement or related documents; (iv) the
occurrence of any event of default with respect to other indebtedness in excess
of $5 million which permits the acceleration of such indebtedness; (v)
bankruptcy, insolvency or other similar events with respect to Wireless or
PageMart; (vi) the occurrence of any change of control (as defined in the
Revolving Credit Agreement) of Wireless; (vii) failure to comply with the
Communications Act or to maintain material licenses or authorizations related to
the business of Wireless and its subsidiaries; or (viii) the failure of the
liens on the collateral to be valid, enforceable, first-priority liens. Upon the
occurrence of an event of default, the lenders are entitled to terminate the
commitments under the Revolving Credit
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Agreement, accelerate any loans made thereunder and enforce the security
interests granted with respect to the assets of Wireless, including the right to
foreclose on the capital stock of PageMart.
As noted above, the amount that Wireless is permitted to borrow under the
Revolving Credit Agreement is limited to a borrowing base calculated by
reference to the accounts receivable and inventory owned by Wireless. Wireless
has entered into a receivables purchase agreement with PageMart pursuant to
which PageMart may sell receivables to Wireless from time to time. In addition,
Wireless expects in the future to purchase messaging equipment inventory from
third-party suppliers which would then be included in the borrowing base under
the Revolving Credit Agreement. Wireless expects that it would sell such
inventory from time to time to PageMart for resale by PageMart to its customers.
DESCRIPTION OF THE NOTES
The Notes were issued under the Indenture dated as of January 17, 1995,
between Wireless and United States Trust Company of New York, as Trustee (the
"Trustee"), a copy of the form of which has been filed as an exhibit to the
Registration Statement. The form and terms of the Notes are identical in all
material respects to the form and terms of the Old Notes, except that the Notes
have been registered under the Securities Act and, therefore, do not bear
legends restricting transfer thereof. The Notes and the Old Notes are deemed the
same class of notes under the Indenture and are both entitled to the benefits
thereof. The following summary of certain provisions of the Indenture is subject
to, and is qualified in its entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein and those terms
made a part thereof by the Trust Indenture Act of 1939, as amended. Whenever
particular Sections or defined terms of the Indenture not otherwise defined
herein are referred to, such Sections or defined terms are incorporated herein
by reference.
GENERAL
The Notes are unsecured senior obligations of Wireless, limited to
$207,270,000 aggregate principal amount at maturity, and will mature on February
1, 2005. Although for Federal income tax purposes a significant amount of
original issue discount, taxable as ordinary income, will be recognized by a
Holder as such discount accrues from the issue date of the Notes, no interest
will be payable on the Notes prior to August 1, 2000. From and after February 1,
2000, interest on the Notes will accrue at the rate of 15% per annum from
February 1, 2000 or from the most recent Interest Payment Date to which interest
has been paid or provided for, payable semiannually (to Holders of record at the
close of business on January 15 or July 15 immediately preceding the Interest
Payment Date) on February 1 and August 1 of each year, commencing August 1,
2000.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of
Wireless in the Borough of Manhattan, The City of New York (which initially will
be the corporate trust office of the Trustee at 114 W. 47th Street, New York,
N.Y. 10036); provided that, at the option of Wireless, payment of interest may
be made by check mailed to the address of the Holders as such address appears in
the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity and any integral
multiple thereof. No service charge will be made for any registration of
transfer or exchange of Notes, but Wireless may require payment of a sum
sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
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OPTIONAL REDEMPTION
The Notes will be redeemable, at Wireless' option, in whole or in part, at
any time on or after February 1, 2000 and prior to maturity, upon not less than
30 nor more than 60 days' prior notice mailed by first-class mail to each
Holders' last address as it appears in the Security Register, at the following
Redemption Prices (expressed in percentages of principal amount at maturity),
plus accrued and unpaid interest, if any, to the Redemption Date (subject to the
right of Holders of record on the relevant Regular Record Date to receive
interest due on an Interest Payment Date that is on or prior to the Redemption
Date) if redeemed during the 12-month period commencing on February 1 of the
applicable year set forth below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000.............................................................. 105.0%
2001.............................................................. 102.5
2002 and thereafter............................................... 100.0
</TABLE>
In addition, at any time prior to February 1, 1998, Wireless may redeem up
to 35% of the Accreted Value of the Notes with the proceeds of one or more
Public Equity Offerings at any time as a whole or from time to time in part, at
a Redemption Price (expressed as a percentage of Accreted Value) of 112.5%, plus
accrued and unpaid interest, if any, to the Redemption Date (subject to the
right of Holders of record on the relevant Regular Record Date to receive
interest due on an Interest Payment Date that is on or prior to the Redemption
Date).
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, on a
pro rata basis, by lot or by such other method as the Trustee in its sole
discretion shall deem to be fair and appropriate; provided that no Note of
$1,000 in principal amount at maturity or less shall be redeemed in part. If any
Note is to be redeemed in part only, the notice of redemption relating to such
Note shall state the portion of the principal amount at maturity thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Note.
RANKING
The Indebtedness evidenced by the Notes will rank pari passu in right of
payment with all other unsubordinated indebtedness of Wireless. However, since
all of the operations of Wireless are conducted through its subsidiaries, the
liabilities of its subsidiaries, including trade payables, will be effectively
senior to the Notes. See "Risk Factors -- Holding Company Structure." At March
31, 1996, Wireless had no indebtedness outstanding other than the Notes, and
Wireless' subsidiaries had $168.1 million of liabilities, including $111.7
million of indebtedness (of which $13.7 million was secured), all of which would
have effectively ranked senior to the Notes. See "Capitalization" and "Selected
Historical Financial and Operating Data."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for which
no definition is provided.
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"Accreted Value" is defined to mean, for any Specified Date, the amount
provided below for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
- ------------------------ --------------
<S> <C>
February 1, 1995.................................................... $ 485.19
August 1, 1995...................................................... $ 521.58
February 1, 1996.................................................... $ 560.70
August 1, 1996...................................................... $ 602.75
February 1, 1997.................................................... $ 647.96
August 1, 1997...................................................... $ 696.55
February 1, 1998.................................................... $ 748.80
August 1, 1998...................................................... $ 804.96
February 1, 1999.................................................... $ 865.33
August 1, 1999...................................................... $ 930.23
February 1, 2000.................................................... $ 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) the original issue price
and (b) an amount equal to the product of (1) the Accreted Value for the
first Semi-Annual Accrual Date less the original issue price multiplied by
(2) a fraction, the numerator of which is the number of days from the issue
date of the Notes to the Specified Date, using a 360-day year of twelve
30-day months, and the denominator of which is the number of days elapsed
from the issue date of the Notes to the first Semi-Annual Accrual Date,
using a 360-day year of twelve 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual
Dates, the Accreted Value will equal the sum of (a) the Accreted Value for
the Semi-Annual Accrual Date immediately preceding such Specified Date and
(b) an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" is defined to mean Indebtedness of a Person
existing at the time such Person became a Restricted Subsidiary and not Incurred
in connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary.
"Adjusted Consolidated Net Income" is defined to mean, for any period, the
aggregate net income (or loss) of Wireless and its consolidated Restricted
Subsidiaries for such period determined in conformity with GAAP; provided that
the following items shall be excluded in computing Adjusted Consolidated Net
Income (without duplication): (i) the net income (or loss) of any Person (other
than net income (or loss) attributable to a Restricted Subsidiary) in which any
Person (other than Wireless or any of its Restricted Subsidiaries) has a joint
interest, except to the extent of the amount of dividends or other distributions
actually paid to Wireless or any of its Restricted Subsidiaries by such other
Person during such period, (ii) solely for the purposes of calculating the
amount of Restricted Payments that may be made pursuant to clause (C) of the
first paragraph of the "Limitation on Restricted Payments" covenant described
below (and in such case, except to the extent includible pursuant to clause (i)
above), the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with Wireless
or any of its Restricted Subsidiaries or all or substantially all of the
property and assets of such Person are acquired by Wireless or any of its
Restricted Subsidiaries, (iii) the net income (or loss) of any
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Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid as dividends on Preferred Stock of
Wireless or Preferred Stock of any Restricted Subsidiary owned by Persons other
than Wireless and any of its Restricted Subsidiaries; and (vi) all extraordinary
gains and extraordinary losses; provided that, solely for the purposes of
calculating the Interest Coverage Ratio (and in such case, except to the extent
it is already included pursuant to clause (i) above), "Adjusted Consolidated Net
Income" shall include the amount of all cash dividends received by Wireless or
any Restricted Subsidiary from an Unrestricted Subsidiary.
"Adjusted Consolidated Net Tangible Assets" is defined to mean the total
amount of assets of Wireless and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of Wireless and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, all as set forth on the most recently available quarterly or annual
consolidated balance sheet of Wireless and its Restricted Subsidiaries, prepared
in conformity with GAAP.
"Affiliate" is defined to mean, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, is defined to mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" is defined to mean (i) an investment by Wireless or any
of its Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of Wireless or shall be merged into or
consolidated with Wireless or any of its Restricted Subsidiaries or (ii) an
acquisition by Wireless or any of its Restricted Subsidiaries of the property
and assets of any Person other than Wireless or any of its Restricted
Subsidiaries that constitute substantially all of a division or line of business
of such Person.
"Asset Disposition" is defined to mean the sale or other disposition by
Wireless or any of its Restricted Subsidiaries (other than to Wireless or
another Restricted Subsidiary of Wireless) of (i) all or substantially all of
the Capital Stock of any Restricted Subsidiary of Wireless or (ii) all or
substantially all of the assets that constitute a division or line of business
of Wireless or any of its Restricted Subsidiaries.
"Asset Sale" is defined to mean any sale, transfer or other disposition
(including by way of merger, consolidation or sale-leaseback transactions) in
one transaction or a series of related transactions by Wireless or any of its
Restricted Subsidiaries to any Person other than Wireless or any of its
Restricted Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of Wireless or any of its Restricted Subsidiaries or
(iii) any other property and assets of Wireless or any of its Restricted
Subsidiaries outside the ordinary course of business of Wireless or such
Restricted Subsidiary and, in each case, that is not governed by the provisions
of the Indenture applicable to Mergers, Consolidations and Sales of Assets;
provided that sales or other dispositions of inventory, receivables and other
current assets shall not be included within the meaning of "Asset Sale."
"Average Life" is defined to mean, at any date of determination with
respect to any debt security, the quotient obtained by dividing (i) the sum of
the products of (a) the number of years from such date of determination to the
dates of each successive scheduled principal payment of such debt security and
(b) the amount of such principal payment by (ii) the sum of all such principal
payments.
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"Capital Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's capital stock, whether now
outstanding or issued after the date of the Indenture, including, without
limitation, all Common Stock and Preferred Stock.
"Capitalized Lease" is defined to mean, as applied to any Person, any lease
of any property (whether real, personal or mixed) of which the discounted
present value of the rental obligations of such Person as lessee, in conformity
with GAAP, is required to be capitalized on the balance sheet of such Person;
and "Capitalized Lease Obligation" is defined to mean the rental obligations, as
aforesaid, under such lease.
"Change of Control" is defined to mean such time as (i) (a) prior to the
occurrence of a Public Market, a "person" or "group" (within the meaning of
Section 13(d) or 14(d)(2) of the Exchange Act) becomes the "beneficial owner"
(as defined in Rule 13d-3 of the Exchange Act) of a greater percentage of the
total Voting Stock, on a fully diluted basis, of Wireless than is held by the
Existing Stockholders and their Affiliates on such date and (b) after the
occurrence of a Public Market, a "person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act) of more than 30% of the total
Voting Stock of Wireless on a fully diluted basis and such ownership is greater
than the amount of Voting Stock, on a fully diluted basis, held by the Existing
Stockholders and their Affiliates on such date; or (ii) individuals who at the
beginning of any period of two consecutive calendar years constituted the Board
of Directors (together with any new directors whose election by the Board of
Directors or whose nomination for election by Wireless' stockholders was
approved by a vote of at least two-thirds of the members of the Board of
Directors then still in office who either were members of the Board of Directors
at the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
members of such board of directors then in office.
"Closing Date" is defined to mean the date on which the Notes were
originally issued under the Indenture.
"Consolidated EBITDA" is defined to mean, for any period, the sum of the
amounts for such period of (i) Adjusted Consolidated Net Income, (ii)
Consolidated Interest Expense, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income, (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income, less all non-cash items increasing
Adjusted Consolidated Net Income, all as determined on a consolidated basis for
Wireless and its Restricted Subsidiaries in conformity with GAAP; provided that,
if any Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated
EBITDA shall be reduced (to the extent not otherwise reduced in accordance with
GAAP) by an amount equal to (A) the amount of the Adjusted Consolidated Net
Income attributable to such Restricted Subsidiary multiplied by (B) the quotient
of (1) the number of shares of outstanding Common Stock of such Restricted
Subsidiary not owned on the last day of such period by Wireless or any of its
Restricted Subsidiaries divided by (2) the total number of shares of outstanding
Common Stock of such Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" is defined to mean, for any period, the
aggregate amount of interest in respect of Indebtedness (including amortization
of original issue discount on any Indebtedness and the interest portion of any
deferred payment obligation, calculated in accordance with the effective
interest method of accounting; all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed by Wireless or any of its Restricted
Subsidiaries) and all but the principal component of rentals in respect of
Capitalized Lease Obligations paid, accrued or scheduled to be paid or to be
accrued by Wireless and its Restricted Subsidiaries during such period;
excluding, however, (i) any amount of such interest of any Restricted Subsidiary
if the net income (or loss) of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition
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thereof (but only in the same proportion as the net income (or loss) of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the offering of the Notes, all as determined on a consolidated basis in
conformity with GAAP.
"Consolidated Net Worth" is defined to mean, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of Wireless and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation), less any amounts attributable to Redeemable Stock or any equity
security convertible into or exchangeable for Indebtedness, the cost of treasury
stock and the principal amount of any promissory notes receivable from the sale
of the Capital Stock of Wireless or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of foreign
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Default" is defined to mean any event that is, or after notice or passage
of time or both would be, an Event of Default.
"Existing Stockholders" is defined to mean The Morgan Stanley Leveraged
Equity Fund II, L.P., Morgan Stanley Capital Partners III, L.P., Morgan Stanley
Capital Investors, L.P., Morgan Stanley Venture Capital Fund, L.P., Morgan
Stanley Venture Capital Fund II, L.P., Morgan Stanley Venture Capital Fund II,
C.V., Morgan Stanley Venture Investors, L.P., Accel Telecom L.P., Accel III L.P.
and Accel Investors '89 L.P.
"GAAP" is defined to mean generally accepted accounting principles in the
United States of America as in effect as of the date of the Indenture,
including, without limitation, those set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as
approved by a significant segment of the accounting profession. All ratios and
computations based on GAAP contained in the Indenture shall be computed in
conformity with GAAP applied on a consistent basis, except that calculations
made for purposes of determining compliance with the terms of the covenants and
with other provisions of the Indenture shall be made without giving effect to
(i) the amortization of any expenses incurred in connection with the offering of
the Units, (ii) except as otherwise provided, the amortization of any amounts
required or permitted by Accounting Principles Board Opinion Nos. 16 and 17 and
(iii) any non-recurring charges associated with the adoption, after the Closing
Date, of Financial Accounting Standard Nos. 106 and 109.
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such other Person (whether
arising by virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided that the term "Guarantee" shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Incur" is defined to mean, with respect to any Indebtedness, to incur,
create, issue, assume, Guarantee or otherwise become liable for or with respect
to, or become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an Incurrence of Acquired Indebtedness by reason of the
acquisition of more than 50% of the Capital Stock of any Person; provided that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness.
"Indebtedness" is defined to mean, with respect to any Person at any date
of determination (without duplication), (i) all Indebtedness of such Person for
borrowed money, (ii) all obligations of such Person
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evidenced by bonds, debentures, notes or other similar instruments, (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (including reimbursement obligations with respect thereto), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not otherwise
included in this definition, obligations under Currency Agreements and Interest
Rate Agreements. The amount of Indebtedness of any Person at any date shall be
the outstanding balance at such date of all unconditional obligations as
described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the obligation,
provided (i) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP and (ii) that
Indebtedness shall not include any liability for federal, state, local or other
taxes.
"Interest Coverage Ratio" is defined to mean, on any Transaction Date, the
ratio of (i) the aggregate amount of Consolidated EBITDA for the four fiscal
quarters for which financial information in respect thereof is available
immediately prior to such Transaction Date (the "Reference Period") to (ii) the
aggregate Consolidated Interest Expense during such Reference Period. In making
the foregoing calculation, (A) pro forma effect shall be given to (1) any
Indebtedness Incurred subsequent to the end of the Reference Period and prior to
the Transaction Date (other than Indebtedness Incurred under a revolving credit
or similar arrangement to the extent of the commitment thereunder (or under any
predecessor revolving credit or similar arrangement) in effect on the last day
of such Reference Period), (2) any Indebtedness Incurred during such period to
the extent such Indebtedness is outstanding at the Transaction Date and (3) any
Indebtedness to be Incurred on the Transaction Date, in each case as if such
Indebtedness had been Incurred on the first day of such Reference Period and
after giving pro forma effect to the application of the proceeds thereof as if
such application had occurred on such first day; (B) Consolidated Interest
Expense attributable to interest on any Indebtedness (whether existing or being
Incurred) computed on a pro forma basis and bearing a floating interest rate
shall be computed as if the rate in effect on the Transaction Date (taking into
account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term in excess of 12 months) had been
the applicable rate for the entire period; (C) there shall be excluded from
Consolidated Interest Expense any Consolidated Interest Expense related to any
amount of Indebtedness that was outstanding during such Reference Period or
thereafter but that is not outstanding or is to be repaid on the Transaction
Date, except for Consolidated Interest Expense accrued (as adjusted pursuant to
clause (B)) during such Reference Period under a revolving credit or similar
arrangement to the extent of the commitment thereunder (or under any successor
revolving credit or similar arrangement) in effect on the Transaction Date; (D)
pro forma effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving pro forma effect to the application of proceeds of any Asset
Disposition) that occur during such Reference Period or thereafter and prior to
the Transaction Date as if they had occurred and such proceeds had been applied
on the first day of such Reference Period; (E) with respect to any such
Reference Period commencing prior to the Closing Date, the issuance of the Notes
shall be deemed to have taken place on the first day of such period; and (F) pro
forma effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving pro forma effect to the application of proceeds of any Asset
Disposition) that have been made by any Person that has become a Restricted
Subsidiary of Wireless or has been merged with or into Wireless or any
Restricted Subsidiary of Wireless during such Reference Period or subsequent to
such period and prior to the Transaction Date and that would have constituted
Asset Dispositions or Asset Acquisitions had such transactions occurred when
such Person was a Restricted Subsidiary of Wireless as if such Asset
Dispositions or Asset Acquisitions were Asset Dispositions or Asset Acquisitions
that occurred on the first day of such Reference Period; provided that to the
extent that clause (D) or (F) of this sentence requires that pro
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forma effect be given to an Asset Acquisition or Asset Disposition, such pro
forma calculation shall be based upon the four full fiscal quarters immediately
preceding the Transaction Date of the Person, or division or line of business of
the Person, that is acquired or disposed for which financial information is
available.
"Investment" is defined to mean any direct or indirect advance, loan or
other extension of credit (other than advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of Wireless or its Restricted Subsidiaries) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by any other Person. For purposes
of the definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described below, (i) "Investment" shall include the fair
market value of the assets (net of liabilities) of any Restricted Subsidiary of
Wireless at the time that such Restricted Subsidiary of Wireless is designated
an Unrestricted Subsidiary and shall exclude the fair market value of the assets
(net of liabilities) of any Unrestricted Subsidiary at the time that such
Unrestricted Subsidiary is designated a Restricted Subsidiary of Wireless and
(ii) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer, in each case as
determined by the Board of Directors in good faith.
"Lien" is defined to mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof, any sale with recourse against the seller or any Affiliate of the
seller, or any agreement to give any security interest).
"Net Cash Proceeds" is defined to mean, with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to Wireless or any Restricted Subsidiary of Wireless) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of (i) brokerage commissions and other fees and
expenses (including fees and expenses of counsel and investment bankers) related
to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes
will actually be paid or are payable) as a result of such Asset Sale without
regard to the consolidated results of operations of Wireless and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by Wireless
or any Restricted Subsidiary of Wireless as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP.
"Permitted Liens" is defined to mean (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be required
in conformity with GAAP shall have been made; (ii) statutory Liens of landlords
and carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or
other similar Liens arising in the ordinary course of business and with respect
to amounts not yet delinquent or being contested in good faith by appropriate
legal proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made; (iii) Liens incurred or deposits made
in the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (iv) Liens incurred
or deposits made to secure the performance of tenders, bids, leases, statutory
or regulatory obligations, bankers' acceptances, surety and appeal bonds,
government contracts, performance and return-of-money bonds and other
obligations of a similar nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (v) rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of Wireless or any of its Restricted Subsidiaries; (vi) Liens
(including extensions and renewals thereof) upon real or personal property
acquired
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after the Closing Date; provided that (a) such Lien is created solely for the
purpose of securing Indebtedness Incurred (1) to finance the cost (including the
cost of improvement or construction) of the item of property or assets subject
thereto and such Lien is created prior to, at the time of or within six months
after the later of the acquisition, the completion of construction or the
commencement of full operation of such property or (2) to refinance any
Indebtedness previously so secured, (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such cost and (c) any such Lien
shall not extend to or cover any property or assets other than such item of
property or assets and any improvements on such item; (vii) leases or subleases
granted to others that do not materially interfere with the ordinary course of
business of Wireless and its Restricted Subsidiaries, taken as a whole; (viii)
Liens encumbering property or assets under construction arising from progress or
partial payments by a customer of Wireless or its Restricted Subsidiaries
relating to such property or assets; (ix) any interest or title of a lessor in
the property subject to any Capitalized Lease or operating lease; (x) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases; (xi) Liens on property of, or on shares of stock or Indebtedness of, any
corporation existing at the time such corporation becomes, or becomes a part of,
any Restricted Subsidiary; (xii) Liens in favor of Wireless or any Restricted
Subsidiary; (xiii) Liens arising from the rendering of a final judgment or order
against Wireless or any Restricted Subsidiary of Wireless that does not give
rise to an Event of Default; (xiv) Liens securing reimbursement obligations with
respect to letters of credit that encumber documents and other property relating
to such letters of credit and the products and proceeds thereof; (xv) Liens in
favor of customs and revenue authorities arising as a matter of law to secure
payment of customs duties in connection with the importation of goods; (xvi)
Liens encumbering customary initial deposits and margin deposits, and other
Liens that are within the general parameters customary in the industry and
incurred in the ordinary course of business and in each case, secure
Indebtedness under Interest Rate Agreements and Currency Agreements and forward
contracts, options, future contracts, futures options or similar agreements or
arrangements designed to protect Wireless or any of its Restricted Subsidiaries
from fluctuations in the price of commodities; (xvii) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by Wireless or any of its Restricted Subsidiaries in
the ordinary course of business in accordance with the past practices of
Wireless and its Restricted Subsidiaries prior to the Closing Date; and (xviii)
Liens on or sales of receivables.
"Public Equity Offering" is defined to mean an underwritten primary public
offering of Common Stock of Wireless or PageMart pursuant to an effective
registration statement under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of Wireless or PageMart has been distributed by means of an
effective registration statement under the Securities Act or sales pursuant to
Rule 144 under the Securities Act.
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms or otherwise is (i) required to be redeemed
prior to the Stated Maturity of the Notes, (ii) redeemable at the option of the
holder of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Redeemable Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes Upon a Change of Control" covenants described below and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to Wireless' repurchase
of such Notes as are required to be repurchased pursuant to the "Limitation on
Asset Sales" and "Repurchase of Notes Upon a Change of Control" covenants
described below.
"Reorganization" means the merger of PageMart with PM Merger Corp., a
wholly owned subsidiary of Wireless, pursuant to an Agreement of Reorganization
and Plan of Merger dated as of December 5, 1994,
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among Wireless, PageMart and PM Merger Corp., pursuant to which PageMart became
a Wholly Owned Subsidiary of Wireless.
"Restricted Subsidiary" is defined to mean any Subsidiary of Wireless other
than an Unrestricted Subsidiary.
"Significant Subsidiary" is defined to mean, at any date of determination,
any Restricted Subsidiary of Wireless that, together with its Subsidiaries, (i)
for the most recent fiscal year of Wireless, accounted for more than 10% of the
consolidated revenues of Wireless and its Restricted Subsidiaries or (ii) as of
the end of such fiscal year, was the owner of more than 10% of the consolidated
assets of Wireless and its Restricted Subsidiaries, all as set forth on the most
recently available consolidated financial statements of Wireless for such fiscal
year.
"Specified Date" is defined to mean any Redemption Date, any date of
purchase for any purchase of Notes pursuant to the "Limitation on Asset Sales"
or "Repurchase of Notes upon a Change of Control" covenants described below or
any date on which the Notes first become due and payable after an event of
default.
"Stated Maturity" is defined to mean, (i) with respect to any debt
security, the date specified in such debt security as the fixed date on which
the final installment of principal of such debt security is due and payable and
(ii) with respect to any scheduled installment of principal of or interest on
any debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Subsidiary" is defined to mean, with respect to any Person, any
corporation, association or other business entity of which more than 50% of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Transaction Date" is defined to mean, with respect to the Incurrence of
any Indebtedness by Wireless or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" is defined to mean (i) any Subsidiary of Wireless
that at the time of determination shall be designated an Unrestricted Subsidiary
by the Board of Directors in the manner provided below and (ii) any Subsidiary
of an Unrestricted Subsidiary. The Board of Directors may designate any
Restricted Subsidiary of Wireless (including any newly acquired or newly formed
Subsidiary of Wireless) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of,
Wireless or any Restricted Subsidiary; provided that either (A) the Subsidiary
to be so designated has total assets of $1,000 or less or (B) if such Subsidiary
has assets greater than $1,000, that such designation would be permitted under
the "Limitation on Restricted Payments" covenant described below. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary of Wireless; provided that immediately after giving effect to such
designation (x) Wireless could Incur $1.00 of additional Indebtedness under the
first paragraph of the "Limitation on Indebtedness" covenant described below and
(y) no Default or Event of Default shall have occurred and be continuing. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Voting Stock" is defined to mean, with respect to any Person, Capital
Stock of any class or kind ordinarily having the power to vote for the election
of directors, managers or other voting members of the governing body of such
Person.
"Wholly Owned" is defined to mean, with respect to any Subsidiary of any
Person, such Subsidiary if all of the outstanding Common Stock or other similar
equity ownership interests (but not including Preferred Stock) in such
Subsidiary (other than any director's qualifying shares or Investments by
foreign nationals mandated by applicable law) is owned directly or indirectly by
such Person.
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COVENANTS
Limitation on Indebtedness
(a) Under the terms of the Indenture, Wireless will not, and will not
permit any of its Restricted Subsidiaries to, Incur any Indebtedness (other than
the Notes and Indebtedness existing on the Closing Date); provided that Wireless
or PageMart may Incur Indebtedness if, after giving effect to the Incurrence of
such Indebtedness and the receipt and application of the proceeds therefrom, the
Interest Coverage Ratio would be for the period beginning on the Closing Date
through October 19, 1995 greater than 1.50:1 and thereafter greater than 1.75:1.
All of Wireless' subsidiaries are Restricted Subsidiaries.
Notwithstanding the foregoing, Wireless and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness of Wireless or PageMart outstanding at any time in an aggregate
principal amount not to exceed $85 million, less any amount of Indebtedness
permanently repaid as provided under the "Limitation on Asset Sale" covenant
described below; provided that (A) such Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such Indebtedness is
issued, provides that no payments of principal of such Indebtedness by way of
sinking fund, mandatory redemption or otherwise (including defeasance) may be
made by Wireless or PageMart, as the case may be, at any time prior to the
Stated Maturity of the Notes and (B) the scheduled maturity of all principal of
such Indebtedness is beyond the Stated Maturity of the Notes; (ii) Indebtedness
to Wireless or any of its Wholly Owned Restricted Subsidiaries as long as such
Indebtedness continues to be owed to Wireless or any of its Wholly Owned
Restricted Subsidiaries; (iii) Indebtedness issued in exchange for, or the net
proceeds of which are used to refinance or refund, then outstanding
Indebtedness, other than Indebtedness Incurred under clause (i), (vii) or (ix)
of this paragraph, and any refinancings thereof in an amount not to exceed the
amount so refinanced or refunded (plus premiums, accrued interest, fees and
expenses); provided that Indebtedness the proceeds of which are used to
refinance or refund the Notes or Indebtedness that is pari passu with, or
subordinated in right of payment to, the Notes shall only be permitted under
this clause (iii) if (A) in case the Notes are refinanced in part or the
Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced or refunded; and provided further that in no event may
Indebtedness of Wireless be refinanced by means of any Indebtedness of any
Restricted Subsidiary of Wireless pursuant to this clause (iii) unless the new
Indebtedness could, at the time of the refinancing, have been Incurred by such
Restricted Subsidiary; (iv) Indebtedness (A) in respect of performance, surety
or appeal bonds provided in the ordinary course of business; (B) under Currency
Agreements and Interest Rate Agreements; provided that, in the case of Currency
Agreements that relate to other Indebtedness, such Currency Agreements do not
increase the Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder; and (C) arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of Wireless or any of its Restricted
Subsidiaries pursuant to such agreements, in any case Incurred in connection
with the disposition of any business, assets or Restricted Subsidiary of
Wireless (other than Guarantees of Indebtedness Incurred by any Person acquiring
all or any portion of such business, assets or Restricted Subsidiary of Wireless
for the purpose of financing such acquisition), in a principal amount not to
exceed the gross proceeds actually received by Wireless or any Restricted
Subsidiary in connection with such disposition; (v) Indebtedness under letters
of credit and bankers' acceptances issued in the ordinary course of business;
(vi) Acquired Indebtedness; provided that, with respect to this clause (vi),
after giving effect to the
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Incurrence thereof, Wireless' Interest Coverage Ratio is not less than it was
immediately prior to the Incurrence of such Acquired Indebtedness; (vii)
Indebtedness, in an amount not to exceed $2 million at any one time outstanding,
Incurred by Wireless in connection with the purchase, redemption, acquisition,
cancellation or other retirement for value of shares of Capital Stock of
Wireless, PageMart or any other Restricted Subsidiary options on any such shares
or related stock appreciation rights or similar securities held by officers or
employees or former officers or employees (or their estates or beneficiaries
under their estates), upon death, disability, retirement, termination of
employment or pursuant to any agreement under which such shares of stock or
related rights were issued; provided that (A) such Indebtedness, by its terms or
by the terms of any agreement or instrument pursuant to which such Indebtedness
is issued, is expressly made subordinate in right of payment to the Notes, (B)
such Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such Indebtedness is issued, provides that no payments of
principal of such Indebtedness by way of sinking fund, mandatory redemption or
otherwise (including defeasance) may be made by Wireless at any time prior to
the Stated Maturity of the Notes and (C) the scheduled maturity of all principal
of such Indebtedness is beyond the Stated Maturity of the Notes; (viii)
Indebtedness to the extent such Indebtedness is secured by Liens permitted under
clause (i) of the second paragraph of the "Limitation on Liens" covenant
described below; and (ix) Indebtedness of Wireless under revolving credit or
working capital facilities in an aggregate principal amount outstanding at any
time not to exceed $50 million, less any amount of Indebtedness permanently
repaid as provided under the "Limitation on Asset Sales" covenant described
below; provided that such Indebtedness need not be Incurred under revolving
credit or working capital facilities to the extent the proceeds of such
Indebtedness are necessary to pay, and are used to pay, interest due to the
Holders of the Notes.
(b) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included. For purposes
of determining compliance with this "Limitation on Indebtedness" covenant, (A)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described in the above clauses, Wireless, in its sole
discretion, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses and (B)
the amount of Indebtedness issued at a price that is less than the principal
amount thereof shall be equal to the amount of the liability in respect thereof
determined in conformity with GAAP and (C) any Liens granted pursuant to the
equal and ratable provisions referred to in the first paragraph of the
"Limitation on Liens" covenant shall not be treated as Indebtedness.
Limitation on Restricted Payments
So long as any of the Notes are outstanding, Wireless will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or
pay any dividend or make any distribution on its Capital Stock (other than
dividends or distributions payable solely in shares of its or such Restricted
Subsidiary's Capital Stock (other than Redeemable Stock) of the same class held
by such holders or in options, warrants or other rights to acquire such shares
of Capital Stock) held by Persons other than Wireless or any of its Wholly Owned
Restricted Subsidiaries, (ii) purchase, redeem, retire or otherwise acquire for
value any shares of Capital Stock of Wireless or any Restricted Subsidiary
(including options, warrants or other rights to acquire such shares of Capital
Stock) held by Persons other than Wireless or any of its Wholly Owned Restricted
Subsidiaries, (iii) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance, or other acquisition
or retirement for value, of Indebtedness of Wireless that is subordinated in
right of payment to the Notes, or (iv) make any Investment in any Affiliate of
Wireless (other than Wireless or a Restricted Subsidiary of Wireless) or any
Unrestricted Subsidiary (such payments or any other actions described in clauses
(i) through (iv) being collectively "Restricted Payments") if, at the time of,
and after giving effect to, the proposed Restricted Payment: (A) a Default or
Event of Default shall have occurred and be continuing, (B) Wireless could not
Incur at least $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant or (C) the aggregate amount expended for
all Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a Board Resolution) after the
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date of the Indenture shall exceed the sum of (1) 50% of the aggregate amount of
the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net
Income is a loss, minus 100% of such amount) (determined by excluding income
resulting from transfers of assets received by Wireless or a Restricted
Subsidiary from an Unrestricted Subsidiary) accrued on a cumulative basis during
the period (taken as one accounting period) beginning on the first day of the
month immediately following the Closing Date and ending on the last day of the
last fiscal quarter preceding the Transaction Date plus (2) the aggregate net
proceeds (including the fair market value of non-cash proceeds as determined in
good faith by the Board of Directors) received by Wireless from the issuance and
sale permitted by the Indenture of its Capital Stock (other than Redeemable
Stock) to a Person who is not a Subsidiary of Wireless, including an issuance or
sale permitted by the Indenture for cash or other property upon the conversion
of any Indebtedness of Wireless subsequent to the Closing Date, or from the
issuance of any options, warrants or other rights to acquire Capital Stock of
Wireless (in each case, exclusive of any Redeemable Stock or any options,
warrants or other rights that are redeemable at the option of the holder, or are
required to be redeemed, prior to the Stated Maturity of the Notes) plus (3) an
amount equal to the net reduction in Investments in Unrestricted Subsidiaries
resulting from payments of interest on Indebtedness, dividends, repayments of
loans or advances, or other transfers of assets, in each case to Wireless or any
Restricted Subsidiary from Unrestricted Subsidiaries, or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investments"), not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made by Wireless
and any Restricted Subsidiary in such Unrestricted Subsidiary.
The foregoing provision shall not take into account, and shall not be
violated by reason of: (i) the payment of any dividend within 60 days after the
date of declaration thereof if, at said date of declaration, such payment would
comply with the foregoing paragraph; (ii) the redemption, repurchase, defeasance
or other acquisition or retirement for value of Indebtedness that is
subordinated in right of payment to the Notes including premium, if any, and
accrued and unpaid interest, with the proceeds of, or in exchange for,
Indebtedness Incurred under clause (iii) of the second paragraph of part (a) of
the "Limitation on Indebtedness" covenant; (iii) the declaration or payment of
dividends on the Common Stock of Wireless or PageMart, as the case may be,
following a Public Equity Offering of such Common Stock, of up to 6% per annum
of the net proceeds received by Wireless or PageMart, as the case may be, in
such Public Equity Offering; (iv) the repurchase, redemption or other
acquisition of Capital Stock of Wireless in exchange for, or out of the proceeds
of a substantially concurrent offering of, shares of Capital Stock (other than
Redeemable Stock) of Wireless; (v) the acquisition of Indebtedness of Wireless
which is subordinated in right of payment to the Notes in exchange for, or out
of the proceeds of, a substantially concurrent offering of, shares of the
Capital Stock of Wireless (other than Redeemable Stock); (vi) the repurchase of
Warrants pursuant to a Repurchase Offer (as defined in the Warrant Agreement);
(vii) the making of up to an aggregate amount of $5 million of Investments in
Unrestricted Subsidiaries; (viii) the purchase, redemption, acquisition,
cancellation or other retirement for value of shares of Capital Stock of
Wireless, PageMart or any other Restricted Subsidiary, options on any such
shares or related stock appreciation rights or similar securities held by
officers or employees or former officers or employees (or their estates or
beneficiaries under their estates), upon death, disability, retirement,
termination of employment or pursuant to any agreement under which such shares
of stock or related rights were issued; provided that the aggregate cash
consideration paid for such purchase, redemption, acquisition, cancellation or
other retirement of such shares of Capital Stock or related rights after the
Closing Date does not exceed an aggregate amount of $2 million and that any
consideration in excess of such $2 million is in the form of Indebtedness that
would be permitted to be Incurred under clause (vii) of the second paragraph of
the "Limitation on Indebtedness" covenant; (ix) payments or distributions
pursuant to or in connection with a consolidation, merger or transfer of assets
that complies with the provisions of the Indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of Wireless; (x) the purchase, redemption, acquisition, cancellation or
other retirement for value of shares of Capital Stock of Wireless, PageMart or
any other Restricted Subsidiary to the extent necessary, in the judgment of the
Board of Directors, to prevent the loss or secure the renewal or reinstatement
of any license or franchise held by Wireless or any of its Subsidiaries from any
governmental agency; and (xi) the repurchase of Non-Voting Common Stock pursuant
to a special redemption of the Units; provided that,
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except in the case of clauses (i) and (iv), no Default or Event of Default shall
have occurred and be continuing or occur as a consequence of the actions or
payments set forth therein.
Notwithstanding the foregoing, in the event of an issuance of Capital Stock
of Wireless and (1) the repurchase, redemption or other acquisition of Capital
Stock out of the proceeds of such issuance or (2) the acquisition of Notes or
Indebtedness that is subordinated in right of payment to the Notes out of the
proceeds of such issuance, as permitted by clauses (iv) and (v) above, then, in
calculating whether the conditions of clause (C) of the first paragraph of this
"Limitation on Restricted Payments" covenant have been met with respect to any
subsequent Restricted Payments, both the proceeds of such issuance and the
application of such proceeds shall be included under such clause (C).
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
So long as any of the Notes are outstanding, Wireless will not, and will
not permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Restricted Subsidiary to (i) pay dividends or make any
other distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by Wireless or any other Restricted Subsidiary, (ii)
pay any Indebtedness owed to Wireless or any other Restricted Subsidiary, (iii)
make loans or advances to Wireless or any other Restricted Subsidiary or (iv)
transfer any of its property or assets to Wireless or any other Restricted
Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture, the 12 1/4%
Indenture, the Vendor Purchase Financing Agreement or any other agreements in
effect on the Closing Date, and any extensions, refinancings, renewals or
replacements of such agreements; provided that the encumbrances and restrictions
in any such extensions, refinancings, renewals or replacements are no less
favorable in any material respect to the Holders than those encumbrances or
restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by Wireless or any Restricted Subsidiary and existing at the time of
such acquisition, which encumbrances or restrictions are not applicable to any
Person or the property or assets of any Person other than such Person or the
property or assets of such Person so acquired; (iv) in the case of clause (iv)
of the first paragraph of this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of Wireless or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of Wireless or any Restricted Subsidiary in any
manner material to Wireless or any Restricted Subsidiary; or (v) with respect to
a Restricted Subsidiary and imposed pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary. Nothing
contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent Wireless or any
Restricted Subsidiary from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of Wireless or
any of its Restricted Subsidiaries that secure Indebtedness of Wireless or any
of its Restricted Subsidiaries.
Limitation on the Issuance of Capital Stock of Restricted Subsidiaries
Under the terms of the Indenture, Wireless will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell any shares of its Capital
Stock (including options, warrants or other rights to purchase shares of such
Capital Stock) except (i) to Wireless or another Restricted Subsidiary that is a
Wholly Owned Subsidiary of Wireless, (ii) issuances or sales to foreign
nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to the
extent required by applicable law, (iii) if, immediately after giving effect to
such issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary
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or (iv) if the Net Cash Proceeds from such issuance or sale are applied, to the
extent required to be applied, pursuant to the "Limitation on Asset Sales"
covenant described below.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
Wireless will not permit any Restricted Subsidiary, directly or indirectly,
to Guarantee any Indebtedness of Wireless which is pari passu with or
subordinate in right of payment to the Notes ("Guaranteed Indebtedness"), unless
(i) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a Guarantee (a "Subsidiary
Guarantee") of payment of the Notes by such Restricted Subsidiary and (ii) such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against Wireless or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee; provided that this paragraph shall not be applicable to
any Guarantee of any Restricted Subsidiary that (x) existed at the time such
Person became a Restricted Subsidiary and (y) was not Incurred in connection
with, or in contemplation of, such Person becoming a Restricted Subsidiary. If
the Guaranteed Indebtedness is (A) pari passu with the Notes, then the Guarantee
of such Guaranteed Indebtedness shall be pari passu with, or subordinated to,
the Subsidiary Guarantee or (B) subordinated to the Notes, then the Guarantee of
such Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee
at least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of Wireless, of all of Wireless' and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
Under the terms of the Indenture, Wireless will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, enter into, renew or
extend any transaction (including, without limitation, the purchase, sale, lease
or exchange of property or assets, or the rendering of any service) with any
holder (or any Affiliate of such holder) of 5% or more of any class of Capital
Stock of Wireless or with any Affiliate of Wireless or any Restricted
Subsidiary, except upon fair and reasonable terms no less favorable to Wireless
or such Restricted Subsidiary than could be obtained, at the time of such
transaction or at the time of the execution of the agreement providing therefor,
in a comparable arm's-length transaction with a Person that is not such a holder
or an Affiliate.
The foregoing limitation does not limit, and shall not apply to: (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which Wireless or a Restricted Subsidiary delivers
to the Trustee a written opinion of a nationally recognized investment banking
firm stating that the transaction is fair to Wireless or such Restricted
Subsidiary from a financial point of view; (ii) any transaction between Wireless
and any of its Wholly Owned Restricted Subsidiaries or between Wholly Owned
Restricted Subsidiaries of Wireless; (iii) the payment of reasonable and
customary regular fees to directors of Wireless who are not employees of
Wireless; (iv) any payments or other transactions pursuant to any tax-sharing
agreement between Wireless and any other Person with which Wireless is required
or permitted to file a consolidated tax return or with which Wireless is or
could be part of a consolidated group for tax purposes; (v) the payment of
amounts to MS&Co. or its Affiliates pursuant to underwriting or placement
agreements; (vi) any loans or advances to officers or employees of Wireless or
any Restricted Subsidiary in the ordinary course of business; (vii) any
Restricted Payments not prohibited by the "Limitation on Restricted Payments"
covenant; or (viii) the sale, lease, transfer or other disposition by Wireless
or any Restricted Subsidiary of Capital Stock or assets of any Unrestricted
Subsidiary having a fair market value of less than $5 million as determined by
the Board of Directors.
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Limitation on Liens
Under the terms of the Indenture, Wireless will not, and will not permit
any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien
on any of its assets or properties of any character (including, without
limitation, licenses), or any shares of Capital Stock or Indebtedness of any
Restricted Subsidiary, without making effective provision for all of the Notes
and all other amounts due under the Indenture to be directly secured equally and
ratably with (or prior to) the obligation or liability secured by such Lien
unless, after giving effect thereto, the aggregate amount of any Indebtedness so
secured does not exceed 10% of Adjusted Consolidated Net Tangible Assets.
The foregoing limitation does not apply to (i) purchase money Liens upon or
in inventory or equipment acquired or held by Wireless or any of its Restricted
Subsidiaries taken or retained by the seller of such inventory or equipment to
secure all or a part of the purchase price therefor; provided that such Liens do
not extend to or cover any property or assets of Wireless or any Restricted
Subsidiary other than the inventory or equipment acquired; (ii) other Liens
existing on the Closing Date; (iii) Liens granted after the Closing Date on any
assets or Capital Stock of Wireless or its Restricted Subsidiaries created in
favor of the Holders; (iv) Liens with respect to Acquired Indebtedness permitted
under the "Limitation on Indebtedness" covenant and permitted refinancings
thereof; provided that such Liens do not extend to or cover any property or
assets of Wireless or any Restricted Subsidiary other than the property or
assets acquired; (v) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to Wireless or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to Wireless or such other Restricted
Subsidiary; (vi) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness and which is permitted to be Incurred under clause (i) or
(iii) of the second paragraph of the "Limitation on Indebtedness" covenant;
provided that such Liens do not extend to or cover any property or assets of
Wireless or any Restricted Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (vii) Permitted Liens; (viii) Liens not
otherwise permitted pursuant to clauses (i) through (vii) above to secure
Indebtedness of Wireless Incurred under clause (ix) of the second paragraph of
the "Limitation on Indebtedness" covenant; provided that the aggregate amount of
Indebtedness secured by Liens permitted under this clause (viii) shall not at
any time exceed $50 million; or (ix) Liens securing Indebtedness which is
Incurred to refinance the 12 1/4% Notes and which is permitted to be Incurred
under clause (iii) of the second paragraph of the "Limitation on Indebtedness"
covenant; provided that such Liens do not extend to or cover the Nationwide
Narrowband License or any of the Regional Narrowband Licenses.
Limitation on Asset Sales
Under the terms of the Indenture, in the event and to the extent that the
Net Cash Proceeds received by the Company or any of its Restricted Subsidiaries
from one or more Asset Sales occurring on or after the Closing Date in any
period of 12 consecutive months exceed 10% of Adjusted Consolidated Net Tangible
Assets in any one fiscal year (determined as of the date closest to the
commencement of such 12-month period for which a consolidated balance sheet of
Wireless and its Subsidiaries has been prepared), then Wireless shall or shall
cause the relevant Restricted Subsidiary to (i) within 12 months after the date
Net Cash Proceeds so received exceed 10% of Adjusted Consolidated Net Tangible
Assets in any one fiscal year (determined as of the date closest to the
commencement of such 12-month period for which a balance sheet of Wireless and
its Subsidiaries has been prepared) (A) apply an amount equal to such excess Net
Cash Proceeds to permanently repay unsubordinated Indebtedness of Wireless or of
any Restricted Subsidiary providing a Subsidiary Guarantee pursuant to the
"Limitation on Issuances of Guarantees by Restricted Subsidiaries" covenant
described above or Indebtedness of any other Restricted Subsidiary, in each case
owing to a Person other than Wireless or any of its Restricted Subsidiaries or
(B) invest an equal amount, or the amount not so applied pursuant to clause (A)
(or enter into a definitive agreement committing to so invest within 12 months
after the date of such agreement), in property or assets of a nature or type or
that are used in a business (or in a company having property and assets of a
nature or type, or engaged in a business) similar or related to the nature or
type of the property and assets of, or the business of, Wireless and its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply (no later than
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the end of the 12-month period referred to in clause (i)) such excess Net Cash
Proceeds (to the extent not applied pursuant to clause (i)) as provided in the
following paragraphs of this "Limitation on Asset Sales" covenant. The amount of
such excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
below) totals at least $5 million, Wireless must, not later than the fifteenth
Business Day of such month, make an offer (an "Excess Proceeds Offer") to
purchase from the Holders on a pro rata basis an aggregate Accreted Value of
Notes equal to the Excess Proceeds on such date, at a purchase price equal to
101% of the Accreted Value of the Notes, plus, in each case, accrued interest
(if any) to the date of purchase (the "Excess Proceeds Payment").
Wireless shall commence an Excess Proceeds Offer by mailing a notice to the
Trustee and each Holder stating: (i) that the Excess Proceeds Offer is being
made pursuant to this "Limitation on Asset Sales" covenant and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Excess Proceeds Payment Date"); (iii) that any Note not tendered will
continue to accrue interest pursuant to its terms; (iv) that, unless Wireless
defaults in the payment of the Excess Proceeds Payment, any Note accepted for
payment pursuant to the Excess Proceeds Offer shall cease to accrue interest on
and after the Excess Proceeds Payment Date; (v) that Holders electing to have a
Note purchased pursuant to the Excess Proceeds Offer will be required to
surrender the Note, together with the form entitled "Option of the Holder to
Elect Purchase" on the reverse side of the Note completed, to the Paying Agent
at the address specified in the notice prior to the close of business on the
Business Day immediately preceding the Excess Proceeds Payment Date; (vi) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding the Excess Proceeds Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount at maturity to the unpurchased portion of the Notes
surrendered; provided that each Note purchased and each new Note issued shall be
in a principal amount at maturity of $1,000 or integral multiples thereof.
On the Excess Proceeds Payment Date, Wireless shall (i) accept for payment
on a pro rata basis Notes or portions thereof tendered pursuant to the Excess
Proceeds Offer; (ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all Notes or portions thereof so accepted; and (iii) deliver,
or cause to be delivered, to the Trustee all Notes or portions thereof so
accepted together with an Officers' Certificate specifying the Notes or portions
thereof accepted for payment by Wireless. The Paying Agent shall promptly mail
to the Holders of Notes so accepted payment in an amount equal to the purchase
price, and the Trustee shall promptly authenticate and mail to such Holders a
new Note equal in principal amount at maturity to any unpurchased portion of the
Note surrendered; provided that each Note purchased and each new Note issued
shall be in a principal amount at maturity of $1,000 or integral multiples
thereof. Wireless will publicly announce the results of the Excess Proceeds
Offer as soon as practicable after the Excess Proceeds Payment Date. For
purposes of this "Limitation on Asset Sales" covenant, the Trustee shall act as
the Paying Agent.
Wireless will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that such Excess Proceeds are received
by Wireless under this "Limitation on Asset Sales" covenant and Wireless is
required to repurchase Notes as described above and Wireless may modify any of
the foregoing provisions of this "Limitation on Asset Sales" covenant to the
extent it is advised by independent counsel that such modification is necessary
or appropriate in order to ensure such compliance.
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REPORTS
At all times from and after the earlier of (i) the date of the commencement
of the Exchange Offer and (ii) the date that is six months after the Closing
Date, in either case, whether or not Wireless is then required to file reports
with the Commission, Wireless shall file with the Commission all such reports
and other information as would be required to be filed with the Commission by
the Exchange Act. Wireless shall supply the Trustee and each holder of Notes, or
shall supply to the Trustee for forwarding to each Holder of Notes, without cost
to such Holder, copies of such reports or other information. In addition, at all
times prior to the earlier of the date of the Exchange Offer or the date that is
six months after the Closing Date, as applicable, Wireless shall, at its cost,
deliver to each Holder of the Notes quarterly and annual reports substantially
equivalent to those which would be required by the Exchange Act.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the
right to require the repurchase of its Notes by Wireless in cash pursuant to the
offer described below (the "Change of Control Offer") at a purchase price equal
to 101% of the Accreted Value thereof, plus accrued interest (if any) to the
date of purchase (the "Change of Control Payment"). Prior to the mailing of the
notice to Holders provided for in the succeeding paragraph, but in any event
within 30 days following any Change of Control, Wireless covenants to (i) repay
in full all indebtedness of Wireless that would prohibit the repurchase of the
Notes as provided for in the succeeding paragraph or (ii) obtain any requisite
consents under instruments governing any such indebtedness of Wireless to permit
the repurchase of the Notes as provided for in the succeeding paragraph.
Wireless shall first comply with the covenant in the preceding sentence before
it shall be required to repurchase Notes pursuant to the "Repurchase of Notes
upon a Change of Control" covenant.
Within 30 days of the Change of Control, Wireless shall mail a notice to
the Trustee and each Holder stating: (i) that a Change of Control has occurred,
that the Change of Control Offer is being made pursuant to this "Repurchase of
Notes Upon a Change of Control" covenant and that all Notes validly tendered
will be accepted for payment; (ii) the purchase price and the date of purchase
(which shall be a Business Day no earlier than 30 days nor later than 60 days
from the date such notice is mailed) (the "Change of Control Payment Date");
(iii) that any Note not tendered will continue to accrue interest pursuant to
its terms; (iv) that, unless Wireless defaults in the payment of the Change of
Control Payment, any Note accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest on and after the Change of Control Payment
Date; (v) that Holders electing to have any Note or portion thereof purchased
pursuant to the Change of Control Offer will be required to surrender such Note,
together with the form entitled "Option of the Holder to Elect Purchase" on the
reverse side of such Note completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
immediately preceding the Change of Control Payment Date; (vi) that Holders will
be entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the third Business Day immediately preceding the
Change of Control Payment Date, a telegram, telex, facsimile transmission or
letter setting forth the name of such Holder, the principal amount of Notes
delivered for purchase and a statement that such Holder is withdrawing his
election to have such Notes purchased; and (vii) that Holders whose Notes are
being purchased only in part will be issued new Notes equal in principal amount
at maturity to the unpurchased portion of the Notes surrendered; provided that
each Note purchased and each new Note issued shall be in a principal amount at
maturity of $1,000 or integral multiples thereof.
On the Change of Control Payment Date, Wireless shall: (i) accept for
payment Notes or portions thereof tendered pursuant to the Change of Control
Offer; (ii) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted; and (iii) deliver, or cause
to be delivered, to the Trustee, all Notes or portions thereof so accepted
together with an Officers' Certificate specifying the Notes or portions thereof
accepted for payment by Wireless. The Paying Agent shall promptly mail, to the
Holders of Notes so accepted, payment in an amount equal to the purchase price,
and the Trustee shall promptly authenticate and mail to such Holders a new Note
equal in principal amount at maturity to any unpurchased portion of the Notes
surrendered; provided that each Note purchased and each new Note issued shall be
in a principal amount at maturity of $1,000 or integral multiples thereof.
Wireless will publicly
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announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date. For purposes of the "Repurchase of
Notes Upon a Change of Control" covenant, the Trustee shall act as Paying Agent.
Wireless will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in the event that a Change of Control occurs under
the "Repurchase of Notes Upon a Change of Control" covenant and Wireless is
required to repurchase the Notes as described above and Wireless may modify any
of the foregoing provisions of this "Repurchase of Notes upon a Change of
Control" covenant to the extent it is advised by independent counsel that such
modification is necessary or appropriate in order to ensure such compliance.
Certain of the covenants under the Indenture impose restrictions on the
Company that reduce the likelihood of the occurrence of a highly leveraged
transaction. These covenants include a limitation on the incurrence of
indebtedness by Wireless and its Restricted Subsidiaries; a limitation on
Restricted Payments, which restricts the ability of Wireless and its Restricted
Subsidiaries to pay dividends and make other payments in respect of capital
stock; and a limitation on Asset Sales, which requires the proceeds of certain
asset sales to be applied towards the payment of debt or the making of permitted
investments, and requires Wireless to make an offer to repurchase the Notes to
the extent of any excess proceeds. See "-- Covenants." The Indenture does not
contain any provisions that afford protection to the Holders in the event of a
highly leveraged transaction. A highly leveraged transaction may not result in a
Change of Control as defined in the Indenture.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days; (c)
Wireless defaults in the performance of or breaches any other covenant or
agreement of Wireless in the Indenture or under the Notes and such default or
breach continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
Notes; (d) there occurs with respect to any issue or issues of Indebtedness of
Wireless or any of its Significant Subsidiaries having an outstanding principal
amount of $5 million or more in the aggregate for all such issues of all such
Persons, whether such Indebtedness now exists or shall hereafter be created, an
event of default that has caused the holder thereof to declare such Indebtedness
to be due and payable prior to its Stated Maturity and such Indebtedness has not
been discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration; (e) any final judgment or order (not
covered by insurance) for the payment of money in excess of $5 million in the
aggregate for all such final judgments or orders against all such Persons
(treating any deductibles, self-insurance or retention as not so covered) shall
be rendered against Wireless or any of its Significant Subsidiaries and shall
not be paid or discharged, and there shall be any period of 60 consecutive days
following entry of the final judgment or order that causes the aggregate amount
for all such final judgments or orders outstanding and not paid or discharged
against all such Persons to exceed $5 million during which a stay of enforcement
of such final judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; (f) a court having jurisdiction in the premises enters a
decree or order for (A) relief in respect of Wireless or any of its Significant
Subsidiaries in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, (B) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
Wireless or any of its Significant Subsidiaries or for all or substantially all
of the property and assets of Wireless or any of its Significant Subsidiaries or
(C) the winding up or liquidation of the affairs of Wireless or any of its
Significant Subsidiaries and, in each case, such decree or order shall remain
unstayed and in effect for a period of 60 consecutive days; (g) Wireless or any
of its Significant Subsidiaries (A) commences a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or consents to the entry of an order for relief in an involuntary case
under any such law, (B) consents to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of Wireless or
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any of its Significant Subsidiaries or for all or substantially all of the
property and assets of Wireless or any of its Significant Subsidiaries or (C)
effects any general assignment for the benefit of creditors; (h) Wireless and/or
one or more of its Significant Subsidiaries fails to make at the final (but not
any interim) fixed maturity of any Indebtedness principal payments aggregating
$5 million or more and all such defaulted payments shall not have been made,
waived or extended within 30 days of the payment default that causes the amount
to exceed $5 million; or (i) the nonpayment or acceleration upon default of any
three or more items of Indebtedness that would constitute at the time of such
nonpayments, but for the individual amounts of such Indebtedness, an Event of
Default under clause (d) or clause (h) above, or both, and which items of
Indebtedness aggregate $5 million or more.
If an Event of Default (other than an Event of Default specified in clause
(f) or (g) above that occurs with respect to Wireless) occurs and is continuing
under the Indenture, the Trustee or the Holders of at least 25% in aggregate
principal amount at maturity of the Notes, then outstanding, by written notice
to Wireless (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the Accreted Value
of, premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such Accreted Value of, premium, if
any, and accrued interest shall be immediately due and payable. In the event of
a declaration of acceleration because an Event of Default set forth in clause
(d), (h) or (i) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (d), (h) or (i)
shall be remedied or cured by Wireless and/or the relevant Significant
Subsidiaries or waived by the holders of the relevant Indebtedness within 60
days after the declaration of acceleration with respect thereto. If an Event of
Default specified in clause (f) or (g) above occurs with respect to Wireless,
the Accreted Value of, premium, if any, and accrued interest on the Notes then
outstanding shall ipso facto become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any Holder. The
Holders of at least a majority in principal amount of the outstanding Notes by
written notice to Wireless and to the Trustee, may waive all past defaults and
rescind and annul a declaration of acceleration and its consequences if (i)
Wireless has paid or deposited (a) all sums paid or advanced by the Trustee
under the Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, (b) all overdue interest on all
Notes, (c) the principal of and premium, if any, on any Notes that have become
due otherwise than by such declaration or occurrence of acceleration and
interest thereon at the rate prescribed therefor by such Notes, and (d) to the
extent that payment of such interest is lawful, interest upon overdue interest
at the rate prescribed therefor by such Notes, (ii) all existing Events of
Default, other than the nonpayment of the Accreted Value of, premium, if any,
and interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived and (iii) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction. For
information as to the waiver of defaults, see "-- Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
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<PAGE> 91
The Indenture requires certain officers of Wireless to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of Wireless and its Restricted
Subsidiaries and Wireless' and its Restricted Subsidiaries' performance under
the Indenture and that Wireless has fulfilled all obligations thereunder, or, if
there has been a default in the fulfillment of any such obligation, specifying
each such default and the nature and status thereof. Wireless will also be
obligated to notify the Trustee of any default or defaults in the performance of
any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Wireless shall not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person (other than PageMart or a Wholly
Owned Restricted Subsidiary of Wireless with a positive net worth; provided
that, in connection with any such merger of Wireless with PageMart or a Wholly
Owned Restricted Subsidiary of Wireless, no consideration (other than Common
Stock in the surviving Person or Wireless) shall be issued or distributed to the
stockholders of Wireless) or permit any Person to merge with or into Wireless
unless: (i) Wireless shall be the continuing Person, or the Person (if other
than Wireless) formed by such consolidation or into which Wireless is merged or
that acquired or leased such property and assets of Wireless shall be a
corporation organized and validly existing under the laws of the United States
of America or any jurisdiction thereof and shall expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, all of the
obligations of Wireless on all of the Notes and under the Indenture; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis, (A) Wireless or any Person
becoming the successor obligor of the Notes, as the case may be, shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
Wireless immediately prior to such transaction or (B) the Interest Coverage
Ratio of Wireless or any Person becoming the successor obligor of the Notes, as
the case may be, is at least equal to the lesser of (I) 3.00:1 and (II) the
Interest Coverage Ratio of Wireless immediately prior to such transaction; and
(iv) Wireless delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clause (iii)) and Opinion
of Counsel, in each case stating that such consolidation, merger or transfer and
such supplemental indenture complies with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with; provided, however, that clause (iii) above does not apply if, in the good
faith determination of the Board of Directors of Wireless, whose determination
shall be evidenced by a Board Resolution, the principal purpose of such
transaction is to change the state of incorporation of Wireless; and provided
further that any such transaction shall not have as one of its purposes the
evasion of the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture provides that Wireless will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) Wireless has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) Wireless has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
Wireless' exercise of its option under this "Defeasance" provision and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax
91
<PAGE> 92
law after the date of the Indenture such that a ruling is no longer required or
(y) a ruling directed to the Trustee received from the Internal Revenue Service
to the same effect as the aforementioned Opinion of Counsel and (ii) an Opinion
of Counsel to the effect that the creation of the defeasance trust does not
violate the Investment Company Act of 1940 and after the passage of 123 days
following the deposit, the trust fund will not be subject to the effect of
Section 547 of the United States Bankruptcy Code or Section 15 of the New York
Debtor and Creditor Law, (C) immediately after giving effect to such deposit on
a pro forma basis, no Event of Default, or event that after the giving of notice
or lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending on the
123rd day after the date of such deposit, and such deposit shall not result in a
breach or violation of, or constitute a default under, any other agreement or
instrument to which Wireless is a party or by which Wireless is bound, and (D)
if at such time the Notes are listed on a national securities exchange, Wireless
has delivered to the Trustee an Opinion of Counsel to the effect that the Notes
will not be delisted as a result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clause (iii) under "Events of Default" with respect to such covenants and
clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets," and
clauses (d), (e), (h) and (i) under "Events of Default" shall be deemed not to
be Events of Default, upon, among other things, the deposit with the Trustee, in
trust, of money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, the satisfaction of
the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by Wireless to the Trustee of an Opinion of Counsel
to the effect that, among other things, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such deposit and
defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
Defeasance and Certain Other Events of Default. In the event Wireless
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, Wireless will remain
liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by Wireless and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal amount of, or premium, if
any, or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
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<PAGE> 93
NO PERSONAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of Wireless in the Indenture, or in any of the
Notes or because of the creation of any Indebtedness represented thereby, shall
be had against any incorporator, shareholder, officer, director, employee or
controlling person of Wireless or of any successor Person thereof. Each Holder,
by acceptance of the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of Wireless, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if its acquires any
conflicting interest, it must eliminate such conflict or resign.
The Trustee is the trustee under the 12 1/4% Notes.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement, or other employee
benefit plan ("Plan") subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") should consider the fiduciary
standards under ERISA in the context of the Plan's particular circumstances
before authorizing an investment of a portion of such Plan's assets in the
Notes. Accordingly, such fiduciary should consider (i) whether the investment
satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA,
(ii) whether the investment is in accordance with the documents and instruments
governing the Plan as required by Section 404(a)(1)(D) of ERISA, and (iii)
whether the investment is prudent under ERISA.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA, and the corresponding provisions of the
Code prohibit a wide range of transactions involving the assets of a Plan or a
plan subject to Section 4975 of the Code (hereinafter a Plan and such Plans are
collectively referred to as an "ERISA Plan") and persons who have certain
specified relationships to the ERISA Plan ("parties in interest" within the
meaning of ERISA, "disqualified persons" within the meaning of the Code). A
prohibited transaction described in Section 406 of ERISA or Section 4975 of the
Code could arise if Wireless were, or were to become, a party in interest or a
disqualified person with respect to an ERISA Plan purchasing the Notes. Certain
exemptions from the prohibited transaction rules could be applicable to the
purchase of the Notes by an ERISA Plan depending on the type and circumstances
of the fiduciary of the ERISA Plan making the decision to acquire the Notes.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 90-1, regarding investments by insurance company pooled separate
accounts; PTCE 91-38, regarding investments by bank collective investment funds;
or PTCE 84-14, regarding transactions effected by a qualified professional asset
manager. Thus, a fiduciary of an ERISA Plan considering an investment in the
Notes also should consider whether the acquisition or the continued holding of
the Notes might constitute or give rise to a non-exempt prohibited transaction.
No ERISA Plan with respect to which Wireless is a party in interest or a
disqualified person may purchase the Notes, unless a statutory or administrative
exemption is available.
Certain employee benefit plans, such as governmental plans and church plans
(if no election has been made under Section 410(d) of the Code), are not subject
to the restrictions of ERISA, and assets of such Plans may be invested in the
Notes without regard to the ERISA considerations described above. The investment
in the Notes by such employee benefit plans may, however, be subject to other
applicable federal
93
<PAGE> 94
and state laws, which should be carefully considered by such employee benefit
plans before investing in the Notes.
The Department of Labor (the "DOL") has issued final regulations (the
"Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under the Regulations, if an ERISA Plan acquires an equity interest in an
entity, which interest is neither a "publicly offered security" nor a security
issued by an investment company registered under the Investment Company Act of
1940, as amended, the ERISA Plan's assets would include, for purposes of the
fiduciary responsibility provisions of ERISA, both the equity interest and an
undivided interest in each of the entity's underlying assets unless one of
certain specified exceptions applies. One such exception is the "operating
company" exception. An entity will qualify as an "operating company" if it is
primarily engaged, directly or through a majority owned subsidiary or
subsidiaries, in the production or sale of a product or service other than the
investment of capital. Wireless has determined that it qualifies as an
"operating company" within the meaning of the Regulations. Accordingly, Wireless
believes that an investment by an ERISA Plan in the Notes should not cause any
of the underlying assets of Wireless to be "plan assets" within the meaning of
the Regulations.
The Regulations define an "equity interest" as "any interest in an entity
other than an instrument that is treated as indebtedness under applicable local
law and which has no substantial equity features." Wireless believes that the
Notes should be treated as indebtedness under New York law, which Wireless
believes is the "applicable local law" for purposes of the Regulations. In the
preamble to the Regulations, the DOL has stated that "whether any particular
investment has substantial equity features is an inherently factual question
that must be resolved on a case by case basis" and that in making such
determination "it would be appropriate . . . to take into account whether the
equity features of an instrument are such that a plan's investment in the
instrument would be a practical vehicle for the indirect provision of investment
management services". Wireless does not believe that the Notes constitute an
"equity interest" in Wireless for purposes of the Regulations. Even if the Notes
were so characterized, however, Wireless believes, based upon its determination
that Wireless qualifies as an "operating company" within the meaning of the
Regulations, that an investment by an ERISA Plan in the Notes should not cause
any of the underlying assets of Wireless to be "plan assets" within the meaning
of the Regulations.
Every investor considering the acquisition of the Notes should consult with
its counsel with respect to the potential applicability of ERISA and Section
4975 of the Code to such investment.
PLAN OF DISTRIBUTION
This Prospectus is to be used by MS&Co. in connection with offers and sales
of the Notes in market-making transactions at negotiated prices relating to
prevailing market prices at the time of sale. MS&Co. may act as principal or
agent in such transactions. MS&Co. has no obligation to make a market in the
Notes, and may discontinue its market-making activities at any time without
notice, at its sole discretion.
There is currently no established public market for the Notes. Wireless
does not currently intend to apply for listing of the Notes on any securities
exchange. Therefore, any trading that does develop will occur on the
over-the-counter market. Wireless has been advised by MS&Co. that it intends to
make a market in the Notes but it has no obligation to do so and any
market-making may be discontinued at any time. No assurance can be given that an
active public market for the Notes will develop.
MS&Co. acted as placement agent in connection with the original private
placement of the Notes and received a placement fee of $3,805,000 in connection
therewith. MS&Co. also acted as the lead managing underwriter in connection with
the initial public offering of Wireless' Class A Common Stock, in which the
underwriters received underwriting discounts and commissions of approximately
$5,460,000 in the aggregate. MS&Co. is affiliated with entities that
beneficially own approximately 51% of the outstanding Common Stock. See
"Principal Stockholders." For other information regarding their equity ownership
in Wireless, see "Certain Transactions."
94
<PAGE> 95
Although there are no agreements to do so, MS&Co., as well as others, may
act as broker or dealer in connection with the sale of Notes contemplated by
this Prospectus and may receive fees or commissions in connection therewith.
Wireless has agreed to indemnify MS&Co. against certain liabilities under
the Securities Act or to contribute to payments that MS&Co. may be required to
make in respect of such liabilities.
LEGAL MATTERS
Certain matters with respect to the legality of the issuance of the
securities offered hereby are being passed upon for the Company by Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York 10017. Davis Polk & Wardwell
has performed, and will continue to perform, legal services for MSVCF, MSLEF II
and MSCP III, companies controlled by MSLEF II, MSCP III and MS & Co. and acted
as counsel to MSLEF II and MSCP III in connection with its investments in the
Company.
EXPERTS
The Consolidated Financial Statements of the Company at December 31, 1994
and 1995, and for each of the three years in the period ended December 31, 1995,
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
95
<PAGE> 96
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 and March 31, 1996....... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and
1995 and for the three months ended March 31, 1995 and March 31, 1996............... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December
31, 1993, 1994 and 1995 and for the three months ended March 31, 1996............... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and
1995 and for the three months ended March 31, 1995 and March 31, 1996............... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 97
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
F-2
<PAGE> 98
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 14,507 $ 26,973 $ 14,201
Accounts receivable (net of allowance for doubtful accounts of $1,388 and
$4,534 in 1994 and 1995, respectively)................................... 15,584 21,503 22,685
Inventories................................................................ 12,809 11,179 12,775
Prepaid expenses and other current assets.................................. 1,497 2,880 3,504
--------- --------- ---------
Total current assets....................................................... 44,397 62,535 53,165
RESTRICTED INVESTMENTS....................................................... 500 500 500
PROPERTY AND EQUIPMENT (net of accumulated depreciation of $16,491 and
$29,163 in 1994 and 1995, respectively..................................... 31,697 52,827 60,674
NARROWBAND LICENSES.......................................................... 58,885 133,065 133,065
DEFERRED DEBT ISSUANCE COSTS (net of accumulated amortization of $959 and
$2,011 in 1994 and 1995, respectively)..................................... 3,041 8,436 8,141
OTHER ASSETS................................................................. 3,539 6,466 7,303
--------- --------- ---------
Total assets......................................................... $ 142,059 $ 263,829 $ 262,848
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable........................................................... $ 16,451 $ 23,094 $ 26,497
Deferred revenue........................................................... 13,962 21,409 22,949
Current maturities of long-term debt....................................... 3,513 5,479 5,660
Other current liabilities.................................................. 4,040 6,526 6,182
--------- --------- ---------
Total current liabilities............................................ 37,966 56,508 61,288
LONG-TERM DEBT............................................................... 92,632 219,364 225,210
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, December 31, 1995
and March 31, 1996....................................................... -- -- --
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 and March 31, 1996...................... 3 -- --
Common stock, $.0001 par value per share, 75,000,000 shares authorized as
of March 31, 1996:
Class A Convertible Common Stock, 23,277,293 shares issued at December
31, 1995 and 23,278,915 shares issued at March 31, 1996................ -- 2 2
Class B Convertible Non-Voting Common Stock, 8,975,469 shares issued at
December 31, 1995 and March 31, 1996................................... -- 1 1
Class C Convertible Non-Voting Common Stock, 731,846 shares issued at
December 31, 1995 and March 31, 1996................................... -- -- --
Class D Convertible Non-Voting Common Stock, 725,445 shares issued at
December 31, 1995 and March 31, 1996................................... -- -- --
Additional paid-in capital................................................. 124,694 154,601 154,612
Accumulated deficit........................................................ (112,977) (166,090) (177,708)
Stock subscriptions receivable............................................. (243) (557) (557)
Treasury stock, 200,000 shares of common stock at December 31, 1994, and
none at December 31, 1995 and March 31, 1996, at cost.................... (16) -- --
--------- --------- ---------
Total stockholders' equity (deficit)................................. 11,461 (12,043) (23,650)
--------- --------- ---------
Total liabilities and stockholders' equity (deficit)................. $ 142,059 $ 263,829 $ 262,848
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-3
<PAGE> 99
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------- ---------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Recurring revenue................. $ 24,184 $ 56,648 $101,503 $ 20,464 $ 33,743
Equipment sales and activation
fees........................... 26,483 53,185 57,688 12,239 14,802
-------- -------- -------- -------- --------
Total revenues............ 50,667 109,833 159,191 32,703 48,545
COST OF EQUIPMENT SOLD.............. 28,230 57,835 63,982 13,378 17,082
OPERATING EXPENSES:
Technical......................... 9,470 16,155 25,679 5,459 8,090
Selling........................... 17,319 31,252 36,094 8,565 9,447
General and administrative........ 15,578 29,810 43,512 9,698 12,919
Depreciation and amortization..... 5,081 8,105 13,272 2,802 4,248
-------- -------- -------- -------- --------
Total operating expenses.......... 47,448 85,322 118,557 26,524 34,704
-------- -------- -------- -------- --------
Operating loss.................... (25,011) (33,324) (23,348) (7,199) (3,241)
OTHER (INCOME) EXPENSE:
Interest expense.................. 6,538 12,933 30,720 6,660 8,401
Interest income................... (428) (858) (1,997) (498) (219)
Other............................. -- 414 1,042 337 195
-------- -------- -------- -------- --------
Total other (income) expense...... 6,110 12,489 29,765 6,499 8,377
-------- -------- -------- -------- --------
NET LOSS............................ $(31,121) $(45,813) $(53,113) $(13,698) $(11,618)
======== ======== ======== ======== ========
NET LOSS PER SHARE
(Primary and Fully Diluted)....... $ (1.51) $ (1.72) $ (1.53) $ (0.40) $ (0.33)
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (Primary and Fully
Diluted).......................... 20,627 26,574 34,653 34,532 34,688
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated financial statements.
F-4
<PAGE> 100
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 STOCK
NUMBER OF NUMBER OF PAID-IN ACCUMULATED SUBSCRIPTIONS TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE STOCK TOTAL
----------- ------ ---------- ------ ---------- ----------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December
31, 1992.......... 10,033,332 $ 1 2,500,000 $ -- $ 27,017 $ (36,043) $ -- $(16) $ (9,041)
Issuance of
5,277,611 shares
of Series C
Preferred Stock
at $3.26 per
share........... 5,277,611 1 -- -- 17,034 -- (125) -- 16,910
Issuance of
627,900 common
stock warrants
at $5.50 per
warrant......... -- -- -- -- 3,453 -- -- -- 3,453
171,074 shares of
common stock
issued under the
stock
option/stock
issuance plan... -- -- 171,074 -- 19 -- (4) -- 15
Net loss.......... -- -- -- -- -- (31,121) -- -- (31,121)
----------- ---- ---------- ---- -------- --------- ----- ---- --------
BALANCE, December
31, 1993.......... 15,310,943 2 2,671,074 -- 47,523 (67,164) (129) (16) (19,784)
11,242,857 shares
of common stock
issued in the
1994 Stock
Offerings....... -- -- 11,242,857 1 76,902 -- -- -- 76,903
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 -- (216) -- 53
Repayment of stock
subscriptions
receivable...... -- -- -- -- -- -- 102 -- 102
Net loss.......... -- -- -- -- -- (45,813) -- -- (45,813)
----------- ---- ---------- ---- -------- --------- ----- ---- --------
BALANCE, December
31, 1994.......... -- -- 29,529,525 3 124,694 (112,977) (243) (16) 11,461
Retirement of
treasury
stock........... -- -- (200,000) -- (16) -- -- 16 --
725,445 shares of
non-voting
common stock
issued in the
Unit Offering... -- -- 725,445 -- 5,078 -- -- -- 5,078
56,654 shares of
common stock
issued under the
Stock
option/Stock
issuance plan... -- -- 56,654 -- 156 -- (125) -- 31
3,598,429 shares
of common stock
issued in the
1995 Stock
Offering........ -- -- 3,598,429 -- 24,689 -- (189) -- 24,500
Net loss.......... -- -- -- -- -- (53,113) -- -- (53,113)
----------- ---- ---------- ---- -------- --------- ----- ---- --------
BALANCE, December
31, 1995.......... -- -- 33,710,053 3 154,601 (166,090) (557) -- (12,043)
1,622 shares of
common stock
issued under the
Stock
option/Stock
issuance plan... -- -- 1,622 -- 11 -- -- -- 11
Net loss.......... -- -- -- -- -- (11,618) -- -- (11,618)
----------- ---- ---------- ---- -------- --------- ----- ---- --------
BALANCE, March 31,
1996
(unaudited)....... -- $ -- 33,711,675 $ 3 $154,612 $(177,708) $(557) $ -- $(23,650)
=========== ==== ========== ==== ======== ========= ===== ==== ========
</TABLE>
The accompanying notes to consolidated statements are an integral part of these
consolidated financial statements.
F-5
<PAGE> 101
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss.................................................... $(31,121) $(45,813) $(53,113) $(13,698) $(11,618)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 5,081 8,105 13,272 2,802 4,248
Provision for bad debt.................................... 1,273 6,590 6,135 1,744 1,453
Accretion of discount on Senior Discount Exchange Notes... 1,885 10,034 26,322 5,782 7,333
Changes in certain assets and liabilities:
(Increase) decrease in accounts receivable.............. (6,541) (14,629) (12,054) 796 (2,635)
(Increase) decrease in inventories...................... (5,024) (4,497) 1,630 2,114 (1,596)
(Increase) decrease in prepaid expenses and other
current assets....................................... (58) (1,091) (1,383) 129 (624)
(Increase) decrease in other assets, net................ (134) 254 (298) 132 (794)
Increase (decrease) in accounts payable................. 6,860 8,491 6,643 (1,953) 3,403
Increase in deferred revenue............................ 2,602 6,780 7,447 3,079 1,540
Increase (decrease) in other current liabilities........ 1,992 248 2,486 (95) (344)
-------- -------- -------- -------- --------
Net cash provided by (used) in operating
activities......................................... (23,185) (25,528) (2,913) 832 366
-------- -------- -------- -------- --------
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) (74,079) --
Purchases of property and equipment......................... (10,810) (16,719) (33,503) (10,376) (11,779)
Investment in international ventures........................ -- (1,902) (2,174) -- (3)
Purchases of intangible assets.............................. (224) (195) (403) (142) (53)
-------- -------- -------- -------- --------
Net cash used in investing activities................ (18,606) (69,085) (110,159) (84,597) (11,835)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock................... 16,910 -- -- -- --
Proceeds from issuance of common stock...................... -- 76,903 29,578 5,078 --
Proceeds from issuance of common stock under the stock
option/stock issuance plan................................ 15 53 31 4 11
Proceeds from issuance of Senior Discount Notes, net........ 67,575 -- 95,001 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) -- (8)
Borrowings from vendor credit facilities.................... 20,111 8,540 6,777 3,924 --
Payments on vendor credit facilities........................ (46,281) (2,052) (4,402) (845) (1,306)
-------- -------- -------- -------- --------
Net cash provided by (used) in financing
activities......................................... 61,783 83,546 125,538 103,162 (1,303)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 19,992 (11,067) 12,466 19,397 (12,772)
CASH AND CASH EQUIVALENTS, beginning of period................ 5,582 25,574 14,507 14,507 26,973
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of period...................... $ 25,574 $ 14,507 $ 26,973 $ 33,904 $ 14,201
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................... $ 3,886 $ 998 $ 2,146 $ 405 $ 556
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> 102
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
F-7
<PAGE> 103
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
development of 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> 104
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-9
<PAGE> 105
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTERIM FINANCIAL PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and substantially in the form
prescribed by the Securities and Exchange Commission in instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
month period ended March 31, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.
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 purchase price of approximately
$133 million. Amortization of the NPCS licenses will commence when placed in
service. The NPCS licenses will be amortized over a period not to exceed 40
years. The Company intends to follow the provisions of Statement of Financial
Accounting Standards No. 34 "Capitalization of Interest Cost" with respect to
its NPCS licenses and the related construction of its two-way messaging network.
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.
F-10
<PAGE> 106
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-11
<PAGE> 107
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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> <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.
F-12
<PAGE> 108
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> <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.
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.
F-13
<PAGE> 109
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
------------------------
DECEMBER 31,
SHARES ------------------------
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.
F-14
<PAGE> 110
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-15
<PAGE> 111
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
F-16
<PAGE> 112
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 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, DECEMBER 31,
1994 CHANGE 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.
F-17
<PAGE> 113
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 (UNAUDITED)
The Company's Certificate of Incorporation was amended on March 28, 1996,
increasing the total authorized shares of common stock to 75,000,000.
F-18
<PAGE> 114
PageMart
Wireless, Inc.
