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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. 33-91142
PAGEMART WIRELESS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2575229
(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)
PAGEMART NATIONWIDE, INC.
(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 33,713,226 shares of the registrant's common
stock outstanding.
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PAGEMART WIRELESS, 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 ......................................................... 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ..................................................................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................................................................... 17
</TABLE>
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PAGEMART WIRELESS, 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 $ 26,973 $ 14,201
Accounts receivable, net 21,503 22,685
Inventories 11,179 12,775
Prepaid expenses and other current assets 2,880 3,504
--------- ---------
Total current assets 62,535 53,165
Restricted investments 500 500
Property and equipment, net 52,827 60,674
Narrowband licenses 133,065 133,065
Deferred debt issuance costs, net 8,436 8,141
Other assets 6,466 7,303
--------- ---------
Total assets $ 263,829 $ 262,848
========= =========
LIABILITIES AND STOCKHOLDERS' 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 6,526 6,182
--------- ---------
Total current liabilities 56,508 61,288
Long-term debt 219,364 225,210
Commitments and contingencies
Stockholders' deficit:
Common stock, $.0001 par value per share, 75,000,000
shares authorized, 33,710,053 and 33,711,675 shares issued
at December 31, 1995 and March 31, 1996, respectively 3 3
Additional paid-in capital 154,601 154,612
Accumulated deficit (166,090) (177,708)
Stock subscriptions receivable (557) (557)
--------- ---------
Total stockholders' deficit (12,043) (23,650)
--------- ---------
Total liabilities and stockholders' deficit $ 263,829 $ 262,848
========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements.
3
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(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 6,660 8,401
Interest income (498) (219)
Other 337 195
-------- --------
Total other (income) expense 6,499 8,377
-------- --------
Net loss $(13,698) $(11,618)
======== ========
Net loss per share
(primary and fully diluted) $ (0.40) $ (0.33)
Weighted average number
of shares outstanding
(primary and fully diluted) 34,532 34,688
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements.
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PAGEMART WIRELESS, 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 $ (13,698) $ (11,618)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 2,802 4,248
Provision for bad debt 1,744 1,453
Accretion of discount on senior discount notes 5,782 7,333
Changes in certain assets and liabilities:
(Increase) decrease in accounts receivable 796 (2,635)
(Increase) decrease in inventories 2,114 (1,596)
(Increase) decrease in prepaid expense and other current
assets 129 (624)
(Increase) decrease in other assets, net 132 (794)
Increase (decrease) in accounts payable (1,953) 3,403
Increase in deferred revenue 3,079 1,540
Decrease in other current liabilities (95) (344)
--------- ---------
Net cash provided by operating activities 832 366
--------- ---------
Cash flows from investing activities:
Purchase of narrowband licenses (74,079) --
Purchases of property and equipment, net (10,376) (11,779)
Investment in international ventures -- (3)
Purchases of intangible assets (142) (53)
--------- ---------
Net cash used in investing activities (84,597) (11,835)
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Cash flows from financing activities:
Proceeds from issuance of common stock 5,078 --
Proceeds from issuance of common stock under
the stock option/stock issuance plan 4 11
Proceeds from issuance of senior discount notes, net 95,001 --
Deferred debt issuance costs incurred for Revolving Credit
Agreement -- (8)
Borrowings from vendor credit facilities 3,924 --
Payments on vendor credit facilities (845) (1,306)
--------- ---------
Net cash provided by (used in) financing activities 103,162 (1,303)
--------- ---------
Net increase (decrease) in cash and cash equivalents 19,397 (12,772)
Cash and cash equivalents, beginning of period 14,507 26,973
--------- ---------
Cash and cash equivalents, end of period $ 33,904 $ 14,201
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 405 $ 556
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 WIRELESS, 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 wireless messaging products and services.
In January 1995, PageMart effected a corporate reorganization pursuant to which
PageMart Nationwide, Inc., a Delaware corporation, became the holding company
parent of PageMart. In December 1995, the corporate name was changed from
PageMart Nationwide, Inc. to PageMart Wireless, Inc. ("Wireless"). Wireless
and its subsidiaries are referred to herein as the "Company." The consolidated
financial statements of the Company include the accounts of PageMart and
PageMart PCS, Inc. ("PageMart PCS"). PageMart PCS holds certain Narrowband
Personal Communications Services licenses. The consolidated financial
statements of PageMart include the accounts of PageMart II, Inc., PageMart
Operations, Inc., PageMart of California, Inc., PageMart of Virginia, Inc. and
PageMart International, Inc. Each of these companies is a wholly-owned
subsidiary of PageMart. PageMart II, Inc. and PageMart Operations, Inc. hold
certain Federal Communications Commission 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.
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, 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. NET LOSS PER SHARE
Net loss per share amounts as reflected on the statements of operations are
based upon the weighted average number of common shares outstanding. As
required by the Securities and Exchange Commission rules, all warrants, options
and shares issued during the year immediately preceding the initial public
offering are assumed to be outstanding for all periods presented. Shares
issuable upon the exercise of stock options and warrants granted before the
year immediately preceding the initial public offering were not included in the
net loss per share calculation as the effect from the exercise of those options
would be antidilutive.
4. 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,
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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.
5. SUBSEQUENT EVENT
The Company has filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission in the contemplation of an initial public
offering of the Company's Class A Common Stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As used herein, references to "Wireless" will be deemed to be references
solely to PageMart Wireless, Inc., references to "PageMart" will be deemed to
be references to Wireless' principal operating subsidiary, PageMart, Inc., and
references to the "Company" will be deemed to be references to Wireless and its
subsidiaries. This discussion should be read in conjunction with the PageMart
Wireless, Inc. and Subsidiaries 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
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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 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
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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
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
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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
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 $6.7 million in the first quarter of 1995
to $8.4 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") and the
15% Senior Discount Notes due 2005 issued by the Company in January 1995 (the
"15% 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. Interest
expense related to the 15% Notes was $3.2 million and $4.4 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
$13.7 million and $11.6 million, respectively, principally due to the cost of
funding the growth rate of the Company's subscriber base which resulted in an
increase in units sold, selling and marketing expenses, operating expenses and
interest expense.
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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, June 30, September 30, December 31, March 31,
1994 1994 1994 1995 1995 1995 1995 1996
-------- ------------- ------------ -------- ---------- ------------- ----------- ----------
(Unaudited)
OPERATING DATA: (In thousands, except other data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Recurring revenues $ 12,946 $ 15,161 $ 17,902 $ 20,464 $ 23,387 $ 26,994 $ 30,658 $ 33,743
Service expenses 10,632 12,160 13,688 15,157 16,208 18,192 19,258 20,735
Depreciation and
amortization 1,876 2,217 2,354 2,802 3,091 3,469 3,910 4,248
-------- -------- -------- -------- ---------- ---------- ---------- ----------
Operating profit before
selling expenses 438 784 1,860 2,505 4,088 5,333 7,490 8,760
Selling expenses (1) 7,543 9,580 11,732 9,704 10,614 10,889 11,181 11,601
-------- -------- -------- -------- ---------- ---------- ---------- ----------
Operating income (loss) $ (7,105) $ (8,796) $ (9,872) $ (7,199) $ (6,526) $ (5,556) $ (3,691) $ (2,841)
======== ======== ======== ======== ========== ========== ========== ==========
EBITDA $ (5,229) $ (6,579) $ (7,518) $ (4,397) $ (3,435) $ (2,087) $ 219 $ 1,407
======== ======== ======== ======== ========== ========== ========== ==========
OTHER DATA:
Units in service (2) 495,605 608,427 772,730 874,944 1,008,683 1,131,464 1,240,024 1,374,146
Net subscriber additions 93,588 112,822 164,303 102,214 133,739 122,781 108,560 134,122
ARPU (3) $ 9.62 $ 9.15 $ 8.64 $ 8.28 $ 8.28 $ 8.41 $ 8.62 $ 8.61
Operating profit before
selling expenses per
subscriber per month (4) .33 .47 .90 1.01 1.45 1.66 2.11 2.23
Selling expenses per net
subscriber addition (1)(5) 81 85 71 95 79 89 103 86
Capital employed per
unit in service (6) 69 53 42 45 39 39 40 41
</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.
(6) Calculated by dividing total assets (excluding cash, narrowband
personal communications services ("NPCS") licenses and international
investments) minus current liabilities (excluding current maturities
of long-term debt) at the end of the period, by units in service at
the end of the period.
13
<PAGE> 14
Supplementary Information
The following table sets forth supplementary financial information related
to the Company's various operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------
PAGEMART PAGEMART PAGEMART
ONE-WAY TWO-WAY INTERNATIONAL TOTAL
-------- -------- ------------- -----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues $ 48,545 $ -- $ -- $ 48,545
Operating loss (2,841) (274) (126) (3,241)
EBITDA 1,407 (274) (126) 1,007
Total assets 119,186 140,251 3,411 262,848
Capital expenditures 11,556 223 -- 11,779
</TABLE>
SEASONALITY
Pager usage is slightly higher during the spring and summer months, which
is reflected in higher incremental usage fees earned by the Company. The
Company's retail sales are subject to seasonal fluctuations that affect retail
sales generally. Otherwise, the Company's results are generally not
significantly affected by seasonal factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require substantial capital investment for the
development and installation of its wireless communications network, the
procurement of messaging equipment and expansion into new markets. To date,
these investments by the Company have been funded by the proceeds from the
issuance of common stock, preferred stock, the 12 1/4% Notes and the 15% Notes,
as well as borrowings under vendor financing agreements.
Capital expenditures for the three months ended March 31, 1996 were $11.8
million compared to $10.4 million for the three months ended March 31, 1995.
Capital expenditures for the first quarter of 1996 include approximately
$223,000 related to the development of two-way messaging services. The
Company's expansion of its one-way wireless communications network and related
administrative facilities will require capital expenditures currently estimated
to be an additional $18 million in 1996. During December 1995, the Company
committed to purchase $40 million in network infrastructure equipment from a
significant vendor from December 1, 1995 to October 31, 1999 (the "Vendor
Commitment").
The Company's net cash provided by operating activities for the three
months ended March 31, 1996 was $366,000 compared to $832,000 for the three
months ended March 31, 1995. Net cash used in investing activities was $11.8
million for the three months ended March 31, 1996 compared with $84.6 million
for the comparable 1995 period. Of the $84.6 million used in investing
activities in 1995, $74.1 million was for the acquisition of NPCS licenses and
the remainder was primarily for capital expenditures. Net cash used in
financing activities, including borrowings and equity issuances was $1.3
million for the three months ended March 31, 1996 compared with net cash
provided of $103.2 million for the three months ended March 31, 1995. Cash
provided in 1995 resulted primarily from the $100.1 million of net proceeds
from the issuance of the 15% Notes and non-voting common stock in January 1995.
Long-term obligations, less current maturities, increased by approximately $5.8
million during the three months ended March 31, 1996. The increase resulted
from the accretion of the 15% Notes and the 12 1/4% Notes.
As of March 31, 1996, the Company's indebtedness under vendor financing
agreements was $13.7 million, its indebtedness under the 12 1/4% Notes was
$98.0 million and its indebtedness under the 15% Notes was $119.1 million.
14
<PAGE> 15
The 12 1/4% Notes, which are unsecured senior obligations of PageMart,
mature in 2003 and were issued at a substantial discount from their principal
amount at maturity. The accretion of original issue discount on the 12 1/4%
Notes will cause an increase in indebtedness from March 31, 1996 to November 1,
1998 of $38.5 million. From and after November 1, 1998, interest on the 12
1/4% Notes will be payable semiannually, in cash.
The 15% Notes, which are unsecured senior obligations of Wireless, mature
in 2005 and were issued at a substantial discount from their principal amount
at maturity. The accretion of original issue discount on the 15% Notes will
cause an increase in indebtedness from March 31, 1996 to February 1, 2000 of
$88.1 million. From and after February 1, 2000, interest on the 15% Notes will
be payable semiannually, in cash.
In 1992, PageMart entered into an equipment lease with Glenayre
Technologies, Inc. (the "Vendor Lease Financing Agreement"), providing for the
financing of transmitter equipment up to a maximum aggregate amount of $15
million, pursuant to lease term schedules mutually agreed upon for lease terms
not exceeding 60 months. The Vendor Lease Financing Agreement is not a
revolving line of credit and the vendor's commitment expired on December 31,
1995. PageMart has an option, at the expiration of any schedule to purchase
all of the equipment leased under that schedule at a nominal purchase price.
The weighted average interest rate in effect on March 31, 1996 with respect to
the Vendor Lease Financing Agreement was 13.49%.
In May 1994, PageMart entered into a vendor purchase financing agreement
with Motorola, Inc. (the "Vendor Purchase Financing Agreement"), providing for
the financing of transmitter equipment over a period of up to 36 months after
the acquisition of such equipment up to a maximum aggregate amount of $8
million. The Vendor Purchase Financing Agreement is not a revolving line of
credit. The interest rate applicable to such financing is 4% above the prime
rate quoted in The Wall Street Journal from time to time. The weighted average
interest rate in effect on March 31, 1996 with respect to the Vendor Purchase
Financing Agreement was 12.5%.
In May 1995, the Company entered into a four year Revolving Credit
Agreement (the "Revolving Credit Agreement") with BT Commercial Corporation, as
Agent, and Bankers Trust Company, as Issuing Bank, which provides for a $50
million revolving line of credit. Currently there are no loans outstanding
under the Revolving Credit Agreement. The maximum amount available under the
Revolving Credit Agreement at any time is limited to a borrowing base amount
equal to the lesser of (i) 80% of eligible accounts receivable plus 50%
eligible inventory owned by Wireless, and (ii) an amount equal to the service
contribution (as defined in the Revolving Credit Agreement) of Wireless and its
subsidiaries for the immediately preceding three-month period times 4.0. As of
March 31, 1996, the amount available under the Revolving Credit Agreement was
$22.7 million.
The Vendor Purchase Financing Agreement, the indenture under which the 15%
Notes were issued (the "15% Indenture"), the indenture under which the 12 1/4%
Notes were issued (the "12 1/4% Indenture") and the Revolving Credit Agreement
contain certain restrictive covenants that, among other things, limit the
ability of the Company to incur indebtedness, pay dividends, repurchase capital
stock, engage in transactions with stockholders and affiliates, create liens,
sell assets, enter into leases and engage in mergers and consolidations, and
the Revolving Credit Agreement requires the Company to maintain certain
financial ratios and limits the ability of the Company to make capital
expenditures. In addition, the 12 1/4% Indenture prohibits PageMart from paying
any dividends or making other distributions on its capital stock, making loans
to Wireless, merging or consolidating with Wireless or assuming or guaranteeing
any obligations of Wireless unless PageMart is in compliance with certain
interest coverage ratios and certain other requirements. PageMart may,
however, sell its assets to Wireless in transactions that are arm's length in
nature. Wireless is currently a holding company with no business or operations
of its own. Because all of Wireless's operations are conducted through its
subsidiaries, Wireless's cash flow and consequently its ability to service
debt, is almost entirely dependent upon the earnings of its subsidiaries and
the distribution of those earnings or upon loans or other payment of funds by
those subsidiaries to Wireless. Wireless's subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to pay
any amounts due pursuant to Wireless's obligations or to make any funds
available therefor, whether by dividends, loans or other payments. Until the
maturity of the 12 1/4% Notes, which mature on November 1, 2003, and the
indebtedness under the Vendor Purchase Financing Agreement, earlier repayment
of such indebtedness or compliance with the requirements of such debt
instruments, Wireless will be unable to use any amount of cash generated by the
operations of PageMart and its
15
<PAGE> 16
subsidiaries. However, currently Wireless does not have significant cash
requirements until August, 2000 when interest on the 15% Notes must be paid in
cash.
On November 15, 1995, the Company purchased through PageMart International,
Inc., 200,000 shares of voting common stock of PageMart Canada Limited
("PageMart Canada"), which represents 20% of the ownership of PageMart Canada.
PageMart International, Inc. also owns 33% of the voting common stock of the
holding company parent of PageMart Canada ("Canada Holding"), which owns the
remaining 80% of the voting common stock of PageMart Canada. The Company's
investment in Canada Holding and PageMart Canada totals approximately $3.7
million.
As of March 31, 1996, the Company had approximately $14.2 million in cash
and cash equivalents. The Company's cash balances, existing vendor financing
arrangements and borrowings under the Revolving Credit Agreement are expected
to be sufficient to fund the Company's one-way operations and related capital
and debt service requirements through 1997.
Significant additional financing will be required to fund the construction
of a transmission network for two-way services and other start-up costs and
selling and marketing expenses associated with the development and
implementation of two-way services. The Company anticipates investing $75 to
$100 million through fiscal 1997 to test and construct a two-way transmission
network. Thereafter, the Company anticipates that the two-way operations may
require up to $100 million of additional investment to substantially complete
the network buildout. The Company expects to require additional financing to
complete the buildout which may include entering into joint venture
arrangements, however, there can be no assurance that sufficient financing will
be available to the Company. The Company's ability to incur indebtedness is
limited by the covenants contained in the 15% Indenture, the 12 1/4% Indenture,
the Revolving Credit Agreement and the Vendor Purchase Financing Agreement, and
as a result any additional financing may need to be equity financing.
Future revenues, costs, product mix and new product acceptance are all
influenced by a number of factors which are inherently uncertain and difficult
to predict. Therefore, no assurance can be given that financing for such
investments will be available. No assurance can be given that the Company's
strategy will be implemented as currently planned or that the Company's
operations will generate positive cash flows.
16
<PAGE> 17
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Consent of Stockholders dated as of March 28, 1996 was executed by
certain stockholders holding an aggregate of 12,904,874 shares of the voting
common stock (representing 55% of the voting common stock of PageMart Wireless,
Inc.) approving an amendment to the Company's Restated Certificate of
Incorporation and approving an amendment to the Company's by-laws.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the accompanying index to exhibits are
filed as part of this quarterly report.
(b) Reports on Form 8-K
None.
17
<PAGE> 18
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 WIRELESS, 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)
18
<PAGE> 19
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.
4.2 * Indenture dated as of January 17, 1995 between PageMart
Nationwide, Inc. and United States Trust Company of New York,
as Trustee, relating to the 15% Senior Discount Notes due 2005.
11.1 ** Statement regarding computation of per share loss for the three
months ended March 31, 1996
11.2 ** Statement regarding computation of per share loss for the three
months ended March 31, 1995
27.1 ** Financial Data Schedule.
* Each of these exhibits is hereby incorporated by reference to the
Registration Statement of the Company on Form S-1, Registration
No. 33-91142.
** Filed herewith
19
<PAGE> 1
EXHIBIT 11.1
PAGEMART WIRELESS, INC.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1996
--------------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
---------- ----------- ------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 534,001 99.86% 533,263
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 100.00% 11,242,857
1995 Common Stock Offerings 4,323,874 100.00% 4,323,874
Impact of Warrants, Options and Shares Issued During
the Year Preceding the Initial Filing of the Form S-1
Registration Statement 976,649 100.00% 976,649
---------- ------------
34,688,324 34,687,586
WEIGHTED AVERAGE SHARES OUTSTANDING
(Primary and Fully Diluted) 34,687,586
NET LOSS FOR NET LOSS PER SHARE
(Primary and Fully Diluted) ($11,618,000)
NET LOSS PER SHARE
(Primary and Fully Diluted) ($0.33)
============
</TABLE>
<PAGE> 1
EXHIBIT 11.2
PAGEMART WIRELESS, INC.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1995
--------------------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
---------- ----------- ------------
<S> <C> <C> <C>
COMMON STOCK
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 478,467 99.56% 476,345
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 100.00% 11,242,857
1995 Common Stock Offerings 725,445 78.89% 572,296
Impact of Warrants, Options and Shares Issued During
the Year Preceding the Initial Filing of the Form S-1
Registration Statement 4,629,468 100.00% 4,629,468
---------- ------------
34,687,180 34,531,909
WEIGHTED AVERAGE SHARES OUTSTANDING
(Primary and Fully Diluted) 34,531,909
NET LOSS FOR NET LOSS PER SHARE
(Primary and Fully Diluted) ($13,698,000)
NET LOSS PER SHARE
(Primary and Fully Diluted) ($0.40)
============
</TABLE>
<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> 14,201
<SECURITIES> 0
<RECEIVABLES> 27,868
<ALLOWANCES> 5,183
<INVENTORY> 12,775
<CURRENT-ASSETS> 53,165
<PP&E> 93,769
<DEPRECIATION> 33,095
<TOTAL-ASSETS> 262,848
<CURRENT-LIABILITIES> 61,288
<BONDS> 225,210
<COMMON> 3
0
0
<OTHER-SE> (23,653)
<TOTAL-LIABILITY-AND-EQUITY> 262,848
<SALES> 14,802
<TOTAL-REVENUES> 48,545
<CGS> 17,082
<TOTAL-COSTS> 17,082
<OTHER-EXPENSES> 34,704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,401
<INCOME-PRETAX> (11,618)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,618)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,618)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
