<PAGE> 1
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______TO_______
COMMISSION FILE NO. 0-28196
PAGEMART WIRELESS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 75-2575229
<S> <C>
(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)
</TABLE>
(214) 750-5809
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- ------
As of April 11, 1997, there were 33,950,752 shares of the registrant's class A
common stock outstanding.
<PAGE> 2
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
CONDENSED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1996
AND MARCH 31, 1997...........................................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1996 AND 1997..........................................4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 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.................................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................16
</TABLE>
2
<PAGE> 3
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,603 $ 11,304
Accounts receivable, net 33,446 40,128
Inventories 11,702 8,511
Prepaid expenses and other current assets 2,821 2,984
--------- ---------
Total current assets 70,572 62,927
Restricted investments -- --
Property and equipment, net 96,943 101,242
Narrowband licenses 133,065 133,065
Deferred debt issuance costs, net 6,378 6,166
Other assets 6,662 5,503
--------- ---------
Total assets $ 313,620 $ 308,903
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 23,186 $ 19,898
Deferred revenue 27,047 30,948
Other current liabilities 12,270 10,679
--------- ---------
Total current liabilities 62,503 61,525
Long-term debt 240,687 248,877
Commitments and contingencies
Stockholders' equity:
Common stock, $.0001 par value per share, 75,000,000 4 4
shares authorized 39,804,932 and 39,863,932 shares issued
at December 31, 1996 and March 31, 1997, respectively
Additional paid-in capital 225,661 225,787
Accumulated deficit (214,688) (226,743)
Stock subscriptions receivable (547) (547)
--------- ---------
Total stockholders' equity (deficit) 10,430 (1,499)
--------- ---------
Total liabilities and stockholders' equity $ 313,620 $ 308,903
========= =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements
3
<PAGE> 4
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Month Ended March 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Revenues:
Recurring revenue $ 33,743 $ 46,475
Equipment sales and activation fees 14,802 15,248
------------ ------------
Total revenues 48,545 61,723
Cost of equipment sold 17,082 18,119
Operating expenses:
Technical 8,090 10,769
Selling 9,447 12,666
General and administrative 12,919 15,776
Depreciation and amortization 4,248 6,849
------------ ------------
Total operating expenses 34,704 46,060
------------ ------------
Operating loss (3,241) (2,456)
Other (income) expense:
Interest expense 8,401 9,038
Interest income (219) (176)
Other 195 737
------------ ------------
Total other (income) expense 8,377 9,599
------------ ------------
Net loss $ (11,618) $ (12,055)
============ ============
Net loss per share
(primary and fully diluted) $ (0.33) $ (0.30)
Weighted average number
of shares outstanding
(primary and fully diluted) 34,688 39,847
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements
4
<PAGE> 5
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Month Ended March 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,618) $ (12,055)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 4,248 6,849
Provision for bad debt 1,453 2,707
Accretion of discount on senior discount notes 7,333 8,190
Amortization of deferred debt issuance costs 303 210
Changes in certain assets and liabilities:
Increase in accounts receivable (2,635) (9,389)
(Increase) decrease in inventories (1,596) 3,191
Increase in prepaid expense and other current assets (624) (163)
(Increase) decrease in other assets, net (1,097) 791
Increase (decrease) in accounts payable 3,403 (3,288)
Increase in deferred revenue 1,540 3,901
Decrease in other current liabilities (344) (1,591)
---------- ----------
Net cash provided by (used in) operating activities 366 (647)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment, net (11,779) (10,020)
Purchase of intangible assets (53) (10)
Other (3) (750)
---------- ----------
Net cash used in investing activities (11,835) (10,780)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock under
the stock option/stock issuance plan 11 14
Proceeds from conversion of common stock warrants -- 112
Payments on vendor credit facilities (1,306) --
Deferred debt issuance costs incurred for Revolving Credit Agreement (8) 2
---------- ----------
Net cash provided by (used in) financing activities (1,303) 128
---------- ----------
Net decrease in cash and cash equivalents (12,772) (11,299)
Cash and cash equivalents, beginning of period 26,973 22,603
========== ==========
Cash and cash equivalents, end of period $ 14,201 $ 11,304
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 556 $ 97
Income taxes $ - $ --
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these financial statements
5
<PAGE> 6
PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 1997
(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., a wholly owned subsidiary of Wireless, ("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 ("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.
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 months ended March 31, 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 consolidated condensed 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.
6
<PAGE> 7
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 months ended March 31, 1996 and 1997.
This discussion should be read in conjunction with the Company's condensed
consolidated financial statements and the notes thereto included elsewhere in
this report.
When used in this discussion, the words `estimate', `project', `plan',
`expect' and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
including the timely development and acceptance of new products, the impact of
competitive products and pricing that could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof.
GENERAL
The Company has constructed and operates a wireless messaging and
communications network and provides paging and other one-way wireless messaging
services to its subscribers. In addition, the Company sells and distributes
wireless messaging equipment to subscribers, retailers and resellers. The
Company earns recurring revenues from each subscriber in the form of fixed
periodic fees and incurs substantial operating expenses in offering its
services, including technical, customer service and general and administrative
expenses. See "Management's Presentation of Results of Operations."
Since commencing operations in 1990, the Company has invested heavily in
its one-way wireless communications network and administrative infrastructure
in order to establish nationwide coverage, sales offices in major metropolitan
areas, customer service call centers and centralized administrative support
functions. The Company incurs substantial fixed operating costs related to its
one-way wireless communications infrastructure, which is designed to serve a
much larger subscriber base than the Company currently serves in order to
accommodate growth. In addition, the Company incurs substantial costs
associated with new subscriber additions. As a result, the Company has
generated significant net operating losses for each year of its operations. See
"Management's Presentation of Results of Operations."
The Company's strategy is to expand its subscriber base as rapidly as
possible to increase cash flow through greater utilization of its nationwide
wireless communications network. From March 31, 1996 to March 31, 1997, the
number of domestic units in service increased from 1,374,146 to 2,001,525. 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. In addition, the Company began
testing and development of two-way wireless messaging services in 1996 and
plans to continue the development and implementation in 1997 and 1998, and
expects to incur additional operating losses during the start-up phase for such
services. The Company does not anticipate any significant revenues from two-way
services during 1997; however, it expects to generate 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
Communications, 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 and depreciation expense than if the
Company leased such equipment to its subscribers. In addition, the Company's
financial results are much different from other paging carriers that lease
messaging equipment to subscribers because the Company recognizes the cost
7
<PAGE> 8
of messaging equipment sold in connection with adding new subscribers at the
time of sale rather than capitalizing and depreciating the cost of messaging
equipment over periods ranging from three to five years as occurs with paging
carriers that lease messaging equipment to subscribers. In addition, the
Company's retail distribution strategy results in the recognition of expenses
associated with messaging equipment sales and other sales and marketing
expenses in advance of new subscribers being added to the base and generating
revenues (as retailers carry inventory).
The Company sells its messaging equipment through multiple distribution
channels, including direct sales, third-party resellers, private brand
strategic alliances and local and national retail stores. Selling and marketing
expenses are primarily attributable to compensation paid to the Company's sales
force, advertising and marketing costs and to losses resulting from the fact
that, for competitive and marketing reasons, the Company generally sells each
new unit for less than its acquisition cost. The Company's accounting practices
result in selling and marketing expenses, including loss on sale of equipment,
being recorded at the time a unit is sold. Units sold by the Company during a
given month may exceed units activated and in service due to inventory stocking
and distribution strategies of the retailers. As a result, selling and
marketing expenses per net subscriber addition may fluctuate from period to
period.
The Company derives its recurring revenue primarily from fixed periodic
fees for services that are not generally dependent on usage. Consequently, the
Company's ability to recoup its initial selling and marketing costs, to meet
operating expenses and to achieve profitability is dependent on the average
length of each customer's subscription period. As long as a subscriber
continues to utilize the Company's service, operating results benefit from the
recurring payments of the fixed fees without the incurrence of additional
selling expenses by the Company. Conversely, operating results are adversely
affected by customer disconnections. Each month a percentage of the Company's
existing customers have their service terminated for a variety of reasons,
including failure to pay, dissatisfaction with service and switching to a
competing service provider. The Company's average monthly disconnection rates
for the year ended December 31, 1994, 1995, 1996 and the three months ended
March 31, 1997 were 3.4%, 2.5%, 2.4% and 2.3%, 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, 1996 AND 1997
Units in Service
Units in service from domestic operations were 1,374,146 and 2,001,525 as
of March 31, 1996 and 1997, respectively, representing an annual growth rate of
46%. In addition, for the three months ended March 31, 1997, PageMart Canada
Limited ("PageMart Canada") added 6,092 subscribers. As a result of its
ownership interest in PageMart Canada, the Company's proportional share of net
subscriber additions from PageMart Canada was 3,665 units for the three months
ended March 31, 1997. 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 private brand strategic alliance
programs.
8
<PAGE> 9
Revenues
Revenues for the three months ended March 31, 1996 and 1997 were $48.5
million and $61.7 million, respectively. Recurring revenues for airtime, voice
mail, and other services for same periods were $33.7 million and $46.5 million,
respectively. Revenues from equipment sales and activation fees for the three
months ended March 31, 1996 and 1997 were $14.8 million and $15.2 million,
respectively. The increases in recurring revenues and revenues from equipment
sales and activation fees were primarily due to the rapid growth in the number
of units in service. The increase in equipment sales during 1997 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 $8.61 and $8.04 in the first 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 private brand
strategic alliance and third party reseller channels. This decrease in ARPU has
been offset somewhat by a higher mix of multi-city, regional and nationwide
services as well as increased sales of other value-added services such as voice
mail and toll-free numbers. 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 alliances
and third party resellers because these are generally high volume customers
that are charged wholesale airtime rates. However, because private brand
strategic alliance partners and third party resellers are responsible for
selling and marketing costs, billing, collection and other administrative costs
associated with end-users, the Company incurs substantially lower marketing and
administrative costs with respect to such subscribers.
Cost of Equipment Sold
The cost of equipment sold for the three months ended March 31, 1996 and
1997 was $17.1 million and $18.1 million, respectively. 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 purchases. Management anticipates that loss on
equipment sold will generally remain constant on a per unit basis for the
foreseeable future.
Operating Expenses
Technical expenses were $8.1 million and $10.8 million for the three
months ended March 31, 1996, and 1997, respectively. 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 $2.06 and $1.86
in the first quarter of 1996 and 1997, 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, 1997, the Company incurred $4,000 in technical expenses
associated with the development of its two-way wireless messaging services.
Selling expenses for the three months ended March 31, 1996 and 1997 were
$9.4 million and $12.7 million, respectively. This increase resulted from
greater marketing and advertising costs related to the growth in units sold, as
well as from increased sales compensation because of the addition of sales
personnel in existing operating markets. During the first quarter of 1996 and
1997, the Company added 134,122 and 150,080 net new domestic units in service,
respectively. Sales and marketing employees increased from 486 at March 31,
1996 to 530 at March 31, 1997. Management views the net loss on equipment sold
to be a component of selling and marketing expenses incurred to add new
subscribers. See "Management's Presentation of Results of Operations." Selling
and marketing expenses per net subscriber addition (including loss on equipment
sales) were $86 and $103 for the three months ended March 31, 1996 and 1997,
respectively. This increase was due to losses recognized on the sale of pagers
due to stocking a large number of new retail outlets in first quarter 1997
including 1,858 new outlets for RadioShack(R). The losses are recognized when
pagers are shipped to the retailers, usually before the units are placed into
service; thus, increasing selling expenses per net subscriber addition. Selling
expenses are also expected to be higher than average during the second quarter
of 1997 due to stocking the remainder of the RadioShack(R) outlets. During the
three months ended March 31, 1997, the Company incurred $94,000 in selling
expenses associated with its international operations (including loss on sale
of equipment).
9
<PAGE> 10
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) in the first
quarter of 1996 and 1997 were $12.9 million and $15.8 million, respectively.
This increase was attributable to the Company's expansion of its customer
service call centers and continued expansion in new and existing markets to
support the growing subscriber base which required additional office space,
administrative personnel and customer service representatives. On an average
cost per month per unit in service basis, general and administrative expenses
were $3.29 and $2.73 in the first quarter of 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. During the three months ended March 31, 1997, the Company incurred
$13,000 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, 1996
and 1997 was $4.2 million and $6.8 million, respectively. The increase resulted
from the expansion to date 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 three months of
1997. As an average cost per month per unit in service, depreciation and
amortization was $1.08 and $1.19 for the three months ended March 31, 1996 and
1997, respectively. During the three months ended March 31, 1997, the Company
incurred $41,000 in depreciation expenses associated with the development of
its two-way wireless messaging services.
Interest Expense
Consolidated interest expense increased from $8.4 million in the first
quarter of 1996 to $9.0 million in the first quarter of 1997. 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 (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 $3.2
million and $3.6 million in the first quarter of 1996 and 1997, respectively.
Interest expense related to the 15% Notes was $4.4 million and $4.8 million in
the first quarter of 1996 and 1997, respectively.
Net Loss
The Company sustained net losses in the first quarter of 1996 and 1997 of
$11.6 million and $12.1 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.
10
<PAGE> 11
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, 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 is useful in
understanding the Company's results.
Management believes that operating profit before selling expenses is a
meaningful indicator of the profitability of the Company's installed base of
units in service because it measures the recurring revenues received for
services less the costs (including depreciation and amortization) associated
with servicing that installed base. Operating profit before selling expenses
per subscriber per month for the Company's one-way operations has grown from
$(0.46) during the first quarter of 1994 to $2.27 during the first 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
------------------------------------------------------------
June 30, Sept 30, Dec 31, Mar 31,
1995 1995 1995 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING DATA:
Recurring revenues $ 23,387 $ 26,994 $ 30,658 $ 33,743
Technical expenses 6,141 6,842 7,015 7,943
General and
administrative expenses 10,067 11,350 12,243 12,792
Depreciation and
amortization 3,091 3,469 3,910 4,248
----------- ----------- ----------- -----------
Operating profit
before selling
expenses 4,088 5,333 7,490 8,760
Selling expenses (1) 10,614 10,889 11,181 11,601
----------- ----------- ----------- -----------
Operating income (loss) $ (6,526) $ (5,556) $ (3,691) $ (2,841)
=========== =========== =========== ===========
EBITDA $ (3,435) $ (2,087) $ 219 $ 1,407
=========== =========== =========== ===========
OTHER DATA:
Units in service (2) 1,008,683 1,131,464 1,240,024 1,374,146
Net subscriber
additions 133,739 122,781 108,560 134,122
ARPU (3) $ 8.28 $ 8.41 $ 8.62 $ 8.61
National retail outlets 2,900 3,408 3,411 3,690
Operating profit
before selling
expenses per
subscriber
per month (4) $ 1.45 $ 1.66 $ 2.11 $ 2.23
Selling
expenses per
net subscriber
addition (1)(5) $ 79 $ 89 $ 103 $ 86
Capital
employed per
unit in service (6) $ 39 $ 39 $ 40 $ 41
<CAPTION>
Three Months Ended
--------------------------------------------------------
June 30, Sept 30, Dec 31, Mar 31,
1996 1996 1996 1997
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING DATA:
Recurring revenues $ 36,964 $ 39,697 $ 42,637 $ 46,475
Technical expenses 8,783 9,725 10,273 10,765
General and
administrative expenses 13,043 13,668 14,162 15,763
Depreciation and
amortization 4,942 5,714 6,288 6,808
----------- ----------- ----------- -----------
Operating profit
before selling
expenses 10,196 10,590 11,914 13,139
Selling expenses (1) 12,836 13,588 14,900 15,443
----------- ----------- ----------- -----------
Operating income (loss) $ (2,640) $ (2,998) $ (2,986) $ (2,304)
=========== =========== =========== ===========
EBITDA $ 2,302 $ 2,716 $ 3,302 $ 4,504
=========== =========== =========== ===========
OTHER DATA:
Units in service (2) 1,524,297 1,684,937 1,851,445 2,001,525
Net subscriber
additions 150,151 160,640 166,508 150,080
ARPU (3) $ 8.50 $ 8.25 $ 8.04 $ 8.04
National retail outlets 4,286 5,025 5,530 7,388
Operating profit
before selling
expenses per
subscriber
per month (4) $ 2.35 $ 2.20 $ 2.25 $ 2.27
Selling
expenses per
net subscriber
addition (1)(5) $ 85 $ 85 $ 89 $ 103
Capital
employed per
unit in service (6) $ 49 $ 49 $ 43 $ 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. Stated as the
monthly average for the quarter.
(4) Calculated by dividing operating profit before selling expenses
(selling expenses include loss on sale of equipment) for the quarter by
the average number of units in service during that quarter. Stated as
the monthly average for the quarter.
(5) Calculated by dividing selling expenses, including loss on sale of
equipment, for the quarter by the net subscriber additions for the
quarter.
(6) Calculated by dividing total assets (excluding cash, narrowband
personal communications services assets 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.
12
<PAGE> 13
Supplementary Information
The following table sets forth supplementary financial information related
to the Company's various operations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------
PAGEMART PAGEMART PAGEMART
ONE-WAY TWO-WAY INTERNATIONAL(1) TOTAL
-------- -------- ---------------- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $ 61,723 $ -- $ -- $ 61,723
Technical expense 10,765 4 -- 10,769
Selling expense 12,572 -- 94 12,666
General and administrative expense 15,763 13 -- 15,776
Operating loss (2,304) (58) (94) (2,456)
EBITDA 4,504 (17) (94) 4,393
Total assets 151,078 156,852 973 308,903
Capital expenditures 4,434 5,586 -- 10,020
</TABLE>
(1) Expenses reflected in this table are for the Company's international
headquarters operations. The Company accounts for its investments in
Canada under the equity method, consequently, the Company's share of
expenses from its Canadian operations are not reflected in this 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 have historically required 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 and revolving credit
agreements.
Capital expenditures for the three months ended March 31, 1997 were $10.0
million compared to $11.8 million for the three months ended March 31, 1996.
Capital expenditures for the first quarter of 1997 include approximately $5.6
million related to the development of two-way messaging services, $2.5 for the
Company's one-way messaging network and $1.9 million for the development of the
Company's new administrative system. During October 1996, the Company committed
to purchase network infrastructure equipment and related services for use in
its two-way network. 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"). Through March
31, 1997, the Company has purchased $20.8 million of network infrastructure
under the purchase commitment.
13
<PAGE> 14
The Company's net cash used in operating activities for the three months
ended March 31, 1997 was $647,000 compared with the net cash provided of
$366,000 for the three months ended March 31, 1996. Net cash used in investing
activities was $10.8 million for the three months ended March 31, 1997 compared
with $11.8 million for the comparable 1996 period. Of the $10.8 million used in
investing activities in 1997, $10.0 million was for capital expenditures. Net
cash provided by financing activities, including borrowings and equity
issuances was $128,000 for the three months ended March 31, 1997 compared with
the net cash provided of $1.3 million for the three months ended March 31,
1996. Long-term obligations, less current maturities, increased by
approximately $8.2 million during the three months ended March 31, 1997. The
increase resulted from the accretion of the 15% Notes and the 12 1/4% Notes.
As of March 31, 1997, the Company had no amounts outstanding under vendor
financing or revolving credit agreements and its indebtedness under the 12 1/4%
Notes was $111.5 million and its indebtedness under the 15% Notes was $137.4
million.
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, 1997 to November 1,
1998 of $69.8 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, 1997 to February 1, 2000 of
$25.1 million. From and after February 1, 2000, interest on the 15% Notes will
be payable semiannually, in cash.
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. As of March 31, 1997 there were 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, 1997, the amount available under the Revolving Credit Agreement was
$29.1 million. In the event Wireless exercised its option to increase its
borrowing base by purchasing inventory and accounts receivable from PageMart,
the maximum amount available under the Revolving Credit agreement would have
been $35.6 million at March 31, 1997. Management anticipates borrowings under
the Revolving Credit Agreement during the second quarter of 1997.
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, earlier repayment of such indebtedness or
compliance with the
14
<PAGE> 15
requirements of such debt instruments, Wireless will be
unable to use any amount of cash generated by the operations of PageMart and
its subsidiaries. However, currently Wireless does not have significant cash
requirements until March 1999 when the Revolving Credit Agreement matures.
On November 15, 1995, the Company purchased through PageMart
International, Inc., 200,000 voting shares of common stock of 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, 1997, the Company had approximately $11.3 million in cash
and cash equivalents. The Company's cash balances and borrowings under the
Revolving Credit Agreement are expected to be sufficient to fund the Company's
one-way operations and related capital requirements through 1997. The Company
anticipates its one-way messaging operations will generate sufficient cash
flows to fund one-way capital expenditures for 1998. The Company's two-way
messaging operations are expected to require additional capital in 1998. The
Company anticipates funding a portion of its two-way messaging operations with
available borrowings under the Revolving Credit Agreement and from any excess
cash generated from the Company's one-way messaging operations.
Significant additional financing will be required to complete 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 1998 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 lease rather than sell a portion
of its two-way messaging units. The Company expects to require additional
financing to complete the buildout, which may include new vendor financing or
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 and the Revolving Credit Agreement; 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.
The Company cautions readers that any forward-looking statements contained
in this form 10-Q or made by management of the Company 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 high 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; 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 two-way services.
15
<PAGE> 16
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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.
16
<PAGE> 17
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 14, 1997 CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
/s/ G. CLAY MYERS
------------------------------
G. CLAY MYERS
MAY 14, 1997 VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND
TREASURER (PRINCIPAL FINANCIAL
AND CHIEF ACCOUNTING OFFICER)
17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
11.1 * Statement regarding computation of per share loss for the
three months ended March 31, 1997
27.1 * Financial Data Schedule.
* Filed herewith
18
<PAGE> 1
EXHIBIT 11.1
PAGEMART WIRELESS, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-------------------------------------------
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 620,483 99.87% 619,666
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
1996 Common Stock Offering 6,000,000 100.00% 6,000,000
Employee Stock Purchase Plan Shares Issued 31,275 100.00% 31,275
1997 Warrants Exercised 34,500 54.44% 18,783
-------------- ------------
39,863,932 39,847,398
WEIGHTED AVERAGE SHARES OUTSTANDING 39,847,398
NET LOSS ($12,055,029)
NET LOSS PER SHARE ($ 0.30)
============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 11,304
<SECURITIES> 0
<RECEIVABLES> 48,443
<ALLOWANCES> (8,315)
<INVENTORY> 8,511
<CURRENT-ASSETS> 62,927
<PP&E> 155,815
<DEPRECIATION> (54,573)
<TOTAL-ASSETS> 308,903
<CURRENT-LIABILITIES> 61,525
<BONDS> 248,877
0
0
<COMMON> 4
<OTHER-SE> (1,503)
<TOTAL-LIABILITY-AND-EQUITY> 308,903
<SALES> 15,248
<TOTAL-REVENUES> 61,723
<CGS> 18,119
<TOTAL-COSTS> 18,119
<OTHER-EXPENSES> 46,060
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,038
<INCOME-PRETAX> (12,055)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,055)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,055)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
