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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NO. 0-28196
PAGEMART WIRELESS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2575229
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6688 N. CENTRAL EXPWY., SUITE 800
DALLAS, TEXAS 75206
(Address of principal executive offices) (Zip code)
(214) 750-5809
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
As of August 7, 1997, there were 34,041,902 shares of the registrant's class A
common stock outstanding.
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1996
AND JUNE 30, 1997 .............................................. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997 .................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 1996 AND 1997 ............................ 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ............. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................. 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ................................................ 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................. 17
</TABLE>
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,603 $ 6,867
Accounts receivable, net 33,446 46,221
Inventories 11,702 7,490
Prepaid expenses and other current assets 2,821 3,400
------------ ------------
Total current assets 70,572 63,978
Property and equipment, net 96,943 107,626
Narrowband licenses 133,065 133,065
Deferred debt issuance costs, net 6,378 5,955
Other assets 6,662 4,531
------------ ------------
Total assets $ 313,620 $ 315,155
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 23,186 $ 16,933
Current maturities of long-term debt -- 923
Deferred revenue 27,047 36,050
Other current liabilities 12,270 11,026
------------ ------------
Total current liabilities 62,503 64,932
Long-term debt 240,687 262,548
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.0001 par value per share, 75,000,000
shares authorized, 39,804,932 and 39,926,638 shares
issued at December 31, 1996 and June 30, 1997,
respectively 4 4
Additional paid-in capital 225,661 226,066
Accumulated deficit (214,688) (237,848)
Stock subscriptions receivable (547) (547)
------------ ------------
Total stockholders' equity (deficit) 10,430 (12,325)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 313,620 $ 315,155
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Recurring revenue $ 36,964 $ 50,006 $ 70,707 $ 96,481
Equipment sales and activation fees 12,153 15,896 26,955 31,144
-------- -------- -------- --------
Total revenues 49,117 65,902 97,662 127,625
Cost of equipment sold 14,641 20,263 31,723 38,382
Operating expenses:
Technical 8,833 11,384 16,923 22,153
Selling 10,464 12,339 19,911 25,005
General and administrative 13,043 15,814 25,962 31,590
Depreciation and amortization 4,942 7,285 9,190 14,134
-------- -------- -------- --------
Total operating expenses 37,282 46,822 71,986 92,882
-------- -------- -------- --------
Operating loss (2,806) (1,183) (6,047) (3,639)
Other (income) expense:
Interest expense 8,915 9,297 17,316 18,335
Interest income (146) (124) (365) (300)
Other 554 749 749 1,486
-------- -------- -------- --------
Total other (income) expense 9,323 9,922 17,700 19,521
-------- -------- -------- --------
Net loss $(12,129) $(11,105) $(23,747) $(23,160)
======== ======== ======== ========
Net loss per share
(primary and fully diluted) $ (0.34) $ (0.28) $ (0.68) $ (0.58)
Weighted average number
of shares outstanding
(primary and fully diluted) 35,633 39,879 35,162 39,864
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(23,747) $(23,160)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,190 14,134
Provision for bad debt 2,777 5,371
Accretion of discount on senior discount notes 14,904 17,105
Amortization of deferred debt issuance costs 950 423
Changes in certain assets and liabilities:
Increase in accounts receivable (10,557) (18,146)
(Increase) decrease in inventories (4,811) 4,212
(Increase) decrease in prepaid expense
and other current assets 65 (579)
(Increase) decrease in other assets, net (1,085) 1,440
Increase (decrease) in accounts payable 1,168 (6,253)
Increase in deferred revenue 4,670 9,003
Increase (decrease) in other current liabilities 519 (1,244)
-------- --------
Net cash provided by (used in) operating activities (5,957) 2,306
-------- --------
Cash flows from investing activities:
Purchases of property and equipment, net (27,197) (23,360)
Release of restricted cash 500 --
Other (89) (766)
-------- --------
Net cash used in investing activities (26,786) (24,126)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 70,500 --
Proceeds from issuance of common stock under
the stock option/stock issuance plan 134 248
Proceeds from conversion of common stock warrants -- 157
Payment of stock subscription receivable 10 --
Borrowings under Revolving Credit Agreement 31,100 --
Payments on Revolving Credit Agreement (31,100) --
Borrowings from vendor financing arrangement -- 5,857
Payments on vendor financing arrangement (15,027) (178)
Deferred debt issuance costs incurred for
Revolving Credit Agreement (14) --
-------- --------
Net cash provided by financing activities 55,603 6,084
-------- --------
Net increase (decrease) in cash & cash equivalents 22,860 (15,736)
Cash and cash equivalents, beginning of period 26,973 22,603
-------- --------
Cash and cash equivalents, end of period $ 49,833 $ 6,867
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,034 $ 348
Income Taxes $ -- $ --
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
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., a wholly owned subsidiary of Wireless, ("PageMart PCS").
PageMart PCS holds certain narrowband personal communications services
licenses. 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.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and are 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. The interim unaudited financial
statements should be read in conjunction with the audited financial statements
of the Company for the year ended December 31, 1996. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997.
Certain amounts in the prior year condensed consolidated financial
statements have been reclassified to conform with the current year
presentation.
3. NET LOSS 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. As
required by the Securities and Exchange Commission rules, all warrants, options
and shares issued during the year immediately preceding the June 1996 initial
public offering are assumed to be outstanding for all periods presented.
The Company will adopt the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share," ("SFAS No. 128") in the fourth quarter
of fiscal 1997. SFAS No. 128, issued February 1997, replaces the primary
earnings per share calculation with a basic earnings per share calculation and
modifies the calculation of diluted earnings per share. The Company anticipates
the adoption of SFAS No. 128 will have no impact on its reporting of net loss
per share for 1997 or prior periods.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the results of operations and financial
condition of the Company for the three and six months ended June 30, 1997 and
1996. This discussion should be read in conjunction with the Company's
condensed consolidated financial statements and the notes thereto included
elsewhere in this report.
When used in this discussion, the words `estimate,' `project,' `plan,'
`expect' and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's judgment only as of the date hereof.
GENERAL
The Company has constructed and operates a wireless messaging and
communications network and provides paging and other one-way wireless messaging
services to its subscribers. In addition, the Company sells and distributes
wireless messaging equipment to subscribers, retailers and resellers. The
Company earns recurring revenues from each subscriber in the form of fixed
periodic fees and incurs substantial operating expenses in offering its
services, including technical, customer service and general and administrative
expenses. See "Management's Presentation of Results of Operations."
Since commencing operations in 1990, the Company has invested heavily in
its one-way wireless communications network and administrative infrastructure
in order to establish nationwide coverage, sales offices in major metropolitan
areas, customer service call centers and centralized administrative support
functions. The Company incurs substantial fixed operating costs related to its
one-way wireless communications infrastructure, which is designed to serve a
much larger subscriber base than the Company currently serves in order to
accommodate growth. In addition, the Company incurs substantial costs
associated with new subscriber additions. As a result, the Company has
generated significant net operating losses for each year of its operations. See
"Management's Presentation of Results of Operations."
The Company's strategy is to expand its subscriber base and to increase
profitability and cash flow through greater utilization of its nationwide
wireless communications network. From June 30, 1996 to June 30, 1997, the
number of domestic units in service increased from 1,524,297 to 2,181,775. None
of the Company's growth is attributable to acquisitions. Given its growth
strategy and the substantial associated selling and marketing expenses, the
Company expects to continue to generate operating losses in 1997 from its
one-way wireless communications business. In addition, the Company began
testing and development of two-way wireless messaging services in 1996 and
plans to continue the development and implementation in 1997 and 1998. The
Company expects to incur additional operating losses during the start-up phase
for two-way wireless messaging services. The Company does not anticipate any
significant revenues from two-way services during 1997, however, it expects to
generate revenues with respect to two-way services in 1998. 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 offsets the fixed operating costs of its wireless networks,
administration and selling and marketing expenses. The Company intends to
achieve this growth by promoting its customized paging and other wireless
messaging services through its national sales offices, retail distribution
channels, private brand strategic alliances with GTE Corporation, Southwestern
Bell Mobile Systems, AT&T Wireless Services, Ameritech Mobile Services, Inc.
and long distance reseller EXCEL Communications, Inc., and international
expansion.
Unlike most other paging carriers, the Company sells, rather than leases,
substantially all of the messaging equipment used by its subscribers. As a
result, the Company has much less capital invested in messaging equipment than
other paging carriers since it recoups a substantial portion of messaging
equipment costs upon sale to retailers and subscribers. This results in
significantly lower capital expenditures and depreciation expense than if the
Company leased such equipment to its subscribers. In addition, the Company's
financial results are much different from those of 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
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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. In addition, the Company's retail
distribution strategy results in the recognition of expenses associated with
messaging equipment sales and other sales and marketing expenses in advance of
new subscribers being added to the base and generating revenues (as retailers
carry inventory).
The Company sells its messaging equipment through multiple distribution
channels, including direct sales, third-party resellers, private brand
strategic alliances and local and national retail stores. Selling and marketing
expenses are primarily attributable to compensation paid to the Company's sales
force, advertising and marketing costs and to losses resulting from the fact
that, for competitive and marketing reasons, the Company generally sells each
new unit for less than its acquisition cost. The Company's accounting practices
result in selling and marketing expenses, including loss on sale of equipment,
being recorded at the time a unit is sold. Units sold by the Company during a
given month may exceed units activated and in service due to inventory stocking
by and distribution strategies of national retailers. As a result, selling and
marketing expenses per net subscriber addition may fluctuate from period to
period.
The Company derives its recurring revenue primarily from fixed periodic
fees for services that are not generally dependent on usage. Consequently, the
Company's ability to recoup its initial selling and marketing costs, to meet
operating expenses and to achieve profitability is dependent on the average
length of each customer's subscription period. As long as a subscriber
continues to utilize the Company's service, operating results benefit from the
recurring payments of the fixed fees without the incurrence of additional
selling expenses by the Company. Conversely, operating results are adversely
affected by customer disconnections. Each month a percentage of the Company's
existing customers have their service terminated for a variety of reasons,
including failure to pay, dissatisfaction with service and switching to a
competing service provider. The Company's average monthly disconnection rates
for the years ended December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1997 were 3.4%, 2.5%, 2.4% and 2.4%, respectively.
Approximately 90% of the Company's average monthly revenue per unit
("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 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 AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
Units in Service
Units in service from domestic operations were 1,524,297 and 2,181,775 as
of June 30, 1996 and 1997, respectively, representing an annual growth rate of
43%. In addition, for the three and six months ended June 30, 1997, PageMart
Canada Limited ("PageMart Canada") added 5,629 and 11,721 subscribers,
respectively. As a result of its ownership interest in PageMart Canada, the
Company's proportional share of net subscriber additions from PageMart Canada
was 3,378 and 7,033 units for the three and six months ended June 30, 1997,
respectively. The Company has experienced strong growth in units in service due
primarily to the success of its sales and marketing strategies in the national
retail, private brand strategic alliance and direct sales programs.
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Revenues
Revenues for the three and six months ended June 30, 1997 were $65.9
million and $127.5 million, respectively, compared to $49.1 million and $97.7
million for the three and six months ended June 30, 1996. Recurring revenues
for airtime, voice mail and other services for the three and six months ended
June 30, 1997 were $50.0 million and $96.5 million, respectively, compared to
$37.0 million and $70.7 million for the comparable periods ended June 30, 1996.
Revenues from equipment sales and activation fees for the three and six months
ended June 30, 1997 were $15.9 million and $31.1 million, respectively,
compared to $12.2 million and $27.0 million for the comparable periods ended
June 30, 1996. 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 second quarter
of 1997 was somewhat offset by a decline in the average price per unit sold.
The Company expects equipment prices per unit generally to remain constant or
decline only slightly as sales volumes increase.
The Company's ARPU was $8.50 and $7.97 in the second quarter of 1996 and
1997, respectively. Over the past year, the Company's ARPU has decreased
primarily as a result of an increase in subscribers added through the private
brand strategic alliance channel. This decrease in ARPU has been offset
somewhat by a higher mix of multi-city, regional and nationwide services as
well as increased sales of other value-added services such as voice mail and
toll-free numbers. Management anticipates that the Company's ARPU will decline
in the foreseeable future due to a continued higher mix of subscribers added
through private brand strategic alliance programs, which yield lower ARPU. ARPU
is lower for subscribers added through private brand strategic alliances
because these are generally high volume customers that are charged wholesale
airtime rates. However, because private brand strategic alliance partners are
responsible for selling and marketing costs, billing, collection and other
administrative costs associated with end-users, the Company incurs
substantially lower marketing and administrative costs with respect to such
subscribers.
Cost of Equipment Sold
The cost of equipment sold for the three and six months ended June 30,
1997 was $20.2 million and $38.3 million, respectively, compared to $14.6
million and $31.7 million for the comparable periods ended June 30, 1996. The
change in 1997 was primarily due to an increase in the number of units sold.
The Company expects pager costs generally to remain constant, with modest
reductions in cost to the Company as a result of volume purchases. Management
anticipates that loss on equipment sold will generally remain constant on a per
unit basis for the foreseeable future.
Operating Expenses
Technical expenses were $11.4 million and $22.2 million for the three and
six months ended June 30, 1997, respectively, compared to $8.8 million and
$16.9 million for the comparable 1996 periods. The increase was primarily due
to increased telecommunications and site expenses associated with servicing the
Company's expanded network and larger subscriber base. On an average monthly
cost per unit in service basis, technical expenses were $2.02 and $1.81 in the
second quarter of 1996 and 1997, respectively, compared to $2.02 and $1.83 for
the six months ended June 30, 1996 and 1997, respectively. The per unit
decrease was the result of increased operating efficiencies and economies of
scale achieved through the growth of the Company's subscriber base. During the
six months ended June 30, 1997, the Company incurred $3,000 in technical
expenses associated with the development of its two-way wireless messaging
services.
Selling expenses for the three and six months ended June 30, 1997 were
$12.2 million and $24.8 million, respectively, compared to $10.5 million and
$19.9 million for the three and six months ended June 30, 1996, respectively.
This increase resulted from greater marketing and advertising costs related to
the growth in units sold as well as costs associated with the stocking of
additional retail outlets. The Company added 6,126 retail outlets from June 30,
1996 to June 30, 1997. During the six months ended June 30, 1996 and 1997, the
Company added 284,273 and 330,330 net new domestic units in service,
respectively. Management views the net loss on equipment sold to be a component
of selling and marketing expenses incurred to add new subscribers. See
"Management's Presentation of Results of Operations." Selling and marketing
expenses per net subscriber addition (including loss on equipment sales) were
$85 and $86 for the three and six months ended June 30, 1996, respectively,
compared to
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$92 and $97 for the three and six months ended June 30, 1997, respectively.
This increase was due to losses recognized on the sale of pagers due to
stocking new retail outlets in the second quarter of 1997. The Company added
3,024 additional retail outlets in the three months ended June 30, 1997,
including additions from RadioShack(R) and Southland (7-Eleven) stores. The
losses on equipment sold are recognized when pagers are shipped to the
retailers, usually before the units are placed into service, thus increasing
selling expenses (including loss on the sale of equipment) per net subscriber
addition. During the three and six months ended June 30, 1997, the Company
incurred $150,000 and $244,000, respectively, in selling expenses associated
with its international operations (including loss on sale of equipment).
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) for the
three and six months ended June 30, 1997 were $15.8 million and $31.6 million,
respectively, compared to $13.0 million and $26.0 million for the comparable
1996 periods. This increase was attributable to the Company's expansion of its
customer service call centers and other administrative capabilities to support
the growing subscriber base which required additional office space,
administrative personnel and customer service representatives. On an average
cost per month per unit in service basis, general and administrative expenses
were $3.00 and $2.52 in the second quarter of 1996 and 1997, respectively, and
$3.13 and $2.61 for the six months ended June 30, 1996 and 1997, respectively.
The per unit decrease was a result of increased operating efficiencies and
economies of scale achieved through the growth of the Company's subscriber
base. During the six months ended June 30, 1997, the Company incurred $13,000
in general and administrative expenses associated with the development of its
two-way wireless messaging services.
Depreciation and amortization for the three and six months ended June 30,
1997 were $7.2 million and $14.0 million, respectively, compared to $4.9
million and $9.2 million for the comparable periods ended June 30, 1996. 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 in 1996 and the first
six months of 1997. As an average cost per month per unit in service,
depreciation and amortization was $1.14 and $1.15 in the second quarter of 1996
and 1997, respectively, and was $1.11 and $1.16 for the six months ended June
30, 1996 and 1997, respectively. During the three and six months ended June 30,
1997, the Company incurred $45,000 and $86,000, respectively, in depreciation
expenses associated with the development of its two-way wireless messaging
services.
Interest Expense
Consolidated interest expense for the three and six months ended June 30,
1997 was $9.3 million and $18.3 million, respectively, compared to $8.9 million
and $17.3 million for the comparable periods ended June 30, 1996. The increase
in 1997 was primarily the result of increased interest expense related to the
12 1/4% Senior Discount Notes due 2003 issued by PageMart in October 1993 (the
"12 1/4% Notes") and the 15% Senior Discount Notes due 2005 issued by the
Company in January 1995 (the "15% Notes"). Interest expense related to the 12
1/4% Notes waS $3.3 million and $3.7 million for the three months ended June
30, 1996 and 1997, respectively, and was $6.5 million and $7.3 million for the
six months ended June 30, 1996 and 1997, respectively. Interest expense related
to the 15% Notes was $4.5 million and $5.4 million for the three months ended
June 30, 1996 and 1997, respectively, and was $8.9 million and $10.2 million
for the six months ended June 30, 1996 and 1997, respectively.
Net Loss
The Company sustained consolidated net losses for the three and six months
ended June 30, 1997 of $11.1 million and $23.2 million, respectively, compared
to $12.1 million and $23.7 million for the three and six months ended June 30,
1996, 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.
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MANAGEMENT'S PRESENTATION OF RESULTS OF OPERATIONS
Comparison with GAAP Presentation
The Company's unaudited condensed consolidated financial statements for
the three and six months ended June 30, 1996 and 1997 included elsewhere in
this report, have been prepared in accordance with generally accepted
accounting principles ("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 is
useful in understanding the Company's results.
Management believes that operating profit before selling expenses is a
meaningful indicator of the profitability of the Company's installed base of
units in service because it measures the recurring revenues received for
services less the costs (including depreciation and amortization) associated
with servicing that installed base. Operating profit before selling expenses
per subscriber per month for the Company's one-way operations has grown from
$1.66 during the third quarter of 1995 to $2.48 during the second quarter of
1997 due primarily to the Company's increase in subscribers and resulting
benefits in economies of scale.
In addition, selling and marketing expenses (including loss on equipment
sold) provide a measure of the costs associated with obtaining new subscribers
that the Company needs to generate the incremental recurring revenue necessary
to achieve profitability. Under the GAAP presentation, recurring revenues and
equipment and activation revenues are aggregated and are not separately
compared to the costs associated with each.
The items included in Management's Presentation of the Results of
Operations and their derivation from financial information presented in
accordance with GAAP are described below.
Recurring Revenues. Recurring revenues include periodic fees for airtime,
voice mail, customized coverage options, toll-free numbers, excess usage
fees and other recurring revenues and fees associated with the subscriber
base. Recurring revenues do not include equipment sales revenues or
initial activation fees. Recurring revenues are the same under both the
management and GAAP presentations.
Technical Expenses. This item is the same under the management and GAAP
presentations.
General and Administrative Expenses. This item is the same under the
management and GAAP presentations.
Depreciation and Amortization. This item is the same under the management
and GAAP presentations.
Operating Profit Before Selling Expenses. Operating profit before selling
expenses under the management presentation is equal to recurring revenues
less technical expenses, general and administrative expenses and
depreciation and amortization. Operating profit before selling expenses is
not derived pursuant to GAAP.
Selling Expenses. Selling expenses under the management presentation
represent the cost to the Company of selling pagers and other messaging
units to a customer, and are equal to selling costs (sales compensation,
advertising, marketing, etc.) plus costs of units sold less revenues from
equipment sales and activation fees. As described above, the Company sells
rather than leases substantially all of the one-way messaging equipment
used by subscribers. Selling expenses under the management presentation
are not derived pursuant to GAAP. Net loss on equipment sales is not
included in the GAAP presentation of selling expenses.
Operating Income (Loss). This item is the same under the management and
GAAP presentations.
EBITDA. EBITDA represents earnings (loss) before interest, taxes,
depreciation and amortization. EBITDA is a financial measure commonly used
in the paging industry. EBITDA is not derived pursuant to GAAP and
therefore should not be construed as an alternative to operating income,
as an alternative to cash flows from operating activities (as determined
in accordance with GAAP) or as a measure of liquidity. The calculation of
EBITDA does not include the commitments of the Company for capital
expenditures and payment of debt and should not be deemed to represent
funds available to the Company. In the fourth quarter of 1995, the
Company's EBITDA from its one-way operations became positive for the first
time.
11
<PAGE> 12
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 condensed consolidated financial statements of the Company and the notes
thereto included elsewhere in this report and the Company's quarterly reports
on Form 10-Q for the corresponding periods below, and should not be considered
in isolation or as an alternative to results of operations that are presented
in accordance with GAAP (in thousands, except other data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Recurring revenues $ 26,994 $ 30,658 $ 33,743 $ 36,964 $ 39,697 $ 42,637 $ 46,475 $ 50,004
Technical expenses 6,842 7,015 7,943 8,783 9,725 10,273 10,765 11,385
General and
administrative expenses 11,350 12,243 12,792 13,043 13,668 14,162 15,763 15,814
Depreciation and
amortization 3,469 3,910 4,248 4,942 5,714 6,288 6,808 7,240
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating profit before
selling expenses 5,333 7,490 8,760 10,196 10,590 11,914 13,139 15,565
Selling expenses (1) 10,889 11,181 11,601 12,836 13,588 14,900 15,443 16,556
========== ========== ========== ========== ========== ========== ========== ==========
Operating income (loss) $ (5,556) $ (3,691) $ (2,841) $ (2,640) $ (2,998) $ (2,986) $ (2,304) $ (991)
========== ========== ========== ========== ========== ========== ========== ==========
EBITDA $ (2,087) $ 219 $ 1,407 $ 2,302 $ 2,716 $ 3,302 $ 4,504 $ 6,249
========== ========== ========== ========== ========== ========== ========== ==========
OTHER DATA:
Units in service (2) 1,131,464 1,240,024 1,374,146 1,524,297 1,684,937 1,851,445 2,001,525 2,181,775
Net subscriber additions 122,781 108,560 134,122 150,151 160,640 166,508 150,080 180,250
ARPU (3) $ 8.41 $ 8.62 $ 8.61 $ 8.50 $ 8.25 $ 8.04 $ 8.04 $ 7.97
National retail outlets 3,408 3,411 3,690 4,286 5,025 5,530 7,388 10,412
Operating profit before
selling expenses per
subscriber per month (4) $ 1.66 $ 2.11 $ 2.23 $ 2.35 $ 2.20 $ 2.25 $ 2.27 $ 2.48
Selling expenses per net
subscriber addition (1)(5) $ 89 $ 103 $ 86 $ 85 $ 85 $ 89 $ 103 $ 92
Capital employed per
unit in service (6) $ 39 $ 40 $ 41 $ 49 $ 49 $ 43 $ 41 $ 40
</TABLE>
- --------------
(1) Includes loss on sale of equipment.
(2) Stated as of the end of each period.
(3) Calculated by dividing recurring revenues for the quarter by the average
number of units in service during that quarter. Stated as the monthly
average for the quarter.
(4) Calculated by dividing operating profit before selling expenses (selling
expenses include loss on sale of equipment) for the quarter by the average
number of units in service during that quarter. Stated as the monthly
average for the quarter.
(5) Calculated by dividing selling expenses, including loss on sale of
equipment, for the quarter by the net subscriber additions for the
quarter.
(6) Calculated by dividing consolidated total assets (excluding cash,
narrowband personal communications services assets and international
investments) minus current liabilities (excluding current maturities of
long-term debt), by units in service at the end of the period.
12
<PAGE> 13
Supplementary Information
The following table sets forth supplementary financial information related
to the Company's various operations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997
------------------------------------------------
PAGEMART PAGEMART PAGEMART
ONE-WAY TWO-WAY INT'L (1) TOTAL
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 65,871 $ -- $ 31 $ 65,902
Technical expense 11,385 (1) -- 11,384
Selling expense 12,189 -- 150 12,339
General and administrative expense 15,814 -- -- 15,814
Depreciation and amortization expense 7,240 45 -- 7,285
Operating loss (991) (44) (148) (1,183)
EBITDA 6,249 1 (148) 6,102
Total assets 153,376 161,502 277 315,155
Capital expenditures 9,067 4,273 -- 13,340
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------
PAGEMART PAGEMART PAGEMART
ONE-WAY TWO-WAY INT'L (1) TOTAL
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 127,529 $ -- $ 96 $ 127,625
Technical expense 22,150 3 -- 22,153
Selling expense 24,761 -- 244 25,005
General and administrative expense 31,577 13 -- 31,590
Depreciation and amortization expense 14,048 86 -- 14,134
Operating loss (3,295) (102) (242) (3,639)
EBITDA 10,753 (16) (242) 10,495
Total assets 153,376 161,502 277 315,155
Capital expenditures 13,501 9,859 -- 23,360
</TABLE>
(1) Expenses reflected in this table are for the Company's international
headquarters operations. The Company accounts for its investments in
Canada under the equity method. Consequently, the Company's share of
expenses from its Canadian operations are not reflected in this 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.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have historically required substantial capital
investment for the development and installation of its wireless communications
network, the procurement of messaging equipment and expansion into new and
existing 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 and
revolving credit agreements.
Capital expenditures for the six months ended June 30, 1997 were $23.4
million compared to $27.2 million for the six months ended June 30, 1996.
Capital expenditures for the six months ended 1997 include approximately $9.9
million related to the development of two-way messaging services, $8.9 million
for the Company's one-way network and $4.6 million for the development of the
Company's new administrative system. During December 1995, the Company
committed to purchase $40 million in network infrastructure equipment from a
significant vendor from December 1, 1995 to October 31, 1999 (the "Vendor
Commitment"). Through June 30, 1997, the Company has purchased $21.7 million of
network infrastructure under this purchase commitment.
The Company's net cash provided by operating activities for the six months
ended June 30, 1997 was $2.3 compared with the net cash used of $6.0 million
for the six months ended June 30, 1996. Net cash used in investing activities
was $24.1 million for the six months ended June 30, 1997 compared with $26.8
million for the comparable 1996 period. Of the $24.1 million used in investing
activities in 1997, $23.4 million was for capital expenditures. Net cash
provided by financing activities, including borrowings and equity issuances was
$6.1 million for the six months ended June 30, 1997 compared with the $55.6
million for the six months ended June 30, 1996. Long-term obligations, less
current maturities, increased by approximately $21.9 million during the six
months ended June 30, 1997. The increase resulted from the accretion of the 15%
Notes of $10.0 million, the accretion of the 12 1/4% Notes of $7.1 million and
$4.8 million of borrowings on a vendor financing arrangement.
In March 1997, PageMart entered into a vendor financing arrangement with
an infrastructure vendor (the "Vendor Financing Arrangement"), providing for
the financing of one-way or two-way infrastructure equipment over a period of
60 months up to a maximum aggregate amount of $30 million. Borrowings under the
Vendor Financing Arrangement are secured by the equipment purchased. The
interest rate applicable to such financing is equal to the sum of 7.00% and the
London interbank offered rate ("LIBOR") as published in the Wall Street Journal
for three month maturities or the sum of 4.25% and the U.S. prime rate of
interest as published in the Wall Street Journal. The weighted average interest
rate in effect on June 30, 1997 with respect to the Vendor Financing
Arrangement was 12.5%.
As of June 30, 1997, the Company had $5.7 million outstanding under a
vendor financing arrangement and its indebtedness under the 12 1/4% Notes was
$115.1 million and its indebtedness under the 15% Notes was $142.7 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 June 30, 1997 to November 1,
1998 of $21.4 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 June 30, 1997 to February 1, 2000 of
$64.6 million. From and after February 1, 2000, interest on the 15% Notes will
be payable semiannually, in cash.
In May 1995, the Company entered into a four year Revolving Credit
Agreement (the "Revolving Credit Agreement") with BT Commercial Corporation, as
Agent, and Bankers Trust Company, as Issuing Bank, which provides for a $50
million revolving line of credit. As of June 30, 1997 there were no loans
outstanding under the Revolving Credit Agreement. The maximum amount available
under the Revolving Credit Agreement at any time
14
<PAGE> 15
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 June 30, 1997, the amount available under
the Revolving Credit Agreement was $36.1 million. In the event Wireless
exercised its option to increase its borrowing base by purchasing inventory and
accounts receivable from PageMart, the maximum amount available under the
Revolving Credit agreement would have been $41.0 million at June 30, 1997.
Management anticipates borrowing under the Revolving Credit Agreement during
the third quarter of 1997.
The indenture under which the 15% Notes were issued (the "15% Indenture"),
the indenture under which the 12 1/4% Notes were issued (the "12 1/4%
Indenture"), the Revolving Credit Agreement and the Vendor Financing 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 its assets to Wireless in transactions that are arm's length in nature.
Wireless is currently a holding company with no business or operations of its
own. Because all of Wireless's operations are conducted through its
subsidiaries, Wireless's cash flow and consequently its ability to service
debt, is almost entirely dependent upon the earnings of its subsidiaries and
the distribution of those earnings or upon loans or other payment of funds by
those subsidiaries to Wireless. Wireless's subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amounts due pursuant to Wireless's obligations or to make any funds
available therefor, whether by dividends, loans or other payments. Until the
maturity of the 12 1/4% Notes, which mature on November 1, 2003, earlier
repayment of such indebtedness or compliance with the requirements of such debt
instruments, Wireless will be unable to use any amount of cash generated by the
operations of PageMart and its subsidiaries. However, currently Wireless does
not have significant cash requirements until March 1999 when the Revolving
Credit Agreement matures.
On November 15, 1995, the Company purchased through PageMart
International, Inc., 200,000 voting shares of common stock of PageMart Canada,
which represents 20% of the ownership of PageMart Canada. PageMart
International, Inc. also owns 33% of the voting common stock of the holding
company parent of PageMart Canada ("Canada Holding"), which owns the remaining
80% of the voting common stock of PageMart Canada. The Company's investment in
Canada Holding and PageMart Canada totals approximately $3.7 million.
As of June 30, 1997, the Company had approximately $6.9 million in cash
and cash equivalents. The Company's cash balances and borrowings under the
Revolving Credit Agreement and the Vendor Financing Arrangement are expected to
be sufficient to fund the Company's one-way operations and related capital
requirements through 1997. The Company anticipates its one-way messaging
operations will generate sufficient cash flows to fund one-way capital
expenditures for 1998. The Company's two-way messaging operations are expected
to require additional capital in 1998. The Company anticipates funding a
portion of its two-way messaging operations with available borrowings under the
Revolving Credit Agreement, Vendor Financing Arrangement and from any excess
cash generated from the Company's one-way messaging operations.
As the Company begins development and implementation of narrowband
personal communications services, the Company expects to incur additional
operating losses during the start-up phase for such services and it will
continue to be necessary for the Company to make substantial investments. The
Company anticipates requiring additional sources of capital to fund the
construction of a two-way messaging network, including expenditures relating to
the buildout requirements of the Federal Communications Commission ("FCC"). The
Company anticipates investing $75 to $100 million through fiscal 1998 to test
and construct a two-way transmission network. Thereafter, the Company
anticipates that the two-way operations may require up to $100 million of
additional investment to fund operations, marketing and to add capacity to the
network as the Company's two-way customer base grows. The Company expects to
lease rather than sell a portion of its two-way messaging units. The Company
15
<PAGE> 16
expects to require additional financing to complete the buildout, which may
include additional vendor financing or entering into joint venture
arrangements, however, there can be no assurance that sufficient financing will
be available to the Company. The Company's ability to incur indebtedness is
limited by the covenants contained in the 15% Indenture, the 12 1/4% Indenture
and the Revolving Credit Agreement. As a result any additional financing may
need to be equity financing. The Company does not anticipate any significant
revenues from two-way services in 1997.
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. While management believes that it will be able to secure adequate
financing and achieve profitable operations, no assurance can be given that
financing for such investments will be available. No assurance can be given
that the Company's strategy will be implemented as currently planned or that
the Company's operations will generate positive cash flows.
This Form 10-Q contains statements that constitute forward-looking
statements. Readers are cautioned that such forward-looking statements involve
risk and uncertainties, and are subject to change based on various important
factors. The following factors, among others, in some cases have affected and
in the future could affect the Company's financial performance and actual
results and could cause actual results for 1997 and beyond to differ materially
from those expressed in any such forward-looking statements - economic
conditions generally in the United States and consumer confidence; the ability
of the Company to manage its debt levels; the impact of technological change in
the telecommunications industry; the future cost of network infrastructure and
subscriber equipment; the impact of competition and pricing of paging and
wireless services; the timely development and acceptance of new products;
changes in regulation by the FCC and various state regulatory agencies and the
ability of the Company to obtain financing to construct, operate and market the
transmission network for two-way services.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. 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 Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the accompanying index to exhibits are filed
as part of this quarterly report.
(b) Reports on Form 8-K
None.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAGEMART WIRELESS, INC.
/s/ JOHN D. BELETIC
------------------------------------
John D. Beletic
August 13, 1997 Chairman, President and
Chief Executive Officer
/s/ G. CLAY MYERS
------------------------------------
G. Clay Myers
August 13, 1997 Vice President, Finance,
Chief Financial Officer and
Treasurer (principal financial
and chief accounting officer)
------------------------------------
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.1* Purchase Financing Agreement dated March 21, 1997 between
PageMart, Inc. and Glenayre Electronics, Inc.
11.1* Statement regarding computation of per share loss for the three
months ended June 30, 1997.
11.2* Statement regarding computation of per share loss for the three
months ended June 30, 1996.
11.3* Statement regarding computation of per share loss for the six
months ended June 30, 1997.
11.4* Statement regarding computation of per share loss for the six
months ended June 30, 1996.
27.1* Financial Data Schedule.
</TABLE>
* Filed herewith
<PAGE> 1
EXHIBIT 10.1
PROMISSORY NOTE
AND SECURITY AGREEMENT
$30,000,000.00 March 21, 1997
FOR VALUE RECEIVED, PageMart, Inc., a Delaware corporation ("Maker"),
hereby promises to pay to the order of GLENAYRE ELECTRONICS, INC., a Colorado
corporation ("Glenayre"), or its successors or assigns, at such place or places
as Glenayre shall designate, the principal amount of THIRTY MILLION AND NO/100
DOLLARS ($30,000,000.00) or so much thereof that shall have been advanced
hereunder, together with accrued interest from the date or dates such funds
have been advanced until paid in full, on the principal amount from time to
time remaining unpaid hereon at the Interest Rate, at the times provided below.
Interest hereunder shall accrue and be calculated under this Note on the
outstanding principal balance for the actual number of days elapsed from the
date or dates such funds have been advanced and interest hereunder shall be
computed on the basis of a three hundred sixty (360) day year.
All capitalized terms used but not otherwise defined herein shall have the
meanings ascribed thereto in Section 9.
This Note evidences purchase money indebtedness of Maker to Glenayre for
Equipment purchased by Maker from Glenayre in accordance with the terms of the
invoices and sales order(s) to be referenced on Exhibit A to each Schedule to
this Note. Upon the execution of a Schedule in the form attached hereto, the
terms and conditions contained herein, together with any and all additional or
specific terms and conditions contained therein, shall apply to that Schedule
and shall be incorporated into and have the same force and effect as to that
Schedule as though expressly set forth therein. This Note has such further
terms, is entitled to the benefits of such agreements and covenants, and is
subject to such provisions, as are set forth below:
SECTION 1. PAYMENT PROVISIONS.
1.1 Principal and Interest Payments. Payments of principal amount due with
respect to each Schedule, together with interest thereon at the Interest Rate,
shall be due and payable in sixty (60) equal consecutive monthly payments
commencing on the effective date of such Schedule, and continuing on the first
(1st) calendar day of each month thereafter through and including the Maturity
Date, on which date all remaining unpaid principal and accrued but unpaid
interest hereunder shall be due and payable, if not sooner paid.
1.2 Optional Prepayments. Maker at any time may prepay this Note, in whole
or in part, without premium or penalty, provided that any such Prepayment is
equal to at least $5,000.00, or, if less, the entire unpaid principal balance
hereof, together in each instance with all accrued but unpaid interest.
<PAGE> 2
1.3 Mandatory Prepayments. There shall be a mandatory Prepayment upon each
occurrence of any of the following events, in such amounts and to be applied as
set forth below in this Section 1.3:
(a) If any of the Collateral is sold or otherwise disposed of as permitted
hereunder, then one hundred percent (100%) of the net cash proceeds from such
sale or disposition (that is, the gross sales proceeds less any customary
expenses incurred in connection with such sale or disposition) shall be paid to
Glenayre as a mandatory Prepayment, unless such proceeds are used to purchase
equipment from Glenayre within 180 days; or
(b) If any insurance proceeds are received as a result of any loss or
damage to the Collateral, then one hundred percent (100%) of such proceeds
shall be paid to Glenayre as a mandatory Prepayment, unless such proceeds are
used to purchase replacement equipment from Glenayre within 180 days or, in the
case of proceeds received as a result of damage, used to reasonably and
promptly repair the Collateral so damaged.
(c) If Parent, Maker or any of Parent's or Maker's Subsidiaries shall
receive in excess of $100 million from any net proceeds from an offering or
issuance of any Capital Stock after the date hereof, Maker shall apply 100% of
the proceeds in excess of $100 million thereof to the prepayment of this Note,
not to exceed the principal balance at the time of prepayment.
1.4 Application of Payments. All payments made under Section 1.1 shall be
applied first to interest (in arrears) and then to principal. All Prepayments
shall be applied in order of scheduled maturities. Maker shall not be permitted
to reborrow any amounts paid or prepaid hereunder.
1.5 Commitment Fee. Maker agrees to pay to Glenayre a commitment fee equal
to one-quarter (1/4) of 1% per annum of the daily average Unallocated Balance
of the Commitment. Such fees shall be payable quarterly in arrears on the last
day of each March, June, September and December through Commitment Expiration
Date, or such earlier date as the Commitment shall terminate as provided
herein, commencing on the first of such dates to occur after the date hereof,
fully earned when due and nonrefundable when paid, and computed on the basis of
a year of 360 days for the actual number of days elapsed.
SECTION 2. CONDITIONS PRECEDENT TO EXTENSIONS OF CREDIT. Prior to the
first extension of credit, hereunder for the purchase of the Equipment, Maker
shall have fulfilled the conditions set forth below in this Section 2:
(a) Documents. This Note and any Documents relating to such extension of
credit shall be duly authorized, executed, delivered to Glenayre and, where
appropriate, acknowledged and recorded or filed.
2
<PAGE> 3
(b) Insurance. Maker shall have delivered to Glenayre evidence reasonably
satisfactory to Glenayre of the existence of general public liability, hazard,
and worker's compensation insurance as required under Section 6.4.
(c) Opinion of Counsel. Maker shall, if required by Glenayre, have
delivered to Glenayre a written opinion of counsel for Maker addressed to
Glenayre and in form and substance and by counsel satisfactory to Glenayre,
including but not limited to an opinion that this Note and any Documents
relating to such extension of credit are valid and enforceable against and
binding upon Maker in accordance with their respective terms and do not violate
any laws, statutes or regulations applicable to Maker or its business or
assets.
(d) Representations. The representations and the information furnished by
Maker to Glenayre pursuant to the Schedule relating to such extension of credit
shall have been and shall continue to be true and not misleading in any
material respect.
(e) Financial Statements. Maker shall have delivered to Glenayre a true
and complete copy of its three (3) most recent fiscal year-end financial
statements and its most recent interim financial statements, as filed with the
Securities Exchange Commission.
(f) No Material Adverse Change. There shall have occurred no material
adverse change in the condition, financial or otherwise, of Maker or any of its
Subsidiaries or any of their respective businesses since the date of the most
recent financial statements delivered pursuant to Section 2 (e).
(g) No Default. No Default or Event of Default shall have occurred and be
continuing.
(h) Additional Documents. Maker shall have delivered to Glenayre such
other assurances, documents, instruments or other items (including, but not
limited to financing statements) and satisfied such other conditions as may be
reasonably required by Glenayre in connection with such extension of credit.
SECTION 3. SECURITY. This Note is and shall at all times be secured by a
first priority purchase money security interest in the Collateral pursuant to
the following terms and conditions:
(a) Maker hereby grants a security interest in the Collateral and will,
upon request of Glenayre, execute such additional security agreements,
financing statements, notices of lien, notices of assignment, transfer
endorsements, conveyances, documents of title and continuations or amendments
to any of the foregoing (collectively, "Lien Documents"), and other documents
(and pay the filing fees or similar fees of filing or recording the same in all
public offices deemed necessary by Glenayre) and do such other acts and things,
all as Glenayre may from time to time reasonably request to establish and
maintain valid perfected security interests in the Collateral as set forth on
Exhibit A to each Schedule to this Note to secure the payment of the
obligations and
3
<PAGE> 4
liabilities of Maker to Glenayre under this Note. Maker hereby constitutes and
appoints Glenayre (and the chairman of the board, the vice chairman of the
board, the chief executive officer, the president or any vice president of
Glenayre from time to time) as its attorney-in-fact with full power and
authority to execute and deliver all documents to the extent necessary to
perfect and keep perfected the security interests created hereby. This power of
attorney hereby granted is a special power of attorney coupled with an interest
and shall be irrevocable by Maker.
(b) There are no Lien Documents now on file in any public office relating
to all or any portion of the Collateral, and so long as any amount remains
unpaid on any of the obligations secured hereby, Maker shall not execute any
Lien Documents, describing or attempting to describe the Collateral secured
herein, except for Lien Documents filed in favor of Glenayre.
(c) Maker will, concurrently with the granting of this security interest
in the Collateral, place notations on its books and records disclosing the
security interest of Glenayre in such Collateral.
(d) Maker will reimburse Glenayre for all reasonable out-of-pocket
expenses, including reasonable attorneys' fees and disbursements, incurred by
Glenayre in seeking to collect any amounts due hereunder or enforcing any
rights hereunder.
(e) Maker shall deliver written notice to Glenayre of any location where
the Equipment will be located other than the locations set forth on Exhibit A
hereto or on Exhibit A to any Schedule to this Note within 60 days of receiving
the Equipment.
(f) This Note shall create a continuing security interest in the
Collateral and shall (i) remain in full force and effect until payment and
performance in full of the obligations of Maker under the Note (ii) be binding
upon Maker, its successors and assigns and (iii) inure, together with the
rights and remedies of Glenayre hereunder, to the benefit of Glenayre, subject
to the terms and conditions of the Note. Glenayre may assign or transfer any
rights and obligations under this Note or the Lien Documents or any rights in
Collateral held by it to any other Person upon written consent of Maker, which
consent is not to be unreasonably withheld. Under no circumstances should Maker
be required to provide such consent in violation of any existing agreement. In
case of any such transfer, such other Person shall thereupon become vested with
all the benefits in respect thereof granted to Glenayre herein or otherwise.
Nothing set forth herein is intended or shall be construed to give to any other
party any right, remedy or claim under, to or in respect of this Note or any
Collateral. Upon the payment in full of the obligations secured hereby, the
security interest granted hereby shall terminate and all rights to the
Collateral shall revert to Maker. Upon the termination of any such security
interest, or upon Glenayre's release of any of the Collateral in accordance
with the terms of this Note, Glenayre shall promptly return to Maker, at
Maker's expense, such of the Collateral (and, in the case of a release, such of
the released Collateral) held by Glenayre as shall not have been sold or
otherwise applied pursuant to the terms
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hereof. Glenayre will, at Maker's expense, execute and deliver to Maker such
other documents as Maker shall reasonably request to evidence such termination
or release, as the case may be.
SECTION 4. LATE CHARGES AND DEFAULT INTEREST. Glenayre may collect a late
charge of three percent (3%) of each installment of principal and/or interest
hereunder or portion thereof more than fifteen (15) days in arrears to cover
the administrative expense in handling such delinquent payment. At Glenayre's
option, the rate applicable to this Note shall become a rate equal to the
Default Rate commencing with and continuing during any Event of Default.
SECTION 5. REPRESENTATIONS AND WARRANTIES. Maker hereby represents and
warrants to Glenayre that:
5.1 Corporate Organization and Authority. Maker is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and shall provide Glenayre with evidence of such good standing upon
request by Glenayre. Maker has the corporate power and authority to enter into
and perform its obligations under this Note and has or will have the corporate
power and authority to enter into and perform its obligations under any other
Document at the time such Document is entered into and has by proper corporate
action duly authorized the execution and delivery of this Note and the other
Documents. This Note is and the other Documents are, or will be at the time
Maker enters into such Documents, valid and binding obligations of Maker
enforceable in accordance with the respective terms hereof and thereof.
5.2 No Violation of Corporate Restrictions. Neither Maker's execution and
delivery of the Documents nor its performance of the obligations under the
Documents, violates any law or governmental order, conflicts with any provision
of any charter document or bylaw of Maker or any Subsidiary or any agreement or
instrument to which Maker or any Subsidiary is a party or by which Maker or any
Subsidiary is bound, or constitutes a breach of or a default under any such
agreement or instrument except as would not have a Material Adverse Effect on
Maker and its Subsidiaries.
5.3 Consents, Licenses And Approvals. No consent, approval or
authorization of, or filing, registration or qualification with, any
governmental authority or any other Person on the part of Maker or any
Subsidiary is required as a condition to (i) the execution, delivery or
performance of this Note by Maker, or of the other Documents by Maker, (ii) the
grant of the security interest in the Collateral by Maker hereby, or (iii) the
exercise by Glenayre of any rights or remedies in respect of the Collateral
hereunder.
5.4 Judgments and Liens. There are no judgments, liens, encumbrances or
other security interests (i) affecting the Collateral other than Glenayre's
purchase money security interest therein or (ii) otherwise outstanding against
Maker or its Subsidiaries or any of their respective properties which would
have a Material Adverse Effect on any of them.
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5.5 Legal Operation. Maker and its Subsidiaries are in compliance with all
applicable laws, rules and regulations (including, without limitation,
environmental laws and regulations), the violation of which would or could have
a Material Adverse Effect on their respective operations.
5.6 Litigation; Government Regulation. Except as previously disclosed in
writing to Glenayre, there are no actions, suits, investigations or other
proceedings pending or, to the knowledge of Maker, threatened against or
affecting Maker or any of its Subsidiaries at law or in equity before any
court, arbitral tribunal or administrative office or agency which might (i)
have a Material Adverse Effect on Maker or any Subsidiary, or (ii) impair
Maker's ability to perform its obligations under this Note or under the other
Documents. Neither Maker nor any of its Subsidiaries is in violation of or in
default under any applicable statute, rule, order, decree, writ, injunction or
regulation of any governmental body (including any court) where such violation
would have a Material Adverse Effect on Maker and its Subsidiaries.
5.7 Security Interest.
(a) As of the date of each Schedule, the site addresses to be listed on
Exhibit A thereto constitute all locations at which Equipment listed on such
Schedule will be located.
(b) As of the date of this Note, Maker currently conducts business only
under its own name.
(c) Maker has not made, nor will it at any time without obtaining the
prior written consent of Glenayre make, any agreement which prohibits or
restricts the pledging or creation of liens upon the Collateral, or which
creates a lien on the Collateral prior to the security interest herein provided
to Glenayre.
5.8 No Untrue Statements. Neither the Documents nor any other reports,
schedules, certificates, documents or instruments delivered heretofore or
simultaneously with the execution of the Documents contains, or will contain,
taken as a whole, any misrepresentation or untrue statement of fact or omits to
state any material fact necessary to make the statements herein or therein, in
the light of the circumstances under, and as of the date as of, which they are
made, not misleading.
SECTION 6. AFFIRMATIVE COVENANTS. Maker agrees that until this Note is
paid in full and satisfied, unless Glenayre shall otherwise consent in writing:
6.1 Maintain Corporate Existence. Maker will maintain its corporate
existence.
6.2 Financial Statements. Maker will provide to Glenayre:
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(a) Annual Statements. Within ninety (90) days after the close of each
fiscal year, consolidated financial reports of Parent, Maker and its
Subsidiaries, including balance sheets, income statements and statements of
cash flows based on Generally Accepted Accounting Principles, as filed with the
Securities Exchange Commission.
(b) Quarterly Statements. Within forty-five (45) days after the close of
each fiscal quarter of each year (except for the fourth and final quarter) a
consolidated balance sheet, income statement and statement of cash flows of
Parent, Maker and its Subsidiaries certified by the chief financial officer of
Maker to be correct and accurate and prepared in accordance with Generally
Accepted Accounting Principles, as filed with the Securities Exchange
Commission.
(c) Other. Such other information respecting the financial condition,
business affairs and operations of Maker and its Subsidiaries as Glenayre may
from time to time reasonably request.
6.3 Payment of Taxes. Maker will, and will cause each of its Subsidiaries
to, comply with all statutes and governmental regulations and pay all taxes,
assessments, governmental charges, claims for labor, supplies, rent and any
other obligation which, if unpaid, might become a lien against any of their
respective properties, except (i) liens for taxes not yet due and payable and
(ii) liabilities being contested in good faith with due diligence and against
which reserves in amounts required under Generally Accepted Accounting
Principles have been established.
6.4 Insurance. Maker shall obtain and maintain for the entire term of this
Note, at its own expense, property damage and liability insurance against loss
or damage to the Equipment including, without limitation, loss by fire
(including so-called extended coverage), theft and such other risks of loss as
are customarily insured by "all risks" policies on the type of Equipment sold
hereunder and by businesses in which it is engaged in such amounts, in such
form and with such insurers as shall be reasonably satisfactory to Glenayre,
but the amount of insurance covering damage to or loss of the Equipment shall
not be less than the greater of (i) the full replacement value of the Equipment
or (ii) the total payments then remaining unpaid hereunder. Each insurance
policy will name Maker as an insured and Glenayre as an additional insured and
loss payee thereof and shall contain a clause requiring the insurer to give to
Glenayre at least thirty (30) days prior written notice of any alteration of
the terms of such policy or of the cancellation thereof. At Glenayre's request,
Maker shall provide Glenayre with a Certificate of Insurance or other evidence
satisfactory to Glenayre that such insurance coverage is in effect. If Maker
fails to provide evidence of insurance satisfactory to Glenayre, Glenayre may
purchase or otherwise provide such insurance and the cost thereof to Glenayre
shall be deemed an additional cost hereunder and shall be payable by Maker on
demand. Maker hereby appoints Glenayre its agent and attorney to make claims
and receive payment in accordance with the provisions of any policy so
purchased or provided by Glenayre. Maker further agrees to give Glenayre prompt
notice of any damage to, or loss of, the Equipment, or any part thereof. All
proceeds of insurance paid or payable under any insurance policy shall be paid
to Glenayre for the benefit of Maker. All insurance proceeds shall be
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applied as a mandatory Prepayment to the extent required by the terms of
Section 1.3. Notwithstanding the application of any insurance proceeds to the
payment of a portion of the indebtedness evidenced hereby, the unpaid portion
of said indebtedness shall remain in full force and effect, and Maker shall not
be excused in the payment thereof. The application by Glenayre of any insurance
proceeds in accordance with the terms hereof shall not cure or waive any Event
of Default or notice of Default or invalidate any act done pursuant to such
notice.
6.5 Records. Maker will keep, and will cause its Subsidiaries to keep,
true books of records and accounts in accordance with Generally Acceptable
Accounting Principles applied on a Consistent Basis, and in which full, true
and correct entries will be made of all their respective dealings and
transactions except for changes with which their independent certified public
accountants agree.
6.6 Maintain Property. Maker will maintain, and will cause each of its
Subsidiaries to maintain, all personal property (including the Collateral) in
good working order and condition, ordinary wear and tear excepted, and make all
needed repairs, replacements and renewals as reasonably necessary to conduct
the business of Maker and its Subsidiaries in accordance with prudent business
practices.
6.7 Collateral. Maker further covenants and agrees with Glenayre as
follows:
(a) None of the Collateral shall be sold or otherwise disposed of without
Glenayre's prior written consent.
(b) The Collateral is not nor shall it at any time be subject to any
security interest, liens, charges or encumbrances for security purposes,
without the prior written consent of Glenayre.
(c) Under no circumstances will any of the Collateral be located at any
time outside the United States or Canada.
6.8 Transactions With Affiliates. Maker shall perform any and all
transactions with Affiliates, including shareholders, on an arm's length basis
except payments of amounts to Morgan Stanley & Co. Incorporated or its
Affiliates, pursuant to underwriting or placement agreements..
6.9 Inspection. Maker will permit any officer or agent of Glenayre
designated in writing by Glenayre to visit and inspect the Collateral and any
of its and its Subsidiaries' properties, books and financial records at such
times as Glenayre may reasonably request upon reasonable notice and during
ordinary business hours.
6.10 Default Notice. Maker will deliver to Glenayre forthwith, upon any
officer of Maker obtaining knowledge of a Default or Event of Default, a
certificate of the chief financial
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officer of Maker specifying the nature and period of existence thereof and what
action Maker proposes to take with respect thereto.
6.11 Other Notices. Maker will notify Glenayre in writing within ten (10)
Business Days after the occurrence of any of the following with respect to
Maker or any of its Subsidiaries:
(a) the pendency or commencement of any material action, suit or
proceeding at law or in equity against Maker or any Subsidiary in excess of
$500,000;
(b) any event or condition which shall constitute an event of default
under any other agreement for borrowed money in excess of $500,000; or
(c) any levy of an attachment, execution or other process against its
assets in excess of an aggregate of $500,000.
6.12 Annual Business Plan. As soon as available, but in no event later
than the end of each fiscal year of Maker, Maker will provide to Glenayre a
copy of the Annual Business Plan for the succeeding fiscal year, in form and
substance reasonably satisfactory to Glenayre.
SECTION 7. NEGATIVE COVENANTS. Maker agrees that until this Note is paid
in full and satisfied, unless Glenayre shall otherwise consent in writing:
7.1 Liens and Encumbrances. Maker will not, nor will it enter into any
binding agreement to (nor will it permit any Subsidiary to or to enter into any
binding agreement to) incur, create or permit to exist any pledge, lien, charge
or other encumbrance of any nature whatsoever on the Collateral other than
liens in favor of Glenayre.
7.2 Sale of FCC License. Parent, Maker or their Subsidiaries will not, nor
will it enter into any binding agreement to transfer, sell, assign, lease or
otherwise dispose of any material FCC Licenses, without the prior written
consent of Glenayre, other than a transfer to a direct or indirect wholly-owned
Subsidiary of Parent or Maker.
7.3 Other Covenants. Maker will not, nor will it enter into any binding
agreement to (nor will it permit any Subsidiary to or to enter into any binding
agreement to):
(a) Sale of Assets. Transfer, sell, assign, lease or otherwise dispose of
any of its properties or assets now owned or hereafter acquired, except in the
ordinary course of business which shall be deemed to include transactions
between Maker or any of its Subsidiaries and Parent, or between Maker or any of
its Subsidiaries and a subsidiary of Parent, or any assets or properties
necessary or desirable for the proper conduct of its business, except for
exchanges (including sale and subsequent purchase) by Maker or any of its
Subsidiaries of property or equipment for other property or equipment used in
the business of Maker and its Subsidiaries, provided that (i) the
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property or equipment received by Maker or such Subsidiary, as the case may be,
in any such exchange has a substantially equal fair market value and (ii) such
exchange is completed within 180 days; provided, however, that, notwithstanding
anything to the contrary contained herein, Maker shall not sell, lease,
transfer or otherwise dispose of any Collateral at any time without the prior
written consent of Glenayre;
(b) Guaranty. Guarantee, assume, sell with recourse, endorse, contingently
agree to purchase, become surety for, or otherwise become liable upon the
obligation of any Person except by endorsement of negotiable instruments for
deposit or collection, other transactions in the ordinary course of business,
or as permitted in section 8.10 of the BT Commercial Corporation credit
agreement dated May 11, 1995;
(c) No Additional Subsidiaries. After the date hereof, have, create or
invest in any Subsidiaries other than those set forth in Schedule 7.3(c) hereto
without the prior written consent of Glenayre, which consent shall not be
unreasonably withheld or delayed;
(d) No Changes in Charter Documents. Modify, amend, supplement or
otherwise change any charter document or bylaw of Maker or any Subsidiary in
such a manner as to adversely affect the ability of Maker to perform its
obligations under this Note or any other Document without the prior written
consent of Glenayre, which consent shall not be unreasonably withheld or
delayed; and
SECTION 8. EVENTS OF DEFAULT AND REMEDIES.
8.1 Events of Default. The following shall be "Events of Default" under
this Note:
(a) Nonpayment. Nonpayment of interest within three (3) Business Days of
when due or of any principal when and as due under this Note.
(b) Breach of Notice Covenants. The failure of Maker to perform and
observe any covenants contained in Sections 6.10 and 6.11.
(c) Breach of Covenants. Other than as set forth in Section 8.1(a) or (b),
the failure to perform and observe any covenant or other obligation contained
herein and the continuation of such failure for a period of thirty (30) days
thereafter.
(d) False Statements. If any representation or warranty made by Maker in
this Note, any other Document or any other certificate, statement or report
heretofore or hereafter made shall be shown to be untrue in any material
respect as of the date as to which such representation or warranty is made.
(e) Bankruptcy. In the event that Parent, Maker or any Subsidiary:
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(1) shall make an assignment for the benefit of creditors; or
(2) has a petition initiating a proceeding under any section or
chapter of the Bankruptcy Code or its amendments, or any other applicable
Federal or state bankruptcy or insolvency law, filed by or against it and,
if against it, such petition is not set aside within sixty (60) days after
such filing; or
(3) shall file any proceedings for dissolution or liquidation; or
(4) has a receiver, trustee or custodian appointed for all or part of
its assets; or
(5) seeks to make an adjustment, settlement or extension of its debts
with its creditors generally; or
(6) has a notice of an action for enforcement of a lien filed or
recorded or a judgment lien or execution obtained against it in excess of
an aggregate of $500,000, which notice of lien is not removed, or
satisfied or contested in good faith within thirty (30) days after Maker
or any Subsidiary becomes aware of such lien.
(f) Defaults of Other Indebtedness. If Parent, Maker or any Subsidiary
defaults in the performance of any other agreement between Parent, Maker or any
Subsidiary and Glenayre or between Parent, Maker or any Subsidiary and any
other lender and such default results in acceleration of any other indebtedness
of Parent, Maker or any Subsidiary; provided, however, that no Event of Default
shall exist under this Section 8.1 (f) unless the aggregate amount of
indebtedness in respect of which any default shall have occurred shall be equal
to at least $1,000,000 .
(g) Judgments, Attachments, etc. If any judgment, levy of an attachment,
execution or other process is filed against the assets of Maker or any of its
Subsidiaries in excess of an aggregate of $3,000,000 and is not discharged,
removed, released or stayed to the satisfaction of Glenayre within thirty (30)
days thereafter.
(h) Change in Control. A Change of Control shall occur or a Person or
Persons shall acquire, directly or indirectly, a lien on greater than 50% of
the capital stock of Parent.
8.2 Remedies. Upon the occurrence and during the continuance of any Event
of Default, Glenayre may take the following actions:
(a) Acceleration of Indebtedness. The entire principal balance of, and all
accrued and unpaid interest and other amounts due on, this Note, howsoever
evidenced, shall become due and payable upon written notice to Maker (other
than an Event of Default described in Section 8.1(e), in
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which case the indebtedness evidenced by this Note and the other Documents
shall become due and payable immediately without necessity of written demand)
without the necessity of any other demand, presentment, protest or notice upon
Maker, all of which are hereby expressly waived by Maker.
(b) No Further Credit. Glenayre shall not be required to make any further
extensions of credit under this Note.
(c) Foreclosure. Glenayre may cause foreclosure upon any collateral
(including, without limitation, the Collateral) now or hereafter securing the
indebtedness evidenced by this Note as authorized herein or in the applicable
security documents pursuant to which the security interests in any such
collateral is created, in order to satisfy all obligations of Maker to Glenayre
under and pursuant to all of the rights and powers and in the manner contained
in such documents. Maker hereby agrees that Glenayre shall have the right to
bid and become a purchaser on its own behalf in any such sale. Glenayre is
hereby granted, to the extent permitted by applicable law, a license or other
right to use, without charge, Maker's labels, copyrights, patents, rights of
use of any name, trade names, trademarks and advertising matter, or any
property of a similar nature, in advertising for foreclosure sale and selling
at foreclosure any Collateral.
(d) Glenayre may exercise all of the rights granted by this Note and the
other Documents and all of the rights and remedies of a secured party under the
UCC and under any other applicable law and also may (i) require Maker to, and
Maker hereby agrees that it will at its expense and upon request of Glenayre
forthwith, assemble all or any part of the Collateral as directed by Glenayre
and make it available to Glenayre at a place to be designated by Glenayre which
is reasonably convenient to the parties and (ii) without notice except as
specified below or required by applicable law, sell, lease, assign, grant an
option or options to purchase or otherwise dispose of the Collateral or any
part thereof in one or more parcels at public or private sale, at Glenayre's
office or elsewhere, for cash, on credit or for future delivery, and upon such
other terms as may be commercially reasonable. Glenayre may be the purchaser of
any or all of the Collateral so sold at any public sale (or, if the Collateral
is of a type customarily sold in a recognized market or is of a type which is
the subject of widely distributed standard price quotations, at any private
sale) and thereafter hold the same, absolutely, free from any right or claim of
whatsoever kind. To the extent permitted by law, Maker hereby specifically
waives all rights of redemption, stay or appraisal which it has or may have
under any rule of law or statute now existing or hereafter in force. Maker
agrees that, to the extent notice of sale shall be required by law, at least
ten (10) days' written notice to Maker of the time and place of any public sale
or the time after which any private sale is to be made shall constitute
reasonable notification. Glenayre shall not be obligated to make any sale of
the Collateral regardless of notice of sale having been given. Glenayre may
adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned.
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(e) Upon the occurrence and during the continuance of an Event of Default,
any cash held by Glenayre as Collateral and all cash proceeds received by
Glenayre in respect of any sale of, collection from, or other realization upon
all or any part of the Collateral may, in the discretion of Glenayre, be held
by Glenayre as Collateral for, and then or at any time thereafter applied
against in whole or in part by Glenayre, all or any part of the obligations of
Maker to Glenayre secured hereby in such order as follows:
(1) the reasonable out-of-pocket expenses of preparing for sale and
selling of the Collateral, specifically including reasonable attorneys'
fees and collection expenses of Glenayre; next, to
(2) the expense of liquidating any liens, security interests,
attachments or encumbrances superior to the security interests herein
created; next, to
(3) the unpaid indebtedness of Maker under this Note, in accordance
with this Note or otherwise as Glenayre shall determine in its sole
discretion.
(4) Any surplus which shall remain shall be paid to Maker or as
otherwise provided by law or as a court of competent jurisdiction shall
direct.
(f) All payments received by Maker under or in connection with any of the
Collateral shall be held by Maker in trust for Glenayre, shall be segregated
from other funds of Maker and shall, forthwith upon receipt by Maker, be turned
over to Glenayre, in the same form as received by Maker (duly endorsed to
Glenayre, if required).
(g) To the extent permitted by applicable law, Maker waives all claims,
damages and demands against Glenayre arising out of the repossession, retention
or sale of the Collateral, or any part or parts thereof, except to the extent
any such claims, damages and awards arise out of the gross negligence or
willful misconduct of Glenayre. To the extent permitted by applicable law, no
claim may be made by Maker against Glenayre, or the directors, officers,
employees, attorneys or agents of Glenayre for any special, indirect,
consequential or punitive damages in respect of any claim for breach of
contract or any other theory of liability arising out of or related to the Note
or any transactions contemplated by this Note, or any act, omission or event
occurring in connection therewith.
(h) Other Remedies. Glenayre may exercise any and all other rights and
remedies available at law or in equity against Maker in connection with the
indebtedness evidenced hereby. The rights and remedies provided under this Note
are cumulative and may be exercised singly or concurrently, and are not
exclusive of any other rights and remedies provided by law or equity.
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SECTION 9. DEFINITIONS.
9.1 Certain Defined Terms. For the purposes hereof, the terms hereafter
set forth shall have the following meanings when used herein:
"Affiliates" has the meaning given to such term under the rules and
regulations of the Securities and Exchange Commission under the Securities Act
of 1933, as amended.
"Bankruptcy Code" means Title 11 of the U.S. Code (11 U.S.C. Section 101
et seq.), as amended from time to time, and any successor statute.
"Business Day" means any day not a Saturday, Sunday or legal holiday on
which national banks are open for business in Charlotte, North Carolina.
"Capital Stock" means any and all shares of common stock and
non-redeemable preferred stock and any and all equivalent ownership interests
in a Person (other than a corporation).
"Change of Control" means the occurrence at any time that the MS Funds own
less than 40% of Parent's outstanding capital stock entitled to vote (including
capital stock entitled to vote only upon the occurrence of certain
contingencies) for the election of directors ("voting stock"), any Person other
than the MS Funds shall have record and beneficial ownership of at least thirty
percent (30%) of Parent's outstanding voting stock.
"Collateral" consists of all equipment purchased from Glenayre and listed
on Exhibit A attached hereto or on Exhibit A to any Schedule to this Note and
incorporated herein by reference (collectively, "Equipment") together, in each
instance, with all accessions and additions thereto, substitutions therefor
purchased from Glenayre, replacements thereof purchased from Glenayre, proceeds
from the sale thereof and insurance proceeds arising therefrom.
"Commitment" means $30,000,000.
"Commitment Expiration Date" means December 31, 1998.
"Consistent Basis", in reference to the application of Generally Accepted
Accounting Principles, means that the accounting principles observed in the
period referred to are comparable in all material respects to those applied in
the most recent preceding comparable period.
"Default" means an event or condition which upon notice or lapse of time
or both would result in or constitute an Event of Default.
"Default Rate" means a fixed rate of interest equal to five percent (5%)
per annum in excess of the Interest Rate otherwise applicable hereunder.
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"Documents" means, collectively, this Note, UCC Financing Statements and
all other documents now or hereafter executed in connection herewith.
"Equipment" has the meaning given thereto in the Collateral definition.
"Event of Default" shall have the meaning given thereto in Section 8.1.
"FCC License" means any license issued by the Federal Communications
Commission on which Maker is currently carrying paying subscribers.
"Generally Accepted Accounting Principles" means those principles of
accounting set forth in pronouncements of the Financial Accounting Standards
Board or the American Institute of Certified Public Accountants, as such
principles are from time to time supplemented or amended.
"Glenayre" has the meaning given thereto in the first paragraph on page 1
hereof.
"Interest Rate" means, except as otherwise set forth in Section 4, a fixed
rate of interest adjusted on the first published day of each calendar quarter
for shipments made in that quarter equal to, at Maker's option, to be
determined at the time of each Schedule, (a) the sum of (i) 7.00% and (ii) the
London interbank offered rate as published in the Wall Street Journal for three
month maturities, or (b) the sum of (i) 4.25% and (ii) the U.S. prime rate of
interest as published in the Wall Street Journal.
"Maker" has the meaning given thereto in the first paragraph on page 1
hereof.
"Material Adverse Effect" means, with respect to any Person, a material
adverse effect upon such business, assets, liabilities, condition (financial or
otherwise) or results of operations or business prospects of such Person and
its Subsidiaries, taken as a whole, in excess of $3,000,000.00.
"Maturity Date" means, with respect to advances reflected on each
Schedule, that date which is five (5) years from the date of such Schedule,
provided that all Schedules commence no later than December 31, 1998.
"MS Funds" means, collectively, The Morgan Stanley Leveraged Equity Fund
II, L.P., Morgan Stanley Capital Partners, III, L.P., Morgan Stanley Capital
Investors, L.P., Morgan Stanley Venture Capital Fund, L.P., Morgan Stanley
Venture Capital Fund II, L.P., Morgan Stanley Venture Capital Fund II, C.V.,
Morgan Stanley Venture Investors, L.P. and MSCP III 892 Investors, L.P.
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"Note" means this Promissory Note and Security Agreement, as it may be
modified, amended, restated or supplemented from time to time.
"Parent" means PageMart Wireless, Inc., a Delaware corporation.
"Person" means an individual, a corporation, a partnership, a joint
venture, an association, a joint stock company, a trust, an unincorporated
organization or a government or any agency or political subdivision thereof.
"Prepayments" means, collectively, all voluntary prepayments and mandatory
prepayments permitted or required under the terms of Sections 1.2 and 1.3,
respectively.
"Purchase Money Lien" means a purchase money security interest per the UCC.
"Schedule" means documentation evidencing purchases by Maker from Glenayre
and Interest Rate, payments, and amortization of principal amount applicable
for such purchases.
"Subsidiaries" means, collectively, all of the direct and indirect
subsidiaries of Maker.
"Subsidiary" means any of the Subsidiaries.
"UCC" means the North Carolina Uniform Commercial Code, or as to any
matter required to be governed by the Uniform Commercial Code of another
jurisdiction, the Uniform Commercial Code of such other jurisdiction.
"Unallocated Balance" means amount of Commitment less cumulative amount of
purchase orders made by Maker to Glenayre.
9.2 Accounting Terms. All accounting terms not specifically defined herein
shall be construed in accordance with Generally Accepted Accounting Principles
applied on a Consistent Basis.
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SECTION 10. ADDITIONAL COVENANTS. In the event that Parent's credit
facility with BT Commercial Corporation is hereafter terminated for any reason
and not replaced with a like facility with BT Commercial Corporation or another
commercial lender, then Glenayre shall have the right, at its sole discretion,
to add such reasonable financial and other covenants to this Note substantially
consistent with those contained in the BT Commercial Corporation or other
credit facility prior to its termination.
SECTION 11. MISCELLANEOUS.
11.1 Notices. Any notice, request, demand or other communication required
or permitted under this Note shall be in writing and shall be conclusively
deemed to be properly given (i) when received, if personally delivered or sent
by overnight courier with appropriate confirmation of delivery or (ii) when the
appropriate confirmation is received, if given by telecopy, each to the
appropriate address set forth below or to such other address that either party
may designate by written notice to the other party.
MAKER: PageMart, Inc.
6688 N. Central Expy
Suite 800
Dallas, TX 75206
Attention: Clay Myers
Telecopy No. (214) 750-5809
GLENAYRE: Glenayre Electronics, Inc.
5935 Carnegie Boulevard
Charlotte, North Carolina 28209
Attention: Credit Department
Telecopy No. (704) 553-9338
A copy of any notice or other communication given by telecopy shall be mailed
by United States first class, certified or registered mail, postage prepaid, to
the appropriate address set forth above or to such other address that either
party may from time to time designate by written notice to the other party in
accordance with the terms hereof.
11.2 Waiver. No waiver by Glenayre of any Default or Event of Default
shall be deemed to be a waiver of any other Default or Event of Default
hereunder and no waiver granted in any single instance shall constitute a
waiver in other applicable instance. No failure or delay on the part of
Glenayre to exercise any right, power or privilege hereunder or otherwise with
respect to this Note shall operate as a waiver of any such right, power or
privilege nor shall any such failure or
17
<PAGE> 18
delay preclude any other or further exercise thereof. The rights and remedies
herein provided are cumulative and not exclusive of any rights or remedies
provided by law.
11.3 Survival. All covenants, agreements, representations and warranties
made herein shall survive the extension by Glenayre of the credit evidenced by
this Note and shall continue in full force and effect until this Note is paid
in full and satisfied.
11.4 Costs. Except as provided below, each party shall pay its own
expenses and costs in connection with the preparation, negotiation, execution
and delivery of this Note and the other Documents. Notwithstanding any other
provision contained herein, Maker shall pay the costs and expenses (including,
without limitation, reasonable attorneys' fees) of Glenayre in connection with
the exercise, implementation and/or enforcement of this Note or any other
Document and shall hold Glenayre harmless from any and all such costs, expenses
and liabilities.
11.5 Indemnification. Maker agrees to indemnify and hold harmless
Glenayre, its employees, agents and affiliated corporations (the "Indemnitee"),
from and against any losses, claims damages or liabilities (including
reasonable attorneys' fees and disbursements) incurred in connection with any
claim, proceeding or litigation related to or arising out of the transactions
contemplated by this Note and the other Documents, except for losses, claims,
damages or liabilities which result from the gross negligence or willful
misconduct of Glenayre. Glenayre will promptly notify Maker upon receipt of
notice of any claim or threat to institute claims and afford Maker the first
right to defend or resolve any such action. Maker and Glenayre each agrees to
fully cooperate in any such resolution or defense in support of the other.
11.6 Amendment; Waiver; Consents. No approval, decision, option or action
required of Glenayre ("Approval") hereunder nor any modification, amendment or
waiver ("Waiver") of any provision of this Note nor any consent to any
departure by Maker therefrom ("Consent") shall in any event be effective unless
the same shall be in writing signed by Glenayre and delivered in accordance
with the provisions of Section 11.1, and then such Approval, Waiver or Consent
shall be effective only in the specific instance and for the purpose for which
given but any such Approval, Waiver or Consent when signed shall be effective
and binding upon Glenayre. No notice to or demand on Maker in any case shall
entitle Maker to any other or further notice or demand in the same, similar or
other circumstances.
11.7 Payment on Business Day. Should any installment or other payment of
the principal or interest on this Note become due and payable on other than a
Business Day, the payment date shall be extended to the next succeeding
Business Day thereafter and in the case of an installment of principal,
interest shall be payable thereon at the rate per annum herein specified during
such extension.
11.8 Captions, Etc. The captions herein are inserted only as a matter of
convenience and for reference and in no way define, limit or describe the scope
of this Note nor the intent of any
18
<PAGE> 19
provisions hereof. All references in this Note to Sections are references to
the Sections in this Note, unless some other reference is clearly indicated.
11.9 Severability. If any provision or obligation of this Note shall be
determined to be invalid, ineffective or unenforceable, the validity,
effectiveness and enforceability of the remaining provisions or obligations
shall not in any way be affected or impaired thereby.
11.10 No Usury. Notwithstanding any other provision contained in this
Note, Glenayre does not intend to charge and Maker shall not be required to pay
any amount of interest or other fees or charges in excess of the maximum
permitted by applicable law. Any payment in excess of such maximum shall be
refunded to Maker or credited against the principal hereof, at the option of
Glenayre.
11.11 Governing Law. This Note and all matters relating thereto shall be
governed by and construed and interpreted in accordance with the laws of the
State of North Carolina. Maker hereby submits to the jurisdiction and venue of
the state and federal courts of North Carolina and agrees that Glenayre may, at
its option, enforce its rights under this Note and the other Documents in such
courts. Maker hereby agrees that both the federal and state courts in
Mecklenburg County, North Carolina are a convenient forum and agrees not to
raise as a defense that such courts are not a convenient forum.
11.12 Waiver of Jury Trial. TO THE MAXIMUM EXTENT PERMITTED BY LAW, EACH
OF MAKER AND GLENAYRE HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS NOTE
OR THE TRANSACTIONS CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, Maker has caused this Note to be executed under seal
by its duly authorized officers and delivered as of the day and year first
above written.
PageMart, Inc.
[CORPORATE SEAL] a Delaware corporation
ATTEST:
By: /s/ TODD A. BERGWALL By: /s/ CLAY MYERS
----------------------------- -------------------------------
Name: Todd A. Bergwall Name: G. Clay Myers
--------------------------- -----------------------------
Title: Corp. Counsel & Sec. Title: V.P. Finance & C.F.O.
-------------------------- ----------------------------
19
<PAGE> 20
Acknowledged, agreed and accepted as of the day and year first above written.
[CORPORATE SEAL] GLENAYRE ELECTRONICS, INC.,
a Colorado corporation
ATTEST:
By: /s/ MARY J. VALENTA By: /s/ STANLEY CIEPCIELINSKI
----------------------------- --------------------------------
Name: Mary T. Valenta Name: Stanley Ciepcielinski
--------------------------- ------------------------------
Title: Treasurer Title: Chief Financial Officer
-------------------------- -----------------------------
20
<PAGE> 21
EXHIBIT A - Financing Summary
<TABLE>
<CAPTION>
Equipment Sales
Serial # Description Site address City State Price
- -------- ----------- ------------ ---- ----- -----
<S> <C> <C> <C> <C> <C>
</TABLE>
<PAGE> 22
Schedule 7.3(c) - Subsidiaries
<PAGE> 1
EXHIBIT 11.1
PAGEMART WIRELESS, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997
-----------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
------------- ------------- -------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 642,233 96.99% 622,916
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 100.00% 11,242,857
1995 Common Stock Offerings 4,323,874 100.00% 4,323,874
1996 Common Stock Offering 6,000,000 100.00% 6,000,000
Employee Stock Purchase Plan Shares Issued 58,431 54.03% 31,573
1997 Warrants Exercised 48,300 97.59% 47,137
------------- -------------
39,926,638 39,879,300
WEIGHTED AVERAGE SHARES OUTSTANDING 39,879,300
NET LOSS $ (11,104,845)
NET LOSS PER SHARE $ (0.28)
=============
</TABLE>
<PAGE> 1
EXHIBIT 11.2
PAGEMART WIRELESS, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 13, 1996
----------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
------------- ------------- -------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 537,414 99.55% 534,988
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 100.00% 11,242,857
1995 Common Stock Offerings 4,323,874 100.00% 4,323,874
Impact of warrants, options and shares issued during
the year preceding the initial public offering 978,581 100.00% 978,581
------------- -------------
34,693,669 34,691,243
Weighted Average Shares Outstanding at 6/13/96 34,691,243
6/13/96 Shares Weighted at 74 days 28,210,461
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1996
----------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
------------- ------------- -------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 552,919 100.00% 552,919
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 100.00% 11,242,857
1995 Common Stock Offerings 4,323,874 100.00% 4,323,874
1996 Common Stock Offering 6,000,000 100.00% 6,000,000
------------- -------------
39,730,593 39,730,593
Weighted Average Shares Outstanding at 6/30/96 39,730,593
6/30/96 Shares Weighted at 17 days 7,422,199
WEIGHTED AVERAGE OF SHARES OUTSTANDING at 6/13/96
and 6/30/96 35,632,660
NET LOSS FOR NET LOSS PER SHARE $ (12,129,000)
NET LOSS PER SHARE $ (0.34)
=============
</TABLE>
<PAGE> 1
EXHIBIT 11.3
PAGEMART WIRELESS, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
------------- ------------- -------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 642,233 96.78% 621,571
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 100.00% 11,242,857
1995 Common Stock Offerings 4,323,874 100.00% 4,323,874
1996 Common Stock Offering 6,000,000 100.00% 6,000,000
Employee Stock Purchase Plan Shares Issued 58,431 53.78% 31,425
1997 Warrants Exercised 48,300 68.40% 33,039
------------- -------------
39,926,638 39,863,709
WEIGHTED AVERAGE SHARES OUTSTANDING 39,863,709
NET LOSS $ (23,159,874)
NET LOSS PER SHARE $ (0.58)
=============
</TABLE>
<PAGE> 1
EXHIBIT 11.4
PAGEMART WIRELESS, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
YTD ENDED JUNE 13, 1996
----------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
------------- ------------- -------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 537,414 99.47% 534,581
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 100.00% 11,242,857
1995 Common Stock Offerings 4,323,874 100.00% 4,323,874
Impact of warrants, options and shares issued during
the year preceding the initial public offering 978,988 100.00% 978,988
------------- -------------
34,694,076 34,691,243
Weighted Average Shares Outstanding at 6/13/96 34,691,243
6/13/96 Shares Weighted at 165 days 31,450,852
</TABLE>
<TABLE>
<CAPTION>
YTD ENDED JUNE 30, 1996
-----------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
------------- ------------- -------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 552,919 100.00% 552,919
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 100.00% 11,242,857
1995 Common Stock Offerings 4,323,874 100.00% 4,323,874
1996 Common Stock Offering 6,000,000 100.00% 6,000,000
------------- -------------
39,730,593 39,730,593
Weighted Average Shares Outstanding at 6/30/96 39,730,593
6/30/96 Shares Weighted at 17 days 3,711,099
WEIGHTED AVERAGE OF SHARES OUTSTANDING at
6/13/96 and 6/30/96 35,161,952
NET LOSS FOR NET LOSS PER SHARE $ (23,747,000)
NET LOSS PER SHARE $ (0.68)
=============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S JUNE 30, 1997 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,867
<SECURITIES> 0
<RECEIVABLES> 55,114
<ALLOWANCES> 8,893
<INVENTORY> 7,490
<CURRENT-ASSETS> 63,978
<PP&E> 169,155
<DEPRECIATION> 61,529
<TOTAL-ASSETS> 315,155
<CURRENT-LIABILITIES> 64,932
<BONDS> 262,548
0
0
<COMMON> 4
<OTHER-SE> (12,329)
<TOTAL-LIABILITY-AND-EQUITY> 315,155
<SALES> 31,144
<TOTAL-REVENUES> 127,625
<CGS> 38,382
<TOTAL-COSTS> 38,382
<OTHER-EXPENSES> 92,882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,335
<INCOME-PRETAX> (23,160)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,160)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,160)
<EPS-PRIMARY> (.58)
<EPS-DILUTED> (.58)
</TABLE>
