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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
================================================================================
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 May 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.
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PAGEMART, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1995
AND MARCH 31, 1996...................................................................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1995 AND 1996..................................................................4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 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>
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PAGEMART, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,897 $ 8,122
Accounts receivable, net 10,079 5,316
Inventories 11,179 8,016
Prepaid expenses and other current assets 3,202 2,907
--------- ---------
Total current assets 34,357 24,361
Restricted investments 500 500
Property and equipment, net 51,810 60,674
Narrowband licenses 38,210 38,210
Deferred debt issuance costs, net 2,695 2,609
Other assets 6,054 7,303
--------- ---------
Total assets $ 133,626 $ 133,657
========= =========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 23,094 $ 26,497
Current maturities of long-term debt 5,479 5,660
Deferred revenue 21,409 22,949
Other current liabilities 6,166 6,870
--------- ---------
Total current liabilities 56,148 61,976
Long-term debt 104,499 106,089
Commitments and contingencies
Stockholder's deficit:
Common stock, $.0001 par value per share, 1,000
shares authorized, 100 shares issued at December 31,
1995 and March 31, 1996 0 0
Additional paid-in capital 124,438 124,438
Accumulated deficit (151,459) (158,846)
--------- ---------
Total stockholder's deficit (27,021) (34,408)
--------- ---------
Total liabilities and stockholder's deficit $ 133,626 $ 133,657
========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements.
3
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PAGEMART, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1995 1996
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<S> <C> <C>
Revenues:
Recurring revenue $ 20,464 $ 33,743
Equipment sales and activation fees 12,239 14,802
-------- --------
Total revenues 32,703 48,545
Cost of equipment sold 13,378 17,082
Operating expenses:
Technical 5,459 8,090
Selling 8,565 9,447
General and administrative 9,698 12,919
Depreciation and amortization 2,802 4,248
-------- --------
Total operating expenses 26,524 34,704
-------- --------
Operating loss (7,199) (3,241)
Other (income) expense:
Interest expense 3,480 4,043
Interest income (212) (92)
Other 337 195
-------- --------
Total other (income) expense 3,605 4,146
-------- --------
Net loss $(10,804) $ (7,387)
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements.
4
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PAGEMART, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1995 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(10,804) $ (7,387)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,802 4,248
Provision for bad debt 1,744 1,453
Accretion of discount on senior discount notes 2,704 3,077
Changes in certain assets and liabilities:
Decrease in accounts receivable 796 3,310
Decrease in inventories 2,114 3,163
(Increase) decrease in prepaid expense and other current assets (506) 295
(Increase) decrease in other assets, net 30 (1,423)
Increase (decrease) in accounts payable (1,953) 3,403
Increase in deferred revenue 3,079 1,540
Increase (decrease) in other current liabilities (652) 704
-------- --------
Net cash provided by (used in) operating activities (646) 12,383
-------- --------
Cash flows from investing activities:
Purchase of narrowband licenses 20,649 --
Purchases of property and equipment, net (10,376) (12,796)
Investment in international ventures -- (3)
Purchases of intangible assets (286) (53)
-------- --------
Net cash provided by (used in) investing activities 9,987 (12,852)
-------- --------
Cash flows from financing activities:
Borrowings from vendor credit facilities 3,924 --
Payments on vendor credit facilities (845) (1,306)
-------- --------
Net cash provided by (used in) financing activities 3,079 (1,306)
-------- --------
Net increase (decrease) in cash and cash equivalents 12,420 (1,775)
Cash and cash equivalents, beginning of period 14,507 9,897
-------- --------
Cash and cash equivalents, end of period $ 26,927 $ 8,122
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 405 $ 675
Income taxes -- --
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements.
5
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PAGEMART, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 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 months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996.
Certain amounts in the prior year condensed consolidated financial
statements have been reclassified to conform with the current year
presentation.
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. SUBSEQUENT EVENT
Wireless has filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission in the contemplation of an initial public
offering of Wireless' Class A Common Stock.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results
of operations of PageMart, Inc. and subsidiaries (the "Company") for the three
months ended March 31, 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.
GENERAL
The Company has constructed and operates a wireless messaging and
communications network and provides paging and other one-way wireless messaging
services to its subscribers. In addition, the Company sells and distributes
wireless messaging equipment to subscribers, retailers and resellers. It earns
recurring revenues from each subscriber in the form of fixed periodic fees and
incurs substantial operating expenses in offering its services, including
technical, customer service and general and administrative expenses. See
"Management's Presentation of Results of Operations."
Since commencing operations in 1990, the Company has invested heavily
in its wireless communications network and administrative infrastructure in
order to establish nationwide coverage, sales offices in major metropolitan
areas, customer service call centers and centralized administrative support
functions. The Company incurs substantial fixed operating costs related to
its one-way wireless communications infrastructure, which is designed to serve
a much larger subscriber base than the Company currently serves in order to
accommodate growth. In addition, the Company incurs substantial costs
associated with new subscriber additions. As a result, the Company has
generated significant net operating losses for each year of its operations.
See "Management's Presentation of Results of Operations."
The Company's strategy is to expand its subscriber base as rapidly as
possible to increase cash flow through greater utilization of its nationwide
wireless communications network. From March 31, 1995 to March 31, 1996, the
number of units in service increased from 874,944 to 1,374,146. None of the
Company's growth is attributable to acquisitions. Given its growth strategy
and the substantial associated selling and marketing expenses, the Company
expects to continue to generate operating losses in 1996 from its one-way
wireless communications business. In addition, the Company plans to begin
development and implementation of two-way wireless messaging services during
1996, and expects to incur additional operating losses during the start-up
phase for such services. The Company does not anticipate any significant
revenues from two-way services during 1996 or 1997, however, it expects to
generate significant revenues with respect to two-way services in 1998. 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.
Unlike most other paging carriers, the Company sells, rather than
leases, substantially all of the messaging equipment used by its subscribers.
As a result, the Company has much less capital invested in messaging equipment
than other paging carriers since it recoups a substantial portion of messaging
equipment costs upon sale to retailers and subscribers. This results in
significantly lower capital expenditures, depreciation and amortization than if
the Company leased such equipment to its subscribers. In addition, the
Company's financial results are much different than other paging carriers that
lease messaging equipment to subscribers because the Company recognizes the
cost of messaging equipment sold in connection with adding new subscribers at
the time of sale rather than capitalizing and depreciating the cost of
messaging equipment over periods ranging from three to five years as occurs
with paging carriers that lease messaging equipment to subscribers. However,
the Company expects to lease rather than sell a portion of its two-way
messaging units. In addition, the Company's retail distribution strategy
results in the recognition of expenses associated with 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).
7
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The Company sells its messaging equipment through multiple
distribution channels including direct sales, third-party resellers, private
brand strategic alliances and local and national retail stores. Selling and
marketing expenses are primarily attributable to compensation paid to the
Company's sales force, advertising and marketing costs and to losses resulting
from the fact that, for competitive and marketing reasons, the Company
generally sells each new unit for less than its acquisition cost. The
Company's accounting practices result in selling and marketing expenses,
including loss on sale of equipment, being recorded at the time a unit is sold.
Units sold by the Company during a given month may exceed units activated and
in service due to inventory stocking and distribution strategies of the
retailers. As a result, selling and marketing expenses per net subscriber
addition may fluctuate from period to period. In general, the Company
anticipates that, based on its recent experience, 90% of its units sold through
retail distribution channels will be activated and in service within 75 days of
shipment.
The Company derives its recurring revenue primarily from fixed
periodic fees for services that are not generally dependent on usage.
Consequently, the Company's ability to recoup its initial selling and marketing
costs, to meet operating expenses and to achieve profitability is dependent on
the average length of each customer's subscription period. As long as a
subscriber continues to utilize the Company's service, operating results
benefit from the recurring payments of the fixed fees without the incurrence of
additional selling expenses by the Company. Conversely, operating results are
adversely affected by customer disconnections. Each month a percentage of the
Company's existing customers have their service terminated for a variety of
reasons, including failure to pay, dissatisfaction with service and switching
to a competing service provider. The Company's average monthly disconnection
rates for the twelve months ended December 31, 1993, 1994, 1995 and March 31,
1996 were 3.7%, 3.4%, 2.5%, and 2.4%, respectively.
More than 90% of the Company's 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 MONTHS ENDED MARCH 31, 1995 AND 1996
Units in Service
Units in service were 874,944 and 1,374,146 as of March 31, 1995 and
1996, respectively, representing an annual growth rate of 57%. The Company has
experienced strong growth in units in service due primarily to the success of
its sales and marketing strategies in the direct sales, national retail and
third-party reseller channels, as well as from private brand strategic alliance
programs.
Revenues
Revenues for the three months ended March 31, 1995 and 1996 were $32.7
million and $48.5 million, respectively. Recurring revenues for airtime,
voicemail and other services for the same periods were $20.5 million and $33.7
million, respectively. Revenues from equipment sales and activation fees for
the three months ended March 31, 1995 and 1996 were $12.2 million and $14.8
million, respectively. The increases in recurring revenues and revenues from
equipment sales and activation fees were primarily due to the rapid growth in
the number of units in service. The increase in equipment sales during the
first quarter of 1996 was somewhat offset by a decline in the
8
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average price per unit sold. The Company expects equipment prices per unit
generally to remain constant or decline only slightly as sales volumes
increase.
The Company's ARPU was $8.28 and $8.61 in the first quarter of 1995
and 1996, respectively. In general, over the past twelve months the Company's
ARPU has increased primarily as a result of an increase in subscribers added
through retail and direct sales channels. In addition, a portion of the
increase in ARPU from the first quarter of 1995 to the first quarter of 1996
was due to a higher mix of multi-city, regional and nationwide services as well
as increased sales of other value-added services such as voicemail and toll
free numbers. Management anticipates that the Company's ARPU will decline in
the foreseeable future due to increased competition and a higher mix of
subscribers added through private brand strategic alliance programs and
third-party resellers, both of which yield lower ARPU. ARPU is lower for
subscribers added through third-party resellers and private brand strategic
alliances because these are generally high volume customers that are charged
reduced airtime rates. However, because third-party resellers and private
brand strategic alliance partners are responsible for selling and marketing
costs, billing, collection and other administrative costs associated with
end-users, the Company does not incur these costs with respect to such
subscribers.
Cost of Equipment Sold
The cost of equipment sold for the three months ended March 31, 1995
and 1996 was $13.4 million and $17.1 million, respectively. The increase was
directly related to the increase in the number of units sold partially offset
by lower average pager prices paid to suppliers. The Company expects pager
costs generally to remain constant, with only modest reductions in cost to the
Company as a result of volume purchases. Management anticipates that loss on
equipment sold will increase on a per unit basis for the foreseeable future due
to increased competition.
Operating Expenses
Technical expenses were $5.5 million and $8.1 million for the three
months ended March 31, 1995 and 1996, respectively. The increase resulted
primarily from the expansion of the Company's nationwide network
infrastructure, which resulted in greater expenses associated with the addition
of new transmitter sites, transmitter and terminal equipment and
telecommunications expenses. On an average monthly cost per unit in service
basis, technical expenses were $2.21 and $2.06 in the first quarter of 1995 and
1996, respectively. The per unit decrease was the result of increased
operating efficiencies and economies of scale experienced with the growth of the
Company's subscriber base. During the three months ended March 31, 1996, the
Company incurred $147,000 in technical expenses associated with the development
of its two-way wireless messaging services.
Selling expenses for the three months ended March 31, 1995 and 1996
were $8.6 million and $9.4 million, respectively. This increase resulted from
greater marketing and advertising costs related to the significant growth in
units sold as well as from increased sales compensation because of the addition
of sales personnel in new and existing operating markets. During the first
quarter of 1995 and 1996, the Company added 102,214 and 134,122 net new units
in service, respectively. Sales and marketing employees increased from 338 at
March 31, 1995 to 486 at March 31, 1996. Management believes the net loss on
equipment sold to be a component of selling and marketing expenses incurred to
add new subscribers because the Company sells, rather than leases units to new
subscribers. See "Management's Presentation of Results of Operations."
Selling and marketing expenses per net subscriber addition (including loss on
equipment sales) were $95 and $86 for the three months ended March 31, 1995 and
1996, respectively. During the three months ended March 31, 1996, the Company
incurred $126,000 in selling expenses associated with its international
operations.
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) in the first
quarter of 1995 and 1996 were $9.7 million and $12.9 million, respectively.
This increase was attributable to the Company's expansion of its customer
service call centers and continued expansion into new markets to support the
growing subscriber base which required additional office space, administrative
personnel and customer service representatives. The Company increased the
number of representatives in its customer service call centers from 389 on
March 31, 1995 to 578 on March 31, 1996, and believes it operates one of the
most extensive of such facilities in the paging industry. On an average cost
per month per unit in service basis, general and administrative expenses were
$3.92 and $3.29 in the first quarter of 1995 and
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1996, respectively. The per unit decrease was a result of increased operating
efficiencies and economies of scale achieved through the growth of the
Company's subscriber base. During the three months ended March 31, 1996, the
Company incurred $127,000 in general and administrative expenses associated
with the development of its two-way wireless messaging services.
Depreciation and amortization for the three months ended March 31,
1995 and 1996 was $2.8 million and $4.2 million, respectively. The increase
resulted from the expansion of the Company's network infrastructure including
transmitter and terminal equipment, as well as the purchase and development of
a new centralized administrative system during 1995 and the first three months
of 1996. As an average cost per month per unit in service, depreciation and
amortization was $1.13 and $1.08 for the three months ended March 31, 1995 and
1996, respectively.
Interest Expense
Interest expense increased from $3.5 million in the first quarter of
1995 to $4.0 million in the first quarter of 1996. 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 $2.8 million and $3.2 million
in the first quarter of 1995 and 1996, respectively.
Net Loss
The Company sustained net losses in the first quarter of 1995 and 1996
of $10.8 million and $7.4 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.
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MANAGEMENT'S PRESENTATION OF RESULTS OF OPERATIONS
Comparison with GAAP Presentation
The Company's unaudited Condensed Consolidated Financial Statements
for the three months ended March 31, 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
$.33 during the second quarter of 1994 to $2.23 during the first quarter of
1996 due primarily to the Company's increase in subscribers and resulting
benefits in economies of scale.
Separately, selling and marketing expenses (including loss on
equipment sold) provide a measure of the costs associated with obtaining new
subscribers that the Company needs to generate the incremental recurring
revenue necessary to achieve profitability. Under the GAAP presentation,
recurring revenues and equipment and activation revenues are aggregated and are
not separately compared to the costs associated with each.
The items included in management's presentation of the results of
operations and their derivation from financial information presented in
accordance with GAAP are described below.
Recurring Revenues. Recurring revenues include periodic fees for
airtime, voicemail, customized coverage options, toll free numbers,
excess usage fees and other recurring revenues and fees associated
with the subscriber base. Recurring revenues do not include equipment
sales revenues or initial activation fees. Recurring revenues are the
same under both the management and GAAP presentations.
Service Expenses. Service expenses under the management presentation
include technical, customer service, general and administrative and
headquarters expenses, but do not include selling and marketing
expenses, depreciation or amortization.
Depreciation and Amortization. This item is the same under the
management and GAAP presentations.
Operating Profit Before Selling Expenses. Operating profit before
selling expenses under the management presentation is equal to
recurring revenues less service expenses and depreciation and
amortization. Operating profit before selling expenses is not derived
pursuant to GAAP.
Selling Expenses. Selling expenses under the management presentation
represent the cost to the Company of selling pagers and other
messaging units to a customer, and are equal to selling costs (sales
compensation, advertising, marketing, etc.) plus costs of units sold
less revenues from equipment sales and activation fees. As described
above, the Company sells rather than leases substantially all of the
one-way messaging equipment used by subscribers. Selling expenses
under the management presentation are not derived pursuant to GAAP.
Net loss on equipment sales is not included in the GAAP presentation
of selling expenses.
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.
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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 should not be considered
in isolation or as an alternative to results of operations that are presented
in accordance with GAAP.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
June 30, September 30, December 31, March 31,
1994 1994 1994 1995
-------- ------------- ------------ ---------
(Unaudited)
OPERATING DATA: (In thousands, except other data)
<S> <C> <C> <C> <C>
Recurring revenues $ 12,946 $ 15,161 $ 17,902 $ 20,464
Service expenses 10,632 12,160 13,688 15,157
Depreciation and amortization 1,876 2,217 2,354 2,802
-------- -------- -------- --------
Operating profit before selling expenses 438 784 1,860 2,505
Selling expenses (1) 7,543 9,580 11,732 9,704
-------- -------- -------- --------
Operating income (loss) $ (7,105) $ (8,796) $ (9,872) $ (7,199)
======== ======== ======== ========
EBITDA $ (5,229) $ (6,579) $ (7,518) $ (4,397)
======== ======== ======== ========
OTHER DATA:
Units in service (2) 495,605 608,427 772,730 874,944
Net subscriber additions 93,588 112,822 164,303 102,214
ARPU (3) $ 9.62 $ 9.15 $ 8.64 $ 8.28
Operating profit before selling expenses per subscriber
per month (4) .33 .47 .90 1.01
Selling expenses per net subscriber addition (1)(5) 81 85 71 95
<CAPTION>
Three Months Ended
------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1995 1995 1995 1996
---------- ------------- ------------ ----------
(Unaudited)
OPERATING DATA: (In thousands, except other data)
<S> <C> <C> <C> <C>
Recurring revenues $ 23,387 $ 26,994 $ 30,658 $ 33,743
Service expenses 16,208 18,192 19,258 20,735
Depreciation and amortization 3,091 3,469 3,910 4,248
---------- ---------- ---------- ----------
Operating profit before selling expenses 4,088 5,333 7,490 8,760
Selling expenses (1) 10,614 10,889 11,181 11,601
---------- ---------- ---------- ----------
Operating income (loss) $ (6,526) $ (5,556) $ (3,691) $ (2,841)
========== ========== ========== ==========
EBITDA $ (3,435) $ (2,087) $ 219 $ 1,407
========== ========== ========== ==========
OTHER DATA:
Units in service (2) 1,008,683 1,131,464 1,240,024 1,374,146
Net subscriber additions 133,739 122,781 108,560 134,122
ARPU (3) $ 8.28 $ 8.41 $ 8.62 $ 8.61
Operating profit before selling expenses per subscriber
per month (4) 1.45 1.66 2.11 2.23
Selling expenses per net subscriber addition (1)(5) 79 89 103 86
</TABLE>
(1) Includes loss on sale of equipment.
(2) Stated as of the end of each period.
(3) Calculated by dividing recurring revenues for the quarter by
the average number of units in service during that quarter.
(4) Calculated by dividing operating profit before selling
expenses (selling expenses include loss on sale of equipment)
for the quarter by the average number of units in service
during that quarter. Stated as the monthly average for the
quarter.
(5) Calculated by dividing selling expenses, including loss on
sale of equipment, for the quarter by the net subscriber
additions for the quarter.
12
<PAGE> 13
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> 14
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
MAY 7, 1996 CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
/S/ G. CLAY MYERS
-----------------
G. CLAY MYERS
MAY 7, 1996 VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND
TREASURER (PRINCIPAL FINANCIAL
AND CHIEF ACCOUNTING OFFICER)
14
<PAGE> 15
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 MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 8,122
<SECURITIES> 0
<RECEIVABLES> 10,499
<ALLOWANCES> 5,183
<INVENTORY> 8,016
<CURRENT-ASSETS> 24,361
<PP&E> 93,769
<DEPRECIATION> 33,095
<TOTAL-ASSETS> 133,657
<CURRENT-LIABILITIES> 61,976
<BONDS> 106,089
<COMMON> 0
0
0
<OTHER-SE> (34,408)
<TOTAL-LIABILITY-AND-EQUITY> 133,657
<SALES> 14,802
<TOTAL-REVENUES> 48,545
<CGS> 17,082
<TOTAL-COSTS> 17,082
<OTHER-EXPENSES> 34,704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,043
<INCOME-PRETAX> (7,387)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,387)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,387)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
