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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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.)
3333 LEE PARKWAY, SUITE 100
DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip code)
(214) 765-4000
(Registrant's telephone number, including area code)
6688 N. CENTRAL EXPWY., SUITE 800; DALLAS, TEXAS 75206
(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
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As of November 5, 1997, 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>
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PART I. FINANCIAL INFORMATION PAGE
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ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1996
AND SEPTEMBER 30, 1997........................................................ 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997....................................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996 AND 1997....................................... 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................. 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................... 14
ITEM 5. OTHER INFORMATION................................................................... 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................... 14
</TABLE>
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PAGEMART, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
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(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 55 $ --
Accounts receivable, net 134 10,028
Inventories 1 6,102
Prepaid expenses and other current assets 3,021 5,153
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Total current assets 3,211 21,283
Property and equipment, net 82,960 86,396
Narrowband licenses 38,210 38,210
Deferred debt issuance costs, net 2,355 2,096
Other assets 5,731 2,520
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Total assets $ 132,467 $ 150,505
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LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 28,133 $ 22,352
Current maturities of long-term debt -- 1,589
Deferred revenue 44,507 60,168
Other current liabilities 8,925 16,008
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Total current liabilities 81,565 100,117
Long-term debt 107,947 126,671
Commitments and contingencies
Stockholder's deficit:
Common stock $.0001 par value per share, 1,000
shares authorized, 100 issued at December 31,
1996 and September 30, 1997 -- --
Additional paid-in capital 124,438 124,438
Accumulated deficit (181,483) (200,721)
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Total stockholder's deficit (57,045) (76,283)
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Total liabilities and stockholder's deficit $ 132,467 $ 150,505
========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements.
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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,
1996 1997 1996 1997
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Revenues:
Recurring revenue $ 39,697 $ 53,593 $ 110,404 $ 150,074
Equipment sales and activation fees 16,253 19,213 43,208 50,357
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Total revenues 55,950 72,806 153,612 200,431
Cost of equipment sold 19,216 24,055 50,939 62,437
Operating expenses:
Technical 9,578 11,963 26,451 34,113
Selling 10,691 12,251 30,602 37,256
General and administrative 13,541 16,957 39,503 48,534
Depreciation and amortization 5,714 7,626 14,904 21,674
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Total operating expenses 39,524 48,797 111,460 141,577
-------- -------- --------- ---------
Operating loss (2,790) (46) (8,787) (3,583)
Other (income) expense:
Interest expense 3,980 4,769 12,075 13,437
Interest income (12) (12) (145) (51)
Other 614 783 1,363 2,269
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Total other (income) expense 4,582 5,540 13,293 15,655
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Net loss $ (7,372) $ (5,586) $ (22,080) $ (19,238)
======== ======== ========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements.
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PAGEMART, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1997
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Cash flows from operating activities:
Net loss $(22,080) $(19,238)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 14,904 21,674
Provision for bad debt 4,610 8,095
Accretion of discount on senior discount notes 9,570 10,879
Amortization of deferred debt issuance costs 254 259
Changes in certain assets and liabilities:
(Increase) decrease in accounts receivable 5,001 (17,989)
(Increase) decrease in inventories 11,179 (5,961)
(Increase) decrease in prepaid expenses and other current assets 261 (2,132)
Increase in due from affiliates -- (200)
(Increase) decrease in other assets (904) 2,264
Decrease in accounts payable (292) (5,781)
Increase in deferred revenue 17,412 15,661
Increase in other current liabilities 3,399 7,083
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Net cash provided by operating activities 43,314 14,614
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Cash flows from investing activities:
Purchases of property and equipment, net (36,485) (23,119)
Release of restricted cash 500 --
Other (121) (984)
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Net cash used in investing activities (36,106) (24,103)
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Cash flows from financing activities:
Borrowings from vendor financing arrangement -- 9,933
Payments on vendor financing arrangement (15,027) (499)
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Net cash provided by (used in) financing activities (15,027) 9,434
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Net decrease in cash and cash equivalents (7,819) (55)
Cash and cash equivalents, beginning of period 9,897 55
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Cash and cash equivalents, end of period $ 2,078 $ 0
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,662 $ 482
Income taxes $ -- $ --
SUPPLEMENTAL SCHEDULE OF NONCASH OPERATING AND INVESTING ACTIVITIES:
Property transferred to PageMart Wireless, Inc. $ 200
</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 AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
1. GENERAL
PageMart, Inc. ("PageMart"), a wholly-owned subsidiary of PageMart
Wireless, Inc. ("Wireless"), was incorporated as a Delaware corporation on May
8, 1989 to provide wireless messaging products and services. The consolidated
financial statements of PageMart include the accounts of PageMart II, Inc.,
PageMart Operations, Inc., PageMart of California, Inc., PageMart of Virginia,
Inc. and PageMart International, Inc. Each of these companies is a wholly-owned
subsidiary of PageMart. PageMart II, Inc. and PageMart Operations, Inc. hold
certain Federal Communications Commission ("FCC") licenses. PageMart
International, Inc., which has had no significant operations to date, holds
certain investments in an international venture in Canada. Other than these
licenses and international investments, the subsidiaries of PageMart have no
significant assets or liabilities. 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 the Company for the year
ended December 31, 1996. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine months
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1997.
Certain amounts in the prior year condensed consolidated financial
statements have been reclassified to conform with the current year presentation.
3. SUBSEQUENT EVENT
The Company is proposing to (a) refinance certain of its outstanding
indebtedness (the "Refinancing"), and (b) modify its corporate structure.
The Refinancing will consist of the offer to purchase all of the 12 1/4%
Senior Discount Notes Due 2003 (the "12 1/4% Notes") of the Company tendered in
its tender offer (the "Tender Offer") for all outstanding 12 1/4% Notes and the
elimination of most of the covenants and agreements in the indenture relating to
the 12 1/4% Notes.
The Company will modify its corporate structure by merging (the "Merger")
the Company into its parent corporation, Wireless, pursuant to which Wireless
will be the surviving corporation.
Wireless is proposing to raise approximately $225 million through an
Offering (the "Offering") of Senior Subordinated Discount Notes Due 2007 (the
"New Subordinated Notes") and to amend the terms of certain of the covenants and
agreements in the indenture relating to its 15% Senior Discount Notes due 2005
(the "15% Notes") pursuant to consents being solicited from holders of such
notes.
Wireless intends to use the net proceeds of the Offering of the New
Subordinated Notes to finance the Tender Offer, to fund the initial construction
and deployment of the its Narrowband Personal Communications Services ("NPCS")
network and for other general corporate purposes.
Consummation of the Offering, the Refinancing and the Merger will occur
simultaneously and is conditional upon, among other things, market conditions,
receipt of consents from at least a majority in principal
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amount at maturity of the 15% Notes and receipt of tenders of at least a
majority in principal amount at maturity of the 12 1/4% Notes.
The New Subordinated Notes will be sold in the United States in a private
placement and outside the United States pursuant to Regulation S. Accordingly,
the New Subordinated Notes will not be registered under the Securities Act of
1933, as amended, and may not be offered or sold in the United States absent
registration or an applicable exemption from the registration requirements of
such act. This Form 10-Q shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of these securities
in any state in which such offer or solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any state.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the results of operations and financial
condition of the Company for the three and nine months ended September 30, 1997
and 1996. This discussion should be read in conjunction with the Company's
condensed consolidated financial statements and the notes thereto included
elsewhere in this report. Certain prior year amounts have been reclassified to
conform with the current year presentation.
When used in this discussion, the words 'estimate,' 'project,' 'plan,'
'expect' and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management's judgment only as of the date hereof.
GENERAL
The Company has constructed and operates a wireless messaging and
communications network and provides paging and other one-way wireless messaging
services to its subscribers. In addition, the Company sells and distributes
wireless messaging equipment to subscribers, retailers and resellers. The
Company earns recurring revenues from each subscriber in the form of fixed
periodic fees and incurs substantial operating expenses in offering its
services, including technical, customer service and general and administrative
expenses. See "Management's Presentation of Results of Operations."
Since commencing operations in 1990, the Company has invested heavily in
its one-way wireless communications network and administrative infrastructure in
order to establish nationwide coverage, sales offices in major metropolitan
areas, centralized customer service call centers and administrative support
functions. The Company incurs substantial fixed operating costs related to its
one-way wireless communications infrastructure, which is designed to serve a
larger subscriber base than the Company currently serves in order to accommodate
growth. In addition, the Company incurs substantial costs associated with new
subscriber additions. As a result, the Company has generated significant net
operating losses for each year of its operations. See "Management's Presentation
of Results of Operations."
The Company's strategy is to expand its subscriber base to increase
profitability and cash flow through greater utilization of its nationwide
wireless communications network. From September 30, 1996 to September 30, 1997,
the number of domestic units in service increased from 1,684,937 to 2,343,299.
None of the Company's growth is attributable to acquisitions. Given its growth
strategy and the substantial associated selling and marketing expenses, the
Company expects to continue to generate operating losses in 1997 from its
one-way wireless communications business. The Company's ability to generate
operating income is primarily dependent on its ability to attain a sufficiently
large installed subscriber base that generates recurring revenues which offsets
the fixed operating costs of its wireless networks, administration and selling
and marketing expenses. The Company intends to achieve this growth by promoting
its customized paging and other wireless messaging services through its national
sales offices, retail distribution channels, private brand strategic alliances
with GTE Corporation, Southwestern Bell Mobile Systems, AT&T Wireless Services,
Ameritech Mobile Services, Inc., EXCEL Communications, Inc., ALLTEL
Communications, Inc., Bluegrass Cellular, First Cellular of Southern Illinois
and
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international expansion.
The Company has historically sold, rather than leased, 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 recouped a substantial portion of messaging equipment costs upon sale
to retailers and subscribers. This resulted in significantly lower capital
expenditures and depreciation expense than if the Company leased such equipment
to its subscribers. In addition, the Company's financial results are much
different from those of other paging carriers that lease messaging equipment to
subscribers because the Company recognizes the cost of messaging equipment sold
in connection with adding new subscribers at the time of sale rather than
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. At September 30, 1997, the
Company's national retail, private brand strategic alliances and national sales
offices strategic business units represented approximately 25%, 30% and 45% of
the Company's total subscriber base, respectively. 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. The Company expects equipment prices
per unit generally to remain constant or decline only slightly as sales volumes
increase. Management anticipates that loss on equipment sold will generally
remain constant on a per unit basis for the foreseeable future. Units sold by
the Company during a given month may exceed units activated and in service due
to inventory stocking by and distribution strategies of national retailers. As a
result, selling and marketing expenses per net subscriber addition may fluctuate
from period to period.
The Company derives its recurring revenue primarily from fixed periodic
fees for services that are not generally dependent on usage. Consequently, the
Company's ability to recoup its initial selling and marketing costs, to meet
operating expenses and to achieve profitability is dependent on the average
length of each customer's subscription period. As long as a subscriber continues
to utilize the Company's service, operating results benefit from the recurring
payments of the fixed fees without the incurrence of additional selling expenses
by the Company. Conversely, operating results are adversely affected by customer
disconnections. Each month a percentage of the Company's existing customers have
their service terminated for a variety of reasons, including failure to pay,
dissatisfaction with service and switching to a competing service provider. The
Company's average monthly disconnection rates for the years ended December 31,
1994, 1995, 1996 and for the nine months ended September 30, 1997 were 3.4%,
2.5%, 2.4% and 2.4%, respectively.
Approximately 90% of the Company's average monthly revenue per unit
("ARPU") is attributable to fixed fees for airtime, coverage options and
features. A portion of the remainder is dependent on usage. Management
anticipates that the Company's ARPU will decline in the foreseeable future due
to a continued higher mix of subscribers added through private brand strategic
alliance programs, which yield lower ARPU. ARPU is lower for subscribers added
through private brand strategic alliance programs because these subscribers are
generally high volume customers that are charged wholesale airtime rates.
However, because private brand strategic alliance partners are responsible for
selling and marketing costs, billing, collection and other administrative costs
associated with end-users, the Company incurs substantially lower marketing and
administrative costs with respect to such subscribers.
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 domestic one-way wireless messaging
operations, unless otherwise indicated.
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Certain of the following financial information is presented on a per
subscriber 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, 1996 AND 1997
Units in Service
Units in service from domestic operations were 1,684,937 and 2,343,299 as
of September 30, 1996 and 1997, respectively, representing an annual growth rate
of 39%. In addition, for the three and nine months ended September 30, 1997,
PageMart Canada Limited ("PageMart Canada") added 6,195 and 17,916 subscribers,
respectively. As a result of its ownership interest in PageMart Canada, the
Company's proportional share of net subscriber additions from PageMart Canada
was 3,717 and 10,750 units for the three and nine months ended September 30,
1997, respectively. The Company has experienced strong growth in units in
service due primarily to the success of its sales and marketing strategies in
the national retail, private brand strategic alliance and direct sales programs.
Revenues
Revenues for the three and nine months ended September 30, 1997 were $72.7
million and $200.3 million, respectively, compared to $56.0 million and $153.6
million for the three and nine months ended September 30, 1996. Recurring
revenues for airtime, voice mail and other services for the three and nine
months ended September 30, 1997 were $53.6 million and $150.1 million,
respectively, compared to $39.7 million and $110.4 million for the comparable
periods ended September 30, 1996. Revenues from equipment sales and activation
fees for the three and nine months ended September 30, 1997 were $19.1 million
and $50.2 million, respectively, compared to $16.3 million and $43.2 million for
the comparable periods ended September 30, 1996. The increases in recurring
revenues and revenues from equipment sales and activation fees were primarily
due to the rapid growth in the number of units in service. The increase in
equipment sales during the third quarter of 1997 was partially offset by a
decline in the average price per unit sold.
The Company's ARPU was $8.25 and $7.90 in the third quarter of 1996 and
1997, respectively. Over the past year, the Company's ARPU has decreased
primarily as a result of an increase in subscribers added through the private
brand strategic alliance channel. This decrease in ARPU has been offset
partially by a higher mix of multi-city, regional and nationwide services as
well as increased sales of other value-added services such as voice mail and
toll-free numbers.
Cost of Equipment Sold
The cost of equipment sold for the three and nine months ended September
30, 1997 was $24.0 million and $62.3 million, respectively, compared to $19.2
million and $50.9 million for the comparable periods ended September 30, 1996.
The change in 1997 was primarily due to an increase in the number of units sold.
The Company expects pager costs generally to remain constant with modest
reductions in cost to the Company as a result of volume purchase discounts.
Operating Expenses
Technical expenses were $12.0 million and $34.1 million for the three and
nine months ended September 30, 1997, respectively, compared to $9.6 million and
$26.5 million for the comparable 1996 periods. The increase was primarily due to
increased telecommunications and site expenses associated with servicing the
Company's expanded network and larger subscriber base. On an average monthly
cost per unit in service basis, technical expenses were $2.02 and $1.76 in the
third quarter of 1996 and 1997, respectively, compared to $2.01 and $1.81 for
the nine months ended September 30, 1996 and 1997, respectively. The per unit
decrease was the result of increased operating efficiencies and economies of
scale achieved through the growth of the Company's subscriber base.
Selling expenses for the three and nine months ended September 30, 1997
were $12.1 million and $36.9 million, respectively, compared to $10.6 million
and $30.3 million for the three and nine months ended September
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30, 1996, respectively. This increase resulted from greater marketing and
advertising costs related to the growth in units sold as well as costs
associated with the stocking of additional retail outlets. The Company added
7,146 retail outlets from September 30, 1996 to September 30, 1997. During the
nine months ended September 30, 1996 and 1997, the Company added 444,913 and
491,854 net new domestic units in service, respectively. Management views the
net loss on equipment sold to be a component of selling and marketing expenses
incurred to add new subscribers. See "Management's Presentation of Results of
Operations." Selling and marketing expenses per net domestic subscriber addition
(including loss on equipment sales) was $85 for both the three and nine months
ended September 30, 1996, compared to $105 and $100 for the three and nine
months ended September 30, 1997, respectively. This increase was due to losses
recognized on the sale of pagers due to stocking new retail outlets. The Company
added 1,759 additional retail outlets in the three months ended September 30,
1997, including additions from Eckerd Drug and Southland (7-Eleven) stores. The
losses on equipment sold are recognized when pagers are shipped to retailers,
usually before the units are placed into service, thus increasing selling
expenses (including loss on the sale of equipment) per net subscriber addition.
During the three and nine months ended September 30, 1997, the Company incurred
$112,000 and $356,000 respectively, in selling expenses associated with its
international operations (including loss on sale of equipment).
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) for the three
and nine months ended September 30, 1997 were $17.0 million and $48.5 million,
respectively, compared to $13.5 million and $39.5 million for the comparable
1996 periods. This increase was attributable to the Company's expansion of its
customer service call centers and other administrative capabilities to support
the growing subscriber base which required additional office space,
administrative personnel and customer service representatives. On an average
cost per month per unit in service basis, general and administrative expenses
were $2.84 and $2.50 in the third quarter of 1996 and 1997, respectively, and
$3.00 and $2.57 for the nine months ended September 30, 1996 and 1997,
respectively. The per unit decrease was a result of increased operating
efficiencies and economies of scale achieved through the growth of the Company's
subscriber base.
Depreciation and amortization for the three and nine months ended September
30, 1997 were $7.6 million and $21.7 million, respectively, compared to $5.7
million and $14.9 million for the comparable periods ended September 30, 1996.
The increase resulted from the expansion of the Company's network infrastructure
including transmitter and terminal equipment, as well as the purchase and
development of a new centralized administrative system in 1996 and the first
nine months of 1997. As an average cost per month per unit in service,
depreciation and amortization was $1.19 and $1.12 in the third quarter of 1996
and 1997, respectively, and was $1.13 and $1.15 for the nine months ended
September 30, 1996 and 1997, respectively.
Interest Expense
Interest expense for the three and nine months ended September 30, 1997 was
$4.8 million and $13.4 million, respectively, compared to $4.0 million and $12.1
million for the comparable periods ended September 30, 1996. The increase in
1997 was primarily the result of increased interest expense related to the 12
1/4% Senior Discount Notes due 2003 issued by the Company in October 1993 (the
"12 1/4% Notes"). Interest expense related to the 12 1/4% Notes was $3.4 million
and $3.8 million for the three months ended September 30, 1996 and 1997,
respectively, and was $9.8 million and $11.1 million for the nine months ended
September 30, 1996 and 1997, respectively.
Net Loss
The Company sustained net losses for the three and nine months ended
September 30, 1997 of $5.6 million and $19.2 million, respectively, compared to
$7.4 million and $22.1 million for the three and nine months ended September 30,
1996, respectively, principally due to the cost of funding the growth rate of
the Company's subscriber base which resulted in an increase in units sold,
selling and marketing expenses, operating expenses and interest expense.
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MANAGEMENT'S PRESENTATION OF RESULTS OF OPERATIONS
Comparison with GAAP Presentation
The Company's unaudited condensed consolidated financial statements for the
three and nine months ended September 30, 1996 and 1997 included elsewhere in
this report, have been prepared in accordance with generally accepted accounting
principles ("GAAP"). For internal management purposes, the Company prepares
statements of operations that are derived from the Company's GAAP financial
statements but are reordered in a format that management uses for its internal
review of the Company's performance and that management believes 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
domestic subscriber per month for the Company's one-way operations has grown
from $2.11 during the fourth quarter of 1995 to $2.51 during the third quarter
of 1997 due primarily to the Company's increase in subscribers and resulting
benefits in economies of scale.
In addition, selling and marketing expenses (including loss on equipment
sold) provide a measure of the costs associated with obtaining new subscribers
that the Company needs to generate the incremental recurring revenue necessary
to achieve profitability. Under the GAAP presentation, recurring revenues and
equipment and activation revenues are aggregated and are not separately compared
to the costs associated with each.
The items included in Management's Presentation of the Results of
Operations and their derivation from financial information presented in
accordance with GAAP are described below.
Recurring Revenues. Recurring revenues include periodic fees for airtime,
voice mail, customized coverage options, toll-free numbers, excess usage
fees and other recurring revenues and fees associated with the subscriber
base. Recurring revenues do not include equipment sales revenues or initial
activation fees. Recurring revenues are the same under both the management
and GAAP presentations.
Technical Expenses. This item is the same under the management and GAAP
presentations.
General and Administrative Expenses. This item is the same under the
management and GAAP presentations.
Depreciation and Amortization. This item is the same under the management
and GAAP presentations.
Operating Profit Before Selling Expenses. Operating profit before selling
expenses under the management presentation is equal to recurring revenues
less technical expenses, general and administrative expenses and
depreciation and amortization. Operating profit before selling expenses is
not derived pursuant to GAAP.
Selling Expenses. Selling expenses under the management presentation
represent the cost to the Company of selling pagers and other messaging
units to a customer, and are equal to selling costs (sales compensation,
advertising, marketing, etc.) plus costs of units sold less revenues from
equipment sales and activation fees. As described above, the Company sells
rather than leases substantially all of the one-way messaging equipment
used by subscribers. Selling expenses under the management presentation are
not derived pursuant to GAAP. Net loss on equipment sales is not included
in the GAAP presentation of selling expenses.
Operating Income (Loss). This item is the same under the management and
GAAP presentations.
EBITDA. EBITDA represents earnings (loss) before interest, taxes,
depreciation and amortization. EBITDA is a financial measure commonly used
in the paging industry. EBITDA is not derived pursuant to GAAP and
therefore should not be construed as an alternative to operating income, as
an alternative to cash flows from operating activities (as determined in
accordance with GAAP) or as a measure of liquidity. The calculation of
EBITDA does not include the commitments of the Company for capital
expenditures and payment of debt and should not be deemed to represent
funds available to the Company. In the fourth quarter of 1995, the
Company's EBITDA from its one-way operations became positive for the first
time.
11
<PAGE> 12
Selected Quarterly Results of Operations
The table below sets forth management's presentation of results of one-way
domestic operations and other data on a quarterly basis for the eight most
recent fiscal quarters. This presentation should be read in conjunction with the
condensed consolidated financial statements of the Company and the notes thereto
included elsewhere in this report and the Company's quarterly reports on Form
10-Q for the corresponding periods below, and should not be considered in
isolation or as an alternative to results of operations that are presented in
accordance with GAAP (in thousands, except other data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
- ------------------------------------------------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Recurring revenues $ 30,658 $ 33,743 $ 36,964 $ 39,697 $ 42,637 $ 46,475 $ 50,004 $ 53,593
Technical expenses 7,015 7,943 8,783 9,725 10,273 10,765 11,385 11,963
General and
administrative expenses 12,243 12,792 13,043 13,668 14,162 15,763 15,814 16,957
Depreciation and
amortization 3,910 4,248 4,942 5,714 6,288 6,808 7,240 7,626
---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Operating profit before
selling expenses 7,490 8,760 10,196 10,590 11,914 13,139 15,565 17,047
Selling expenses (1) 11,181 11,601 12,836 13,588 14,900 15,443 16,556 16,981
---------- ---------- ----------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) $ (3,691) $ (2,841) $ (2,640) $ (2,998) $ (2,986) $ (2,304) $ (991) $ 66
========== ========== ========== ========== ========== ========== ========== ==========
EBITDA $ 219 $ 1,407 $ 2,302 $ 2,716 $ 3,302 $ 4,504 $ 6,249 $ 7,692
========== ========== ========== ========== ========== ========== ========== ==========
OTHER DATA:
Units in service (2) 1,240,024 1,374,146 1,524,297 1,684,937 1,851,445 2,001,525 2,181,775 2,343,299
Net subscriber additions 108,560 134,122 150,151 160,640 166,508 150,080 180,250 161,524
ARPU (3) $ 8.62 $ 8.61 $ 8.50 $ 8.25 $ 8.04 $ 8.04 $ 7.97 $ 7.90
National retail outlets 3,411 3,690 4,286 5,025 5,530 7,388 10,412 12,171
Operating profit before
selling expenses per
domestic subscriber per
per month (4) $ 2.11 $ 2.23 $ 2.35 $ 2.20 $ 2.25 $ 2.27 $ 2.48 $ 2.51
Selling expenses per net
domestic subscriber
addition (1)(5) $ 103 $ 86 $ 85 $ 85 $ 89 $ 103 $ 92 $ 105
</TABLE>
- ---------------------
(1) Includes loss on sale of equipment.
(2) Stated as of the end of each period.
(3) Calculated by dividing domestic recurring revenues for the quarter by the
average number of domestic 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 domestic 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 domestic subscriber additions for the
quarter.
12
<PAGE> 13
This Form 10-Q contains statements that constitute forward-looking
statements. Readers are cautioned that such forward-looking statements involve
risk and uncertainties, and are subject to change based on various important
factors. The following factors, among others, in some cases have affected and in
the future could affect the Company's financial performance and actual results,
and could cause actual results for 1997 and beyond to differ materially from
those expressed in any such forward- looking statements - economic conditions
generally in the United States and consumer confidence; the ability of the
Company to manage its debt levels; the impact of technological change in the
telecommunications industry; the future cost of network infrastructure and
subscriber equipment; the impact of competition and pricing of paging and
wireless services; the timely development and acceptance of new products;
changes in regulation by the FCC and various state regulatory agencies and the
ability of the Company to obtain financing to construct, operate and market the
transmission network for advanced messaging services.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Incorporated by reference to the Company's Form 8-K filed on November 5,
1997
ITEM 5. OTHER INFORMATION
On September 30, 1997, Roger Linquist resigned from the Company's board of
directors based on the prospect that his endeavors at General Wireless, Inc.
will occupy much more of his time. Mr. Linquist served on the board for
approximately eight years and was a founder of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the accompanying index to exhibits are
filed as a part of this quarterly report.
(b) Reports on Form 8-K
None.
14
<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.
BY: /S/JOHN D. BELETIC
----------------------------
JOHN D. BELETIC
NOVEMBER 12, 1997 CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
BY: /S/ G. CLAY MYERS
----------------------------
G. CLAY MYERS
NOVEMBER 12, 1997 VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND
TREASURER (PRINCIPAL FINANCIAL
AND CHIEF ACCOUNTING OFFICER)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
20.1** Form 8-K of the Company dated November 5, 1997
27.1* Financial Data Schedule.
</TABLE>
* Filed herewith.
** Previously filed
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S SEPTEMBER 30, 1997 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 14,135
<ALLOWANCES> 4,107
<INVENTORY> 6,102
<CURRENT-ASSETS> 21,283
<PP&E> 154,894
<DEPRECIATION> 68,498
<TOTAL-ASSETS> 150,505
<CURRENT-LIABILITIES> 100,117
<BONDS> 126,671
0
0
<COMMON> 0
<OTHER-SE> (76,283)
<TOTAL-LIABILITY-AND-EQUITY> 150,505
<SALES> 50,357
<TOTAL-REVENUES> 200,431
<CGS> 62,437
<TOTAL-COSTS> 62,437
<OTHER-EXPENSES> 141,577
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,437
<INCOME-PRETAX> (19,238)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,238)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,238)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
