<PAGE> 1
This Prospectus Supplement is filed under Rule 424(b)(3)
and relates to Registration Statement No. 33-81084
PROSPECTUS SUPPLEMENT
(to Prospectus Dated August 2, 1996)
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 June 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 marketing-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.
August 29, 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 JUNE 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 August 1, 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>
<S> <C>
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1995
and June 30, 1996................................................ 3
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1995 and 1996........ 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 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.................................................. 13
Item 6. Exhibits and Reports on Form 8-K................................... 13
</TABLE>
2
<PAGE> 4
PAGEMART, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,897 $ 4,336
Accounts receivable, net 10,079 2,318
Inventories 11,179 2,192
Prepaid expenses and other current assets 3,202 2,731
------------ -------------
Total current assets 34,357 11,577
Restricted investments 500 -
Property and equipment, net 51,810 69,216
Narrowband licenses 38,210 38,210
Deferred debt issuance costs, net 2,695 2,527
Other assets 6,054 6,934
------------ -------------
Total assets $ 133,626 $ 128,464
============ =============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 23,094 $ 24,262
Current maturities of long-term debt 5,479 -
Deferred revenue 21,409 37,808
Other current liabilities 6,166 6,882
------------ -------------
Total current liabilities 56,148 68,952
Long-term debt 104,499 101,241
Commitments and contingencies
Stockholder's deficit:
Common stock $.0001 par value per share, 1,000
shares authorized, 100 issued at December 31,
1995 and June 30, 1996 - -
Additional paid-in capital 124,438 124,438
Accumulated deficit (151,459) (166,167)
------------ -------------
Total stockholder's deficit (27,021) (41,729)
------------ -------------
Total liabilities and stockholders' deficit $ 133,626 $ 128,464
============ =============
</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 June 30, Six Months Ended June 30,
--------------------------- ----------------------------
1995 1996 1995 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Recurring revenue $ 23,387 $ 36,964 $ 43,851 $ 70,707
Equipment sales and activation fees 13,896 12,153 26,135 26,955
------------ ----------- ------------ ------------
Total revenues 37,283 49,117 69,986 97,662
Cost of equipment sold 15,294 14,641 28,672 31,723
Operating expenses:
Technical 6,141 8,783 11,600 16,873
Selling 9,216 10,464 17,781 19,911
General and administrative 10,067 13,043 19,765 25,962
Depreciation and amortization 3,091 4,942 5,893 9,190
------------ ----------- ------------ ------------
Total operating expenses 28,515 37,232 55,039 71,936
------------ ----------- ------------ ------------
Operating loss (6,526) (2,756) (13,725) (5,997)
Other (income) expense:
Interest expense 3,782 4,052 7,262 8,095
Interest income (242) (41) (454) (133)
Other 271 554 608 749
------------ ----------- ------------ ------------
Total other (income) expense 3,811 4,565 7,416 8,711
------------ ----------- ------------ ------------
Net loss $ (10,337) $ (7,321) $ (21,141) $ (14,708)
============ =========== ============ ============
</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>
Six months Ended June 30,
----------------------------
1995 1996
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (21,141) $ (14,708)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities
Depreciation and amortization 5,893 9,190
Provision for bad debt 3,478 2,777
Accretion of discount on senior discount notes 5,560 6,290
Changes in certain assets and liabilities:
(Increase) decrease in accounts receivable (3,448) 4,984
Decrease in inventories 1,916 8,987
(Increase) decrease in prepaid expenses and other current assets (1,304) 471
(Increase) decrease in other assets, net 206 (1,304)
Increase in accounts payable 2,429 1,168
Increase in deferred revenue 4,507 16,399
Increase in other current liabilities 1,051 716
----------- -----------
Net cash provided by (used in) operating activities (853) 34,970
----------- -----------
Cash flows from investing activities:
Proceeds from transfer of narrowband licenses 20,649 -
Purchases of property and equipment, net (17,309) (25,915)
Release of restricted cash - 500
Other (67) (89)
----------- -----------
Net cash provided by (used in) investing activities 3,273 (25,504)
----------- -----------
Cash flows from financing activities:
Borrowings from vendor credit facilities 5,732 -
Payments on vendor credit facilities (1,933) (15,027)
----------- -----------
Net cash provided by (used in) financing activities 3,799 (15,027)
----------- -----------
Net increase (decrease) in cash and cash equivalents 6,219 (5,561)
Cash and cash equivalents, beginning of period 14,507 9,897
----------- -----------
Cash and cash equivalents, end of period $ 20,726 $ 4,336
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 939 $ 1,265
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 SIX MONTHS ENDED JUNE 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 six months ended June 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. 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 six months ended June 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' 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 June 30, 1995 to June 30, 1996, the
number of domestic units in service increased from 1,008,683 to 1,524,297.
None of the Company's growth is attributable to acquisitions. Given its growth
strategy and the substantial associated selling and marketing expenses, the
Company expects to continue to generate operating losses in 1996 from its
one-way wireless communications business. In addition, the Company plans to
begin development and implementation of two-way wireless messaging services
during 1996 and 1997, 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 June 30, 1996, the Company's affiliate
PageMart Canada Limited ("PageMart Canada") added 1,637 subscribers. As a
result of its ownership interest in PageMart Canada, the Company's share of the
units in service of PageMart Canada was 760 units in service at June 30, 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
7
<PAGE> 9
than other paging carriers since it recoups a substantial portion of messaging
equipment costs upon sale to retailers and subscribers. This results in
significantly lower capital expenditures, depreciation and amortization than if
the Company leased such equipment to its subscribers. The Company expects to
lease rather than sell a portion of its two- way messaging units. 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. In general, the Company
anticipates that, based on its recent experience, 90% of its units sold through
retail distribution channels will be activated and in service within 75 days of
shipment.
The Company derives its recurring revenue primarily from fixed
periodic fees for services that are not generally dependent on usage.
Consequently, the Company's ability to recoup its initial selling and marketing
costs, to meet operating expenses and to achieve profitability is dependent on
the average length of each customer's subscription period. As long as a
subscriber continues to utilize the Company's service, operating results
benefit from the recurring payments of the fixed fees without the incurrence of
additional selling expenses by the Company. Conversely, operating results are
adversely affected by customer disconnections. Each month a percentage of the
Company's existing customers have their service terminated for a variety of
reasons, including failure to pay, dissatisfaction with service and switching
to a competing service provider. The Company's average monthly disconnection
rates for the twelve months ended December 31, 1993, 1994, 1995 and June 30,
1996 were 3.7%, 3.4%, 2.5%, and 2.2%, 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 SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Units in Service
Units in service from domestic operations were 1,008,683 and 1,524,297
as of June 30, 1995 and 1996, respectively, representing an annual growth rate
of 51%. In addition, during the quarter ended June 30, 1996, PageMart Canada
added 1,637 subscribers. As a result of its ownership interest in PageMart
Canada, the Company's share of the units in service of PageMart Canada was 760
units at June 30, 1996. The Company has experienced
8
<PAGE> 10
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 six months ended June 30, 1996 were $49.1
million and $97.7 million, respectively, compared to $37.3 million and $70.0
million for the three and six months ended June 30, 1995. Recurring revenues
for airtime, voicemail, and other services for the three and six months ended
June 30, 1996 were $37.0 million and $70.7 million, respectively, compared to
$23.4 million and $43.9 million for the comparable periods ended June 30, 1995.
Revenues from equipment sales and activation fees for the three and six months
ended June 30, 1996 were $12.2 million and $27.0 million, respectively,
compared to $13.9 million and $26.1 million for the comparable periods ended
June 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 $8.28 and $8.50 in the second quarter of 1995
and 1996, respectively. In general, over the past twelve months the Company's
ARPU has increased primarily as a result of an increase in subscribers added
through retail and direct sales channels. In addition, a portion of the
increase in ARPU from the second quarter of 1995 to the second quarter of 1996
was due to a higher mix of multi-city, regional and nationwide services as well
as increased sales of other value-added services such as voicemail and toll
free numbers. Management anticipates that the Company's ARPU will decline in
the foreseeable future due to a higher mix of subscribers added through private
brand strategic alliance programs and third-party resellers, which yield lower
ARPU. ARPU is lower for subscribers added through third-party resellers and
private brand strategic alliances because these are generally high volume
customers that are charged reduced airtime rates. However, because third-party
resellers and private brand strategic alliance partners are responsible for
selling and marketing costs, billing, collection and other administrative costs
associated with end-users, the Company does not incur these costs with respect
to such subscribers.
Cost of Equipment Sold
The cost of equipment sold for the three and six months ended June 30,
1996 was $14.6 million and $31.7 million, respectively, compared to $15.3
million and $28.7 million for the three and six months ended June 30, 1995,
respectively. The change in 1996 was a combination of an increase in the
number of units sold combined with lower average pager prices paid to
suppliers. The Company expects pager costs generally to remain constant, with
only modest reductions in cost to the Company as a result of volume purchases.
Management anticipates that loss on equipment sold will increase on a per unit
basis for the foreseeable future due to increased competition.
Operating Expenses
Technical expenses were $8.8 million and $16.9 million for the three
and six months ended June 30, 1996, respectively, compared to $6.1 million and
$11.6 million for the comparable 1995 periods. The increase in 1996 resulted
primarily from the expansion of the Company's nationwide network
infrastructure, which resulted in greater expenses associated with the addition
of new transmitter sites, transmitter and terminal equipment and
telecommunications expenses. On an average monthly cost per unit in service
basis, technical expenses were $2.17 and $2.02 in the second quarter of 1995
and 1996, respectively, compared to $2.17 and $2.03 for the six months ended
June 30, 1995 and 1996, respectively.
Selling expenses were $10.5 million and $19.9 million for the three
and six months ended June 30, 1996, respectively, compared to $9.2 million and
$17.8 million for the three and six months ended June 30, 1995, respectively.
The increase in 1996 resulted from greater marketing and advertising costs
related to the significant growth in units sold, as well as from increased
sales compensation because of the addition of sales personnel in new and
existing operating markets. During the six months ended June 30, 1995 and
1996, the Company added 235,953 and 284,273 net new domestic units in service,
respectively. Sales and marketing employees increased from 450 at June 30,
1995 to 531 at June 30, 1996. Management views the net loss on equipment sold
to be a component of
9
<PAGE> 11
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
$86 for both the six months ended June 30, 1995 and 1996. During the three and
six months ended June 30, 1996, the Company incurred $116,000 and $242,000,
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 six months ended June 30, 1996 were $13.0 million and $26.0 million,
respectively, compared to $10.1 million and $19.8 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. The Company
increased the number of representatives in its customer service call centers
from 493 on June 30, 1995 to 561 on June 30, 1996, and believes its operates
one of the most extensive of such facilities in the paging industry. On an
average cost per month per unit in service basis, general and administrative
expenses were $3.56 and $3.00 in the second quarter of 1995 and 1996,
respectively, and $3.70 and $3.13 for the three and six months ended June 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 six months ended June
30, 1996 were $4.9 million and $9.2 million, respectively, compared to $3.1
million and $5.9 million for the comparable periods ended June 30, 1995. The
increase in 1996 resulted from the expansion of the Company's network
infrastructure including transmitter and terminal equipment, as well as the
purchase and development of a new centralized administrative system during 1995
and the first half of 1996. As an average cost per month per unit in service,
depreciation and amortization was $1.09 and $1.14 in the second quarter of 1995
and 1996, respectively, and was $1.10 and $1.11 for the six months ended June
30, 1995 and 1996, respectively.
Interest Expense
Interest expense for the three and six months ended June 30, 1996 was
$4.1 million and $8.1 million, respectively, compared to $3.8 million and $7.3
million for the comparable periods ended June 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 $2.9 million and $3.3 million
for the three months ended June 30, 1995 and 1996, respectively, and was $5.7
million and $6.5 million for the six months ended June 30, 1995 and 1996,
respectively.
Net Loss
The Company sustained net losses for the three and six months ended
June 30, 1996 of $7.3 million and $14.7 million, respectively, compared to
$10.3 million and $21.1 million for the three and six months ended June 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 six months ended June 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
$.47 during the third quarter of 1994 to $2.35 during the second quarter of
1996 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, 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.
EBITDA. EBITDA represents earnings (loss) before interest, taxes,
depreciation and amortization. EBITDA is a financial measure commonly
used in the paging industry. EBITDA is not derived pursuant to GAAP
and therefore should not be construed as an alternative to operating
income, as an alternative to cash flows from operating activities (as
determined in accordance with GAAP) or as a measure of liquidity. The
calculation of EBITDA does not include the commitments of the Company
for capital expenditures and payment of debt and should not be deemed
to represent funds available to the Company. In the fourth quarter of
1995, the Company's EBITDA from its one-way operations became positive
for the first time.
11
<PAGE> 13
Selected Quarterly Results of Operations
The table below sets forth management's presentation of results of
one-way domestic operations and other data on a quarterly basis for the eight
most recent fiscal quarters. This presentation should be read in conjunction
with the condensed consolidated financial statements of the Company and the
notes thereto included elsewhere in this report and the Company's quarterly
reports on Form 10-Q for the corresponding periods below, and should not be
considered in isolation or as an alternative to results of operations that are
presented in accordance with GAAP (in thousands, except other data).
<TABLE>
<CAPTION>
Three Months Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1994 1994 1995 1995 1995 1995 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Recurring revenues $15,161 $17,902 $20,464 $23,387 $26,994 $30,658 $33,743 $36,964
Technical expenses 4,199 4,802 5,459 6,141 6,842 7,015 7,943 8,783
General and
administrative
expenses 7,961 8,886 9,698 10,067 11,350 12,243 12,792 13,043
Depreciation and
amortization 2,217 2,354 2,802 3,091 3,469 3,910 4,248 4,942
------- ------- ------- ------- -------- -------- -------- --------
Operating profit
before selling
expenses 784 1,860 2,505 4,088 5,333 7,490 8,760 10,196
Selling expenses (1) 9,580 11,732 9,704 10,614 10,889 11,181 11,601 12,836
------- ------- ------- ------- -------- -------- -------- --------
Operating income
(loss) $(8,796) $(9,872) $(7,199) $(6,526) $ (5,556) $ (3,691) $ (2,841) $ (2,640)
======= ======= ======= ======= ======== ======== ======== ========
EBITDA $(6,579) $(7,518) $(4,397) $(3,435) $ (2,087) $ 219 $ 1,407 $ 2,302
======= ======= ======= ======= ======== ======== ======== ========
OTHER DATA:
Units in service (2) 608,427 772,730 874,944 1,008,683 1,131,464 1,240,024 1,374,146 1,524,297
Net subscriber
additions 112,822 164,303 102,214 133,739 122,781 108,560 134,122 150,151
ARPU (3) $9.15 $8.64 $8.28 $8.28 $8.41 $8.62 $8.61 $8.50
Operating profit
before selling
expenses per
subscriber per
month (4) .47 .90 1.01 1.45 1.66 2.11 2.23 2.35
Selling expenses
per net
subscriber
addition (1)(5) 85 71 95 79 89 103 86 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.
12
<PAGE> 14
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. 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.
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.
13
<PAGE> 15
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
August 2, 1996 Chairman, President and
Chief Executive Officer
/s/ G. CLAY MYERS
---------------------------------------------
G. Clay Myers
August 2, 1996 Vice President, Finance,
Chief Financial Officer and
Treasurer (principal financial
and chief accounting officer)
14
<PAGE> 16
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
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.
* This exhibit is hereby incorporated by reference to the Registration
Statement of PageMart, Inc. on Form S-1, Registration No. 33-78054.
** Filed herewith.
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S JUNE 30, 1996 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,336
<SECURITIES> 0
<RECEIVABLES> 7,373
<ALLOWANCES> 5,055
<INVENTORY> 2,192
<CURRENT-ASSETS> 11,577
<PP&E> 106,890
<DEPRECIATION> 37,674
<TOTAL-ASSETS> 128,464
<CURRENT-LIABILITIES> 68,952
<BONDS> 101,241
<COMMON> 0
0
0
<OTHER-SE> (41,729)
<TOTAL-LIABILITY-AND-EQUITY> 128,464
<SALES> 26,955
<TOTAL-REVENUES> 97,662
<CGS> 31,723
<TOTAL-COSTS> 31,723
<OTHER-EXPENSES> 71,936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,095
<INCOME-PRETAX> (14,708)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,708)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,708)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
