<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1996
REGISTRATION NO. 333-03012
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PAGEMART WIRELESS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 4812 75-2575229
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Code Number) Identification No.)
6688 NORTH CENTRAL EXPRESSWAY JOHN D. BELETIC
SUITE 800 PAGEMART WIRELESS, INC.
DALLAS, TX 75206 6688 NORTH CENTRAL EXPRESSWAY
(214) 750-5809 SUITE 800
(Address, including zip code, DALLAS, TX 75206
and telephone (214) 750-5809
number, including area code, of (Name, address, including zip
registrant's code, and telephone number,
principal executive offices) including area code, of agent
for service)
</TABLE>
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Copies to:
SARAH JONES BESHAR JERRY V. ELLIOTT
DAVIS POLK & WARDWELL SHEARMAN & STERLING
450 LEXINGTON AVENUE 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10022
(212) 450-4000 (212) 848-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and the list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED PRICE(1) FEE
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<S> <C> <C>
Class A Common Stock, par value $.0001 per share.......... $92,000,000 $31,724(2)
4,600,000 1,587(3)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
(3) Paid herewith.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
PAGEMART WIRELESS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
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FORM S-1 CAPTION PROSPECTUS CAPTION
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<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus.................... Facing Page, Outside Front Cover
Page; Cross Reference Sheet;
Inside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................ Inside Front Cover Page; Table of
Contents; Additional Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges......................... Prospectus Summary; Risk Factors
4. Use of Proceeds..................................... Use of Proceeds
5. Determination of Offering Price..................... Outside Front Cover Page;
Underwriters
6. Dilution............................................ Dilution
7. Selling Security Holders............................ Not Applicable
8. Plan of Distribution................................ Outside Front Cover Page;
Underwriters
9. Description of Securities to be Registered.......... Outside Front Cover Page;
Prospectus Summary; Dividend
Policy; Description of Capital
Stock
10. Interests of Named Experts and Counsel.............. Not Applicable
11. Information with Respect to the Registrant.......... Inside Front Cover Page; Prospectus
Summary; Risk Factors; Use of
Proceeds; Dividend Policy;
Dilution; Capitalization;
Selected Historical Financial and
Operating Data; Management's
Discussion and Analysis of
Financial Condition and Results
of Operations; Business;
Management; Certain Transactions;
Principal Stockholders;
Description of Capital Stock;
Consolidated Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities.................... Not Applicable
</TABLE>
<PAGE> 3
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any state in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************
PROSPECTUS (Subject to Completion)
Issued May 6, 1996
6,000,000 Shares
PageMart
Wireless, Inc.
CLASS A COMMON STOCK
------------------------
ALL OF THE SHARES OF CLASS A COMMON STOCK, PAR VALUE $.0001 PER SHARE, ARE BEING
OFFERED BY THE COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC
MARKET FOR THE CLASS A COMMON STOCK OF THE COMPANY. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL
BE BETWEEN $12 AND $14. SEE "UNDERWRITERS" FOR A
DISCUSSION OF THE FACTORS CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
------------------------
APPLICATION HAS BEEN MADE FOR APPROVAL FOR TRADING OF THE CLASS A COMMON STOCK
ON THE NASDAQ NATIONAL MARKET SYSTEM UNDER THE TRADING SYMBOL "PMWI."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR 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.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
---------------------- ---------------------- ---------------
<S> <C> <C> <C>
Per Share.................. $ $ $
Total(3)................... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at
$1,675,000.
(3) The Company has granted the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of 900,000
additional shares at the price to public shown above less underwriting
discounts and commissions for the purpose of covering over-allotments,
if any. If the Underwriters exercise such option in full, the total
price to public, underwriting discounts and commissions, and proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Shearman &
Sterling, counsel for the Underwriters. It is expected that delivery of the
Shares will be made on or about , 1996 at the offices of Morgan
Stanley & Co. Incorporated, New York, New York, against payment therefor in
immediately available funds.
------------------------
MORGAN STANLEY & CO.
Incorporated
GOLDMAN, SACHS & CO.
J.P. MORGAN & CO.
LEHMAN BROTHERS
, 1996
<PAGE> 4
[Image material appears here consisting of a circle divided into three
sections labelled "strategic partners," "national retail" and "direct sales."
The following company logos appear in each section as indicated: (i) in the
section labelled "strategic partners," Southwestern Bell Mobile Systems, AT&T
Wireless Services, GTE Corporation, Ameritech Mobile Services, Inc. and EXCEL
Communications, Inc.; (ii) in the section labelled "national retail," Office
Depot Inc., Montgomery Ward Company Inc., Dillards Department Stores, Best Buy,
Inc., Comp USA, Inc., Target Stores, Inc., Radio Shack, a division of Tandy
Corporation and Venture; and (iii) in the section labelled "direct sales,"
Kodak, Trane, Tandem, Brinks, ADT Corporation and Chevron.]
[Image material appears here consisting of a map of all fifty of the
United States, the provinces of British Columbia, Alberta, Saskatchewan,
Manitoba, Ontario, Quebec, New Brunswick, Prince Edward Island, Nova Scotia and
Newfoundland in Canada, the Bahamas, Puerto Rico and the Virgin Islands
labelled "Paging Coverage," with the logo "PageMart Wireless," that indicates
the cities served by the Company as of April 1, 1996, cities in which service
is scheduled to commence by June 30, 1996 and cities in which an office of the
Company is located.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 5
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
No action has been or will be taken in any jurisdiction by the Company or
by any Underwriter that would permit a public offering of the Class A Common
Stock or possession or distribution of this Prospectus in any jurisdiction where
action for that purpose is required, other than in the United States. Persons
into whose possession this Prospectus comes are required by the Company and the
Underwriters to inform themselves about and to observe any restrictions as to
the offering of the Class A Common Stock and the distribution of this
Prospectus.
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
---------------------
FOR INVESTORS OUTSIDE THE UNITED STATES: NO ACTION HAS BEEN OR WILL BE
TAKEN IN ANY JURISDICTION BY THE COMPANY OR ANY UNDERWRITER THAT WOULD PERMIT A
PUBLIC OFFERING OF THE CLASS A COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED,
OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS
COMES ARE REQUIRED BY THE COMPANY AND THE UNDERWRITERS TO INFORM THEMSELVES
ABOUT, AND TO OBSERVE ANY RESTRICTIONS AS TO, THE OFFERING OF THE CLASS A COMMON
STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS.
---------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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Prospectus Summary.................................................................... 4
Risk Factors.......................................................................... 10
The Company........................................................................... 16
Use of Proceeds....................................................................... 16
Dividend Policy....................................................................... 16
Dilution.............................................................................. 17
Capitalization........................................................................ 18
Selected Historical Financial and Operating Data...................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 21
Business.............................................................................. 32
Management............................................................................ 50
Certain Transactions.................................................................. 63
Principal Stockholders................................................................ 66
Description of Capital Stock.......................................................... 69
Shares Eligible for Future Sale....................................................... 72
Underwriters.......................................................................... 73
Legal Matters......................................................................... 75
Experts............................................................................... 75
Additional Information................................................................ 75
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
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The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited consolidated financial information.
3
<PAGE> 6
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,
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. The Company has four
classes of common stock outstanding. See "Description of Capital Stock." Unless
otherwise indicated, the information contained in this Prospectus assumes that
the underwriters' over-allotment option will not be exercised. See
"Underwriters." 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 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 the leading
supplier of paging units to consumers through retail distribution
channels. The Company has been selected as the pager supplier for a
number of leading retail chains, including Office Depot Inc., Comp USA,
Inc., Montgomery Ward Company, Inc., Target Stores, Inc. and Best Buy,
Inc.
Private Brand Strategic Alliances. The Company was one of the first
paging companies to broaden its distribution reach by establishing
strategic relationships with large communications providers. The Company
has established strategic relationships with GTE Corporation,
Southwestern Bell Mobile Systems, AT&T Wireless Services, Ameritech
Mobile Services, Inc. and long distance reseller EXCEL
Telecommunications, Inc.
National Sales Offices. The Company's national sales offices sell
equipment and services through three distribution channels: direct
sales, third party resellers and local retailers. The Company has a
direct sales force presence in over 75 Metropolitan Statistical Areas
("MSAs") through 65 offices.
4
<PAGE> 7
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.
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.
5
<PAGE> 8
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.
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
6
<PAGE> 9
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(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 60.4% of the outstanding Common Stock of the Company and
approximately 48.9% of the outstanding voting Common Stock. After giving effect
to the Offering, the Morgan Stanley Shareholders will own approximately 51.3% of
the outstanding Common Stock and 38.9% of the outstanding voting Common Stock
(approximately 50.1% and 37.7%, respectively of the outstanding Common Stock and
outstanding voting Common Stock if the Underwriters' over-allotment option is
exercised in full).
7
<PAGE> 10
THE OFFERING
Class A Common Stock offered
hereby.......................... 6,000,000 shares
Common Stock to be outstanding
after the Offering(1)(2)........ 39,711,675 shares
Use of Proceeds................. The net proceeds of the Offering are expected
to be used as follows: approximately $50
million to fund the initial construction of
the Company's NPCS transmission network;
approximately $13 million for the
retirement of the Company's vendor debt;
with the balance to be used to repay
approximately $8 million of outstanding
loans under the Company's revolving credit
facility and for other general corporate
purposes. See "Use of Proceeds."
- ---------------
(1) 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
share of each class having a par value of $.0001 per share. Class A Common
Stock, Class B Common Stock and Class C Common Stock are convertible by
certain existing institutional stockholders that are subject to voting
control and regulatory restrictions at any time at the option of the
holders, in accordance with the terms of the Stockholders Agreement (as
defined herein). Class D Common Stock is convertible, at the option of the
holder, at any time after this Offering. For description of each class of
Common Stock, see "Description of Capital Stock."
(2) Based on approximately 33,711,675 shares of Common Stock outstanding on
March 31, 1996. Excludes (i) 2,793,274 shares issuable upon exercise of
outstanding stock options at exercise prices ranging from $.08 to $12.00
per share, (ii) 627,900 shares issuable upon exercise of outstanding
warrants 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. See
"Description of Capital Stock -- Warrants."
8
<PAGE> 11
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 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.
<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)
Pro forma net loss per common share(1)... (1.44) (0.31)
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(2).................................. $ 8.27 $ 8.66 $ 9.81 $ 8.64 $ 8.62 $ 8.28 $ 8.61
Operating profit (loss) before selling
expenses per subscriber per month(3)... (7.78) (12.69) (.98) .90 2.11 1.01 2.23
Selling expenses per net subscriber
addition(4)............................ 146 157 91 81 91 95 86
EBITDA(5)................................ (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(6)................ -- -- -- 58,885 74,079 74,079 --
Depreciation and amortization............ 1,224 2,624 5,081 8,105 13,272 2,802 4,248
</TABLE>
- ---------------
(1) Based on the weighted average number of shares and share equivalents
outstanding during the period, plus the issuance of 1,000,000 shares of
Class A Common Stock offered hereby, representing the number of shares the
proceeds of which are to be used to repay the Company's vendor indebtedness.
Also assumes such repayment occurred at the beginning of the applicable
period.
(2) 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 for the final quarter of the year.
(3) 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.
(4) 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.
(5) 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.
(6) Reflects the acquisition of the NPCS Licenses in the Federal Communications
Commission ("FCC") NPCS auctions. See "Business -- Government Regulation."
9
<PAGE> 12
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."
HIGH LEVERAGE; STOCKHOLDERS' DEFICIT; 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 pursuant to which the Company's 15% Senior Discount Notes due
2005 (the "15% Notes") were issued (the "15% Indenture") and the indenture
pursuant to which the 12 1/4% Senior Discount Notes due 2003 (the "12 1/4%
Notes") of the Company's operating subsidiary, PageMart, Inc. ("PageMart") were
issued (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."
10
<PAGE> 13
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."
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."
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
11
<PAGE> 14
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 15% Indenture, the 12 1/4% Indenture, the Vendor Purchase Financing
Agreement (as defined herein) 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 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.
12
<PAGE> 15
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 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."
13
<PAGE> 16
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 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."
14
<PAGE> 17
SIGNIFICANT OWNERSHIP
The Morgan Stanley Shareholders (as defined herein) currently own
approximately 60.4% of the outstanding Common Stock of the Company and
approximately 48.9% of the outstanding voting Common Stock. After giving effect
to the Offering, the Morgan Stanley Shareholders will own approximately 51.3% of
the outstanding Common Stock and 38.9% of the outstanding voting Common Stock
(approximately 50.1% of the outstanding Common Stock and 37.7% of the
outstanding voting Common Stock if the Underwriters' over-allotment option is
exercised in full). 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 eight 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 Agreement among certain Stockholders
dated as of September 19, 1995, as amended (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."
POTENTIAL ADVERSE EFFECT ON MARKET PRICE BECAUSE OF SHARES ELIGIBLE FOR FUTURE
SALE
Of the 39,711,675 shares of Class A Common Stock which will be outstanding
after consummation of the Offering, only the 6,000,000 shares being offered
hereby will be eligible for immediate resale in the public market without
restriction, except to the extent that any of such shares are acquired by an
affiliate of the Company. The future sale of a substantial number of shares of
Common Stock in the public market following the Offering, or the perception that
such sales could occur, could adversely affect the market price for Common
Stock. The Company has granted all the investors party to the Stockholders
Agreement certain registration rights with respect to the Common Stock owned by
these investors. If these investors should sell a substantial amount of such
Common Stock, the prevailing market price for the Common Stock could be
adversely affected. The Company, these investors and the officers and directors
of the Company have agreed not to sell any shares of the Common Stock, or any
securities convertible into or exercisable or exchangeable for Common Stock, for
a period of 180 days after the date of this Prospectus without the consent of
Morgan Stanley & Co. Incorporated ("MS & Co."). See "Shares Eligible for Future
Sale."
ABSENCE OF PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock. Although the Company expects the Class A Common Stock to be
approved for trading on the Nasdaq National Market ("Nasdaq"), there can be no
assurance that an active public market for the Class A Common Stock will develop
and continue after the Offering or that the Class A Common Stock offered hereby
will trade at or above the initial public offering price. MS & Co. will not act
as a market-maker of the Class A Common Stock. See "Underwriters."
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BY-LAWS
AND DELAWARE LAW
Certain provisions of the Company's Certificate of Incorporation, By-laws
and the Stockholders Agreement, as well as provisions of the Delaware General
Corporation Law, may have the effect of delaying or preventing transactions
involving a change of control of the Company, including transactions in which
stockholders might otherwise receive a substantial premium for their shares over
then current market prices, and may limit the ability of stockholders to approve
transactions that they may deem to be in their best interests. In particular,
under the certificate of incorporation, the Board of Directors is authorized to
issue one or more classes of preferred stock having such designations, rights
and preferences as may be determined by the Board. See "Description of Capital
Stock."
POTENTIAL DILUTION OF VOTING POWER UPON CONVERSION INTO CLASS A COMMON STOCK
Conversion of shares of Class B Common Stock, Class C Common Stock or Class
D Common Stock into shares of Class A Common Stock would result in a decrease in
the voting power of the investors in the Class A
15
<PAGE> 18
Common Stock offered hereby, as well as holders of the previously outstanding
Class A Common Stock. Although the holder of Class D Common Stock may freely
convert such shares into Class A Common Stock following the Offering, holders of
Class B Common Stock and Class C Common Stock are subject to certain
restrictions on conversion of such shares into Class A Common Stock. See
"Description of Capital Stock -- Common Stock."
DILUTION
Investors in the Class A Common Stock offered hereby will experience an
immediate dilution of $15.38 per share (assuming an initial public offering
price of $13.00 per share) in the net tangible book value of their shares of
Class A Common Stock. See "Dilution."
THE COMPANY
PageMart Wireless, Inc. ("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 Reorganization, 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.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Class A Common Stock
offered hereby are estimated to be approximately $70.9 million ($82.6 million if
the Underwriters' over-allotment option is exercised in full) based on an
assumed initial public offering price of $13.00 per share and after deducting
estimated underwriting discounts and commissions and estimated fees and expenses
of the Offering. The Company expects to use the proceeds of the Offering as
follows: approximately $50 million to fund the initial construction of the
Company's NPCS transmission network and approximately $13 million for the
retirement of the Company's vendor debt, with the balance to be used to repay
approximately $8 million of outstanding loans under the Company's revolving
credit facility and for other general corporate purposes. The weighted average
cost of vendor debt at March 31, 1996 was 13.2%, and such debt matures on
various dates through 2000. The weighted average cost of borrowings under the
Company's revolving credit facility at March 31, 1996 was 9.5%, and amounts
outstanding under the Revolving Credit Agreement mature on March 31, 1999. 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. See "Risk
Factors -- Risk 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."
DIVIDEND POLICY
The Company has not paid dividends on the Common Stock since its
organization in 1989. The Company currently intends to retain future earnings
for the development of its business and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The Company's future
dividend policy will be determined by its Board of Directors on the basis of
various factors, including the Company's results of operations, financial
condition, capital requirements and investment opportunities. In addition, the
Company's debt instruments substantially restrict (and currently prohibit) the
payment of cash dividends.
16
<PAGE> 19
DILUTION
The deficit in net tangible book value of the Company as of March 31, 1996
was $165.5 million or $4.91 per share of outstanding Common Stock. After giving
effect to the sale of 6,000,000 shares of Class A Common Stock offered hereby at
an assumed initial public offering price of $13.00 per share, the pro forma
deficit in net tangible book value of the Company as of March 31, 1996 would
have been approximately $94.6 million or $2.38 per share, representing an
immediate dilution of $15.38 per share to investors purchasing shares in the
Offering. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per common share..................... $13.00
Net tangible book value (deficit) per common share at March 31,
1996(1)............................................................... $(4.91)
Increase in net tangible book value per common share attributable to sale
of common shares in the Offering(2)................................... $ 2.53
------
Pro forma net tangible book value per common share after the Offering...... $(2.38)
------
Dilution per share to persons who purchase common shares in the
Offering(3).............................................................. $15.38
======
</TABLE>
- ---------------
(1) Net tangible book value (deficit) per common share prior to the Offering has
been determined by dividing the net tangible book value (total assets less
net intangibles and less total liabilities) by the sum of the number of
shares of Common Stock outstanding as of March 31, 1996. No effect is given
to the exercise of warrants, stock options or shares issuable upon the
conversion of securities held by unaffiliated, third party Canadian
stockholders of Canada Holding.
(2) After deducting estimated underwriting discounts and fees and expenses of
the Offering.
(3) Dilution means the difference between the initial public offering price per
share and the pro forma net tangible book value per share after giving
effect to the Offering.
The following table sets forth on a pro forma basis as of March 31, 1996,
the number and percentage of total outstanding Common Stock purchased, the total
consideration and percentage of total consideration paid and the weighted
average price paid per share by existing stockholders and by purchasers of the
Class A Common Stock offered hereby. The calculations in this table with respect
to Class A Common Stock to be purchased by new investors in the Offering reflect
an assumed initial public offering price of $13.00 per share.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
----------------------- ------------------------ PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 33,711,675 85% $153,911,393 66% $ 4.57
---------- ---- ------------ ---- ------
New investors....................... 6,000,000 15% $ 78,000,000 34% $13.00
---------- ---- ------------ ---- ------
Total..................... 39,711,675 100% 231,911,393 100% $ 5.84
========== ==== ============ ==== ======
</TABLE>
17
<PAGE> 20
CAPITALIZATION
The following table sets forth the current maturities of long-term debt and
capitalization of the Company as of March 31, 1996 and as adjusted to give
effect to the sale by the Company of 6,000,000 shares of Class A Common Stock
pursuant to the Offering at an assumed initial public offering price of $13.00
per share (less estimated underwriting discounts and fees and expenses). 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
---------------------
ACTUAL ADJUSTED
-------- --------
(UNAUDITED)
<S> <C> <C>
(IN THOUSANDS, EXCEPT
SHARE INFORMATION)
Current maturities of long-term debt................................... $ 5,660 $ --
======== ========
Long-term debt, excluding current maturities:
12 1/4% Senior Discount Exchange Notes, at accreted value............ $ 98,029 $ 98,029
15% Senior Discount Exchange Notes, at accreted value................ 119,121 119,121
Vendor notes payable................................................. 8,060 --
-------- --------
Total long-term debt(1)................................................ 225,210 217,150
Stockholders' equity (deficit)(2):
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,
45,000,000 shares authorized, 23,278,915 shares issued
and outstanding; 29,278,915 shares issued and outstanding
as adjusted....................................................... 2 3
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 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........................................... 154,612 225,476
Stock subscriptions receivable....................................... (557) (557)
Accumulated deficit.................................................. (177,708) (177,708)
-------- --------
Total stockholders' equity (deficit)................................... (23,650) 47,215
-------- --------
Total capitalization................................................... $201,560 $264,365
======== ========
</TABLE>
- ---------------
(1) Subsequent to March 31, 1996, the Company expects to borrow approximately $8
million under the Company's revolving credit facility. See "Use of
Proceeds."
(2) 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 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. See "Description of Capital
Stock -- Warrants."
18
<PAGE> 21
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 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.
<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)
Pro forma net loss per common share(1).... (1.44) (0.31)
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(2)................................... $ 8.27 $ 8.66 $ 9.81 $ 8.64 $ 8.62 $ 8.28 $ 8.61
Operating profit (loss) before selling
expenses per subscriber per month(3).... (7.78) (12.69) (.98) .90 2.11 1.01 2.23
Selling expenses per net subscriber
addition(4)............................. 146 157 91 81 91 95 86
EBITDA(5)................................. (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(6)................. -- -- -- 58,885 74,079 74,079 --
Depreciation and amortization............. 1,224 2,624 5,081 8,105 13,272 2,802 4,248
</TABLE>
(Footnotes appear on the following page)
19
<PAGE> 22
- ---------------
(1) Based on the weighted average number of shares and share equivalents
outstanding during the period, plus the issuance of 1,000,000 shares of
Class A Common Stock offered hereby, representing the number of shares the
proceeds of which are to be used to repay the Company's vendor
indebtedness. Also assumes such repayment occurred at the beginning of the
applicable period.
(2) 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 for the final quarter of the
year.
(3) 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.
(4) 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.
(5) 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.
(6) Reflects the acquisition of the NPCS Licenses in the FCC NPCS auctions. See
"Business -- Government Regulation."
20
<PAGE> 23
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. It earns
recurring revenues from each subscriber in the form of fixed periodic fees and
incurs substantial operating expenses in offering its services, including
technical, customer service and general and administrative expenses. See
"-- Management's Presentation of Results of Operations."
Since commencing operations in 1990, the Company has invested heavily in
its wireless communications network and administrative infrastructure in order
to establish nationwide coverage, sales offices in major metropolitan areas,
customer service call centers and centralized administrative support functions.
The Company incurs substantial fixed operating costs related to its one-way
wireless communications infrastructure, which is designed to serve a much larger
subscriber base than the Company currently serves in order to accommodate
growth. In addition, the Company incurs substantial costs associated with new
subscriber additions. As a result, the Company has generated significant net
operating losses for each year of its operations. See "-- Management's
Presentation of Results of Operations."
The Company's strategy is to expand its subscriber base as rapidly as
possible to increase cash flow through greater utilization of its nationwide
wireless communications network. From January 1, 1992 to 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
21
<PAGE> 24
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
22
<PAGE> 25
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
23
<PAGE> 26
number of representatives in its customer service call centers from 389 on March
31, 1995 to 578 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 15% 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 15% 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.
24
<PAGE> 27
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 15% 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 mil-
25
<PAGE> 28
lion and $11.8 million in 1993, 1994 and 1995, respectively. Interest expense
related to the 15% Notes was $15.3 million in 1995.
Net Loss
The Company sustained net losses in 1993, 1994 and 1995 of $31.1 million,
$45.8 million and $53.1 million, respectively, principally due to the cost of
funding the growth rate of the Company's subscriber base which resulted in an
increase in units sold, selling and marketing expenses, operating expenses and
interest expense.
MANAGEMENT'S PRESENTATION OF RESULTS OF OPERATIONS
COMPARISON WITH GAAP PRESENTATION
The Company's audited Consolidated Financial Statements for the years ended
December 31, 1993, 1994 and 1995, included elsewhere in this 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.
26
<PAGE> 29
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 MARCH JUNE
30, SEPTEMBER 30, DECEMBER 31, 31, 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.
(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.
27
<PAGE> 30
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 15% Notes,
as well as borrowings under vendor financing agreements.
Capital expenditures were $10.8 million, $16.7 million and $33.5 million
for the years ended December 31, 1993, 1994 and 1995, respectively 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
28
<PAGE> 31
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 15% Notes and 725,445 shares of Common Stock, and $24.5 million of net
proceeds from the sale of Common Stock (the "1995 Private Stock 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 15% 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 15% Notes was $119.1 million.
The 12 1/4% Notes, which are unsecured senior obligations of PageMart,
mature in 2003 and were issued at a substantial discount from their principal
amount at maturity. The accretion of original issue discount on the 12 1/4%
Notes will cause an increase in indebtedness from 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 15% Notes, which are unsecured senior obligations of Wireless, mature
in 2005 and were issued at a substantial discount from their principal amount at
maturity. The accretion of original issue discount on the 15% Notes will cause
an increase in indebtedness from March 31, 1996 to February 1, 2000 of $88.1
million. From and after February 1, 2000, interest on the 15% Notes will be
payable semiannually, in cash.
In 1992, PageMart entered into an equipment lease agreement with Glenayre
(the "Vendor Lease Financing Agreement"), providing for the financing of
transmitter equipment up to a maximum aggregate amount of $15 million, pursuant
to lease term schedules mutually agreed upon for lease terms not exceeding 60
months. The Vendor Lease Financing Agreement is not a revolving line of credit
and the vendor's commitment expired on December 31, 1995. PageMart has an
option, at the expiration of any schedule to purchase all of the equipment
leased under that schedule at a nominal purchase price. The weighted average
interest rate in effect on March 31, 1996 with respect to the Vendor Lease
Financing Agreement was 13.49%. All outstanding indebtedness under the Vendor
Lease Financing Agreement will be repaid with a portion of the net proceeds from
the Offering.
29
<PAGE> 32
In May 1994, PageMart entered into a vendor purchase financing agreement
with Motorola (the "Vendor Purchase Financing Agreement"), providing for the
financing of transmitter equipment over a period of up to 36 months after the
acquisition of such equipment up to a maximum aggregate amount of $8 million.
The Vendor Purchase Financing Agreement is not a revolving line of credit. The
interest rate applicable to such financing is 4% above the prime rate quoted in
The Wall Street Journal from time to time. The weighted average interest rate in
effect on March 31, 1996 with respect to the Vendor Purchase Financing Agreement
was 12.5%.
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.
The Vendor Purchase Financing Agreement, the 12 1/4% Indenture, the 15%
Indenture and the Revolving Credit Agreement contain certain restrictive
covenants that, among other things, limit the ability of the Company to incur
indebtedness, pay dividends, repurchase capital stock, engage in transactions
with stockholders and affiliates, create liens, sell assets, enter into leases
and engage in mergers and consolidations, and the Revolving Credit Agreement
requires the Company to maintain certain financial ratios and limits the ability
of the Company to make capital expenditures. In addition, the 12 1/4% Indenture
prohibits PageMart from paying any dividends or making other distributions on
its capital stock, making loans to Wireless, merging or consolidating with
Wireless or assuming or guaranteeing any obligations of Wireless unless PageMart
is in compliance with certain interest coverage ratios and certain other
requirements. PageMart may, however, sell assets to Wireless in transactions
that are arm's-length in nature. Wireless is currently a holding company with no
business or operations of its own. Because all of Wireless's operations are
conducted through its subsidiaries, Wireless's cash flow and consequently its
ability to service debt, is almost entirely dependent upon the earnings of its
subsidiaries and the distribution of those earnings or upon loans or other
payment of funds by those subsidiaries to Wireless. Wireless's subsidiaries are
separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to Wireless's obligations or to make
any funds available therefor, whether by dividends, loans or other payments.
Until the maturity of the 12 1/4% Notes, which mature on November 1, 2003, and
the indebtedness under the Vendor Purchase Financing Agreement, earlier
repayment of such indebtedness or compliance with the requirements of such debt
instruments, Wireless will be unable to use any amount of cash generated by the
operations of PageMart and its subsidiaries. However, currently Wireless does
not have significant cash requirements until August 2000 when interest on the
15% Notes must be paid in cash. See "Risk Factors -- High Leverage;
Stockholders' Deficit; 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, existing vendor financing
arrangements and borrowings under the Revolving Credit Agreement are expected to
be sufficient to fund the Company's one-way operations and related capital and
debt service requirements through 1997. 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
30
<PAGE> 33
fiscal 1997 to test and construct a two-way transmission network. Thereafter,
the Company anticipates that the two-way operations may require up to $100
million of additional investment to substantially complete the network buildout.
The Company expects to require additional financing to complete the buildout
which may include entering into joint venture arrangements, however there can be
no assurance that sufficient financing will be available to the Company. The
Company's ability to incur indebtedness is limited by the covenants contained in
the 15% Indenture, the 12 1/4% Indenture, the Revolving Credit Agreement and the
Vendor Purchase Financing Agreement, and as a result any additional financing
may need to be equity financing. 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> 34
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 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 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.
32
<PAGE> 35
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 the leading
supplier of paging units to consumers through retail distribution
channels. The Company has been selected as the pager supplier for a
number of leading retail chains, including Office Depot Inc., Comp USA,
Inc., Montgomery Ward Company, Inc., Target Stores, Inc. and Best Buy,
Inc.
Private Brand Strategic Alliances. The Company was one of the first
paging companies to broaden its distribution reach by establishing
strategic relationships with large communications providers. The Company
has established strategic relationships with GTE Corporation,
Southwestern Bell Mobile Systems, AT&T Wireless Services, Ameritech
Mobile Services, Inc. and long distance reseller Excel.
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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 in state of the art
call center facilities. Management believes that these services are an
important factor in supporting and retaining its strategic partners,
retailers and subscribers.
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TWO-WAY MESSAGING STRATEGY
One of the Company's principal strategies is to become a leading provider
of two-way messaging services in the United States. Management believes that the
introduction of two-way messaging services may present significant future growth
opportunities to the Company by enabling it to provide a new generation of
advanced messaging services, including data messaging, stored voice messaging
and other services, to new and existing subscribers.
The Company's two-way messaging strategy is founded on four principal
competitive advantages: (i) nationwide spectrum, (ii) incremental introduction
of technology, (iii) established diversified distribution channels, and (iv)
operating efficiency.
NATIONWIDE SPECTRUM. With the acquisition of the NPCS Licenses, the Company
became one of four companies with 150 kHz or more of nationwide NPCS frequency.
As a result, the Company is positioned to create a high capacity nationwide
network capable of delivering local, multi-city, regional, or nationwide data
and stored voice messaging services to a large number of subscribers.
INCREMENTAL INTRODUCTION OF TECHNOLOGY. The Company intends to introduce
two-way messaging technology by initially building upon its one-way transmission
network, enabling the Company to minimize the level of capital expenditures and
investments. The Company plans to introduce two-way stored voice service paced
to the availability of infrastructure equipment, subscriber devices and to meet
the market demand for such services.
ESTABLISHED DIVERSIFIED DISTRIBUTION CHANNELS. The Company plans to
leverage its established diversified distribution channels to achieve efficient,
rapid market penetration of its two-way services.
OPERATING EFFICIENCY. The Company expects to utilize its existing one-way
network and centralized administration to minimize incremental costs of product
and service expansion. Management believes that the Company's centralized
customer service, information systems, inventory control and distribution,
credit and collections, accounting and marketing organizations will be capable
of supporting the Company's two-way strategy.
As a result of these operating advantages, the Company plans to provide a
complete array of two-way services at affordable prices, including stored voice
and data services, that should appeal to a large number of potential
subscribers.
The Company expects to begin testing two-way data and stored voice services
in the second quarter of 1996. Upon completion of testing, two-way data services
are expected to be marketed on a city-by-city basis beginning in late 1996.
Two-way data services may include guaranteed alphanumeric message delivery with
acknowledgment and message with response capabilities. In 1997, the Company
plans to introduce its VoiceMart 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,
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
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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 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 nationwide network. The
Company will lease, operate and maintain the transmitters and will provide
wireless services to GTE customers, as well as customers of the Company via the
Company's nationwide network. The
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Company's services are sold across the United States through GTE Telephone
Operations, GTE Phone Mart Stores and GTE Mobilnet.
SOUTHWESTERN BELL MOBILE SYSTEMS. 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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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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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> 42
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. The Company buys pagers primarily from Motorola as well as other
manufacturers and therefore is dependent on such manufacturers to obtain
sufficient pager inventory for new subscriber units and replacement needs. 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 terrestial 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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<PAGE> 45
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 4
Outbound Throughput(1)....................... 112,000 bps 25,600 bps 19,200 bps 32,000 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 are currently projecting that
the Company's nationwide NPCS network will consist of approximately 2,300
transmitter/receiver sites and approximately 1,700 stand-alone receivers
when the network is substantially completed.
Equipment. The infrastructure of the Company's network will consist of
radio transmitters and receivers, switches, Rf controllers and ancillary
equipment, such as coaxial cable and antennas. The Company plans to
purchase this infrastructure equipment (other than the ancillary equipment)
from industry leading equipment suppliers, Motorola and Glenayre.
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
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<PAGE> 46
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 plans to purchase subscriber messaging units from Motorola and
other manufacturers. The Company understands that Motorola has licensed to other
wireless equipment manufacturers the relevant signaling system technology, as
Motorola has done with signaling system technology for its other FLEX protocols.
Although the Company believes that sufficient alternative sources of two-way
messaging units will exist, the Company would be adversely affected if it were
unable to obtain the units on satisfactory terms. See "Risk
Factors -- Dependence on Key Suppliers." The Company currently has no agreements
to purchase equipment or messaging units for its two-way services.
As the Company begins development and implementation of two-way services,
the Company expects to incur significant additional operating losses during the
start-up phase for such services, and it will be necessary for the Company to
make substantial investments. The Company anticipates requiring additional
sources of capital to fund the construction of a two-way messaging network,
including expenditures relating to the build-out requirements of the FCC. See
"-- Government Regulation." The Company anticipates investing $75 to $100
million through fiscal 1997 to test and construct a two-way transmission
network. Thereafter, the Company anticipates that its two-way operations may
require up to $100 million of additional investment to substantially complete
the network buildout. The Company expects to require additional financing to
complete the buildout, which may include 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.
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
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<PAGE> 47
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.
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,
45
<PAGE> 48
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.
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
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<PAGE> 49
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 incumbent
licensees to file applications for additional transmission sites that are within
40 miles of an authorized transmission site that was licensed to the same
applicant on the same channel on or before February 8, 1996 and which is
operational as of the date the application for the additional transmission site
is filed. It is not clear when the rulemaking proceeding will be completed or
what, if any, new rules the FCC will issue as a result of the rulemaking
proceeding.
In another ongoing rulemaking pertaining to interconnection between local
exchange carriers ("LECs") and CMRS providers, the FCC has proposed that
interconnection rates should be based on a "bill and keep"
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<PAGE> 50
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.
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
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<PAGE> 51
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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<PAGE> 52
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
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.
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
50
<PAGE> 53
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 Vice President of Operations
until she left the Company in September 1990 to pursue other business interests.
Upon returning in July 1991, she was named Vice President, Operations. In 1995,
Ms. Hopkins became Vice President, Customer Advocacy. Before co-founding the
Company, Ms. Hopkins was President of Multicom, Inc., a subsidiary of PacTel
Personal Communications for six years; President of Gencell, the cellular
subsidiary of Communications Industries; and founded TelPage, a regional paging
company.
Douglas S. Glen, Vice President, Strategic Alliances Business Unit. Mr.
Glen has been a Vice President since July 1989. Formerly, Mr. Glen was Regional
Manager and Director of Finance and Administration for Multicom, Inc., a
subsidiary of PacTel Personal Communications for three years. Additionally, Mr.
Glen was manager of financial control with PepsiCola Bottling Group and a
consultant with Arthur Andersen & Co. Mr. Glen serves as a director of PCIA, the
industry trade association and chairman of the Paging and Narrowband PCS
Alliance.
Douglas H. Kramp, Vice President, National Retail Business Unit. Mr. Kramp
joined the Company as a Vice President in August 1993. Before joining PageMart,
Mr. Kramp was President and co-founder of Artificial Linguistics Inc. ("ALI"), a
text management software company from 1988 to 1993. Before co-founding ALI, Mr.
Kramp was responsible for starting up and managing high technology companies for
the Hart Group from 1984 to 1988.
Paul L. Turner, Vice President, Customer Service. Mr. Turner has been Vice
President, Customer Service of the Company since March 1994. Before joining the
Company, Mr. Turner was with MCI from 1984 to 1994 in positions of increasing
responsibility. From 1990 to 1994 he held various management positions, the most
recent being Senior Manager, MCI Consumer Markets.
51
<PAGE> 54
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.
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
52
<PAGE> 55
Howard Corporation, Kohl's Corporation, Southern Pacific Rail Corporation and
Sullivan Communications Inc. He is a director of the general partner of The
Morgan Stanley Leveraged Equity Fund II, L.P. ("MSLEF II") and of the respective
managing general partners of the general partner of Morgan Stanley Venture
Capital Fund, L.P. ("MSVCF"), Morgan Stanley Venture Capital Fund II, L.P.
("MSVCF II") and Morgan Stanley Capital Partners III, L.P. ("MSCP III"). Mr.
Sica was designated by MSLEF II pursuant to the Stockholders Agreement. See
"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 (a California modem manufacturing company), Fomento
Empresarial Regiomontano, S.A. de C.V. (a Mexico-based telecommunications
company), and Kb/tel Telecommunications S.A. de C.V. (a Mexico-based
communications engineering company). Mr. Perez was designated by Pulsar pursuant
to the Stockholders Agreement. See "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> 56
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> 57
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 UNEXERCISED(3) EXERCISABLE UNEXERCISABLE(3)
----------- -------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John D. Beletic........... -- $ -- 103,334 266,666 $ 596,739 $849,059
Kenneth L. Hilton......... 14,285 42,855 14,881 135,834 44,643 287,502
Homer L. Huddleston....... -- -- 18,666 81,334 85,330 189,670
Sandra D. Neal............ -- -- 32,499 97,501 223,687 317,312
Carol W. Dickson.......... -- -- 13,333 36,667 39,999 110,001
</TABLE>
- ---------------
(1) Each of these options is exercisable for shares of Class A Common Stock.
(2) The fair market value at December 31, 1995 was estimated to be $10.00 per
share.
(3) Each of these options is immediately exercisable; however, the underlying
option shares are unvested and remain subject to repurchase by the Company
at the option price paid per share. The optionee acquires a vested interest
in, and the Company's repurchase right accordingly lapses with respect to,
(i) 20% of the option shares one year after the date of grant and (ii) the
balance of the option shares in equal successive monthly installments over
each of the next forty-eight (48) months of service thereafter.
DIRECTORS' COMPENSATION
Directors of the Company currently receive no compensation for their
services in such capacity.
55
<PAGE> 58
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.
Until such time as the Company's outstanding shares of Class A Common Stock are
first registered under Section 12 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (which will occur in connection with this
Offering), the Company retains a right of first refusal with respect to any
proposed sale or other disposition by a participant (or any successor in
interest by reason of purchase, gift or other mode of transfer) of any shares of
Class A Common Stock issued under the Stock Option Plan.
56
<PAGE> 59
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, 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
57
<PAGE> 60
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 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
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<PAGE> 61
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 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 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.
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 more than 5% 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 the first day of a plan year, or July 1 for those employees not eligible
on the first day of a plan year, each eligible employee will be granted an
option to purchase any whole number of shares of Class A Common Stock with an
aggregate fair market value that does not exceed $25,000. Each option may be
exercised, in whole or in part, on the 15th and last day of a month (or
immediately preceding business day if such day is not a business day) and only
while the holder is an employee of the Company or an affiliate. Options must be
exercised prior to the end of the year in which granted (the "Purchase Period"),
at which time the option will expire. The initial Purchase Period will commence
on July 1, 1996 and end on December 31, 1996. Thereafter, Purchase Periods will
commence on January 1 and end on December 31 of any year. For employees who
become eligible after January 1 of any plan year but prior to July 1 of such
year, the Purchase Period will begin on July 1 of such plan year. For employees
who become eligible after July 1 of a plan year, the Purchase Period will begin
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. No purchases may be made until an
eligible employee has accumulated at least $100 in his or her payroll
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<PAGE> 62
deduction account. 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.
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.
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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.
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.
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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 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
15% Notes and received compensation from the Company in the amount of $2.6
million and $3.8 million, respectively, for acting in such capacity. MS & Co. is
acting as an underwriter in the Offering.
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 issued to the MS Merchant Banking Funds (as defined
herein), other than MSLEF II, and 357,143 shares were issued to First Plaza
Group Trust. The remaining 964,000 shares of Common Stock were issued to other
institutional investors and officers of the Company consisting of John D.
Beletic, Daniel W. Hay, G. Clay Myers, Todd A. Bergwall, Lawrence H. Wecsler,
Paul L. Turner, Kenneth L. Hilton and Douglas H. Kramp.
In October 1995, MSLEF II, MSCP III, MSCI, MSVCF, MSVCF II, MSVC II, MSCP
892 Investors, L.P. ("MSCP 892"), and MSVI (collectively, the "Morgan Stanley
Shareholders") exchanged a portion of their Class A Common Stock of the Company
for Class B Common Stock in a share-for-share exchange without payment of any
additional consideration. 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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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 (with certain exceptions) once the total number of shares
of Common Stock of the Company owned by such investor falls below 7.5%. After
giving effect to the Offering, the Morgan Stanley Shareholders will own 51.3% of
the Common Stock of the Company (50.1% if the Underwriters' over-allotment
option is exercised in full) and 38.9% of the voting Common Stock (37.7% if the
Underwriters' over-allotment is exercised in full).
Accel Telecom L.P., Accel III, L.P. and Accel Investors 89, L.P.
(collectively, "Accel") also has the right to designate one director for
election to the Board of Directors so long as Accel owns at least 7.5% of the
outstanding Common Stock of the Company. So long as Pulsar owns at least 5% of
the outstanding capital stock of the Company (or until the expiration of the
Pulsar Exclusivity Period, as defined in the Stockholders' Agreement), it will
have the right to designate one member of the Board of Directors.
So long as J.P. Morgan Capital Corporation owns no less than 4% of the
Common Stock of the Company, the Company will permit a representative of such
holder to attend as an observer all meetings of the Board of Directors of the
Company and all committees thereof. Such representative is entitled to receive
all written materials and other information given to directors in connection
with such meetings.
So long as the Morgan Stanley Shareholders hold securities representing at
least 10% of the outstanding Common Stock, the Company is required to maintain
compensation and audit committees of its Board of Directors, each consisting of
up to four directors. Accel and those members of the Board of Directors who are
not designated by the Morgan Stanley Shareholders are each entitled to designate
one director on each such committee and the Morgan Stanley Shareholders is
entitled to designate up to two directors on each such committee.
The Company will not amend the Company's Restated Certificate of
Incorporation or By-laws to eliminate the right of stockholders of the Company
to take action upon written consent without a meeting, without prior notice and
without a vote as provided in the Company's By-laws, so long as the MS Merchant
Banking Funds hold at least 7.5% of the Company's Common Stock.
REGISTRATION RIGHTS
The Stockholders Agreement provides that the parties thereto, which include
substantially all of the current stockholders of the Company (collectively, the
"Holders"), collectively have the right to "demand" an unlimited number of
registrations at any time at least six months after this Offering. 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 of 1933, as amended (the "Securities Act"), covering the
registration of a number of shares equal to at least three million shares of
Common Stock or a lesser number if such number represents a majority of the
Registrable Securities then outstanding. The Company is obligated within ten
days of the receipt thereof to give written notice of such request to all
Holders and to use its best efforts to effect as soon as practicable the
registration under the Securities Act of all Registrable Securities that the
Holders request to be registered within 20 days of such notice by the Company.
Unless the Holders of a majority of the Registrable Securities to be registered
shall consent in writing, no other party (including the Company) will be
permitted to offer securities under such demand registration. Under certain
circumstances, Pulsar may also request that the Company file a registration
under the Securities Act covering the registration
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of all of the Registrable Securities Pulsar owns. Pulsar may make no more than
two such requests. The Company is not obligated to effect more than one demand
registration in any six-month period.
In the event the managing underwriter advises the Holders that the size of
the offering is such that the success of the offering would be materially and
adversely affected by inclusion of all Registrable Securities requested to be
included, then the number of shares of Registrable Securities to be included in
the underwriting will be reduced on a pro rata basis, provided that the Company
will first reduce entirely all securities other than Registrable Securities to
be included in such underwriting.
The Stockholders Agreement also provides that, if the Company proposes to
register any of its stock or other securities under the Securities Act in
connection with the public offering of such securities solely for cash (other
than this Offering), the Company shall, at such time, promptly (but in no event
less than 30 days before the filing date) give each Holder written notice of
such registration, and such notice shall offer the Holders the opportunity to
register such number of shares of Registrable Securities as such Holder may
request. Subject to certain restrictions, upon the written request of each
Holder given within 20 days after delivery of such notice by the Company, the
Company shall cause to be registered under the Securities Act all of the
Registrable Securities that each such Holder has requested to be registered.
If the underwriters determine that the total amount of securities requested
to be included in any such offering would materially and adversely affect the
success of such offering, the Company will be required to include in the
offering, in addition to any shares to be registered by the Company, only that
number of such Registrable Securities that the underwriters determine in their
sole discretion would not affect the success of such offering.
RESTRICTIONS ON TRANSFER
Under the Stockholders Agreement, if MSLEF II, MSCI, MSCP 892 and MSCP III
(collectively, the "MS Merchant Banking Funds") propose to transfer (other than
in a sale to the public) shares which, taken together with any prior transfers
by the MS Merchant Banking Funds, represent more than 10% of the shares owned by
them on the date of the Stockholders Agreement, the Holders have a right to
require the transferee to purchase their shares on a pro rata basis. The Holders
who own at least 67% of the voting Common Stock (the "Compelling Holders") also
have the right to require all Holders to sell their shares to any third party
that buys all of the shares owned by the Compelling Holders.
The Stockholders Agreement further provides for certain restrictions on the
amount of Common Stock which may be transferred by the parties to the
Stockholders Agreement for a period of one year following any public offering of
the Company's Common Stock (including this Offering), based on, with certain
exceptions, the percentage of shares of Common Stock sold in any such offering
by certain institutional investors party to the Stockholders Agreement. These
restrictions on transfer, and the right of the Compelling Holders described
above, will terminate, subject to certain extensions, approximately one year
following the consummation of the Offering. The Stockholders Agreement also
provides for certain restrictions on the transfer of shares of Common Stock by
holders thereof subject to Regulation Y of the Board of Governors of the Federal
Reserve System.
RESTRICTIONS ON AMENDMENT OF CERTIFICATE OF INCORPORATION
The Company will not amend the Company's Amended and Restated Certificate
of Incorporation or By-laws to eliminate the right of stockholders of the
Company to take action upon written consent of the holders of a majority of the
outstanding shares of Class A Common Stock without a meeting, without prior
notice and without a vote as provided in the Company's By-laws, so long as the
MS Merchant Banking Funds hold at least 7.5% of the Company's Common Stock. See
"Description of Capital Stock."
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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 May 1,
1996 (i) by each person known by the Company to own beneficially more than 5% of
the outstanding Class A Common Stock, (ii) by each director of the Company,
(iii) by each of the most highly compensated executive officers of the Company,
and (iv) by all executive officers and directors of the Company as a group.
Except as otherwise indicated, each named person has voting and investment power
over the listed shares, and such voting and investment power is exercised solely
by the named person or shared with a spouse.
<TABLE>
<CAPTION>
TOTAL
CLASS B, C AND D COMMON
CLASS A COMMON STOCK(1) COMMON STOCK(2) STOCK
-------------------------------------- --------------------- ------
TO BE OWNED OWNED PRIOR TO AFTER
OWNED PRIOR TO AFTER THE AND AFTER THE
THE OFFERING OFFERING THE OFFERING OFFERING
------------------ ------------------ --------------------- --------
NUMBER % NUMBER % NUMBER % %
--------- ------ --------- ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
The Morgan Stanley Leveraged
Equity Fund II, L.P.(3)
1221 Avenue of the Americas
New York, NY 10020................... 5,829,919 25.0% 5,829,919 19.9% 4,598,137(4) 44.1% 26.3%
Morgan Stanley Capital
Partners III, L.P.(3)
1221 Avenue of the Americas
New York, NY 10020................... 3,488,846 15.0% 3,488,846 11.9% 2,751,701(5) 26.4% 15.7%
Morgan Stanley Venture
Capital Fund, L.P.(6)
1221 Avenue of the Americas
New York, NY 10020................... 1,481,511 6.4% 1,481,511 5.1% 1,168,489(7) 11.2% 6.7%
Other Morgan Stanley-sponsored
limited partnerships(8)............ 579,598 2.5% 579,598 2.0% 457,142(9) 4.4% 2.6%
Mellon Bank, N.A., as Trustee for
First Plaza Group Trust(10)
One Mellon Plaza
Pittsburgh, PA 15258................. 3,214,286 13.8% 3,214,286 11.0% -- -- 8.1%
Accel Telecom L.P.(11)
One Embarcadero Center, Ste. 3820
San Francisco, CA 94111.............. 1,542,300 6.6% 1,542,300 5.3% -- -- 3.9%
Accel III L.P.(11)
One Embarcadero Center, Ste. 3820
San Francisco, CA 94111.............. 1,416,200 6.1% 1,416,200 4.8% -- -- 3.6%
Accel Investors '89 L.P.(11)
One Embarcadero Center, Ste. 3820
San Francisco, CA 94111.............. 91,500 * 91,500 * -- -- *
Pulsar
Av. Roble, No. 300. Mezzanine
Edifino Torra Alta
Garza Garcia, N.L.
Mexico C.P. 66265.................... 2,142,857 9.2% 2,142,857 7.3% -- -- 5.4%
</TABLE>
66
<PAGE> 69
<TABLE>
<CAPTION>
TOTAL
CLASS B, C AND D COMMON
CLASS A COMMON STOCK(1) COMMON STOCK(2) STOCK
-------------------------------------- --------------------- ------
TO BE OWNED OWNED PRIOR TO AFTER
OWNED PRIOR TO AFTER THE AND AFTER THE
THE OFFERING OFFERING THE OFFERING OFFERING
------------------ ------------------ --------------------- --------
NUMBER % NUMBER % NUMBER % %
--------- ------ --------- ------ --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Directors and Named
Executive Officers:
John D. Beletic(12)................ 470,004 2.0% 470,004 1.6% -- -- 1.2%
Roger D. Linquist(13).............. 1,525,000 6.6% 1,525,000 5.2% -- -- 3.8%
Kenneth L. Hilton(14).............. 59,667 * 59,667 * -- -- *
Homer L. Huddleston(15)............ 26,332 * 26,332 * -- -- *
Sandra D. Neal(16)................. 68,400 * 68,400 * -- -- *
Carol W. Dickson(17)............... 15,000 * 15,000 * -- -- *
Frank V. Sica(3)(6)................ -- * -- * -- -- *
Guy L. de Chazal(6)................ -- * -- * -- -- *
Arthur Patterson(18)............... 3,050,000 13.1% 3,050,000 10.4% -- -- 7.7%
Andrew C. Cooper(6)................ -- * -- * -- -- *
Alejandro Perez Elizondo........... -- * -- * -- -- *
Leigh J. Abramson(3)............... -- * -- * -- -- *
Pamela D.A. Reeve.................. -- * -- * -- -- *
All directors and executive officers
as a group(19)..................... 5,705,878 24.2% 5,705,878 19.3% -- -- 14.3%
</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 following the completion of this Offering, 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. See "Description of Capital Stock."
(2) Holders of Class B, C and D Common Stock have no voting power except under
certain limited exceptions. See "Description of Capital Stock."
(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.
(4) Represents 4,598,137 shares of Class B Common Stock owned by MSLEF II.
(5) Represents 2,751,701 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.
(7) Represents 1,168,489 shares of Class B Common Stock owned by MSVCF.
(8) Includes 256,307 shares owned by MSVCF II, 118,688 shares owned by MSCI,
73,676 shares owned by MSVI, 69,345 shares owned by MSVC II and 61,582
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. Each of MSVCF II, MSVI and MSVC II is an investment partnership
for which the relationships described in footnote (6) above are applicable.
(9) Includes 202,153 shares of Class B Common Stock owned by MSVCF II, 93,612
shares of Class B Common Stock owned by MSCI, 58,110 shares of Class B
Common Stock owned by MSVI,
67
<PAGE> 70
54,695 shares of Class B Common Stock owned by MSVC II and 48,572 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 133,335 stock options which are
exercisable within the 60-day period commencing May 1, 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 27,382 stock options which are exercisable within the 60-day
period commencing May 1, 1996 pursuant to the Stock Option Plan.
(15) Includes 26,332 stock options which are exercisable within the 60-day
period commencing May 1, 1996 pursuant to the Stock Option Plan.
(16) Includes 45,332 stock options which are exercisable within the 60-day
period commencing May 1, 1996 pursuant to the Stock Option Plan.
(17) Includes 15,000 stock options which are exercisable within the 60-day
period commencing May 1, 1996 pursuant to the Stock Option Plan. Ms.
Dickson resigned from the Company effective February 29, 1996. Pursuant to
the terms of the Stock Option Plan, Ms. Dickson's options may be exercised
on or before May 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 561,385 stock options which are exercisable within the 60-day
period commencing May 1, 1996.
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<PAGE> 71
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following summary of the Company's capital stock does not purport to be
complete and is subject to and qualified in its entirety by the Company's
Amended and Restated Certificate of Incorporation, as amended (the
"Certificate"), and the laws of the State of Delaware.
The Certificate authorizes the issuance of 70,000,000 shares of Capital
Stock, consisting of 45,000,000 shares of Class A Common Stock, 12,000,000
shares of Class B Common Stock, 2,000,000 shares of Class C Common Stock,
1,000,000 shares of Class D Common Stock and 10,000,000 shares of preferred
stock. As of March 31, 1996, 23,278,915 of the authorized shares of Class A
Common Stock were outstanding, 8,975,469 of the authorized shares of Class B
Common Stock were outstanding, 731,846 of the authorized shares of Class C
Common Stock were outstanding, 725,445 of the authorized shares of Class D
Common Stock were outstanding and none of the authorized shares of Preferred
Stock were outstanding. As of March 31, 1996, there were 97 holders of Class A
Common Stock, eight holders of Class B Common Stock, one holder of Class C
Common Stock and one holder of Class D Common Stock. As of March 31, 1996,
2,793,274 shares of Class A Common Stock were reserved for issuance upon
exercise of outstanding stock options, 627,900 shares of such stock were
reserved for issuance upon exercise of the warrants issued by the Company in
1993 in connection with the placement of the 12 1/4% Notes (the "1993
Warrants"), 714,286 shares of such stock were reserved for issuance upon
conversion of securities by unaffiliated third-party Canadian stockholders of
Canada Holding and 206,748 shares of such stock were reserved for issuance on
exercise of the warrants issued to Mitsui Co., Ltd. in 1995 (the "Mitsui
Warrants"). See "Management -- Stock Option Plan," "Management -- Stock Issuance
Plan" and " -- Warrants."
COMMON STOCK
Class A Common Stock. Holders of Class A Common Stock are entitled to one
vote for each share of Class A Common Stock held on each matter submitted to a
vote of stockholders, including the election of directors. Holders of Class A
Common Stock are not entitled to cumulative voting. Shares of Class A Common
Stock have no preemptive or other subscription rights and are convertible
(except as provided in the Stockholders Agreement) (i) by the Morgan Stanley
Shareholders into an equal number of shares of Class B Common Stock and (ii) by
J.P. Morgan Capital Corporation and BT Investment Partners, Inc. (together, the
"Regulated Shareholders") into an equal number of shares of Class C Common
Stock.
Class B Common Stock. Holders of the Class B Common Stock have no right to
vote on matters submitted to a vote of stockholders, except (i) as otherwise
required by law and (ii) that the holders of Class B Common Stock shall have the
right to vote as a class on any amendment, repeal or modification to the
Certificate that adversely affects the powers, preferences or special rights of
the holders of such class. Shares of Class B Common Stock have no preemptive or
other subscription rights and are convertible into an equal number of shares of
Class A Common Stock (x) at the option of the holder thereof to the extent the
Morgan Stanley Shareholders do not, in the aggregate, own more than 49% of the
outstanding shares of Class A Common Stock and (y) automatically upon the
transfer by any Morgan Stanley Shareholder of such shares to a person that is
not a Morgan Stanley Shareholder or an affiliate of a Morgan Stanley
Shareholder.
Class C Common Stock. Holders of the Class C Common Stock have no right to
vote on matters submitted to a vote of stockholders, except (i) as otherwise
required by law and (ii) that the holders of Class C Common Stock shall have the
right to vote as a class on any amendment, repeal or modification to the
Certificate that adversely affects the powers, preferences or special rights of
the holders of such class. Shares of Class C Common Stock have no preemptive or
other subscription rights and are convertible, at the option of the holder
thereof, into an equal number of shares of Class A Common Stock but only to the
extent such holder and its affiliates would not, as a result of such conversion,
own, control or have the power to vote a greater number of shares of Class A
Common Stock than such holder and its affiliates are permitted to own, control
or have the power to vote under Regulation Y of the Board of Governors of the
Federal Reserve System (12 C.F.R. part 225) ("Regulation Y").
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<PAGE> 72
Class D Common Stock. Holders of the Class D Common Stock have no right to
vote on matters submitted to a vote of stockholders, except (i) as otherwise
required by law and (ii) that the holders of Class D Common Stock shall have the
right to vote on any merger, consolidation or disposition of assets that
requires stockholder approval under Delaware law, in which case holders of Class
D Common Stock shall vote (at a rate of one vote per share of Class D Common
Stock held) with holders of Common Stock as a single class on such matter unless
otherwise required by law. Shares of Class D Common Stock have no preemptive or
other subscription rights and are convertible, at the option of the holder
thereof, into an equal number of shares of Class A Common Stock at any time
after the consummation of the Offering.
Conversion of the Class B Common Stock, the Class C Common Stock and the
Class D Common Stock into shares of Class A Common Stock would result in a
decrease in the voting power of the holders of the previously outstanding Class
A Common Stock and the holders of the Class A Common Stock offered hereby.
Dividends. All holders of Common Stock are entitled to receive such
dividends or other distributions, if any, as may be declared from time to time
by the Board of Directors in its discretion out of funds legally available
therefor, subject to the prior rights of any preferred stock then outstanding,
and to share equally, share for share, in such dividends or other distributions
as if all shares of Common Stock were of a single class. Dividends or other
distributions declared or paid in shares of Common Stock, or options, warrants
or rights to acquire such stock or securities convertible into or exchangeable
for shares of such stock, are payable to all of the holders of Common Stock
ratably according to the number of shares held by them, in shares of Class A
Common Stock to holders of that class of stock, Class B Common Stock to holders
of that class of stock, Class C Common Stock to holders of that class of stock,
and Class D Common Stock to holders of that class of stock.
Liquidation. Subject to the prior rights of holders of all classes of stock
outstanding having prior rights with respect to the assets of the Company, upon
the liquidation or dissolution of the Company, the holders of Common Stock are
entitled to share ratably according to the number of shares held by them in all
assets remaining available for distribution to stockholders.
Full Payment and Nonassessability. All outstanding shares of Common Stock
are, and the shares to be issued by the Company pursuant to the Offering will
be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors, without further stockholder authorization, is
authorized to issue additional shares of preferred stock in one or more class or
series and to fix the rights, preferences and privileges of each additional
class or series, including dividend rights and preferences over dividends on the
Common Stock, conversion rights, voting rights (in addition to those provided by
law), redemption rights and the terms of any sinking fund therefor, and rights
upon liquidation, including preferences over the Common Stock. The issuance of
any such preferred stock may have the effect of delaying or preventing
transactions involving a change of control of the Company, including
transactions in which stockholders might otherwise receive a substantial premium
for their shares over then current market prices, and may limit the ability of
the stockholders to approve transactions that they deem to be in their best
interests.
CERTAIN REDEMPTION RIGHTS
Under the Certificate, the Company has the right to redeem outstanding
shares of its capital stock if the Board of Directors determines that such
redemption is necessary to prevent the loss or secure the reinstatement of any
governmental license or franchise held by the Company at a price equal to the
current market value of such shares (as determined in accordance with the
Certificate). For example, if at any time the percentage of the Company's
outstanding capital stock owned by persons or entities that are not U.S. persons
under the FCC rules ("Non-U.S. Persons") were to exceed 25%, the Company could
redeem shares of the Company's capital stock held by Non-U.S. Persons. If the
Company were to redeem shares of its stock in order to comply with regulatory
restrictions, the shares to be redeemed would be selected in a manner determined
by the Board of Directors, which may include selection first of the most
recently purchased shares,
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<PAGE> 73
selection by lot or selection in any other manner determined by the Board of
Directors. Based on currently available information, the Company estimates that
its percentage of foreign ownership is approximately 22%.
WARRANTS
In 1993, the Company issued the 1993 Warrants to purchase Common Stock at
an exercise price of $3.26 per share as part of the placement of the 12 1/4%
Notes. The 1993 Warrants may be exercised in whole or in part at any time until
December 31, 2003. The 1993 Warrants are currently exercisable for 627,900
shares of Class A Common Stock. In 1995, the Company issued to Mitsui Co., Ltd.
the Mitsui Warrants to purchase Common Stock at an exercise price of $10.00 per
share. The Mitsui Warrants may be exercised in whole or in part starting on
March 20, 1997 and until March 20, 2005. The Mitsui Warrants will be exercisable
for 206,748 shares of Class A Common Stock. The number of shares covered by the
1993 Warrants and the Mitsui Warrants may be adjusted on the occurrence of
certain events, specifically including, in the case of the 1993 Warrants, the
issuance of securities of the Company at less than fair market value (as defined
therein), or certain dividends, distributions or recapitalizations with respect
to the Class A Common Stock. See "Shares Eligible for Future Sale."
LIMITATION ON DIRECTORS' LIABILITY
The Certificate provides that the Company's directors are not liable to the
Company or its stockholders for monetary damages for breach of their fiduciary
duties to the fullest extent permitted by Delaware law. Under existing Delaware
law, directors would not be liable except under certain circumstances, including
breach of the director's duty of loyalty, acts or omissions not in good faith or
involving intentional misconduct or a knowing violation of law or any
transaction from which the director derived improper personal benefit. The
inclusion of this provision in the Certificate may have the effect of reducing
the likelihood of derivative litigation against directors and may discourage or
deter stockholders or the Company from bringing a lawsuit against directors of
the Company for breach of their duty of care. However, the provision does not
affect the availability of equitable remedies such as an injunction or
rescission.
DELAWARE TAKEOVER STATUTE
Section 203 of the Delaware Corporation Law, as amended ("Section 203"),
provides that, subject to certain exceptions specified therein, an "interested
stockholder" of a Delaware corporation shall not engage in any business
combination, including mergers or consolidations or acquisitions of additional
shares of the corporation with the corporation for a three-year period following
the date that such stockholder becomes an "interested stockholder" unless (i)
prior to such date, the board of directors of the corporation approved either
the business combination or the transaction which resulted in the stockholder
becoming an "interested stockholder", (ii) upon consummation of the transaction
which resulted in the stockholder becoming an "interested stockholder", the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding certain shares) or
(iii) on or subsequent to such date, the business combination is approved by the
board of directors of the corporation and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested stockholder."
Except as otherwise specified in Section 203, an "interested stockholder" is
defined to include (x) any person that is the owner of 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within three years immediately prior to the
relevant date and (y) the affiliates and associates of any such person.
These provisions could have the effect of delaying, deferring or preventing
a change of control of the Company. The Company's stockholders, by adopting an
amendment to its Certificate or bylaws, may elect not to be governed by Section
203, effective twelve months after adoption. Neither the Certificate nor the
By-laws presently exclude the Company from the restrictions imposed by Section
203.
71
<PAGE> 74
REGISTRAR AND TRANSFER AGENT
Keycorp Shareholder Services, Inc., is the Registrar and Transfer Agent for
the Company's Class A Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
39,711,675 shares of Common Stock (40,611,675 shares if the Underwriters'
over-allotment option is exercised in full). The Company will have outstanding
29,278,915 (30,178,915 if the Underwriters' over-allotment option is exercised
in full) shares of Class A Common Stock, 8,975,469 shares of Class B Common
Stock, 731,846 shares of Class C Common Stock, and 725,445 shares of Class D
Common Stock. Shares of Class B, C and D Common Stock are convertible, subject
to certain ownership and regulatory restrictions, at the option of the holder
into an equal number of shares of Class A Common Stock. Shares of Class A Common
Stock held by the Morgan Stanley Shareholders are convertible into an equal
number of shares of Class B Common Stock and shares of Class A Common Stock held
by the Regulated Shareholders are convertible into an equal number of shares of
Class C Common Stock. The Company has outstanding 2,793,274 options to purchase
shares of Class A Common Stock pursuant to the Stock Option Plan. In 1995,
36,664 shares of Class A Common Stock were issued upon the exercise of options
granted pursuant to the Stock Option Plan. Upon issuance, approximately 32,387
of such shares would be registered pursuant to a Form S-8 registration
statement. However, the shares registered under the Form S-8 are subject to
certain transfer restrictions contained in the stock purchase agreement executed
by each optionee upon exercise of each option. In addition, 834,648 shares of
Common Stock are issuable upon the exercise of outstanding warrants. See
"Description of Capital Stock." Only the 6,000,000 shares sold in the Offering
will be freely transferable in the United States without restriction under the
Securities Act unless such shares of Common Stock are held by an "affiliate" of
the Company (as that term is defined under the rules and regulations of the
Securities Act). Any such affiliate will be subject to the resale limitations of
Rule 144 adopted under the Securities Act in the event such affiliate desires to
publicly dispose of such shares. Restricted securities may not be resold except
in compliance with the registration requirements of the Securities Act or
pursuant to an exemption therefrom, such as the exemptions provided by Rule 144
and Rule 144A.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
"restricted securities" for at least two years will be entitled to sell within
any three-month period a number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock (approximately 397,117
shares immediately after the Offering) and (ii) the average weekly trading
volume in the Common Stock on all national securities exchanges and/or reported
through the automated quotation system of registered securities associations
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Securities and Exchange Commission (the
"Commission"). Sales pursuant to Rule 144 are also subject to certain other
requirements regarding the manner of sale, notice and availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months immediately preceding the sale is entitled to sell
restricted securities pursuant to Rule 144(k) without regard to the limitations
described above, provided that three years have expired since the later of the
date on which such restricted securities were acquired from the Company or the
date they were acquired from an affiliate of the Company. As defined in Rule
144, an "affiliate" of an issuer is a person that directly, or indirectly
through one or more intermediaries, controls or is controlled by, or is under
common control with, such issuer. The Commission has proposed reducing the
periods of beneficial ownership of "restricted securities" required by Rule 144.
Under the proposal, persons who have beneficially owned restricted securities
for at least one year instead of two years as currently required, would be able
to resell such securities by complying with the volume limitations described
above. In the case of a person who is not deemed to be an affiliate of the
Company during the preceding three months, the proposal would permit sales
without regard to the limitations described above as long as such person had
held the securities for at least two years, instead of three years as currently
required. There can be no assurance that the proposed revisions to Rule 144 will
be adopted by the Commission.
72
<PAGE> 75
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters") have severally agreed to purchase, and the
Company has agreed to sell to them, severally, the respective number of shares
of Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated....................................
Goldman, Sachs & Co..................................................
J.P. Morgan Securities Inc...........................................
Lehman Brothers Inc..................................................
----------
Total...................................................... 6,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.
The Underwriters propose to offer part of the Common Stock directly to the
public at the Price to Public set forth on the cover page hereof and part to
certain dealers at a price that represents a concession not in excess of
$ per share under the public offering price. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to other Underwriters or to certain other dealers. After the initial
offering of the Common Stock, the offering price and other selling terms may
from time to time be varied by the Underwriters.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
Each Underwriter has represented and agreed that (i) it has not offered or
sold and during the period of six months from the date hereof will not offer or
sell any shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their business or
otherwise in circumstances which have not resulted and will not result in an
offer in the United Kingdom within the meaning of Public Offers of Securities
Regulations 1995 (the "Regulation"); (ii) it has complied and will comply with
all applicable provisions of the Financial Services Act of 1986 and the
Regulation with respect to anything done by it in relation to the shares in,
from or otherwise involving the United Kingdom; and (iii) it has only issued or
passed on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the offer of the shares if that
person is of a kind described in Article 11(3) of the Financial Services Act of
1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to whom
such document may otherwise lawfully be issued or passed on.
Pursuant to the Underwriting Agreement, the Company has granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to 900,000 additional shares of Common Stock at the
Price to Public set forth on the cover page hereof, less underwriting discounts
and commissions. The Underwriters may exercise such option to purchase solely
for the purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Common Stock hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number set forth next to such
73
<PAGE> 76
Underwriter's name in the preceding table bears to the total number of shares of
Common Stock offered by the Underwriters hereby.
The Company, all of the Company's executive officers and directors, and
certain other shareholders of the Company who own in the aggregate approximately
shares of Common Stock, have agreed that, without the prior written
consent of MS & Co. they will not (a) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock (whether such
shares or any such securities are then owned by such person or are thereafter
acquired directly from the Company), or (b) enter into any swap or similar
agreement that transfers, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (a) or (b) of this paragraph is settled by delivery of such Common Stock
or such other securities, in cash or otherwise, for a period of 180 days after
the date of this Prospectus, other than (i) the sale to the Underwriters of the
shares of Common Stock under the Underwriting Agreement, (ii) the issuance by
the Company of shares of Common Stock upon the exercise of an option or warrant
or the conversion of a security outstanding on the date of this Prospectus, or
(iii) any options granted or shares of Common Stock issued pursuant to existing
benefit plans of the Company.
Prior to the Offering, the Morgan Stanley Shareholders, affiliates of MS &
Co., beneficially own in the aggregate 60.4% of the shares of Common Stock
outstanding. Immediately after the consummation of the Offering, the Morgan
Stanley Shareholders will own approximately 51.3% (50.1% if the Underwriters'
over-allotment option is exercised in full) of the shares of Common Stock
outstanding. In addition, J.P. Morgan Capital Corporation Co., an affiliate of
one of the Underwriters, owns 100% of the Class C Common Stock of the Company.
Four of the Company's eight directors are employees of MS & Co., Inc. MS & Co.
acted as the placement agent for the offering of the 12 1/4% Notes and 15% Notes
and received compensation for acting in such capacity. See "Certain
Transactions."
By virtue of such relationships described above, the provisions of Schedule
E ("Schedule E") to the Bylaws of the NASD apply to the Offering. Accordingly,
the public offering price can be no higher than that recommended by a "qualified
independent underwriter." In accordance with the requirements of Schedule E,
Lehman Brothers Inc. is assuming the responsibilities of acting as qualified
independent underwriter, and the initial public offering price of the shares of
Class A Common Stock offered hereby will not be higher than the initial public
offering price recommended by Lehman Brothers Inc. Lehman Brothers Inc. also has
participated in the preparation of the Registration Statement of which this
Prospectus is a part and has performed due diligence with respect thereto.
Pursuant to the requirements of Schedule E, the Underwriters will not
confirm sales of shares of Common Stock offered hereby to any accounts over
which they exercise discretionary authority without the prior written approval
of the transaction by the customer.
At the request of the Company, the Underwriters have reserved 100,000
shares of the Class A Common Stock for sale at the initial public offering price
to employees of the Company. The number of shares available for sale to the
public will be reduced to the extent such individuals purchase such reserved
shares. Reserved shares purchased by such individuals will, except as restricted
by applicable securities laws, be available for resale following the Offering.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined by negotiations between the Company and the Underwriters in
accordance with the recommendations of Lehman Brothers Inc., the "qualified
independent underwriter," as required by Schedule E. Among the factors to be
considered in determining the initial public offering price will be the sales,
earnings and certain other financial and operating information of the Company in
recent periods, the future prospects of the Company and its industry in general,
and certain ratios, market prices of securities and certain financial and
operating information of companies engaged in activities similar to those of the
Company and such other factors as may be deemed relevant. The initial public
offering price does not necessarily bear any relationship to the Company's
assets, book value, revenues or other established criteria of value, and should
not be considered indicative of the actual value of the Common Stock.
74
<PAGE> 77
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. Certain legal matters in connection with the securities offered hereby
will be passed upon for the Underwriters by Shearman & Sterling, 599 Lexington
Avenue, New York, New York 10022. Shearman & Sterling has performed, and will
continue to perform, legal services for MSLEF II, MSCP III, companies controlled
by MSLEF II, MSCP III and MS & Co.
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.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement
(together with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act with respect to the Class A Common Stock
being offered hereby. This Prospectus, which constitutes part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, to which reference is made hereby. Statements made in
this Prospectus concerning the contents of any contract, agreement or other
document referred to herein are not necessarily complete. With respect to each
such contract, agreement or other document filed with the Commission as an
exhibit to the Registration Statement, reference is hereby 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.
The Company files reports and other information with the Commission under
the Exchange Act. Such reports and other information may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such material can be obtained from the public reference section
of the Commission at 450 Fifth Street, N.W. Washington, D.C. 20549, at
prescribed rates.
75
<PAGE> 78
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> 79
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> 80
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, 60,000,000 shares authorized:
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> 81
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> 82
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> 83
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> 84
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> 85
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> 86
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> 87
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.
4. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
Effective November 15, 1995, PageMart International, Inc. owns 200,000
shares of common stock of PageMart Canada Limited ("PageMart Canada") which
represents 20% of the ownership of PageMart Canada. The remaining 800,000 shares
(representing 80% of the ownership) is held by PageMart Canada Holding
Corporation ("Canada Holding"). Canada Holding is owned 50% (1,000,000 shares of
Class A Common Stock) by third-party Canadian investors unrelated to PageMart
and 50% (1,000,000 shares of Class B Common Stock) by PageMart International,
Inc. The common shares have identical economic rights. However, voting control
of Canada Holding is held by the Class A Common Stockholders as the Class A
shares have two votes per share. The Company accounts for its investments in
PageMart Canada and Canada Holding under the equity method. Such investments are
included in Other Assets in the Consolidated Balance Sheet.
The agreement among stockholders contains provisions which restrict the
transfer of Canada Holding shares and PageMart Canada shares for periods ranging
from three to five years. During the two years following the third anniversary
of the transactions, the third-party Canadian investors may exchange the
1,000,000 Class A common shares they hold in Canada Holding for 714,286 shares
of voting common stock of Wireless, subject to certain U.S. and Canadian
ownership requirements. Wireless is ultimately responsible for effectuating the
exchange within the U.S. and Canadian ownership regulations. Such exchange may
be accelerated in the event Wireless enters into an agreement to be acquired.
After the third anniversary of the transactions, Wireless will have the right to
purchase the shares held by the third-party Canadian investors at their fair
market value provided regulatory ownership requirements permit such purchase.
5. LONG-TERM DEBT
Long-term debt, including capital lease obligations, consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- --------
<S> <C> <C>
12 1/4% Senior Discount Notes due November 1, 2003, at accreted value.... $83,494 $ 94,952
15% Senior Discount Exchange Notes due February 1, 2005, at accreted
value.................................................................. -- 114,865
</TABLE>
F-10
<PAGE> 88
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1995
------- --------
<S> <C> <C>
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.
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
F-11
<PAGE> 89
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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>
F-18
<PAGE> 96
[Image material appears here consisting of a circle containing a satellite
dish connected by arrow to pictures of computer terminals and people labelled
"Sender," "PageMart Message Center," "Desktop Message Marker/Telephone,"
"Personal Computer with Modem Connection," "Internet," "Business Professional,"
" Corporate LAN," "Corporate MIS," "Mobile Professional" and "Mobile
Individual. The word "Connectivity" is superimposed on the image and the image
is labelled "Connecting to the PageMart Wireless Network."]
<PAGE> 97
PAGEMART WIRELESS, INC.
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth costs and expenses, other than underwriting
discounts and commissions payable by the Company in connection with the Class A
Common Stock being registered. All amounts are estimates except the registration
fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
Registration fee......................................................... $ 31,724
National Association of Securities Dealers Fee........................... 9,700
Nasdaq Listing Fee....................................................... 33,576
Printing................................................................. 300,000
Legal fees and expenses.................................................. 750,000
Accounting fees and expenses............................................. 150,000
Transfer Agent fees and expenses......................................... 50,000
Blue Sky fees and expenses and legal fees................................ 50,000
Miscellaneous............................................................ 300,000
----------
Total.................................................................. $1,675,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware permits
Wireless, subject to the standards set forth therein, to indemnify any person in
connection with any action, suit or proceeding brought or threatened by reason
of the fact that such person is or was a director, officer, employee or agent of
Wireless or is or was serving as such with respect to another corporation or
entity at the request of Wireless. Article IX, Section B of Wireless' Restated
Certificate of Incorporation provides for full indemnification of its officers,
directors, employees and agents to the extent permitted by Section 145.
Wireless provides insurance from commercial carriers against certain
liabilities incurred by the directors and officers of Wireless.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished as to securities of Wireless sold
since its date of incorporation (November 29, 1994) which were not registered
under the Securities Act of 1933, as amended (the "Securities Act"). Exemption
from registration under the Securities Act is claimed for these transactions
under Section 4(2) of the Securities Act for transactions by an issuer not
involving any public offering. Except for the commissions paid to Morgan Stanley
& Co. Incorporated in connection with the sales of Wireless' 15% Senior Discount
Notes due 2005 (the "15% Notes") and the shares of Wireless' non-voting Common
Stock, par value $.0001 per share (the "Non-Voting Common Stock"), in January
1995, no underwriting discounts or commissions were paid in connection with the
sales.
On January 17, 1995, Wireless sold 20,727 units (the "Units"), each unit
consisting of $10,000 principal amount at maturity of Notes and 35 shares of
Non-Voting Common Stock. The total offering price of the Units was
$105,079,671.90. The total commission paid to Morgan Stanley & Co. Incorporated,
as placement agent, was $3,805,000. Net proceeds to Wireless equaled
$101,274,671.90.
On January 19, 1995, Wireless effected a corporate reorganization (the
"Reorganization"), pursuant to which Wireless became the holding company parent
of PageMart, Inc. ("PageMart"). In connection with the Reorganization, Wireless
issued 28,615,238 shares of its Common Stock, par value $.0001 per share, to
holders of PageMart common stock, in a share-for-share exchange, and 714,287
shares of its Convertible Non-
II-1
<PAGE> 99
Voting Common Stock, par value $.0001 per share, to holders of PageMart
convertible non-voting common stock, in a share-for-share exchange.
On May 11, 1995, Wireless completed a private offering of 3,598,429 shares
of its voting common stock at $7.00 per share to the MS Merchant Banking Funds
(other than MSLEF II), to First Plaza Group Trust, to certain institutional
investors and certain executive officers of the Company. The net proceeds to
Wireless (after expenses) from the offering were approximately $24.5 million.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS
----------- --------
<S> <C>
1.1*** -- Underwriting Agreement
3(i)***** -- Restated Certificate of Incorporation of PageMart Wireless, Inc.
3(ii)* -- By-laws of PageMart Wireless, Inc.
3(iii)***** -- Certificate of Amendment to Restated Certificate of Incorporation of
PageMart Wireless, Inc.
4.1**** -- Specimen certificate for Class A Common Stock
4.2** -- Indenture, dated as of October 19, 1993, between PageMart, Inc. and
United States Trust Company of New York, as Trustee, relating to the
12 1/4% Senior Discount Notes due 2003
4.3** -- Indenture dated as of January 17, 1995 between PageMart Nationwide,
Inc. and United States Trust Company of New York, as Trustee, relating
to the 15% Senior Discount Notes due 2005
5.1**** -- Opinion of Davis Polk & Wardwell as to the legality of the Common
Stock
10.1** -- Warrant Agreement, dated as of October 19, 1993, between PageMart,
Inc. and United States Trust Company of New York, as Warrant Agent,
relating to the Warrants to purchase Common Stock of the Company
10.2** -- Telecommunications Service Agreement, dated May 29, 1992, between
PageMart, Inc. and WilTel, Inc.
10.3** -- Equipment Lease Agreement, dated May 20, 1992, between PageMart, Inc.
and Glenayre Electronics, Inc.
10.4** -- First Addendum to Equipment Lease Agreement, dated May 20, 1992,
between PageMart, Inc. and Glenayre Electronics, Inc.
10.5** -- Amendment No. 2 to Equipment Lease Agreement, dated October 18, 1993,
between PageMart, Inc. and Glenayre Electronics, Inc.
10.6** -- Lease Agreement and Addendum, dated January 10, 1990, between Kingston
Houston Partners I, Ltd. and PageMart, Inc.
10.7** -- Expansion and Extension of Lease Agreement, dated April 7, 1993,
between Kingston Houston Partners I, Ltd. and PageMart, Inc.
10.8** -- Office Lease Agreement, dated January 29, 1992, between Dallas Central
Development Corp. and PageMart, Inc.
10.9** -- First Amendment to Office Lease Agreement, dated July 29, 1992,
between Fulcrum Central Ltd., as successor in interest to Dallas
Central Development Corp., and PageMart, Inc.
</TABLE>
II-2
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS
----------- --------
<S> <C>
10.10** -- Second Amendment to Office Lease Agreement, dated December 1, 1992,
between Fulcrum Central Ltd., as successor in interest to Dallas
Central Development Corp., and PageMart, Inc.
10.11** -- Third Amendment to Office Lease Agreement, dated December 29, 1992,
between Fulcrum Central Ltd., as successor in interest to Dallas
Central Development Corp., and PageMart, Inc.
10.12** -- Fourth Amendment to Office Lease Agreement, dated July 21, 1993,
between Fulcrum Central Ltd., as successor in interest to Dallas
Central Development Corp., and PageMart, Inc.
10.13** -- License Agreement, dated May 12, 1994, between PageMart, Inc.,
licensee, and International Business Machines Corporation, licensor
10.14** -- Sales Contract, dated January 21, 1994, between PageMart, Inc., buyer,
and Mitsui Comtek Corporation, seller
10.15** -- Resale Agreement, dated November 1, 1993, between PageMart, Inc.,
licensor, and GTE Service Corporation, licensee
10.16** -- Financing and Security Agreement between Motorola and Pagemart, Inc.
dated May 18, 1994
10.17** -- Subscription Agreement, dated June 9, 1994, between PageMart, Inc. and
Fomento Empresarial Regiomontano, S.A. de C.V.
10.18** -- Letter of Intent, dated June 9, 1994, between PageMart, Inc. and
Fomento Empresarial Regiomontano, S.A. de C.V.
10.19* -- Strategic Alliance Agreement No. 1, dated September 15, 1994, between
GTE Service Corporation and PageMart, Inc.
10.20* -- Strategic Alliance Agreement No. 2, dated October 13, 1994, between
GTE Service Corporation and PageMart, Inc.
10.21* -- Secured promissory note of John D. Beletic, as Maker, in favor of
PageMart, Inc. dated January 28, 1994, in the amount of $97,800
10.22* -- Secured promissory note of John D. Beletic, as Maker, in favor of
PageMart, Inc. dated November 29, 1994, in the amount of $200,000
10.23* -- Agreement of Reorganization and Plan of Merger, dated as of December
5, 1994, between PageMart, Inc., PageMart Nationwide, Inc. and PM
Merger Corp.
10.24* -- Registration Rights Agreement dated as of January 17, 1995 between
PageMart Nationwide, Inc. and Morgan Stanley & Co. Incorporated
10.25++ -- PageMart Nationwide, Inc. Third Amended and Restated 1991 Stock Option
Plan and Third Amended and Restated 1991 Stock Issuance Plan
10.26** -- Satellite Services and Space Segment Lease Agreement, dated January 2,
1995, between PageMart, Inc. and SpaceCom Systems, Inc.
10.27** -- Credit Agreement, dated as of May 11, 1995, by and among PageMart
Nationwide, Inc., the Lenders named therein, BT Commercial
Corporation, as Agent, and Bankers Trust Company, as Issuing Bank
10.28** -- Subscription Agreement, dated as of May 11, 1995, by and among
PageMart Nationwide, Inc. and the investors named therein
</TABLE>
II-3
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C>
10.29+ -- Amended and Restated Agreement Among Certain Stockholders of PageMart
Nationwide, Inc. dated as of September 19, 1995
10.30***** -- Secured promissory note of John D. Beletic, as Maker, in favor of
PageMart Nationwide, Inc. dated May 11, 1995, in the amount of
$21,000.
10.31***** -- Subscription Agreement dated as of July 7, 1995 among PageMart
Nationwide, Inc., PageMart Canada Holding Corporation and TD Capital
Group Ltd.
10.32***** -- Agreement Among Stockholders among PageMart Nationwide, Inc., PageMart
International, Inc., TD Capital Group Ltd., PageMart Canada Holding
Corporation and PageMart Canada Limited
10.33***** -- Equipment Purchase Agreement between Motorola, Inc. and PageMart
Wireless, Inc.(1)
10.34***** -- Technology Asset Agreement dated as of December 1, 1995 between
Motorola, Inc. and PageMart Wireless, Inc.(1)
10.35***** -- Form of PageMart Wireless, Inc. Employee Stock Purchase Plan
10.36***** -- PageMart Wireless, Inc. Nonqualified Formula Stock Option Plan for
Non-Employee Directors
11.1***** -- Computation of earnings (loss) per share
21.1***** -- PageMart Wireless, Inc. Subsidiaries
23.1*** -- Consent of Arthur Andersen LLP
23.2 -- Consent of Davis Polk & Wardwell (included in Exhibit 5.1)
24.1***** -- Power of Attorney.
27.1*** -- Financial Data Schedule for the year ended December 31, 1995 and the
three months ended March 31, 1996.
</TABLE>
- ---------------
* Each of these exhibits is hereby incorporated by reference to the Form
10-K of the Company for the fiscal year ended December 31, 1994.
** Each of these exhibits is hereby incorporated by reference to the
Registration Statement on Form S-1 of the Company (Reg. No. 33-91142).
*** Filed herewith.
**** To be filed by amendment.
***** Previously Filed.
+ Each of these exhibits is hereby incorporated by reference to the Form
8-K of the Company dated October 6, 1995.
++ Each of these exhibits is hereby incorporated by reference to the
Registration Statement on Form S-8 of the Company (Reg. No. 33-98116).
(1) The Company has requested confidential treatment for certain portions of
this agreement.
(B) FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants on Financial Statement
Schedules
Schedule I -- Condensed Financial Information of Registrant
Schedule II -- Valuation and Qualifying Accounts for the Years Ended
December 31, 1993, 1994 and 1995
II-4
<PAGE> 102
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlled
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
II-5
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on this 6th
day of May, 1996.
PAGEMART WIRELESS, INC.
(Registrant)
By: /s/ JOHN D. BELETIC
-----------------------------
John D. Beletic
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------- ----------------
<C> <S> <C>
/s/ JOHN D. BELETIC Chairman, President and Chief May 6, 1996
- --------------------------------------------- Executive Officer (Principal
John D. Beletic Executive Officer)
* Vice President, Finance, Chief May 6, 1996
- --------------------------------------------- Financial Officer and
G. Clay Myers Treasurer (Principal Financial
and Accounting Officer)
* Director May 6, 1996
- ---------------------------------------------
Frank V. Sica
* Director May 6, 1996
- ---------------------------------------------
Guy L. de Chazal
* Director May 6, 1996
- ---------------------------------------------
Arthur Patterson
Director
- ---------------------------------------------
Andrew C. Cooper
* Director May 6, 1996
- ---------------------------------------------
Roger D. Linquist
* Director May 6, 1996
- ---------------------------------------------
Leigh J. Abramson
* Director May 6, 1996
- ---------------------------------------------
Alejandro Perez Elizondo
- --------------------------------------------- Director
Pamela D. A. Reeve
*By: /s/ JOHN D. BELETIC
----------------------------------
John D. Beletic
Attorney-in-fact
</TABLE>
II-6
<PAGE> 104
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of
PageMart Wireless, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of PageMart Wireless, Inc. and
subsidiaries included in this Registration Statement on Form S-1 and have issued
our report thereon dated February 12, 1996. Our audit was made for the purpose
of forming an opinion on those financial statements taken as a whole. Schedules
I and II are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 12, 1996
S-1
<PAGE> 105
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PAGEMART WIRELESS, INC.
(PARENT COMPANY)
CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Current assets:
Cash and cash equivalents..................................................... $ 17,075
Accounts receivable, net...................................................... 11,424
Prepaid expenses and other current assets..................................... 52
------------
Total current assets....................................................... 28,551
Investment in PageMart PCS, Inc................................................. 95,912
Investment in PageMart, Inc..................................................... (27,022)
Deferred debt issuance costs, net............................................... 5,741
------------
Total assets.......................................................... $ 103,182
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Other current liabilities....................................................... $ 360
Long-term debt.................................................................. 114,865
Stockholders' deficit:
Common stock $.0001 par value per share, 60,000,000 shares authorized,
33,710,053 shares issued at December 31, 1995.............................. 3
Additional paid-in capital.................................................... 154,601
Accumulated deficit........................................................... (166,090)
Stock subscription receivable................................................. (557)
------------
Total stockholders' deficit................................................ (12,043)
------------
Total liabilities and stockholders' deficit........................... $ 103,182
==========
</TABLE>
See accompanying notes
S-2
<PAGE> 106
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
PAGEMART WIRELESS, INC.
(PARENT COMPANY)
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Operating loss.................................................................. $ 0
Other (income) expense:
Equity in net loss of subsidiaries............................................ 38,858
Interest expense.............................................................. 15,521
Interest income............................................................... (1,266)
--------
Total other (income) expense.......................................... 53,113
--------
Net loss........................................................................ $(53,113)
========
</TABLE>
See accompanying notes
S-3
<PAGE> 107
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
PAGEMART WIRELESS, INC.
(PARENT COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Net cash provided by operating activities....................................... $ 1,623
--------
Cash flows from investing activities:
Investment in PageMart PCS, Inc............................................... (96,287)
--------
Net cash used in investing activities...................................... (96,287)
--------
Cash flows from financing activities:
Proceeds from issuance of senior discount notes, net.......................... 95,001
Proceeds from issuance of common stock........................................ 29,578
Proceeds from issuance of common stock under the stock option/stock issuance
plan....................................................................... 31
Purchase of accounts receivable from subsidiary............................... (11,424)
Deferred debt issuance costs incurred for Revolving Credit Agreement.......... (1,447)
--------
Net cash provided by financing activities.................................. 111,739
--------
Net increase in cash and cash equivalents....................................... 17,075
Cash and cash equivalents, beginning of period.................................. --
--------
Cash and cash equivalents, end of period........................................ $ 17,075
========
</TABLE>
See accompanying notes
S-4
<PAGE> 108
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
PAGEMART WIRELESS, INC.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
PageMart, Inc. ("PageMart") was incorporated as a Delaware corporation on
May 8, 1989, to provide wireless messaging products and services. In January
1995, PageMart effected a corporate reorganization pursuant to which PageMart
Nationwide, Inc., a Delaware corporation, became the holding company parent of
PageMart. In December 1995, the corporate name was changed from PageMart
Nationwide, Inc. to PageMart Wireless, Inc. (the "Company").
In the parent-company-only financial statements, the Company's investment
in subsidiaries is stated at cost less equity in losses of subsidiaries since
date of inception. The Company's share of net losses of its unconsolidated
subsidiaries is included in consolidated net loss using the equity method.
Parent-company-only financial statements should read in conjunction with the
Company's consolidated financial statements.
2. LONG-TERM DEBT
In January 1995, the Company completed an offering of 15% Senior Discount
Notes due 2005 and 725,445 shares of non-voting common stock, par value $.0001
per share (the "Unit Offering"). Net proceeds from the Unit Offering were
approximately $100 million, of which approximately $5.1 million was allocated to
the non-voting common stock. The amount of 15% Senior Discount Notes outstanding
at December 31, 1995, was $114,865. The 15% Senior Discount Notes due 2005 (the
"15% Notes") have a principal amount at maturity of $207.3 million with an
initial accreted value of $100 million. The 15% Notes mature on February 1,
2005. From and after August 1, 2000, interest on the 15% Notes will be payable
semiannually in cash at the rate of 15% per annum. The 15% Notes are redeemable
at any time on or after February 1, 2000, at the option of the Company in whole
or in part, at 105% of their principal amount at maturity, plus accrued and
unpaid interest, declining to 100% of their principal amount at maturity plus
accrued interest on and after February 1, 2002. In addition, at any time prior
to February 1, 1998, up to 35% of the accreted value of the 15% Notes may be
redeemed at a redemption price of 112.5% of their accreted value on the
redemption date at the option of the Company in connection with a public
offering of its common stock.
In June 1995, the Company commenced an exchange offer pursuant to an
effective registration statement whereby all outstanding 15% Notes were
exchanged for the Company's 15% Senior Discount Exchange Notes.
On May 11, 1995, the Company entered into the Revolving Credit Agreement
which provides for a $50 million revolving line of credit. As of December 31,
1995, there were no loans outstanding under the Revolving Credit Agreement. The
maximum amount available under the Revolving Credit Agreement at any time is
limited to a borrowing base amount equal to the lesser of (i) a specified
percentage of eligible accounts receivable and inventory owned by the Company,
and (ii) an amount equal to the service contribution (as defined in the
Revolving Credit Agreement) of the Company for the immediately preceding
three-month period times 4.0 (or 4.5, at times prior to December 31, 1995). The
interest rate applicable to loans under the Revolving Credit Agreements is, at
the option of the Company, either at a prime rate plus 1 1/4% or a Eurodollar
rate plus 2 1/2%. Commitments under the Revolving Credit Agreement expire and
all loans will be due and payable on March 31, 1999.
The Revolving Credit Agreement contains certain covenants that, among other
things, limit the ability of the Company to incur indebtedness, make capital
expenditures and investments, pay dividends, repurchase capital stock, engage in
transactions with affiliates, create liens, sell assets, or engage in mergers or
consolidations, and also requires the Company to maintain certain financial
ratios.
The Revolving Credit Agreement is secured by all trade receivables and
inventory owned by the Company from time to time and by all of the capital stock
of PageMart owned by the Company. As of December 31, 1995, the maximum amount
available under the Revolving Credit Agreement was $28.2 million.
S-5
<PAGE> 109
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C
ADDITIONS
COLUMN B -----------------------
BALANCE AT CHARGED TO CHARGED TO COLUMN E
COLUMN A BEGINNING COSTS AND OTHER COLUMN D BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ----------------------------------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Year Ended December 31, 1995....... $1,388 $6,135 $0 $2,989(a) $ 4,534
Year Ended December 31, 1994....... $1,172 $6,590 $0 $6,374(a) $ 1,388
Year Ended December 31, 1993....... $ 708 $1,273 $0 $ 809(a) $ 1,172
</TABLE>
- ---------------
(a) Accounts written off as uncollectible, net of recoveries.
S-6
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT PAGES
- ------------ ----------------------------------------------------------------------------------
<S> <C> <C>
1.1*** -- Underwriting Agreement.
3(i)***** -- Restated Certificate of Incorporation of PageMart Wireless, Inc.
3(ii)* -- By-laws of PageMart Nationwide, Inc.
3(iii)***** -- Certificate of Amendment to Restated Certificate of Incorporation of
PageMart Wireless, Inc.
4.1**** -- Specimen certificate for Class A Common Stock
4.2** -- Indenture, dated as of October 19, 1993, between PageMart, Inc. and
United States Trust Company of New York, as Trustee, relating to the
12 1/4% Senior Discount Notes due 2003
4.3** -- Indenture dated as of January 17, 1995 between PageMart Nationwide,
Inc. and United States Trust Company of New York, as Trustee,
relating to the 15% Senior Discount Notes due 2005
5.1**** -- Opinion of Davis Polk & Wardwell as to the legality of the Common
Stock
10.1** -- Warrant Agreement, dated as of October 19, 1993, between PageMart,
Inc. and United States Trust Company of New York, as Warrant Agent,
relating to the Warrants to purchase Common Stock of the Company.
10.2** -- Telecommunications Service Agreement, dated May 29, 1992, between
PageMart, Inc. and WilTel, Inc.
10.3** -- Equipment Lease Agreement, dated May 20, 1992, between PageMart,
Inc. and Glenayre Electronics, Inc.
10.4** -- First Addendum to Equipment Lease Agreement, dated May 20, 1992,
between PageMart, Inc. and Glenayre Electronics, Inc.
10.5** -- Amendment No. 2 to Equipment Lease Agreement, dated October 18,
1993, between PageMart, Inc. and Glenayre Electronics, Inc.
10.6** -- Lease Agreement and Addendum, dated January 10, 1990, between
Kingston Houston Partners I, Ltd. and PageMart, Inc.
10.7** -- Expansion and Extension of Lease Agreement, dated April 7, 1993,
between Kingston Houston Partners I, Ltd. and PageMart, Inc.
10.8** -- Office Lease Agreement, dated January 29, 1992, between Dallas
Central Development Corp. and PageMart, Inc.
10.9** -- First Amendment to Office Lease Agreement, dated July 29, 1992,
between Fulcrum Central Ltd., as successor in interest to Dallas
Central Development Corp., and PageMart, Inc.
10.10** -- Second Amendment to Office Lease Agreement, dated December 1, 1992,
between Fulcrum Central Ltd., as successor in interest to Dallas
Central Development Corp., and PageMart, Inc.
10.11** -- Third Amendment to Office Lease Agreement, dated December 29, 1992,
between Fulcrum Central Ltd., as successor in interest to Dallas
Central Development Corp., and PageMart, Inc.
10.12** -- Fourth Amendment to Office Lease Agreement, dated July 21, 1993,
between Fulcrum Central Ltd., as successor in interest to Dallas
Central Development Corp., and PageMart, Inc.
</TABLE>
<PAGE> 111
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT PAGES
- ------------ ----------------------------------------------------------------------------------
<S> <C> <C>
10.13** -- License Agreement, dated May 12, 1994, between PageMart, Inc.,
licensee, and International Business Machines Corporation, licensor.
10.14** -- Sales Contract, dated January 21, 1994, between PageMart, Inc.,
buyer, and Mitsui Comtek Corporation, seller.
10.15** -- Resale Agreement, dated November 1, 1993, between PageMart, Inc.,
licensor, and GTE Service Corporation, licensee.
10.16** -- Financing and Security Agreement between Motorola and Pagemart, Inc.
dated May 18, 1994.
10.17** -- Subscription Agreement, dated June 9, 1994, between PageMart, Inc.
and Fomento Empresarial Regiomontano, S.A. de C.V.
10.18** -- Letter of Intent, dated June 9, 1994, between PageMart, Inc. and
Fomento Empresarial Regiomontano, S.A. de C.V.
10.19* -- Strategic Alliance Agreement No. 1, dated September 15, 1994,
between GTE Service Corporation and PageMart, Inc.
10.20* -- Strategic Alliance Agreement No. 2, dated October 13, 1994, between
GTE Service Corporation and PageMart, Inc.
10.21* -- Secured promissory note of John D. Beletic, as Maker, in favor of
PageMart, Inc. dated January 28, 1994, in the amount of $97,800.
10.22* -- Secured promissory note of John D. Beletic, as Maker, in favor of
PageMart, Inc. dated November 29, 1994, in the amount of $200,000.
10.23* -- Agreement of Reorganization and Plan of Merger, dated as of December
5, 1994, between PageMart, Inc., PageMart Nationwide, Inc. and PM
Merger Corp.
10.24* -- Registration Rights Agreement dated as of January 17, 1995 between
PageMart Nationwide, Inc. and Morgan Stanley & Co. Incorporated.
10.25++ -- PageMart Nationwide, Inc. Third Amended and Restated 1991 Stock
Option Plan and Third Amended and Restated 1991 Stock Issuance Plan.
10.26** -- Satellite Services and Space Segment Lease Agreement, dated January
2, 1995, between PageMart, Inc. and SpaceCom Systems, Inc.
10.27** -- Credit Agreement, dated as of May 11, 1995, by and among PageMart
Nationwide, Inc., the Lenders named therein, BT Commercial
Corporation, as Agent, and Bankers Trust Company, as Issuing Bank
10.28** -- Subscription Agreement, dated as of May 11, 1995, by and among
PageMart Nationwide, Inc. and the investors named therein
10.29+ -- Amended and Restated Agreement Among Certain Stockholders of
PageMart Nationwide, Inc. dated as of September 19, 1995
10.30***** -- Secured promissory note of John D. Beletic, as Maker, in favor of
PageMart Nationwide, Inc. dated May 11, 1995, in the amount of
$21,000.
10.31***** -- Subscription Agreement dated as of July 7, 1995 among PageMart
Nationwide, Inc., PageMart Canada Holding Corporation and TD Capital
Group Ltd.
10.32***** -- Agreement Among Stockholders among PageMart Nationwide, Inc.,
PageMart International, Inc., TD Capital Group Ltd., PageMart Canada
Holding Corporation and PageMart Canada Limited.
</TABLE>
<PAGE> 112
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT PAGES
- ------------ ----------------------------------------------------------------------------------
<S> <C> <C>
10.33***** -- Equipment Purchase Agreement between Motorola, Inc. and PageMart
Wireless, Inc.(1)
10.34***** -- Technology Asset Agreement dated as of December 1, 1995 between
Motorola, Inc. and PageMart Wireless, Inc.(1)
10.35***** -- Form of PageMart Wireless, Inc. Employee Stock Purchase Plan
10.36***** -- Nonqualified Formula Stock Option Plan for Non-Employee Directors
11.1***** -- Computation of earnings (loss) per share.
21.1***** -- PageMart Wireless, Inc. Subsidiaries.
23.1*** -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Davis Polk & Wardwell (included in Exhibit 5.1)
24.1***** -- Power of Attorney (included on signature page).
27.1*** -- Financial Data Schedule for the year ended December 31, 1995 and the
three months ended March 31, 1996.
</TABLE>
- ---------------
* Each of these exhibits is hereby incorporated by reference to the Form
10-K of the Company for the fiscal year ended December 31, 1994.
** Each of these exhibits is hereby incorporated by reference to the
Registration Statement on Form S-1 of the Company (Reg. No. 33-91142).
*** Filed herewith.
**** To be filed by amendment.
***** Previously filed.
+ Each of these exhibits is hereby incorporated by reference to the Form
8-K of the Company dated October 6, 1995.
++ Each of these exhibits is hereby incorporated by reference to the
Registration Statement on Form S-8 of the Company (Reg. No. 33-98116).
(1) The Company has requested confidential treatment for certain portions of
this agreement.
<PAGE> 1
EXHIBIT 1.1
6,000,000 Shares
PAGEMART WIRELESS, INC.
CLASS A COMMON STOCK (par value $.0001 per share)
UNDERWRITING AGREEMENT
______ __, 1996
<PAGE> 2
______ __, 1996
Morgan Stanley & Co.
Incorporated
Goldman, Sachs & Co.
JP Morgan Securities Inc.
Lehman Brothers Inc.
c/o Morgan Stanley & Co.
Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
PageMart Wireless, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule I hereto (the "Underwriters"), an aggregate of 6,000,000 shares of the
Class A Common Stock (par value $.0001 per share) of the Company (the "Firm
Shares").
The Company also proposes to issue and sell to the several
Underwriters not more than an additional 900,000 shares of its Class A Common
Stock (par value $.0001 per share) (the "Additional Shares"), if and to the
extent that you, as managers of the offering, shall have determined to
exercise, on behalf of the Underwriters, the right to purchase such shares of
common stock granted to the Underwriters in Article II hereof. The Firm Shares
and the Additional Shares are hereinafter collectively referred to as the
"Shares". The shares of Class A Common Stock (par value $.0001 per share) of
the Company to be outstanding after giving effect to the sales contemplated
hereby are hereinafter referred to as the "Class A Common Stock".
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, including a
prospectus, relating to the Shares. The registration statement as amended at
the time it becomes effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to
Rule 430A under the Securities Act of 1933, as amended (the "Securities Act"),
is hereinafter referred to as the "Original Registration Statement"; any
registration statement filed pursuant to Rule 462(b) under the Securities Act
is hereinafter referred to as the "Rule 462(b) Registration Statement"; the
Original Registration Statement and any Rule 462(b) Registration Statement are
hereinafter referred to collectively as the "Registration Statement"; and the
prospectus in the form first used to confirm sales of Shares is hereinafter
referred to as the "Prospectus".
<PAGE> 3
2
I.
The Company represents and warrants to each of the
Underwriters that:
(a) The Original Registration Statement has become
effective, and if, the Company has elected to rely upon Rule 462(b)
under the Securities Act, the Rule 462(b) Registration Statement shall
have become effective not later than the earlier of (i) 10:00 p.m.
Eastern time on the date hereof and (ii) the time confirmations are
sent or given, as specified by Rule 462(b) under the Securities Act;
no stop order suspending the effectiveness of the Registration
Statement is in effect, and no proceedings for such purpose are
pending before, and the Company does not know of any such proceedings
that are threatened by, the Commission.
(b) (i) Each part of the Registration Statement, when
such part became effective, did not contain and each such part, as
amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder and (iii) the Prospectus does
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this
paragraph (b) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information
relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State
of Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(d) Each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in
which the conduct of its business or its
<PAGE> 4
3
ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(e) The authorized capital stock of the Company conforms
as to legal matters to the description thereof contained in the
Prospectus.
(f) The shares of Common Stock outstanding prior to the
issuance of the Shares to be sold by the Company have been duly
authorized and are validly issued, fully paid and non-assessable.
(g) The Shares to be sold by the Company have been duly
authorized and, when issued and delivered in accordance with the terms
of this Agreement, will be validly issued, fully paid and
non-assessable, and the issuance of such Shares will not be subject to
any preemptive or similar rights.
(h) This Agreement has been duly authorized, executed and
delivered by the Company.
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the certificate
of incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no
consent, approval, authorization or order of, or qualification with,
any governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except as have been
obtained under the Securities Act and such as may be required by the
securities or Blue Sky laws of the various states in connection with
the offer and sale of the Shares.
(j) There has not occurred any material adverse change,
or any development that could reasonably be expected to cause a
prospective material adverse change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus.
(k) There are no legal or governmental proceedings
pending or threatened to which the Company or any of its subsidiaries
is a party or to which any of the properties of the Company or any of
its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or
any statutes, regulations, contracts or other documents that are
required to be described in the
<PAGE> 5
4
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not described or filed as
required.
(l) Each of the Company and its subsidiaries has all
necessary consents, authorizations, approvals, orders, certificates
and permits of and from, and has made all declarations and filings
with, all federal, state, local and other governmental authorities,
all self-regulatory organizations and all courts and other tribunals,
to own, lease, license and use its properties and assets and to
conduct its business in the manner described in the Prospectus, except
to the extent that the failure to obtain such consents,
authorizations, approvals, orders, certificates or permits or make
such declarations or filings would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole.
(m) Each preliminary prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities
Act and the rules and regulations of the Commission thereunder.
(n) The Company is not an "investment company", as
defined in the Investment Company Act of 1940, as amended.
(o) The Company and its subsidiaries are (i) in
compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), (ii) have
received all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions
of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
(p) There are no holders of securities of the Company or
any of its subsidiaries, or holders of rights, options, or warrants to
obtain securities of the Company or any of its subsidiaries, who have
the right, during the 180 day period after the date of this Agreement
to request the Company to register securities held by them under the
Securities Act, other than holders who have waived such right for the
180 day period after the date of the initial public offering of the
Shares and have waived their rights with respect to the inclusion of
their securities in the Registration Statement.
<PAGE> 6
5
(q) The Company has complied with all provisions of
Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
(r) The Shares have been approved for trading on the
Nasdaq National Market ("Nasdaq") by the National Association of
Securities Dealers, Inc., subject to notice of issuance.
II.
The Company hereby agrees to sell to the several Underwriters,
and the Underwriters, upon the basis of the representations and warranties
herein contained, but subject to the conditions hereinafter stated, agree,
severally and not jointly, to purchase from the Company the respective number
of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter at $__.__ a share -- the purchase price.
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Company agrees
to sell to the Underwriters the Additional Shares, and the Underwriters shall
have a one-time right to purchase, severally and not jointly, up to 900,000
Additional Shares at the purchase price. Additional Shares may be purchased as
provided in Article IV hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If
any Additional Shares are to be purchased, the Underwriters agree, severally
and not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not (i) offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (whether such shares or any such
securities are then owned by such person or are thereafter acquired directly
from the Company) or (ii) enter into any swap or similar agreement that
transfers, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, for a period of 180 days after the date of
the Prospectus, other than (A) the Shares to be sold hereunder, (B) any shares
of Common Stock sold by the Company upon the exercise of an option or warrant
or the conversion of a security outstanding on the date hereof and (C)
<PAGE> 7
6
shares or options to acquire shares of Common Stock granted pursuant to the
Company's Stock Option Plan, Stock Issuance Plan, Stock Purchase Plan or
Directors Plan.
III.
The Company is advised by you that the Underwriters propose to
make a public offering of their respective portions of the Shares as soon after
the Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Company is further advised by you that the Shares
are to be offered to the public initially at $______ a share (the public
offering price) and to certain dealers selected by you at a price that
represents a concession not in excess of $______ a share under the public
offering price, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in excess of $_____ a share, to any Underwriter or
to certain other dealers.
IV.
Payment for the Firm Shares to be sold by the Company shall be
made in same day funds by wire transfer to the Company's account at _____ at a
closing (the "Closing") to be held at the office of Shearman & Sterling, 599
Lexington Avenue, New York, New York, at 10:00 A.M., local time, on ______ __,
1996, or at such other time on the same or such other date, not later than
______ __, 1996, as shall be designated in writing by you. The time and date of
such payment are hereinafter referred to as the "Closing Date".
Payment for any Additional Shares shall be made in same day
funds by wire transfer to the Company's account at _____ at a closing to be
held at the office of Shearman & Sterling, 599 Lexington Avenue, New York, New
York, at 10:00 A.M., local time, on such date (which may be the same as the
Closing Date but shall in no event be earlier than the Closing Date nor later
than ten business days after the giving of the notice hereinafter referred to)
as shall be designated in a written notice from you to the Company of your
determination, on behalf of the Underwriters, to purchase a number, specified
in said notice, of Additional Shares, or on such other date, in any event not
later than ______ __, 1996, as shall be designated in writing by you. The time
and date of such payment are hereinafter referred to as the "Option Closing
Date". The notice of the determination to exercise the option to purchase
Additional Shares and of the Option Closing Date may be given at any time
within 30 days after the date of this Agreement.
Certificates for the Firm Shares and Additional Shares shall
be in definitive form and registered in such names and in such denominations as
you shall request in writing not later than one business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts
<PAGE> 8
7
of the several Underwriters, with any transfer taxes payable in connection with
the transfer of the Shares to the Underwriters duly paid, against payment of
the purchase price therefor.
V.
The obligations of the Company and the several obligations of
the Underwriters hereunder are subject to the condition that the Original
Registration Statement shall have become effective not later than the date
hereof.
The several obligations of the Underwriters hereunder are
subject to the following further conditions:
(a) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date,
(i) there shall not have occurred any
downgrading, nor shall any notice have been given of any
intended or potential downgrading or of any review for a
possible change that does not indicate the direction of the
possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization", as such term is defined for purposes of Rule
436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change, or
any development involving a prospective change, in the
condition, financial or otherwise, or in the earnings,
business or operations, of the Company and its subsidiaries,
taken as a whole, from that set forth in the Registration
Statement, that, in your judgment, is material and adverse and
that makes it, in your judgment, impracticable to market the
Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing
Date a certificate, dated the Closing Date and signed by an executive
officer of the Company, to the effect set forth in clause (a) (i)
above and to the effect that the representations and warranties of the
Company contained in this Agreement are true and correct as of the
Closing Date and that the Company has complied in all material
respects with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or
before the Closing Date.
The officer signing and delivering such certificate may rely
upon the best of his knowledge as to proceedings threatened.
(c) You shall have received on the Closing Date an
opinion of Davis
<PAGE> 9
8
Polk & Wardwell, counsel for the Company, dated the Closing Date, to
the effect that
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the State of Delaware and has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus;
(ii) each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority to own
its property and to conduct its business as described in the
Prospectus;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(iv) the shares of Common Stock outstanding prior
to the issuance of the Shares to be sold by the Company have
been duly authorized and are validly issued, fully paid and
non-assessable;
(v) the Shares to be sold by the Company have
been duly authorized and, when issued and delivered, in
accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or similar
rights;
(vi) this Agreement has been duly authorized,
executed and delivered by the Company;
(vii) the execution and delivery by the Company of,
and the performance by the Company of its obligations under,
this Agreement will not contravene any provision of applicable
law or the certificate of incorporation or by-laws of the
Company, and no consent, approval, authorization or order of
or qualification with any governmental body or agency is
required for the performance by the Company of its obligations
under this Agreement, except as have been obtained under the
Securities Act and such as may be required by (A) the
securities or Blue Sky laws of the various states or (B) the
U.S. Communications Act of 1934, as amended, and the rules,
regulations and policies of the Federal Communications
Commission or (C) the public utilities laws of the various
states and the rules, regulations and policies of the state
public utilities regulatory authorities thereunder, in
connection with the offer and sale of the Shares;
<PAGE> 10
9
(viii) the statements (1) in the Prospectus under
the captions "Certain Transactions," "Description of Capital
Stock" and "Underwriters" and (2) in the Registration
Statement in Items 14 and 15, in each case insofar as such
statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present
the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters
referred to therein;
(ix) such counsel is not aware of any legal or
governmental proceeding pending or threatened to which the
Company or any of its subsidiaries is a party or to which any
of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(x) the Company is not an "investment company",
as defined in the Investment Company Act of 1940, as amended;
and
(xi) such counsel (1) is of the opinion that the
Registration Statement and Prospectus (except for financial
statements and schedules and other financial data included
therein as to which such counsel need not express any opinion)
comply as to form in all material respects with the Securities
Act and the rules and regulations of the Commission
thereunder, (2) believes that (except for financial statements
and schedules and other financial data as to which such
counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective did not contain any
untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading and (3) believes
that (except for financial statements and schedules and other
financial data as to which such counsel need not express any
belief) the Prospectus does not contain any untrue statement
of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
With respect to subparagraph (xi) of this paragraph (c) above,
Davis Polk & Wardwell may state that their opinion and belief are
based upon their participation in the preparation of the Registration
Statement and Prospectus and any amendments or supplements thereto and
review and discussion of the contents thereof, but are without
independent check or verification except as specified. Such counsel
need not express any opinion with respect to matters governed by or
related to (i) the U.S. Communications
<PAGE> 11
10
Act of 1934, as amended, or the rules, regulations or policies of the
Federal Communications Commission or (ii) the public utilities laws of
the various states or the rules, regulations or policies of the state
public utilities regulatory authorities thereunder.
The opinion of Davis Polk & Wardwell described above shall be
rendered to you at the request of the Company and shall so state
therein.
(d) You shall have received on the Closing Date an
opinion of Paul, Weiss, Rifkind, Wharton & Garrison, special FCC
counsel for the Company, dated the Closing Date, to the effect that:
(i) the statements in the Prospectus under the
captions "Risk Factors--Potential for Change in Regulatory
Environment" and "Business--Government Regulation" (except for
any and all statements regarding the Company's FCC licenses
and any and all statements regarding management's awareness of
certain matters), insofar as such statements constitute a
summary of the legal matters, documents or proceedings
referred to therein, are accurate in all material respects,
fairly present the information called for with respect to such
legal matters, documents and proceedings and fairly summarize
the matters referred to therein; and
(ii) the procedures followed by the Company in
respect of its investigation into the foreign ownership of the
Company were reasonable and comply in all material respects
with the requirements of the Communications Act and the rules,
regulations and policies of the FCC.
The opinion of Paul, Weiss, Rifkind, Wharton & Garrison
described above shall be rendered to you at the request of the Company
and shall so state therein.
(e) You shall have received on the Closing Date
an opinion of O'Connor & Hannan, special FCC counsel for the
Company, dated the Closing Date, to the effect that
(i) the Company and its subsidiaries have all the
FCC authorizations, consents and approvals (collectively, "FCC
Licenses") that are required to carry on the Company's and its
subsidiaries' businesses as now conducted. The FCC Licenses
have been duly and validly issued and are in full force and
effect. To the best of such counsel's knowledge, the Company
and its subsidiaries are not in violation of any of the terms
and conditions of the FCC Licenses;
(ii) the Company and its subsidiaries have all the
authorizations of the California and Pennsylvania Public
Utilities Commissions (the "State PUCs"),
<PAGE> 12
11
consents and approvals (collectively, "State Licenses") that
are required to carry on the Company's and its subsidiaries'
businesses as now conducted in California and Pennsylvania.
The State Licenses have been duly and validly issued and are
in full force and effect. To the best of such counsel's
knowledge, the Company and its subsidiaries are not in
violation of any of the terms and conditions of the State
Licenses;
(iii) there is no outstanding adverse judgment,
decree, or order that has been issued by the FCC against the
Company or its subsidiaries or, to the best of such counsel's
knowledge, any action, proceeding, or investigation pending or
threatened by the FCC against the Company or its subsidiaries
which would materially and adversely affect the operations of
the Company or its subsidiaries. To the best of such
counsel's knowledge, the Company and its subsidiaries are in
compliance with the Communications Act and the rules,
regulations and policies of the FCC;
(iv) there is no outstanding adverse judgment,
decree, or order that has been issued by the State PUCs
against the Company or its subsidiaries, or to the best of
such counsel's knowledge, any action, proceeding, or
investigation pending or threatened by the State PUCs against
the Company or its subsidiaries, which would materially affect
the operations of the Company or its subsidiaries. To the
best of such counsel's knowledge, the Company and its
subsidiaries are in compliance with California PUC Law and
Pennsylvania PUC Law (collectively, "State PUC Law");
(v) no consent, approval, order or authorization
of, or filing with, the FCC or with any State PUC on the part
of the Company or its subsidiaries with regard to any of the
FCC Licenses, FCC applications, State Licenses and State
applications, is required in connection with the issuance of
the Shares pursuant to this Agreement;
(vi) the Company and its subsidiaries will be in
compliance with Section 310(a) and Section 310(b) of the
Communications Act and the rules, regulations, and policies of
the FCC thereunder; and
(vii) the statements contained in the Prospectus
under the captions "Risk Factors--Potential for Change in
Regulatory Environment" and "Business--Government Regulation",
insofar as such statements constitute a summary of the legal
matters, documents or proceedings referred to therein, are
accurate in all material respects, fairly present the
information called for with
<PAGE> 13
12
respect to such legal matters, documents and proceedings and
fairly summarize the matters referred to therein.
The opinion of O'Connor & Hannan described above shall be
rendered to you at the request of the Company and shall so state
therein.
(f) You shall have received on the Closing Date an
opinion of Shearman & Sterling, counsel for the Underwriters, dated
the Closing Date, with respect to the Registration Statement and the
Prospectus and such other related matters as you may reasonably
request, and such counsel shall have received such documents and
information as they may reasonably request to enable them to pass upon
such matters.
(g) You shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing
Date, as the case may be, in form and substance satisfactory to you,
from Arthur Andersen LLP, independent public accountants, containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in
the Registration Statement and the Prospectus.
(h) The "lock-up" agreements between you and the Company,
certain management stockholders, directors and major stockholders of
the Company listed on Schedule II hereto relating to sales of shares
of common stock of the Company or any securities convertible into or
exercisable or exchangeable for such common stock, delivered to you on
or before the date hereof, shall be in full force and effect on the
Closing Date.
(i) The Shares shall have been approved for trading on
Nasdaq by the National Association of Securities Dealers, Inc.
(j) No stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such
purpose shall be pending before or, to the knowledge of the Company or
the Underwriters, threatened by the Commission.
(k) The Company shall have complied with the provisions
of Section VI(a) hereof with respect to the furnishing of Prospectuses
on the business day next succeeding the date of this Agreement, in
such quantities as you shall have reasonably requested.
(l) You shall have received such other documents and
certificates as are reasonably requested by you or your counsel.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the delivery to you on the Option
Closing Date of such documents as
<PAGE> 14
13
you may reasonably request with respect to the good standing of the Company,
the due authorization and issuance of the Additional Shares and other matters
related to the issuance of the Additional Shares.
VI.
In further consideration of the agreements of the Underwriters
herein contained, the Company covenants as follows:
(a) To furnish to you, without charge, five signed copies
of the Registration Statement (including exhibits thereto) and for
delivery to each other Underwriter a conformed copy of the
Registration Statement (without exhibits thereto) and, during the
period mentioned in paragraph (c) below, as many copies of the
Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request. In the case of
the Prospectus, to use its best efforts to furnish or cause to have
furnished to you copies of the Prospectus in New York City, prior to
10:00 a.m., on the business day next succeeding the date of this
Agreement, in such quantities as you reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and to file no such proposed
amendment or supplement to which you reasonably object.
(c) If, during such period after the first date of the
public offering of the Shares as in the opinion of your counsel the
Prospectus is required by law to be delivered in connection with sales
by an Underwriter or dealer, any event shall occur or condition exist
as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of
the circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of your counsel, it is necessary to
amend or supplement the Prospectus to comply with law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to
the Underwriters and to the dealers (whose names and addresses you
will furnish to the Company) to which Shares may have been sold by you
on behalf of the Underwriters and to any other dealers upon request,
either amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not,
in the light of the circumstances when the Prospectus is delivered to
a purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale
under the securities or Blue Sky laws of such jurisdictions as you
shall reasonably request.
<PAGE> 15
14
(e) If the Company elects to rely on Rule 462(b) under
the Securities Act, the Company shall file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule 462(b) under the
Securities Act no later than the earlier of (i) 10:00 p.m. Eastern
time on the date hereof and (ii) the time confirmations are sent or
given, as specified by Rule 462(b)(2) under the Securities Act, and
shall pay the applicable fees in accordance with Rule 111 under the
Securities Act.
(f) To make generally available to the Company's security
holders and to you, as soon as practicable but not later than 60 days
after the end of the twelve-month period beginning at the end of the
Company's fiscal quarter during which the effective date of the
Original Registration Statement occurs, an earnings statement of the
Company covering such twelve-month period that satisfies the
provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(g) Whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated, the Company agrees to
pay, or reimburse if paid by or on behalf of you, all costs and
expenses incident to the public offering of the Shares and the
performance of the obligations of the Company under this Agreement,
including those relating to: (i) the fees, disbursements and expenses
of the Company's counsel and accountants in connection with the
issuance of the Shares, the preparation, printing, filing and
distribution of the Registration Statement including financial
statements and all exhibits, each preliminary prospectus, the
Prospectus, all amendments and supplements to the Registration
Statement and the Prospectus, and the printing, filing and
distribution of this Agreement (including all document production
charges and reasonable expenses of counsel for the Underwriters in
connection with the preparation of this Agreement); (ii) the
preparation and delivery of any certificates for the Shares to the
Underwriters; (iii) all expenses in connection with the registration
or qualification of the Shares for offer and sale under the securities
or Blue Sky laws of such jurisdictions as you shall request, including
the reasonable fees and disbursements of counsel for the Underwriters
in connection with such registration and qualification and the
preparation, printing, distribution and shipment of preliminary and
supplementary Blue Sky memoranda; (iv) the furnishing (including costs
of shipping and mailing) to you and to the Underwriters of copies of
each preliminary prospectus, the Prospectus and all amendments or
supplements to the Prospectus, and of the several documents required
by this paragraph to be so furnished, as may be reasonably requested
for use in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold; (v) the filing
fees and expenses (including the reasonable fees and disbursements of
counsel to the Underwriters), if any, incurred with respect to any
filing with the National Association of Securities Dealers, Inc., made
in connection with the offering of the Shares; (vi) any expenses
incurred by the Company in connection with a "road show" presentation
to potential investors; and (vii) all transfer taxes, if any, with
respect to the sale and delivery of the Shares by the Company to the
Underwriters.
<PAGE> 16
15
VII.
The Company agrees to indemnify and hold harmless each
Underwriter (including any Underwriter in its role as qualified independent
underwriter pursuant to the rules of the National Association of Securities
Dealers, Inc.) and each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or is under
common control with, or is controlled by, any Underwriter, from and against any
and all losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact necessary to make the statements
therein in light of the circumstances under which they were made not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any such untrue statement or omission or alleged untrue statement or
omission based upon information relating to any Underwriter furnished to the
Company in writing by such Underwriter through you expressly for use therein.
Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act to the same extent as the foregoing indemnity from the Company
to each Underwriter, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus,
the Prospectus or any amendments or supplements thereto.
In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to any of the two preceding paragraphs, such
person (the "indemnified party") shall promptly notify the person against whom
such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding
and shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel, but the fees and expenses of such counsel shall be
at the expense of such indemnified party unless (i) the indemnifying party and
the indemnified party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the
<PAGE> 17
16
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
It is understood that the indemnifying party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for (a)
the fees and expenses of more than one separate firm (in addition to any local
counsel) for all Underwriters and all persons, if any, who control any
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act and (b) the fees and expenses of more than one
separate firm (in addition to any local counsel) for the Company, its
directors, its officers who sign the Registration Statement and each person, if
any, who controls the Company within the meaning of either such Section, and
that all such fees and expenses shall be reimbursed as they are incurred. In
the case of any such separate firm for the Underwriters and such control
persons of Underwriters, such firm shall be designated in writing by Morgan
Stanley & Co. Incorporated. In the case of any such separate firm for the
Company, and such directors, officers and control persons of the Company, such
firm shall be designated in writing by the Company. The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written consent but, if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party from and against any loss or liability by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel as contemplated by the
second and third sentences of this paragraph, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 60 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
To the extent the indemnification provided for in the first or
second paragraph of this Article VII is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the indemnifying party or parties on the one hand
and the indemnified party or parties on the other hand from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not permitted
by applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the indemnifying party or parties on the one hand and of the indemnified
party or parties on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or
<PAGE> 18
17
liabilities, as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other hand in connection with the offering of the Shares shall be deemed
to be in the same respective proportions as the net proceeds from the offering
of the Shares (before deducting expenses) received by the Company and the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover of the Prospectus, bear to the
aggregate public offering price of the Shares. The relative fault of the
Company on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company or by the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The
Underwriters' respective obligations to contribute pursuant to this Article VII
are several in proportion to the respective number of Shares they have
purchased hereunder, and not joint.
The Company and the Underwriters agree that it would not be
just or equitable if contribution pursuant to this Article VII were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Article VII, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The remedies provided for in this
Article VII are not exclusive and shall not limit any rights or remedies which
may otherwise be available to any indemnified party at law or in equity.
The indemnity and contribution provisions contained in this
Article VII and the representations and warranties of the Company contained in
this Agreement shall remain operative and in full force and effect regardless
of (i) any termination of this Agreement, (ii) any investigation made by or on
behalf of any Underwriter or any person controlling any Underwriter or any
person controlling the Company, its officers or directors or any person
controlling the Company and (iii) acceptance of and payment for any of the
Shares.
<PAGE> 19
18
VIII.
This Agreement shall be subject to termination by notice given
by you to the Company, if (a) after the execution and delivery of this
Agreement and prior to the Closing Date (i) trading generally shall have been
suspended or materially limited on or by, as the case may be, any of the New
York Stock Exchange, the American Stock Exchange, the National Association of
Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either federal or New York
State authorities, or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such event singly or
together with any other such event makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the
Prospectus.
IX.
This Agreement shall become effective upon the later of (a)
execution and delivery hereof by the parties hereto and (b) release of
notification of the effectiveness of the Registration Statement by the
Commission.
If, on the Closing Date or the Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares that it or they have agreed to purchase hereunder on such date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than
one-tenth of the aggregate number of the Shares to be purchased on such date,
the other Underwriters shall be obligated severally in the proportions that the
number of Firm Shares set forth opposite their respective names in Schedule I
bears to the aggregate number of Firm Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to Article II be increased pursuant to this Article IX by an
amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date or the Option Closing
Date, as the case may be, any Underwriter or Underwriters shall fail or refuse
to purchase Shares and the aggregate number of Shares with respect to which
such default occurs is more than one-tenth of the aggregate number of Shares to
be purchased on such date, and arrangements satisfactory to you and the Company
for the purchase of such Shares are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
nondefaulting Underwriter or the Company. In any such case either you or the
Company shall have the right to postpone the Closing Date or the Option Closing
Date, as the case may be, but in no event
<PAGE> 20
19
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason the Company shall be unable to perform its obligations under
this Agreement, the Company will reimburse the Underwriters or such
Underwriters as have so terminated this Agreement with respect to themselves,
severally, for all out-of-pocket expenses (including the fees and disbursements
of their counsel) reasonably incurred by such Underwriters in connection with
this Agreement or the offering contemplated hereunder.
This Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
<PAGE> 21
20
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
Very truly yours,
PageMart Wireless, Inc.
By
--------------------------------
Name:
Title:
Accepted, ______ __, 1996
Morgan Stanley & Co.
Incorporated
Goldman, Sachs & Co.
JP Morgan Securities Inc.
Lehman Brothers Inc.
Acting severally on behalf
of themselves and the
several Underwriters
named in Schedule I hereto.
By: Morgan Stanley & Co.
Incorporated
By
-------------------------------
Name:
Title:
<PAGE> 22
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriter To Be Purchased
----------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
JP Morgan Securities Inc.
Lehman Brothers Inc.
---------
Total 6,000,000
=========
</TABLE>
<PAGE> 23
SCHEDULE II
Stockholders Executing Lock-up Agreements
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
Amendment No. 1 to Registration Statement No. 333-03012.
ARTHUR ANDERSEN LLP
Dallas, Texas
May 3, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
COMPANY'S DECEMBER 31, 1995 AND MARCH 31, 1996 CONSOLIDATED FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 26,973 14,201
<SECURITIES> 0 0
<RECEIVABLES> 26,037 27,868
<ALLOWANCES> 4,534 5,183
<INVENTORY> 11,179 12,775
<CURRENT-ASSETS> 62,535 53,165
<PP&E> 81,990 93,769
<DEPRECIATION> 29,163 33,095
<TOTAL-ASSETS> 263,829 262,848
<CURRENT-LIABILITIES> 56,508 61,288
<BONDS> 219,364 225,210
<COMMON> 3 3
0 0
0 0
<OTHER-SE> (12,046) (23,653)
<TOTAL-LIABILITY-AND-EQUITY> 263,829 262,848
<SALES> 57,688 14,802
<TOTAL-REVENUES> 159,191 48,545
<CGS> 63,982 17,082
<TOTAL-COSTS> 63,982 17,082
<OTHER-EXPENSES> 118,557 34,704
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 30,720 8,401
<INCOME-PRETAX> (53,113) (11,618)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (53,113) (11,618)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (53,113) (11,618)
<EPS-PRIMARY> (1.53) (0.33)
<EPS-DILUTED> (1.53) (0.33)
</TABLE>
