<PAGE> 1
PROSPECTUS SUPPLEMENT THIS PROSPECTUS SUPPLEMENT IS FILED UNDER
(TO PROSPECTUS DATED AUGUST 2, 1996) RULE 424(B)(3) AND RELATES TO
REGISTRATION STATEMENT NO. 33-81084
PAGEMART, INC.
12 1/4% SENIOR DISCOUNT EXCHANGE NOTES DUE 2003
--------------
RECENT DEVELOPMENTS
Attached hereto and incorporated by reference herein is the Form 10-Q
Quarterly Report of PageMart, Inc. for the quarterly period ended September 30,
1996.
--------------
This Prospectus Supplement, together with the Prospectus, is to be used by
Morgan Stanley & Co. Incorporated in connection with offers and sales of the
above-referenced securities in market-making transactions at negotiated prices
related to prevailing market prices at the time of sale. Morgan Stanley & Co.
Incorporated may act as principal or agent in such transactions.
November 15, 1996
<PAGE> 2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
================================================================================
Form 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to
---------- ----------
Commission File No. 0-24436
PAGEMART, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2283921
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6688 N. CENTRAL EXPWY., SUITE 800
DALLAS, TEXAS 75206
(Address of principal executive offices) (Zip Code)
(214) 750-5809
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
---------- ----------
As of November 13, 1996, there were 100 shares of the registrant's common
stock outstanding, all of which were owned by PageMart Wireless, Inc.
The registrant meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
<PAGE> 3
PAGEMART, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
1995 AND SEPTEMBER 30, 1996 . . . . . . . . . . 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 . . . . . . . . . . 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30,
1995 AND 1996 . . . . . . . . . . . . . . . . . 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS . . . . . . . . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . 14
</TABLE>
2
<PAGE> 4
PAGEMART, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,897 $ 2,078
Accounts receivable, net 10,079 468
Inventories 11,179 --
Prepaid expenses and other current
assets 3,202 2,941
--------- ---------
Total current assets 34,357 5,487
Restricted investments 500 --
Property and equipment, net 51,810 74,487
Narrowband licenses 38,210 38,210
Deferred debt issuance costs, net 2,695 2,441
Other assets 6,054 5,983
--------- ---------
Total assets $ 133,626 $ 126,608
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 23,094 $ 22,802
Current maturities of long-term debt 5,479 --
Deferred revenue 21,409 38,821
Other current liabilities 6,166 9,565
--------- ---------
Total current liabilities 56,148 71,188
Long-term debt 104,499 104,521
Commitments and contingencies
Stockholder's deficit:
Common stock $.0001 par value per share,
1,000 shares authorized, 100 issued at
December 31, 1995 and September 30, 1996 -- --
Additional paid-in capital 124,438 124,438
Accumulated deficit (151,459) (173,539)
--------- ---------
Total stockholder's deficit (27,021) (49,101)
--------- ---------
Total liabilities and
stockholder's deficit $ 133,626 $ 126,608
========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these financial statements.
3
<PAGE> 5
PAGEMART, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1995 1996 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Recurring revenue $ 26,994 $ 39,697 $ 70,845 $ 110,404
Equipment sales and activation fees 16,348 16,253 42,483 43,208
--------- --------- --------- ---------
Total revenues 43,342 55,950 113,328 153,612
Cost of equipment sold 17,927 19,216 46,599 50,939
Operating expenses:
Technical 6,842 9,578 18,442 26,451
Selling 9,310 10,691 27,091 30,602
General and administrative 11,350 13,541 31,115 39,503
Depreciation and amortization 3,469 5,714 9,362 14,904
--------- --------- --------- ---------
Total operating expenses 30,971 39,524 86,010 111,460
--------- --------- --------- ---------
Operating loss (5,556) (2,790) (19,281) (8,787)
Other (income) expense:
Interest expense 3,858 3,980 11,120 12,075
Interest income (196) (12) (650) (145)
Other 229 614 837 1,363
--------- --------- --------- ---------
Total other (income) expense 3,891 4,582 11,307 13,293
--------- --------- --------- ---------
Net loss $ (9,447) $ (7,372) $ (30,588) $ (22,080)
========= ========= ========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these financial statements.
4
<PAGE> 6
PAGEMART, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(30,588) $(22,080)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 9,362 14,904
Provision for bad debt 4,627 4,610
Accretion of discount on senior discount notes 8,445 9,570
Changes in certain assets and liabilities:
(Increase) decrease in accounts receivable (3,002) 5,001
Decrease in inventories 2,781 11,179
(Increase) decrease in prepaid expenses and other current assets (1,373) 261
Increase in other assets, net (419) (650)
Increase (decrease) in accounts payable 2,604 (292)
Increase in deferred revenue 5,510 17,412
Increase in other current liabilities 2,647 3,399
-------- --------
Net cash provided by operating activities 594 43,314
-------- --------
Cash flows from investing activities:
Proceeds from transfer of narrowband licenses 20,649 --
Purchases of property and equipment, net (24,745) (36,485)
Release of restricted cash -- 500
Other (2,441) (121)
-------- --------
Net cash used in investing activities (6,537) (36,106)
-------- --------
Cash flows from financing activities:
Borrowings from vendor credit facilities 6,657 --
Payments on vendor credit facilities (3,129) (15,027)
-------- --------
Net cash provided by (used in) financing activities 3,528 (15,027)
-------- --------
Net decrease in cash and cash equivalents (2,415) (7,819)
Cash and cash equivalents, beginning of period 14,507 9,897
-------- --------
Cash and cash equivalents, end of period $ 12,092 $ 2,078
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,476 $ 1,662
Income taxes $ -- $ --
</TABLE>
The accompanying notes to condensed consolidated financial statements are
an integral part of these financial statements.
5
<PAGE> 7
PAGEMART, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
1. GENERAL
PageMart, Inc. ("PageMart") was incorporated as a Delaware corporation on
May 8, 1989 to provide paging products and services. PageMart is a
wholly-owned subsidiary of PageMart Wireless, Inc. ("Wireless"). 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 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. PageMart and its subsidiaries are
referred to herein as the "Company".
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and are in the form
prescribed by the Securities and Exchange Commission in instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. The interim unaudited financial
statements should be read in conjunction with the audited financial statements
of PageMart, Inc. and subsidiaries for the year ended December 31, 1995. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
3. LITIGATION
On July 8, 1994, an action against the Company was filed in the United
States District Court for the Eastern District of New York by Universal Contact
Communications Inc., a former reseller of the Company's wireless messaging
devices. The Company terminated the reseller relationship due to a monetary
default by the plaintiff. The Company subsequently contacted plaintiff's
customers in an effort to provide continued service directly through the
Company, and discontinued plaintiff's paging services. In the complaint,
plaintiff alleges, among other things, that the Company violated federal law by
making unsolicited advertisements, breached its contract with plaintiff,
slandered plaintiff, converted certain confidential information and trade
secrets, tortiously interfered with plaintiff's business and contractual
relations, and engaged in unfair competition. Plaintiff seeks, among other
things, compensatory damages of $500,000 with respect to each of the nine causes
of action included in the complaint, punitive damages of $5,000,000, and various
forms of injunctive relief. The Company is vigorously defending the action.
Trial has been set for March 3, 1997. In management's opinion, the ultimate
outcome of this lawsuit is not expected to have a material adverse effect on the
results of operations or financial condition of the Company.
4. INITIAL PUBLIC OFFERING
On June 19, 1996, Wireless 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. Wireless 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 Wireless repaid approximately $11.9 million of loans outstanding
under Wireless' revolving credit facility. The remaining proceeds are expected
to be used by Wireless to fund the initial construction of the Company's
narrowband personal communications service transmission network and for general
corporate purposes.
6
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of PageMart, Inc. and subsidiaries (the "Company") for the three and
nine months ended September 30, 1995 and 1996. This discussion should be read
in conjunction with the Company's condensed consolidated financial statements
and the notes thereto included elsewhere in this report.
When used in this discussion, the words 'estimate', 'project', 'plan',
'expect' and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
including the timely development and acceptance of new products, the impact of
competitive products and pricing, and those discussed below or in the Company's
Form 10-K for the year ended December 31, 1995 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 much larger subscriber base than the Company currently serves in order to
accommodate growth. In addition, the Company incurs substantial costs
associated with new subscriber additions. As a result, the Company has
generated significant net operating losses for each year of its operations.
See "Management's Presentation of Results of Operations."
The Company's strategy is to expand its subscriber base as rapidly as
possible to increase cash flow through greater utilization of its nationwide
wireless communications network. From September 30, 1995 to September 30,
1996, the number of domestic units in service increased from 1,131,464 to
1,684,937. None of the Company's growth is attributable to acquisitions.
Given its growth strategy and the substantial associated selling and marketing
expenses, the Company expects to continue to generate operating losses in 1996
from its one-way wireless communications business. In addition, the Company
has begun 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 1996 or 1997; however, it expects to generate significant revenues with
respect to two-way services in 1998. The Company's ability to generate
operating income is primarily dependent on its ability to attain a sufficiently
large installed subscriber base that generates recurring revenues which offset
the fixed operating costs of its wireless networks, administration and selling
and marketing expenses. The Company intends to achieve this growth by
promoting its customized paging and other wireless messaging services through
its national sales offices, retail distribution channels, private brand
strategic alliances with GTE Corporation, Southwestern Bell Mobile Systems,
AT&T Wireless Services, Ameritech Mobile Services, Inc. and long distance
reseller EXCEL Telecommunications, Inc., and international expansion.
During the three months ended September 30, 1996, the Company's affiliate
PageMart Canada Limited ("PageMart Canada") added 4,312 subscribers. As a
result of its ownership interest in PageMart Canada, the Company's share of the
units in service of PageMart Canada was 3,569 units in service at September 30,
1996.
7
<PAGE> 9
Unlike most other paging carriers, the Company sells, rather than leases,
substantially all of the messaging equipment used by its subscribers. As a
result, the Company has much less capital invested in messaging equipment than
other paging carriers since it recoups a substantial portion of messaging
equipment costs upon sale to retailers and subscribers. This results in
significantly lower capital expenditures and depreciation expense than if the
Company leased such equipment to its subscribers. In addition, the Company's
financial results are much different 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 twelve months ended December 31, 1993, 1994, 1995 and September 30,
1996 were 3.7%, 3.4%, 2.5%, and 2.3%, 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.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
Units in Service
Units in service from domestic operations were 1,131,464 and 1,684,937 as
of September 30, 1995 and 1996, respectively, representing an annual growth
rate of 49%. In addition, during the quarter ended September 30, 1996,
PageMart Canada added 4,312 subscribers. As a result of its ownership interest
in PageMart Canada, the Company's share of the units in service of PageMart
Canada was 3,569 units at September 30, 1996. The Company
8
<PAGE> 10
has experienced strong growth in units in service due primarily to the success
of its sales and marketing strategies in the direct sales, national retail and
third-party reseller channels, as well as from private brand strategic alliance
programs.
Revenues
Revenues for the three and nine months ended September 30, 1996 were $56.0
million and $153.6 million, respectively, compared to $43.3 million and $113.3
million for the three and nine months ended September 30, 1995. Recurring
revenues for airtime, voicemail, and other services for the three and nine
months ended September 30, 1996 were $39.7 million and $110.4 million,
respectively, compared to $27.0 million and $70.8 million for the comparable
periods ended September 30, 1995. Revenues from equipment sales and activation
fees for the three and nine months ended September 30, 1996 were $16.3 million
and $43.2 million, respectively, compared to $16.3 million and $42.5 million
for the comparable periods ended September 30, 1995. The increases in
recurring revenues and revenues from equipment sales and activation fees were
primarily due to the rapid growth in the number of units in service. The
increase in equipment sales during 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 only slightly as sales volumes
increase.
The Company's ARPU was $8.41 and $8.25 in the third quarter of 1995 and
1996, respectively. In general, 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 voicemail and toll free numbers. Management
anticipates that the Company's ARPU will decline in the foreseeable future due
to a 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 reduced airtime rates.
However, because private brand strategic alliance partners and third party
resellers are responsible for selling and marketing costs, billing, collection
and other administrative costs associated with end-users, the Company incurs
substantially lower administrative costs with respect to such subscribers.
Cost of Equipment Sold
The cost of equipment sold for the three and nine months ended September
30, 1996 was $19.2 million and $50.9 million, respectively, compared to $17.9
million and $46.6 million for the three and nine months ended September 30,
1995, respectively. The change in 1996 was a combination of an increase in the
number of units sold combined with slightly lower average pager prices paid to
suppliers. The Company expects pager costs generally to remain constant, with
only modest reductions in cost to the Company as a result of volume purchases.
Management anticipates that loss on equipment sold will increase on a per unit
basis for the foreseeable future due to increased competition, especially in
the national retail channel.
Operating Expenses
Technical expenses were $9.6 million and $26.5 million for the three and
nine months ended September 30, 1996, respectively, compared to $6.8 million
and $18.4 million for the comparable 1995 periods. The increase in 1996
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 decreased from $2.13 in the third quarter of 1995 to
$1.99 in the third quarter of 1996. In addition, technical expenses decreased
from $2.15 for the nine months ended September 30, 1995 to $2.01 for the nine
months ended September 30, 1996.
Selling expenses were $10.7 million and $30.6 million for the three and
nine months ended September 30, 1996, respectively, compared to $9.3 million
and $27.1 million for the three and nine months ended September 30, 1995,
respectively. The increase in 1996 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
9
<PAGE> 11
existing operating markets. During the nine months ended September 30, 1995
and 1996, the Company added 358,734 and 444,913 net new domestic units in
service, respectively. Sales and marketing employees increased from 446 at
September 30, 1995 to 534 at September 30, 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 marketing expenses per net subscriber addition
(including loss on equipment sales) were $87 and $85 for the nine months ended
September 30, 1995 and 1996, respectively. During the three and nine months
ended September 30, 1996, the Company incurred $66,000 and $308,000,
respectively, in selling expenses associated with its international operations.
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) for the
three and nine months ended September 30, 1996 were $13.5 million and $39.5
million, respectively, compared to $11.4 million and $31.1 million for the
comparable 1995 periods. The increase was attributable to the Company's
expansion of its customer service call centers and continued expansion into new
markets to support the growing subscriber base which required additional office
space, administrative personnel and customer service representatives. On an
average cost per month per unit in service basis, general and administrative
expenses were $3.54 and $2.81 in the third quarter of 1995 and 1996,
respectively, and $3.63 and $3.00 for the nine months ended September 30, 1995
and 1996, respectively. The per unit decrease was a result of increased
operating efficiencies and economies of scale achieved through the growth of
the Company's subscriber base.
Depreciation and amortization for the three and nine months ended
September 30, 1996 were $5.7 million and $14.9 million, respectively, compared
to $3.5 million and $9.4 million for the comparable periods ended September 30,
1995. The increase in 1996 resulted from the continued expansion of the
Company's network infrastructure including transmitter and terminal equipment,
as well as the purchase and development of a new centralized administrative
system during 1995 and 1996. As an average cost per month per unit in service,
depreciation and amortization was $1.08 and $1.19 in the third quarter of 1995
and 1996, respectively, and was $1.09 and $1.13 for the nine months ended
September 30, 1995 and 1996, respectively.
Interest Expense
Interest expense for the three and nine months ended September 30, 1996
was $4.0 million and $12.1 million, respectively, compared to $3.9 million and
$11.1 million for the comparable periods ended September 30, 1995. The
increase in 1996 was primarily the result of increased interest expense related
to the 12 1/4% Senior Discount Notes due 2003 issued by PageMart (the "12 1/4%
Notes"). Interest expense related to the 12 1/4% Notes was $3.0 million and
$3.4 million for the three months ended September 30, 1995 and 1996,
respectively, and was $8.7 million and $9.8 million for the nine months ended
September 30, 1995 and 1996, respectively.
Net Loss
The Company sustained net losses for the three and nine months ended
September 30, 1996 of $7.4 million and $22.1 million, respectively, compared to
$9.4 million and $30.6 million for the three and nine months ended September
30, 1995, 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.
10
<PAGE> 12
MANAGEMENT'S PRESENTATION OF RESULTS OF OPERATIONS
Comparison with GAAP Presentation
The Company's unaudited condensed consolidated financial statements for
the three and nine months ended September 30, 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 is
useful in understanding the Company's results.
Management believes that operating profit before selling expenses is a
meaningful indicator of the profitability of the Company's installed base of
units in service because it measures the recurring revenues received for
services less the costs (including depreciation and amortization) associated
with servicing that installed base. Operating profit before selling expenses
per subscriber per month for the Company's one-way operations has grown from
$.90 during the fourth quarter of 1994 to $2.20 during the third quarter of
1996 due primarily to the Company's increase in subscribers, operating
efficiency and resulting benefits in economies of scale. During the third
quarter of 1996, the operating profit before selling expense per subscriber per
month decreased to $2.20 from $2.35 during the second quarter of 1996 due to
lower average revenue per unit combined with an increase in absolute technical
expenses associated with network expansion, and increased general and
administrative expenses associated with expansion of customer service
capabilities.
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,
voicemail, customized coverage options, toll free numbers, excess usage
fees and other recurring revenues and fees associated with the subscriber
base. Recurring revenues do not include equipment sales revenues or
initial activation fees. Recurring revenues are the same under both the
management and GAAP presentations.
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.
11
<PAGE> 13
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.
12
<PAGE> 14
Selected Quarterly Results of Operations
The table below sets forth management's presentation of results of one-way
domestic operations and other data on a quarterly basis for the eight most
recent fiscal quarters. This presentation should be read in conjunction with
the condensed consolidated financial statements of the Company and the notes
thereto included elsewhere in this report and the Company's quarterly reports
on Form 10-Q for the corresponding periods below, and should not be considered
in isolation or as an alternative to results of operations that are presented
in accordance with GAAP (in thousands, except other data).
<TABLE>
<CAPTION>
Three Months Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Mar 31, June 30, Sept. 30, Dec. 31, Mar 31, June 30, Sept. 30,
1994 1995 1995 1995 1995 1996 1996 1996
------- ------- ------- ------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Recurring revenues $17,902 $20,464 $23,387 $26,994 $30,658 $33,743 $36,964 $39,697
Technical expenses 4,802 5,459 6,141 6,842 7,015 7,943 8,783 9,725
General and
administrative
expenses 8,886 9,698 10,067 11,350 12,243 12,792 13,043 13,668
Depreciation and
amortization 2,354 2,802 3,091 3,469 3,910 4,248 4,942 5,714
------- ------- ------- ------- ------- ------- ------- -------
Operating profit
before selling
expenses 1,860 2,505 4,088 5,333 7,490 8,760 10,196 10,590
Selling expenses (1) 11,732 9,704 10,614 10,889 11,181 11,601 12,836 13,588
------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss) $(9,872) $(7,199) $(6,526) $(5,556) $(3,691) $(2,841) $(2,640) $(2,998)
======= ======= ======= ======= ======= ======= ======= =======
EBITDA $(7,518) $(4,397) $(3,435) $(2,087) $ 219 $ 1,407 $ 2,302 $ 2,716
======= ======= ======= ======= ======= ======= ======= =======
OTHER DATA:
Units in service (2) 772,730 874,944 1,008,683 1,131,464 1,240,024 1,374,146 1,524,297 1,684,937
Net subscriber
additions 164,303 102,214 133,739 122,781 108,560 134,122 150,151 160,640
ARPU (3) $ 8.64 $ 8.28 $ 8.28 $ 8.41 $ 8.62 $ 8.61 $ 8.50 $ 8.25
Operating profit
before selling
expenses per
subscriber per
month (4) .90 1.01 1.45 1.66 2.11 2.23 2.35 2.20
Selling expenses
per net
subscriber
addition (1)(5) 71 95 79 89 103 86 85 85
</TABLE>
(1) Includes loss on sale of equipment.
(2) Stated as of the end of each period.
(3) Calculated by dividing recurring revenues for the quarter by the average
number of units in service during that quarter. Stated as the monthly
average for the quarter.
(4) Calculated by dividing operating profit before selling expenses (selling
expenses include loss on sale of equipment) for the quarter by the average
number of units in service during that quarter. Stated as the monthly
average for the quarter.
(5) Calculated by dividing selling expenses, including loss on sale of
equipment, for the quarter by the net subscriber additions for the
quarter.
13
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the normal course
of business. In management's opinion, the ultimate outcome of these lawsuits
will not have a material adverse effect on the Company's financial position or
results of operations.
On July 8, 1994, an action against the Company was filed in the United
States District Court for the Eastern District of New York by Universal Contact
Communications Inc., a former reseller of the Company's wireless messaging
devices. The Company terminated the reseller relationship due to a monetary
default by the plaintiff. The Company subsequently contacted plaintiff's
customers in an effort to provide continued service directly through the
Company, and discontinued plaintiff's paging services. In the complaint,
plaintiff alleges, among other things, that the Company violated federal law by
making unsolicited advertisements, breached its contract with plaintiff,
slandered plaintiff, converted certain confidential information and trade
secrets, tortiously interfered with plaintiff's business and contractual
relations, and engaged in unfair competition. Plaintiff seeks, among other
things, compensatory damages of $500,000 with respect to each of the nine causes
of action included in the complaint, punitive damages of $5,000,000, and various
forms of injunctive relief. The Company is vigorously defending the action.
Trial has been set for March 3, 1997. In management's opinion, the ultimate
outcome of this lawsuit is not expected to have a material adverse effect on the
results of operations or financial condition of the Company.
Local 337 of the International Brotherhood of the Teamsters has filed a
petition to organize the employees of the Detroit PageMart office. The union is
attempting to organize all full and part time sales and support personnel.
There are currently thirteen employees in sales and support. The election has
been scheduled by the National Labor Relations Board for December 10, 1996. A
majority of those voting must vote for the union in order to win the election.
In management's opinion, the ultimate outcome of the election is not expected
to have a materially adverse effect on the results of operations or financial
condition of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibit listed on the accompanying index to exhibit is filed as a
part of this quarterly report.
(b) Reports on Form 8-K
None.
14
<PAGE> 16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
PAGEMART, INC.
/s/ JOHN D. BELETIC
-----------------------------
JOHN D. BELETIC
NOVEMBER 14, 1996 CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
/s/ G. CLAY MYERS
---------------------------
G. CLAY MYERS
NOVEMBER 14, 1996 VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND
TREASURER (PRINCIPAL FINANCIAL
AND CHIEF ACCOUNTING OFFICER)
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
4.1 * Indenture dated as of October 19, 1993, between
PageMart, Inc. and United States Trust Company of New
York, as Trustee, relating to the 12 1/4% Senior
Discount Notes due 2003.
27.1 ** Financial Data Schedule.
</TABLE>
* This exhibit is hereby incorporated by reference to the Registration
Statement of PageMart, Inc. on Form S-1, Registration No. 33-78054.
** Filed herewith.
