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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, 1998
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)
DELAWARE 75-2575229
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3333 LEE PARKWAY, SUITE 100
DALLAS, TEXAS 75219
(Address of principal executive offices) (Zip code)
(214) 765-4000
(Registrant's telephone number, including area code)
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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As of April 17, 1998, there were 34,313,308 shares of the registrant's class A
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, 1997
AND MARCH 31, 1998 .................................................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1997 AND 1998 .................................. 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 1997 AND 1998 .................................. 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 .......................................................... 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........................ 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ........................................... 18
</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,
1997 1998
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,337 $ 87,712
Accounts receivable, net 61,394 55,080
Inventories 5,359 4,143
Prepaid expenses and other current assets 9,043 8,770
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Total current assets 84,133 155,705
Property and equipment, net 136,727 163,823
Narrowband licenses 133,065 133,065
Deferred debt issuance costs, net 5,532 11,438
Other assets 2,419 2,941
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Total assets $ 361,876 $ 466,972
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LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 28,009 $ 36,790
Deferred revenue 53,469 58,116
Current maturities of long-term debt 2,755 --
Other current liabilities 20,740 14,146
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Total current liabilities 104,973 109,052
Long-term debt 289,344 413,698
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, $.0001 par value per share, 75,000,000 4 4
shares authorized 40,032,937 and 40,130,436 shares issued
at December 31, 1997 and March 31, 1998, respectively
Additional paid-in capital 226,622 227,123
Accumulated deficit (258,575) (282,364)
Stock subscriptions receivable (492) (541)
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Total stockholders' (deficit) equity (32,441) (55,778)
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Total liabilities and stockholders' (deficit) equity $ 361,876 $ 466,972
========= =========
</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
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------
1997 1998
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Revenues:
Recurring revenue $ 46,475 $ 60,875
Equipment sales 15,248 16,319
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Total revenues 61,723 77,194
Cost of equipment sold 18,119 20,620
Operating expenses:
Technical 10,769 12,494
Selling 12,666 13,897
General and administrative 15,776 20,160
Depreciation and amortization 6,849 8,602
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Total operating expenses 46,060 55,153
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Operating (loss) income (2,456) 1,421
Other (income) expense:
Interest expense 9,038 11,609
Interest income (176) (972)
Other 737 765
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Total other (income) expense 9,599 11,402
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Net loss before extraordinary item (12,055) (9,981)
Extraordinary item:
Early retirement of debt -- (13,808)
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Net loss $(12,055) $(23,789)
======== ========
Net loss per share
(basic and diluted)
Net loss before extraordinary item $ (0.30) $ (0.25)
Extraordinary item -- (0.34)
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Net loss $ (0.30) $ (0.59)
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Weighted average number
of shares outstanding
(basic and diluted) 39,847 40,082
======== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements
4
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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,
-----------------------------
1997 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (12,055) $ (23,789)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Extraordinary item -- 13,808
Depreciation and amortization 6,849 8,602
Provision for bad debt 2,707 2,542
Accretion of discount on senior discount notes 8,190 10,472
Amortization of deferred debt issuance costs 212 268
Changes in certain assets and liabilities:
(Increase) decrease in accounts receivable (9,389) 3,772
Decrease in inventories 3,191 1,216
(Increase) decrease in prepaid expense and other current assets (163) 273
(Increase) decrease in other assets, net 791 (684)
Increase (decrease) in accounts payable (3,288) 8,781
Increase in deferred revenue 3,901 4,647
Decrease in other current liabilities (1,591) (7,928)
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Net cash (used in) provided by operating activities (645) 21,980
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Cash flows from investing activities:
Purchases of property and equipment related to one-way messaging (4,434) (8,823)
Purchases of property and equipment related to advanced messaging (5,586) (25,382)
Other (760) (6)
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Net cash used in investing activities (10,780) (34,211)
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Cash flows from financing activities:
Proceeds from issuance of common stock under
the stock option/stock issuance plan 14 412
Proceeds from conversion of common stock warrants 112 --
Payments of stock subscriptions receivable -- 40
Retirement of 12 1/4% Senior Discount Notes -- (130,689)
Proceeds from issuance of 11 1/4% Senior Subordinated Discount Notes -- 249,700
Offering Costs related to issuance of 11 1/4% Senior Subordinated
Discount Notes and retirement of 12 1/4% Senior Discount Notes -- (11,876)
Payments on vendor financing arrangement -- (21,249)
Borrowings on vendor financing arrangement -- 5,268
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Net cash provided by financing activities 126 91,606
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Net (decrease) increase in cash and cash equivalents (11,299) 79,375
Cash and cash equivalents, beginning of period 22,603 8,337
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Cash and cash equivalents, end of period $ 11,304 $ 87,712
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 97 $ 579
</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, 1998
(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"). On January 28, 1998,
PageMart was merged into Wireless with Wireless as the surviving corporation.
Wireless and its subsidiaries are referred to herein as the "Company." The
consolidated financial statements of the Company include the accounts of
PageMart PCS, Inc., 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 Wireless. PageMart PCS
holds certain narrowband personal communications services licenses. PageMart II,
Inc. and PageMart Operations, Inc. hold certain Federal Communications
Commission ("FCC") licenses. PageMart International, Inc. holds certain
investments in an international venture in Canada. Other than these licenses and
international investments, the subsidiaries of Wireless 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, 1997. 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, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
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.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement No. 128 - Earnings per Share ("SFAS 128"). The Company adopted
SFAS 128 for the fiscal year ending December 31, 1997. SFAS 128 replaces the
primary earnings per share calculation with a basic earnings per share
calculation and modifies the calculation of diluted earnings per share. Adoption
of SFAS 128 did not affect the calculation of earnings per share for the
Company.
4. CAPITALIZED INTEREST
In accordance with statement of Financial Accounting Standards No. 34 -
Capitalization of Interest Cost, the Company capitalizes interest on certain
qualifying assets during the construction period. Interest costs attributable to
the construction of the Company's advanced messaging network of $1.3 million
were capitalized for the three months ended March 31, 1998. The Company did not
capitalize any interest costs for the three months ended March 31, 1997.
6
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5. LONG-TERM DEBT
On January 28, 1998, the Company, in a private offering raised
approximately $249.7 million in gross proceeds from the sale of its 11 1/4%
Senior Subordinated Discount Notes due 2008 (the "Offering"). Simultaneously,
with the closing of the Offering, the Company refinanced certain of its
outstanding indebtedness, (the "Refinancing"), and modified its corporate
structure. The Refinancing consisted of: (i) purchasing all of the Company's
outstanding 12 1/4% Senior Discount Notes due 2003 (the 12 1/4% Notes); (ii)
amending certain terms of the covenants and agreements in the indenture relating
to the Company's 15% Senior Discount Notes due 2005; and (iii) merging PageMart,
Inc. into PageMart Wireless, Inc., with PageMart Wireless, Inc. as the surviving
corporation.
Approximately $130.7 million of the net proceeds of the Offering were
used to finance the retirement of the 12 1/4% Notes. The proceeds remaining
after expenses of the Offering and Refinancing were approximately $107.8
million. In connection with the Refinancing, the Company incurred an
extraordinary charge of approximately $13.8 million related to the early
retirement of debt.
The 11 1/4% Senior Discount Notes due 2008 (the "11 1/4% Notes") have a
principal amount at maturity of $432.0 million with an initial accreted value of
$249.7 million. The 11 1/4% Notes mature on February 1, 2008. From and after
August 1, 2003, interest on the 11 1/4% Notes will be paid semiannually in cash
at the rate of 11 1/4% per annum. The 11 1/4% Notes are redeemable at any time
on or after February 1, 2003, at the option of the Company in whole or in part,
at 105.625% of their principal amount at maturity, plus accrued and unpaid
interest, declining to 100% of their principal amount at maturity plus accrued
interest on and after February 1, 2006. In addition, at any time prior to
February 1, 2001, up to 35% of the accreted value of the 11 1/4% Notes may be
redeemed at a redemption price of 111.25% of their accreted value on the
redemption date at the option of the Company in connection with a public
offering of its common stock, provided that at least $280.8 million aggregate
principal amount at maturity of the 11 1/4% Notes remains outstanding after each
redemption.
In April, 1998, the Company commenced an exchange offer pursuant to an
effective registration statement which is anticipated to close in late May 1998.
6. LEGAL PROCEEDINGS
On March 20, 1998, an action against the Company and Paging Network,
Inc. was filed in Superior Court of the State of California, County of Los
Angeles, by three customers of EconoPage of Southern California, Inc. ("EPSC"),
a reseller of the Company's services that had resold the Company's paging
services to approximately 12,000 customers. The Company terminated the reseller
agreement when EPSC ceased operations on March 4, 1998. In the complaint,
plaintiffs have requested class action status on behalf of EPSC customers and
allege that EPSC was an agent of the Company, that the Company was aware that
EPSC's pricing would not permit it to sustain its business and the Company
permitted EPSC to continue to enter into service contracts with customers while
EPSC was having serious financial difficulties. The complaint alleges violation
of statute, fraud and negligent misrepresentation by the Company, and requests
injunctive relief as well as compensatory, punitive, special and incidental
damages in an unspecified amount. The Company denies all claims and will
vigorously defend itself. The Company does not expect the ultimate outcome of
this suit to have a material adverse effect on its results of operations or
financial condition.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the results of operations and
financial condition of the Company for the three months ended March 31, 1998 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. Certain prior year amounts have been reclassified to conform with
the current year presentation.
This Form 10-Q contains statements that constitute forward-looking
statements. The words "estimate," "project," "plan," "expect," "believe" and
similar expressions are intended to identify forward-looking statements. Readers
are cautioned that such forward-looking statements involve risks and
uncertainties, and are subject to change based on various important factors. The
factors set forth in other filings with the Securities Exchange Commission and
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 1998 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 outstanding indebtedness; the impact of technological change in
the telecommunications industry; the future cost of network infrastructure and
subscriber equipment; the impact of competition and pricing of paging and
wireless services; the timely development and acceptance of new products;
changes in regulation by the FCC and various state regulatory agencies and
potential delays relating to the construction of the Company's transmission
network for advanced messaging services.
GENERAL
The Company has constructed and operates a wireless messaging and
communications network and provides paging and other one-way wireless messaging
services to its subscribers. In addition, the Company sells and distributes
wireless messaging equipment to subscribers, retailers and resellers. The
Company earns recurring revenues from each subscriber in the form of fixed
periodic fees and incurs substantial operating expenses in offering its
services, including technical, customer service and general and administrative
expenses. See "Management's Presentation of Results of Operations."
Since commencing operations in 1990, the Company has invested heavily
in its one-way wireless communications network and administrative infrastructure
in order to establish nationwide coverage, sales offices in major metropolitan
areas, centralized customer service call centers and administrative support
functions. The Company incurs substantial fixed operating costs related to its
one-way wireless communications infrastructure, which is designed to serve a
larger subscriber base than the Company currently serves in order to accommodate
growth. In addition, the Company incurs substantial costs associated with new
subscriber additions. As a result, the Company has generated significant net
losses for each year of its operations. See "Management's Presentation of
Results of Operations."
The Company's strategy is to expand its subscriber base to increase
profitability and cash flow through greater utilization of its nationwide
wireless communications network. From December 31, 1996 to March 31, 1998, the
number of domestic units in service increased from 1,851,445 to 2,652,443. None
of the Company's growth was attributable to acquisitions. The Company intends to
achieve this growth by promoting its customized paging and other wireless
messaging services through its national sales offices, national retail
distribution channels and private brand strategic alliances with GTE
Corporation, Southwestern Bell Mobile Systems, AT&T Wireless Services, WorldCom
Network Services, Ameritech Mobile Services, Inc., EXCEL Communications, Inc.,
ALLTEL Communications, Inc., BellSouth Cellular Corp., Bluegrass Cellular and
First Cellular of Southern Illinois, as well as international expansion. Given
the fixed operating costs of its wireless networks, and administrative and
selling and marketing expenses associated with its growth strategy, the Company
generated operating losses in 1997 from its one-way wireless communications
business. In the third quarter of 1997, the Company began generating operating
profits in its one-way messaging business and management expects this trend to
continue during 1998.
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The Company began testing and development of advanced messaging
services in 1996, which continued throughout 1997. The Company has begun
implementation of an advanced messaging platform in 1998 and expects to incur
additional operating losses and make significant capital expenditures during
1998 and 1999. The Company does not anticipate any significant revenues from
advanced messaging services during 1998.
The Company has historically sold, rather than leased, substantially
all of the messaging equipment used by its subscribers. As a result, the Company
has much less capital invested in subscriber units than other paging carriers
since it has recouped a substantial portion of subscriber unit costs upon sale
to retailers and subscribers. This has resulted in significantly lower capital
expenditures and depreciation expense than if the Company had leased units to
its subscribers. In addition, the Company's financial results are much different
than other paging carriers that lease subscriber units to subscribers because
the Company recognizes the cost of subscriber units sold in connection with
adding new subscribers at the time of sale rather than capitalizing and
depreciating the cost of subscriber units over periods ranging from three to
four years, as occurs with paging carriers that lease subscriber units to
subscribers. In addition, the Company's retail distribution strategy results in
the recognition of expenses associated with subscriber unit 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
expects, however, to lease a substantial portion of its advanced messaging
subscriber units as initial sales of advanced messaging services is expected to
be dominated by business and corporate customers and because of the higher cost
of advanced messaging subscriber units compared to one-way messaging units.
The Company sells its subscriber units through the following
distribution channels: (i) direct sales, third-party resellers and local retail
stores through its National Sales Offices strategic business unit ("SBU"); (ii),
private brand strategic alliances through its Carrier Services Division and
(iii) national retail stores through its National Retail SBU. At March 31, 1998,
26% of the Company's total units in service originated from the National Retail
SBU, 34% originated from the Carrier Services Division and 40% originated from
the National Sales Offices SBU. Selling and marketing expenses primarily consist
of compensation paid to the Company's sales force and advertising and marketing
costs including losses on sales of new units. For competitive and marketing
reasons, the Company generally sells each new unit to national retailers for
less than its acquisition cost. These losses are treated as a marketing
expense. The Company's accounting practices result in selling and marketing
expenses, including loss on sale of equipment, being recorded at the time a unit
is sold. The Company expects its cost of subscriber units on a per unit basis
generally to remain constant or decline slightly as sales volumes increase.
Management anticipates that loss on equipment sold will generally remain
constant on a per unit basis for the foreseeable future. Units sold by the
Company during a given month may exceed units activated and in service due to
inventory stocking 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 for
service, dissatisfaction with service and switching to a competing service
provider. The Company's average monthly disconnection rates for the years ended
December 31, 1995, 1996 and 1997 and the three months ended March 31, 1998 were
2.5%, 2.4%, 2.5% and 2.6%, respectively.
Approximately 90% of the Company's average monthly revenue per unit
("ARPU") is attributable to fixed fees for airtime, coverage options and
features. A portion of the remainder is dependent on usage. Management
anticipates that the Company's ARPU will remain constant or decline slightly in
the foreseeable future due to a continued higher mix of subscribers added
through private brand strategic alliance programs, which yield lower ARPU
because strategic alliance partners are generally high volume customers that are
charged wholesale airtime rates. However, because private brand strategic
alliance partners are responsible for selling and marketing costs, and billing,
collection and other administrative costs associated with end-users, the Company
incurs substantially lower marketing and administrative costs with respect to
such subscribers.
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RESULTS OF OPERATIONS
The Company's principal operations to date are its domestic one-way
wireless operations. The following discussion of results of operations analyzes
the results of the Company's domestic one-way wireless messaging operations,
unless otherwise indicated.
Certain of the following financial information is presented on a per
subscriber unit basis. Management of the Company believes that such a
presentation is useful in understanding the Company's results because it
provides 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, 1997 AND 1998
Units in Service
Units in service from domestic operations were 2,001,525 and 2,652,443
as of March 31, 1997 and 1998, respectively, representing an annual growth rate
of 33%. The net subscriber additions for the Company's one-way messaging
operations have ranged between 139,000 to 181,000 for each of the last five
fiscal quarters. In the three months ended March 31, 1998, the Company's one-way
messaging operations generated 139,106 net subscriber additions, representing an
annualized growth rate of approximately 22%. Management expects the one-way
messaging operations to generate annual growth rates ranging from 16%-23% each
fiscal quarter of 1998, which would result in net subscriber additions ranging
from approximately 100,000 to 140,000 for each of the fiscal quarters of 1998.
In addition, for the three months ended March 31, 1997 and 1998, PageMart Canada
Limited's ("PageMart Canada") units in service were 19,362 and 31,521,
respectively. As a result of its ownership interest in PageMart Canada, the
Company's proportional share of the units in service of PageMart Canada was
11,617 and 18,913 at March 31, 1997 and 1998, respectively. The Company has
experienced strong growth in units in service due primarily to the success of
its sales and marketing strategies in the national retail and private brand
strategic alliance programs.
Revenues
Revenues were $77.2 million for the three months ended March 31, 1998
compared to $61.7 million for the three months ended March 31, 1997. Recurring
revenues for airtime, voice mail and other services were $60.9 million for the
three months ended March 31, 1998 compared to $46.5 million for the comparable
period ended March 31, 1997. Revenues from equipment sales and activation fees
were $16.3 million for the three months ended March 31, 1998 compared to $15.2
million for the comparable period ended March 31, 1997. The increases in
recurring revenues and revenues from equipment sales and activation fees were
primarily due to the rapid growth in the number of units in service. The
increase in equipment sales during the first quarter of 1998 was partially
offset by a decline in the average price per unit sold.
The Company's ARPU was $8.04 and $7.86 in the first quarter of 1997 and
1998, respectively. The decline over the past year resulted primarily from an
increase in subscribers added through private brand strategic alliance channels.
This decrease in ARPU has been partially offset by a higher mix of multi-city,
regional and nationwide services as well as increased sales of other value-added
services such as voice mail and toll-free numbers.
Cost of Equipment Sold
The cost of equipment sold was $20.6 million for the three months ended
March 31, 1998 compared to $18.1 million for the comparable period ended March
31, 1997. The change in 1998 was primarily due to an increase in the number of
units sold due to rapid growth in the number of national retail outlets from
7,388 at March 31, 1997 to 15,615 at March 31, 1998, which was partially offset
by a decline in the average cost per unit sold. The Company expects pager costs
generally to remain constant, with modest reductions in cost to the Company as a
result of volume purchase discounts.
Operating Expenses
Technical expenses were $12.4 million for the three months ended March
31, 1998 compared to $10.8 million for the three months ended March 31, 1997.
The increase was primarily due to increased telecommunications and site expenses
associated with servicing the Company's expanded network and larger
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subscriber base. Based on an average monthly cost per unit in service, technical
expenses were $1.86 and $1.59 in the first quarter of 1997 and 1998,
respectively. The per unit decrease was the result of increased operating
efficiencies and economies of scale achieved through the growth of the Company's
subscriber base. During the three months ended March 31, 1998, the Company
incurred $135,000 in technical expenses associated with the development of its
advanced messaging services.
Selling expenses were $13.5 million for the three months ended March
31, 1998 compared to $12.7 million for the three months ended March 31, 1997.
This increase resulted from greater marketing and advertising costs related to
the growth in national retail outlets. During the three months ended March 31,
1997 and 1998, the Company added 150,080 and 139,106 net new domestic units in
service, respectively. Management views the net loss on equipment sold to be a
component of selling and marketing expenses incurred to add new subscribers. See
"Management's Presentation of Results of Operations." The increase in selling
expenses and the loss on the sale of equipment was due to stocking new national
retail outlets. The Company added 2,691 additional national retail outlets in
the three months ended March 31, 1998, including additions from Southland
(7-Eleven) and Eckerd Drug. The losses on equipment sold are recognized when
pagers are shipped to the retailers, usually before the units are placed into
service, thus, increasing selling expenses (including loss on sale of equipment)
per net subscriber addition. During the three months ended March 31, 1998, the
Company incurred $167,000 and $254,000 in selling expenses associated with its
international operations and its development of advanced messaging services,
respectively.
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) were $19.7
million for the three months ended March 31, 1998 compared to $15.8 million for
the three months ended March 31, 1997. This increase was attributable to the
Company's expansion of its customer service call centers, information systems
and administrative capabilities to support the growing subscriber base which
required additional office space, administrative personnel and customer service
representatives. On an average cost per month per unit in service basis, general
and administrative expenses were $2.73 and $2.55 in the first quarter of 1997
and 1998, 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, 1998, the
Company incurred $432,000 in general and administrative expenses associated with
the development of its advanced messaging services.
Depreciation and amortization was $8.5 million for the three months
ended March 31, 1998 compared to $6.8 million for the three months ended March
31, 1997. 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 computer hardware and software associated with the
Company's administrative system in 1997 and the first three months of 1998. As
an average cost per month per unit in service, depreciation and amortization was
$1.18 and $1.09 in the first quarter of 1997 and 1998, respectively. During the
three months ended March 31, 1998, the Company incurred $120,000 in depreciation
expenses associated with the development of its advanced messaging services.
Interest Expense
Consolidated interest expense was $11.6 million for the three months
ended March 31, 1998 compared to $9.0 million for the comparable period ended
March 31, 1997. The increase in 1998 was primarily the result of interest
expense related to the 11 1/4% Senior Subordinated Discount Notes due 2008
issued by the Company in January 1998 (the "11 1/4% Notes") and increased
interest expense related to the 15% Senior Discount Notes due 2005 issued by the
Company in January 1995 (the "15% Notes"). Interest expense related to the 11
1/4% Notes was $5.0 million for the three months ended March 31, 1998. Interest
expense related to the 15% Notes was $4.8 million and $5.9 million for the three
months ended March 31, 1997 and 1998, respectively. Interest expense for the
three months ended March 31, 1997 and 1998 on the 12 1/4% Senior Discount Notes
due 2003 issued by PageMart, Inc. in October 1993 (the "12 1/4% Notes"), which
were retired in January 1998, was $3.6 million and $1.2 million, respectively.
Total interest expense was reduced by the capitalization of $1.3 million of
interest related to construction of the Company's advanced messaging network.
Net Loss
The Company sustained a consolidated net loss before extraordinary item of
$10.0 million for the three months ended March 31, 1998 compared to $12.1
million for the three months ended March 31, 1997, principally
11
<PAGE> 12
due to the cost of funding the growth of the Company's subscriber base which
resulted in an increase in units sold, selling and marketing expenses and
operating expenses. A one-time extraordinary charge of $13.8 million was
recognized during the first quarter of 1998 related to the early retirement of
the 12 1/4% Notes. Including the extraordinary item, the Company's consolidated
net loss for the three months ended March 31, 1998 was $23.8 million.
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, 1997 and 1998 included elsewhere in this
report, have been prepared in accordance with generally accepted accounting
principles ("GAAP"). For internal management purposes, the Company prepares
statements of operations that are derived from the Company's GAAP financial
statements but are reordered in a format that management uses for its internal
review of the Company's performance and that management believes are useful in
understanding the Company's results.
Management believes that operating profit before selling expenses is a
meaningful indicator of the profitability of the Company's installed base of
units in service because it measures the recurring revenues received for
services less the costs (including depreciation and amortization) associated
with servicing that installed base. Operating profit before selling expenses per
domestic subscriber per month for the Company's one-way operations has grown
from $1.01 during the first quarter of 1995 to $2.62 during the first quarter of
1998 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 sale of
equipment) 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.
12
<PAGE> 13
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.
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>
ONE-WAY DOMESTIC OPERATIONS
THREE MONTHS ENDED
(UNAUDITED)
- -----------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1997
----------- ----------- ----------- -----------
<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 (LOSS) INCOME $ (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
Capital employed per
unit in service(4) $ 49 $ 49 $ 43 $ 41
EBITDA Margin 6.2% 6.8% 7.7% 9.7%
EBIT Margin (7.1)% (7.6)% (7.0)% (5.0)%
Annualized EBITDA/Capital
employed(5) 12.3% 13.2% 16.6% 22.0%
<CAPTION>
JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING DATA:
RECURRING REVENUES $ 50,004 $ 53,593 $ 56,828 $ 60,872
Technical expenses 11,385 11,963 12,397 12,359
General and
administrative expense 15,814 16,957 17,911 19,728
Depreciation and
amortization 7,240 7,626 7,987 8,482
----------- ----------- ----------- -----------
OPERATING PROFIT BEFORE
SELLING EXPENSES 15,565 17,047 18,533 20,303
Selling expenses(1) 16,556 16,981 17,191 17,777
----------- ----------- ----------- -----------
OPERATING (LOSS) INCOME $ (991) $ 66 $ 1,342 $ 2,526
=========== =========== =========== ===========
EBITDA $ 6,249 $ 7,692 $ 9,329 $ 11,008
=========== =========== =========== ===========
OTHER DATA:
Units in service(2) 2,181,775 2,343,299 2,513,337 2,652,443
Net subscriber additions 180,250 161,524 170,038 139,106
ARPU(3) $ 7.97 $ 7.90 $ 7.80 $ 7.86
National retail outlets 10,412 12,171 12,924 15,615
Capital employed per
unit in service(4) $ 40 $ 36 $ 34 $ 31
EBITDA Margin 12.5% 14.4% 16.4% 18.1%
EBIT Margin (2.0)% 0.1% 2.4% 4.1%
Annualized EBITDA/Capital
employed(5) 28.6% 36.5% 43.7% 53.6%
</TABLE>
- -----------------
(1) Includes loss on sale of equipment.
(2) Stated as of the end of each period.
(3) Calculated by dividing domestic recurring revenues for the quarter by the
average number of domestic units in service during that quarter. Stated as
the monthly average for the quarter.
(4) Calculated by dividing consolidated 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 domestic units in service at the end of the period.
(5) Calculated by multiplying quarterly EBITDA by four and dividing by capital
employed per unit in service multiplied by units in service.
13
<PAGE> 14
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, 1998
--------------------------------------------------------------------
ONE-WAY ADVANCED
MESSAGING MESSAGING INTERNATIONAL (1) TOTAL
--------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 77,161 $ -- $ 33 $ 77,194
Technical expense 12,359 135 -- 12,494
Selling expense 13,476 254 167 13,897
General and administrative expense 19,728 432 -- 20,160
Depreciation and amortization expense 8,482 120 -- 8,602
Operating income (loss) 2,526 (941) (164) 1,421
EBITDA 11,008 (821) (164) 10,023
Total assets 252,307 216,530 (1,865) 466,972
Capital expenditures 8,823 25,382 -- 34,205
</TABLE>
(1) Expenses reflected in this column 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 subscriber units and expansion into new and existing
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,
the 15% Notes and the 11 1/4% Notes, as well as borrowings under the Vendor
Financing Arrangement and the Revolving Credit Agreement (both as defined
herein).
Capital expenditures for the three months ended March 31, 1998 were
$34.2 million compared to $10.0 million for the three months ended March 31,
1997. Capital expenditures for the three months ended March 31, 1998 include
approximately $25.4 million related to the development of its advanced messaging
network, $3.4 million for the Company's one-way messaging network, $2.3 million
for computer hardware and software, $1.2 million for corporate expansion and
relocation and $1.2 million for pagers. Capital expenditures for the three
months ended March 31, 1997 included approximately $5.6 million related to the
development of advanced messaging services, $2.5 million for the Company's
one-way messaging network and $1.9 million for the development of the Company's
administrative system. During December 1995, the Company committed to purchase
$40.0 million in network infrastructure equipment from Motorola, Inc. from
December 1, 1995 to October 31, 1999. Through March 31, 1998, the Company has
purchased $22.0 million of network infrastructure under this purchase
commitment. The Company also capitalized approximately $1.3 million of interest
expense for the narrowband personal communication services ("NPCS") licenses and
advanced messaging network costs for those markets under construction during the
period.
14
<PAGE> 15
The Company's net cash provided by operating activities for the three
months ended March 31, 1998 was $22.0 million compared with the net cash used of
$645,000 for the three months ended March 31, 1997. Net cash provided by
operations for the three months ended March 31, 1998 was increased by $8.1
million due to increases in accounts payable related to capital expenditures for
the construction of the Company's advanced messaging network. Net cash used in
investing activities was $34.2 million for the three months ended March 31, 1998
compared with $10.8 million for the comparable 1997 period. The $34.2 million
and $10.8 million used in investing activities in the first three months of 1998
and 1997, respectively, were primarily for capital expenditures. Net cash
provided by financing activities was $91.6 million for the three months ended
March 31, 1998 compared with the $126,000 for the three months ended March 31,
1997. The increase in net cash provided from financing activities for the three
months ended March 31, 1998 was due primarily to $107.8 million of net proceeds
from the issuance of the 11 1/4% Notes offset by $16.0 million of net payments
on the Vendor Financing Arrangement (defined below).
On January 28, 1998, the Company completed an offering of 11 1/4% Notes
(the "Offering") resulting in approximately $249.7 million in gross proceeds.
Simultaneously, with the closing of the Offering, the Company refinanced certain
of its outstanding indebtedness and modified its corporate structure (the
"Refinancing"). The Refinancing consisted of the following: (i) purchasing all
of the outstanding 12 1/4% Notes ($136.5 million principal amount at maturity),
(ii) amending of certain terms of the covenants and agreements in the indenture
relating to the 15% Notes; and (iii) merging PageMart, Inc. into PageMart
Wireless, Inc., with PageMart Wireless, Inc. as the surviving corporation.
Approximately $130.7 million of the gross proceeds of the Offering was
used to purchase all of the outstanding 12 1/4% Notes. The proceeds remaining
after offering expenses and refinancing were approximately $107.8 million. The
Company intends to use the remaining proceeds to fund the construction of its
advanced messaging network and for general corporate purposes. In connection
with the Refinancing, the Company incurred an extraordinary charge of
approximately $13.8 million related to the early retirement of debt.
The 11 1/4% Notes, which are unsecured senior subordinated obligations
of the Company, mature in 2008 and were issued at a substantial discount from
their principal amount at maturity. The accretion of original issue discount on
the 11 1/4% Notes will cause an increase in indebtedness from March 31, 1998 to
February 1, 2003 of $177.4 million. From and after August 1, 2003, interest on
the 11 1/4% Notes will be paid semiannually, in cash.
The 15% Notes, which are unsecured senior obligations of the Company,
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, 1998 to February 1, 2000
of $48.2 million. From and after February 1, 2000, interest on the 15% Notes
will be payable semiannually, in cash.
In March 1997, PageMart entered into a vendor financing arrangement
with an infrastructure vendor (the "Vendor Financing Arrangement"), providing
for the financing of one-way or advanced messaging infrastructure equipment over
a period of 60 months up to a maximum aggregate amount of $30 million.
Borrowings under the Vendor Financing Arrangement are secured by the equipment
purchased. The interest rate applicable to such financing is equal to the sum of
7.00% and the London interbank offered rate ("LIBOR") as published in The Wall
Street Journal for three month maturities or the sum of 4.25% and the U.S. prime
rate of interest as published in The Wall Street Journal. The weighted average
interest rate in effect on March 31, 1998 with respect to the Vendor Financing
Arrangement was 12.7%. During the first quarter ended March 31, 1998, the
Company repaid the total amount outstanding of $21.2 million on the Vendor
Financing Arrangement and modified the agreement to provide $30 million of
available financing, in aggregate, during the period from September 1, 1998
through December 31, 2000.
As of March 31, 1998, the Company had no amounts outstanding under the
Vendor Financing Arrangement and its indebtedness under the 15% Notes was $159.1
million and its indebtedness under the 11 1/4% Notes was $254.6 million.
15
<PAGE> 16
In May 1995, the Company entered into a four year 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 (the
"Revolving Credit Agreement"). As of March 31, 1998 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%
of eligible inventory of the Company, and (ii) an amount equal to the service
contribution (as defined in the Revolving Credit Agreement) of the Company and
its subsidiaries for the immediately preceding three-month period times 4.0. As
of March 31, 1998, the amount available under the Revolving Credit Agreement was
$40.8 million.
The indenture under which the 15% Notes were issued (the "15%
Indenture"), the indenture under which the 11 1/4% Notes were issued (the "11
1/4% Indenture"), the Vendor Financing Arrangement 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.
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 initial
investment in Canada Holding and PageMart Canada totals approximately $3.7
million.
During the first quarter of 1998, the Company began the implementation
of its advanced messaging services network. The Company expects to incur
significant capital expenditures and operating losses associated with the
implementation and start-up phase for advanced messaging services. The Company
anticipates capital expenditures of approximately $90 million in 1998 to
construct and deploy an advanced messaging network, which the Company expects to
enable it to market advanced messaging services nationwide by the end of 1998.
In addition, the Company expects to incur cash operating expenses of
approximately $10 million in 1998. Thereafter, the Company anticipates that the
advanced messaging operations will require up to $55 million of additional
capital expenditures to complete construction and to add capacity to the network
in 1999. In addition, the Company expects the advanced messaging operations to
require up to $45 million to fund operations and marketing in 1999 and 2000 as
the Company's advanced messaging customer base grows. In addition, the Company
may require up to $50 million of secured vendor financing to fund the purchase
of subscriber units. The Company believes that it will not require such
financing until 1999 or later. The Company expects such financing to be
available. The Company is moving forward with the overlay of advanced messaging
technology on its nationwide one-way paging network, with construction underway
in 20 cities as of April 30, 1998. Advanced messaging services will be launched
first in the Austin, San Antonio, Dallas/Fort Worth and Denver markets, with
nationwide services expected by year-end. The Company is currently testing
second generation subscriber units from Glenayre Technologies Inc. and Motorola,
Inc. Once the Company has certified the subscriber units, the Company will
proceed to commercial launch.
As of March 31, 1998, the Company had approximately $87.7 million in
cash and cash equivalents. On January 28, 1998, the Company received net
proceeds after offering expenses and the Refinancing of approximately $107.8
million from the Offering. At March 31, 1998, the Company's borrowings available
under the Revolving Credit Agreement were $40.8 million. Under the Vendor
Financing Arrangement, $30 million of financing, in aggregate, will be available
during the period from September 1, 1998 through December 31, 2000. The Company
anticipates its one-way messaging operations will generate sufficient cash flows
to fund one-way capital expenditures and consolidated working capital
requirements for 1998 and 1999.
The Company anticipates that its capital resources, combined with
anticipated excess cash flows from the Company's one-way messaging operations,
will be sufficient to fund the Company's consolidated operations and capital
expenditures through 1998 and 1999.
16
<PAGE> 17
In 1997, the Company began an evaluation of its computer systems and
paging networks for Year 2000 compliance. The Year 2000 issue stems from the use
of two-digit dates in computer programs. Programs that use the two-digit dates
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures causing disruptions in operations. The Company
is currently in the process of assessing the impact of the Year 2000 on its
operations and is aware that it will be required to upgrade and/or modify
certain software systems in order to be Year 2000 compliant. The Company is also
working with software vendors whose products and services, if not Year 2000
compliant, would have a materially adverse affect of the Company's results of
operations.
Although final cost estimates have not been fully determined, the
Company currently believes that the cost of becoming Year 2000 compliant will
not be material to the Company. However, the Company's business, financial
position, or results of operations could be materially adversely affected by the
failure of its computer systems and applications, or those operated by other
parties, to properly operate or manage dates beyond 1999.
From time to time, the Company will selectively consider potential
opportunities to make acquisitions intended to enhance its strategic position in
the wireless messaging industry. If the Company were to pursue any such
acquisitions, the Company would expect to obtain any necessary financing through
additional borrowings and/or equity financing and would need to successfully
integrate the acquired business into the existing operations.
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.
17
<PAGE> 18
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 results of operations or
financial condition of the Company.
On March 20, 1998, an action against the Company and Paging
Network, Inc. was filed in Superior Court of the State of California, County of
Los Angeles, by three customers of EconoPage of Southern California, Inc.
("EPSC"), a reseller of the Company's services that had resold the Company's
paging services to approximately 12,000 customers. The Company terminated the
reseller agreement when EPSC ceased operations on March 4, 1998. In the
complaint, plaintiffs have requested class action status on behalf of EPSC
customers and allege that EPSC was an agent of the Company, that the Company was
aware that EPSC's pricing would not permit it to sustain its business and the
Company permitted EPSC to continue to enter into service contracts with
customers while EPSC was having serious financial difficulties. The complaint
alleges violation of statute, fraud and negligent misrepresentation by the
Company, and requests injunctive relief as well as compensatory, punitive,
special and incidental damages in an unspecified amount. The Company denies all
claims and will vigorously defend itself. The Company does not expect the
ultimate outcome of this suit to have a material adverse effect on its results
of operations or financial condition.
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
The following current report on Form 8-K was filed by PageMart
Wireless, Inc. during the quarter ended March 31, 1998:
Current Report on Form 8-K dated January 28, 1998 reporting
under Item 5 "Other Event" the refinancing of certain of its
outstanding indebtedness and the modification of its corporate
structure.
18
<PAGE> 19
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.
BY: /S/JOHN D. BELETIC
JOHN D. BELETIC,
MAY 14, 1998 CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
BY: /S/ G. CLAY MYERS
G. CLAY MYERS,
MAY 14, 1998 VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND
TREASURER (PRINCIPAL FINANCIAL
AND CHIEF ACCOUNTING OFFICER)
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
10.1* Modification and Reaffirmation Agreement, dated March 12,
1998, between PageMart Wireless, Inc. and Glenayre
Electronics, Inc.
11.1* Statement regarding computation of per share loss for the
three months ended March 31, 1998.
11.2* Statement regarding computation of per share loss for the
three months ended March 31, 1997.
27.1* Financial Data Schedule.
</TABLE>
* Filed herewith
20
<PAGE> 1
EXHIBIT 10.1
MODIFICATION AND REAFFIRMATION AGREEMENT
THIS MODIFICATION AND REAFFIRMATION AGREEMENT (this "Modification
Agreement") is made and entered into as of the 12th day of March, 1998, by and
between PAGEMART WIRELESS, INC., a Delaware corporation and successor in
interest by merger to PAGEMART, INC.("Maker"), and GLENAYRE ELECTRONICS, INC., a
Colorado corporation ("Glenayre").
Statement of Purpose
Maker and Glenayre have previously entered into a Promissory Note and
Security Agreement dated as of March 21, 1997 (the "Note"), providing for the
extension of certain purchase money financing by Glenayre to Maker in the
maximum principal amount of up to $30,000,000. Except as otherwise provided
herein, all capitalized terms used but not otherwise defined herein shall have
the meanings assigned thereto in the Note.
The Note has previously been supplemented by various Schedules in
accordance with the terms of the Note and, as of the date hereof, pursuant to
the terms of the Note and the Schedules, Maker owes Glenayre an amount equal to
$20,766,396.40 (the "Existing Glenayre Indebtedness"), of which $20,686,371.80
is unpaid principal and $80,024.60 is accrued but unpaid interest.
Maker now desires, in accordance with the terms of Section 1.2 of the
Note, to prepay in full the Existing Glenayre Indebtedness but, in connection
therewith has requested certain modifications and amendments to the Note,
including, without limitation, the right to obtain additional purchase money
financing from Glenayre in an aggregate amount not to exceed the Commitment
during the period from September 1, 1998 through and including December 31, 2000
pursuant to the terms of the Note, and Glenayre has agreed to such modifications
in accordance with the terms hereof, subject to the terms and conditions
contained herein.
In furtherance of the foregoing, Maker and Glenayre have agreed to
modify and amend the terms of the Note, all as more particularly described
herein.
NOW, THEREFORE, for and in consideration of the premises, the mutual
agreements and covenants hereinafter set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Maker and Glenayre hereby agree as follows:
1. EFFECT OF MODIFICATION AGREEMENT. This Modification Agreement shall
modify and amend the Note as set forth or provided for herein. Except as
expressly modified hereby or by those other documents, agreements and
instruments referred to herein, the Note and the other documents executed or
delivered in connection herewith or therewith, including without limitation each
representation, warranty and covenant contained herein or therein, shall be and
remain in full force and effect.
2. PURPOSE OF MODIFICATION. The purpose of this modification is to (i)
provide for the right for Maker to obtain, after payment in full of the Existing
Glenayre Indebtedness and compliance by Maker with each of the terms and
conditions of the Note and this Modification Agreement, additional purchase
money financing from Glenayre in an aggregate amount not to exceed the
Commitment during the period from September 1, 1998 through and including
December 31, 2000, and (ii) make certain additional changes to the Agreement, as
set forth herein and subject to the terms hereof.
3. AMENDMENTS TO NOTE. In furtherance of the foregoing, the Note is
hereby amended as follows:
<PAGE> 2
(a) The term "Maturity Date" contained in Section 9 of the Note is
hereby deleted in its entirety and the following definition is inserted in lieu
thereof:
" 'Maturity Date' means, with respect to advances reflected on each
Schedule, that date which is five (5) years from the date of such Schedule,
provided that all Schedules commence no later than December 31, 2000."
(b) The term "Note" contained in Section 9 of the Note is hereby
deleted in its entirety and the following definition is inserted in lieu
thereof:
" 'Note' means the Promissory Note and Security Agreement dated as of
March 21, 1997 made by Maker to the order of Glenayre, as amended by this
Modification Agreement and as it may be further modified, amended, restated or
supplemented from time to time."
(c) The term "Schedule" contained in Section 9 of the Note is hereby
deleted in its entirety and the following definition is inserted in lieu
thereof:
" 'Schedule' means documentation evidencing (i) purchases by Maker from
Glenayre during the period from September 1, 1998 through and including December
31, 2000 and (ii) the Interest Rate, payments and amortization of principal
amount applicable for such purchases."
(d) The following new definition shall be added to Section 9 of the
Note in the appropriate alphabetical order:
" 'Modification Agreement' means the Modification and Reaffirmation
Agreement dated as of March 12, 1998 between Maker and Glenayre."
(e) The Schedules executed prior to the date of the Modification
Agreement shall be of no further force or effect.
(f) The amount in Section 6.11 (a) is modified from $500,000 to
$5,000,000.
(g) The following phrase is added to Section 7.3 (b) after "dated May
22, 1995" and before";":
"as amended, restated, refinanced or replaced from time to time; "
(h) The following Subsidiaries are added to Schedule_7.3(c):
PageMart de Colombia, Ltd.
PageMart de Venezuela, C.A.
PageMart California, Inc.
PageMart Virginia, Inc.
(i) Maker shall not be entitled to obtain any financing from Glenayre
except during the period from September 1, 1998 through and including December
31, 2000, and then only in accordance with, and as permitted under, the terms of
the Note.
4. REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES, ETC. Except as
modified herein, the Note remains in full force and effect, and Maker hereby
expressly represents and warrants that all covenants, representations and
warranties specified in the Note, as amended and modified by this Modification
Agreement, are true and correct as of this date.
5. NO DEFENSES. Maker hereby acknowledges and affirms that it has no
defenses, legal or equitable, to the validity and enforceability of the Note,
or, except as otherwise expressly set forth herein with
<PAGE> 3
respect to the Schedules executed prior to the date hereof, any other document
or instrument executed or delivered in connection therewith.
6. CONDITIONS PRECEDENT. Glenayre's obligations hereunder are subject
to the following conditions precedent, all of which must be satisfied prior to
the execution and delivery hereof by Glenayre:
(a) Modification Documents. This Modification Agreement, shall be duly
executed and delivered and in form and substance satisfactory to Glenayre.
(b) Status and Authority of Borrower and Guarantors. Maker shall, if
requested by Glenayre, furnish or cause to be furnished to Glenayre a certified
document in form and substance satisfactory to Glenayre (collectively, the
"Certificate and Resolution") evidencing the power and authority of Maker to
execute and deliver this Modification Agreement and to perform the terms and
provisions of the Note, as amended and modified by this Modification Agreement.
(c) Payoff of Existing Glenayre Indebtedness. Maker shall have caused
the Existing Glenayre Indebtedness to be paid in full to Glenayre, in accordance
with Glenayre's instructions, in immediately available funds in Charlotte, North
Carolina.
7. REPRESENTATIONS AND WARRANTIES. Maker hereby further represents and
warrants to Glenayre as follows:
(a) Power and Authority; Enforceability. Maker has the power and
authority to execute and deliver this Modification Agreement and to perform the
terms and conditions of the Note, as amended and modified by this Modification
Agreement. The execution and delivery of this Modification Agreement by Maker
and the performance of the Note, as amended and modified by this Modification
Agreement, do not and will not violate any law, rule or regulation, or
constitute a breach of the articles, bylaws or corporate resolutions of Maker or
any agreement to which Maker is a party or by which its assets are bound. The
Note, as amended and modified by this Modification Agreement, constitutes the
legal, valid and binding obligation of Maker enforceable in accordance with its
terms.
(b) No Default or Event of Default. There is no Default or Event of
Default under the Note, as amended and modified by this Modification Agreement,
and Maker is not in default in the performance, observance or fulfillment of any
of the obligations, covenants or conditions contained in any other document or
instrument executed or delivered in connection herewith or therewith.
(c) Representations. The representations and warranties of Maker to
Glenayre contained herein, in the Note as modified by this Modification
Agreement, and in any other document, agreement or instrument executed or
delivered by Maker in connection therewith are true and not misleading in all
material respects, except as otherwise disclosed in writing to Glenayre and
approved by Glenayre prior to the date hereof.
8. RELEASE OF SECURITY INTERESTS. Glenayre hereby releases the
Collateral existing on the date of this Modification Agreement from all security
interests, liens and encumbrances, and all rights in such Collateral revert to
Maker. Glenayre shall promptly execute and deliver to Maker such UCC-3 forms and
such other release or termination documents as may be required to evidence this
release in the public records where evidence of such security interests, liens
or encumbrances have been filed.
<PAGE> 4
IN WITNESS WHEREOF, Maker and Glenayre have caused this Modification
Agreement to be duly executed and delivered under seal by their duly authorized
officers, all as of the day and year first above written.
[CORPORATE SEAL] PAGEMART WIRELESS, INC.,
a Delaware corporation
ATTEST:
By: /s/ Frederick G. Anderson By: /s/ Clay Myers
------------------------------------- --------------------------------
Name: Frederick G. Anderson Name: G. Clay Myers
----------------------------------- ------------------------------
Title: V.P., General Counsel & Secretary Title: V.P. Finance & CFO
---------------------------------- -----------------------------
[CORPORATE SEAL] GLENAYRE ELECTRONICS, INC.,
ATTEST:
By: /s/ Billy G. Layton By: /s/ Mary T. Velenta
------------------------------------- --------------------------------
Name: Billy G. Layton Name: Mary T. Velenta
----------------------------------- ------------------------------
Title: Assistant Secretary Title: V.P and Treasurer
---------------------------------- -----------------------------
<PAGE> 1
EXHIBIT 11.1
PAGEMART WIRELESS, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
----------- ----------- ------
COMMON STOCK
<S> <C> <C> <C>
From Founders' Stock 2,300,000 100.00% 2,300,000
Stock Options Exercised 828,571 94.10% 779,658
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 75,891 100.00% 75,891
1997 Warrants Exercised 48,300 100.00% 48,300
---------- ------------
40,130,436 40,081,523
WEIGHTED AVERAGE SHARES OUTSTANDING 40,081,523
NET LOSS ($23,788,689)
NET LOSS PER SHARE ($0.59)
============
</TABLE>
<PAGE> 1
EXHIBIT 11.2
PAGEMART WIRELESS, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------
NUMBER PERCENT EQUIVALENT
OF SHARES OUTSTANDING SHARES
--------- ----------- ------
COMMON STOCK
<S> <C> <C> <C>
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 39,847,399
WEIGHTED AVERAGE SHARES OUTSTANDING 39,847,399
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, 1998 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 87,712
<SECURITIES> 0
<RECEIVABLES> 61,561
<ALLOWANCES> 6,481
<INVENTORY> 4,143
<CURRENT-ASSETS> 155,705
<PP&E> 248,119
<DEPRECIATION> 84,296
<TOTAL-ASSETS> 466,972
<CURRENT-LIABILITIES> 109,052
<BONDS> 413,698
0
0
<COMMON> 4
<OTHER-SE> (55,782)
<TOTAL-LIABILITY-AND-EQUITY> 466,972
<SALES> 16,319
<TOTAL-REVENUES> 77,194
<CGS> 20,620
<TOTAL-COSTS> 33,114
<OTHER-EXPENSES> 8,602
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,609
<INCOME-PRETAX> (9,981)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,981)
<DISCONTINUED> 0
<EXTRAORDINARY> (13,808)
<CHANGES> 0
<NET-INCOME> (23,789)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
