-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sf5/p+nQkRwzGdtUwXq9YaCoJHaJf4AF5rgG0WMGuomOuM0rtAXrzT9QqzUhTwOa rK1shU8l9MpaOWDL0rQxbw== 0000950134-97-002168.txt : 19970326 0000950134-97-002168.hdr.sgml : 19970326 ACCESSION NUMBER: 0000950134-97-002168 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAGEMART WIRELESS INC CENTRAL INDEX KEY: 0000947268 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 752575229 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-28196 FILM NUMBER: 97562790 BUSINESS ADDRESS: STREET 1: 6688 N CENTRAL EXPRESSWAY STREET 2: STE 800 CITY: DALLAS STATE: TX ZIP: 75206 BUSINESS PHONE: 2147505809 MAIL ADDRESS: STREET 1: 6688 NORTH CENTRAL EXPRESSWAY STREET 2: STE 800 CITY: DALLAS STATE: TX ZIP: 75206 FORMER COMPANY: FORMER CONFORMED NAME: PAGEMART NATIONWIDE INC /DE DATE OF NAME CHANGE: 19950627 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1996 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-K (MARK ONE) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF ---- THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ------------ TO ------------
COMMISSION FILE NO. 0-28196 ------------------------------ PAGEMART WIRELESS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) DELAWARE 75-2575229 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
6688 NORTH CENTRAL EXPRESSWAY, SUITE 800 DALLAS, TEXAS 75206 (Address of principal executive offices) (Registrant's telephone number, including area code): (214) 750-5809 ------------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF EACH CLASS --------------- Class A Common Stock -- par value $0.0001 per share ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on February 28, 1997 as reported on the NASDAQ National Market System, was approximately $45,391,200. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status for this purpose is not necessarily a conclusive determination for other purposes. As of February 28, 1997, 33,946,152 shares of the Registrant's Class A Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy Statement for its Annual Meeting of Shareholders scheduled to be held on May 20, 1997, are incorporated by reference into Part III (items 10, 11, 12 and 13) hereof. ================================================================================ 2 PART I ITEM 1. BUSINESS GENERAL PageMart Wireless, Inc. (hereinafter referred to together with its subsidiaries as the "Company") is one of the fastest growing providers of wireless messaging services in the United States. The Company has grown to become the sixth largest paging carrier in the United States, based on 1,859,407 subscribers at December 31, 1996. The Company's number of subscribers has increased at annual growth rates of 136%, 60% and 50% in 1994, 1995 and 1996, respectively. The Company has made no acquisitions, and all subscriber growth has been internally generated. The Company offers local, multi-city, regional and nationwide paging and other one-way wireless services in all 50 states, covering 90% of the population of the United States. The Company also provides services in Puerto Rico, the U.S. Virgin Islands and the Bahamas, and Canada. On February 25, 1997, the Company announced an expansion of services into Mexico and most of Central America through its affiliation with Buscatel, a subsidiary of Telefonos de Mexico ("TelMex"), Mexico's largest telecommunications company, as well as other firms in Central America. The Company employs a digital, state of the art transmission network that is 100% FLEX(R) enabled, allowing the use of high speed messaging technology thereby providing increased transmission capacity. The Company was incorporated in Delaware on November 29, 1994 as a wholly-owned subsidiary of PageMart, Inc. ("PageMart"). Effective January 19, 1995, PageMart merged with a wholly-owned subsidiary of the Company, pursuant to which PageMart was the surviving corporation (the "Reorganization"). As part of the Reorganization, each share of outstanding common stock of PageMart was converted into the right to receive one share of common stock of the Company. Upon consummation of the Reorganization, the stockholders of PageMart had the same ownership interest in the Company as they had in PageMart, and the Company owned all of the capital stock of PageMart. On December 28, 1995, the name of the Company was changed from PageMart Nationwide, Inc. to PageMart Wireless, Inc. OPERATING STRATEGY The Company attributes the significant growth of its paging business to the successful implementation of its six operating principles: (i) diversified distribution channels, (ii) nationwide and NAFTA-wide common frequency, (iii) efficient network architecture, (iv) spectrum-rich frequency position, (v) centralized administration and (vi) customer service capabilities. DIVERSIFIED DISTRIBUTION CHANNELS. The Company utilizes a number of distribution channels to market its products and services, including retail marketing, private brand strategic alliances and national sales offices. Retail Marketing. The Company believes that it is a leading supplier of paging units to consumers through retail distribution channels. The Company has been selected as the pager supplier for a number of leading retail chains, including Office Depot Inc., RadioShack, a division of Tandy Corporation, Federated Department Stores, Inc., Target Stores, Inc. and Best Buy, Inc. Private Brand Strategic Alliances. The Company was one of the first paging companies to broaden its distribution reach by establishing strategic relationships with large communications providers. The Company has established strategic relationships with GTE Corporation, Southwestern Bell Mobile Systems, AT&T Wireless Services, Ameritech Mobile Services, Inc., EXCEL Communications, Inc. and Puerto Rico Telephone Company. National Sales Offices. The Company's national sales offices sell equipment and services through four distribution channels: direct sales, agents, third-party resellers and local retailers. The Company has a direct sales force presence in approximately 80 Metropolitan Statistical Areas ("MSAs") through 65 offices. 2 3 Management believes that a diversified approach to distribution is important to sustain growth as paging services more deeply penetrate the United States population, especially the consumer market. This diversification is a key element of the Company's strategy of expanding its subscriber base as rapidly as possible to increase profitability and cash flow through greater utilization of its nationwide wireless communication network. NATIONWIDE AND NAFTA-WIDE COMMON FREQUENCY. The Company has constructed its nationwide messaging network on a common frequency. Use of a common frequency provides the Company with a number of important strategic advantages not available to many of its competitors which operate on multiple frequencies across markets. The use of a common frequency across the United States enables the Company's customers to travel throughout the United States while continuing to use the same messaging device. In addition, the use of a common frequency has been expanded to encompass the countries that are parties to the North American Free Trade Agreement ("NAFTA"), which enables customers to travel to Canada, the Bahamas and, by the third quarter of 1997, Mexico and Central America. As a result, the Company is able to provide multi-city coverage customized to accommodate the customer's needs ("coverage on demand"). The common frequency also provides a competitive advantage to the Company when marketing its services to regional and national retailers and private brand strategic alliance partners. These distributors are able to buy the paging unit without being limited by where they can distribute the product or by the service they sell with the unit. This allows retailers and strategic partners to offer customers all service options while minimizing the number of stock keeping units ("SKUs") that the distributor must carry, thus reducing inventory carrying costs. In addition, the flexibility of the Network enables the Company to address many of the reasons for customer disconnections, such as a move to another city or a desire to expand coverage. The Company's average monthly disconnection rates for the twelve months ended December 31, 1995 and 1996 were 2.5% and 2.4%, respectively. EFFICIENT NETWORK ARCHITECTURE. The Company is an industry leader in the implementation of advanced telecommunications technologies, including pioneering the use of direct broadcast satellite ("DBS") technology for paging. The Company's nationwide wireless transmission network is 100% controlled by DBS technology, which gives the Company a flexible, highly reliable and efficient network architecture. The use of DBS technology eliminates the need for expensive terrestrial radio frequency ("RF") control links and repeater equipment while enabling the Company to provide a wide range of coverage options. The Company's network covers the top 300 MSAs across the United States, or approximately 90% of the total population in the United States and is designed to serve a larger subscriber base than the one currently served by the Company. The Company's wireless transmission network is 100% FLEX(R) enabled, allowing the use of the high speed FLEX(R) protocol to transmit messages and maximize system capacity. SPECTRUM-RICH FREQUENCY POSITION. The Company ranks among the top four paging carriers in the United States in licensed nationwide frequencies. The Company's exclusive frequency licenses include two nationwide paging frequencies and 150 kHz of nationwide Narrowband Personal Communications Service ("NPCS") frequency (the "NPCS Licenses"). The Company believes that this frequency has important strategic value because it may enable the Company to grow its one-way subscriber base and to provide two-way messaging and other value-added services to its subscribers. As a result, the Company believes its spectrum-rich frequency position enables it to attract private brand strategic alliance partners. CENTRALIZED ADMINISTRATION. The Company has centralized customer service, information systems, inventory control and distribution, finance and marketing functions. This centralized administration has enabled the Company to become one of the lowest cost providers of paging and other one-way wireless communications services in the United States. In addition, the administrative infrastructure is designed to support a significantly larger customer base than that currently served by the Company, which will allow it to realize additional operating efficiency as the Company continues to grow. CUSTOMER SERVICE CAPABILITIES. Management has focused on developing industry-leading customer service capabilities. The Company employs approximately 600 highly trained customer service personnel 3 4 operating in state of the art call center facilities. Management believes that these services are an important factor in supporting and retaining its strategic partners, retailers and subscribers. INTERNATIONAL EXPANSION The Company plans to provide messaging services in selected countries on a seamless international network. Management believes that its technology, operational structure and distribution strategies can be replicated in foreign countries to establish nationwide wireless networks. In each country in which the Company plans to offer paging and messaging services, the Company will seek to obtain or have a local affiliate obtain a nationwide frequency common to at least one of the nationwide frequencies it holds in the United States in order to allow a single messaging device to be used in multiple countries. The Company expects to pursue international opportunities through minority interests in joint venture arrangements or network affiliation agreements whereby the Company would contribute its expertise in designing and managing messaging services with minimal incremental capital investments. The Company's international strategy is initially to pursue opportunities in North America, Central America and South America. One of the Company's affiliates, PageMart Canada Limited ("PageMart Canada"), has obtained a nationwide license in Canada based on a frequency common to one of its frequencies in the United States. PageMart Canada began providing service in the largest metropolitan areas in Canada to United States subscribers in March 1996 and to Canadian subscribers in April 1996. The Company also provides paging coverage in the Bahamas, Puerto Rico and the U.S. Virgin Islands. The Company has entered into an exclusive ten year network affiliation agreement with Telefonos de Mexico through its wholly owned subsidiary, Buscatel. TelMex has acquired in Mexico the same nationwide frequency the Company uses nationwide in the United States and Canada and has installed it in all 33 markets where Buscatel operates. The agreement provides for the linking of these respective systems so as to provide generally similar services including local, regional, nationwide and international coverage options all on the same frequency. The companies will also facilitate roaming between systems. Under the terms of the agreement, the Company and Buscatel will integrate networks to enable efficient, user transparent messaging. The companies will jointly expand coverage, concentrating initially on major cities located along the 2,000-mile United States/Mexico border. The two companies will also jointly market services and co-brand pagers where appropriate. With the addition of Mexico via the TelMex agreement, PageMart offers true NAFTA-wide coverage. PageMart has also signed network affiliation agreements with leading paging companies in El Salvador, Guatemala, Honduras, Costa Rica and Panama. As in the case of Mexico, the same nationwide 900MHz frequency used by the Company has been licensed by the Company's network affiliates in each country. The extension of the companies' services, including roaming, to these areas will allow the PageMart network to offer paging from the Panama Canal to Canada. The common frequency allows the Company's affiliates in each country to provide customized coverage that extends beyond the borders of the serving country, using the same pager. For example, a subscriber in New York could choose New York and Toronto or Mexico City coverage. NPCS MESSAGING STRATEGY One of the Company's principal strategies is to become a leading provider of two-way messaging services in the United States. Management believes that the introduction of two-way messaging services may present significant future growth opportunities to the Company by enabling it to provide a new generation of advanced messaging services, to new and existing subscribers. The Company's NPCS messaging strategy is founded on four principal competitive advantages: (i) nationwide spectrum, (ii) incremental introduction of technology, (iii) established diversified distribution channels and (iv) operating efficiency. NATIONWIDE SPECTRUM. With the acquisition of the NPCS Licenses, the Company became one of four companies in the United States with 150 kHz or more of nationwide NPCS frequency. As a result, the 4 5 Company is positioned to create a nationwide network capable of delivering local, multi-city, regional, or nationwide data or stored voice messaging services to a large number of subscribers. INCREMENTAL INTRODUCTION OF TECHNOLOGY. When ready, the Company intends to deploy NPCS data messaging technology by building upon its one-way transmission network, enabling the Company to minimize the level of capital expenditures and investments. The Company will continue to monitor voice paging opportunities and technologies and may introduce one-way and /or two-way stored voice service depending on market demand for such services. ESTABLISHED DIVERSIFIED DISTRIBUTION CHANNELS. The Company plans to leverage its established diversified distribution channels to achieve efficient market penetration of its advanced messaging services. OPERATING EFFICIENCY. The Company expects to utilize its existing one-way network and centralized administration to minimize incremental costs of product and service expansion. Management believes that the Company's centralized customer service, information systems, inventory control and distribution, finance and marketing organizations will be capable of supporting the Company's two-way strategy. As a result of these operating advantages, the Company plans to offer an array of advanced messaging services at affordable prices that the Company believes should appeal to a large number of potential subscribers and to its current distribution channels. In 1996, the Company began testing both NPCS data and stored voice messaging services. Upon successful completion of testing, the two-way data messaging network is expected to be deployed on a city-by-city basis. Advanced data messaging services include guaranteed alphanumeric message delivery with acknowledgment and message with response capabilities. ONE-WAY MESSAGING OPERATIONS COAM STRATEGY The Company's operating model is unique in the industry in that it follows a strategy of selling rather than leasing messaging equipment to subscribers. As of December 31, 1996, approximately 98% of the Company's messaging units were COAM, which compares to an industry average of approximately 62%. The Company believes that by following a COAM strategy it can achieve significantly better capital efficiency than if it were to follow a lease strategy, which is reflected in its relatively low capital employed per subscriber of $43 at December 31, 1996. Capital employed per subscriber represents total assets, less NPCS Licenses, cash, non-debt current liabilities and international investments divided by units in service. The Company believes that its COAM strategy provides additional benefits, including reduced risk of technological obsolescence and avoidance of the credit risk associated with leasing pagers to end-users. In addition, management believes that this strategy minimizes its disconnection rates in the retail channel. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. PAGERS The Company does not manufacture any of the pagers used in its paging operations. Currently, the Company buys approximately 60% of its pagers from Motorola with the remainder purchased from other manufacturers. The Company is dependent on such manufacturers to obtain sufficient pager inventory for new subscriber units and replacement needs. SALES AND MARKETING The Company's customers include individuals, corporations and other organizations that desire affordable communication services offering substantial mobility, accessibility and the ability to receive timely information. The Company utilizes a number of distribution channels to market its products and services, including retail marketing, private brand strategic alliances and national sales offices. Management believes that a diversified approach to distribution is important to sustain growth as demand for paging services more deeply penetrates the United States population, especially the consumer market. This diversification is a key element of the Company's strategy of expanding its subscriber base to increase profitability and cash flow through greater utilization of its nationwide wireless communication network. The Company is not dependent on any 5 6 single customer or a few customers, the loss of one or more of whom would have a material adverse effect on the Company. RETAIL MARKETING Since early 1993, the Company has been an industry pioneer in developing the national retail distribution channel through sales arrangements with regional and national retail chains that sell electronic and business equipment or consumer goods. The Company provides equipment to a retailer who then sells the equipment to potential users. Once the unit is purchased, the customer can activate it and subscribe for local, regional or nationwide paging coverage with the Company by simply calling the toll-free number identified on the unit. Because the Company's pagers operate on a common nationwide frequency, they can be sold in any retail store located in the Company's nationwide coverage area. By contrast, competitors that use multiple frequencies across markets require retailers to maintain many more SKUs to serve each local market that utilizes a different frequency. The Company has entered into sales arrangements with a number of large national retail chains such as Office Depot, Inc., RadioShack, a division of Tandy Corporation, Federated Department Stores, Inc., Target Stores, Inc. and Best Buy, Inc. Retail distribution also allows the Company to sell pagers in markets that would not support a direct sales office but in which it has installed the necessary equipment required for providing paging services. The Company can thus enter new markets by capitalizing on its existing infrastructure of transmitters with the only incremental expense being the procurement of local access phone lines. The Company expects national retail sales to continue to be an important channel of distribution for pagers. The number of national retail store locations has increased to 5,530 stores from 3,411 stores and 2,200 stores at December 31, 1996, 1995 and 1994, respectively. Approximately 25% of the Company's units in service were sold through the national retail channel. PRIVATE BRAND STRATEGIC ALLIANCES The Company has established numerous strategic relationships with large communications providers. These companies utilize their brand awareness and billing efficiencies to market private brand pagers and services using the Company's transmission network. Approximately 18% of the Company's units in service were sold through private brand strategic alliances, and the Company expects this proportion to increase over the next several years. GTE CORPORATION ("GTE"). During 1993 and 1994, the Company and GTE signed a series of agreements providing for the sale and marketing through GTE of GTE-labeled services throughout the United States. In addition, several of these agreements provide for joint cooperation in the deployment of paging network facilities for the provision of wireless messaging and data transmission in the United States. Pursuant to the terms of one of the agreements, GTE agreed to purchase up to 250 new transmitters to be deployed throughout the Company's nationwide network. The Company leases, operates and maintains the transmitters and will provide wireless services to GTE customers, as well as customers of the Company via the Company's nationwide network. The Company's services are sold across the United States through GTE Telephone Operations, GTE Phone Mart Stores, GTE Mobilnet and authorized GTE agents. SOUTHWESTERN BELL MOBILE SYSTEMS ("SBMS"). In May 1995, the Company and SBMS signed an agreement for the sale and marketing through SBMS of SBMS-labeled services. After a successful test in several Texas markets in the third quarter of 1995, SBMS has expanded marketing of the service into all SBMS markets. In the fourth quarter of 1996, SBMS initiated direct marketing programs to Southwestern Bell residential telephone customers. AT&T WIRELESS SERVICES ("AT&T WIRELESS"). In November 1995, the Company and AT&T Wireless entered into a three-year agreement for the sale and marketing through AT&T Wireless of AT&T Wireless-labeled services. AMERITECH MOBILE SERVICES, INC. ("AMERITECH"). In February 1996, the Company and Ameritech signed an agreement for the sale and marketing through Ameritech of Ameritech-labeled services. 6 7 EXCEL COMMUNICATIONS, INC. ("EXCEL"). In March 1996, the Company and EXCEL, a long distance reseller, signed an agreement for the sale and marketing through EXCEL of EXCEL-labeled services. PUERTO RICO TELEPHONE COMPANY ("PRTC"). In December 1996, the Company and PRTC, the largest provider of telephone and wireless services in Puerto Rico, signed a ten-year agreement for the resale of PRTC-labeled PageMart services, and for the sharing of network infrastructure and marketing of United States and Puerto Rico coverage to existing PageMart and PRTC customers. NATIONAL SALES OFFICES The Company's national sales offices sell equipment and services through four distribution channels: direct sales, agents, third-party resellers and local retailers. The Company has a direct sales force of 552 personnel located in approximately 80 MSAs through 65 offices. DIRECT SALES. The Company markets its equipment and services through its direct sales force and related marketing activities such as telemarketing and advertisements in radio, print media and telephone company yellow pages. Direct sales representatives are paid in part by commission (which varies depending on the type of service subscribed for and other factors) for each unit sold or placed in service. Approximately 22% of the Company's units in service were sold through its direct sales force. AGENTS. The Company markets its equipment and services through agents. Agents establish customers which are billed directly by the Company. Agents earn a commission and a share of future revenues for the customers they establish. THIRD-PARTY RESELLERS. In addition to offering paging and messaging services directly to end-users, the Company also provides services under marketing agreements with third-party resellers. Typically, the Company offers third-party resellers paging services in bulk quantities at a wholesale monthly rate that is lower than the Company's regular retail rates. Approximately 35% of the Company's units in service were sold through third-party resellers. LOCAL RETAILERS. The Company markets its services under sales arrangements with local retailers located in the MSAs where national sales offices are present. MESSAGING SERVICES PAGING SERVICES The Company charges subscribers a monthly fee which covers the paging and messaging services subscribed for and any additional services purchased by the subscriber. The amount of the monthly fee varies primarily based on the type of service provided and the geographic area covered. The Company charges higher rates for multi-city and nationwide service options. The Company currently offers the following two basic types of one-way paging and messaging services.
SERVICE FUNCTIONS ------- --------- Numeric paging........................ Provides the subscriber with the telephone number of the person who is seeking to contact the subscriber. Numeric pagers can store and retrieve up to 40 numeric messages, which are displayed on a liquid crystal display. Alphanumeric paging................... Offers the subscriber the ability to receive a text message rather than simply a numeric message. Alphanumeric pagers can store and retrieve up to 40 messages of up to 80 characters each, which are displayed on a liquid crystal display.
7 8 NUMERIC PAGING. Among the Company's subscribers who use a numeric display pager, a high percentage select local coverage, although the percentage of subscribers who select multi-city coverage has been increasing. Monthly fees for regional and national paging coverage are substantially higher than the fees charged for single local area coverage. The Company's revenues from multi-city coverage increased to approximately 37% of airtime revenues for the month ended December 31, 1996 from approximately 28% during the month ended December 31, 1995. ALPHANUMERIC PAGING. The Company launched its alphanumeric paging services in July 1993 under the tradenames InfoPage(R) and InfoNowSM, and the number of subscribers utilizing this service represented approximately 2.8% of the Company's total subscribers as of December 31, 1996. The percentage of paging industry subscribers utilizing alphanumeric pagers at the end of 1996 was reported to be approximately 12%. The Company has not focused a significant portion of its selling and marketing efforts on alphanumeric paging service, primarily because technology has inhibited the Company's ability to deliver the service in a cost effective manner. With the Company's introduction of high speed FLEX(R) protocols, the Company anticipates alphanumeric paging service becoming a larger portion of its selling and marketing efforts. The ability of alphanumeric pagers to deliver longer text messages, including the ability to store messages received for playback when desired by the subscriber, allows the Company to charge higher monthly fees for its InfoPage(R) and InfoNowSM services than for numeric display paging services. ROAMING SERVICES. infoRoamSM and OmniRoamSM services allow customers the flexibility to change their local coverage through a simple phone call. Using a touchtone phone, the customer needs only to enter the area code of the city to which he or she is traveling and the local coverage is changed. Numeric and text messages are automatically sent to the customer's "roaming" city until coverage is moved back to the "home" city. With these services, the customer does not pay for paging coverage that is not needed, (i.e., nationwide). These services are available due to the Company's unique network architecture. These products give the Company's customers the ability to take local coverage with them when they travel to the more than 1,500 PageMart communities in the United States, Canada, U.S. Virgin Islands, Puerto Rico and the Bahamas. In 1997, the Company's customers using these services will be able to roam throughout NAFTA and most major cities in Central America. ADDITIONAL VALUE-ADDED SERVICES In addition to paging services, the Company offers subscribers a number of additional value-added services, including voice mail services that allow subscribers to retrieve voice messages from persons attempting to contact the subscriber. In addition, the Company offers a numeric message retrieval service which allows a subscriber to retrieve messages that were sent at a time when the subscriber was outside of his or her service area. Other optional services include a nationwide toll-free 800 access number for paging subscribers, a customized voice prompt that allows subscribers to record a personal greeting, maintenance agreements and loss protection programs. Approximately 22% of the Company's recurring revenues during the fiscal quarter ended December 31, 1996 were derived from these additional services. The Company also plans to offer wireless connectivity to the Internet for message transfer and information requests through the "PageMart Wireless Web" service utilizing the Company's wireless communications network. These services will include electronic mail, news and other information delivered to messaging devices. NPCS SERVICES One of the Company's principal strategies is to become a leading provider of advanced messaging services in the United States utilizing its NPCS two-way technology and spectrum. Management believes that the introduction of advanced messaging services may present significant future growth opportunities to the Company by enabling it to provide a new generation of advanced messaging services, including two-way data messaging and other services, to new and existing subscribers. In 1996, the Company began testing both NPCS data and stored voice messaging services. Upon successful completion of testing, the two-way data messaging network is expected to be deployed on a city-by- 8 9 city basis. Advanced data messaging services include guaranteed alphanumeric message delivery with acknowledgment and message with response capabilities. The Company's planned service offerings are expected to be delivered to a pocket-sized subscriber unit containing a transmitter, enabling it to send a signal identifying its location to the Company's network. Management estimates that the Company's enhanced alphanumeric services will be offered to customers at monthly prices competitive with current one-way alphanumeric paging services in similar service areas. The Company's service offerings are expected to include: ENHANCED ALPHANUMERIC MESSAGING. The Company's enhanced alphanumeric messaging service will enable the subscriber to receive alphanumeric messages up to several hundred characters in length (compared to the approximately 80 characters in traditional one-way alphanumeric messaging) which will be input by either (i) a computer or other software-enabled device with the proper software and a modem that can access the Company's network directly or via the Internet or (ii) a dispatch operator. The service is expected to be based on Motorola Inc.'s ("Motorola") ReFLEX25(TM) technology. This technology will permit the network to verify that the subscriber unit has obtained the message ("guaranteed delivery"), that the subscriber has read the message ("read acknowledgement") and to store the message for later delivery if the subscriber's unit is not currently available. The Company believes that penetration of alphanumeric service on a regional and nationwide basis has been limited to date due to the reluctance of many one-way paging operators to promote the service because of its relatively high use of system capacity during transmission. The NPCS Licenses and the ReFLEX25(TM) technology should offer significant increases in capacity and delivery speed over the spectrum and technology currently delivering alphanumeric messaging services. The Company expects that its enhanced alphanumeric service will improve upon traditional service by permitting longer messages, by guaranteeing and acknowledging delivery and, eventually, by permitting the subscriber to initiate responses. Management believes that these service enhancements, along with its competitive pricing, will appeal to subscribers of traditional alphanumeric messaging services and to cost conscious customers who have not previously subscribed to such services. OTHER SERVICES. Over time, the Company intends to participate in the growth of wireless data messaging services through new and existing strategic alliances, wireless data alliances with software companies and electronic equipment manufacturers to develop additional text messaging services. In addition to pocket-sized pagers, the Company expects that wireless text and data transmissions will be received by computers, organizers or a personal digital assistant equipped with two-way RF modems or built-in RF capability. It is anticipated that a limited response by the device will be possible. ONE-WAY TRANSMISSION NETWORK The Company utilizes DBS technology exclusively in its one-way transmission network. Although the Company's one-way transmission network is substantially built out, the Company continues to make expenditures to improve and expand its coverage into new areas. The Company's use of the DBS system has certain cost and performance advantages over traditional paging systems and traditional satellite paging systems. Traditional Paging Systems. The traditional method of controlling paging transmitters in local and regional simulcasting systems is to use terrestrial RF control links that originate from one broadcast transmitter that is controlled by a local paging terminal. At the paging terminal, the messages are received and assembled for transmission via RF or wireline control link to each transmitter. Once a message is received by each transmitter in a simulcast market, it in turn broadcasts the paging information using the paging broadcast frequency. The RF control link frequency is different from the paging broadcast frequency. In order to simulcast the paging signal, a traditional system must be fine-tuned ("optimized") so that each transmitter broadcasts the paging signal at the same time. Optimization becomes more complex and expensive as the service area expands. In addition, since a traditional system requires line-of-site transmission of the RF control link signal, repeater stations must be used to re-broadcast this RF signal in a large system 9 10 such as the New York or Los Angeles metropolitan areas. The more distant the transmitter sites are from the central RF control link transmitter, the more repeaters are necessary. Repeater stations make optimization more difficult and increase equipment and recurring tower rental costs. For non-contiguous regional coverage either telephone lines or microwave communication links are typically used in lieu of RF control links. Traditional Satellite Paging Systems. Some paging system operators have adopted an alternative approach using satellites, rather than telephone lines, to communicate between the paging terminal and the traditional RF control link systems. Numeric and alphanumeric messages are processed by a central paging terminal that uplinks the messages to a satellite, which then broadcasts the messages to the destination cities. The satellite signal is received by one central RF radio control transmitter paging dish in each city and broadcast via traditional RF control link transmitters to the paging transmitters in that city. With this infrastructure, the satellite is used only in place of other long distance communication options. Both an RF control link frequency and a paging signal frequency must be employed as with a traditional system. The current broadcast configuration employed by many other leading nationwide carriers has the added inefficiency of satellite transmissions that address their entire nationwide system or entire regions whenever a page transmission is sent, thus limiting the total number of subscribers on the system. The Company's Direct Broadcast Satellite Paging System. The Company has developed an innovative satellite-based transmission network that gives the Company a flexible, highly reliable network architecture and an efficient operating structure. The Company's network is comprised of three primary components: network access, a nationwide network linking the Company's paging terminals and a satellite network which controls the Company's transmitters. The Company's numeric and alphanumeric paging services can be accessed via local telephone numbers or 800 numbers using a touch-tone key pad or personal computer messaging software. Local numbers are provided by regional telephone companies and 800 number service is provided by long distance telecommunications services providers. The Company uses a nationwide data network to carry all paging traffic from local telephone markets to its satellite uplink facilities in Illinois. This network configuration allows the Company to add new lines quickly and efficiently and provides the Company with back-up power, fire protection and diverse routing capabilities. The Company began using DBS technology in 1990 and was the first one-way wireless communications carrier to use DBS technology to control all of its transmitters. With a DBS paging system, the satellite can broadcast messages directly to each transmitter in the Company's paging system, which then broadcasts the message to pagers on the Company's nationwide broadcast frequency. DBS eliminates the expensive terrestrial radio link and repeater equipment that many paging companies have employed to control simulcast transmissions in large metropolitan markets. In addition, the Company's satellite system can selectively address one or any combination of its transmitters, thereby providing a wide range of coverage options and permitting efficient use of paging frequencies in each market. The Company leases its satellite services pursuant to the Satellite Service and Space Segment Lease Agreement, dated January 2, 1995, with SpaceCom Systems, Inc. ("SpaceCom"). The agreement subjects the Company to monthly service charges based on the amount and types of services used and expires on January 31, 2002. The agreement may be terminated by SpaceCom upon certain failures of the Company to pay monthly service fees. The agreement does not include any renewal provisions. Although the Company is currently party to only one satellite service agreement, management believes that the services provided by SpaceCom are sufficient to meet the Company's foreseeable needs and that there are numerous alternate satellite sources available to the Company on comparable terms and conditions. As a result, the Company does not believe the loss of its relationship with its current satellite supplier would have a material adverse effect on its business and operations. Benefits of the Direct Broadcast Satellite. The use of a DBS broadcast system provides a number of benefits to the Company including: - Selectively addresses one or all markets to provide a wide range of local, multi-city, regional or nationwide coverage options. The Company's system configuration employs a high degree of spectrum 10 11 efficiency with regard to the paging frequency because only the coverage area the customer has selected will be activated with each page. - Replaces terrestrial RF control link equipment with satellite based equipment and signaling. This eliminates capital expenditures associated with terrestrial RF control link equipment and the associated telecommunications expenses, utilities and ongoing site rent and requires much lower expenditures for satellite receivers and satellite service. - Suffers significantly less degradation in performance due to building reflection and simulcasting problems, such as the overlapping of two independently controlled markets. - Allows for rapid deployment of the network system because the transmitters are operational immediately upon installation, while terrestrial RF control links need to be optimized, which can take up to three months in some large urban markets. - Supports the high data rates that will be required in order to effectively provide enhanced services such as two-way messaging services. Management believes that this will allow the Company to implement higher speed signal technologies quickly and in a cost effective manner. TWO-WAY MESSAGING NETWORK NARROWBAND PCS PROTOCOLS Paging networks use various "protocols" to provide seamless communications between the various components which make up a paging network. Protocols regulate the format and flow of messages which are transmitted over the network. As such, protocols facilitate the orderly and efficient flow of message traffic over the network. Motorola has developed, and licensed to Glenayre Technologies, Inc. ("Glenayre"), several protocols, including FLEX(R), ReFLEX25TM, ReFLEX 50TM and InFLEXionTMVoice. Of these protocols, ReFLEX25TM and ReFLEX50TM support two-way alphanumeric messaging, and InFLEXionTMVoice supports stored voice messaging. These various protocols have different transmission speeds and capacity characteristics. Consequently, the ability to deliver various types of wireless messaging services, including stored voice messaging, on a cost-efficient basis is dependent upon the protocol used. The following table illustrates certain characteristics of various protocols based on current publicly available information.
INFLEXION(TM) VOICE REFLEX50(TM) REFLEX25(TM) ------------------- ------------ ------------ Technology............................................ Analog Digital Digital Outbound Message Transmission Speed per Channel(1).... -- 6,400 bits 6,400 bits per second per second Number of Channels(1)................................. 7 4 3 Outbound Throughput(1)................................ -- 25,600 bps 19,200 bps per area per area Frequency Reuse....................................... Yes Yes Yes(2) Message Acknowledgement............................... Yes Yes Yes Limited Alphanumeric Message Response................. No Yes Yes Stored Voice Messaging(3)............................. Yes No No Advanced Text Messaging(4)............................ No Yes Yes
- --------------- (1) Bits per second (bps) gross rate including message overhead. Based on NPCS networks with 50 kHz outbound frequency. InFLEXion(TM) Voice does not transmit voice messages digitally. (2) Motorola states that ReFLEX25(TM) protocol will in the future support cellular-like frequency reuse within a city/zone if the Company requires it for additional capacity. (3) Although the ReFLEX50(TM) and ReFLEX25(TM) protocols technically have the ability to support digital voice service offerings, management believes that neither of these protocols can cost-effectively support these service offerings. (4) InFLEXion(TM) Voice does not support text messaging. The Company understands that Motorola may modify the protocol in the future to support data services. 11 12 NPCS NETWORK BUILDOUT The Company expects to design and construct its nationwide NPCS network to provide advanced messaging services and currently expects to complete substantially its network buildout by the end of 1999. The key elements of the network buildout are as follows: Design. The design of the Company's nationwide NPCS network is currently expected to be based upon Motorola's ReFLEX25(TM) technology in order to achieve cost effective sharing of the existing FLEX(R) network, efficient use of the Company's spectrum and to accommodate a greater number of subscribers. The design process requires extensive RF planning, which involves the selection of specific sites for the placement of transmitters and receivers as well as functioning infrastructure equipment from manufacturers. As part of the design process, the Company's engineers are identifying sites using the Company's database (as well as other sources), which contains specific information about available sites throughout the nation. Sites are chosen on the basis of their coverage and on frequency propagation characteristics, such as terrain, topography, building penetration and population density. Equipment. The infrastructure of the Company's network will consist of radio transmitters and receivers, switches, RF controllers and ancillary equipment, such as coaxial cable and antennas. The Company plans to purchase this infrastructure equipment (other than the ancillary equipment) from industry leading equipment suppliers, Motorola and Glenayre. The Company believes that currently there is only a limited number of suppliers of terminals and transmitters and as a result the Company is dependent on such suppliers for its infrastructure equipment needs. The Company currently has no agreements with Motorola and Glenayre that require it to purchase infrastructure equipment or messaging units beyond its two test networks for its two-way services. The Company has entered into a five year agreement with AvData Systems, Inc. to purchase VSAT equipment and satellite capacity for its NPCS network. Development of Technology. Motorola and Glenayre are still developing and conducting over-the-air testing of ReFLEX25TM technology, infrastructure equipment and subscriber units. The vendor tests do not take into account certain factors prevalent in the design of the Company's two-way network buildout such as terrain topography, building penetration and population density, hence the Company has constructed its own networks for the purpose of evaluating these factors as well as the performance of the infrastructure equipment. The Company believes that Motorola and Glenayre will establish that the technology and equipment can deliver a wireless voice message to subscriber unit under controlled circumstances. The Company also understands that Motorola's ReFLEX50TM technology has been introduced and is being used commercially by another paging company. However, there can be no assurance that two-way service will be commercially viable, and the success of two-way service could be affected by matters beyond the Company's control. The Company expects to purchase a significant portion of its subscriber messaging units from Motorola, with the remainder expected to be purchased from other manufacturers. The Company understands that Motorola has licensed to other wireless equipment manufacturers the relevant protocol, as Motorola has done with its FLEX(R) protocols. Although the Company believes that sufficient alternative sources of two-way messaging units will exist, the Company would be adversely affected if it were unable to obtain the units on satisfactory terms. As the Company begins development and implementation of NPCS services, the Company expects to incur significant additional operating losses during the start-up phase for such services, and it will be necessary for the Company to make substantial investments. The Company anticipates requiring additional sources of capital to fund the construction of a two-way messaging network, including expenditures relating to the build-out requirements of the Federal Communications Commission ("FCC"). See "Government Regulation." The Company anticipates investing $75 to $100 million to test and construct a two-way transmission network. Thereafter, the Company anticipates that its two-way operations may require up to $100 million of additional investment to add capacity to the network as the Company's two-way customer base grows. The Company expects to require additional financing to complete the buildout, which may include entering into joint venture arrangements, however there can be no assurance that sufficient financing will be available to the Company. 12 13 See Item 7. Management's Discussion of Financial Condition and Results of Operations -- Liquidity and Capital Resources. COMPETITION The Company competes primarily on the basis of the price of its equipment and wireless services, quality of service, and its coverage capability. Its competitors include both companies which provide paging or other mobile communications services in local markets in which the Company operates and regional and nationwide paging service providers. These include regional telephone companies and both small and large paging service providers, such as Paging Network, Inc., AirTouch Communications, Inc. and Arch Communications Group, Inc. Certain of these companies have substantially greater financial, technical and other resources than the Company. In addition, a number of paging carriers have constructed or are in the process of constructing nationwide wireless networks that will compete with the Company's services, including the provision of two-way messaging. Management believes that the Company's low cost structure and service offerings will enable it to continue to compete effectively in all markets. A number of competing technologies, including cellular telephone service, broadband and narrowband personal communications services, specialized mobile radio, low speed data networks and mobile satellite services, are used in, or projected to be used for, two-way wireless messaging services. Cellular telephone technology provides an alternative communications system for customers who are frequently away from fixed-wire communications systems (i.e., ordinary telephones). Compared to cellular telephone service, paging service is generally less expensive, offers longer battery life, provides better in-building penetration, extends over wider coverage areas, and is more transportable. For those cellular customers for whom convenience and price are considerations, paging can compete successfully by complementing their cellular usage. Management believes that paging will remain one of the lowest-cost forms of wireless messaging due to the low cost infrastructure associated with paging systems, as well as advances in technology that will reduce paging costs. Broadband personal communications services technologies are currently being offered commercially in some cities, are under development in other areas of the United States and are similar to cellular technology. This technology will offer greater capacity for two-way wireless messaging services and, accordingly, is expected to result in greater competition. Technological advances in the telecommunications industry have created, and are expected to continue to create, new services and products competitive with the wireless services currently provided by the Company. In addition, certain companies are developing one-way and two-way wireless messaging services which may compete with the one-way and two-way wireless messaging services which the Company expects to provide. There can be no assurance that the Company will not be adversely affected as new competitive technologies become available and are implemented in the future. In addition, the Company may be adversely affected if cellular telephone companies or broadband personal communications service providers begin to provide other wireless services or enter into partnerships with other companies to provide wireless services that complement cellular or broadband PCS services. GOVERNMENT REGULATION Wireless messaging operations are subject to regulation by the FCC under the Communications Act of 1934, as amended (the "Communications Act") including recent amendments contained in the Telecommunications Act of 1996 (the "1996 Act"). At the present time, wireless messaging services are primarily offered over radio frequencies that the FCC has allocated for either common carriage (the licensees for which are known as radio common carriers ("RCCs")), or private carriage (the licensees for which are known as private carrier paging operators ("PCPs")). RCCs are granted an exclusive license to a particular radio frequency in a particular locality or region. Certain qualified PCPs have been granted such exclusive use of their frequencies as well. In addition, the FCC has recently granted, by auction, regional and nationwide NPCS licenses that can be used for advanced paging services, such as two-way paging. The Company provides one-way paging services directly to subscribers over its own transmission facilities. The Company (through subsidiaries) holds certain RCC licenses (the "RCC Licenses") and two 13 14 exclusive nationwide PCP licenses, as well as exclusive licenses on various PCP frequencies in certain metropolitan areas, including New York, Los Angeles and Chicago (the "PCP Licenses"). Additionally, the Company holds a 50 kHz unpaired nationwide NPCS license (the "Nationwide Narrowband License") and five 50/50 kHz paired regional NPCS licenses (the "Regional Narrowband Licenses"); the latter five licenses authorize the Company to operate regional narrowband systems on the same frequencies throughout the continental United States. The Nationwide Narrowband License was granted on September 29, 1994, and the Regional Narrowband Licenses were granted on January 27, 1995. The Nationwide Narrowband License and the Regional Narrowband Licenses may be utilized in connection with various two-way NPCS services or to expand the Company's existing one-way transmission network. The Omnibus Budget Reconciliation Act of 1993 (the "Budget Act") amended the Communications Act by eliminating many of the regulatory distinctions governing mobile service providers. The FCC implemented the new law by creating a new regulatory category called "commercial mobile radio services" ("CMRS"), which includes most paging providers previously operating as either RCCs or PCPs, including the Company. The FCC has adopted new rules to govern regulation of this new category, which became effective in August 1996. As a result of the new rules, PCP licensees such as the Company have additional obligations. For example, these licensees must provide connection upon reasonable request, must not engage in any unreasonably discriminatory practices and will be subject to complaints regarding any unlawful practices. PCP licensees also are subject to provisions that authorize the FCC to provide remedial relief to an aggrieved party upon finding a violation of the Communications Act and related customer protection provisions. The Company's PCP, RCC and NPCS Licenses (collectively, the "Licenses") authorize the Company to use the radio frequencies necessary to conduct its paging operations. The Licenses prescribe the technical parameters, such as power output and tower height, under which the Company is authorized to use those frequencies. The Licenses are for varying terms of up to 10 years, at the end of which time renewal applications must be submitted to the FCC for approval. Several of the Company's PCP and RCC Licenses expire between 1997 and 1999. In order to be granted the exclusive use of a frequency, the Company is required to construct and maintain a specified minimum number of transmission sites, depending upon the breadth of the exclusivity, each of which is licensed by the FCC (the "Operating Licenses"). Of the Company's approximately 1,700 Operating Licenses, 317 require renewal in 1997 and 316 require renewal in 1998. The Nationwide Narrowband License will expire on September 29, 2004 unless renewed by the Company. The Regional Narrowband Licenses will expire on January 27, 2005 unless otherwise renewed. FCC renewals are routinely granted in most cases upon a demonstration of compliance with FCC regulations and adequate service to the public. Although the Company is unaware of the existence of any circumstances which would prevent the grant of any pending or future renewal applications, no assurance can be given that the Licenses will be renewed by the FCC in the future. Furthermore, although revocation and involuntary modification of licenses are extraordinary regulatory measures, the FCC has the authority to restrict the operation of licensed facilities or to revoke or modify licenses. No License of the Company has ever been revoked or modified involuntarily. The Company has complied with FCC requirements with respect to the buildout of its existing one-way paging network. There are separate FCC buildout requirements with respect to the Company's NPCS Licenses. As a nationwide NPCS licensee, the Company must construct base stations that provide coverage to a composite area of 750,000 square kilometers or serve 37.5% of the United States population within five years of the initial license grant date and must construct base stations that provide coverage to a composite area of 1,500,000 square kilometers or serve 75% of the United States population within ten years of the initial license grant date. Additionally, as a regional NPCS licensee, the Company must construct base stations that provide coverage to a composite area of 150,000 square kilometers or serve 37.5% of the population of the service area within five years of its initial license grant date and must construct base stations that provide coverage to a composite area of 300,000 square kilometers or serve 75% of its service area population within ten years of the initial license grant date. Failure to meet the construction requirements will result in forfeiture of the license and ineligibility to regain it. The Communications Act requires licensees such as the Company to obtain prior approval from the FCC for the assignment of any station license or the transfer of control of any entity holding such licenses. The FCC 14 15 has approved each transfer of control for which the Company has sought approval. The Communications Act also requires prior approval by the FCC of acquisitions of paging companies. The Company also regularly applies for FCC authority to use frequencies, modify the technical parameters of existing licenses, expand its service territory and provide new services. Although there can be no assurance that any requests for approval or applications filed by the Company will be approved or acted upon in a timely manner by the FCC, or that the FCC will grant the relief requested, the Company has no reason to believe any such requests, applications or relief will not be approved or granted. The Communications Act limits foreign ownership of entities that hold certain licenses from the FCC, including licenses of the type held by the Company. Because of this limitation, except pursuant to FCC discretion, no more than 25% of the Company's stock may be owned, directly or indirectly, or voted by non-United States citizens or their representatives, a foreign government or its representatives, or a foreign corporation. Based on currently available information, the Company estimates that its foreign ownership is approximately 22%. However, this percentage is subject to change at any time upon any transfer of direct or indirect ownership of the Company's Common Stock. If the Company obtains knowledge that the foreign ownership of its stock exceeds 25%, it would be forced to either seek approval from the FCC for the additional foreign ownership or redeem common stock at current market value (determined as set forth in the Company's certificate of incorporation) from foreign shareholders in an amount sufficient to reduce such ownership to below 25% (as permitted by the Company's certificate of incorporation). The Budget Act imposed a structure of regulatory fees which the Company is required to pay with respect to its Licenses. The FCC has proposed an increase in these fees for fiscal year 1997. The Company believes that these regulatory fees (either as in effect or as proposed) will not have any material adverse effect on the Company's business. On February 24, 1997, the FCC released its Second Report and Order, which sets a system of competitive bidding ("auctions") to issue licenses for frequencies for which there are mutually exclusive applications. Under the FCC proposal, licenses for individual paging channels for which there are mutually exclusive applications would be auctioned on a geographic basis. In defining the area within which existing users would be protected from interference from the auction winners or neighboring licensees (an area known as an "interference contour"), the FCC created a new methodology that in many instances reduces the size of the area within existing licensees' interference contours. This change, however, does not have any impact on licensees with nationwide exclusivity (such as the Company), because no other operator has the right to apply for such licensees' exclusive frequencies. The FCC's Second Report and Order contains a Further Notice of Proposed Rulemaking in which the FCC seeks commentary on whether it should impose coverage requirements on licensees with nationwide exclusivity (such as the Company), whether these coverage requirements should be imposed on a nationwide or regional basis, and whether -- if such requirements are imposed -- failure to meet the requirements should result in a revocation of the entire nationwide license or just a portion of the license. If the FCC were to impose stringent coverage requirements on licensees with nationwide exclusivity, the Company might have to accelerate the build-out of its system in certain areas. In a rulemaking proceeding pertaining to interconnection between local exchange carriers ("LECs") and CMRS providers, the FCC has concluded that LECs are required to compensate CMRS providers for the reasonable costs incurred by such providers in terminating traffic that originates at LEC facilities, and vice versa. With regard to the negotiation of these mutual compensation arrangements, the FCC has concluded that states have the authority under certain circumstances to mandate a "bill and keep" arrangement on negotiating parties (i.e., the LEC and the CMRS provider would charge each other a rate of zero for the termination of the other's traffic). The Company believes that "bill and keep" arrangements, if applied to paging services, would not have any material adverse effect on the Company's business. Consistent with this ruling mandating compensation for carriers terminating LEC-originated traffic, the FCC has determined that LECs may not charge a CMRS provider or other carrier for terminating LEC-originated traffic. Some LECs have been reluctant to comply with the FCC orders and have threatened to terminate interconnection arrangements with the Company if it does not agree to pay to terminate 15 16 LEC-originated traffic. The Company has made certain payments to the LECs under protest and has maintained reserves for payments that the LECs claim are due, but that the Company is presently withholding. As a result of the enactment of the 1996 Act, the Company may face additional financial obligations. In November 1996, in response to a directive in the 1996 Act, the FCC adopted new rules that govern compensation to be paid to pay phone providers. These rules are the subject of several judicial appeals. If the FCC rules ultimately are upheld, however, the cost of providing certain paging services, including 800 number paging, could increase. Also, in response to changes made by the 1996 Act, the FCC currently is considering the adoption of new rules regarding payments by telecommunications firms into a revamped fund that will provide for the widespread availability of telecommunications services, including to low-income consumers ("Universal Service"). Prior to the implementation of the 1996 Act, Universal Service obligations largely were met by local telephone companies. Under the proposed rules, all telecommunications carriers, including paging companies, will be required to contribute to the Universal Service Fund. Payments into the fund will likely increase the cost of doing business and could make the Company's service less competitive with the other services. From time to time, legislation and regulations which could potentially adversely affect the Company are proposed by federal and state legislators and regulators. Legislation is currently in effect in Texas requiring paging companies to contribute a portion of their taxable telecommunications revenues to a Telecommunication Infrastructure Fund created by the state legislature. Management does not believe that the Texas law will have a material adverse effect on the Company's operations and is not aware of any other currently pending legislation or regulations which will have a material adverse impact on the Company's operations. However, there can be no assurance that Federal or other state legislation will not be adopted, or that the FCC or the various state agencies will not adopt regulations or take other actions, that would adversely affect the business of the Company. TRADEMARKS The Company owns certain intellectual property, including without limitation, trademark and service mark rights associated with certain federal and foreign trademark registrations and applications, common law trademark, trade name and service mark rights, and other legal and equitable rights connected with the Company's voice and data communication products and services and, in particular, one-way and two-way paging systems and technologies and related services. The Company markets its multiple city wireless service under the name Pick-Your-Cities(R) and its nationwide service under the name Page-Me-USA(R), both of which are federally registered service marks. The Company has filed applications with the United States Patent and Trademark Office as well as certain foreign trademark offices to register approximately 107 additional service and trademarks. The Company also has full use of the name PageMart, as a mark. EMPLOYEES At December 31, 1996, the Company had 1,833 full-time employees, approximately 1,441 of whom were engaged in sales and customer service. No employees of the Company are covered by a collective bargaining agreement, and management believes the Company's relationship with its employees is good. ITEM 2. PROPERTIES The principal tangible assets of the Company are its paging network equipment. Paging network equipment utilized by the Company includes paging switching terminals, paging transmitters and a host of related equipment such as satellite and digital link controllers, satellite dishes, antennas, cable, etc. The Company continues to add equipment as it expands to new service areas. To date, it has not experienced any difficulty or delay in obtaining equipment as needed. 16 17 The Company acquired the NPCS Licenses in auctions held by the FCC. The NPCS Licenses permit the nationwide operation of NPCS networks with 100 kHz of outbound capacity and 50 kHz of response capacity. The Company generally leases the locations used for its transmission facilities under operating leases. These leases, which are generally for five years or less, currently provide for aggregate annual rental charges of approximately $8.1 million. The Company does not anticipate difficulty in renewing these leases or finding equally suitable alternate facilities on acceptable terms. The Company also leases approximately 130,000 square feet of office space for its corporate headquarters in Dallas, Texas, at an annual cost of approximately $1.3 million and varying lesser amounts for local offices at other locations. Aggregate annual rental charges under the Company's local office leases are approximately $2.5 million. Effective February 1, 1998, the Company's corporate headquarters lease, covering 130,000 square feet of office space, will expire. On November 26, 1996, the Company entered into a lease agreement for new facilities for its corporate headquarters. Under the terms of the lease, the Company is committed to leasing 30,000 square feet of office space by June 1, 1997 expanding to 120,000 square feet on May 1, 1998. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various lawsuits arising in the normal course of business. In management's opinion, the ultimate outcome of these lawsuits will not have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The Company's Class A Common Stock, $0.0001 par value, was initially offered to the public on June 14, 1996, and is listed on the Nasdaq National Market System under the symbol PMWI. Prior to the offering (the "Offering"), there was no public market for the Company's Class A Common Stock. There currently is no public market for the Company's Class B, Class C or Class D Common Stock. Class A Common Stock is convertible by certain holders thereof into either Class B or C Common Stock. Classes B, C and D Common Stock are convertible to Class A Common Stock. Set forth below are the high and low sales prices for shares of the Company's Class A Common Stock in 1996 from June 13, 1996, the date of the Offering, through the end of the second quarter of 1996 and for each full quarterly period thereafter in 1996.
HIGH LOW ---- ---- 1996: Second Quarter.................................. $13 1/4 $ 10 Third Quarter................................... $11 7/8 $ 8 1/4 Fourth Quarter.................................. $10 1/8 $ 6
As of February 28, 1997, the Company's Class A, Class B, Class C and Class D Common Stock was held by approximately 197, 8, 2 and 1 holders of record, respectively. The Company has not paid dividends on the common stock since its organization in 1989. The Company currently intends to retain future earnings for the development of its business and does not anticipate paying cash dividends on its common stock in the foreseeable future. The Company's future dividend policy will be determined by its Board of Directors on the basis of various factors, including the Company's results of operations, financial condition, capital requirements and investment opportunities. In addition, the Company's debt instruments substantially restrict (and currently prohibit) the payment of cash dividends. 17 18 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth summary historical financial information and operating data for each of the five fiscal years ended December 31, 1996. The financial information and operating data were derived from, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this report.
FISCAL YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1992 1993 1994 1995 1996 ----------- ----------- ----------- ------------- ------------- (IN THOUSANDS, EXCEPT UNIT, ARPU, PER SUBSCRIBER AND PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Recurring revenues................... $ 6,668 $ 24,184 $ 56,648 $ 101,503 $ 153,041 Equipment sales and activation fees............................... 9,837 26,483 53,185 57,688 68,551 -------- -------- -------- ---------- ---------- Total revenues....................... 16,505 50,667 109,833 159,191 221,592 Cost of equipment sold............... 10,044 28,230 57,835 63,982 78,896 Operating expenses................... 25,584 47,448 85,322 118,557 155,265 -------- -------- -------- ---------- ---------- Operating loss....................... (19,123) (25,011) (33,324) (23,348) (12,569) Interest expense..................... (2,456) (6,538) (12,933) (30,720) (35,041) Interest income...................... 529 428 858 1,997 1,140 Other................................ -- -- (414) (1,042) (2,128) -------- -------- -------- ---------- ---------- Net loss............................. (21,050) (31,121) (45,813) (53,113) (48,598) ======== ======== ======== ========== ========== Net loss per common share............ $ (1.24) $ (1.51) $ (1.72) $ (1.53) $ (1.30) Weighted average number of common shares and share equivalents outstanding........................ 16,962 20,627 26,574 34,653 37,462 BALANCE SHEET DATA (AT PERIOD END): Current assets....................... $ 13,365 $ 51,279 $ 44,397 $ 62,535 $ 70,572 Total assets......................... 30,772 78,773 142,059 263,829 313,620 Current liabilities.................. 14,754 20,198 37,966 56,508 62,503 Long-term debt, less current maturities......................... 25,059 78,359 92,632 219,364 240,687 Stockholders' equity (deficit)....... (9,041) (19,784) 11,461 (12,043) 10,430 OTHER DATA: Units in service -- domestic......... 117,034 327,303 772,730 1,240,024 1,851,445 Units in service -- international.... -- -- -- -- 7,962 Net subscriber additions............. 64,909 210,269 445,427 467,294 619,383 ARPU(1).............................. $ 8.66 $ 9.81 $ 8.64 $ 8.62 $ 8.04 Operating profit (loss) before selling expenses per subscriber per month(2)........................... (12.69) (.98) .90 2.11 2.25 Selling expenses per net subscriber addition(3)........................ 157 91 81 91 87 EBITDA(4)............................ (16,499) (19,930) (25,219) (10,076) 8,623 Capital expenditures................. 13,729 10,810 16,719 33,503 63,804 Depreciation and amortization........ 2,624 5,081 8,105 13,272 21,192
- --------------- (1) Average monthly revenue per unit ("ARPU") is calculated by dividing (i) recurring revenues, consisting of fees for airtime, voice mail, customized coverage options, excess usage fees and other recurring revenues and fees associated with the subscriber base for the quarter by (ii) the average number of units in service for the quarter. ARPU is stated as the monthly average for the final quarter of the year. (2) Operating profit (loss) before selling expenses (selling expenses include loss on sale of equipment) per subscriber for the Company's one-way operations is calculated by dividing (i) recurring revenues less technical expenses, general and administrative expenses, and depreciation and amortization for the final quarter of the period by (ii) the average number of units in service for the final quarter of the period. Stated as the monthly average for the fourth fiscal quarter of the period. (3) Selling expenses per net subscriber addition for the Company's domestic one-way operations is calculated by dividing (i) selling expenses, including loss on sale of equipment for the year by (ii) the net domestic subscriber additions for the year. (4) EBITDA represents earnings (loss) before interest, taxes, depreciation and amortization. EBITDA is a financial measure commonly used in the paging industry. EBITDA is not derived pursuant to generally accepted accounting principles ("GAAP") and therefore should not be construed as an alternative to operating income, as an alternative to cash flows from operating activities (as determined in accordance with GAAP) or as a measure of liquidity. The calculation of EBITDA does not include the commitments of the Company for capital expenditures and payment of debt and should not be deemed to represent funds available to the Company. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the financial operations and liquidity of the Company as determined in accordance with GAAP. 18 19 ITEM 7. 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 years ended December 31, 1996. This discussion should be read in conjunction with the Company's 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, including the timely development and acceptance of new products, the impact of competitive products and pricing that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. GENERAL The Company has constructed and operates a wireless messaging and communications network and provides paging and other one-way wireless messaging services to its subscribers. In addition, the Company sells and distributes wireless messaging equipment to subscribers, retailers and resellers. The Company earns recurring revenues from each subscriber in the form of fixed periodic fees and incurs substantial operating expenses in offering its services, including technical, customer service and general and administrative expenses. See "-- Management's Presentation of Results of Operations." Since commencing operations in 1990, the Company has invested heavily in its one-way wireless communications network and administrative infrastructure in order to establish nationwide coverage, sales offices in major metropolitan areas, customer service call centers and centralized administrative support functions. The Company incurs substantial fixed operating costs related to its one-way wireless communications infrastructure, which is designed to serve a larger subscriber base than the Company currently serves in order to accommodate growth. In addition, the Company incurs substantial costs associated with new subscriber additions. As a result, the Company has generated significant net operating losses for each year of its operations. See "-- Management's Presentation of Results of Operations." The Company's strategy is to expand its subscriber base to increase profitability and cash flow through greater utilization of its nationwide wireless communications network. From January 1, 1992 to December 31, 1996, the number of units in service increased from 52,125 to 1,859,407. 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, and expects to incur additional operating losses during the start-up phase for such services. The Company does not anticipate any significant revenues from two-way services during 1997, however, it expects to generate revenues with respect to two-way services in 1998. The Company's ability to generate operating income is primarily dependent on its ability to attain a sufficiently large installed subscriber base that generates recurring revenues which offset the fixed operating costs of its wireless networks, administration and selling and marketing expenses. The Company intends to achieve this growth by promoting its customized paging and other wireless messaging services through its national sales offices, retail distribution channels, private brand strategic alliances with GTE Corporation, Southwestern Bell Mobile Systems, AT&T Wireless Services, Ameritech Mobile Services, Inc. and long distance reseller EXCEL Communications, Inc., and international expansion. During the twelve months ended December 31, 1996, the Company's affiliate PageMart Canada added 13,270 subscribers. As a result of its ownership interest in PageMart Canada, the Company's proportional share of the units in service of PageMart Canada was 7,962 units at December 31, 1996. 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 19 20 costs upon sale to retailers and subscribers. This results in significantly lower capital expenditures and depreciation expense than if the Company leased such equipment to its subscribers. In addition, the Company's financial results are much different than other paging carriers that lease messaging equipment to subscribers because the Company recognizes the cost of messaging equipment sold in connection with adding new subscribers at the time of sale rather than capitalizing and depreciating the cost of messaging equipment over periods ranging from three to five years as occurs with paging carriers that lease messaging equipment to subscribers. In addition, the Company's retail distribution strategy results in the recognition of expenses associated with messaging equipment sales and other sales and marketing expenses in advance of new subscribers being added to the base and generating revenues (as retailers carry inventory). The Company sells its messaging equipment through multiple distribution channels including direct sales, third-party resellers, private brand strategic alliances and local and national retail stores. Selling and marketing expenses are primarily attributable to compensation paid to the Company's sales force, advertising and marketing costs and to losses resulting from the fact that, for competitive and marketing reasons, the Company generally sells each new unit for less than its acquisition cost. The Company's accounting practices result in selling and marketing expenses, including loss on sale of equipment, being recorded at the time a unit is sold. Units sold by the Company during a given month may exceed units activated and in service due to inventory stocking and distribution strategies of the retailers. As a result, selling and marketing expenses per net subscriber addition may fluctuate from period to period. The Company derives its recurring revenue primarily from fixed periodic fees for services that are not generally dependent on usage. Consequently, the Company's ability to recoup its initial selling and marketing costs, to meet operating expenses and to achieve profitability is dependent on the average length of each customer's subscription period. As long as a subscriber continues to utilize the Company's service, operating results benefit from the recurring payments of the fixed fees without the incurrence of additional selling expenses by the Company. Conversely, operating results are adversely affected by customer disconnections. Each month a percentage of the Company's existing customers have their service terminated for a variety of reasons, including failure to pay, dissatisfaction with service and switching to a competing service provider. The Company's average monthly disconnection rates for the years ended December 31, 1994, 1995 and 1996 were 3.4%, 2.5% 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 of the Company believes that such a presentation is useful in understanding the Company's results because it is a meaningful comparison period to period given the Company's growth rate and the significant differences in the number of subscribers of other paging companies. FISCAL YEARS 1994, 1995 AND 1996 Units in Service Units in service were 772,730, 1,240,024 and 1,851,445 as of December 31, 1994, 1995 and 1996, respectively. This represents an annual growth rate of 60% and 49% in 1995 and 1996, respectively. In addition, for the year ended December 31, 1996, PageMart Canada added 13,270 subscribers. As a result of its ownership interest in PageMart Canada, the Company's proportional share of the units in service of PageMart Canada was 7,962 units at December 31, 1996. The Company has experienced strong growth in units in 20 21 service due primarily to the success of its sales and marketing strategies in the direct sales, national retail and third-party reseller channels, as well as from private brand strategic alliance programs. Revenues Revenues for the fiscal years 1994, 1995 and 1996 were $109.8 million, $159.2 million and $221.6 million, respectively. Recurring revenues for airtime, voice mail and other services for the same periods were $56.6 million, $101.5 million and $153.0 million, respectively. Revenues from equipment sales and activation fees for 1994, 1995 and 1996 were $53.2 million, $57.7 million and $68.6 million, respectively. The increases in recurring revenues and revenues from equipment sales and activation fees were primarily due to rapid growth in the number of units in service. The increase in equipment sales during 1996 was somewhat offset by a decline in the average price per unit sold. The Company expects equipment prices per unit generally to remain constant or decline slightly as sales volumes increase. The Company's ARPU was $8.64, $8.62 and $8.04 in the final quarter of 1994, 1995 and 1996, respectively. Over the past twelve months, the Company's ARPU has decreased primarily as a result of an increase in subscribers added through private brand strategic alliance and third party reseller channels. This decrease in ARPU has been offset somewhat by a higher mix of multi-city, regional and nationwide services as well as increased sales of other value-added services such as voice mail and toll-free numbers. Management anticipates that the Company's ARPU will decline in the foreseeable future due to a continued higher mix of subscribers added through private brand strategic alliance programs which yield lower ARPU. ARPU is lower for subscribers added through private brand strategic alliances and third party resellers because these are generally high volume customers that are charged wholesale airtime rates. However, because third-party resellers and private brand strategic alliance partners are responsible for selling and marketing costs, billing, collection and other administrative costs associated with end-users, the Company incurs substantially lower marketing and administrative costs with respect to such subscribers. Cost of Equipment Sold The cost of equipment sold in 1994, 1995 and 1996 was $57.8 million, $64.0 million and $78.9 million, respectively. The change in 1996 was a combination of an increase in the number of units sold and slightly lower average pager prices paid to suppliers. The Company expects pager costs generally to remain constant, with modest reductions in cost to the Company as a result of volume purchases. Management anticipates that loss on equipment sold will increase on a per unit basis for the foreseeable future due to increased competition, especially in the national retail channel. Operating Expenses Technical expenses were $16.2 million, $25.5 million and $36.7 million in 1994, 1995 and 1996, respectively. The increase resulted primarily from the continued expansion of the Company's nationwide network infrastructure, which resulted in greater expenses associated with the addition of new transmitter sites, transmitter and terminal equipment and telecommunications expenses. On an average monthly cost per unit in service basis, technical expenses were $2.45, $2.11 and $1.98 in 1994, 1995 and 1996, respectively. The per unit decreases were the result of increased operating efficiencies and economies of scale experienced with the growth of the Company's subscriber base. During 1996, the Company incurred $297,000 in technical expenses associated with the development of its two-way wireless messaging services. Selling expenses in 1994, 1995 and 1996 were $31.3 million, $36.1 million and $42.6 million, respectively. This increase resulted from greater marketing and advertising costs related to the growth in units sold as well as from increased sales compensation because of the addition of sales personnel in new and existing operating markets. During the years ended December 31, 1994, 1995 and 1996, the Company added 445,427, 467,294 and 611,421 net new domestic units in service, respectively. Sales and marketing employees decreased from 450 at December 31, 1994 to 445 at December 31, 1995 and then increased to 552 at December 31, 1996. Management views the net loss on equipment sold to be a component of selling and marketing expenses incurred to add new subscribers. See "-- Management's Presentation of Results of Operations." Selling and 21 22 marketing expenses per net subscriber addition (including loss on equipment sales) were $81, $91 and $87 for the years ended December 31, 1994, 1995 and 1996, respectively. During the twelve months ended December 31, 1996, the Company incurred $447,000 in selling expenses associated with international operations (including loss on equipment sales). General and administrative expenses (including costs associated with customer service, field administration and corporate headquarters) in 1994, 1995 and 1996 were, $29.8 million, $43.4 million and $53.7 million, respectively. This increase was attributable to the Company's expansion of its customer service call centers and continued expansion in new and existing markets to support the growing subscriber base which required additional office space, administrative personnel and customer service representatives. On an average cost per month per unit in service basis, general and administrative expenses were $4.52, $3.59 and $2.89 for fiscal years 1994, 1995, and 1996, respectively. The per unit decreases were a result of increased operating efficiencies and economies of scale achieved through the growth of the Company's subscriber base. During 1996, the Company incurred $341,000 in general and administrative expenses associated with the development of its two-way wireless messaging services. Depreciation and amortization in 1994, 1995 and 1996 was $8.1 million, $13.3 million and $21.2 million, respectively. The increases resulted from the expansion of the Company's network infrastructure including transmitter and terminal equipment, as well as the purchase and development of a new centralized administrative system in 1995 and 1996. As an average cost per month per unit in service, depreciation and amortization was $1.23, $1.10 and $1.14 for the years ended December 31, 1994, 1995 and 1996, respectively. Interest Expense Consolidated interest expense increased from $12.9 million in 1994 to $30.7 million in 1995 and $35.0 million in 1996. The increase in 1995 was primarily the result of the issuance of the Company's 15% Senior Discount Notes due 2005 (the "15% Notes") in January 1995, increased interest related to the 12 1/4% Senior Discount Notes due 2003 issued by PageMart (the "12 1/4% Notes"), as well as increased borrowings under vendor financing agreements. Interest expense related to the 12 1/4% Notes was $10.8 million, $11.8 million and $13.3 million in 1994, 1995 and 1996, respectively. Interest expense related to the 15% Notes was $15.3 million and $18.4 million in 1995 and 1996 respectively. Net Loss The Company sustained net losses in 1994, 1995 and 1996 of $45.8 million, $53.1 million and $48.6 million, respectively, principally due to the cost of funding the growth rate of the Company's subscriber base which resulted in an increase in units sold, selling and marketing expenses, operating expenses and interest expense. MANAGEMENT'S PRESENTATION OF RESULTS OF OPERATIONS COMPARISON WITH GAAP PRESENTATION The Company's audited Consolidated Financial Statements for the years ended December 31, 1994, 1995 and 1996, included elsewhere in this 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 are useful in understanding the Company's results. Management believes that operating profit before selling expenses is a meaningful indicator of the profitability of the Company's installed base of units in service because it measures the recurring revenues received for services less the costs (including depreciation and amortization) associated with servicing that installed base. Operating profit before selling expenses per subscriber per month for the Company's one-way operations has grown from $(0.46) during the first quarter of 1994 to $2.25 during the fourth quarter of 1996 22 23 due primarily to the Company's increase in subscribers, operating efficiency 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. 23 24 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).
THREE MONTHS ENDED ---------------------------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1995 1995 1995 1995 1996 1996 1996 1996 --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (UNAUDITED) OPERATING DATA: Recurring revenues......... $ 20,464 $ 23,387 $ 26,994 $ 30,658 $ 33,743 $ 36,964 $ 39,697 $ 42,637 Technical expenses......... 5,459 6,141 6,842 7,015 7,943 8,783 9,725 10,273 General and administrative expenses................. 9,698 10,067 11,350 12,243 12,792 13,043 13,668 14,162 Depreciation and amortization............. 2,802 3,091 3,469 3,910 4,248 4,942 5,714 6,288 -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating profit before selling expenses......... 2,505 4,088 5,333 7,490 8,760 10,196 10,590 11,914 Selling expenses(1)........ 9,704 10,614 10,889 11,181 11,601 12,836 13,588 14,900 -------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss).... $ (7,199) $ (6,526) $ (5,556) $ (3,691) $ (2,841) $ (2,640) $ (2,998) $ (2,986) ======== ========== ========== ========== ========== ========== ========== ========== EBITDA..................... $ (4,397) $ (3,435) $ (2,087) $ 219 $ 1,407 $ 2,302 $ 2,716 $ 3,302 ======== ========== ========== ========== ========== ========== ========== ========== OTHER DATA: Units in service(2)........ 874,944 1,008,683 1,131,464 1,240,024 1,374,146 1,524,297 1,684,937 1,851,445 Net subscriber additions... 102,214 133,739 122,781 108,560 134,122 150,151 160,640 166,508 ARPU(3).................... $ 8.28 $ 8.28 $ 8.41 $ 8.62 $ 8.61 $ 8.50 $ 8.25 $ 8.04 Operating profit before selling expenses per subscriber per month(4)................. 1.01 1.45 1.66 2.11 2.23 2.35 2.20 2.25 Selling expenses per net subscriber addition(1)(5)........... 95 79 89 103 86 85 85 89 Capital employed per unit in service(6)............ 45 39 39 40 41 49 49 43
- --------------- (1) Includes loss on sale of equipment. (2) Stated as of the end of each period. (3) Calculated by dividing recurring revenues for the quarter by the average number of units in service during that quarter. Stated as the monthly average for the quarter. (4) Calculated by dividing operating profit before selling expenses (selling expenses include loss on sale of equipment) for the quarter by the average number of units in service during that quarter. Stated as the monthly average for the quarter. (5) Calculated by dividing selling expenses, including loss on sale of equipment, for the quarter by the net subscriber additions for the quarter. (6) Calculated by dividing total assets (excluding cash, NPCS licenses and international investments) minus current liabilities (excluding current maturities of long-term debt) at the end of the period, by units in service at the end of the period. 24 25 SUPPLEMENTARY INFORMATION The following table sets forth supplementary financial information related to the Company's various operations (in thousands):
FISCAL YEAR ENDED DECEMBER 31, 1994 ----------------------------------------------------- PAGEMART PAGEMART PAGEMART THE COMPANY ONE-WAY TWO-WAY INTERNATIONAL CONSOLIDATED -------- -------- ------------- ------------ Revenues.................................... $109,833 $ -- $ -- $109,833 Operating loss.............................. (33,324) -- -- (33,324) EBITDA...................................... (25,219) -- -- (25,219) Total assets................................ 81,470 58,885 1,704 142,059 Capital expenditures........................ 16,719 -- -- 16,719
FISCAL YEAR ENDED DECEMBER 31, 1995 ----------------------------------------------------- PAGEMART PAGEMART PAGEMART THE COMPANY ONE-WAY TWO-WAY INTERNATIONAL CONSOLIDATED -------- -------- ------------- ------------ Revenues.................................... $159,191 $ -- $ -- $159,191 Operating loss.............................. (22,972) (376) -- (23,348) EBITDA...................................... (9,700) (376) -- (10,076) Total assets................................ 120,004 140,235 3,590 263,829 Capital expenditures........................ 32,486 1,017 -- 33,503
FISCAL YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------ PAGEMART PAGEMART PAGEMART THE COMPANY ONE-WAY TWO-WAY INTERNATIONAL(1) CONSOLIDATED -------- -------- ---------------- ------------ Revenues.................................... $221,592 $ -- $ -- $221,592 Operating loss.............................. (11,465) (657) (447) (12,569) EBITDA...................................... 9,727 (657) (447) 8,623 Total assets................................ 160,858 151,108 1,654 313,620 Capital expenditures........................ 50,838 12,966 -- 63,804
- --------------- (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. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have historically required substantial capital investment for the development and installation of its wireless communications network, the procurement of messaging equipment and expansion into new markets. To date, these investments by the Company have been funded by the proceeds from the issuance of common stock, preferred stock, the 12 1/4% Notes and the 15% Notes, as well as borrowings under vendor financing agreements and revolving credit agreements. Capital expenditures were $16.7 million, $33.5 million and $63.8 million for the years ended December 31, 1994, 1995 and 1996, respectively. Capital expenditures for 1996 include $34.4 million for the expansion and enhancement of the Company's one-way network, $13.0 million related to the development of two-way messaging services, and $6.4 million for the development of the Company's new administrative system. During October 1996, the Company committed to purchase network infrastructure equipment and related services for use in its two-way network. During December 1995, the Company committed to purchase $40 million in network infrastructure equipment from a significant vendor from December 1, 1995 to 25 26 October 31, 1999. Through December 31, 1996, the Company had purchased $19.9 million of network infrastructure under this purchase commitment. The Company's net cash used in operating activities for the years ended December 31, 1994 and 1995 and provided by operating activities for the year ended December 31, 1996 was $25.5 million, $2.9 million and $3.6 million, respectively. The increased operating cash flow in 1996 was a result of improved operating results from a larger subscriber base offset by a net investment in working capital. Net cash used in investing activities was $69.1 million, $110.2 million and $64.0 million for the years ended December 31, 1994, 1995 and 1996, respectively. Of the $64.0 million used in investing activities in 1996, $63.8 million was for capital expenditures. Net cash provided by financing activities, including proceeds from borrowings and issuances of common and preferred stock was $83.5 million, $125.5 million and $56 million for the years ended December 31, 1994, 1995 and 1996, respectively. Cash provided in 1995 resulted primarily from the $100.1 million of net proceeds from the issuance of the 15% Notes and non-voting common stock in January 1995. Cash provided in 1996 resulted primarily from $70.5 million in net proceeds received in connection with the initial public offering of the Company's Class A Common Stock (the "Offering"). In June 1996, the Company sold an aggregate of 6.0 million shares of Class A Common Stock in the Offering at a price to the public of $13 per share. The Company received net proceeds of approximately $70.5 million of which approximately $12.9 million was used to retire vendor debt and $11.9 million was used to repay outstanding loans under the Company's revolving credit agreement. As of December 31, 1996, the Company had no amounts outstanding under vendor financing or revolving credit agreements, its indebtedness under the 12 1/4% Notes was $107.9 million and its indebtedness under the 15% Notes was $132.7 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 December 31, 1996 to November 1, 1998 of $28.6 million. From and after November 1, 1998, interest on the 12 1/4% Notes will be payable semiannually, in cash. The 15% Notes, which are unsecured senior obligations of Wireless, mature in 2005 and were issued at a substantial discount from their principal amount at maturity. The accretion of original issue discount on the 15% Notes will cause an increase in indebtedness from December 31, 1996 to February 1, 2000 of $74.5 million. From and after February 1, 2000, interest on the 15% Notes will be payable semiannually, in cash. In 1992, PageMart entered into an equipment lease agreement with Glenayre (the "Vendor Lease Financing Agreement"), providing for the financing of transmitter equipment. On June 28, 1996, the Company retired $8.8 million of debt outstanding under the Vendor Lease Financing Agreement and the Vendor Lease Financing Agreement was terminated. In May 1994, PageMart entered into a vendor purchase financing agreement with Motorola (the "Vendor Purchase Financing Agreement"), providing for the financing of transmitter equipment. On June 28, 1996, the Company retired $4.1 million of debt outstanding under the Vendor Purchase Financing Agreement and the Vendor Purchase Financing Agreement was terminated. 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 December 31, 1996, there were no loans outstanding under the Revolving Credit Agreement. The maximum amount available under the Revolving Credit Agreement at any time is limited to a borrowing base amount equal to the lesser of (i) 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 December 31, 1996, the amount available under the Revolving Credit Agreement was $23.7 million. Management anticipates borrowings under the Revolving Credit Agreement during 1997. 26 27 The indenture under which the 12 1/4% Notes were issued (the "12 1/4% Indenture"), the indenture pursuant to which the 15% Notes were issued (the "15% Indenture") and the Revolving Credit Agreement contain certain restrictive covenants that, among other things, limit the ability of the Company to incur indebtedness, pay dividends, repurchase capital stock, engage in transactions with stockholders and affiliates, create liens, sell assets, enter into leases and engage in mergers and consolidations, and the Revolving Credit Agreement requires the Company to maintain certain financial ratios and limits the ability of the Company to make capital expenditures. In addition, the 12 1/4% Indenture prohibits PageMart from paying any dividends or making other distributions on its capital stock, making loans to Wireless, merging or consolidating with Wireless or assuming or guaranteeing any obligations of Wireless unless PageMart is in compliance with certain interest coverage ratios and certain other requirements. PageMart may, however, sell assets to Wireless in transactions that are arm's-length in nature. Wireless is currently a holding company with no business or operations of its own. Because all of Wireless's operations are conducted through its subsidiaries, Wireless's cash flow and consequently its ability to service debt, is almost entirely dependent upon the earnings of its subsidiaries and the distribution of those earnings or upon loans or other payment of funds by those subsidiaries to Wireless. Wireless's subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to Wireless's obligations or to make any funds available therefor, whether by dividends, loans or other payments. Until the maturity of the 12 1/4% Notes, which mature on November 1, 2003, 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 December 31, 1996, the Company had approximately $22.6 million in cash and cash equivalents. The Company's cash balances and borrowings under the Revolving Credit Agreement are expected to be sufficient to fund the Company's one-way operations and related capital expenditures 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, and from any excess cash generated from the Company's one-way messaging operations. Significant additional financing will be required to complete the construction of a transmission network for two-way services and other start-up costs and selling and marketing expenses associated with the development and implementation of two-way services. The Company anticipates investing $75 to $100 million through fiscal 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 substantially complete the network buildout. The Company expects to lease rather than sell a portion of its two-way messaging units. The Company expects to require additional financing to complete the buildout, which may include new vendor financings 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, the Revolving Credit Agreement, and as a result any additional financing may need to be equity financing. Future revenues, costs, product mix and new product acceptance are all influenced by a number of factors which are inherently uncertain and difficult to predict. Therefore, no assurance can be given that financing for such investments will be available. No assurance can be given that the Company's strategy will be implemented as currently planned or that the Company's operations will generate positive cash flows. 27 28 The Company cautions readers that any forward-looking statements contained in this Form 10-K or made by management of the Company involve risks and uncertainties, and are subject to change based on various important factors. The following factors, among others, in some cases have affected and in the future could affect the Company's financial performance and actual results, and could cause actual results for 1997 and beyond to differ materially from those expressed in any such forward-looking statements -- economic conditions generally in the United States and consumer confidence; the ability of the Company to manage its high debt levels; the impact of technological change in the telecommunications industry; the future cost of network infrastructure and subscriber equipment; the impact of competition and pricing of paging and wireless services; 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are included in this report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 28 29 PART III The information required by Items 10 through 13 are incorporated by reference to the Registrant's definitive Proxy Statement for its 1997 annual meeting of stockholders scheduled to be held on May 20, 1997. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this 10-K: (1) Financial Statements. See Index to Consolidated Financial Statements and Financial Statement Schedule on Page F-1 hereof. (2) Financial Statement Schedules. See Index to Consolidated Financial Statements and Financial Statement Schedule on Page F-1 hereof. (3) Exhibits Required by Item 601 of Regulation S-K. (a) EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT ------- ---------------------- 3(i)*** Restated Certificate of Incorporation of PageMart Wireless, Inc. 3(ii)* By-laws of PageMart Wireless, Inc. 3(iii)*** Certificate of Amendment to Restated Certificate of Incorporation of PageMart Wireless, Inc. 4.1** Indenture, dated as of October 19, 1993, between PageMart, Inc. and United States Trust Company of New York, as Trustee, relating to the 12 1/4% Senior Discount Notes due 2003 4.2** Indenture dated as of January 17, 1995 between PageMart Nationwide, Inc. and United States Trust Company of New York, as Trustee, relating to the 15% Senior Discount Notes due 2005 10.1** Warrant Agreement, dated as of October 19, 1993, between PageMart, Inc. and United States Trust Company of New York, as Warrant Agent, relating to the Warrants to purchase Common Stock of the Company. 10.2** Telecommunications Service Agreement, dated May 29, 1992, between PageMart, Inc. and WilTel, Inc. 10.3** Equipment Lease Agreement, dated May 20, 1992, between PageMart, Inc. and Glenayre Electronics, Inc. 10.4** First Addendum to Equipment Lease Agreement, dated May 20, 1992, between PageMart, Inc. and Glenayre Electronics, Inc. 10.5** Amendment No. 2 to Equipment Lease Agreement, dated October 18, 1993, between PageMart, Inc. and Glenayre Electronics, Inc. 10.6** Lease Agreement and Addendum, dated January 10, 1990, between Kingston Houston Partners I, Ltd. and PageMart, Inc. 10.7** Expansion and Extension of Lease Agreement, dated April 7, 1993, between Kingston Houston Partners I, Ltd. and PageMart, Inc. 10.8** Office Lease Agreement, dated January 29, 1992, between Dallas Central Development Corp. and PageMart, Inc. 10.9** First Amendment to Office Lease Agreement, dated July 29, 1992, between Fulcrum Central Ltd., as successor in interest to Dallas Central Development Corp., and PageMart, Inc. 10.10** Second Amendment to Office Lease Agreement, dated December 1, 1992, between Fulcrum Central Ltd., as successor in interest to Dallas Central Development Corp., and PageMart, Inc. 10.11** Third Amendment to Office Lease Agreement, dated December 29, 1992, between Fulcrum Central Ltd., as successor in interest to Dallas Central Development Corp., and PageMart, Inc.
29 30
EXHIBIT NO. DESCRIPTION OF EXHIBIT ------- ---------------------- 10.12** Fourth Amendment to Office Lease Agreement, dated July 21, 1993, between Fulcrum Central Ltd., as successor in interest to Dallas Central Development Corp., and PageMart, Inc. 10.13** License Agreement, dated May 12, 1994, between PageMart, Inc., licensee, and International Business Machines Corporation, licensor 10.14** Sales Contract, dated January 21, 1994, between PageMart, Inc., buyer, and Mitsui Comtek Corporation, seller 10.15** Resale Agreement, dated November 1, 1993, between PageMart, Inc., licensor, and GTE Service Corporation, licensee 10.16** Financing and Security Agreement between Motorola and Pagemart, Inc. dated May 18, 1994 10.17** Subscription Agreement, dated June 9, 1994, between PageMart, Inc. and Fomento Empresarial Regiomontano, S.A. de C.V. 10.18** Letter of Intent, dated June 9, 1994, between PageMart, Inc. and Fomento Empresarial Regiomontano, S.A. de C.V. 10.19* Strategic Alliance Agreement No. 1, dated September 15, 1994, between GTE Service Corporation and PageMart, Inc. 10.20* Strategic Alliance Agreement No. 2, dated October 13, 1994, between GTE Service Corporation and PageMart, Inc. 10.21* Secured promissory note of John D. Beletic, as Maker, in favor of PageMart, Inc. dated January 28, 1994, in the amount of $97,800 10.22* Secured promissory note of John D. Beletic, as Maker, in favor of PageMart, Inc. dated November 29, 1994, in the amount of $200,000 10.23* Agreement of Reorganization and Plan of Merger, dated as of December 5, 1994, between PageMart, Inc., PageMart Nationwide, Inc. and PM Merger Corp. 10.24* Registration Rights Agreement dated as of January 17, 1995 between PageMart Nationwide, Inc. and Morgan Stanley & Co. Incorporated 10.25++ PageMart Nationwide, Inc. Third Amended and Restated 1991 Stock Option Plan and Third Amended and Restated 1991 Stock Issuance Plan(1) 10.26** Satellite Services and Space Segment Lease Agreement, dated January 2, 1995, between PageMart, Inc. and SpaceCom Systems, Inc. 10.27** Credit Agreement, dated as of May 11, 1995, by and among PageMart Nationwide, Inc., the Lenders named therein, BT Commercial Corporation, as Agent, and Bankers Trust Company, as Issuing Bank 10.28** Subscription Agreement, dated as of May 11, 1995, by and among PageMart Nationwide, Inc. and the investors named therein 10.29+ Amended and Restated Agreement Among Certain Stockholders of PageMart Nationwide, Inc. dated as of September 19, 1995 10.30*** Secured promissory note of John D. Beletic, as Maker, in favor of PageMart Nationwide, Inc. dated May 11, 1995, in the amount of $21,000. 10.31*** Subscription Agreement dated as of July 7, 1995 among PageMart Nationwide, Inc., PageMart Canada Holding Corporation and TD Capital Group Ltd. 10.32*** Agreement Among Stockholders among PageMart Nationwide, Inc., PageMart International, Inc., TD Capital Group Ltd., PageMart Canada Holding Corporation and PageMart Canada Limited. 10.33**** Equipment Purchase Agreement between Motorola, Inc. and PageMart Wireless, Inc. (2) 10.34**** Technology Asset Agreement dated as of December 1, 1995 between Motorola, Inc. and PageMart Wireless, Inc.(2) 10.35*** PageMart Wireless, Inc. Employee Stock Purchase Plan(1) 10.36*** PageMart Wireless, Inc. Nonqualified Formula Stock Option Plan for Non-Employee Directors(1)
30 31 10.37***** Office Lease Agreement date as of November 26, 1996 between Crescent Real Estate Equities Limited and PageMart Wireless, Inc. 10.38(3) PageMart Wireless, Inc. Fourth Amended and Restated 1991 Stock Option Plan. 11.1***** Computation of earnings (loss) per share 21.1*** PageMart Wireless, Inc. Subsidiaries 27.1***** Financial Data Schedule for the year ended December 31, 1996.
- --------------- * Each of these exhibits is hereby incorporated by reference to the Form 10-K of the Company for the fiscal year ended December 31, 1994. ** Each of these exhibits is hereby incorporated by reference to the Registration Statement on Form S-1 of the Company (Reg. No. 33-91142). *** Each of these exhibits is hereby incorporated by reference to the Registration Statement on Form S-1 of the Company (Reg. No. 33-03012). **** Each of these exhibits is hereby incorporated by reference to the Form 10-K of the Company for the fiscal year ended December 31, 1995. ***** Filed herewith. + Each of these exhibits is hereby incorporated by reference to the Form 8-K of the Company dated October 6, 1995. ++ Each of these exhibits is hereby incorporated by reference to the Registration Statement on Form S-8 of the Company (Reg. No. 33-98116). (1) This exhibit is a "management contract or compensatory plan or arrangement" required to be filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K. (2) The Company has requested confidential treatment for certain portions of this agreement. (3) Originally filed as Exhibit 10.1 in the Company's Form 10-Q for the quarterly period ended September 30, 1996. (b) REPORTS ON FORM 8-K None 31 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 24, 1997 PAGEMART WIRELESS, INC. (Registrant) By: /s/ JOHN D. BELETIC ------------------------------------ John D. Beletic Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN D. BELETIC Chairman, President and Chief March 24, 1997 - ----------------------------------------------------- Executive Officer (Principal John D. Beletic Executive Officer) /s/ G. CLAY MYERS Vice President, Finance, Chief March 24, 1997 - ----------------------------------------------------- Financial Officer and Treasurer G. Clay Myers (Principal Financial and Accounting Officer) /s/ FRANK V. SICA Director March 24, 1997 - ----------------------------------------------------- Frank V. Sica /s/ GUY L. DE CHAZAL Director March 24, 1997 - ----------------------------------------------------- Guy L. de Chazal /s/ ARTHUR PATTERSON Director March 24, 1997 - ----------------------------------------------------- Arthur Patterson /s/ ROGER D. LINQUIST Director March 24, 1997 - ----------------------------------------------------- Roger D. Linquist /s/ LEIGH J. ABRAMSON Director March 24, 1997 - ----------------------------------------------------- Leigh J. Abramson /s/ ALEJANDRO PEREZ ELIZONDO Director March 24, 1997 - ----------------------------------------------------- Alejandro Perez Elizondo /s/ PAMELA D.A. REEVE Director March 24, 1997 - ----------------------------------------------------- Pamela D.A. Reeve
33 PAGEMART WIRELESS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996...................................................... F-3 Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996.......................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1994, 1995 and 1996...... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996.......................... F-6 Notes to Consolidated Financial Statements.................. F-7 Report of Independent Public Accountants on Financial Statement Schedule........................................ S-1 Schedule II -- Valuation and Qualifying Accounts for the Years Ended December 31, 1994, 1995 and 1996.............. S-2
F-1 34 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of PageMart Wireless, Inc.: We have audited the accompanying consolidated balance sheets of PageMart Wireless, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PageMart Wireless, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Dallas, Texas, ARTHUR ANDERSEN LLP January 31, 1997 F-2 35 PAGEMART WIRELESS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, --------------------- 1995 1996 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 26,973 $ 22,603 Accounts receivable (net of allowance for doubtful accounts of $4,534 and $4,776 in 1995 and 1996, respectively)........................................... 21,503 33,446 Inventories............................................... 11,179 11,702 Prepaid expenses and other current assets................. 2,880 2,821 --------- --------- Total current assets............................... 62,535 70,572 RESTRICTED INVESTMENTS...................................... 500 -- PROPERTY AND EQUIPMENT (net of accumulated depreciation of $29,163 and $48,851 in 1995 and 1996, respectively)....... 52,827 96,943 NARROWBAND LICENSES......................................... 133,065 133,065 DEFERRED DEBT ISSUANCE COSTS (net of accumulated amortization of $2,011 and $4,094 in 1995 and 1996, respectively)............................................. 8,436 6,378 OTHER ASSETS................................................ 6,466 6,662 --------- --------- Total assets....................................... $ 263,829 $ 313,620 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable.......................................... $ 23,094 $ 23,186 Deferred revenue.......................................... 21,409 27,047 Current maturities of long-term debt...................... 5,479 -- Other current liabilities................................. 6,526 12,270 --------- --------- Total current liabilities.......................... 56,508 62,503 LONG-TERM DEBT.............................................. 219,364 240,687 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $.0001 par value per share, 75,000,000 shares authorized: Class A Convertible Common Stock, 33,887,152 shares issued at December 31, 1996........................... 2 3 Class B Convertible Non-Voting Common Stock, 3,809,363 shares issued at December 31, 1996.................... 1 1 Class C Convertible Non-Voting Common Stock, 1,428,472 shares issued at December 31, 1996.................... -- -- Class D Convertible Non-Voting Common Stock, 679,945 shares issued at December 31, 1996.................... -- -- Additional paid-in capital................................ 154,601 225,661 Accumulated deficit....................................... (166,090) (214,688) Stock subscriptions receivable............................ (557) (547) --------- --------- Total stockholders' equity (deficit)............... (12,043) 10,430 --------- --------- Total liabilities and stockholders' equity......... $ 263,829 $ 313,620 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-3 36 PAGEMART WIRELESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, -------------------------------- 1994 1995 1996 -------- -------- -------- REVENUES: Recurring revenue........................................ $ 56,648 $101,503 $153,041 Equipment sales and activation fees...................... 53,185 57,688 68,551 -------- -------- -------- Total revenues................................... 109,833 159,191 221,592 COST OF EQUIPMENT SOLD..................................... 57,835 63,982 78,896 OPERATING EXPENSES: Technical................................................ 16,155 25,679 37,021 Selling.................................................. 31,252 36,094 43,046 General and administrative............................... 29,810 43,512 54,006 Depreciation and amortization............................ 8,105 13,272 21,192 -------- -------- -------- Total operating expenses......................... 85,322 118,557 155,265 -------- -------- -------- Operating loss................................... (33,324) (23,348) (12,569) OTHER (INCOME) EXPENSE: Interest expense......................................... 12,933 30,720 35,041 Interest income.......................................... (858) (1,997) (1,140) Other.................................................... 414 1,042 2,128 -------- -------- -------- Total other (income) expense..................... 12,489 29,765 36,029 -------- -------- -------- NET LOSS................................................... $(45,813) $(53,113) $(48,598) ======== ======== ======== NET LOSS PER SHARE (Primary and Fully Diluted).............................. $ (1.72) $ (1.53) $ (1.30) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Primary and Fully Diluted).............................. 26,574 34,653 37,462
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-4 37 PAGEMART WIRELESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE PREFERRED STOCK COMMON STOCK -------------------- ------------------- ADDITIONAL STOCK NUMBER OF NUMBER OF PAID-IN ACCUMULATED SUBSCRIPTIONS TREASURY SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE STOCK ----------- ------ ---------- ------ ---------- ----------- ------------- -------- BALANCE, December 31, 1993... 15,310,943 $ 2 2,671,074 $ -- $ 47,523 $ (67,164) $(129) $(16) 11,242,857 shares of common stock issued in the 1994 Stock Offerings.......... -- -- 11,242,857 1 76,902 -- -- -- Conversion of convertible preferred stock to common stock.................... (15,310,943) (2) 15,310,943 2 -- -- -- -- 304,651 shares of common stock issued under the Stock option/Stock issuance plan............ -- -- 304,651 -- 269 -- (216) -- Repayment of stock subscriptions receivable............... -- -- -- -- -- -- 102 -- Net loss................... -- -- -- -- -- (45,813) -- -- ----------- ---- ---------- ---- -------- --------- ----- ---- BALANCE, December 31, 1994... -- -- 29,529,525 3 124,694 (112,977) (243) (16) Retirement of treasury stock.................... -- -- (200,000) -- (16) -- -- 16 725,445 shares of non-voting common stock issued in the Unit Offering................. -- -- 725,445 -- 5,078 -- -- -- 56,654 shares of common stock issued under the Stock option/Stock issuance plan............ -- -- 56,654 -- 156 -- (125) -- 3,598,429 shares of common stock issued in the 1995 Stock Offering........... -- -- 3,598,429 -- 24,689 -- (189) -- Net loss................... -- -- -- -- -- (53,113) -- -- ----------- ---- ---------- ---- -------- --------- ----- ---- BALANCE, December 31, 1995... -- -- 33,710,053 3 154,601 (166,090) (557) -- 94,879 shares of common stock issued under the Stock option/Stock issuance plan/Employee Stock Purchase Plan...... -- -- 94,879 -- 561 -- -- -- Repayment of stock subscriptions receivable............... -- -- -- -- -- -- 10 -- 6,000,000 shares of common stock issued in initial public offering.......... -- -- 6,000,000 1 70,499 -- -- -- Net loss................... -- -- -- -- -- (48,598) -- -- ----------- ---- ---------- ---- -------- --------- ----- ---- BALANCE, December 31, 1996... -- $ -- 39,804,932 $ 4 $225,661 $(214,688) $(547) $ -- =========== ==== ========== ==== ======== ========= ===== ==== TOTAL -------- BALANCE, December 31, 1993... $(19,784) 11,242,857 shares of common stock issued in the 1994 Stock Offerings.......... 76,903 Conversion of convertible preferred stock to common stock.................... -- 304,651 shares of common stock issued under the Stock option/Stock issuance plan............ 53 Repayment of stock subscriptions receivable............... 102 Net loss................... (45,813) -------- BALANCE, December 31, 1994... 11,461 Retirement of treasury stock.................... -- 725,445 shares of non-voting common stock issued in the Unit Offering................. 5,078 56,654 shares of common stock issued under the Stock option/Stock issuance plan............ 31 3,598,429 shares of common stock issued in the 1995 Stock Offering........... 24,500 Net loss................... (53,113) -------- BALANCE, December 31, 1995... (12,043) 94,879 shares of common stock issued under the Stock option/Stock issuance plan/Employee Stock Purchase Plan...... 561 Repayment of stock subscriptions receivable............... 10 6,000,000 shares of common stock issued in initial public offering.......... 70,500 Net loss................... (48,598) -------- BALANCE, December 31, 1996... $ 10,430 ========
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-5 38 PAGEMART WIRELESS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 -------- --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(45,813) $ (53,113) $(48,598) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 8,105 13,272 21,192 Provision for bad debt.................................. 6,590 6,135 6,986 Accretion of discount on Senior Discount Exchange Notes................................................ 10,034 26,322 30,871 Amortization of deferred debt issuance costs............ 800 1,052 2,083 Changes in certain assets and liabilities: Increase in accounts receivable...................... (14,629) (12,054) (18,929) (Increase) decrease in inventories................... (4,497) 1,630 (523) (Increase) decrease in prepaid expenses and other current assets..................................... (1,091) (1,383) 59 Increase in other assets, net........................ (546) (1,350) (1,052) Increase in accounts payable......................... 8,491 6,643 92 Increase in deferred revenue......................... 6,780 7,447 5,638 Increase in other current liabilities................ 248 2,486 5,744 -------- --------- -------- Net cash provided by (used in) operating activities....................................... (25,528) (2,913) 3,563 -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments....................... (2,480) -- -- Proceeds from sales of short-term investments............. 11,096 -- -- Purchases of Narrowband Licenses.......................... (58,885) (74,079) -- Purchases of property and equipment....................... (16,719) (33,503) (63,804) Investment in international ventures...................... (1,902) (2,174) (4) Purchases of intangible assets............................ (195) (403) (644) Release of restricted cash................................ -- -- 500 -------- --------- -------- Net cash used in investing activities.............. (69,085) (110,159) (63,952) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.................... 76,903 29,578 70,500 Proceeds from issuance of common stock under the stock option/stock issuance plan.............................. 53 31 561 Proceeds from issuance of Senior Discount Notes, net...... -- 95,001 -- Payment of stock subscriptions receivable................. 102 -- 10 Deferred debt issuance costs incurred for Revolving Credit Agreement............................................... -- (1,447) (25) Borrowings under Revolving Credit Agreement............... -- -- 31,100 Payments under Revolving Credit Agreement................. -- -- (31,100) Borrowings from vendor credit facilities.................. 8,540 6,777 -- Payments on vendor credit facilities...................... (2,052) (4,402) (15,027) -------- --------- -------- Net cash provided by financing activities.......... 83,546 125,538 56,019 -------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (11,067) 12,466 (4,370) CASH AND CASH EQUIVALENTS, beginning of period.............. 25,574 14,507 26,973 -------- --------- -------- CASH AND CASH EQUIVALENTS, end of period.................... $ 14,507 $ 26,973 $ 22,603 ======== ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest................................................ $ 998 $ 2,146 $ 1,231 Income taxes............................................ $ -- $ -- $ -- NONCASH TRANSACTIONS: Common stock issued in exchange for stock subscriptions receivable.............................................. $ 216 $ 314 $ --
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. F-6 39 PAGEMART WIRELESS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL PageMart, Inc. ("PageMart") was incorporated as a Delaware corporation on May 8, 1989, to provide wireless messaging products and services. In January 1995, PageMart effected a corporate reorganization pursuant to which PageMart Nationwide, Inc., a Delaware corporation, became the holding company parent of PageMart. In December 1995, the corporate name was changed from PageMart Nationwide, Inc. to PageMart Wireless, Inc. ("Wireless"). Wireless and its subsidiaries are referred to herein as the "Company." The consolidated financial statements of the Company include the accounts of PageMart and PageMart PCS, Inc., 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. The Company has incurred substantial losses from operations and negative cash flows from operations since inception and is highly leveraged. Management expects to continue to incur operating losses in 1997 and 1998. These losses are driven by the Company's investment in the growth of its subscriber base and continued expansion into additional markets. The Company's business plan calls for substantial growth in its subscriber base in order for the Company to achieve operating profitability and positive cash flows from operations. There can be no assurance that the Company will meet its business plan, achieve operating profitability, or achieve positive cash flows from operations. If the Company cannot achieve operating profitability, it may not be able to make the required payments on existing or future obligations. The Company has made significant investments in Narrowband Personal Communications Services ("NPCS") licenses through participation in auctions conducted by the FCC. The Company plans to utilize these assets in connection with two-way wireless messaging services. The Company's success in implementing two-way services is dependent primarily upon market acceptance of proposed two-way services and the ability of the Company to successfully develop and construct a transmission network and market its two-way services. There can be no assurance that two-way services offered will be accepted by the market or that the Company will be successful in developing and constructing a transmission network or marketing its two-way services. In management's opinion, the Company's current working capital combined with borrowings expected to be available from the Revolving Credit Agreement will be sufficient to support the planned growth for its one-way wireless communications operations through 1997. As the Company begins implementation and development of two-way services, the Company anticipates requiring additional sources of capital to fund the construction and operation of a two-way messaging network. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The accompanying financial statements include the accounts of Wireless and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company includes as cash and cash equivalents cash on hand, cash in banks and highly liquid investments with original maturities of three months or less. F-7 40 INVENTORIES Inventories consist of pagers held for resale and are stated at the lower of cost or market. Cost is determined by using the specific identification method, which approximates the first-in, first-out method. The Company purchases a majority of its pagers from Motorola, Inc. RESTRICTED INVESTMENTS In 1995 the Company had Restricted investments which represented certificates of deposit in the amount of $500,000 pledged as collateral on the Company's notes payable to vendor. The Restricted investments were released upon retirement of the note payable to the vendor. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated using the straight-line method for financial reporting purposes and accelerated methods for tax reporting purposes over estimated useful lives ranging from three to seven years. Depreciation expense totaled approximately $7,824,000, $12,683,000 and 19,688,000 for the years ended December 31, 1994, 1995 and 1996, respectively. The Company purchases a majority of its network equipment from Motorola, Inc. and Glenayre Technologies, Inc. Maintenance and repair costs are charged to expense as incurred. Property and equipment consisted of the following (in thousands):
DECEMBER 31, ------------------- 1995 1996 -------- -------- Network equipment........................................... $ 58,404 $109,856 Computer equipment.......................................... 16,829 26,268 Furniture and equipment..................................... 6,757 9,670 -------- -------- 81,990 145,794 Less: Accumulated depreciation.............................. (29,163) (48,851) -------- -------- $ 52,827 $ 96,943 ======== ========
REVENUE RECOGNITION The Company recognizes equipment revenue immediately upon the shipment of pagers adjusted by allowances for normal returns. Recurring revenue, including revenue from airtime charges and fees for other services such as voice mail, customized coverage options and toll-free numbers are recognized in the month in which the service is provided. All expenses related to the sale of equipment are recognized at the time of sale. Deferred revenue represents advance billings for services not yet performed. Such revenue is deferred and recognized in the month in which the service is provided. Patent licensing revenues are recognized on a straight-line basis over the term of the related agreement (see Note 6). Patent licensing revenues of $383,000 and $4,596,000 are included in recurring revenues in fiscal 1995 and 1996, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ADVERTISING EXPENSES Advertising expenses are expensed as incurred. F-8 41 EARNINGS PER SHARE Net loss per share amounts as reflected on the statements of operations are based upon the weighted average number of common shares outstanding. As required by the Securities and Exchange Commission rules, all warrants, options and shares issued during the year immediately preceding the initial public offering (see Note 1) are assumed to be outstanding prior to the closing of the initial public offering for all periods presented. Shares issuable upon the exercise of stock options and warrants granted before the year immediately preceding the initial public offering were not included in the net loss per share calculation as the effect from the exercise of those options would be antidilutive. RECLASSIFICATIONS Certain amounts in the prior years' consolidated financial statements have been reclassified to conform with the current year presentation. ACCOUNTING FOR LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The Company adopted SFAS 121 for the fiscal year ending December 31, 1996. SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. SFAS 121 requires that those assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through future cash flows. SFAS 121 requires that those assets to be disposed of be reported at the lower of the carrying amount or the fair value less cost to sell. Adoption of SFAS 121 did not affect the 1996 financial statements of the Company. The Company will continue to evaluate the effect of SFAS 121 in subsequent periods. 3. NARROWBAND PERSONAL COMMUNICATIONS SERVICES LICENSES During July and December 1994, the Company participated in auctions of NPCS frequencies conducted by the FCC. As a result of the auctions, the Company was awarded two nationwide NPCS licenses for a total purchase price of approximately $133 million. Amortization of the NPCS licenses will commence when placed in service. The NPCS licenses will be amortized over a period not to exceed 40 years. The Company intends to follow the provisions of Statement of Financial Accounting Standards No. 34 "Capitalization of Interest Cost" with respect to its NPCS licenses and the related construction of its two-way messaging network. 4. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY Effective November 15, 1995, PageMart International, Inc. owns 200,000 shares of common stock of PageMart Canada Limited ("PageMart Canada") which represents 20% of the ownership of PageMart Canada. The remaining 800,000 shares (representing 80% of the ownership) is held by PageMart Canada Holding Corporation ("Canada Holding"). Canada Holding is owned 50% (1,000,000 shares of Class A Common Stock) by third-party Canadian investors unrelated to PageMart and 50% (1,000,000 shares of Class B Common Stock) by PageMart International, Inc. The common shares have identical economic rights. However, voting control of Canada Holding is held by the Class A Common Stockholders as the Class A shares have two votes per share. The Company accounts for its investments in PageMart Canada and Canada Holding under the equity method. Such investments are included in Other Assets in the Consolidated Balance Sheet. The agreement among stockholders contains provisions which restrict the transfer of Canada Holding shares and PageMart Canada shares for periods ranging from three to five years. During the two years following the third anniversary of the transactions, the third-party Canadian investors may exchange the 1,000,000 Class A common shares they hold in Canada Holding for 714,286 shares of voting common stock of Wireless, subject to certain United States and Canadian ownership requirements. Wireless is ultimately F-9 42 responsible for effectuating the exchange within the United States and Canadian ownership regulations. Such exchange may be accelerated in the event Wireless enters into an agreement to be acquired. After the third anniversary of the transactions, Wireless will have the right to purchase the shares held by the third-party Canadian investors at their fair market value provided regulatory ownership requirements permit such purchase. 5. LONG-TERM DEBT Long-term debt, including capital lease obligations, consisted of the following (in thousands):
DECEMBER 31, -------------------- 1995 1996 -------- -------- 12 1/4% Senior Discount Notes, face amount $136,500 due November 1, 2003, at accreted value....................... $ 94,952 $107,947 15% Senior Discount Exchange Notes, face amount $207,270 due February 1, 2005, at accreted value....................... 114,865 132,740 Vendor Purchase Financing Facility of $8 million, bearing interest at 4% based upon the rate quoted by The Wall Street Journal from time to time 12.75% at December 31, 1995...................................................... 5,138 -- Capital lease obligations to a vendor up to $15 million, bearing interest ranging from 11.84% to 15.13% at December 31, 1995.................................................. 9,888 -- -------- -------- Total debt........................................ 224,843 240,687 Less: Current maturities........................ (5,479) -- -------- -------- Long-term debt.................................... $219,364 240,687 ======== ========
During the fourth quarter of 1993, the Company completed an offering in which it issued $136.5 million principal amount (at maturity) of 12 1/4% Senior Discount Notes due 2003 (the "12 1/4% Notes") with an initial accreted value of $71.6 million together with warrants to purchase 627,900 shares of its common stock for $3.26 per share. From and after May 1, 1999, interest on the 12 1/4% Notes will be payable semiannually in cash at the rate of 12 1/4% per annum. The 12 1/4% Notes represent senior indebtedness of the Company and are redeemable at the option of the Company, in whole or in part, at any time after November 1, 1998, at $136.5 million plus accrued interest. In July 1994, the Company commenced an exchange offer pursuant to an effective registration statement whereby all outstanding 12 1/4% Notes were exchanged for the Company's 12 1/4% Senior Discount Exchange Notes due 2003. In January 1995, the Company completed an offering of 15% Senior Discount Notes due 2005 and 725,445 shares of non-voting common stock, par value $.0001 per share (the "Unit Offering"). Net proceeds from the Unit Offering were approximately $100 million, of which approximately $5.1 million was allocated to the non-voting common stock. The 15% Senior Discount Notes due 2005 (the "15% Notes") have a principal amount at maturity of $207.3 million with an initial accreted value of $100 million. The 15% Notes mature on February 1, 2005. From and after August 1, 2000, interest on the 15% Notes will be payable semiannually in cash at the rate of 15% per annum. The 15% Notes are redeemable at any time on or after February 1, 2000, at the option of the Company in whole or in part, at 105% of their principal amount at maturity, plus accrued and unpaid interest, declining to 100% of their principal amount at maturity plus accrued interest on and after February 1, 2002. In addition, at any time prior to February 1, 1998, up to 35% of the accreted value of the 15% Notes may be redeemed at a redemption price of 112.5% of their accreted value on the redemption date at the option of the Company in connection with a public offering of its common stock. In June 1995, the Company commenced an exchange offer pursuant to an effective registration statement whereby all outstanding 15% Notes were exchanged for the Company's 15% Senior Discount Exchange Notes due 2005. F-11 43 The 12 1/4% Notes and the 15% Notes carry certain restrictive covenants that, among other things, limit the ability of the Company to incur indebtedness, pay dividends, prepay subordinated indebtedness, repurchase capital stock, create liens, sell assets, engage in mergers and consolidations, and enter into transactions with any holder of 5% or more of any capital stock of the Company or any of its affiliates. The Company is in compliance with all such restrictive covenants. On May 11, 1995, the Company entered into the Revolving Credit Agreement which provides for a $50 million revolving line of credit. As of December 31, 1996, there were no loans outstanding under the Revolving Credit Agreement. The maximum amount available under the Revolving Credit Agreement at any time is limited to a borrowing base amount equal to the lesser of (i) a specified percentage of eligible accounts receivable and inventory owned by Wireless, and (ii) an amount equal to the service contribution of the Company as defined in the Revolving Credit Agreement for the immediately preceding three-month period times 4.0 (or 4.5, at all times prior to December 31, 1995). The interest rate applicable to loans under the Revolving Credit Agreement is, at the option of Wireless, either at a prime rate plus 1 1/4% or a Eurodollar rate plus 2 1/2%. Commitments under the Revolving Credit Agreement expire and all loans thereunder will be due and payable on March 31, 1999. The Revolving Credit Agreement contains certain covenants that, among other things, limit the ability of the Company to incur indebtedness, make capital expenditures and investments, pay dividends, repurchase capital stock, engage in transactions with affiliates, create liens, sell assets, or engage in mergers and consolidations, and also requires the Company to maintain certain financial ratios. The Revolving Credit Agreement is secured by all trade receivables and inventory owned by Wireless from time to time and by all of the capital stock of PageMart owned by Wireless. As of December 31, 1996, the maximum amount available under the Revolving Credit Agreement was $23.7 million. Maturities of long-term debt and capital lease obligations are as follows (in thousands):
FOR THE YEAR ENDING DECEMBER 31, - ------------------- 1997................................................................. $ -- 1998................................................................. -- 1999................................................................. -- 2000................................................................. -- 2001................................................................. -- Thereafter........................................................... 240,687 -------- $240,687 ========
6. COMMITMENTS AND CONTINGENCIES The Company has entered into various operating lease agreements for office space, office equipment and transmission equipment sites. Total rent expense for 1994, 1995 and 1996 was $6,084,000, $8,471,000 and $13,496,000, respectively. Future minimum lease payments related to the Company's operating leases are as follows (in thousands):
FOR THE YEAR ENDING OPERATING DECEMBER 31, LEASES - ------------------- --------- 1997.................................................................. $11,309 1998.................................................................. 9,921 1999.................................................................. 8,106 2000.................................................................. 6,342 2001.................................................................. 4,178 Thereafter............................................................ 9,061 ------- Total minimum lease payments.......................................... $48,917 =======
F-11 44 The Company is party to various legal proceedings arising out of the ordinary course of business. The Company believes, based on the advice of legal counsel, that there is no proceeding, either threatening or pending, against the Company that could result in a material adverse effect on the results of operations or financial condition of the Company. In December 1995, the Company transferred certain intellectual property to a significant vendor in exchange for certain benefits which will be recognized over a forty-seven month period. The Company also committed to purchase $40 million in network infrastructure equipment over a forty-seven month period as part of this transaction. Through December 31, 1996, the Company had purchased $19.9 million of network infrastructure under this purchase commitment. 7. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating the fair value disclosures for its financial instruments. For cash and cash equivalents, the carrying amounts reported in the Consolidated Balance Sheets are equal to fair value. For debt, management estimated the fair value based upon quoted market prices for publicly traded debt and based on the appropriate interest rate at year-end for all other debt. The carrying amounts and fair values of the Company's financial instruments at December 31, 1995 and 1996, are as follows (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1996 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Cash and cash equivalents......................... $ 26,973 $ 26,973 $ 22,603 $ 22,603 Long-term debt.................................... $224,843 $241,621 $240,687 $250,156
8. STOCKHOLDERS' EQUITY (DEFICIT) PREFERRED STOCK On August 5, 1994, in conjunction with the 1994 Stock Offerings and the related stockholders' agreement, each outstanding share of preferred stock converted into one share of common stock. In September 1994, the Company's Certificate of Incorporation was amended to reduce the number of authorized shares of preferred stock to 10,000,000. At December 31, 1995 and 1996, none of the authorized shares of preferred stock were issued and outstanding. Under the Company's Certificate of Incorporation, the board of directors has the power to authorize the issuance of one or more classes or series of preferred stock and to fix the designations, powers, preferences and relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, if any, with respect to each such class or series of preferred stock. COMMON STOCK During the fourth quarter 1993 in connection with issuance of the 12 1/4% Notes (see Note 5), the Company issued warrants to purchase 627,900 shares of its common stock for $3.26 per share. The warrants were valued at $5.50 per share at the date issued. The warrants may be exercised at any time prior to December 31, 2003. Warrants that are not exercised by such date will expire. During the third quarter of 1994, the Company issued an aggregate of 11,242,857 shares of common stock in the 1994 Stock Offerings at a purchase price of $7.00 per share. The aggregate net proceeds (after expenses) of the 1994 Stock Offerings were approximately $76.9 million. Of the total shares issued, 714,287 shares were convertible non-voting common stock and the remaining 10,528,570 shares were common stock. At the request of the holder, the non-voting common stock was converted to common stock in January 1995. During the first quarter of 1995 in connection with the Unit Offering (see Note 5), the Company issued 725,445 shares of non-voting common stock at a purchase price of $7.00 per share. During the second quarter F-12 45 of 1995, the Company completed a private offering of common stock to a group of institutional investors and certain officers of the Company (the "1995 Stock Offering"). In the 1995 Stock Offering, the Company sold 3,598,429 shares of common stock for net proceeds (after expenses) of approximately $24.5 million. In October 1995, the Company's Certificate of Incorporation was amended (the "Amended Certificate") and at that time the Amended and Restated Agreement Among Certain Stockholders of PageMart Nationwide, Inc. dated September 19, 1995 (the "Stockholders' Agreement"), became effective. The Amended Certificate provides that the Company will have four classes of outstanding common stock, summarized as follows:
SHARES ISSUED AND OUTSTANDING ----------------------- SHARES DECEMBER 31, AUTHORIZED 1995 1996 ---------- ---------- ---------- Class A Convertible Common Stock, $.0001 par value per share (the "Class A Common Stock").................... 60,000,000 23,277,293 33,887,152 Class B Convertible Non-Voting Common Stock, $.0001 par value per share (the "Class B Common Stock").......... 12,000,000 8,975,469 3,809,363 Class C Convertible Non-Voting Common Stock, $.0001 par value per share (the "Class C Common Stock").......... 2,000,000 731,846 1,428,472 Class D Convertible Non-Voting Common Stock, $.0001 par value per share (the "Class D Common Stock").......... 1,000,000 725,445 679,945 ---------- ---------- ---------- 75,000,000 33,710,053 39,804,932 ========== ========== ==========
Upon filing of the Amended Certificate, all shares of previously outstanding common stock were automatically converted into shares of Class A Common Stock, and all shares of previously outstanding non-voting common stock issued in the Unit Offering were converted into shares of Class D Common Stock. Additionally, pursuant to the Stockholders' Agreement, a number of shares of Class A Common Stock owned by certain institutional investors were automatically converted into shares of Class B Common Stock and Class C Common Stock, such that voting control of the Company lies with the stockholders generally. Class A Common Stock, Class B Common Stock and Class C Common Stock are convertible by certain institutional investors subject to voting control and regulatory restrictions at any time at the option of the holder, in accordance with the terms of the Stockholders' Agreement. Class D Common Stock is convertible, at the option of the holder, at any time after the occurrence of an initial public offering following which the common stock of the Company is publicly traded. The Company had an initial public offering on June 13, 1996. Class A Common Stock is convertible by certain holders thereof into either Class B or C Common Stock. Classes B, C and D Common Stock are convertible to Class A Common Stock. The Stockholders' Agreement provides that the parties thereto ("Holders") shall collectively have the right to "demand" registrations at any time at least six months after an initial public offering following which the common stock of the Company is publicly traded. Pursuant to these "demand" rights, Holders of common stock (the "Registrable Securities") may request in writing that the Company file a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering the registration of a number of shares equal to at least three million shares or a lesser number if such number represents a majority of the Registrable Securities then outstanding. On March 20, 1995, the Company granted to a strategic partner warrants to purchase a total of 206,748 shares of the Company's common stock at an exercise price of $10.00. On June 19, 1996, the Company issued an aggregate of 6,000,000 shares of Class A Common Stock in an initial public offering (the "Offering") at a price of $13.00 per share. The Company received proceeds from the Offering of approximately $70.5 million after deducting underwriting discounts, commissions, fees and expenses associated with the Offering. Upon receipt of the net proceeds, the Company retired vendor debt of approximately $12.9 million and repaid approximately $11.9 million of loans outstanding under the Company's F-13 46 revolving credit facility. The remaining proceeds are expected to be used to fund the initial construction of the Company's narrowband personal communications service transmission network and for general corporate purposes. Following is a schedule of common stock reserved at December 31, 1996:
SHARES --------- Exercise of common stock warrants........................... 834,648 Stock option/stock issuance plan............................ 3,674,017 Employee Stock Purchase Plan................................ 468,725 Non-Employee/Director Stock Option Plan..................... 75,000 --------- 5,052,390 =========
9. STOCK OPTION/STOCK ISSUANCE/STOCK PURCHASE PLANS STOCK COMPENSATION PLANS At December 31, 1996, the Company has three stock-based compensation plans, the 1991 Stock Option/Issuance Plan, the 1996 Nonqualified Stock Option Plan for Non-Employee Directors and the Employee Stock Purchase Plan. The Company applies Accounting Principles Board Opinion 25 and related Interpretations to account for expenses related to its plans. Accordingly, no compensation costs have been recognized for its fixed option plans or its employee stock purchase plan. If compensation costs for these plans had been determined based on the fair value at the grant dates for awards under the plans consistent with the method of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1995 1996 -------- -------- Net loss....................................... As reported $(53,113) $(48,598) Pro forma (53,380) (50,095) Primary and fully diluted earnings per share... As reported $ (1.53) $ (1.30) Pro forma (1.54) (1.34)
As the Employee Stock Purchase Plan and the 1996 Nonqualified Stock Option Plan for Non-Employee Directors were adopted in 1996, 1995 pro forma balances do not include expenses for these plans. FIXED STOCK OPTION PLANS The Company has two fixed stock option plans. Under the 1991 Stock Option/Issuance Plan, ("1991 Plan"), the Company may grant options to its employees for up to 4,550,000 shares of Class A Common Stock. Under the 1996 Nonqualified Stock Option Plan for Non-Employee Directors, ("Directors Plan"), the Company may grant options to its non-employee directors for up to 100,000 shares of common stock. Under both plans, the exercise price of each option equals the market price of the Company's stock at the close of the market on the date of grant and an option's maximum term is 10 years. Options are granted at various times during the year and vest over a five year period under the 1991 Plan and over a three year period under the Directors Plan. Both plans are administered by the Board of Directors. Under the provisions of the 1991 Plan, the Company may also issue stock to employees. The stock vests over a period not to exceed forty-eight months. Additional vesting occurs upon death or disability. Upon the termination of an officer, the Company can repurchase the unvested stock at cost. Under the Plan, the Company issued 300,000 shares to an officer during 1992 at $0.326 per share. All awards under the Plan have been made at a price at or above the estimated fair value of the Company's common stock at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1995 and 1996: dividend F-14 47 yield of 0 percent for all years; expected volatility of 40 percent, risk-free interest rates average 6.44 percent in 1995 and 6.35 percent in 1996 for the 1991 Plan and 6.67 percent in 1996 for the Directors Plan; and expected lives of 8.23 years. A summary of the status of the Company's 1991 Plan as of December 31, 1994, 1995 and 1996; and the Directors Plan as of December 31, 1996 and changes during the years ending on these dates is presented below: 1991 PLAN
1994 1995 1996 ----------------- ----------------- ----------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE (000) PRICE (000) PRICE (000) PRICE ------ -------- ------ -------- ------ -------- Outstanding at beginning of year.......... 1,147 $2.02 1,597 $4.83 2,669 $6.59 Granted................................... 866 6.95 1,205 8.84 1,126 8.49 Exercised................................. (304) 0.89 (37) 4.12 (64) 5.24 Forfeited................................. (112) 3.23 (96) 5.82 (258) 8.51 ----- ----- ----- Outstanding at end of year................ 1,597 $4.83 2,669 $6.59 3,473 $7.09 ===== ===== ===== Options exercisable at year-end........... 237 583 1,077 ===== ===== ===== Weighted-average fair value of options granted during the year................. N/A $5.07 $5.02 ===== ===== =====
DIRECTORS PLAN
1996 -------------------------- WEIGHTED SHARES AVERAGE (000) EXERCISE PRICE ------ -------------- Outstanding at beginning of year............................ -- $ -- Granted..................................................... 25 12.00 Exercised................................................... -- -- Forfeited................................................... -- -- ----- Outstanding at end of year.................................. 25 $12.00 ===== Options exercisable at year-end............................. 6 ===== Weighted-average fair value of options granted during the year...................................................... $ 7.04 ======
F-15 48 The following table summarized information about fixed stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ---------------------------- NUMBER WEIGHTED-AVG. NUMBER RANGE OF OUTSTANDING REMAINING WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG. EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE - --------------- ----------- ---------------- -------------- ----------- -------------- 1991 PLAN $ 0.00 to 2.00 245,000 5.2 $ 0.92 212,000 $ 0.86 2.01 to 4.00 443,000 6.5 3.26 295,000 3.26 4.01 to 6.00 40,000 7.1 5.00 13,000 5.00 6.01 to 8.00 1,660,000 8.7 6.94 411,000 7.12 8.01 to 10.00 743,000 8.8 9.99 146,000 9.97 10.01 to 12.00 342,000 8.8 11.12 -- -- --------- --------- 3,473,000 8.2 7.09 1,077,000 5.19 ========= ========= DIRECTORS PLAN $ 0.00 to 12.00 25,000 9.2 $12.00 6,000 $12.00 ========= =========
EMPLOYEE STOCK PURCHASE PLAN Under the Employee Stock Purchase Plan, the Company is authorized to issue up to 500,000 shares of common stock to its eligible employees. Under terms of the Plan, employees can choose on January 1 and July 1 of each year to have a portion of their earnings not to exceed $25,000 of market value per year withheld to purchase the Company's common stock. The purchase price of the stock is 90 percent of the lower of the market price on the grant date or the market price on the June 30 or December 31 immediately following the grant date of an option. Under the Plan, the Company sold 31,275 shares to employees in 1996. Compensation cost is recognized for the fair value of the employees's purchase rights, which was estimated using the Black-Scholes model with the following assumptions for 1996: dividend yield of 0 percent; an expected life of 0.5 years; expected volatility of 40 percent; and a risk-free interest rate of 6.27 percent. The weighted-average fair value of those purchased rights granted in 1996 was $2.14. 10. FEDERAL INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." SFAS 109 requires an asset and liability approach which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events which have been recognized in the Company's financial statements. The Company had approximately $126.8 million and $149.2 million of net operating loss carryforwards for federal income tax purposes at December 31, 1995 and 1996, respectively. The net operating loss carryforwards will expire in the years 2004 through 2011 if not previously utilized. The utilization of these carryforwards is subject to certain limitations. Of the net operating loss carryforwards at December 31, 1996, management has estimated that approximately $38.9 million is subject to an annual utilization limit of $4.8 million. In connection with the adoption of SFAS 109, the Company has recorded a valuation reserve equal to its net deferred tax asset at each reporting period, due to historical and anticipated future operating losses. Accordingly, the adoption of SFAS 109 did not have an effect on the Company's financial position or results of operations. Management will evaluate the appropriateness of the reserve in the future based upon historical and operating results of the Company. F-16 49 Deferred income taxes reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial reporting basis and the potential benefits of certain tax carryforwards. The significant deferred tax assets and liabilities, as determined under the provisions of SFAS 109, and the change in those assets and liabilities are as follows (in thousands):
DECEMBER 31, DECEMBER 31, 1995 CHANGE 1996 ------------ -------- ------------ Gross deferred tax asset: Net operating loss carryforwards...................... $ 43,128 $ 7,613 $ 50,741 Bad debt reserve...................................... 2,098 1,017 3,115 Inventory reserve..................................... 828 699 1,527 Accretion of Senior Discount Notes.................... 13,002 10,495 23,497 Other................................................. 943 (161) 782 -------- -------- -------- 59,999 19,663 79,662 Gross deferred tax liability: Depreciation.......................................... (3,694) (3,305) (6,999) -------- -------- -------- 56,305 16,358 72,663 Valuation allowance................................ (56,305) (16,358) (72,663) -------- -------- -------- Net deferred tax asset............................. $ -- $ -- $ -- ======== ======== ========
11. RELATED-PARTY TRANSACTIONS In connection with the Unit Offering completed in 1995 (see Note 5), the Company incurred $3,805,000 in fees to an affiliate of a shareholder. In addition, an affiliate of a shareholder acted as an underwriter of the Company's initial public offering in June 1996 and received $2.0 million in compensation in the form of an underwriter's discount. As of December 31, 1996, the president and certain other officers of the Company are indebted to the Company in the aggregate amount of $671,627 under promissory notes issued in connection with the purchase of the Company's common stock (the "Notes"). The Notes have terms ranging from three to four years and are secured by common stock owned by the officers. The Notes bear interest at the Applicable Federal Rate in effect on the date of issuance as published by the Internal Revenue Service. Interest rates on the Notes range from 3.55% to 7.00%. Interest is due and payable annually beginning on the first anniversary of the date of each Note. All Notes are included in Stock Subscriptions Receivable in the Consolidated Balance Sheet. F-17 50 12. SUPPLEMENTARY INFORMATION The following table sets forth supplementary financial information related to the Company's various operations (in thousands):
FISCAL YEAR ENDED DECEMBER 31, 1994 -------------------------------------------------- PAGEMART PAGEMART PAGEMART ONE-WAY TWO-WAY INTERNATIONAL CONSOLIDATED -------- -------- ------------- ------------ Revenues........................................... $109,833 $ -- $ -- $109,833 Operating loss..................................... (33,324) -- -- (33,324) Total assets....................................... 81,470 58,885 1,704 142,059 Capital expenditures............................... 16,719 -- -- 16,719
FISCAL YEAR ENDED DECEMBER 31, 1995 -------------------------------------------------- PAGEMART PAGEMART PAGEMART ONE-WAY TWO-WAY INTERNATIONAL CONSOLIDATED -------- -------- ------------- ------------ Revenues........................................... $159,191 $ -- $ -- $159,191 Operating loss..................................... (22,972) (376) -- (23,348) Total assets....................................... 120,004 140,235 3,590 263,829 Capital expenditures............................... 32,486 1,017 -- 33,503
FISCAL YEAR ENDED DECEMBER 31, 1996 -------------------------------------------------- PAGEMART PAGEMART PAGEMART ONE-WAY TWO-WAY INTERNATIONAL CONSOLIDATED -------- -------- ------------- ------------ Revenues........................................... $221,592 $ -- $ -- $221,592 Operating loss..................................... (11,465) (657) (447) (12,569) Total assets....................................... 160,858 151,108 1,654 313,620 Capital expenditures............................... 50,838 12,966 -- 63,804
F-18 51 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of PageMart Wireless, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of PageMart Wireless, Inc. and subsidiaries included in this Form 10-K and have issued our report thereon dated January 31, 1997. Our audit was made for the purpose of forming an opinion on those financial statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Dallas, Texas, ARTHUR ANDERSEN LLP January 31, 1997 S-1 52 PAGEMART WIRELESS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER BALANCE AT DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD ----------- ---------- ---------- ---------- ---------- ------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year Ended December 31, 1996...... $4,534 $6,986 $-- $6,744(a) $4,776 Year Ended December 31, 1995...... $1,388 $6,135 $-- $2,989(a) $4,534 Year Ended December 31, 1994...... $1,172 $6,590 $-- $6,374(a) $1,388
- --------------- (a) Accounts written off as uncollectible, net of recoveries. S-2 53 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT ------- ---------------------- 3(i)*** Restated Certificate of Incorporation of PageMart Wireless, Inc. 3(ii)* By-laws of PageMart Wireless, Inc. 3(iii)*** Certificate of Amendment to Restated Certificate of Incorporation of PageMart Wireless, Inc. 4.1** Indenture, dated as of October 19, 1993, between PageMart, Inc. and United States Trust Company of New York, as Trustee, relating to the 12 1/4% Senior Discount Notes due 2003 4.2** Indenture dated as of January 17, 1995 between PageMart Nationwide, Inc. and United States Trust Company of New York, as Trustee, relating to the 15% Senior Discount Notes due 2005 10.1** Warrant Agreement, dated as of October 19, 1993, between PageMart, Inc. and United States Trust Company of New York, as Warrant Agent, relating to the Warrants to purchase Common Stock of the Company. 10.2** Telecommunications Service Agreement, dated May 29, 1992, between PageMart, Inc. and WilTel, Inc. 10.3** Equipment Lease Agreement, dated May 20, 1992, between PageMart, Inc. and Glenayre Electronics, Inc. 10.4** First Addendum to Equipment Lease Agreement, dated May 20, 1992, between PageMart, Inc. and Glenayre Electronics, Inc. 10.5** Amendment No. 2 to Equipment Lease Agreement, dated October 18, 1993, between PageMart, Inc. and Glenayre Electronics, Inc. 10.6** Lease Agreement and Addendum, dated January 10, 1990, between Kingston Houston Partners I, Ltd. and PageMart, Inc. 10.7** Expansion and Extension of Lease Agreement, dated April 7, 1993, between Kingston Houston Partners I, Ltd. and PageMart, Inc. 10.8** Office Lease Agreement, dated January 29, 1992, between Dallas Central Development Corp. and PageMart, Inc. 10.9** First Amendment to Office Lease Agreement, dated July 29, 1992, between Fulcrum Central Ltd., as successor in interest to Dallas Central Development Corp., and PageMart, Inc. 10.10** Second Amendment to Office Lease Agreement, dated December 1, 1992, between Fulcrum Central Ltd., as successor in interest to Dallas Central Development Corp., and PageMart, Inc. 10.11** Third Amendment to Office Lease Agreement, dated December 29, 1992, between Fulcrum Central Ltd., as successor in interest to Dallas Central Development Corp., and PageMart, Inc. 10.12** Fourth Amendment to Office Lease Agreement, dated July 21, 1993, between Fulcrum Central Ltd., as successor in interest to Dallas Central Development Corp., and PageMart, Inc. 10.13** License Agreement, dated May 12, 1994, between PageMart, Inc., licensee, and International Business Machines Corporation, licensor 10.14** Sales Contract, dated January 21, 1994, between PageMart, Inc., buyer, and Mitsui Comtek Corporation, seller 10.15** Resale Agreement, dated November 1, 1993, between PageMart, Inc., licensor, and GTE Service Corporation, licensee 10.16** Financing and Security Agreement between Motorola and Pagemart, Inc. dated May 18, 1994 10.17** Subscription Agreement, dated June 9, 1994, between PageMart, Inc. and Fomento Empresarial Regiomontano, S.A. de C.V. 10.18** Letter of Intent, dated June 9, 1994, between PageMart, Inc. and Fomento Empresarial Regiomontano, S.A. de C.V.
54
EXHIBIT NO. DESCRIPTION OF EXHIBIT ------- ---------------------- 10.19* Strategic Alliance Agreement No. 1, dated September 15, 1994, between GTE Service Corporation and PageMart, Inc. 10.20* Strategic Alliance Agreement No. 2, dated October 13, 1994, between GTE Service Corporation and PageMart, Inc. 10.21* Secured promissory note of John D. Beletic, as Maker, in favor of PageMart, Inc. dated January 28, 1994, in the amount of $97,800 10.22* Secured promissory note of John D. Beletic, as Maker, in favor of PageMart, Inc. dated November 29, 1994, in the amount of $200,000 10.23* Agreement of Reorganization and Plan of Merger, dated as of December 5, 1994, between PageMart, Inc., PageMart Nationwide, Inc. and PM Merger Corp. 10.24* Registration Rights Agreement dated as of January 17, 1995 between PageMart Nationwide, Inc. and Morgan Stanley & Co. Incorporated 10.25++ PageMart Nationwide, Inc. Third Amended and Restated 1991 Stock Option Plan and Third Amended and Restated 1991 Stock Issuance Plan(1) 10.26** Satellite Services and Space Segment Lease Agreement, dated January 2, 1995, between PageMart, Inc. and SpaceCom Systems, Inc. 10.27** Credit Agreement, dated as of May 11, 1995, by and among PageMart Nationwide, Inc., the Lenders named therein, BT Commercial Corporation, as Agent, and Bankers Trust Company, as Issuing Bank 10.28** Subscription Agreement, dated as of May 11, 1995, by and among PageMart Nationwide, Inc. and the investors named therein 10.29+ Amended and Restated Agreement Among Certain Stockholders of PageMart Nationwide, Inc. dated as of September 19, 1995 10.30*** Secured promissory note of John D. Beletic, as Maker, in favor of PageMart Nationwide, Inc. dated May 11, 1995, in the amount of $21,000. 10.31*** Subscription Agreement dated as of July 7, 1995 among PageMart Nationwide, Inc., PageMart Canada Holding Corporation and TD Capital Group Ltd. 10.32*** Agreement Among Stockholders among PageMart Nationwide, Inc., PageMart International, Inc., TD Capital Group Ltd., PageMart Canada Holding Corporation and PageMart Canada Limited. 10.33**** Equipment Purchase Agreement between Motorola, Inc. and PageMart Wireless, Inc. (2) 10.34**** Technology Asset Agreement dated as of December 1, 1995 between Motorola, Inc. and PageMart Wireless, Inc.(2) 10.35*** PageMart Wireless, Inc. Employee Stock Purchase Plan(1) 10.36*** PageMart Wireless, Inc. Nonqualified Formula Stock Option Plan for Non-Employee Directors(1) 10.37***** Office Lease Agreement date as of November 26, 1996 between Crescent Real Estate Equities Limited and PageMart Wireless, Inc. 10.38(3) PageMart Wireless, Inc. Fourth Amended and Restated 1991 Stock Option Plan. 11.1***** Computation of earnings (loss) per share 21.1*** PageMart Wireless, Inc. Subsidiaries 27.1***** Financial Data Schedule for the year ended December 31, 1996.
- --------------- * Each of these exhibits is hereby incorporated by reference to the Form 10-K of the Company for the fiscal year ended December 31, 1994. ** Each of these exhibits is hereby incorporated by reference to the Registration Statement on Form S-1 of the Company (Reg. No. 33-91142). *** Each of these exhibits is hereby incorporated by reference to the Registration Statement on Form S-1 of the Company (Reg. No. 33-03012). **** Each of these exhibits is hereby incorporated by reference to the Form 10-K of the Company for the fiscal year ended December 31, 1995. ***** Filed herewith. 55 + Each of these exhibits is hereby incorporated by reference to the Form 8-K of the Company dated October 6, 1995. ++ Each of these exhibits is hereby incorporated by reference to the Registration Statement on Form S-8 of the Company (Reg. No. 33-98116). (1) This exhibit is a "management contract or compensatory plan or arrangement" required to be filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K. (2) The Company has requested confidential treatment for certain portions of this agreement. (3) Originally filed as Exhibit 10.1 in the Company's Form 10-Q for the quarterly period ended September 30, 1996. EX-10.37 2 OFFICE LEASE AGREEMENT 1 EXHIBIT 10.37 3333 LEE PARKWAY OFFICE LEASE THIS OFFICE LEASE (this "Lease") is made as of the _____ day of ___________________, 1996, by and between Crescent Real Estate Equities Limited Partnership, a Delaware limited partnership ("Landlord"), and the Tenant named below. WITNESSETH: 1. BASIC PROVISIONS. (a) TENANT: PageMart Wireless, Inc. ------------------------------------------------------------- 6688 North Central Expressway ------------------------------------------------------------- Suite 800 ------------------------------------------------------------- Dallas, Texas 75206 ------------------------------------------------------------- (b) BUILDING: 3333 Lee Parkway ------------------------------------------------------------- Dallas, Texas 75219 ------------------------------------------------------------- ------------------------------------------------------------- (c) PREMISES: Suite , on the floor of the Building ---- ----- Approximate Rentable Area of the Premises(1): 30,000 square feet(2) ------------------------
__________________________________ 1 Landlord agrees that Tenant shall have the right to cause the Rentable Area of the Premises to be verified by an architect selected by Tenant and approved by Landlord, at Tenant's sole cost and expense, one time only, after each of the following dates, and with respect to that portion of the Premises then being added only: (1) the Commencement Date of this Lease (as such term is defined in Paragraph 3 of this Lease), (2) the First Expansion Space Commencement Date (as such term is defined in Rider No. 101 attached to this Lease), and (3) the Second Expansion Space Commencement Date (as such term is defined in Rider No. 101 attached to this Lease), or one time only, with respect to the entire Premises, after the Second Expansion Space Commencement Date. The results of any such verification shall be binding on both Landlord and Tenant, and in the event of a discrepancy between the Rentable Area of the Premises as determined by the architect and the Rentable Area specified in this Paragraph 1(c), the Lease shall be modified to reflect the actual Rentable Area of the Premises. 2 Landlord and Tenant agree that after the Second Expansion Space Commencement Date (as such term is defined in Rider No. 101 attached to this Lease), Tenant shall lease a total of approximately 120,000 rentable square feet in the Building, and that such space shall consist of all of the eighth, ninth, tenth, eleventh, and twelfth floors, and a portion of the first and seventh floors of the Building; provided that, at Landlord's option, Landlord may substitute the fifth floor of the Building for the seventh floor of the Building. The Premises shall be constructed by Landlord and occupied by Tenant pursuant to the terms and conditions of the Construction Agreement and Rider No. 101 attached to this Lease. On or before each of the following dates, (i) the Commencement Date of this Lease, (ii) the First Expansion Space Commencement Date, and (iii) the Second Expansion Space Commencement Date, Landlord and Tenant will enter into an amendment to this Lease modifying the description of the Premises to include the applicable space and containing other appropriate terms and conditions related to the addition of such space. 2 Rentable Area of the Building: 233,484 square feet(3) --------------------- (d) BASIC RENTAL: Months 1-12: $ per month; annual rental rate per ---------- square foot of Rentable Area: $17.70. ----- Months 13-24: $ per month; annual rental rate per ---------- square foot of Rentable Area: $17.95. ----- Months 25-36: $ per month; annual rental rate per ---------- square foot of Rentable Area: $18.20. ----- Months 37-48: $ per month; annual rental rate per ---------- square foot of Rentable Area: $18.70. ----- Months 49-72: $ per month; annual rental rate per ---------- square foot of Rentable Area: $18.95. ----- Months 73-84: $ per month; annual rental rate per ---------- square foot of Rentable Area: $19.20. ----- Months 85-96: $ per month; annual rental rate per ---------- square foot of Rentable Area: $19.70. -----
__________________________________ 3 Landlord agrees that the Rentable Area of the Building specified in this Paragraph 1(c) shall not be modified during the initial term of this Lease, except in the event of an expansion or addition to the Building, if any. -2- 3 Months 97-108: $ per month; annual rental rate per ---------- square foot of Rentable Area: $19.95. ----- Months 109-128: $ per month; annual rental rate ---------- per square foot of Rentable Area: $20.20. ----- (e) SECURITY DEPOSIT: $190,900.00 . ----------------------------------------------------------- (f) LEASE TERM: Ten (10) years and eight (8) months . ------------------------------------------------------------ (g) ESTIMATED COMMENCEMENT DATE: June 1 , 1997. ------------------------------------------------------ (h) OPERATING EXPENSE STOP: The quotient of (i) the amount of the Actual Operating Expenses for the Project for the calendar year 1997, divided by (ii) the number of square feet of Rentable Area in the Building. (i) PERMITTED USE: General office use(4), but excluding(5) any use for collection agency, credit processing or telemarketing purposes.
2. LEASE GRANT. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises described above, which will(6) consist of(7) approximately 30,000 square feet of Rentable Area (herein so called) located on the _____ floor(s) of the building described above (the "Building"), as shown in Exhibit A-1.(8) The Premises are located in the Building which is located on the real property described in Exhibit A-2 attached hereto __________________________________ 4 , including employee training, data processing, customer service, retail sales and service, 5 (except to the extent that the following services are provided for Tenant's benefit only, and not for the benefit of a third party) 6 initially 7 a minimum of 8 which shall be attached hereto pursuant to Rider No. 101 attached to this Lease. Landlord shall lease to Tenant and Tenant shall lease from Landlord additional space in the Building pursuant to the terms and conditions of Rider No. 101 attached to this Lease. -3- 4 (the "Land"). The Land, the Building, the parking facilities, parking garage and other structures and improvements, landscaping, fixtures, appurtenances and other common areas now or hereafter placed, constructed or erected thereon comprise the project (the "Project") known as 3333 Lee Parkway in Dallas, Dallas County, Texas. Tenant is hereby granted a nonexclusive right to use the Common Areas during the term of this Lease for their intended purposes, in common with others, subject to the terms and conditions of this Lease, including, without limitation, the rules and regulations promulgated by Landlord. "Common Areas" will mean all areas, spaces, facilities, and equipment (whether or not located within the Building) made available by Landlord for the common and joint use of Landlord, Tenant and others, including, but not limited to, tunnels, walkways, sidewalks and driveways necessary for access to the Building, Building lobbies, landscaped areas, enclosed mall areas, loading areas, public corridors, public restrooms, Building stairs and elevators, drinking fountains and such other areas and facilities, if any, as are designated by Landlord from time to time as Common Areas. "Service Areas" will refer to areas, spaces, facilities and equipment serving the Building (whether or not located within the Building) but to which Tenant and other occupants of the Building will not have access, including, but not limited to, mechanical, telephone, electrical and similar rooms, and air and water refrigeration equipment. This Lease is granted subject to the terms hereof, the rights and interests of third parties under existing liens, easements and encumbrances affecting such property, all zoning regulations, rules, ordinances, building restrictions and other laws and regulations now in effect or hereafter adopted by any governmental authority having jurisdiction over the Project or any part thereof. 3. LEASE TERM. This Lease shall be for the term of years described above, commencing on the(9) of (a) the Estimated Commencement Date set forth in Paragraph 1,(10) (b) ten (10) days after Landlord's substantial completion of the Finish Work, as such term is defined in the Construction Agreement (as defined in Paragraph 4),(11). The date the Lease Term commences shall be referred to in this Lease as the "Commencement Date". If the Lease Term expires on a date other than the last day of a calendar month, Landlord and Tenant shall be deemed to have agreed that the Lease Term shall be extended through the last day of the calendar month in which the expiration date falls (the "Expiration Date"). On the Commencement Date(12) Tenant will, within ten (10) days after __________________________________ 9 later 10 or 11 but if Tenant takes possession of the Premises for the conduct of business before either such date, then the Lease Term shall commence on the date Tenant in fact occupies the Premises 12 of this Lease, the First Expansion Space Commencement Date, and the Second Expansion Space Commencement Date, -4- 5 request from Landlord, execute, acknowledge, and deliver to Landlord a statement in the form of Exhibit B attached hereto.(13) 4. CONSTRUCTION. In the event any construction of tenant improvements is necessary for the Premises, such construction will be accomplished and the cost of such construction will be paid in accordance with a separate "Construction Agreement" (herein so called) between Landlord and Tenant(14). Except as expressly provided in this Lease or in the Construction Agreement, Tenant acknowledges that Landlord has not undertaken to perform any modification, alteration or improvement to the Premises. 5. TENANT'S BASIC RENTAL OBLIGATION. Beginning on the Commencement Date, all Basic Rental shall be paid monthly by Tenant to Landlord in advance on or before the first day of each calendar month during the Lease Term, without demand, deduction or setoff(15). All rental and other payments which are due hereunder shall be made payable to Landlord. Tenant agrees to pay said rental and other payments to Landlord at Crescent Real Estate Equities Limited Partnership, P.O. Box 844255, Dallas, Texas 75284-4255, or at such other place as may from time to time be designated in writing by Landlord, in lawful money of the United States of America without any prior demand therefor and without any deduction or setoff whatsoever(16). If the day on which Basic Rental is first due is other than the first day of a calendar month, rent for such partial month shall be prorated on a daily basis. 6. TENANT'S ADDITIONAL RENTAL OBLIGATIONS. (a) Additional Rental. Beginning on the Commencement Date, Tenant shall pay to Landlord each calendar year the Additional Rental (herein so called) equal to Tenant's proportionate share of (i) the Actual Operating Expenses (defined below) for the Project for such calendar year in excess of (ii) the Operating Expense Stop multiplied by the number of square feet of Rentable Area in the Building. Additional Rental shall be prorated on a daily basis for each partial calendar year in the Lease Term. Tenant's proportionate share shall be based on the ratio which the Rentable Area in the Premises (adjusted for office expansions) bears to the Rentable Area within the Building(17). __________________________________ 13 Tenant shall have the option to terminate this Lease pursuant to the terms and conditions of Rider No. 501 attached to this Lease. 14 attached hereto as Exhibit C and incorporated herein for all purposes 15 , except as otherwise set forth herein 16 , except as otherwise set forth herein 17 (adjusted for Building expansions) -5- 6 Rentable Area of the Premises and Rentable Area of the Building shall be computed in accordance with Paragraph 19(x). (b) Adjustment of Actual Operating Expenses. Notwithstanding any language herein to the contrary, if the Building is not fully occupied during any calendar year of the Lease Term,18) Actual Operating Expenses(19) shall be determined as if the Building had been fully occupied during such year. For the purposes of this Lease, "fully occupied" shall mean(20) occupancy of(21) of the Rentable Area in the Building(22). (c) Actual Operating Expenses Enumerated. Actual Operating Expenses shall include all expenses, costs and disbursements of every kind and nature incurred or paid by Landlord in connection with the ownership and/or the operation, maintenance, repair and security of the Project, including, without limitation, expenses for the following: (i) garbage and waste disposal; (ii) janitorial service and window cleaning for the Building and the Common Areas and Service Areas (including materials, supplies, Building Standard light(23) and ballasts, equipment and tools therefor and rental and depreciation costs related to any of the foregoing) or contracts with third parties to provide same (the term "Building Standard" as used herein shall mean the type, brand and/or quality of materials Landlord designates from time to time to be the minimum quality to be used in the Building or the exclusive type, grade or quality of material to be used in the Building); (iii) security; (iv) insurance premiums (including, without limitation, property, liability and any other types of insurance carried by Landlord with respect to the Building and the Common Areas and Service Areas, the costs of which may include an allocation of a portion of the premium of a blanket insurance policy maintained by Landlord); __________________________________ 18 those 19 which vary with occupancy 20 the actual occupancy of the Building or 21 ninety percent (90%) 22 , whichever is greater 23 tubes -6- 7 (v) real estate taxes, assessments, business taxes, excises, and any other governmental levies and charges of every kind and nature whatsoever, general and special, extraordinary and ordinary, foreseen and unforeseen, which may during the Lease Term be levied or assessed against, or arising in connection with the ownership, use, occupancy, operation or possession of, the Building and the Common Areas and Service Areas, or any part thereof, or substituted, in whole or in part, for a real estate tax, assessment, excise or governmental charge or levy previously in existence, by any authority having the direct or indirect power to tax, including interest on installment payments and all costs and fees (including attorneys' fees) incurred by Landlord in contesting or negotiating with taxing authorities as to same, but excluding any inheritance, estate, succession, transfer, gift, franchise, corporation, income or profits tax imposed upon Landlord; (vi) water and sewer charges and any add-ons; (vii) operation, maintenance, and repair (to include replacement of components(24)) of the Building, including but not limited to all floor, wall and window coverings and personal property in the Common Areas, Building systems (such as heat, ventilation and air conditioning systems), elevators, escalators, and all other mechanical or electrical systems serving the Building and the Common Areas and Service Areas and service agreements for all such systems and equipment; (viii) (ix) license, permit and inspection fees; (x) compliance with any fire safety or other governmental rules, regulations, laws, statutes, ordinances or requirements imposed by any governmental authority or insurance company with respect to the Building during the Lease Term; (xi) wages, salaries, employee benefits and taxes (or an allocation of the foregoing) for personnel(25) working full or part time in connection with the __________________________________ 24 ; provided, that if such components are properly classified as capital in nature, the cost of such components shall be included in Actual Operating Expenses and amortized pursuant to subparagraph (xv) below only to the extent that the replacement of such components constitutes a Required Capital Improvement or Cost Savings Improvement, as those terms are defined in such subparagraph 25 , at or below the level of regional property manager and regional asset manager, -7- 8 operation, maintenance and management of the Building and the Common Areas and Service Areas; (xii) accounting and legal services (but excluding(26) legal services in connection with negotiations and disputes with specific tenants unless the matter involved affects all tenants of the Building); (xiii) management fees for the Building(27) and Landlord's overhead expenses directly attributable to the Building, including without limitation, the cost of an office in the Building maintained for management of the Project; (xiv) indoor and outdoor landscaping; (xv) depreciation (or amortization) of Required Capital Improvements and Cost Savings Improvements. "Required Capital Improvements" will mean capital improvements or replacements made in or to the Building in order to conform to any Applicable Law.(28) "Cost Savings Improvements" will mean any capital improvements or replacements which are intended to reduce, stabilize or limit increases in Actual Operating Expenses. The cost of Cost Savings Improvements will be amortized by spreading such costs uniformly over a term equal to the lesser of (a) the period of years over which the amount by which Actual Operating Expenses are reduced would be equal to the cost of such installation or (b) ten (10) years. The cost of Required Capital Improvements and depreciable (or amortizable) maintenance and repair items (e.g., painting of Common Areas, replacement of carpet in elevator lobbies), will be amortized by spreading such costs uniformly over a term equal to the lesser of (A) the period employed by Landlord for federal income tax purposes or (B) ten (10) years; (xvi) ; and __________________________________ 26 accounting and 27 (which fees shall not exceed five percent (5%) of the gross revenues for the Project) 28 For purposes of this Paragraph 6(c)(xv), Landlord represents that, to Landlord's current and actual knowledge, the Building is in compliance with all Applicable Laws in effect as of the execution of this Lease. This representation shall not apply to The Americans With Disabilities Act and the Texas Architectural Barriers Act, and all rules, regulations and guidelines promulgated thereunder. -8- 9 (xvii) expenses and fees (including attorneys' fees) incurred contesting the validity or applicability of any governmental enactments which may affect Actual Operating Expenses. (d) Exclusions from Actual Operating Expenses. Actual Operating Expenses shall exclude the following: (i) leasing commissions, attorneys' fees, costs and disbursements and other expenses incurred in connection with leasing,(29) renovating or improving space for tenants or prospective tenants of the Building; (ii) costs (including permit, license and inspection fees) incurred in renovating or otherwise improving or decorating, painting or redecorating space for tenants or vacant space; (iii) Landlord's costs of any services sold to tenants for which Landlord is entitled to be reimbursed by such tenants as an additional charge or rental over and above the Basic Rental and Actual Operating Expenses payable under the lease with such tenant or other occupant; (iv) any depreciation and amortization on the Building except as expressly permitted herein; (v) costs incurred due to violation by Landlord of any of the terms and conditions of this Lease or any other lease relating to the Building; (vi) interest on debt or amortization payments on any mortgages or deeds of trust or any other debt for borrowed money; (vii) all items and services for which Tenant reimburses Landlord outside of Actual Operating Expenses or pays third persons or which Landlord provides selectively to one or more tenants or occupants of the Building (other than Tenant) without reimbursement; (viii) (30) repairs or other work occasioned by fire, windstorm or other work(31) insurance or condemnation proceeds; __________________________________ 29 lease disputes, 30 the cost of 31 to the extent such cost is reimbursed by -9- 10 (ix) repairs resulting from any defect in the original design or construction of the Building; (32) __________________________________ 32 (x) Landlord's general overhead and administrative expenses (except as otherwise provided in Paragraph 6(c) above); (xi) Advertising and promotional expenditures in excess of $35,000.00 per calendar year; (xii) Fees for professional services including legal, architectural, engineering, accounting and appraisal that (i) are not directly related to the management, operation, repair and maintenance of the Project, or (ii) are related to the sale, leasing, attempted sale or attempted leasing of the Project or any part thereof; (xiii) Ground lease payments, mortgage principal, interest or other charges commonly referred to as "points" or other loan charges and fees in connection with any financing or refinancing associated with the Project, the land it is located on, or with respect to all or any part of either; (xiv) The cost of any electric current other than that furnished to the Premises or other Rentable Area of the Building for purposes other than the operation of the Building; (xv) Except as provided in subparagraph (c)(xv) above, the cost of any additions, repairs, alterations, changes, replacements and other items which are not properly classified as an expense; (xvi) Any costs and expenses payable to affiliates of Landlord to the extent such costs and expenses exceed competitive fees charged by unaffiliated persons or entities of similar skill, competence and reputation; (xvii) The cost of any work or service performed for or facilities furnished to any tenant of the Building to a greater extent or in a manner more favorable to such tenant than performed for or furnished to Tenant; (xviii) The cost of any work or service performed for any facility other than the Project; (xix) Any expenses for repairs or maintenance related to the Project that are reimbursed to Landlord pursuant to warranties or service contracts; (xx) Any costs, penalties and fines including interest thereon incurred due to the violation by Landlord of any building codes, or any other governmental rule or requirement pertaining to the Building, except such as may be incurred by Landlord in contesting in good faith the alleged violation; (xxi) Interest and penalties due to late payment of taxes payable by Landlord, except such as may be incurred by Landlord in contesting in good faith the payment of such taxes; and (xxii) Interest upon the undepreciated (or unamortized) balance of the original cost of items which Landlord is entitled to depreciate (or amortize) as an Actual Operating Expense. -10- 11 (e) Credits. Landlord will credit against Actual Operating Expenses any refunds received as a result of tax contests, after deduction for Landlord's costs in connection with same. (f) Discretionary Items. The foregoing provisions of this Paragraph 6 will not be deemed to require Landlord to furnish or cause to be furnished any service or facility not otherwise required to be furnished by Landlord pursuant to the provisions of this Lease, although Landlord, in Landlord's absolute discretion, may choose to do so from time to time. (g) Estimated Actual Operating Expenses. Landlord shall have the right to estimate Additional Rental to accrue hereunder and Tenant shall pay to Landlord one-twelfth (1/12) of the amount of such estimate monthly with each of Tenant's Basic Rental payments. If Landlord estimates Additional Rental in advance, then by each April 1 or as soon thereafter as practical, Landlord shall furnish to Tenant a statement of Landlord's Actual Operating Expenses for the previous calendar year. If for any calendar year Tenant's Additional Rental collected for the prior year, as a result of payment of Tenant's estimated Additional Rental, is in excess of Tenant's Additional Rental actually due during such prior year, then, so long as Tenant is not in default hereunder, Landlord shall refund to Tenant(33) any overpayment(34). Likewise, Tenant shall pay to Landlord, on demand, any underpayment with respect to the prior year, which obligation of Tenant shall survive the expiration or earlier termination of this Lease. (h) Energy Costs. As additional rental, Tenant shall pay to Landlord along with each of Tenant's Basic Rental payments, Tenant's proportionate share of the(35) costs incurred by Landlord for (i) any and all forms of fuel or energy utilized in connection with the operation, maintenance, and use of the Project, (ii) sales, use, excise and other taxes assessed by governmental authorities on energy sources supplied to the Project, and (iii) other(36) costs of providing energy to the Project. Tenant's proportionate share shall be based on the ratio which the Rentable Area in the Premises (adjusted for office expansions(37)) bears to the number of square feet of all Rentable Area occupied by tenants in the Building from time to time. Landlord shall have the __________________________________ 33 within thirty (30) days 34 , which obligation shall survive the expiration or earlier termination of this Lease 35 actual 36 actual 37 , and excluding the Rentable Area of that portion of the Premises which is separately metered -11- 12 right to estimate such energy costs in the same manner as the estimation of Actual Operating Expenses pursuant to Paragraph 6(g) above. (38) 7. LANDLORD'S OBLIGATIONS. (a) Water, Heat, Air Conditioning, Janitorial and Elevator Service and Maintenance Obligations. Subject to the limitations hereinafter set forth, Landlord agrees to furnish Tenant while occupying the Premises and while Tenant is not in default under this Lease: (i) water (hot and cold) at those points of supply provided for general use of tenants of the Building; (ii) Building Standard heat and air conditioning in season, as determined by Landlord, weekdays (other than holidays) between 7:00 a.m. and 6:00 p.m., and Saturdays between 8:00 a.m. and 1:30 p.m., at such temperatures and in such amounts as are reasonably considered by Landlord to be standard (Landlord shall only furnish heat and air conditioning weekdays after 6:00 p.m., on Saturdays after 1:30 p.m., and on Sundays and holidays at the written request of Tenant (which must be received by Landlord at least twenty-four (24) hours in advance, but no later than 12:00 noon of the preceding Friday, if the request is for Saturday, Sunday or a holiday), and at Tenant's cost payable within fifteen (15) days after receipt of an invoice); (iii) Building Standard janitorial service on weekdays other than holidays for Building installations(39) and Building Standard window washing; (iv) operatorless passenger elevators for ingress __________________________________ 38 (i) Right to Audit. Tenant shall have the right, at Tenant's sole cost and expense, for a period of sixty (60) days after Landlord delivers to Tenant the statement of Landlord's Actual Operating Expenses for the previous calendar year (the "Review Period") to conduct an audit of that portion of Landlord's books and records pertaining only to the Actual Operating Expenses for such preceding calendar year; provided that the accounting firm conducting the audit and Tenant execute a confidentiality agreement for the benefit of Landlord prior to the commencement of any such audit. This paragraph shall not be construed to limit or abate Tenant's obligation to pay the Additional Rental when due as set forth hereinabove. If such audit conducted by Tenant discloses that Tenant has overpaid or underpaid Tenant's proportionate share of Actual Operating Expenses, then, after verification of such audit by Landlord or by accountants selected by Landlord, any overpayment shall be refunded to Tenant (so long as Tenant is not then in default of any of the terms of this Lease, in which event such overpayment shall be applied against any amount Tenant owes as a result of such default) within thirty (30) days after the verification of the audit, or any underpayment shall be paid to Landlord within thirty (30) days after the verification of the audit. If the audit proves that Landlord's calculation of Tenant's Additional Rental for the calendar year under inspection was overstated by more than five percent (5%), then, after verification, Landlord shall pay Tenant's actual reasonable out-of-pocket audit and inspection fees applicable to the review of said calendar year statement within thirty (30) days after receipt of Tenant's invoice therefor. 39 (a copy of the current Building Standard Janitorial Services is attached hereto as Exhibit D, such services are subject to change by Landlord at any time without notice to Tenant) -12- 13 and egress to the floor(s) on which the Premises are located(40); and (v) replacement of Building Standard fluorescent tubes, but(41).(42) Landlord additionally agrees to maintain in the Building the exterior walls, roof, windows, structural steel, load-bearing nondemising walls, floors below the level of Tenant's floor covering(43) and the HVAC, electrical and plumbing systems serving the Premises, but located outside the Premises, subject to the terms and conditions of this Lease which may limit Landlord's maintenance, repair and rebuilding obligations under various circumstances.(44) __________________________________ 40 , including, but not limited to, an operatorless passenger elevator for ingress and egress between the tenth, eleventh, and twelfth floors of the Premises 41 the cost of replacement of such tubes shall be charged by Landlord as an Actual Operating Expense of the Project 42 Notwithstanding any provision to the contrary in Paragraph 7(a)(ii) above, Landlord and Tenant agree that Tenant shall install, at Tenant's sole cost and expense, the equipment necessary to supply heat, air conditioning, and electricity to any floor(s) in the Premises which requires twenty-four (24) hour HVAC service ("Tenant's HVAC Equipment"). In addition, Landlord shall install and maintain, at the sole cost and expense of Tenant, a submeter which shall be read by Landlord and which shall determine the amount of electricity consumed by Tenant per month on such floor(s), and Tenant shall pay to Landlord monthly, upon demand, the actual cost of such electrical service. For the purposes hereof, the terms month or monthly shall include any other billing period used by the utility supplying electricity to the Building. Landlord shall not be liable in any way to Tenant for any failure or defect in the supply or character of electric energy furnished to the separately metered floor(s) by reason of any requirement, act, or omission of the public utility serving the Building with electricity, nor shall Landlord be liable in any way to Tenant for the maintenance or operation of Tenant's HVAC Equipment. All installations of electrical fixtures, appliances, and equipment within the Premises shall be subject to Landlord's prior approval, which approval shall not be unreasonably withheld, conditioned, or delayed. If Tenant desires that Landlord provide such electrical services to the separately metered floor(s) at any time during the Lease Term, then Tenant shall design the installation of Tenant's HVAC Equipment in such a manner so that Landlord is capable of providing electrical service to the separately metered floor(s), and in such event, Tenant shall pay to Landlord all costs associated with Landlord's supply of such electrical power. Landlord acknowledges that Tenant's use of the Premises will require the placement of a separate generator on a portion of the Project to serve the Premises throughout the term of this Lease. Landlord agrees to allow Tenant to install such generator at Tenant's sole cost and expense prior to the commencement of the Lease Term upon a location within the Project to be mutually agreed upon by Landlord and Tenant. Tenant shall maintain the generator at Tenant's sole cost and expense, and shall have access to the generator at all times during the Lease Term. Notwithstanding anything to the contrary set forth herein, Tenant shall not be required to pay any additional rental with respect to the space utilized by the generator. Landlord shall have the right to relocate such generator at any time during the term of this Lease to another area within the Project mutually agreed upon by Landlord and Tenant, at Landlord's sole cost and expense. 43 , the Common Areas and the Service Areas, 44 Landlord agrees that the above-described services and maintenance of the Building and its components shall be comparable to services and maintenance provided in other office buildings in the Dallas, Texas area which are comparable in size, quality and location, throughout the Lease Term and any renewals, extensions or expansions thereof. Landlord has provided Tenant with a copy of the Report of Property Condition Survey for the Project prepared by Law Engineering, Inc., and dated December, 1995 (the "Property Condition Report"). Except as otherwise provided in the Property Condition Report, the HVAC, electrical and plumbing systems serving the Premises are in good working condition on the date of execution of this Lease. -13- 14 (b) Electrical Service. Tenant's use of electrical services furnished by Landlord shall be subject to the following: (i) * Landlord shall not be required to furnish electrical current for computers, electronic data processing equipment, special lighting, equipment that requires more than 110 volts, or any other equipment whose electrical energy consumption exceeds normal office usage.(45) (ii) The amount of electricity consumed by Tenant shall be determined, at the election of Landlord, either (A) based upon a survey performed by a reputable consultant to be selected by Landlord and paid by Tenant, or (B) through a separate meter to be installed, maintained and read by Landlord at the sole cost of Tenant. (iii) If(46) Tenant's requirements for or consumption of electrical services(47) the usage amount specified in Paragraph 7(b)(i) hereof, then(48) subject to the following terms: (A) Tenant shall pay for all costs of installation and maintenance of submeters, wiring, air conditioning and other items required by Landlord, in Landlord's discretion, to accommodate Tenant's excess design loads and capacities. __________________________________ * Except as otherwise provided herein, 45 Landlord acknowledges that Tenant will require excess electrical service in all or a portion of the Premises. Landlord agrees to inform Tenant, in connection with the approval of the Preliminary Plans (as such term is defined in the Construction Agreement), if Tenant's electrical requirements will exceed normal office usage. In the event that Tenant's electrical requirements exceed normal office usage, Landlord will furnish such excess electrical current to Tenant pursuant to the terms and conditions of Paragraph 7(b)(iii) below. 46 , during the approval of the Preliminary Plans for the Premises (as such term is defined in the Construction Agreement attached hereto as Exhibit C), Landlord determines that 47 will exceed 48 Landlord agrees to furnish such excess electrical current to Tenant -14- 15 (B) Tenant shall pay to Landlord, upon demand, the(49) cost of the excess demand and consumption of electrical service at rates(50) by Landlord which shall be in accordance with any Applicable Laws. (C) (c) Interruption of Services. Failure to any extent to make available, or any slow-down, stoppage or interruption of any services described in this Paragraph 7 resulting from any cause whatsoever (other than Landlord's gross negligence(51)) shall not render Landlord liable in any respect for damages, nor be construed as an eviction of Tenant, nor relieve Tenant from fulfillment of any covenant or agreement hereof. Should any service being furnished by Landlord be interrupted for any cause whatsoever, Tenant shall notify Landlord(52) and Landlord shall use reasonable diligence to restore such service promptly.(53) __________________________________ 49 actual 50 paid 51 or willful misconduct 52 in writing 53 Tenant shall be entitled to an equitable diminution of rent based upon the pro rata portion of the Premises which is rendered unfit for occupancy for the Permitted Use, if such interruption of service continues for more than five (5) consecutive business days. Such equitable diminution of rent shall commence on the sixth business day of such interruption and shall constitute Tenant's sole and exclusive remedy in the event of any such occurrence, except as otherwise set forth herein. Notwithstanding anything in this Lease to the contrary, in addition to Tenant's foregoing rights, in the event of a failure by Landlord (except due to Tenant's negligence, gross negligence or willful misconduct) for any reason to provide any of the services described in Paragraphs 7(a)(i) (other than supply of heated water), 7(a)(ii), 7(a)(iv), or 7(b)(i), and if such failure (the "Services Failure") should continue beyond a period of sixty (60) days (or such longer period as is reasonably necessary to remedy such Services Failure, provided Landlord shall continuously and diligently pursue such remedy at all times until such Services Failure is cured), Tenant shall have the right to deliver a written notice thereof (the "Services Notice") to Landlord (with a copy of said notice being sent simultaneously therewith to Landlord's mortgagee in accordance with Paragraph 13(e) hereof). If such Services Failure shall continue uncured by Landlord and Landlord's mortgagee for an additional thirty (30) days after the receipt of the Services Notice, Tenant shall have the right to cure such Services Failure, and Landlord shall reimburse Tenant (which reimbursement Tenant may effect through the withholding of rent) for all reasonable sums expended in so curing such failure. In the event Tenant undertakes to correct or cure the Services Failure, Tenant shall indemnify, defend and hold Landlord harmless from and against any loss, costs, claim, expense or liability arising out of the actions of Tenant or its contractors, agents or employees. The foregoing rental abatement and self-help (and offset) rights of Tenant for a Services Failure shall constitute Tenant's sole and exclusive remedies involving or with respect to a Services Failure, unless such Services Failure is due to the gross negligence or willful misconduct of Landlord. Tenant agrees there shall be no abatement of rent, nor shall Tenant have the right to avail itself of self-help (and offset) rights, on account of a Services Failure due to Tenant's negligence, gross negligence or willful misconduct. The foregoing self-help and offset rights (but not the abatement right) of Tenant for a Services Failure shall be personal solely to PageMart Wireless, Inc., and shall not be available to any assignee or sublessee, other than a Fortune 500 company or an Affiliate (as hereinafter defined). -15- 16 (d) Discontinuance of Service. Landlord reserves the right, upon not less than thirty (30) days written notice to Tenant, to discontinue the availability of electrical service to the Premises. If Landlord elects such option, Tenant will contract directly with such public utility for the continuance of service to the Premises. 8. TENANT'S COVENANTS. Tenant covenants and agrees as follows: (a) Alterations. Tenant shall make no alterations, changes or improvements to the Premises without first submitting to Landlord plans and specifications and obtaining the prior written consent of Landlord(54). All work done by Tenant shall be performed in a good and workmanlike manner by a contractor approved by Landlord, in compliance with Applicable Laws and at such times and in such manner as not to cause interference with construction in progress or with other tenants in the Building.(55) __________________________________ 54 , which consent shall not be unreasonably withheld provided: (i) Tenant notifies Landlord in writing and furnishes Landlord with complete plans and specifications of all such alterations, changes or improvements (collectively, "Modifications") at least ten (10) days prior to undertaking them, (ii) Tenant agrees to provide Landlord with "record" plans and specifications related to such Modifications upon completion of same, (iii) such Modifications are not visible from the exterior of the Premises or the Building, (iv) such Modifications are completed in compliance with all Applicable Laws and do not adversely affect the mechanical, electrical or plumbing systems or the structural integrity of the Building, and (v) Tenant coordinates the construction of such Modifications with the Building's property manager. Notwithstanding the foregoing, Landlord's prior written consent shall not be required for work to the interior of the Premises (hereinafter referred to as "Cosmetic Work") which (i) is not visible from and does not affect the exterior of the Premises or the Building, (ii) is completed in accordance with all Applicable Laws, and (iii) does not adversely affect the mechanical, electrical or plumbing systems or the structural integrity of the Building, so long as Tenant provides advance written notice to Landlord of such Cosmetic Work. Landlord shall, at the written request of Tenant, indicate whether such alterations, changes or improvements must be removed by Tenant upon the expiration or termination of this Lease. Tenant agrees that the Modifications and Cosmetic Work shall be completed at Tenant's sole cost and expense 55 Notwithstanding the foregoing, Landlord's approval of the contractor performing the work shall not be required so long as (i) the work is purely Cosmetic Work to the interior of the Premises, and (ii) the contractor is experienced, licensed, insured, and bonded. -16- 17 (b) Mechanic's and Materialmen's Liens. Tenant shall have no authority or power, express or implied, to create or cause any mechanic's or materialmen's lien, charge or encumbrance of any kind against the Premises or the Project or any portion thereof. Tenant shall promptly cause any such liens which have arisen by reason of any work or materials claimed to have been provided to or undertaken by or through Tenant to be released by payment, bonding or otherwise within thirty (30) days after request by Landlord, and Tenant shall indemnify Landlord against losses arising out of any such claim. Tenant's indemnification of Landlord contained in this Paragraph 8(b) shall survive the expiration or earlier termination of this Lease. (c) Permitted Use of Premises. Tenant shall not permit the Premises to be used for any purpose other than for the use specified in Paragraph 1 of this Lease. Tenant will, at Tenant's sole cost, promptly comply with all Applicable Laws(56). The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any Applicable Law will be conclusive of that fact between Landlord and Tenant. Tenant will conduct its business and occupy the Premises and will control its agents, employees, licensees and(57) invitees in such a manner so as not to create any nuisance or interfere with, annoy or disturb any of the other tenants in the Building or Landlord in its management of the Building and so as not to injure the reputation of the Building. (d) Repairs. Tenant will not in any manner deface or injure the Building, and will pay the cost of repairing and replacing any damage or injury done to the Building or any part thereof by Tenant or Tenant's agents, contractors or employees(58). Tenant shall throughout the Lease Term keep the Premises free from deterioration, waste and nuisance of any kind, excluding (i) ordinary and customary wear and tear, and (ii) damage resulting from a fire or other casualty. Tenant agrees to keep the Premises in good condition and repair and Tenant shall make all necessary repairs and replacements(59). If Tenant fails to make such repairs or replacements within fifteen (15) days after notice from Landlord, Landlord may at its option make such repairs or replacements, and Tenant shall upon demand pay Landlord for the cost thereof. __________________________________ 56 , except to the extent that the Applicable Laws apply to obligations and responsibilities of Landlord pursuant to the terms of this Lease 57 will use its best efforts to control its 58 to the extent such damage or injury is not covered by the insurance maintained by Landlord pursuant to Paragraph 10 of this Lease 59 for which Tenant is responsible pursuant to the terms of this Lease -17- 18 (e) Security. Tenant shall take all reasonable steps necessary to adequately secure the Premises from unlawful intrusion, theft, fire and other hazards, and shall keep and maintain all security devices in or on the Premises in good working order, including, but not limited to, locks, smoke detectors and burglar alarms, and shall cooperate with Landlord and other tenants in the Building with respect to Building security matters. 9. ASSIGNMENT AND SUBLETTING. (a) Assignment and Subletting. Tenant shall not sublet the Premises in whole or in part or market the Premises for sublease and shall not sell, assign or in any manner transfer this Lease or any interest herein, directly or indirectly (by transfer of control of Tenant, for example), or voluntarily or by operation of law or otherwise, or permit any transfer of Tenant's interest created hereby, or allow any lien upon Tenant's interest by operation of law or otherwise, or permit the use or occupancy of the Premises or any part thereof, by anyone other than Tenant, nor shall Tenant sublease space in the Building from another tenant thereof, without Landlord's prior written consent(60). (61) __________________________________ 60 , which consent shall not be unreasonably withheld or delayed so long as (i) the assignee's or sublessee's financial condition is reasonably satisfactory to Landlord, in that such assignee's or sublessee's financial statements indicate the ability to pay all of such party's obligations under the proposed assignment or sublease, as applicable; (ii) the assignee or sublessee has a net worth of at least $5,000,000.00; (iii) the assignee's or sublessee's use of the Premises complies with the Permitted Use provisions hereof; (iv) the assignee or sublessee does not have a bad or negative reputation in the business community; (v) the proposed assignment or sublease will not have an adverse effect on the real estate investment trust qualification tests applicable to Landlord and its affiliates; (vi) Tenant is not in default under the Lease at the time of such assignment or subletting; and (vii) Tenant shall remain liable for the performance of each and every term, covenant and condition hereof, as the same may be amended from time to time 61 Notwithstanding the foregoing, Tenant may assign this Lease to an Affiliate (as hereinafter defined) without the prior written consent of Landlord, provided that (i) such assignee's use of the Premises complies with the Permitted Use provisions hereof; (ii) assignee does not have a bad or negative reputation in the business community; (iii) Tenant notifies Landlord in advance of such assignment, which notice shall include the identity of such assignee; (iv) such assignee has a net worth at the time of such assignment of not less than $5,000,000.00; (v) such assignee agrees in writing to assume and fully perform and observe the obligations and agreements of Tenant under this Lease; (vi) Tenant is not in default under the Lease at the time of such assignment; and (vii) Tenant remains liable for the performance of each and every term, covenant and condition hereof, as the same may be amended from time to time. Any permitted assignment of Tenant's interest in this Lease shall not become effective until an assumption agreement is executed by the permitted assignee, including an Affiliate, which assumption agreement shall be approved by Landlord and promptly delivered to Landlord following the execution thereof. As used herein, "Affiliate" means any person or entity controlling, controlled by or under common control with Tenant. "Control" as used herein means the power, directly or indirectly, to direct or cause the direction of the management and policies of the controlled person or entity. The ownership, directly or indirectly, of at least fifty-one percent (51%) of the voting securities of, or the possession of the right to vote in the ordinary direction of its affairs at least fifty-one percent (51%) of the voting interest in, any person or entity shall be presumed to constitute such control. In addition to the foregoing, Tenant may assign this Lease to a Fortune 500 company, without the prior written consent of Landlord, provided that (i) such assignee's use of the Premises complies with the Permitted Use provisions hereof; (ii) Tenant notifies Landlord in advance of such assignment, which notice shall include the identity of such assignee; (iii) Tenant is not in default under the Lease at the time of such assignment; and (iv) such assignee agrees in writing to assume and fully perform and observe the obligations and agreements of Tenant under this Lease. Any permitted assignment of Tenant's interest in this Lease to a Fortune 500 company shall not become effective until an assumption agreement is executed by the Fortune 500 company, which assumption agreement shall be approved by Landlord and promptly delivered to Landlord following the execution thereof. Upon delivery to Landlord of an assumption agreement executed by the Fortune 500 company, Tenant shall be released from liability for the performance of the terms, covenants and conditions of this Lease, as the same may be amended from time to time. -18- 19 If this Lease or any interest in this Lease is sold, assigned or transferred, or Tenant subleases any part of the Premises, without Landlord's consent, Landlord may, cumulative of any other right or remedy available to Landlord, elect to terminate this Lease (as it affects the portion of the Premises sought to be sublet or assigned) as of the effective date of the proposed transfer. Landlord's acceptance of any name for listing on the Building directory will not be deemed, nor will it substitute for, Landlord's consent, as required by this Lease, to any sublease, assignment or other occupancy of the Premises. (b) Consent to Assignment. Consent by Landlord to one or more assignments or sublettings shall not operate as a waiver of Landlord's rights as to any subsequent assignments and sublettings. (62)any assignment or subletting, Tenant shall at all times remain fully responsible and liable for the payment of the rent and other sums herein specified and for compliance with all of Tenant's other obligations under this Lease, and Landlord may proceed against Tenant for the enforcement of such obligations without first proceeding against any other party. No direct collection by Landlord from any such assignee or sublessee shall be construed to constitute a novation or a release of Tenant from the further performance of its obligations hereunder. If the proposed sublessee or assignee is subject to compliance with additional requirements under The Americans with Disabilities Act beyond those requirements which are applicable to the Tenant desiring to sublet or assign, Landlord may condition Landlord's consent upon receipt of (i) plans and specifications acceptable to Landlord for complying with the additional requirements, and (ii) security acceptable to Landlord that such construction will be completed timely and lien-free. In addition, any rights which Tenant may have relating to the renewal or extension of the Lease or the expansion of the Premises, if any, are personal to Tenant and shall not be available to any proposed or actual sublessee, assignee or transferee(63). __________________________________ 62 Except as otherwise expressly provided herein, notwithstanding 63 , other than a Fortune 500 company or an Affiliate, if any -19- 20 (c) Excess Rents. If any rents or other sums received by Tenant under any sublease are in excess of the rent and other sums payable by Tenant under this Lease (prorated for a sublease of less than one hundred percent (100%) of the Premises), or if any additional consideration is paid to Tenant by any assignee under any assignment, then such excess rents under any sublease or such additional consideration under any assignment (64) shall be paid by Tenant to Landlord as additional rent hereunder within ten (10) days after Tenant receives the same. Tenant will exercise its best efforts to structure any sublease or assignment so that the portion of the excess rents which become payable to Landlord will not have an adverse effect on the real estate investment trust qualification tests applicable to Landlord and its affiliates. (d) Landlord's Right to Transfer. Landlord shall have the right to transfer, assign and convey, in whole or in part, the Building and any and all of its rights under this Lease, and in such event, Landlord shall thereby be released from any further obligations hereunder(65), and Tenant agrees to look solely to such successor-in-interest of Landlord for performance of such obligations. 10. INDEMNITY AND INSURANCE. (a) (66)Indemnity(67). (68)Tenant hereby agrees to indemnify, protect, defend and hold harmless Landlord and its partners, affiliated companies, officers, directors, shareholders, employees and agents (collectively, "Landlord Indemnitees") for, from and against all liabilities, claims, fines, penalties, costs, damages or injuries to persons, damages to property, losses, liens, causes of action, suits, judgments and expenses (including court costs, attorneys' fees and costs of investigation), of any nature, kind or description of any person or entity, directly or indirectly arising out of, caused by, or resulting from (in whole or part)(69) Tenant's construction of or use, occupancy or __________________________________ 64 (after deducting therefrom all expenses and concessions or inducements (excluding Tenant's internal overhead and administrative and legal expenses) incurred or provided by Tenant in connection with such assignment or sublease) 65 (except for any obligations accruing prior to such transfer which are not expressly assumed by the successor- in-interest of Landlord) 66 (i) 67 of Landlord by Tenant 68 Subject to the provisions of Paragraph 10(c) of this Lease, 69 (A) -20- 21 enjoyment of the Premises,(70) any activity, work or other things done, permitted or suffered by Tenant and its agents and employees in or about the Premises,(71) any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease including, but not limited to, Tenant's security obligations set forth in Paragraph 8(f) of this Lease,(72) any act, omission, negligence or willful misconduct of Tenant or any of its agents, contractors, employees, business invitees or licensees, or(73) damage to Tenant's property, or the property of Tenant's agents, employees, contractors, business invitees or licensees, located in or about the Premises (collectively, "Tenant Liabilities"), EVEN IF SUCH TENANT LIABILITIES ARE CAUSED SOLELY OR IN PART BY THE NEGLIGENCE OF LANDLORD OR ANY OTHER LANDLORD INDEMNITEE, BUT NOT IF SUCH TENANT LIABILITIES ARE CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LANDLORD OR ANY OTHER LANDLORD INDEMNITEE. Tenant shall promptly advise Landlord in writing of any action, administrative or legal proceeding or investigation as to which this indemnification may apply, and Tenant, at Tenant's expense, shall assume on behalf of Landlord (and the other Landlord Indemnitees) and conduct with due diligence and in good faith the defense thereof with counsel satisfactory to Landlord; provided, however, that any Landlord Indemnitee shall have the right, at its option, to be represented therein by advisory counsel of its own selection and at its own expense. In the event of failure by Tenant to fully perform in accordance with this Paragraph 10(a), Landlord, at its option, and without relieving Tenant of its obligations hereunder, may so perform, but all costs and expenses so incurred by Landlord in that event shall be reimbursed by Tenant to Landlord, together with interest on the same from the date any such expense was paid by Landlord until reimbursed by Tenant, at the rate of interest provided to be paid on judgments, by the law of the jurisdiction to which the interpretation of this Lease is subject. This indemnification shall not be limited to damages, compensation or benefits payable under insurance policies, workers' compensation acts, disability benefit acts or other employees' benefit acts and shall survive the expiration or earlier termination of this Lease. (74) __________________________________ 70 (B) 71 (C) 72 (D) 73 (E) 74 (ii) Indemnity of Tenant by Landlord. Subject to the provisions of Paragraph 10(c) of this Lease, Landlord hereby agrees to indemnify, protect, defend and hold harmless Tenant and its partners, officers, directors, shareholders, employees and agents (collectively, "Tenant Indemnitees") for, from and against all liabilities, claims, fines, penalties, costs, damages to persons, damages to property, losses, liens, causes of action, suits, judgments and expenses (including court costs, attorneys' fees and costs of investigation), of any nature, kind or description of any person or entity, directly or indirectly arising out of, caused by, or resulting from (in whole or part) (A) any activity, work or other things done, permitted or suffered by Landlord and its agents and employees in or about the Common Areas, (B) any breach or default in the performance of any obligation on Landlord's part to be performed under the terms of this Lease, or (C) any gross negligence or willful misconduct of Landlord or any of its agents, contractors, employees, business invitees or licensees (collectively, "Landlord Liabilities"), EVEN IF SUCH LANDLORD LIABILITIES ARE CAUSED SOLELY OR IN PART BY THE NEGLIGENCE OF TENANT OR ANY OTHER TENANT INDEMNITEE, BUT NOT IF SUCH LIABILITIES ARE CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF TENANT OR ANY OTHER TENANT INDEMNITEE. Landlord shall promptly advise Tenant in writing of any action, administrative or legal proceeding or investigation as to which this indemnification may apply, and Landlord, at Landlord's expense, shall assume on behalf of Tenant (and the other Tenant Indemnitees) and conduct with due diligence and in good faith the defense thereof; provided, however, that any Tenant Indemnitee shall have the right, at its option, to be represented therein by advisory counsel of its own selection and at its own expense. In the event of failure by Landlord to fully perform in accordance with this indemnification paragraph, Tenant, at its option, and without relieving Landlord of its obligations hereunder, may so perform, but all costs and expenses so incurred by Tenant in that event shall be reimbursed by Landlord to Tenant, together with interest on the same from the date any such expense was paid by Tenant until reimbursed by Landlord, at the rate of interest provided to be paid on judgments, by the law of the jurisdiction to which the interpretation of this Lease is subject. This indemnification shall not be limited to damages, compensation or benefits payable under insurance policies, workers' compensation acts, disability benefit acts or other employees' benefit acts, but shall be limited by the provisions of Paragraph 19(c) hereof. -21- 22 (b) Insurance. (i) (75) Tenant at all times during the Lease Term shall, at its own expense, keep in full force and effect (A) commercial general liability insurance providing coverage against bodily injury and disease, including death resulting therefrom, personal injury and property damage to a combined single limit of $3,000,000 to one or more than one person as the result of any one accident or occurrence, which shall include provision for contractual liability coverage insuring Tenant for the performance of its indemnity obligations set forth in Paragraphs 10(a) and 18 of this Lease, (B) worker's compensation insurance to the statutory limit and employer's liability insurance to the limit of $500,000 per occurrence, and (C) all risk personal property insurance covering full replacement value of all of Tenant's personal property. Landlord shall be named an additional insured on each of said policies (excluding the worker's compensation policy) and said policies shall be issued by an insurance company or companies(76) acceptable to Landlord. Each of said policies shall also include a waiver of subrogation provision or endorsement in favor of Landlord, and an endorsement providing __________________________________ 75 Tenant's Insurance. 76 reasonably -22- 23 that Landlord shall receive ninety (90) days prior notice of any cancellation of, non-renewal of, reduction of coverage or material change in coverage on said policies. Tenant hereby waives its right of recovery(77) of any amounts paid by Tenant or on Tenant's behalf to satisfy applicable worker's compensation laws. The policies or duly executed certificates for the same, together with satisfactory evidence of the payment of the premiums therefor, shall be deposited with Landlord on the date Tenant first occupies the Premises and upon renewals of such policies not less than fifteen (15) days prior to the expiration of the term of such coverage. (ii) It is expressly understood and agreed that the coverages required represent Landlord's minimum requirements and such are not to be construed to void or limit Tenant's indemnity obligations contained in this Lease. Neither shall (A) the insolvency, bankruptcy or failure of any insurance company carrying Tenant, (B) the failure of any insurance company to pay claims occurring nor (C) any exclusion from or insufficiency of coverage be held to affect, negate or waive any of Tenant's indemnity obligations under Paragraphs 10(a) and 18 or any other provision of this Lease. With respect to insurance coverages, except worker's compensation, maintained hereunder by Tenant and insurance coverage separately obtained by Landlord, all insurance coverages afforded by policies of insurance maintained by Tenant shall be primary insurance as such coverages apply to Landlord, and such insurance coverages separately maintained by Landlord shall be excess, and Tenant shall have its insurance policies endorsed to reflect that policies maintained by Tenant naming Landlord as an additional insured are primary, and policies separately maintained by Landlord are excess. The amount of liability insurance under insurance policies maintained by Tenant shall not be reduced by the existence of insurance coverage under policies separately maintained by Landlord. Tenant shall be solely responsible for any premiums, assessments, penalties, deductible assumptions, retentions, audits, retrospective adjustments or any other kind of payment due under its policies. (iii) Tenant's occupancy of the Premises without delivering the certificates of insurance shall not constitute a waiver of Tenant's obligations to provide the required coverages. If Tenant provides to Landlord a certificate that does not evidence the coverages required herein, or that is faulty in any respect, such shall not constitute a waiver of Tenant's obligations to provide the proper insurance. __________________________________ 77 from Landlord -23- 24 (78) (c) Mutual Waivers of Recovery. It is the intent of Landlord and Tenant not to hold each other responsible for that portion of any loss or damage paid or reimbursed by an insurer of Landlord or Tenant under any fire, extended coverage or other property insurance policy maintained by Tenant with respect to its Premises or by Landlord with respect to the(79). Therefore, with respect to the amount of any damage, loss, claim or liability paid or reimbursed by an insurer under any fire, extended coverage or property insurance policy maintained by Tenant with respect to the Premises, or Landlord with respect to the(80), Landlord, Tenant and all parties claiming under them each mutually release and discharge each other from such damages, losses, claims or liabilities, no matter how caused, including negligence, and each waives any right of recovery from the other including, but not limited to, claims for contribution or indemnity, which might otherwise exist on account thereof. Any fire, extended coverage or property insurance policy maintained by Tenant with respect to the Premises, or Landlord with respect to the(81), shall contain, in the case of Tenant's policies, a waiver of subrogation provision or endorsement in favor of Landlord, and in the case of Landlord's policies, a waiver of subrogation provision or endorsement in favor of __________________________________ 78 (iv) Landlord's Insurance. (A) Landlord shall, at its own cost and expense, keep in full force and effect commercial general liability insurance covering the Project, insuring against claims for personal or bodily injury or death or property damage caused by the negligence of Landlord occurring upon, in or about the Project to afford protection to the limit of not less than $1,000,000 combined single limit with respect to injury or death to any number of persons and property damage arising out of any one occurrence. This insurance coverage shall extend to any liability of Landlord arising out of the indemnities provided for in this Lease. (B) Landlord shall, at its own cost and expense, keep in full force and effect a policy or policies of "all risk" property insurance covering the Project (excluding property required to be insured by Tenant) endorsed to provide replacement cost coverage up to policy limits in providing protection against perils included within the applicable standard form of fire and extended coverage insurance policy, together with insurance against sprinkler damage, vandalism, malicious mischief, and such risks as Landlord may from time to time determine, and with any such deductibles as Landlord may from time to time determine. (C) Any insurance provided for in this subparagraph may be effected by a policy or policies of blanket insurance covering additional items or locations or assureds, provided that the requirements of this subparagraph are otherwise satisfied. Tenant shall have no rights in any policy or policies maintained by Landlord. 79 Project 80 Project 81 Project -24- 25 Tenant, or, in the event that such insurers cannot or will not include or attach such waiver of subrogation provision or endorsement, Tenant and Landlord shall obtain the approval and consent of their respective insurers, in writing, to the terms of this Lease. Neither Tenant nor its insurers shall be entitled to receive any contribution from any insurance policies separately maintained by Landlord, and Tenant agrees to indemnify, protect, defend and hold harmless Landlord and any of Landlord's insurers from any claim, suit or cause of action asserted or brought by Tenant's insurers for, on behalf of, or in the name of Tenant, including but not limited to, claims for contribution, indemnity or subrogation.(82) The mutual releases, discharges and waivers contained in this provision shall apply EVEN IF THE LOSS OR DAMAGE TO WHICH THIS PROVISION APPLIES IS CAUSED SOLELY OR IN PART BY THE NEGLIGENCE OF LANDLORD OR TENANT. (d) Business Interruption. Landlord shall not be responsible for, and Tenant releases and discharges Landlord from, and Tenant further waives any right of recovery from Landlord for, any loss from business interruption or loss of use of the Premises suffered by Tenant in connection with Tenant's use or occupancy of the Premises, EVEN IF SUCH LOSS IS CAUSED SOLELY OR IN PART BY THE NEGLIGENCE OF LANDLORD. (e) Adjustment of Claims. Tenant shall cooperate with Landlord and Landlord's insurers in the adjustment of any insurance claim pertaining to the Building or Landlord's use thereof.(83) (f) Increase in Landlord's Insurance Costs. Tenant agrees to pay to Landlord any increase in premiums for Landlord's insurance policies resulting from Tenant's use or occupancy of the Premises. (g) Failure to Maintain Insurance. Any failure of Tenant(84) to obtain and maintain the insurance policies and coverages required hereunder or failure by Tenant(85) __________________________________ 82 Neither Landlord nor its insurers shall be entitled to receive any contribution from any insurance policies separately maintained by Tenant, and Landlord agrees to indemnify, protect, defend and hold harmless Tenant and any of Tenant's insurers from any claim, suit or cause of action asserted or brought by Landlord's insurers for, on behalf of, or in the name of Landlord, including but not limited to, claims for contribution, indemnity or subrogation. 83 Landlord shall cooperate with Tenant and Tenant's insurers in the adjustment of any insurance claim pertaining to the Premises and Tenant's use thereof. 84 or Landlord 85 or Landlord -25- 26 to meet any of the insurance requirements of this Lease shall constitute a material breach hereof(86) shall entitle Landlord to pursue, exercise or obtain any of the remedies provided for in Paragraph 13, and Tenant shall be solely responsible for any loss suffered by Landlord as a result of such failure. In the event of failure by Tenant to maintain the insurance policies and coverages required by this Lease or to meet any of the insurance requirements of this Lease, Landlord, at its option, and without relieving Tenant of its obligations hereunder, may obtain said insurance policies and coverages or perform any other insurance obligation of Tenant, but all costs and expenses incurred by Landlord in obtaining such insurance or performing Tenant's insurance obligations shall be reimbursed by Tenant to Landlord, together with interest on same from the date any such cost or expense was paid by Landlord until reimbursed by Tenant, at the rate of interest provided to be paid on judgments, by the law of the jurisdiction to which the interpretation of this Lease is subject. 11. FIRE OR CASUALTY. In the event that (a) the Premises or the Building should be so damaged by fire or other casualty that rebuilding or repairs cannot be completed within one (1) year after the date of commencement of reconstruction, as determined by Landlord, or (b) the Premises shall be so damaged during the last two (2) years of the Lease Term to the extent that more than thirty percent (30%) of the area thereof is rendered untenantable, Landlord may at its option terminate this Lease within ninety (90) days after such damage by giving written notice to Tenant, in which event rent shall be abated effective with the date of such damage.(87) __________________________________ 86 . Any such failure by Tenant 87 Tenant shall have the right to terminate this Lease following the occurrence of a fire or other casualty under the following conditions: (a) If the time it will take to restore the Premises to substantially its condition immediately prior to the fire or other casualty will exceed two hundred seventy (270) days after the date of such casualty, Landlord shall give Tenant written notice thereof within ninety (90) days after the occurrence of the casualty, and Tenant shall have the option to terminate this Lease by giving Landlord written notice within thirty (30) days after Tenant's receipt of Landlord's notice. (b) If the time it takes to restore the Premises to substantially its condition immediately prior to the fire or other casualty exceeds two hundred seventy (270) days after the date of such casualty, Tenant shall have the option to terminate this Lease by giving Landlord written notice within thirty (30) days after the expiration of such two hundred seventy (270) day period. (c) If the parking facilities associated with the Building are so damaged by fire or other casualty that Landlord is unable to provide at least fifty percent (50%) of the parking spaces to which Tenant is entitled under this Lease, and if Landlord is unable to (i) restore the parking facilities to substantially their condition immediately prior to the fire or other casualty within two hundred seventy (270) days after the date of such casualty, and (ii) provide temporary alternative parking arrangements, including transportation which provides reasonable access to the Building, within a one and one-half (1.5) mile radius of the Building within thirty (30) days after the date of such casualty, then Tenant shall have the option to terminate this Lease by giving Landlord written notice within thirty (30) days after the expiration of such thirty (30) day or two hundred seventy (270) day period. If Tenant is unable to use, or Landlord is unable to provide, all or a portion of the parking spaces to which Tenant is entitled under this Lease, Landlord shall abate Tenant's obligation to pay parking charges for such spaces for so long as Tenant does not have the use thereof. -26- 27 If, following any such casualty, Landlord(88) does not terminate this Lease, or in the event of casualty damage of a lesser extent to the Building, Landlord shall, following receipt of insurance proceeds if such proceeds are made available to Landlord by the holder of any mortgage encumbering the Project or the Building, rebuild or repair the Premises or the Building to substantially the same condition in which they were immediately prior to the happening of the fire or other casualty, except that Landlord shall not be required to (i) spend more than the amount of insurance proceeds actually received, or (ii) rebuild, repair or replace any part of the furniture, equipment, fixtures and other personal property which may have been placed by Tenant or other tenants within the Building or the Premises. Landlord shall allow Tenant a fair diminution of rental during the time the Premises are unfit for occupancy, and at Landlord's option, the Lease Term shall be extended for a period equal to the period that the Premises are unfit for occupancy. 12. CONDEMNATION. In the event that the Premises or the Building or any part thereof shall be taken for public use or condemned under eminent domain or conveyed under threat of such a taking or condemnation, or access to the Premises precluded by any such event, either Landlord or Tenant may cancel and terminate this Lease as it affects the portion of the Premises taken, or the portion to which access is precluded, by giving notice to the other within ten (10) days after the date on which title to the property taken vests in the condemnor. Notwithstanding the foregoing, Tenant may not terminate this Lease pursuant to the preceding sentence as a result of the condemnation of the Building or any part thereof unless such condemnation materially affects Tenant's use of or access to the Premises.(89) If this Lease is not terminated as to all of the Premises following any of said actual takings or conveyances of any part of the Premises, __________________________________ 88 or Tenant 89 In the event of a taking or condemnation which materially affects Tenant's use of or access to more than fifty percent (50%) of the Premises, Tenant shall have the option to terminate this Lease with respect to the entire Premises by giving Landlord written notice within ten (10) days after the date on which title to the property taken vests in the condemnor. Furthermore, in the event of a taking or condemnation of the parking facilities associated with the Building which affects Tenant's use of or access to more than fifty percent (50%) of the parking spaces to which Tenant is entitled under this Lease, and in the event that Landlord is unable to provide alternative parking arrangements, including transportation which provides reasonable access to the Building, within a one and one-half (1.5) mile radius of the Building within thirty (30) days after the date on which title to the property taken vests in the condemnor, Tenant shall have the option to terminate this Lease with respect to the entire Premises by giving Landlord written notice within sixty (60) days after the date on which title to the property taken vests in the condemnor. -27- 28 then Landlord shall, to the extent of an equitable proportion of the award for the portion of the Premises taken (excluding any award for land) and to the extent such award is made available to Landlord from the holder of any mortgage encumbering the Project or the Building, make such repairs to the Premises as are necessary to constitute a complete architectural and tenantable unit.(90) In the event of a partial taking or conveyance of the Premises, Landlord shall allow Tenant a fair diminution of rental.(91) Tenant shall not be entitled to claim, or have paid to Tenant, any compensation or damages whatsoever for or on account of any taking or conveyance of any right, interest or estate of Tenant under this Lease, and Tenant hereby relinquishes and assigns to Landlord any rights to any such compensation or damages. Tenant does not hereby waive or release claims for moving expenses, inconvenience or business interruption related to a condemnation of the Premises, but any such claim shall be asserted, if at all, in a proceeding independent of Landlord's primary condemnation suit. 13. DEFAULT AND REMEDIES. (a) Events of Default. The following events shall be deemed to be events of default (herein so called) by Tenant under this Lease: (i) Tenant shall fail to pay within five (5) days of the due date Basic Rental, Additional Rental or any other rental or sums payable by Tenant hereunder;(92) (ii) Tenant shall fail to comply with or observe any other provision of this Lease and such failure shall continue for(93) days after written notice to Tenant(94) (or, in the case of Tenant's failure to comply with or observe any other single provision of this Lease more than three (3) times during the Lease Term, upon the occurrence of the fourth and all subsequent such failures, without notice from Landlord); (iii) Tenant or any guarantor of Tenant's obligations hereunder shall __________________________________ 90 If Landlord elects not to make the repairs to the Premises as described in the immediately preceding sentence, then Landlord shall notify Tenant of such election and Tenant shall have the option to terminate this Lease by giving Landlord written notice within thirty (30) days after receipt of Landlord's notice. 91 In the event of a taking or condemnation which affects Tenant's use of or access to all or a portion of the parking spaces to which Tenant is entitled under this Lease and in the event that Landlord is unable to provide alternative parking arrangements, including transportation which provides reasonable access to the Building, within a one and one-half (1.5) mile radius of the Building, Landlord shall abate Tenant's obligation to pay parking charges for the affected spaces. 92 provided, however, that the first two (2) times during any consecutive twelve (12) month period Tenant so fails to timely pay any of such amounts, Landlord shall provide Tenant with written notice (either by hand delivery or by facsimile with electronic confirmation), and a period of five (5) days in which to pay same before Tenant shall be in default hereunder; 93 thirty (30) 94 or, if such failure cannot be cured within such thirty (30) day period with reasonable diligence, such failure shall continue beyond a reasonable time not to exceed thirty (30) days, provided that Tenant has commenced curative action within such thirty (30) day period and is diligently attempting to cure such failure -28- 29 make a general assignment for the benefit of creditors; (iv) any petition shall be filed by or against Tenant or any guarantor of Tenant's obligations hereunder under the United States Bankruptcy Code, as amended, or under any similar law or statute of the United States or any state thereof, and such petition shall not be dismissed within(95) days of filing, or Tenant or any guarantor of Tenant's obligations hereunder shall be adjudged bankrupt or insolvent in proceedings filed thereunder; (v) a receiver or trustee shall be appointed for all or substantially all of the assets of Tenant or any guarantor of Tenant's obligations hereunder, and such appointment shall not be vacated or otherwise terminated, and the action in which such appointment was ordered dismissed, within(96) days of filing; (vi) Tenant shall fail to take possession of or shall desert, abandon or vacate the Premises; (vii) or (viii) the occurrence of an event described in clauses (iv) or (v) of this Paragraph 13(a) (without regard to any cure periods contained therein) and the failure thereafter of Tenant (A) to timely and fully make any payment of rent or any other sum of money due hereunder or (B) to perform or observe any other covenant, condition or agreement to be performed or observed by it hereunder. (b) Remedies. (97)the occurrence of any event of default specified in this Lease, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever and without releasing Tenant from any obligation under this Lease(98): (i) Landlord may enter the Premises without terminating this Lease and perform any covenant or agreement or cure any condition creating or giving rise to an event of default under this Lease and Tenant shall pay to Landlord on demand, as additional rent, the amount expended by Landlord in performing such covenants or agreements or satisfying or observing such condition. Landlord or its agents or employees shall have the right to enter the Premises, and such entry and such performance shall not terminate this Lease or constitute an eviction of Tenant. __________________________________ 95 sixty (60) 96 sixty (60) 97 Except as otherwise provided below, upon 98 Notwithstanding anything to the contrary contained herein, upon the occurrence of an event of default by Tenant based solely on Paragraph 13(a)(vi) above, and so long as Tenant continues to comply with all other terms and provisions of this Lease, including, but not limited to, Tenant's obligation to pay Basic Rental, Additional Rental and all other sums payable by Tenant under the Lease, Landlord's only remedy shall be the option to terminate Tenant's right of possession with respect to that portion of the Premises which Tenant has either deserted, abandoned or vacated, without terminating this Lease, in accordance with the terms and provisions of this Paragraph 13(b). -29- 30 (ii) Landlord may terminate this Lease by written notice to Tenant (and not otherwise) or Landlord may terminate Tenant's right of possession without terminating this Lease. In either of such events Tenant shall surrender possession of and vacate the Premises immediately and deliver possession thereof to Landlord, and Tenant hereby grants to Landlord full and free license to enter the Premises, in whole or in part, with or without process of law and to expel or remove Tenant and any other person, firm or corporation who may be occupying the Premises or any part thereof and remove any and all property therefrom, using such lawful force as may be necessary. (iii) In the event Landlord elects to re-enter or take possession of the Premises after Tenant's default, with or without terminating this Lease, Landlord may change or pick locks or alter security devices and lock out, expel or remove Tenant and any other person who may be occupying all or any part of the Premises without being liable for any claim for damages. Notwithstanding anything to the contrary contained herein or in Section 93.002 of the Texas Property Code, Landlord may exercise any and all of its rights or remedies under this Lease following an event of default by Tenant without compliance with Section 93.002 of the Texas Property Code, the benefits of which are hereby expressly waived by Tenant. (iv) If Landlord elects to re-enter or take possession of the Premises without terminating this Lease, then Tenant shall be liable for and shall pay to Landlord all Basic Rental and any other amounts of money due to Landlord hereunder as of the date of such election. Tenant shall also pay to Landlord all Basic Rental required to be paid by Tenant during the remainder of the Lease Term as such amounts become due, diminished by any net sums received by Landlord, if any, through reletting the Premises during said period (after deducting all expenses incurred by Landlord in connection with any reletting of the Premises). Landlord is not obligated to relet the Premises, and if no reletting occurs, Tenant shall be responsible for the full amounts due. If Landlord elects to relet, Landlord shall have the sole and unfettered right to relet all or any part of the Premises for such rent and upon such terms as shall be satisfactory to Landlord (including but not limited to the right to relet the Premises for a term shorter or longer than that remaining under this Lease, the right to relet the Premises as a part of a larger area and the right to change the character or use made of the Premises). Tenant shall not in any event be entitled to any sums collected in connection with a reletting of the Premises that exceed the amount of Basic Rental and other sums of money due hereunder. Landlord shall not be required to wait until the expiration of the Lease Term in order to collect any such deficiencies, and shall have the right to file suit from time to time, on one or more occasions, to collect the deficiencies then due. Any such suit shall not -30- 31 prejudice in any way the right of Landlord to bring similar actions for any subsequent deficiency or deficiencies. (v) Notwithstanding any prior election by Landlord to not terminate this Lease, Landlord may at any time, including subsequent to any re-entry or taking of possession of the Premises as allowed hereinabove, elect to terminate this Lease. Tenant shall be liable for and shall immediately pay to Landlord the amount of all Basic Rental and other sums of money due under this Lease as may have accrued as of the date of termination. Tenant shall also immediately pay to Landlord, as agreed and liquidated damages, an amount of money equal to the Basic Rental and other amounts due for the remaining portion of the Lease Term (had such term not been terminated by Landlord prior to the expiration of the Lease Term), less the fair rental value of the Premises for the residue of the Lease Term, both discounted to their present value based upon an interest rate of eight percent (8%) per annum. In determining fair rental value, Landlord shall be entitled to take into account the time and expenses necessary to obtain a replacement tenant or tenants, including anticipated expenses hereinafter described relating to recovery, preparation and reletting of the Premises; provided, however, the parties hereto stipulate and agree that the fair rental value shall never be deemed to exceed eighty-five percent (85%) of the Basic Rental provided for herein for said residual period. If Landlord elects to relet the Premises, or any portion thereof, before presentation of proof of such liquidated damages, the amount of rent reserved upon such reletting shall be deemed prima facie evidence of the fair rental value of the portion of the Premises so relet. (vi) In addition to any sum provided to be paid above, Tenant shall also be liable for and shall immediately pay to Landlord all broker's fees incurred by Landlord in connection with any reletting of the whole or any part of the Premises, the costs of removing and storing Tenant's or any other occupant's property, the cost of repairing, altering, remodeling, renovating or otherwise putting the Premises into a condition acceptable to a new tenant or tenants, the cost of removal and replacement of signage and all reasonable expenses by Landlord in enforcing Landlord's remedies, including reasonable attorneys' fees. (vii) Landlord may apply Tenant's Security Deposit to the extent necessary to make good any rent arrearage, to pay the cost of remedying Tenant's default or to reimburse Landlord for expenditures made or damages suffered as a consequence of Tenant's default. Following any such application of the Security Deposit, Tenant shall pay to Landlord on demand the amount so applied in order to restore the Security Deposit to its original amount. (viii) Nothing contained in this Paragraph 13(b) shall be construed as imposing any enforceable duty upon Landlord to relet the Premises or otherwise -31- 32 mitigate or minimize Landlord's damages by virtue of Tenant's default. Landlord shall not be liable in any manner, nor shall Tenant's obligations hereunder be diminished, by the failure of Landlord to relet the Premises, or in the event of reletting to collect rent. (c) Effect of Suit or Partial Collection. Institution of a forcible detainer action to re-enter the Premises shall not be construed to be an election by Landlord to terminate this Lease. Landlord may collect and receive any rent due from Tenant and the payment thereof shall not constitute a waiver of or affect any notice or demand given, suit instituted or judgment obtained by Landlord, or be held to waive or alter the rights or remedies which Landlord may have at law or in equity or by virtue of this Lease at the time of such payment. (d) Remedies Cumulative. All rights and remedies of Landlord herein or existing at law or in equity are cumulative and the exercise of one or more rights or remedies shall not be taken to exclude or waive the right to the exercise of any other. (e) Notice to Mortgagees. If Landlord defaults under this Lease and, if as a consequence of such default, Tenant will have the right to terminate this Lease, Tenant will not exercise such right to terminate unless and until (i) Tenant gives notice of such default (specifying the exact nature of such default and how such default may be remedied) to any lessor under a ground lease or any mortgagee of the Building, and (ii) such lessor and/or mortgagee fails to cure, or to cause to be cured, such default within thirty (30) days after such lessor's or mortgagee's receipt of notice. (99) 14. SURRENDER OF PREMISES. (a) Surrender. (100)the Expiration Date or earlier termination of this Lease, Tenant shall peaceably surrender to Landlord the Premises, including the alterations, improvements and changes (except as provided in Paragraph 14(b)) other than Tenant's fixtures remaining the property of Tenant, broom-clean and in the condition the __________________________________ 99 (f) Landlord Defaults and Tenant Remedies. Except as provided otherwise in this Lease and subject to Paragraphs 13(e), 19(c) and 19(n) hereof, if Landlord shall fail in the performance of any of Landlord's obligations hereunder and such failure shall continue for a period of thirty (30) days after Landlord's receipt of written notice thereof from Tenant (or an additional reasonable time after such receipt if (i) such failure cannot be cured within such thirty (30) day period, and (ii) Landlord commences curing such failure within such thirty (30) day period and thereafter diligently pursues the curing of such failure), then Tenant shall be entitled to exercise any remedies that Tenant may have at law or in equity. 100 Subject to the terms of Paragraph 15 hereof, upon -32- 33 same were in on the Commencement Date, subject only to (i) ordinary and customary wear and tear, and (ii) damage resulting from a fire or other casualty. (b) Removal of Alterations and Tenant's Property. (i) (101)all permanent or built-in fixtures or improvements and all mechanical, electrical and plumbing equipment in the Premises shall be the property of Landlord upon the termination of this Lease,(102) all furnishings, equipment, furniture, trade fixtures and other removable equipment installed in the Premises by Tenant shall remain the property of Tenant and shall be removed by Tenant upon the expiration or termination of this Lease. Tenant shall repair any damage caused by such removal. (ii) If any furnishings, equipment, furniture, trade fixtures or other removable equipment are not removed within five (5) business days after the expiration of this Lease, then Tenant hereby grants to Landlord the option, exercisable at any time thereafter without the requirement of any notice to Tenant, (A) to treat such property, or any portion thereof, as being abandoned by Tenant to Landlord, whereupon Landlord shall be deemed to have full rights of ownership thereof; (B) to elect to remove and store such property, or any portion thereof, on Tenant's behalf (but without assuming any liability to any person) and at Tenant's sole cost and expense, with reimbursement therefor to be made to Landlord upon demand; and/or (C) to sell, give away, donate or dispose of as trash or refuse any or all of such property without any responsibility to deliver to Tenant any proceeds therefrom. If(103) rights to occupy the Premises are terminated by Landlord, prior to Landlord's termination or the expiration of this Lease, and any of Tenant's furnishings, equipment, furniture, trade fixtures or other removable equipment are not removed within five (5) business days thereafter, then Tenant hereby grants to Landlord the option, exercisable at any time thereafter without the requirement of notice to Tenant, (x) to treat such property, or any portion thereof, as being abandoned by Tenant to Landlord, whereupon Landlord shall be deemed to have full rights of ownership thereof; (y) to elect to remove and store such property, or any portion thereof, on Tenant's behalf (but without assuming any liability to any person) __________________________________ 101 Except as otherwise provided in writing by Landlord and Tenant, (A) 102 and (B) 103 Tenant's -33- 34 and at Tenant's sole cost and expense, with reimbursement therefor to be made to Landlord upon demand; and/or (z) to sell, give away, donate or dispose of as trash or refuse any or all of such property without responsibility to deliver to Tenant any proceeds therefrom. Landlord shall have no liability of any kind whatsoever to Tenant in respect of the exercise or failure to exercise the options set forth in this Paragraph 14(b). Specifically, Tenant shall not have the right to assert against Landlord a claim either for the value, or the use, of any such property, either as an offset against any amount of money owing to Landlord or otherwise. The provisions of this Paragraph 14(b) shall supersede the provisions of Section 93.002(d) and (e) of the Texas Property Code, as such may be amended from time to time, and any other law which purports to restrict the options granted to Landlord herein. 15. HOLDING OVER. If Tenant remains in possession of the Premises after the expiration of the tenancy created hereunder and without the execution of a new lease, Tenant shall be deemed to be occupying the Premises as a tenant at will and subject to all of the provisions of this Lease except those relating to term and except that the Basic Rental and Additional Rental shall be(104) the amount payable during the last month of the Lease Term(105) (without waiver of Landlord's right to recover damages as permitted by this Lease or by law). Said tenancy may be terminated by Landlord or Tenant by giving(106) written notice to the other at any time. Landlord's acceptance during any such holdover period of Basic Rental and/or Additional Rental payments from Tenant of less than the full amounts to which Landlord is entitled under this Paragraph 15 shall not be deemed to constitute a waiver of Landlord's right to later collect from Tenant the difference between the amounts actually paid by Tenant and the full amounts due hereunder. 16. MORTGAGES. This Lease shall be subordinate to all deeds of trust and ground leases now or hereafter encumbering the Building, and all refinancings, replacements, renewals, modifications, extensions or consolidations thereof. Tenant agrees to attorn to any mortgagee, ground lessor, trustee under a deed of trust or purchaser at a foreclosure sale or trustee's sale as Landlord under this Lease. Tenant covenants and agrees that Tenant shall within five (5) days after Landlord's request execute in recordable form and deliver to Landlord whatever instruments may be required to acknowledge and further evidence the subordination of this Lease __________________________________ 104 one hundred fifty percent (150%) of 105 for the first ninety (90) days of any such holdover and double the amount payable during the last month of the Lease Term thereafter 106 thirty (30) days prior -34- 35 and/or the attornment by Tenant to such mortgagee, ground lessor, trustee or purchaser.(107) If within five (5) business days after submission of any such instrument, Tenant fails to execute the same, Landlord is hereby authorized to execute the same as attorney-in-fact for Tenant. Any holder of a deed of trust covering all or any part of the Building may at any time elect to have this Lease have priority over its deed of trust by executing unilaterally an instrument of subordination or placing a clause of such subordination in any pleadings or in its deed of trust and recording the same. 17. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord shall have the following rights: (a) Common and Service Area Alterations. To decorate and to make repairs, alterations, additions, changes or improvements, whether structural or otherwise, in, about or on the exterior of the Building, or any part thereof, and to change, alter, relocate, remove or replace Service Areas and/or Common Areas; to place, inspect, repair and replace in the Premises (below floors, above ceilings or next to columns) utility lines, pipes, cables and the like to serve other areas of the Building outside the Premises; and to otherwise alter or modify the Project, and for such purposes to enter upon the Premises and, during the continuance of any such work, to take such measures for safety or for the expediting of such work as may be required, in Landlord's judgment, all without affecting any of Tenant's obligations hereunder, provided Landlord's entries in the Premises shall be subject to the terms of Paragraph 19(l).(108) (b) Parking. To permit Tenant and its employees to use the parking facilities associated with the Building only in accordance with rules and regulations promulgated from time to time by Landlord and/or the operator of the parking facilities and at such charges as then may be in effect; and to prohibit Tenant and its employees to use any on-site surface parking spaces within the Project designated for visitors, occupants of the Building, or otherwise.(109) The number of parking spaces available for Tenant's use __________________________________ 107 Notwithstanding the foregoing, Tenant's agreement to subordinate this Lease and to attorn to any mortgagee, ground lessor, trustee or purchaser as provided in this Paragraph 16 shall be contingent on Landlord obtaining a nondisturbance agreement for the benefit of Tenant from any future holder of a deed of trust covering all or any part of the Building. Such nondisturbance agreement shall be in the form required by such holder provided that such form does not materially diminish Tenant's rights under this Lease. 108 Landlord agrees to take such actions as may be reasonably required to minimize interference with Tenant's access to the Building and use and occupancy of the Premises for the Permitted Use, so long as such actions do not increase the cost of the work performed or caused to be performed by Landlord in the exercise of its rights under this Paragraph 17(a). 109 Notwithstanding the foregoing, during the initial term of this Lease, so long as Tenant is not in default hereunder, Tenant shall be permitted to use at no charge to Tenant nonreserved parking spaces in the parking garage associated with the Building at the ratio of one (1) parking space for every three hundred (300) square feet of Rentable Area in the Premises. In the event Tenant requires additional parking spaces, Landlord agrees to use reasonable efforts to accommodate Tenant's parking needs to the extent that available parking spaces exist in the Building parking facilities. -35- 36 shall not exceed one (1) space for every three hundred (300) square feet of Rentable Area in the Premises. Parking spaces will be unassigned, provided that Landlord may at any time assign parking spaces. Landlord shall not be obligated to control any unauthorized parking in any reserved or assigned parking spaces of Tenant. Tenant shall, if requested by Landlord, furnish to Landlord a complete list of the license plate numbers of all vehicles operated by Tenant and Tenant's employees and agents. Landlord shall not be liable for any damage of any nature whatsoever to, or any theft of, vehicles, or contents therein, in or about such parking facility. If, for any reason, Landlord fails or is unable to provide, or Tenant is not permitted to use, all or any portion of the parking spaces to which Tenant is entitled hereunder, then Tenant's obligation to pay for such spaces shall be abated for so long as Tenant does not have the use thereof; this abatement shall be in full settlement of all claims that Tenant might otherwise have against Landlord because of Landlord's failure or inability to provide Tenant with such parking spaces. (c) Rules and Regulations. To establish and amend from time to time rules and regulations governing all tenants' use and occupancy of the Building, provided that in the event of a conflict between those rules and this Lease, this Lease shall control.(110) The rules and regulations now enforced by Landlord are(111). (d) Food Preparation. To prohibit the preparation of food within the Premises for commercial purposes or the placing of vending or dispensing machines of any kind in or about the Premises if such vending or dispensing machines are available to the general public. (e) Signs. (112)prohibit all signs, posters, advertisements, or notices from being painted or affixed on any of the windows, or doors, or any other part of the Building, except of such color, size, and style, and in such places as shall be first approved in writing by Landlord(113). __________________________________ 110 Such rules and regulations will be uniformly applied to and enforced against all tenants in the Building. 111 attached hereto as Exhibit E, and are subject to change from time to time 112 Except as otherwise provided in this Lease, to 113 , which approval shall not be unreasonably withheld as long as any such signs, posters, advertisements or notices are consistent with the operation and appearance of the Building as a Class A office building -36- 37 (f) Security Measures. To take all such reasonable measures as Landlord may deem advisable for the security of the Building and its occupants(114). Landlord, however, shall have no liability to Tenant or its employees, agents, invitees or licensees for loss of property or personal injury except to the extent caused by Landlord's gross negligence or willful misconduct. Tenant shall cooperate fully in Landlord's efforts to maintain security in the Building and shall follow all regulations promulgated by Landlord with respect thereto. (g) Right To Relocate Tenant. (115)any time after the execution of this Lease and on thirty (30) days prior written notice, Landlord may substitute for the Premises other premises in the Building (the "New Premises"), in which event the New Premises shall be deemed to be the Premises for all purposes hereunder, provided: (i) the New Premises shall be similar in area, finish and appropriateness for the Permitted Use; (ii) the Basic Rental and other rentals payable under this Lease shall remain the same; and (iii) reasonable out-of- pocket costs in connection with relocation to the New Premises shall be reimbursed by Landlord after receipt of third party invoices therefor. 18. HAZARDOUS MATERIAL; INDEMNITY. (a) Indemnity. Tenant shall not cause or permit any Hazardous Material (as hereinafter defined) to be brought upon, kept or used in or about the Premises or the Project by Tenant or its agents, employees, contractors or invitees without the prior written consent of Landlord (which Landlord shall not unreasonably withhold as long as Tenant demonstrates to Landlord's reasonable satisfaction that such Hazardous Material is necessary or useful to Tenant's business and will be used, kept and stored in a manner that complies with all laws regulating any such Hazardous Material so brought upon or used or kept in or about the Premises or the Project).(116) If Tenant breaches the obligations stated in the preceding sentence, or if the presence of Hazardous Material on the Premises or the Project caused or permitted by Tenant results in contamination of the Premises or the Project, or if contamination of the Premises or the Project by Hazardous Material otherwise occurs for which Tenant is legally liable to Landlord for damage resulting therefrom, then Tenant shall indemnify, defend and hold Landlord harmless __________________________________ 114 ; provided, that such measures shall be commensurate with the security provided for buildings of similar size and quality in the Dallas, Texas area 115 With respect to the portion of the Premises located on multiple tenant floors of the Building only, excluding the first floor of the Building, at 116 Notwithstanding the foregoing, Tenant may, without Landlord's prior consent, but in compliance with all Applicable Laws, use any ordinary and customary Hazardous Material reasonably required to be used by Tenant in the normal course of Tenant's business permitted on the Premises, so long as such Hazardous Material is used, kept and stored in a manner that complies with all laws regulating any such Hazardous Material. -37- 38 from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses, including, without limitation, diminution in value of the Premises, damages, penalties, fines, costs, liabilities or losses (including, without limitation, restriction on use of rentable or usable space or of any amenity of the Premises or the Project, damages arising from any adverse impact on marketing of space, and sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees) which arise during or after the Lease Term as a result of such contamination. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any clean up, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material(117) present in the soil or ground water on or under the Premises or the Project. Without limiting the foregoing, if the presence of any Hazardous Material on the Premises or the Project caused or permitted by Tenant results in any contamination of the Premises or the Project, Tenant shall promptly take all actions at its sole expense as are necessary to return the Premises and the Project to the condition existing prior to the introduction of any such Hazardous Material to the Premises or the Project; provided that Landlord's approval of such actions shall first be obtained, which approval shall not be unreasonably withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the Premises or the Project. The indemnification of Landlord by Tenant contained in this Paragraph 18 shall survive the expiration or earlier termination of this Lease. (b) Definition. As used herein, the term "Hazardous Material" means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of Texas or the United States Government, including, but not limited to, any material or substance that is (i) petroleum, (ii) asbestos, (iii) designated as a "hazardous substance" pursuant to Section 311 of the Water Pollution Control Act (33 U.S.C. Section 1321), (iv) defined as a "hazardous waste" pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, (v) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, or (vi) defined as a "regulated substance" pursuant to Subchapter IX, Solid Waste Disposal Act, 42 U.S.C. Section 6991. (118) __________________________________ 117 caused or permitted by Tenant to be 118 Landlord has provided Tenant with a copy of the Environmental Site Assessment for the Project prepared by Law Engineering and Environmental Services and dated February 1996 (the "Environmental Report"). Except as otherwise provided in the Environmental Report, Landlord has no actual knowledge of the presence of any Hazardous Material in, on, under or about the Premises. -38- 39 19. MISCELLANEOUS. (a) Time Is of the Essence. The time of the performance of all of the covenants, conditions and agreements of this Lease is of the essence. (b) Force Majeure. If either Landlord or Tenant is prevented or hindered from timely satisfying any provisions set forth herein because of a shortage of or inability to obtain materials or equipment, strikes or other labor difficulties, governmental restrictions, casualties or any other cause beyond such party's reasonable control, such party shall be permitted an extension of time of performance by the number of days during which such performance was prevented or hindered; provided, however, that this paragraph shall not apply to the payment of rent or other monies by Landlord or Tenant(119), nor shall the provisions of this paragraph postpone the date that rent is payable pursuant to this Lease, except as expressly provided to the contrary in the Construction Agreement (if any) entered into pursuant to Paragraph 4. (c) No Personal Liability of Landlord. If Landlord shall fail to perform any covenant, term or condition of this Lease and, as a consequence, if Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds received at a judicial sale upon execution and levy against the right, title and interest of Landlord in the Building and in the rents or other income from the Building receivable by Landlord, and neither Landlord nor Landlord's affiliated companies nor their respective owners, partners, venturers, shareholders, directors or officers shall have any personal, corporate or other liability hereunder.(120) __________________________________ 119 (except as otherwise set forth in this Lease) 120 If Tenant recovers a final, non-appealable money judgment against Landlord for Landlord's default of its obligations hereunder or otherwise, such judgment shall be satisfied from (i) the proceeds of sale received upon execution of such judgment and levy thereon against the right, title and interest of Landlord in the Project (or any portion thereof), (ii) rent or other income from the Project received and/or receivable by Landlord, (iii) a credit against future rent and other charges as they become payable under this Lease, and/or (iv) the consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title or interest in the Project or any portion thereof; provided further, that in the event of Landlord's failure to perform any covenant or obligation of Landlord under either Paragraph 11 or Paragraph 12 of this Lease, following damage to or destruction of or a taking of all or any part of the Project, any final, non-appealable judgment recovered by Tenant as a consequence thereof may also be satisfied out of the insurance proceeds or condemnation award, as the case may be, paid and/or payable to Landlord as a result of such damage, destruction or taking. The provisions of this paragraph shall not be deemed to deny Tenant, or to lessen Tenant's right to obtain, injunctive relief or specific performance of Landlord's covenants under this Lease or to avail itself of any other right or remedy (not involving the personal liability of Landlord) which may be afforded to Tenant by law or under the terms of this Lease by reason of Landlord's failure to perform its obligations under this Lease. -39- 40 (d) Quiet Enjoyment. Landlord hereby covenants and agrees that if Tenant shall perform all of the covenants and agreements herein stipulated to be performed on Tenant's part, Tenant shall at all times during the continuance hereof have peaceable and quiet enjoyment and possession of the Premises without hindrance from Landlord or any person or persons lawfully claiming the Premises by or through Landlord, subject, however, to the terms of this Lease and to all mortgages, ground leases, deeds of trust, leases and agreements to which this Lease is subordinate. (e) Entire Agreement and Amendments. This Lease is the only agreement between the parties hereto and their representatives and agents. There are no representations or warranties between the parties other than the representations and warranties contained in this document. No agreement shall be effective to change, modify or terminate this Lease in whole or in part unless such agreement is in writing and duly signed by the party against whom enforcement of such change, modification or termination is sought. (f) Interpretation. The necessary grammatical changes required to make the provisions of this Lease apply in the plural sense where there is more than one Tenant and to either corporations, associations, partnerships or individuals, male or female, shall in all instances be assumed as though in each case fully expressed. The laws of the State of Texas shall govern the validity, performance and enforcement of this Lease. All obligations hereunder are performable in Dallas County, Texas. If this Lease is executed by more than one person or entity as "Tenant", each such person or entity executing this Lease as Tenant shall be jointly and severally bound and liable hereunder. (g) Severability. No provision of this Lease shall be construed or interpreted in any manner which would render such provision invalid. If any provision of this Lease is held to be invalid, such invalid provision shall be deemed to be severable from and shall not affect the validity of the remainder of this Lease. (h) Terms Binding. Subject to the limitations on subletting and assignment set forth in this Lease, all covenants, promises, conditions, representations and agreements herein contained shall be binding upon and apply and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. (i) Estoppel Certificates. Within(121) days after request by Landlord, Tenant agrees to execute and deliver to Landlord estoppel or offset letters as required by Landlord or by Landlord's lenders. The letters shall certify the date of this Lease and any amendments, that Landlord is not in default of any of the terms and provisions of __________________________________ 121 ten (10) business -40- 41 this Lease or specifying the provisions as to which Landlord is in default if Landlord shall be in default, that Landlord has performed all inducements required of Landlord in connection with this Lease, including any construction obligations, specifying any inducements which have not been fulfilled by Landlord, the date to which rent has been paid, and any other matters which Landlord or its lenders may reasonably require. Tenant's failure to deliver such letters to Landlord within said(122) day period will be conclusive evidence of the matters set forth therein. Tenant further agrees to furnish to Landlord from time to time when requested by Landlord a letter of acceptance in conformity with any requirements made by any existing or proposed lenders. (j) Late Payment Charge and Interest Payable. Landlord may impose a late payment charge equal to five percent (5%) of any amount due if not paid within five (5) days from the date required to be paid hereunder. In addition, any payment due under this Lease not paid within ten (10) days after the date herein specified to be paid shall bear interest from the date such payment is due to the date of actual payment at the rate of(123) per annum or the highest lawful rate of interest permitted by Texas or federal law, whichever rate of interest is lower. (k) Security Deposit. Tenant shall deposit with Landlord the amount shown in Paragraph 1(e) above as a Security Deposit(124). Landlord shall hold Tenant's Security Deposit without interest, and the same shall not be considered prepaid rent or a measure of Landlord's damages in case of default by Tenant. The remaining balance of the Security Deposit (after application of any part thereof in accordance with Paragraph 13(b) or for necessary repairs to the Premises) shall be refundable to Tenant within thirty (30) days after the expiration or earlier termination of this Lease. (l) Access to Premises. Tenant agrees that Landlord and its agents may enter the Premises for the purpose of inspecting and making such repairs (structural or otherwise), additions, improvements, changes or alterations to the Premises or the Building as may be permitted or required under this Lease or as Landlord may elect, and to exhibit the same to prospective purchasers, mortgagees or(125) tenants. In the event of any such repairs, additions, improvements, changes or alterations, Tenant shall __________________________________ 122 ten (10) business 123 fourteen percent (14%) 124 in three (3) separate installments as follows: (i) $47,725.00 within five (5) business days after execution of this Lease, (ii) $95,450.00 on the Commencement Date of this Lease (as such term is defined in Paragraph 3 contained herein), and (iii) $47,725.00 on or before December 1, 1997 125 , during the last year of the Lease Term, to prospective -41- 42 cooperate with Landlord to facilitate Landlord's efforts. Landlord's entries in the Premises shall be preceded by reasonable notice (except in the case of an emergency) and shall not unreasonably interfere with Tenant's use and occupancy of the Premises for the Permitted Use. (m) Notices. Notices hereunder must be hand-delivered or sent by(126) nationally recognized overnight courier or by certified mail, return receipt requested, postage prepaid, addressed, if to Landlord, at Suite 110, 3333 Lee Parkway, Dallas, Texas 75219, Attention: Property Manager, with a copy to Crescent Real Estate Equities Limited Partnership, 777 Main Street, Suite 2100, Fort Worth, Texas 76102, Attention: James S. Wassel, and if to Tenant, at the address specified for Tenant in Paragraph 1(a) above prior to the Commencement Date and to the Premises thereafter, or to such other address as may be specified by written notice actually received by the other party. Notice shall be deemed given upon tender of delivery (in the case of a hand- delivered notice) or upon posting of same with the overnight courier service or in an official depository of the United States Postal Service (in the case of a certified or registered letter), provided that no notice of either party's change of address shall be effective until fifteen (15) days after the addressee's actual receipt thereof. (n) Acceptance of Premises and Building by Tenant. LANDLORD HEREBY DISCLAIMS ANY EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT'S INTENDED PURPOSE OR USE. THE TAKING OF POSSESSION BY TENANT SHALL BE CONCLUSIVE EVIDENCE THAT TENANT: (I) ACCEPTS THE PREMISES AS SUITABLE FOR THE PURPOSES FOR WHICH THEY WERE LEASED; (II) ACCEPTS THE BUILDING AND EVERY PART AND APPURTENANCE THEREOF(127) AS BEING IN GOOD AND SATISFACTORY CONDITION; AND (III) WAIVES ANY DEFECTS IN THE PREMISES AND ITS APPURTENANCES EXISTING NOW OR IN THE FUTURE (128), EXCEPT THAT TENANT'S TAKING OF POSSESSION SHALL NOT BE DEEMED TO WAIVE LANDLORD'S COMPLETION OF MINOR FINISH WORK ITEMS __________________________________ 126 facsimile (with electronic confirmation) or by 127 (EXCLUDING LATENT DEFECTS) 128 (EXCLUDING LATENT DEFECTS) -42- 43 THAT DO NOT INTERFERE WITH TENANT'S OCCUPANCY OF THE PREMISES. TENANT ACKNOWLEDGES THE DISCLAIMER BY LANDLORD SET FORTH HEREIN AND WAIVES ALL CLAIMS BASED ON ANY IMPLIED WARRANTY OF SUITABILITY. FURTHERMORE, TENANT CONFIRMS THAT ITS OBLIGATIONS TO PAY BASIC RENTAL, ADDITIONAL RENTAL AND OTHER AMOUNTS OF MONEY DUE TO LANDLORD HEREUNDER ARE NOT DEPENDENT OF THE CONDITION OF THE PREMISES OR THE BUILDING, THE COMPLETION OF ANY MINOR FINISH WORK ITEMS OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER. TENANT SHALL CONTINUE TO PAY BASIC RENTAL, ADDITIONAL RENTAL AND OTHER AMOUNTS OF MONEY DUE TO LANDLORD HEREUNDER, WITHOUT ABATEMENT, SETOFF OR DEDUCTION, NOTWITHSTANDING ANY BREACH OR ALLEGED BREACH BY LANDLORD OF ITS OBLIGATIONS HEREUNDER. (o) Building Name. (129) (p) Landlord's Lien. (130) __________________________________ 129 Landlord agrees that, so long as Tenant occupies at least 120,000 square feet of Rentable Area in the Building, Tenant shall have the right to designate the name of the Building. Tenant agrees that the name selected by Tenant shall be subject to Landlord's reasonable approval, and shall not be changed thereafter. Tenant further agrees that Landlord shall not be required to use the name on stationary, cards, and other printed material used by the management of the Building. 130 Landlord hereby agrees that no equipment, furnishings, furniture, supplies or other personal property of any kind (other than fixtures and items which Landlord and Tenant have agreed in writing will remain the property of Landlord upon the expiration or earlier termination of this Lease) which are placed upon or permitted to be placed upon the Premises by Tenant, or by any of Tenant's employees, agents, representatives, subtenants, successors or assigns, during the term of this Lease or any renewal thereof, shall be subject to or liable for levy or distress or any legal process whatsoever for the collection of rent, additional rent or other charges payable hereunder by Tenant. Landlord thus hereby waives, releases and negates any and all contractual liens and security interests, constitutional liens and security interests, statutory liens and security interests and/or any and all other liens and security interests, arising by operation of law or otherwise, to which Landlord might now or hereafter be entitled upon all equipment, furnishings, furniture, supplies, trade fixtures or other personal property which Tenant now or hereafter places (or causes or permits to be placed) in or upon the Premises. -43- 44 (q) Authority To Sign Lease. If Tenant is a corporation or a partnership (general or limited), each person(s) signing this Lease as an officer or partner of Tenant represents to Landlord that such person(s) is authorized to execute this Lease without the necessity of obtaining any other signature of any other officer or partner, that the execution of this Lease has been authorized by the board of directors of the corporation or by the partners of the partnership, as the case may be, and that this Lease is fully binding on Tenant. Landlord reserves the right to request evidence of the approval of -44- 45 this Lease and authorization of Tenant's signatories to bind Tenant, which evidence shall be satisfactory in form and content to Landlord and its counsel. (r) Attorneys' Fees. In the event either party is in default beyond any applicable grace or notice period in the performance of any of the terms of this Lease and the other party employs an attorney in connection therewith, the nonprevailing party agrees to pay the prevailing party's reasonable attorneys' fees. (s) Execution of Lease. The submission of this Lease for examination does not constitute a reservation of or option for the Premises or any other space within the Building and shall vest no right in either party. This Lease shall become effective only after the full execution and delivery hereof by all of the parties hereto and upon the approval by the holder of any mortgage encumbering the Project. (t) No Attornment. All checks tendered to Landlord as and for the Basic Rental and/or Additional Rental required hereunder shall be deemed payments for the account of Tenant. Acceptance by Landlord of Basic Rental and/or Additional Rental from anyone other than Tenant shall not be deemed to operate as an attornment to Landlord by the payor of such Basic Rental and/or Additional Rental or as a consent by Landlord to an assignment of this Lease or subletting by Tenant of the Premises to such payor, or as a modification of any of the provisions of this Lease. (u) Applicable Laws. As used herein, the term "Applicable Laws" shall mean all laws, statutes, ordinances, regulations, guidelines or requirements now in force or hereafter enacted and the requirements of any governmental authority having jurisdiction over the Building, board of fire underwriters, utility company serving the Building or other similar body now or hereafter constituted, relating to or affecting the condition, use or occupancy of the Premises, including without limitation, Title III of The Americans with Disabilities Act of 1990, all regulations issued thereunder, and the Accessibility Guidelines for Buildings and Facilities issued pursuant thereto, and the Texas Architectural Barriers Act, as the same are in effect on the date of this Lease and as hereafter amended. (v) Arms-Length Transaction. This Lease has been entered into by the undersigned after arms-length negotiation, with each party acknowledging that it and its counsel, if it so chooses, have had an opportunity to review this Lease, and therefore, the parties agree that this Lease shall not be construed against Landlord on the ground that Landlord's representatives prepared this Lease. (w) Waiver. No covenant, term or condition or the breach thereof will be deemed waived, except by written consent of the party against whom the waiver is claimed and any waiver of the breach of any covenant, term or condition will not be deemed to be a waiver of any preceding or succeeding breach of the same or any other -45- 46 covenant, term or condition. Acceptance by Landlord of any performance by Tenant after the time the same was due will not constitute a waiver by Landlord of the breach or default of any covenant, term or condition unless otherwise expressly agreed to by Landlord in writing. (x) Computation of Rentable Area. (1) Single Tenant Floor. With respect to a single tenant floor, "Rentable Area" will mean the sum of (i) the floor area (in square feet) bounded by the inside surfaces of the exterior glass walls of the Building, excluding standard openings in the floor slab used, for example, for Building stairs, elevator and other shafts and vertical ducts (collectively, the "Excluded Spaces"), and (ii) an allocation of the floor area of Common Areas and Service Areas located in or serving the Building. (2) Multiple Tenant Floor. With respect to a multiple tenant floor, "Rentable Area" will mean the sum of (i) the floor area (in square feet) bounded by the inside surfaces of the exterior glass walls, the outside surfaces of partitions separating the Premises from corridors and other Common Areas and Service Areas, and the center line of partitions separating the Premises from adjoining leasable spaces, less any Excluded Spaces located within such boundaries, and (ii) an allocation of the floor area of the Common Areas and Service Areas on such floor, and (iii) an allocation of the floor area of Common Areas and Service Areas located in or serving the Building. (3) Columns and Non-Standard Openings. No deductions will be made in either Paragraph 19(x)(1) or Paragraph 19(x)(2) for (i) columns and projections necessary to the structural support of the Building or (ii) for openings in the floor slab which were made at the request of Tenant or to accommodate items installed at the request of Tenant. (y) Exhibits and Riders. The following exhibits and riders are attached hereto, incorporated herein and made a part of this Lease for all purposes: Exhibit A-1: Floor Plan of Premises Exhibit A-2: Property Description Exhibit B: Certificate of Acceptance of Premises Exhibit C: Construction Agreement Exhibit D: Building Standard Janitorial Services Exhibit E: Building Rules and Regulations Exhibit F: Rooftop License Agreement Rider No. 101: Leasing Rights and Obligations Rider No. 201: Option to Expand Exhibit 201-A: Columbia Space Rider No. 301: Right of First Refusal
-46- 47 Exhibit 301-A: Right of First Refusal Space Rider No. 401: Option to Extend Rider No. 501: Termination Option
(z) Counterparts. This Lease may be executed in several counterparts, each of which will be deemed an original, and all of which will constitute but one and the same instrument. (131) __________________________________ 131 (aa) Club Memberships. Landlord agrees to pay, out of the Basic Rental payable for the first month of the Lease Term, either directly to Tenant or, at the request of Tenant, on behalf of Tenant, the initiation fees in connection with a total of eighteen (18) memberships to either The Crescent Club or The Spa at The Crescent, which memberships will be activated on the Commencement Date (or as soon thereafter as is practicable). The issuance of such memberships shall be subject to the prior approval of the applicable of The Crescent Club and The Spa at The Crescent. Monthly dues and all other expenses incurred by Tenant or any other person in connection with the use of such memberships shall be solely the responsibility of Tenant. (bb) Signage. Landlord agrees that, during the term of this Lease, Tenant shall have the right to place exterior signage reflecting Tenant's name on the upper portion of two (2) opposite sides of the Building and the non-exclusive right to place Tenant's name on the monument sign in front of the Building (collectively, the "Signage"). The Signage shall be installed and maintained at Tenant's sole cost and expense throughout the term of this Lease; provided, however that, at Tenant's option, the cost of installing the Signage may be included in the cost of the Finish Work and may be paid out of the Finish Allowance (as such terms are defined in the Construction Agreement attached hereto as Exhibit C) to the extent sufficient funds are available for such purpose. The location, size, material and design of the Signage shall be subject to the prior written approval of Landlord, and Tenant shall be responsible for compliance with any laws, rules, regulations, ordinances, building codes, restrictive covenants, or architectural guidelines applicable to the Project, as the same may be amended or modified from time to time. Upon the expiration or earlier termination of this Lease, Tenant shall remove the Signage, at Tenant's sole cost and expense, and restore the areas of the Project to which the Signage was affixed to their condition prior to the installation of the Signage. (cc) Rooftop Access. Tenant may install communication equipment and related wiring on the roof of the Building pursuant to the terms and conditions of the Rooftop License Agreement attached to this Lease as Exhibit F. (dd) Broker. Landlord and Tenant each warrant and represent to the other that neither has dealt with any real estate broker, agent or finder in connection with this transaction other than The Staubach Company ("Staubach"), which is acting as Tenant's agent in connection herewith; and Landlord and Tenant agree to protect, defend, indemnify and hold harmless the other from and against any and all liabilities, costs, causes of action, damages and expenses, including without limitation, attorneys' fees, for any claims made by any real estate broker, agent or finder with respect to this transaction other than claims of Staubach, which shall be compensated by Landlord pursuant to a separate agreement. (ee) Lobby Improvements. Landlord will construct certain improvements to the lobby of the Building (the "Lobby Improvements"). Prior to the commencement of construction of the Lobby Improvements, Landlord shall deliver to Tenant plans and specifications for the Lobby Improvements for Tenant's review and approval, which approval shall not be unreasonably withheld or delayed. Landlord agrees that the total cost of the Lobby Improvements shall be at least $40,000.00, and that Landlord shall commence construction of the Lobby Improvements during construction of the First Expansion Space Finish Work (as such term is defined in the Construction Agreement), and Landlord shall complete construction of the Lobby Improvements no later than the date of substantial completion of the First Expansion Space Finish Work. -47- 48 [Remainder of page intentionally left blank.] -48- 49 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Lease as of the day and year first above written. LANDLORD: -------- CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP, a Delaware limited partnership By: Crescent Real Estate Equities, Ltd., a Delaware corporation, its general partner By: /s/ JAMES S. WASSEL ---------------------------------------- Name: James S. Wassel Title: Senior Vice President TENANT: ------ PAGEMART WIRELESS, INC., a Delaware corporation By: /s/ JOHN D. BELETIC ------------------------------------------------ Name: John D. Beletic Title: President, CEO -49- 50 EXHIBIT A-1 FLOOR PLAN OF PREMISES [To be attached] 51 EXHIBIT A-2 PROPERTY DESCRIPTION BEING all of Lot 8A, Block Z/1039 of Bank of Dallas Addition, an addition to the City of Dallas as recorded in Volume 82054, Page 2955, Deed Records, Dallas County, Texas and being more particularly described as follows: BEGINNING at an "x" set for corner in the Easterly line of Welborn Street (a 60' R.O.W.), said point being the Northwest corner of Block Z/1039; THENCE South 45 degrees 00 minutes East, along the Southerly line of Rawlins Street, 400 feet to an "x" set for corner, said point being the Northeast corner of Block Z/1039; THENCE South 45 degrees 00 minutes West, along the Westerly R.O.W. line of Lee Parkway (a 60' R.O.W.), 153 feet to an "x" set for corner; THENCE North 45 degrees 00 minutes West, along the North side of a 15 foot alley, 400 feet to an "x" set for corner in the Easterly R.O.W. line of Welborn Street; THENCE North 45 degrees 00 minutes East, along said Easterly R.O.W. line of Welborn Street, 153 feet to the POINT OF BEGINNING and containing 61,200 square feet of land, more or less. 52 EXHIBIT B CERTIFICATE OF ACCEPTANCE OF PREMISES Re: Office Lease for space in 3333 Lee Parkway, dated the _____ day of ______________, 1996, between Crescent Real Estate Equities Limited Partnership ("Landlord"), and PageMart Wireless, Inc. ("Tenant"). Landlord and Tenant hereby agree that: 1. Except for those items shown on the attached "punch list", if any, Landlord has fully completed any construction work required under the terms of the Lease. 2. The Premises are tenantable, the Landlord has no further obligation for construction (except as specified above), and Tenant acknowledges that both the Building and the Premises (excluding any latent defects) are satisfactory in all respects. 3. The Commencement Date of the Lease is the _____ day of ________________, 19__. 4. The Expiration Date of the Lease is to be the _____ day of _______________, 19___. All other terms and conditions of the Lease are hereby ratified and acknowledged to be unchanged. EXECUTED this _____ day of ______________________, 1996. TENANT: LANDLORD: - ------ -------- PAGEMART WIRELESS, INC. CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP By: By: Crescent Real Estate Equities, Ltd., -------------------------- its General Partner Name: ------------------- Title: ------------------- By: ----------------------------------- Name: ----------------------------- Title: ----------------------------- 53 EXHIBIT C CONSTRUCTION AGREEMENT This Construction Agreement is executed by and between CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP ("Landlord") and PAGEMART WIRELESS, INC. ("Tenant") in connection with that certain Office Lease (the "Lease") executed by the parties on even date herewith (the "Effective Date") relating to the lease by Landlord to Tenant of certain premises in the building commonly known as "3333 Lee Parkway", and located at 3333 Lee Parkway, Dallas, Texas. All defined terms used herein, unless otherwise defined herein, shall have the same meanings given to such terms in the Lease. Landlord shall construct, or cause to be constructed, leasehold improvements in and upon the Premises in up to a total of three (3) separate phases as Landlord prepares the Initial Space, the First Expansion Space and the Second Expansion Space for occupancy by Tenant. Landlord agrees that Tenant may require, at Tenant's option, that Landlord construct the leasehold improvements for the First Expansion Space and the Second Expansion Space simultaneously. Landlord's construction of all phases of the leasehold improvements shall be governed by the terms and conditions of this Construction Agreement, and all defined terms used herein shall have their respective meanings in connection with the construction of the leasehold improvements for the Initial Space, the First Expansion Space, and the Second Expansion Space. If Tenant elects to have the leasehold improvements for the First Expansion Space and Second Expansion Space constructed simultaneously, then the term "First Expansion Space" wherever used in this Lease shall be deemed to include the Second Expansion Space, and all terms and provisions of this Lease referring to the term "Second Expansion Space" shall be null, void, and of no further force or effect. (a) Construction Costs. Landlord shall construct, or cause to be constructed, leasehold improvements (the "Finish Work"), in a good and workmanlike manner in and upon the applicable space, in accordance with the Final Working Drawings (hereinafter defined). Landlord shall provide Tenant with an allowance to be applied towards the cost of constructing the Finish Work in an amount not to exceed $15.00 per rentable square foot in the applicable space (the "Finish Allowance"). The cost of all space planning and construction drawings shall be included in the cost of the Finish Work and may be paid out of the Finish Allowance, to the extent sufficient funds are available for such purpose. In the event that the total cost of the Finish Work exceeds the Finish Allowance, Tenant may elect to (i) pay such excess amount to Landlord promptly upon demand prior to Landlord's commencing construction, or (ii) with respect to a portion of such excess, not to exceed an amount equal to $8.00 per rentable square foot in the applicable space (the "Amortizable Amount"), increase the amount of monthly payments of Basic Rental due under the Lease by an amount equal to the amount of the monthly installment payment which would be required to fully amortize a loan of a principal amount equal to the Amortizable Amount bearing interest at twelve and one-half percent (12.5%) per annum, and having a loan term equal to the initial term of the Lease with respect to the Initial 54 Space, and equal to the remainder of the initial term of the Lease with respect to the First Expansion Space and the Second Expansion Space. Change orders requested by Tenant and approved by Landlord after construction has commenced and which increase the cost of construction over the amount of the Finish Allowance shall be paid by Tenant to Landlord promptly upon demand. All installations and improvements now or hereafter placed in the Premises other than Building Standard (as defined in the Lease) improvements shall be for Tenant's account and at Tenant's cost (and Tenant shall pay ad valorem taxes and increased insurance thereon or attributable thereto), which cost shall be payable by Tenant to Landlord upon demand as additional rent. Tenant further agrees to pay Landlord a fee of three percent (3%) of the contract price for the Finish Work (the "Construction Management Fee") as compensation for Landlord's supervision of the construction and installation of the Finish Work on the commencement of construction thereof. Landlord and Tenant agree that the Construction Management Fee may be paid out of the Finish Allowance to the extent funds are available for such purpose. Tenant agrees that in the event of default of payment thereof, Landlord (in addition to all other remedies) shall have the same rights as in the event of default of payment of rent under the Lease. (b) Preparation of Plans. Tenant shall deliver to Landlord preliminary construction drawings and space plans (the "Preliminary Plans") for the Finish Work no later than the applicable Preliminary Plans Date (hereinafter defined). Landlord will review the Preliminary Plans and notify Tenant of Landlord's reasonable approval or disapproval thereof (and any such notice of disapproval shall state the reasons for Landlord's disapproval) within five (5) business days after receipt of the Preliminary Plans. Tenant shall then revise the Preliminary Plans and resubmit them to Landlord for Landlord's approval or disapproval within five (5) business days of Tenant's receipt of Landlord's notice of disapproval. If Landlord does not notify Tenant of Landlord's approval or disapproval within the five (5) business day period, Landlord will be deemed to have approved the Preliminary Plans. The Preliminary Plans, as revised and approved by Landlord (or which are deemed to be approved by Landlord) shall constitute "Final Working Drawings". (c) Construction. Upon completion of the Final Working Drawings, Landlord shall select a minimum of three (3) experienced, licensed contractors (which contractors shall be subject to Tenant's approval) to bid for the construction of the Finish Work based on the Final Working Drawings. Landlord will employ the contractor who submits the lowest qualified and complete bid to construct the Finish Work and will require in the construction contract that such contractor construct the Finish Work in a good and workmanlike manner and in compliance with all Applicable Laws; provided, however, Tenant will be solely responsible for determining whether or not Tenant is a public accommodation under The Americans with Disabilities Act and whether or not the Final Working Drawings comply with such laws and the regulations thereunder. The parties acknowledge that Landlord is not an architect or engineer, and that the Finish Work will be designed and performed by independent architects, engineers and contractors. Accordingly, Landlord does not guarantee or warrant that the plans or Final Working Drawings will be free from errors or omissions, nor that the Finish Work will be free -2- 55 from defects, and Landlord will have no liability therefor. In the event of such errors, omissions, or defects, Landlord will, at the request of Tenant, demand performance under any warranties related to the Finish Work and diligently pursue the enforcement of such warranties, and Landlord will use reasonable efforts to cooperate in any action Tenant desires to bring against such parties. (d) Substantial Completion. For purposes hereof, the Finish Work shall be deemed to be "substantially complete" when: (i) all ceilings and lighting in the applicable space are in and operative; (ii) all walls and partitions in the applicable space have been erected with final painting or wall covering complete, and doors and hardware have been installed; (iii) all built-in cabinetry, millwork, glass, stairways, plumbing and bookshelves in the applicable space have been completed and installed; (iv) all floor coverings in the applicable space have been installed; (v) building elevators, plumbing, HVAC and electrical systems serving the applicable space have been installed and are in good working condition; electrical service is adequate for Tenant's lighting fixtures, office equipment and additional requirements, in keeping with the approved space plans and Final Working Drawings; and HVAC system has been balanced; (vi) all debris has been removed from the applicable space, and the applicable space cleaned; and (vii) a certificate of occupancy for the applicable space has been granted by the City of Dallas, Texas. Landlord and Tenant agree that minor "punch-list" type items which do not impede Tenant's use of the applicable space will not prevent the Finish Work from being considered "substantially complete". Prior to the applicable space being delivered to Tenant, a representative of Landlord and a representative of Tenant shall walk through the applicable space and jointly prepare a list (the "Punch List") of minor items which, in the mutual opinion of Landlord and Tenant, have not been fully completed or require repair (the "Punch List Items"). Landlord will deliver a copy of the Punch List to Tenant immediately upon request by Tenant. Landlord shall diligently cause the completion of the Punch List Items within a reasonable time after Tenant commences occupancy of the space, taking reasonable steps to minimize disruption to Tenant's use and occupancy of the space while the Punch List Items are being completed. -3- 56 (e) Delays. (i) Initial Space. Subject to the occurrence of a Force Majeure Delay or a Tenant Delay (both hereinafter defined), Landlord agrees to substantially complete the construction of the Initial Space Finish Work by June 1, 1997 (the "Estimated Commencement Date"). In the event of a Force Majeure Delay or a Tenant Delay, the Estimated Commencement Date shall be extended one (1) day for every day of such delay. If Landlord is delayed in completing such construction by the Estimated Commencement Date for any reason other than a Force Majeure Delay or a Tenant Delay, then the delay in commencement of Tenant's obligation to pay rent under the Lease for that portion of the Initial Space which is untenable until ten (10) days after substantial completion of the Initial Space Finish Work, shall constitute full settlement of all claims that Tenant may have against Landlord based on such a delay. Likewise, if Landlord is delayed in completing such construction by the Estimated Commencement Date due to the occurrence of a Force Majeure Delay, then the delay in commencement of Tenant's obligation to pay rent under the Lease for that portion of the Initial Space which is untenable until ten (10) days after substantial completion of the Initial Space Finish Work, shall constitute full settlement of all claims that Tenant may have against Landlord based on such a delay. However, if Landlord is unable to complete the Initial Space Finish Work by the Estimated Commencement Date due to a Tenant Delay or due to any other cause related to the acts, neglects, failures or omissions of Tenant, Tenant's servants, employees, agents or representatives, then Tenant's rental obligations under the Lease with respect to the Initial Space shall begin on the date on which Landlord would have delivered possession of the Initial Space to Tenant absent such Tenant Delay, and such date shall be the Initial Space Commencement Date. (ii) First Expansion Space. Subject to the occurrence of a Force Majeure Delay or a Tenant Delay (both hereinafter defined), Landlord agrees to substantially complete the construction of the First Expansion Space Finish Work by January 15, 1998 (the "First Expansion Space Estimated Commencement Date"). In the event of a Force Majeure Delay or a Tenant Delay, the First Expansion Space Estimated Commencement Date shall be extended one (1) day for every day of such delay. If Landlord is delayed in completing such construction by January 15, 1998, for any reason other than a Force Majeure Delay or a Tenant Delay, then (i) Tenant's obligation to pay rent under the Lease for that portion of the First Expansion Space which is untenable shall be abated until ten (10) days after substantial completion of the First Expansion Space Finish Work, and (ii) Tenant shall be entitled to an additional rental abatement, which shall be applied towards the rent payable for the Initial Space, in an amount equal to the difference between (a) the base rental (at the holdover rates) payable by Tenant for the portion of Tenant's existing premises which Tenant intends to vacate in order to occupy the First Expansion Space, and (b) the Basic Rental which would be payable by Tenant under this Lease for the First Expansion Space for each day of such delay prior to the date of substantial completion of the First Expansion Space Finish Work. The foregoing rental -4- 57 abatements shall constitute full settlement of all claims that Tenant may have against Landlord based on such a delay. Notwithstanding the foregoing, if Landlord is delayed in completing such construction by January 15, 1998, due to the occurrence of a Force Majeure Delay, then the delay in commencement of Tenant's obligation to pay rent under the Lease for that portion of the First Expansion Space which is untenable until ten (10) days after substantial completion of the First Expansion Space Finish Work shall constitute full settlement of all claims that Tenant may have against Landlord based on such a delay. Furthermore, if Landlord is unable to complete the First Expansion Space Finish Work by January 15, 1998, due to a Tenant Delay or due to any other cause related to the acts, neglects, failures or omissions of Tenant, Tenant's servants, employees, agents or representatives, then Tenant's rental obligations under the Lease with respect to the First Expansion Space shall begin on the date on which Landlord would have delivered possession of the First Expansion Space to Tenant absent such Tenant Delay, and such date shall be the First Expansion Space Commencement Date. (iii) Second Expansion Space. Subject to the occurrence of a Force Majeure Delay or a Tenant Delay (both hereinafter defined), Landlord agrees to substantially complete the construction of the Second Expansion Space Finish Work by May 1, 1998 (the "Second Expansion Space Estimated Commencement Date"). In the event of a Force Majeure Delay or a Tenant Delay, the Second Expansion Space Estimated Commencement Date shall be extended one (1) day for every day of such delay. If Landlord is delayed in completing such construction by May 1, 1998, for any reason other than a Force Majeure Delay or a Tenant Delay, then (i) Tenant's obligation to pay rent under the Lease for that portion of the Second Expansion Space which is untenable shall be abated until ten (10) days after substantial completion of the Second Expansion Space Finish Work, and (ii) Tenant shall be entitled to an additional rental abatement, which shall be applied towards the rent payable for the Initial Space and the First Expansion Space, in an amount equal to the difference between (a) the base rental (at the holdover rates) payable by Tenant for the portion of Tenant's existing premises which Tenant intends to vacate in order to occupy the Second Expansion Space, and (b) the Basic Rental which would be payable by Tenant under this Lease for the Second Expansion Space for each day of such delay prior to the date of substantial completion of the Second Expansion Space Finish Work. The foregoing rental abatements shall constitute full settlement of all claims that Tenant may have against Landlord based on such a delay. Notwithstanding the foregoing, if Landlord is delayed in completing such construction by May 1, 1998, due to the occurrence of a Force Majeure Delay, then the delay in commencement of Tenant's obligation to pay rent under the Lease for that portion of the Second Expansion Space which is untenable until ten (10) days after substantial completion of the Second Expansion Space Finish Work shall constitute full settlement of all claims that Tenant may have against Landlord based on such a delay. Furthermore, if Landlord is unable to complete the Second Expansion Space Finish Work by May 1, 1998, due to a Tenant Delay or due to any other cause related to the acts, neglects, failures or omissions of Tenant, Tenant's servants, employees, agents or -5- 58 representatives, then Tenant's rental obligations under the Lease with respect to the Second Expansion Space shall begin on the date on which Landlord would have delivered possession of the Second Expansion Space to Tenant absent such Tenant Delay, and such date shall be the Second Expansion Space Commencement Date. (iv) Tenant Delay. As used herein, the term "Tenant Delay" shall mean (i) any delay resulting from Tenant's failure to deliver space plans and preliminary construction drawings to Landlord on or before (a) February 1, 1997, with respect to the Initial Space, (b) May 15, 1997, with respect to the First Expansion Space, or (c) September 1, 1997, with respect to the Second Expansion Space (respectively, the "Preliminary Plans Date"), or Tenant's failure to submit Final Working Drawings to Landlord on or before (a) February 15, 1997, with respect to the Initial Space, (b) June 15, 1997, with respect to the First Expansion Space, or (c) October 1, 1997, with respect to the Second Expansion Space; provided, however, if the delay in submitting Final Working Drawings is due solely to Landlord unreasonably withholding its approval of such drawings, then the delay in submitting the Final Working Drawings shall not constitute a Tenant Delay; (ii) changes in plans and specifications; or (iii) the selection of non-building standard items requiring additional time for delivery, installation or fabrication or the presence of installers. Tenant shall be responsible for and shall pay to Landlord any and all costs and expenses incurred by Landlord and caused by a Tenant Delay. Landlord shall not be liable for any damages caused by a Tenant Delay. (v) Force Majeure Delay. As used herein, "Force Majeure Delay" shall mean any actual delay caused solely by (a) civil disturbance; future order or regulation of any government, court or regulatory body claiming jurisdiction; the failure of any governmental or regulatory body with an appropriate jurisdiction to issue any necessary permit, approval or inspection within the time period typically required to issue such permit, approval or inspection as of the date of this Lease (provided that such delay shall be a Force Majeure Delay only to the extent that such delay is caused by or within the control of the governmental or regulatory body and not to the extent that such delay is caused by or within the control of Landlord); or (b) the act of public enemy, war, riot, sabotage, blockade, embargo; inability to secure customary materials, supplies or labor through ordinary sources by reason of regulation or order of any governmental or regulatory body; lightning, earthquake, hurricane, tornado, flood, explosion, fire or casualty; and strikes, boycotts or labor disturbances and any other causes provided such cause is beyond the reasonable control of the party from whom performance is required, or any of its contractors or other representatives. [Remainder of page intentionally left blank.] -6- 59 EXECUTED as of the Effective Date. TENANT: LANDLORD: - ------ -------- PAGEMART WIRELESS, INC. CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP By: /s/ JOHN D. BELETIC By: Crescent Real Estate Equities, Ltd., -------------------------- its General Partner Name: John D. Beletic -------------------- Title: President and CEO ------------------- By: /s/ JAMES S. WASSEL ------------------------------------- Name: James S. Wassel ------------------------------- Title: Sr. V.P of Asset Mgmt. ------------------------------- -7- 60 EXHIBIT D 3333 LEE PARKWAY BUILDING STANDARD JANITORIAL SERVICES AREAS TO BE SERVICED OFFICE AREAS A. Services to be performed nightly: 1. Empty all waste receptacles; remove wastepaper and trash from the premises; replace trash can liners. 2. Empty and damp wipe all ashtrays. 3. Vacuum all rugs and carpeted areas in offices, including under furniture. 4. Hand dust and wipe clean with damp or treated cloth all office furniture, files, fixtures, paneling, window sills, and all other horizontal surfaces; wash windows on inside when necessary. 5. Damp wipe and polish all glass furniture tops. 6. Remove all finger marks and smudges from all vertical surfaces, including doors, door frames, around light switches and private entrance glass partitions. 7. All entry glass next to door will be damp wiped. B. Services to be performed as necessary: 1. Sweep all stairways weekly, dust handrails and vacuum if carpeted. 2. Police all stairwells throughout the entire building weekly and keep in clean condition. 3. Damp dust all vinyl covered furniture and vacuum all of the upholstered furniture as needed. 4. Dust mini-blinds bi-weekly. D-1 61 RESTROOMS A. Services to be performed nightly: 1. Mop and rinse floors nightly. 2. Empty and sanitize all receptacles and sanitary disposals; thoroughly clean and wash at least once per week; replace trash can liners. 3. Clean and polish all mirrors, bright work, and enameled surfaces. 4. Fill toilet tissue, soap, and towel dispensers. 5. Clean flushometers, piping, toilet seat hinges, and other metal work. B. Services to be performed as necessary: 1. Remove all spots, stains and fingerprints from metal partitions, walls and outside surfaces of all dispensers and soap dishes. 2. Vacuum louvers, ventilation grills and dust light fixtures as needed. 3. Spray buff all hard surface floors. 4. Wash all baseboards. PUBLIC AREAS A. Services to be performed nightly: 1. Empty, damp wipe, sift or otherwise service all ashtrays and sand urns. 2. Clean and sanitize all drinking fountains; vending machines, table tops, chairs, counter tops and sinks in lunch room facilities. 3. Dust all furniture and fixtures. 4. Vacuum all carpeted areas. 5. Spot clean all hard surface floors. D-2 62 6. Spot clean all fingerprints from door frames, light switches, push/kick plates and handles. 7. Spot clean stains on carpeted areas. 8. Clean and polish all metal fittings. 9. Dust mop all hard surface floors with a treated dust mop. 10. Sweep and/or vacuum entrance mats. 11. Keep supply rooms in a clean, neat and orderly condition. 12. Glass globes in common areas shall be damp wiped every two weeks. 13. All hand railing and woodwork shall be dusted. B. Services to be performed as necessary: 1. Dust all fire extinguishers. 2. Damp dust all ceiling air conditioning diffusers, wall grids, registers and other ventilation louvers. 3. Dust the exterior surfaces of lighting fixtures, including glass and plastic enclosures. D-3 63 EXHIBIT E BUILDING RULES AND REGULATIONS The following rules and regulations shall apply to the Premises, the Building, the parking garage associated therewith, the Land and the appurtenances thereto: 1. Sidewalks, doorways, vestibules, halls, stairways, and other similar areas shall not be obstructed by tenants or used by any tenant for purposes other than ingress and egress to and from their respective leased premises and for going from one to another part of the Building. 2. Plumbing, fixtures and appliances shall be used only for the purposes for which designed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or deposited therein. Damage resulting to any such fixtures or appliances from misuse by a tenant or its agents, employees or invitees, shall be paid by such tenant. 3. No signs, advertisements or notices shall be painted or affixed on or to any windows, doors, or elevators, or other part of the Building without the prior written consent of Landlord. No curtains or other window treatments shall be placed between the glass and the Building standard window treatments. 4. Landlord shall provide and maintain an alphabetical directory for all tenants in the main lobby of the Building. 5. Landlord shall provide all door locks in each tenant's leased premises, at the cost of such tenant, and no tenant shall place any additional door locks in its leased premises without Landlord's prior written consent. Landlord shall furnish to each tenant a reasonable number of keys to such tenant's leased premises, at such tenant's cost, and no tenant shall make a duplicate thereof. 6. Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by tenants of any bulky material, merchandise or materials which require use of elevators or stairways, or movement through the Building entrances or lobby shall be conducted under Landlord's supervision at such times and in such a manner as Landlord may reasonably require. Each tenant assumes all risks of and shall be liable for all damage to articles moved and injury to persons or public engaged or not engaged in such movement, including equipment, property and personnel of Landlord if damaged or injured as a result of acts in connection with carrying out this service for such tenant. 7. Landlord may prescribe weight limitations and determine the locations for safes and other heavy equipment or items, which shall in all cases be placed in the Building so as to distribute weight in a manner acceptable to Landlord which may include the use of such E-1 64 supporting devices as Landlord may require. All damages to the Building caused by the installation or removal of any property of a tenant, or done by a tenant's property while in the Building, shall be repaired at the expense of such tenant. 8. Corridor doors, when not in use, shall be kept closed. Nothing shall be swept or thrown into the corridors, halls, elevator shafts or stairways. No birds, fish, or other animals shall be brought into or kept in, on or about any tenant's leased premises. No portion of any tenant's leased premises shall at any time be used or occupied as sleeping or lodging quarters. 9. Tenant shall cooperate with Landlord's employees in keeping its leased premises neat and clean. Tenants shall not employ any person for the purpose of such cleaning other than the Building's cleaning and maintenance personnel. 10. To ensure orderly operation of the Building, no ice, mineral or other water, towels, newspapers, etc. shall be delivered to any leased area except by persons approved by Landlord. 11. Tenant shall not make or permit any improper, objectionable or unpleasant noises or odors in the Building or otherwise interfere in any way with other tenants or persons having business with them. 12. No machinery of any kind (other than normal office equipment) shall be operated by any tenant on its leased area without Landlord's prior written consent, nor shall any tenant use or keep in the Building any flammable or explosive fluid or substance. 13. Landlord will not be responsible for lost or stolen personal property, money or jewelry from tenant's leased premises or public or common areas regardless of whether such loss occurs when the area is locked against entry or not. 14. No vending or dispensing machines of any kind may be maintained in any leased premises without the prior written permission of Landlord. 15. All mail chutes located in the Building shall be available for use by Landlord and all tenants of the Building according to the rules of the United States Postal Service. E-2 65 RIDER NO. 101 LEASING RIGHTS AND OBLIGATIONS Initial Space. Effective on the Commencement Date of this Lease (as defined in Paragraph 3 of the Lease), the Premises shall consist of a minimum of 30,000 rentable square feet, located on all or a portion of one or more of the first, seventh, eighth, ninth, tenth, eleventh, or twelfth floors of the Building; provided that, at Landlord's option, Landlord may substitute the fifth floor of the Building for the seventh floor of the Building (collectively, the "Initial Space"). Tenant shall have the right to require that Landlord construct leasehold improvements in space which contains more than 30,000 rentable square feet, so long as the additional space (the "Additional Square Footage") is necessary to complete the remainder of an entire floor on which a portion of the required 30,000 rentable square feet (the "Required Square Footage") is located. In the event that Tenant requires the construction of leasehold improvements in the Additional Square Footage, Landlord agrees that Tenant shall not be obligated to pay Basic Rental for the Additional Square Footage until January 15, 1998; provided that Tenant pays its proportionate share of Actual Operating Expenses for the Additional Square Footage, and that the Additional Square Footage shall be deemed to be part of the Initial Space. Upon completion of the Finish Work for the Initial Space, Landlord and Tenant agree to enter into an amendment to this Lease which modifies the description of the Premises contained in Paragraph 1(c) of this Lease to reflect the location(s) and Rentable Area of the Initial Space; which attaches Exhibit A-1, the Floor Plan of the Premises, to this Lease; which recalculates the Basic Rental amounts shown in Paragraph 1(d) of this Lease based on the Rentable Area of the Initial Space; and which contains other appropriate terms and provisions relating to the addition of the Initial Space. First Expansion Space. Effective on the First Expansion Space Commencement Date (hereinafter defined), the Premises shall be expanded to include an additional 70,000 square feet of Rentable Area (in excess of the minimum 30,000 rentable square feet in the Initial Space), which space shall be located on all or a portion of one or more of the first, seventh, eighth, ninth, tenth, eleventh, or twelfth floors of the Building; provided that, at Landlord's option, Landlord may substitute the fifth floor of the Building for the seventh floor of the Building (collectively, the "First Expansion Space"). The First Expansion Space shall be leased by Tenant subject to the same terms, covenants and conditions as provided in this Lease for the Premises, except that the amount of the Finish Allowance (as defined in the Construction Agreement) provided by Landlord with respect to the First Expansion Space shall not exceed $15.00 per square foot of Rentable Area contained in the First Expansion Space. Except as otherwise provided in the Construction Agreement in the event of a delay, Tenant's right to occupy the First Expansion Space and its obligation to pay Basic Rental, Additional Rental, and all other sums due under this Lease for the First Expansion Space shall commence on the later of (a) the First Expansion Space Estimated Commencement Date, or (b) ten (10) days after Landlord's substantial completion of the First Expansion Space Finish Work, as such terms are defined in the Construction Agreement, but if Tenant takes possession of the First Expansion 66 Space for the conduct of business before either such date, then the commencement date shall be the date Tenant in fact occupies the First Expansion Space (the "First Expansion Space Commencement Date"), and shall terminate with the term of this Lease. From and after the First Expansion Space Commencement Date, except as otherwise specifically provided herein, any reference to the term "Premises" in this Lease and any amendments thereto, shall be deemed to include the First Expansion Space as though originally a part of the Premises under this Lease, and Tenant's occupancy of the First Expansion Space shall be subject to all terms and conditions of this Lease, as amended from time to time. Upon completion of the Finish Work for the First Expansion Space, Landlord and Tenant agree to enter into an amendment to this Lease which modifies the description of the Premises contained in Paragraph 1(c) of this Lease to include the location(s) and Rentable Area of the First Expansion Space; which attaches a revised Exhibit A-1, the Floor Plan of the Premises, to this Lease; which recalculates the Basic Rental amounts shown in Paragraph 1(d) of this Lease based on the addition of the Rentable Area of the First Expansion Space; and which contains other appropriate terms and provisions relating to the addition of the First Expansion Space. Second Expansion Space. Effective on the Second Expansion Space Commencement Date (hereinafter defined), the Premises shall be expanded to include an additional 20,000 square feet of Rentable Area (in excess of the 100,000 rentable square feet contained in the Initial Space and the First Expansion Space), which space shall be located on all or a portion of one or more of the first, seventh, eighth, ninth, tenth, eleventh, or twelfth floors of the Building; provided that, at Landlord's option, Landlord may substitute the fifth floor of the Building for the seventh floor of the Building (collectively, the "Second Expansion Space"). The Second Expansion Space shall be leased by Tenant subject to the same terms, covenants and conditions as provided in this Lease for the Premises, except that the amount of the Finish Allowance (as defined in the Construction Agreement) provided by Landlord with respect to the Second Expansion Space shall not exceed $15.00 per square foot of Rentable Area contained in the Second Expansion Space. Except as otherwise provided in the Construction Agreement in the event of a delay, Tenant's right to occupy the Second Expansion Space and its obligation to pay Basic Rental, Additional Rental, and all other sums due under this Lease for the Second Expansion Space shall commence on the later of (a) the Second Expansion Space Estimated Commencement Date, or (b) ten (10) days after Landlord's substantial completion of the Second Expansion Space Finish Work, as such terms are defined in the Construction Agreement, but if Tenant takes possession of the Second Expansion Space for the conduct of business before either such date, then the commencement date shall be the date Tenant in fact occupies the Second Expansion Space (the "Second Expansion Space Commencement Date"), and shall terminate with the term of this Lease. From and after the Second Expansion Space Commencement Date, except as otherwise specifically provided herein, any reference to the term "Premises" in this Lease and any amendments thereto, shall be deemed to include the Second Expansion Space as though originally a part of the Premises under this Lease, and Tenant's occupancy of the Second Expansion Space shall be subject to all terms and conditions of this Lease, as amended from time to time. Upon completion of the Finish Work for the Second Expansion Space, Landlord and Tenant agree to enter into an amendment to this Lease which modifies the description of the 2 67 Premises contained in Paragraph 1(c) of this Lease to include the location(s) and Rentable Area of the Second Expansion Space; which attaches a revised Exhibit A-1, the Floor Plan of the Premises, to this Lease; which recalculates the Basic Rental amounts shown in Paragraph 1(d) of this Lease based on the addition of the Rentable Area of the Second Expansion Space; and which contains other appropriate terms and provisions relating to the addition of the Second Expansion Space. 3 68 RIDER NO. 201 OPTION TO EXPAND Tenant shall have the option to lease additional space consisting of approximately 30,000 rentable square feet located on the third and fourth floors of the Building, as designated and referred to on Exhibit "201-A" attached to this Lease as the "Columbia Space", pursuant to the terms and provisions contained in this Rider No. 201. The Columbia Space is currently occupied by Columbia/HCA Healthcare Corporation ("Columbia"), as the successor-in-interest to Keystone Homehealth Management, Inc. ("Keystone"), under that certain Office Lease dated January 5, 1996, by and between Keystone and Landlord (the "Columbia Lease"), which expires on January 31, 1999 (the "Columbia Expiration Date"). Under the Columbia Lease, both Landlord and Columbia have the right to terminate the Columbia Lease, at any time, by giving the other party six (6) months prior written notice. Columbia also has the right to extend the term of the Columbia Lease for one (1) additional period of three (3) years by giving Landlord written notice at least nine (9) months before the Columbia Expiration Date. Tenant shall have the option to lease the Columbia Space, as it becomes available, pursuant to the following terms and conditions: (a) Events of Availability: (1) Termination by Columbia. In the event Columbia elects to terminate the Columbia Lease by giving Landlord six (6) months prior written notice, Landlord shall, upon receipt of such notice, promptly notify Tenant of such fact and of the date such termination shall become effective. Upon such a termination, Tenant shall have the right to lease all or a portion of the Columbia Space, so long as Tenant leases a minimum of 10,000 rentable square feet of the Columbia Space. Tenant shall have a period of thirty (30) days after receipt of Landlord's notice to notify Landlord whether Tenant elects to exercise its right to lease all or a portion of the Columbia Space. If Tenant elects to lease only a portion of the Columbia Space, then Tenant shall specify in the notice the amount of rentable square feet which Tenant desires to lease (which amount cannot be less than 10,000 rentable square feet), and Landlord shall have the right to determine the location of such portion. If Tenant waives its right to lease all or a portion of the Columbia Space (either by giving written notice thereof or by failing to give any notice to Landlord within the required thirty (30) day period), this Option to Expand shall thereafter be null, void and of no further force or effect. (2) Expiration of the Columbia Lease. In the event Columbia waives its right to extend the term of the Columbia Lease, either by giving written notice thereof to Landlord or by failing to give any notice to Landlord by April 30, 1998, Landlord shall promptly notify Tenant of such fact. Upon such an expiration, Tenant shall have the right to lease all or a portion of the Columbia Space, so long as Tenant leases a minimum of 10,000 rentable square feet of the Columbia Space. Tenant shall have a period of thirty (30) days after receipt of Landlord's notice to notify Landlord whether Tenant elects to exercise its right to lease all or a portion of the Columbia Space. If Tenant elects to lease only a portion of the Columbia Space, then Tenant shall specify 69 in the notice the amount of rentable square feet which Tenant desires to lease (which amount cannot be less than 10,000 rentable square feet), and Landlord shall have the right to determine the location of such portion. If Tenant waives its right to lease all or a portion of the Columbia Space (either by giving written notice thereof or by failing to give any notice to Landlord within the required thirty (30) day period), this Option to Expand shall thereafter be null, void and of no further force or effect. (3) Extension of the Columbia Lease With the Termination Right. In the event Columbia elects to exercise its right to extend the term of the Columbia Lease through and including January 31, 2002, subject to all the terms, covenants and conditions of the Columbia Lease, including, but not limited to, the right of either Landlord or Columbia to terminate the Columbia Lease upon six (6) months prior written notice to the other party, Landlord shall promptly notify Tenant of such fact. At any time after receipt of Landlord's notice, if Tenant requires additional space in the Building and desires to expand into the Columbia Space, then Tenant shall have the right to request that Landlord exercise its termination right with respect to the Columbia Space, by giving Landlord written notice at least seven (7) months prior to the date on which Tenant desires to commence construction on the Columbia Space. Landlord will then notify Columbia of the termination of the Columbia Lease. In the event Columbia exercises its termination right during the extended term of the Columbia Lease, Landlord shall notify Tenant of such fact pursuant to the terms and conditions of subparagraph (1) above. (4) Extension of the Columbia Lease Without the Termination Right. In the event Columbia notifies Landlord of its desire to exercise its right to extend the term of the Columbia Lease through and including January 31, 2002, subject to all the terms, covenants and conditions of the Columbia Lease, except for the right of either Landlord or Columbia to terminate the Columbia Lease upon six (6) months prior written notice to the other party, Landlord shall promptly notify Tenant of such fact. Tenant shall have a period of thirty (30) days after receipt of Landlord's notice to notify Landlord whether Tenant elects to exercise its right to lease the entire Columbia Space. If Tenant waives its right to lease the Columbia Space (either by giving written notice thereof or by failing to give any notice to Landlord within the required thirty (30) day period), Tenant shall be deemed to have waived its right to exercise this Option to Expand through and including January 31, 2002. Tenant shall have the right to lease the Columbia Space after January 31, 2002, provided that Tenant gives Landlord written notice no later than January 31, 2001, of Tenant's desire to lease the Columbia Space upon the expiration of the extended term of the Columbia Lease. (b) Tenant's Exercise of Its Option to Expand. Tenant's Option to Expand provided herein is subject to the condition that on the date Tenant notifies Landlord of Tenant's election to lease the Columbia Space and on the Columbia Space Commencement Date (hereinafter defined), (i) no event of default, as defined in Paragraph 13 of this Lease, shall have occurred, and (ii) Tenant occupies no less than 100,000 rentable square feet in the Building. If the foregoing conditions are met, and if Tenant timely notifies Landlord of Tenant's election to exercise its Option to Expand upon one (1) of the events of availability of the Columbia Space 2 70 set forth in paragraph (a) above, then Landlord and Tenant shall enter into a written agreement modifying and supplementing this Lease and specifying that the Columbia Space is part of the Premises under this Lease and containing other appropriate terms and provisions relating to the addition of such space to this Lease (including specifically any increase of rent as a result of such addition) as follows: Tenant shall lease the Columbia Space for a term commencing on the date of substantial completion of the leasehold improvements to the Columbia Space, but in no event later than seventy-five (75) days after Columbia vacates the Columbia Space (the "Columbia Space Commencement Date"), and ending contemporaneously with the expiration of the term of this Lease (unless sooner terminated pursuant to the terms and provisions of this Lease). Tenant's obligation to pay Basic Rental, Additional Rental, and all other sums due under this Lease for the Columbia Space shall commence on the Columbia Space Commencement Date, and shall terminate with the term of this Lease. If the Columbia Space Commencement Date occurs during the first three (3) years of the Lease Term, then (i) the Basic Rental for the Columbia Space shall be at the same rental rate then in effect for the Premises pursuant to the Lease, which Basic Rental shall be increased as provided in and under the Lease, and (ii) the amount of the tenant improvement allowance given for the Columbia Space shall be reduced by $0.12 for each month of the Lease Term that has expired prior to the Columbia Space Commencement Date (for example, if the Columbia Space Commencement Date is ten (10) months after the Commencement Date of the Lease, then the tenant improvement allowance payable by Landlord with respect to the Columbia Space shall not exceed $13.80 per square foot of Rentable Area contained in the Columbia Space). If the Columbia Space Commencement Date occurs after the third anniversary of the Commencement Date of the Lease, then (i) the Basic Rental for the Columbia Space shall be at the prevailing rate for comparable space in the Building on the Columbia Space Commencement Date, and (ii) the amount of the tenant improvement allowance given for the Columbia Space shall be at the prevailing rate for comparable space in the Building on the Columbia Space Commencement Date. Landlord shall not be liable for the failure to give possession of the Columbia Space upon the occurrence of an event of availability as set forth in paragraph (a) above by reason of the holding over or retention of possession of any tenant, tenants or occupants, and such failure shall not impair the validity of this Lease, or extend the Lease Term, but the rent for the Columbia Space shall be abated until possession is delivered to Tenant and such abatement shall constitute full settlement of all claims that Tenant might otherwise have against Landlord by reason of such failure to give possession of the Columbia Space to Tenant on such date. Any assignment or subletting by Tenant pursuant to Paragraph 9 of this Lease, other than to a Fortune 500 company or an Affiliate, if any, shall terminate the option of Tenant contained herein. If Tenant shall exercise its right of expansion as provided in this Rider No. 201, and shall occupy the Columbia Space during the initial Lease Term, then, for purposes of the extension of the Lease Term pursuant to an option to extend this Lease, if any, the Columbia Space shall be considered to be a part of the Premises under this Lease, and the Basic Rental for the Columbia Space shall be adjusted as provided in and under such option to extend. 3 71 RIDER NO. 301 RIGHT OF FIRST REFUSAL Provided this Lease is then in full force and effect and no event of default, as defined in Paragraph 13 of this Lease, shall have occurred, Tenant shall have the right of first refusal as hereinafter described to lease that portion of the space to be leased to a prospective tenant (the "Offered Space") which is all or part of the third, fourth, fifth, and/or sixth floor of the Building (collectively, the "Right of First Refusal Space"), as shown and designated on Exhibit "301-A" attached to this Lease as the "Right of First Refusal Space", at such time as Landlord engages in negotiations with a prospective tenant, exercisable at the following times and upon the following conditions: 1. If Landlord enters into negotiations with a prospective tenant to lease the Offered Space, Landlord shall notify Tenant of such fact and shall include in such notice the rent, term, and other terms (including finish out) at which Landlord is prepared to offer such Offered Space to such prospective tenant. Tenant shall have a period of five (5) business days from the date of delivery of the notice to notify Landlord whether Tenant elects to exercise the right granted hereby to lease the Offered Space on terms which result in the same economic benefit to Landlord as the rent, term, and other terms specified in the notice. With respect to the Columbia Space only (as defined in Rider No. 201 attached to this Lease), Tenant shall have the option to lease the Offered Space either (i) upon the same rent, term, and other terms specified in the notice, or (ii) for a term which expires upon the expiration date of this Lease and at a rate and other terms which collectively provide the same economic benefit to Landlord as the rent, term, and other terms specified in the notice. With respect to the Columbia Space only, Tenant shall have a period of five (5) business days from the date of delivery of the notice to notify Landlord whether Tenant elects to exercise the right granted hereby to lease the Offered Space and under which of the foregoing options Tenant elects to lease the Offered Space. If Tenant fails to give any notice to Landlord within the required five (5) business day period, Tenant shall be deemed to have waived its right to lease the Offered Space. 2. If Tenant so waives its right to lease the Offered Space (either by giving written notice thereof or by failing to give any notice), Landlord shall have the right to lease the Offered Space to the prospective tenant, on terms which result in the same economic benefit to Landlord as the terms contained in Landlord's notice to Tenant, and upon the execution of such lease between Landlord and the prospective tenant this Right of First Refusal as to the Offered Space shall thereafter be null, void and of no further force or effect. 3. If Landlord does not enter into a lease with such prospective tenant covering the Offered Space, or if Landlord offers the Offered Space to the prospective tenant on terms which do not result in the same economic benefit to Landlord as the terms contained in Landlord's notice to Tenant, then Landlord shall not thereafter engage in other lease negotiations with respect to the Right of First Refusal Space without first complying with the provisions of this Rider No. 301. 72 4. Upon the exercise by Tenant of its right of first refusal as provided in this Rider No. 301, Landlord and Tenant shall, within twenty (20) days after Tenant delivers to Landlord notice of its election, enter into a lease or an amendment to this Lease covering the Offered Space for the rent, for the term, and containing such other terms and conditions as Landlord notified Tenant pursuant to paragraph 1 above. 5. Any assignment or subletting by Tenant pursuant to Paragraph 9 of this Lease, other than to a Fortune 500 company or an Affiliate, if any, shall terminate the right of first refusal of Tenant contained herein. 2 73 RIDER NO. 401 OPTION TO EXTEND Tenant at its option may extend the term of this Lease for one (1) extension term of five (5) years by serving written notice thereof upon Landlord at least twelve (12) months before the expiration of the initial lease term, provided that at the time of such notice and at the commencement of such extended term, no event of default, as defined in Paragraph 13 of this Lease, shall have occurred. Upon the service of such notice and subject to the conditions set forth in the preceding sentence, this Lease shall be extended without the necessity of the execution of any further instrument or document. Such extended term shall commence upon the expiration date of the initial lease term, expire upon the annual anniversary of such date five (5) years thereafter, and be upon the same terms, covenants, and conditions as provided in this Lease for the initial term, except that the Basic Rental payable during the extended term shall be at the prevailing rate for comparable space in the Building, at the commencement of such extended term, which new Basic Rental shall be adjusted as provided in and under this Lease. Payment of all additional rent and other charges required to be made by Tenant as provided in this Lease for the initial term shall continue to be made during the extended term. Any termination of this Lease during the initial term shall terminate all rights of extension hereunder. Any assignment or subletting by Tenant pursuant to Paragraph 9 of this Lease, other than to a Fortune 500 company or an Affiliate, if any, shall terminate the option of Tenant contained herein. Notwithstanding the foregoing, in no event shall the Basic Rental for the extension term be less than the Basic Rental during the last year of the initial term. 74 RIDER NO. 501 TERMINATION OPTION Tenant shall have the option to terminate this Lease on the last day of any month after the date which is five (5) years and eight (8) months after the Commencement Date of this Lease (as applicable, the "Termination Date"); provided that (i) Tenant gives Landlord at least nine (9) months prior written notice to terminate, and (ii) Tenant is not in default under the Lease at the time of the giving of such notice nor on the Termination Date. Additionally, Tenant's right to terminate hereunder is conditioned upon the payment in full by Tenant, on or before the Termination Date, of (a) all Basic Rental, Additional Rental and other sums owed by Tenant under the Lease through and including the Termination Date; and (b) an amount equal to the sum of (i) the amount obtained by multiplying $5,685,000.00 by a fraction having as its numerator, the number of months remaining in the initial Lease Term, and having as its denominator, the number sixty (60), plus (ii) the unamortized cost of all tenant improvement allowances, leasing commissions and other transaction costs actually paid by Landlord in connection with this Lease with interest thereon at the rate of twelve and one-half percent (12.5%) per annum (collectively, the "Termination Payment"). After Landlord's receipt of the Termination Payment, and so long as Tenant has surrendered the Premises in the condition required under this Lease, neither party shall have any rights, liabilities or obligations under this Lease for the period accruing after the Termination Date, except those which, by the provisions of this Lease, expressly survive the termination of this Lease. 75 EXHIBIT F ROOFTOP LICENSE AGREEMENT THIS ROOFTOP LICENSE AGREEMENT (this "Agreement") is entered into as of the ____ day of _________, 1996, by and between CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP ("Licensor") and PAGEMART WIRELESS, INC. ("Licensee"). RECITALS: A. Licensee and Licensor entered into that certain Office Lease dated _________________________ (as amended, the "Lease") pursuant to which Licensee has leased from Licensor certain premises in the building (the "Building") located in the project commonly known as "3333 Lee Parkway" and located at 3333 Lee Parkway, Dallas, Dallas County, Texas (the "Project"). B. Licensee desires to license from Licensor certain space located on the roof of the Building for the installation of the Communications Equipment (defined below) of Licensee. AGREEMENT: NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00), the mutual promises set forth herein and in the Lease, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confessed, Licensor and Licensee hereby agree as follows: 1. License of Equipment Area. Subject to the terms and conditions hereof, Licensor hereby licenses to Licensee, and Licensee hereby licenses from Licensor, the right to use approximately ______________ square feet of space located on the roof of the Building (the "Equipment Area") for the installation and operation of the Communications Equipment. The location of the Equipment Area is depicted on Exhibit A attached hereto and incorporated herein by reference. Licensee accepts the Equipment Area in its "as-is" condition and acknowledges that Licensor makes no representations or warranties whatsoever with respect thereto. 2. Term. The term of this Agreement (the "Term") shall commence on _______________________, 19____, and shall expire on the date of the expiration or termination of the Lease, unless sooner terminated pursuant to the provisions hereof. This Agreement may be cancelled at any time by Licensor delivering to Licensee ____________ (____) days prior written notice of such cancellation. Licensee may terminate this Agreement at any time by delivering to Licensor ninety (90) days prior written notice of such termination. 3. License Fee; Electrical Costs. As consideration for the license granted to Licensee herein, Licensee agrees to pay to Licensor, in advance without deduction or setoff, and on the first day of the month, a license fee (the "License Fee") in the amount of $_______________ 76 _ per month. Such payments shall be made in the same manner as Licensee's rental payments are made under the Lease, or at such other place as may from time to time be designated by Licensor. In the event that the Term begins or ends on a day other than the first or last day of a month, as applicable, the License Fee for such period shall be prorated on a per diem basis. The License Fee for the first calendar month or portion thereof shall be paid concurrently with the execution of this Agreement. Licensee shall also pay to Licensor as an additional license fee hereunder, within fifteen (15) days after the receipt of an invoice therefor, the costs incurred by Licensor in providing electrical service to the Equipment Area. 4. Security Deposit. Licensee shall deposit with Licensor a security deposit (the "Security Deposit") in the amount of $__________ contemporaneously with the execution hereof. Licensor shall hold the Security Deposit without interest, and the same shall not be considered a prepayment of the License Fee nor a measure of Licensor's damages in case of default by Licensee. Licensor may apply the Security Deposit to the extent necessary to make good any payment arrearages, to pay the cost of remedying Licensee's default or to reimburse Licensor for expenditures made or damages suffered as a consequence of Licensee's default. Following any such application of the Security Deposit, Licensee shall pay to Licensor on demand the amount so applied in order to restore the Security Deposit to its original amount. Any remaining balance of the Security Deposit shall be refundable to Licensee within thirty (30) days after the expiration or earlier termination of this Agreement. 5. Communications Equipment. Licensee shall have the right to install and maintain in the Equipment Area, at Licensee's sole cost and expense,[ _________ (____) MICROWAVE DISHES (NOT TO EXCEED SIX (6) FEET IN DIAMETER), ___________ (_____) DIRECTIONAL PANEL OR OMNIDIRECTIONAL WHIP RADIO COMMUNICATIONS ANTENNAE] and any necessary connecting equipment or cabling (collectively, the "Communications Equipment"). 6. Compliance With Legal Requirements. The installation, maintenance, use, removal and any relocation of the Communications Equipment shall comply with all laws, rules, regulations, restrictions, restrictive covenants and architectural guidelines applicable to the Project and/or the Communications Equipment, as the same may be amended from time to time (the "Legal Requirements"), and Licensee shall obtain, at its sole cost and expense, all approvals, consents, licenses, authorizations and permits required under the Legal Requirements in connection with any such installation, maintenance, use, removal or relocation. 7. Installation of Communications Equipment. Before beginning the installation of the Communications Equipment, Licensee shall deliver to Licensor final plans and specifications setting forth in detail the design, location, size, weight, color scheme, material composition, method of installation, and frequency of the Communications Equipment for Licensor's review and approval, together with evidence reasonably satisfactory to Licensor that all Legal Requirements have been satisfied. Licensor's approval of any such plans and specifications shall not constitute a representation or warranty by Licensor that such plans and specifications comply with the Legal Requirements. Such compliance shall be the sole responsibility of Licensee, but Licensor shall, at Licensee's request and expense, use reasonable efforts to assist Licensee in F-2 77 complying therewith. Upon approval by Licensor of the plans and specifications therefor and the location thereof, Licensee may install the Communications Equipment in the Equipment Area, provided that such work is coordinated with and completed in accordance with the instructions of Licensor and Licensor's roofing contractor, and is performed in a good and workmanlike manner, in accordance with all Legal Requirements and the plans and specifications therefor, and in a manner so as not to damage the Project or materially interfere with the use of any portion of the Project while such installation is taking place. Except to the extent otherwise directed by Licensor, Licensee shall, at Licensee's sole cost and expense, connect the Communications Equipment to the Premises through cables in conduit in the utility chases in the Building and to the Building lightning protection system and electrical service, and install a submeter for the providing of electrical service to the Equipment Area. 8. Equipment Changes. From time to time Licensee shall have the right, with the prior written approval of Licensor and at Licensee's sole cost and expense, to install, maintain, repair and replace the Communications Equipment or components thereof, including, without limitation, electrical and communications wires, cables and other pipes, conduits and lines linking various components of the Communications Equipment with other components thereof. In exercising the rights granted hereunder, Licensee shall comply with all Legal Requirements and with the reasonable rules and regulations of the Building which may from time to time be prescribed by Licensor. 9. Interference. Licensee acknowledges and agrees that its use of the rooftop of the Building is of a non-exclusive nature and that Licensor has the right to grant other licenses, leases or rights of use, of any kind or nature, to parties other than Licensee. The Communications Equipment shall be of such type and frequencies, and shall be operated in a manner, that will not cause measurable frequency interference with the business or operations of any tenant, occupant or other licensee of the Building, including the operation of transmitting and receiving devices operated within their assigned frequencies and within Federal Communications Commission ("FCC") rules and regulations. Licensor shall use reasonable efforts to ensure that any rights to use the roof of the Building (including, without limitation, any rights to install other antenna equipment), or any other lease or license for use of the Building for communications uses, granted to third parties hereafter shall not result in measurable frequency interference with the Communications Equipment, and Licensor shall use reasonable diligence to prevent or stop such interference upon receiving notice thereof from Licensee. Licensor and Licensee agree that Licensor (or, if requested by Licensee, an independent third party qualified in the communications industry, provided any fees charged by such third party shall be paid by Licensee) shall arbitrate any disputes between Licensee and other tenants, occupants or licensees of the Building concerning alleged interference with the operation of the Communications Equipment, whether claimed to be caused by Licensee or such other tenants, occupants or licensees. Licensee shall be bound by Licensor's (or, if applicable, the third party's) determination in such disputes. In determining such disputes, the underlying assumption shall be that the device installed later in time shall be required to have frequencies and operating characteristics that minimize interference with devices installed prior in time, but that all devices shall be designed, maintained and upgraded to minimize interference with other F-3 78 devices in accordance with industry standards as they change from time to time. In the event the Communications Equipment causes interference to any device installed prior in time, Licensee will take all steps necessary to correct and eliminate the interference. If said interference cannot be eliminated within a reasonable length of time, Licensee agrees, at the request of Licensor, to remove the Communications Equipment from the Project and this Agreement shall then terminate without further obligation on the part of Licensor or Licensee, except as expressly provided otherwise herein. 10. Access to Equipment Area. Licensee shall have access to the Equipment Area twenty-four (24) hours per day, each and every day during the Term; provided, that (i) Licensee shall provide to Licensor at least two (2) hours advance notice of any need for access, and (ii) a representative of Licensor may accompany Licensee on the roof of the Building during such access. Access to the Equipment Area may be arranged through Licensor's property management personnel or, after the normal business hours for the Building, through Licensor's security personnel at the Building. In the event that Licensee requests access to the Equipment Area at times other than the normal business hours for the Building, Licensee shall compensate Licensor for reasonable trip charges and overtime charges resulting from employees or agents of Licensor making trips to the Building to provide such after hours access. 11. Service Interruptions; Equipment Malfunctions. Licensor shall not be liable to Licensee for the interruption or suspension of electrical service to the Communications Equipment. In addition, Licensor shall not be liable or responsible for any alleged malfunction or non-functioning of the Communications Equipment or for the repair, maintenance or any loss of, or damage to, such equipment. 12. Licensee's Covenants. Licensee covenants and agrees as follows: (a) Condition of Equipment; Repairs. Licensee shall use, maintain, and operate the Communications Equipment in a good and safe condition and in accordance with all Legal Requirements, and shall keep the Equipment Area free from all trash, debris and waste resulting from the use thereof by Licensee. Licensee shall repair all damage caused to the Project by the installation, use, maintenance, relocation or removal of the Communications Equipment and shall, upon its removal, restore the Equipment Area to its condition immediately before the installation thereof, ordinary wear and tear excepted. If Licensee fails to do so within five (5) days after Licensor's request, Licensor may perform such work and Licensee shall reimburse Licensor for all reasonable costs incurred in connection therewith within fifteen (15) days after Licensor's request therefor, which reimbursement obligation of Licensee shall survive the expiration or earlier termination of this Agreement. (b) Costs; Liens. Licensee shall pay or cause to be paid all costs for materials provided or work performed by or at the direction of Licensee related to the Communications Equipment or the Equipment Area. In the event of any claim of any kind or nature against Licensor or, if other than Licensor, the owner of the property on which the Building is located (including, but not limited to, mechanic's liens), arising out of the failure of payment or F-4 79 performance of an obligation required of Licensee under this Agreement, Licensee shall be solely responsible to adjust, settle and/or pay any and all such claims, in full, at the sole cost and expense of Licensee. If a mechanic's lien is filed against the Building or the Project as a result of such claim, Licensee shall bond against or discharge any such liens within five (5) days after notice from Licensor. In the event Licensor or, if other than Licensor, the owner of the property on which the Building is located sustains any loss or damage by reason of any such claim, Licensee will fully indemnify Licensor and/or said owner for any such loss or damage, including reasonable attorneys' fees incurred in connection therewith, which indemnity obligation of Licensee shall survive the expiration or earlier termination of this Agreement. (c) Taxes. Licensee shall pay any sales, use and personal property taxes assessed on, or any portion of such taxes attributable to, the Communications Equipment. In addition, Licensee shall pay, as an additional license fee hereunder, any increase in real property taxes levied against the Building (excluding any additional taxes that relate to the period prior to the commencement date of the Term) which is directly attributable to Licensee's use of the Equipment Area. (d) Surrender; Removal of Equipment. Upon the expiration or earlier termination of this Agreement, Licensee shall remove the Communications Equipment from the Project and peaceably surrender the Equipment Area to Licensor in the condition the same was in at the commencement of this Agreement, ordinary wear and tear excepted. In addition, Licensee shall remove the Communications Equipment from the Project within ten (10) days after the termination of Licensee's right to possess the premises therein. If Licensee fails to perform any such removal work, Licensor may do so and store or dispose of the Communications Equipment in any manner Licensor deems appropriate without liability to Licensee. Licensee shall reimburse Licensor for all reasonable costs incurred by Licensor in connection therewith within fifteen (15) days after Licensor's request therefor, which reimbursement obligation of Licensee shall survive the expiration or earlier termination of this Agreement. (e) Increases in Operating Expenses or Insurance. If Licensee's installation or operation of the Communications Equipment results in an increase in Licensor's operating expenses (including taxes) or insurance premiums related to the Project at any time during the Term, Licensee shall be responsible for the payment of the amount of such increase which is attributable to such installation or operation, as reasonably determined by Licensor. Licensee shall pay any such amounts to Licensor within ten (10) days after receipt of an invoice therefor. Licensee shall not install or operate the Communications Equipment in a manner that results in the cancellation or termination of Licensor's insurance. (f) Relocation Expenses. Licensee shall pay all costs associated with any relocation of the Communications Equipment required by any governmental authority. F-5 80 13. Certain Rights Reserved by Licensor. Licensor shall have the following rights: (a) Right to Relocate Equipment. At any time after the execution of this Agreement and on fifteen (15) days prior written notice, Licensor may substitute for the Equipment Area other space on the roof of the Building (the "New Equipment Area"), in which event the New Equipment Area shall be deemed to be the Equipment Area for all purposes hereunder. Licensor shall reimburse Licensee for Licensee's reasonable out-of-pocket costs in connection with the relocation of the Communications Equipment to the New Equipment Area. (b) Screening of Equipment. At any time during the Term, Licensor may require that Licensee install, at Licensee's sole cost and expense, a screening device to ensure that the Communications Equipment cannot be viewed by the public. Such screening device shall comply with all Legal Requirements and any requirements regarding the construction, maintenance and removal of such screening device that Licensor may establish from time to time. Licensee shall obtain Licensor's prior written approval of all plans and specifications for such screening device. 14. Licensee's Insurance. (a) No construction, alteration or removal operations shall be initiated by Licensee unless Licensee has first obtained builders risk insurance in limits and with coverage reasonably acceptable to Licensor. (b) At all times during the Term, Licensee shall maintain in force, at its expense, a policy of public liability insurance insuring Licensee with a combined single limit of at least $2,000,000.00 for injury or death or property damage, with an umbrella policy providing excess liability coverage of not less than $3,000,000.00 insuring against the liability of Licensee arising out of or in connection with its installation, maintenance, operation and use of the Telecommunications Equipment and/or the provision of services at the Equipment Area. (c) At all times during the Term, Licensee shall maintain workers compensation insurance covering Licensee's employees entering the Building. (d) At all times during the Term, Licensee shall maintain fire and casualty insurance on Licensee's personal property for the replacement cost thereof. (e) All insurance required to be maintained by Licensee hereunder shall be issued by an insurance company licensed to do business in the State of Texas, shall name Licensor and its managing agent, if any, as additional insureds, and shall insure Licensee's performance of its obligations under the indemnity provisions of this Agreement. Licensee's insurance shall contain provisions providing that such insurance shall be primary insurance insofar as Licensor and Licensee are concerned, with any other insurance maintained by Licensor being excess and non-contributing with the insurance of Licensee required hereunder. Licensee shall provide a certificate evidencing such insurance to Licensor prior to F-6 81 commencement of any construction pursuant to this Agreement and upon renewals of such policies prior to the renewal date. Licensor shall have the right to review the adequacy of the limits of insurance coverage required of Licensee hereunder, and make changes it deems necessary, not less than every year. 15. Waiver of Subrogation. It is the intent of Licensor and Licensee not to hold each other responsible for that portion of any loss or damage paid or reimbursed by an insurer of Licensor or Licensee under any fire, extended coverage or other property insurance policy maintained by Licensee with respect to the Equipment Area or by Licensor with respect to the Building. Therefore, with respect to the amount of any damage, loss, claim or liability paid or reimbursed by an insurer under any fire, extended coverage or property insurance policy maintained by Licensee with respect to the Equipment Area, or Licensor with respect to the Building, Licensor, Licensee and all parties claiming under them each mutually release and discharge each other from such damages, losses, claims or liabilities, no matter how caused, including negligence, and each waives any right of recovery from the other including, but not limited to, claims for contribution or indemnity, which might otherwise exist on account thereof. Any fire, extended coverage or property insurance policy maintained by Licensee with respect to the Equipment Area, or Licensor with respect to the Building, shall contain, in the case of Licensee's policies, a waiver of subrogation provision or endorsement in favor of Licensor, and in the case of Licensor's policies, a waiver of subrogation provision or endorsement in favor of Licensee, or, in the event that such insurers cannot or will not attach such waiver of subrogation provisions or endorsements, Licensee and Licensor shall obtain the approval and consent of their respective insurers, in writing, to the terms of this Agreement. Neither Licensee nor its insurers shall be entitled to receive any contribution from any insurance policies separately maintained by Licensor, and Licensee agrees to indemnify, protect, defend and hold harmless Licensor and any of Licensor's insurers from any claim, suit or cause of action asserted or brought by Licensee's insurers for, on behalf of, or in the name of Licensee, including but not limited to, claims for contribution, indemnity or subrogation. The mutual releases, discharges and waivers contained in this provision shall apply EVEN IF THE LOSS OR DAMAGE TO WHICH THIS PROVISION APPLIES IS CAUSED SOLELY OR IN PART BY THE NEGLIGENCE OF LICENSOR OR LICENSEE. 16. INDEMNITY. LICENSEE HEREBY AGREES TO INDEMNIFY, DEFEND AND HOLD HARMLESS LICENSOR AND ITS MANAGING AGENT, AND THEIR RESPECTIVE PARTNERS, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, AFFILIATES AND SUCCESSORS-IN-INTEREST (COLLECTIVELY AND TOGETHER WITH LICENSOR, THE "LICENSOR PARTIES") FROM AND AGAINST ALL LIABILITY, LOSS, DAMAGE, COST OR EXPENSE, INCLUDING ATTORNEYS' FEES, ON ACCOUNT OF ANY CLAIMS OF ANY NATURE WHATSOEVER (INCLUDING CLAIMS OR LIENS OF LABORERS OR MATERIALMEN OR OTHERS) FOR WORK PERFORMED, MATERIALS OR SUPPLIES FURNISHED, DAMAGE TO PROPERTY OR INJURY TO PERSONS CAUSED BY THE NEGLIGENCE OR MISCONDUCT OF LICENSEE OR LICENSEE'S AGENTS, SERVANTS, OR EMPLOYEES OR ANY OTHER PERSONS ENTERING UPON THE EQUIPMENT AREA OR THE BUILDING UNDER THE EXPRESS F-7 82 OR IMPLIED INVITATION OF LICENSEE, OR WHERE SUCH INJURY IS THE RESULT OF THE VIOLATION OF THE PROVISIONS OF THIS AGREEMENT BY ANY SUCH PERSON OR CAUSED BY THE CONSTRUCTION, INSTALLATION, ALTERATION, MAINTENANCE, REPAIR, RELOCATION OR USE OF THE COMMUNICATIONS EQUIPMENT. LICENSEE'S OBLIGATIONS AND LIABILITIES UNDER THIS PARAGRAPH SHALL SURVIVE THE EXPIRATION OR TERMINATION OF THIS AGREEMENT. 17. Hazardous Materials. Licensee shall not cause or permit the storage, use, generation or disposition of any Hazardous Materials (as hereinafter defined) in the Equipment Area without the prior written consent of Licensor. Licensee hereby agrees to indemnify, defend and hold harmless the Licensor Parties from and against all fines, suits, procedures, claims and actions of every kind, and all costs associated therewith (including attorneys' and consultants' fees) arising out of or in any way connected with any deposit, spill, discharge or other release of Hazardous Materials that occurs in or from the Equipment Area, or which arises from Licensee's use or occupancy of the Equipment Area. Licensee's obligations and liabilities under this paragraph shall survive the expiration or termination of this Agreement. For purposes of this Agreement, the term "Hazardous Materials" means any explosives, radioactive materials or other hazardous substances which are governed by any federal, state or local statute, law, ordinance, code, rule, regulation or decree applicable to the Project. 18. Default and Remedies. Licensor and Licensee hereby agree that time is of the essence with respect to the payment by Licensee of the License Fee and any other monetary obligation of Licensee under this Agreement and the performance by Licensee of the terms, covenants and conditions of this Agreement. If Licensee fails to pay the License Fee or other monetary obligation under this Agreement when due or otherwise defaults in the performance of any of the terms, covenants and conditions of this Agreement, Licensor may, at its option and in addition to all other remedies available under applicable law, terminate this Agreement. In the event of such a default, all payments previously made by Licensee under this Agreement will remain the property of Licensor. Termination of Licensee's right to use the Equipment Area under this Agreement will not affect Licensee's obligation to make all License Fee payments coming due after the date of termination. Upon termination of Licensee's right to use the Equipment Area under this Agreement, Licensor will have the right, but no obligation, to relicense the Equipment Area to another party. In the event the Equipment Area is licensed by Licensor to another party, any License Fee received from the other party applicable to the remainder of the Term will be applied first to any costs and expenses incurred in attempting to enforce this Agreement or in relicensing the Equipment Area, including costs of court and attorneys' fees with respect thereto, and then to the satisfaction of Licensee's obligations under this Agreement. The remedies provided in this paragraph are cumulative and not to the exclusion of any other rights or remedies that may be available to Licensor, at law or in equity. No waiver of any default or breach by Licensee hereunder shall be construed to be a waiver or release of any other default or breach of this Agreement at a later time. No failure or delay by Licensor in the exercise of any remedy provided for in this paragraph shall be construed as a forfeiture or waiver of the same or any other remedy at a later time. F-8 83 19. Miscellaneous. (i) Assignment. Licensee shall have no right to assign, sell or transfer its rights or obligations under this Agreement to any third party without the prior written consent of Licensor, which consent may be withheld by Licensor for any reason in its sole and absolute discretion. Any purported sale, transfer or assignment in violation of the provisions of this paragraph shall be null and void and shall constitute an event of default hereunder. This Agreement and the rights of Licensor to any payments hereunder are fully assignable by Licensor, and Licensee shall pay any such assignee directly upon delivery of written notice of any such assignment to Licensee. (ii) Notices. All notices, demands, payments and other communications required to be given or made hereunder shall be in writing and shall be hand-delivered or sent by nationally recognized overnight courier or mailed by certified or registered mail, first class postage prepaid, to Licensor at Suite 110, 3333 Lee Parkway, Dallas, Texas 75219, Attention: Property Manager, with a copy to Crescent Real Estate Equities Limited Partnership, 777 Main Street, Suite 2100, Fort Worth, Texas 76102, Attention: James S. Wassel, or to Licensee at _____________________________________ ___________________, _______________________, _____________________________ __, Attention: __________________________________________, or to such other address as Licensor or Licensee shall provide to each other in writing, provided that no notice of either party's change of address shall be effective until fifteen (15) days after the addressee's actual receipt thereof. Notice shall be deemed given upon tender of delivery (in the case of a hand-delivered notice) or upon posting of same with the overnight courier or upon the depositing of same in an official depository of the United States Postal Service (in the case of a certified or registered letter). (iii) Entire Agreement. This Agreement (including all exhibits attached hereto, which are hereby incorporated by reference herein) is the entire agreement between the parties concerning its subject matter, and it supersedes and cancels all prior agreements or understandings, written or oral, between the parties. (iv) Choice of Laws. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAW. (v) No Lease. The parties hereto acknowledge that this Agreement is merely a license to use, and not an agreement to lease, the Equipment Area. This Agreement does not create any property rights or rights of possession or occupancy whatsoever in favor of or on behalf of Licensee, but only licenses to Licensee the right to use the Equipment Area for the purposes, and in the manner, provided for in this Agreement. (vi) Binding Effect. This Agreement shall be binding on the successors, permitted assigns, heirs, executors and administrators of the parties hereto. F-9 84 (vii) Amendments and Waiver. This Agreement cannot be changed or modified, and no breach hereof shall be deemed waived or released, except in a writing executed by the party sought to be charged therewith. (viii) Late Charges and Interest. Licensor may impose a late payment charge equal to five percent (5%) of any amount due if not paid within five (5) days from the date required to be paid hereunder. In addition, any payment due under this Agreement not paid within ten (10) days after the date herein specified to be paid shall bear interest from the date such payment is due to the date of actual payment at the rate of eighteen percent (18%) per annum or the highest lawful rate of interest permitted by Texas or federal law, whichever rate of interest is lower. (ix) Attorneys' Fees. In the event either party is in default beyond any applicable grace or notice period in the performance of any of the terms of this Agreement and the other party employs an attorney in connection therewith, the nonprevailing party agrees to pay the prevailing party's reasonable attorneys' fees. (x) Interpretation. Whenever the context shall require, the singular shall include the plural, the plural shall include the singular and words of any gender shall be deemed to include words of any other gender. The captions contained in this Agreement are inserted only as a matter of convenience and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provisions hereof. (xi) Severability. In the event one or more of the provisions of this Agreement are declared invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. (xii) No Personal Liability of Licensor. If Licensor shall fail to perform any covenant, term or condition of this Agreement and, as a consequence, if Licensee shall recover a money judgment against Licensor, such judgment shall be satisfied only out of the proceeds received at a judicial sale upon execution and levy against the right, title and interest of Licensor in the Building and in the rents or other income from the Building receivable by Licensor, and neither Licensor nor Licensor's owners, partners, shareholders or venturers shall have any personal, corporate or other liability hereunder. (xiii) Execution of Agreement. The submission of this Agreement for examination does not constitute a reservation of or option for the Equipment Area or any other space within or on the Building and shall vest no right in either party. This Agreement shall become effective only after the full execution and delivery hereof by all of the parties hereto and, if required, upon the approval by the holder of any mortgage encumbering the Project. F-10 85 IN WITNESS WHEREOF, Licensor and Licensee have caused this Agreement to be duly executed as of the date first set forth above. LICENSOR: -------- CRESCENT REAL ESTATE EQUITIES LIMITED PARTNERSHIP, a Delaware limited partnership By: Crescent Real Estate Equities, Ltd., a Delaware corporation, its general partner By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------- LICENSEE: -------- PAGEMART WIRELESS, INC., a Delaware corporation By: ----------------------------------------------- Name: --------------------------------------------- Title: --------------------------------------------- F-11 EX-11.1 3 COMPUTATION OF EARNINGS (LOSS) PER SHARE 1 EXHIBIT 11.1 PAGEMART WIRELESS, INC.
YTD ENDED JUNE 13, 1996 ------------------------------------- NUMBER PERCENT EQUIVALENT OF SHARES OUTSTANDING SHARES ---------- ----------- ---------- 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 ---------- ---------- 33,715,088 33,712,255 Adjustments to outstanding shares: Add Exercises for 6/13/95 - 6/13/96 at 100%.............. 2,833 Add Shares Issuable upon Exchange of Shares in PageMart Canada Holding........................................ 714,286 Add Weighted Average Grants Issued 6/13/95 - 6/13/96..... 261,869 ------- Total adjustments to outstanding shares:................... 978,988 ---------- Weighted Average Shares Outstanding (as adjusted) at 6/13/96.................................................. 34,691,243 6/13/96 Shares Weighted at 165 days........................ 15,639,494
JUNE 14 THROUGH DECEMBER 31, 1996 --------------------------------------- NUMBER PERCENT EQUIVALENT OF SHARES OUTSTANDING SHARES ---------- ----------- ------------ COMMON STOCK From Founders' Stock................................... 2,300,000 100.00% 2,300,000 Stock Options Exercised................................ 595,983 93.82% 559,154 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 Offerings............................ 6,000,000 100.00% 6,000,000 Employee Stock Purchase Plan Shares Issued............. 31,275 0.50% 156 ---------- ------------ 39,804,932 39,736,984 Weighted Average Shares Outstanding at 12/31/96.......... 39,736,984 12/31/96 Shares Weighted at 201 days..................... 21,822,770 WEIGHTED AVERAGE OF SHARES OUTSTANDING at 6/13/96 and 12/31/96............................................... 37,462,264 NET LOSS................................................. $(48,598,000) NET LOSS PER SHARE....................................... $ (1.30) ============
EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S DECEMBER 31, 1995 CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 22,603 0 38,222 4,776 11,702 70,572 145,794 48,851 313,620 62,503 240,687 4 0 0 10,426 313,620 68,551 221,592 78,896 78,896 155,265 0 35,041 (48,598) 0 (48,598) 0 0 0 (48,598) (1.30) (1.30)
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