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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 JUNE 30, 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 [ ]
As of July 31, 1998, there were 34,431,365 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>
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PART I. FINANCIAL INFORMATION PAGE
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ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1997
AND JUNE 30, 1998.................................................................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1997 AND 1998................................................................4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 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.......................................................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................................20
</TABLE>
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,337 $ 65,662
Accounts receivable, net 61,394 46,406
Inventories 5,359 6,063
Prepaid expenses and other current assets 9,043 10,000
------------ ------------
Total current assets 84,133 128,131
Property and equipment, net 136,727 202,953
Narrowband licenses 133,065 133,065
Deferred debt issuance costs, net 5,532 11,138
Other assets 2,419 2,480
------------ ------------
Total assets $ 361,876 $ 477,767
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 28,009 $ 38,836
Deferred revenue 53,469 57,887
Current maturities of long-term debt 2,755 --
Other current liabilities 20,740 21,347
------------ ------------
Total current liabilities 104,973 118,070
Long-term debt 289,344 426,547
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, $.0001 par value per share, 75,000,000
shares authorized 40,032,937 and 40,274,884 shares issued
at December 31, 1997 and June 30, 1998, respectively 4 4
Additional paid-in capital 226,622 227,797
Accumulated deficit (258,575) (294,078)
Stock subscriptions receivable (492) (573)
------------ ------------
Total stockholders' (deficit) equity (32,441) (66,850)
------------ ------------
Total liabilities and stockholders' (deficit) equity $ 361,876 $ 477,767
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Recurring revenues $ 50,006 $ 63,537 $ 96,481 $ 124,409
Equipment revenues 15,896 13,171 31,144 29,490
------------ ------------ ------------ ------------
Total revenues 65,902 76,708 127,625 153,899
Cost of equipment sold 20,263 15,915 38,382 36,533
Operating expenses:
Technical 11,384 13,683 22,153 26,177
Selling 12,339 14,190 25,005 28,086
General and administrative 15,814 21,051 31,590 41,211
Depreciation and amortization 7,285 9,177 14,134 17,779
------------ ------------ ------------ ------------
Total operating expenses 46,822 58,101 92,882 113,253
------------ ------------ ------------ ------------
Operating (loss) income (1,183) 2,692 (3,639) 4,113
Other (income) expense:
Interest expense 9,297 10,314 18,335 21,923
Interest income (124) (1,088) (300) (2,060)
Other 749 1,382 1,486 2,147
------------ ------------ ------------ ------------
Total other (income) expense 9,922 10,608 19,521 22,010
------------ ------------ ------------ ------------
Net loss before extraordinary items (11,105) (7,916) (23,160) (17,897)
Extraordinary items:
Early retirement of debt -- -- -- (13,808)
Satellite failure -- (3,798) -- (3,798)
------------ ------------ ------------ ------------
Net loss $ (11,105) $ (11,714) $ (23,160) $ (35,503)
============ ============ ============ ============
Net loss per share
(basic and diluted)
Net loss before extraordinary items $ (0.28) $ (0.20) $ (0.58) $ (0.44)
Extraordinary items -- (0.09) -- (0.44)
------------ ------------ ------------ ------------
Net loss $ (0.28) $ (0.29) $ (0.58) $ (0.88)
============ ============ ============ ============
Weighted average number
of shares outstanding
(basic and diluted) 39,879 40,198 39,864 40,140
============ ============ ============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (23,160) $ (35,503)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Extraordinary items -- 17,606
Depreciation and amortization 14,134 17,779
Provision for bad debt 5,371 5,290
Accretion of discount on senior discount notes 17,105 20,102
Amortization of deferred debt issuance costs 423 568
Changes in certain assets and liabilities:
(Increase) decrease in accounts receivable (18,146) 9,698
(Increase) decrease in inventories 4,212 (704)
Increase in prepaid expense and other current assets (579) (957)
(Increase) decrease in other assets, net 1,440 (288)
Increase (decrease) in accounts payable (6,253) 10,827
Increase in deferred revenue 9,003 4,418
Decrease in other current liabilities (1,244) (4,352)
--------- ---------
Net cash provided by operating activities 2,306 44,484
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment related to one-way messaging (13,501) (19,841)
Purchases of property and equipment related to advanced messaging (9,859) (59,344)
Other (766) (49)
--------- ---------
Net cash used in investing activities (24,126) (79,234)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock under
the stock option/stock issuance plan 248 1,036
Proceeds from conversion of common stock warrants 157 --
Payments of stock subscriptions receivable -- 58
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 -- (12,049)
Payments on vendor financing arrangement (178) (21,249)
Borrowings on vendor financing arrangement 5,857 5,268
--------- ---------
Net cash provided by financing activities 6,084 92,075
--------- ---------
Net (decrease) increase in cash and cash equivalents (15,736) 57,325
Cash and cash equivalents, beginning of period 22,603 8,337
--------- ---------
Cash and cash equivalents, end of period $ 6,867 $ 65,662
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 348 $ 647
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 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
International, Inc. and certain other direct and indirect subsidiaries of
Wireless. Each of these companies, other than PageMart International, Inc., 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
international operations 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 and six months ended June 30, 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 $3.2 million and
$4.5 million were capitalized for the three and six months ended June 30, 1998.
The Company did not capitalize any interest costs for the three and six months
ended June 30, 1997.
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5. LONG-TERM DEBT
On January 28, 1998, the Company 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 and modified its
corporate structure (the "Refinancing"). 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 was 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 in the first quarter of 1998 related to the early
retirement of debt.
The 11 1/4% Senior Subordinated 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.
6. EXTRAORDINARY ITEM
On May 19, 1998, the Company and many other paging companies experienced an
unprecedented interruption of service when the PanAmSat Galaxy IV communications
satellite, on which the Company leases capacity, ceased to communicate with
paging uplink stations throughout the United States. Management believes that
this is the first event of its kind to affect the paging industry in the 35 year
history of satellite telecommunications. This event occurred when the
satellite's onboard control system and a back-up control system failed and
PanAmSat technicians were unable to restore the satellite's proper orientation
toward Earth.
The Company initiated its recovery plan by re-orienting its satellite links
to its back-up satellites. In order to re-orient the satellite links, the
Company realigned satellite dish antennas on each of its approximately 2,000
transmission sites to receive the back-up satellites' signals. Although the
satellite failure was beyond the Company's control, the Company provided its
customers with a two-day airtime credit to compensate them for the period when
they were unable to receive messages. The Company incurred $3.8 million of costs
(including the airtime credit) during the three months ended June 30, 1998 and
has recorded these costs as an extraordinary charge.
7. YEAR 2000 DISCLOSURE
In 1997, the Company began an evaluation of its computer systems and
network infrastructure 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 expects
the large majority of upgrades to take place in 1998. The potential scope of
Year 2000 problems is very broad. The Company cannot guarantee that its
operations will not be disrupted if services, products and systems of third
parties that are used by or interface with the Company's networks and systems
fail to properly operate and exchange date data. To minimize this risk, the
Company is polling its vendors on Year 2000 compliance and requiring Year 2000
compliance information from each vendor. The Company is also working with
vendors whose products and services, if not Year 2000 compliant, would have a
materially adverse affect on the Company's results of operations, as well as
evaluating alternative solutions to these issues.
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Final cost estimates to correct Year 2000 issues have not been fully
determined by the Company. As of June 30, 1998, the costs have not been material
to the Company's results of operations or financial position. The total costs
could ultimately be material to the Company's results of operations or financial
position. In addition, 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.
8. LEGAL PROCEEDINGS
On October 27, 1997, an action against PageMart and another major paging
carrier was filed in Superior Court of the State of California, County of San
Francisco, by two customers of EconoPage, Inc. ("EconoPage"), a reseller of the
Company's services that had resold PageMart's paging services to approximately
38,000 customers. PageMart terminated the reseller agreement due to monetary
default by EconoPage. In the complaint, plaintiffs requested class action status
on behalf of EconoPage customers and alleged that EconoPage was an agent of
PageMart, that PageMart was aware that EconoPage's pricing would not permit it
to sustain its business and PageMart permitted EconoPage to continue to enter
into service contracts with customers while EconoPage was having serious
financial difficulties. The complaint alleged violation of statute, fraud and
negligent misrepresentation by PageMart, and requested injunctive relief as well
as compensatory, punitive, special and incidental damages in an unspecified
amount. PageMart denies all claims. Discovery has proceeded and plaintiffs filed
a motion for class certification. After briefing and oral arguments, the court
denied plaintiff's motion. Plaintiff's counsel has informed the Company that
plaintiffs intend to appeal the denial of class certification. The Company will
continue to defend this action vigorously. 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.
On March 20, 1998, an action against the Company and another major paging
carrier 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 alleged violation
of statute, fraud and negligent misrepresentation by the Company, and requested
injunctive relief as well as compensatory, punitive, special and incidental
damages in an unspecified amount. The other major paging carrier demurred to
plaintiff's complaint on the grounds that it did not state facts sufficient to
constitute a cause of action. The court sustained the demurrer without leave to
amend the fraud and negligent misrepresentation causes of action, and it
sustained with leave to amend the statutory violation cause of action if
plaintiffs could allege that defendants knew EPSC was going to fail but
continued to allow their names to be used to solicit customers. Plaintiffs have
filed an amended complaint that states only a statutory violation cause of
action against defendants. The Company denies all claims and will defend this
action vigorously. 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of the results of operations and
financial condition of the Company for the three and six months ended June 30,
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
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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
Through its PageMart Paging division, 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. Through its
PageMart PCS division, the Company is constructing an advanced messaging network
as an overlay of its one-way network. In June 1998, the Company launched
commercial advanced messaging services in its first two local markets, Austin
and San Antonio, Texas. The Company sells and leases 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.
Since commencing operations in 1990, the Company has invested heavily
in its wireless communications network and administrative infrastructure in
order to establish nationwide coverage, sales offices in major metropolitan
areas, centralized customer service call centers and administrative support
functions. The Company incurs substantial fixed operating costs related to its
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.
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 June 30, 1998, the
number of domestic one-way units in service increased from 1,851,445 to
2,752,580. 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
telecommunication companies such as GTE Corporation, Southwestern Bell Mobile
Systems, WorldCom Network Services, Ameritech Mobile Services, Inc., EXCEL
Communications, Inc., ALLTEL Communications, Inc., BellSouth Cellular Corp.,
Bluegrass Cellular, Pacific Bell 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
PageMart Paging division. In the third quarter of 1997, the Company began
generating operating profits in its PageMart Paging division and management
expects this trend to continue during 1998.
The Company began testing and development of advanced messaging
services in 1996, which continued throughout 1997. In 1998, the Company began
implementation of an advanced messaging network 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
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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). During the
second quarter 1998, the Company experienced an increase in leasing of one-way
alphanumeric units in its PageMart Paging division. The Company expects to lease
a substantial portion of its advanced messaging subscriber units as initial
sales of advanced messaging services are 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 and third-party resellers through its
National Sales Offices strategic business unit ("SBU"), (ii) private brand
strategic alliances through its Carrier Services SBU and (iii) national retail
stores through its National Retail SBU. At June 30, 1998, 26% of the Company's
total units in service originated from the National Retail SBU, 35% originated
from the Carrier Services SBU and 39% 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. Management anticipates that the loss on equipment sold in the
National Retail SBU will generally remain constant on a per unit basis for the
foreseeable future. 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. Units sold by the Company during a given month may exceed units
activated and in service due to inventory stocking and distribution strategies
of retailers.
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 six months ended June 30, 1998 were
2.5%, 2.4%, 2.5% and 2.7%, 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.
On May 19, 1998, the Company and many other paging companies experienced an
unprecedented interruption of service when the PanAmSat Galaxy IV communications
satellite, on which the Company leases capacity, ceased to communicate with
paging uplink stations throughout the United States. Management believes that
this is the first event of its kind to affect the paging industry in the 35 year
history of satellite telecommunications. This event occurred when the
satellite's onboard control system and a back-up control system failed and
PanAmSat technicians were unable to restore the satellite's proper orientation
toward Earth.
The Company initiated its recovery plan by re-orienting its satellite links
to its back-up satellites. In order to re-orient the satellite links, the
Company realigned satellite dish antennas on each of its approximately 2,000
transmission sites to receive the back-up satellites' signals. Although the
satellite failure was beyond the Company's control, the Company provided its
customers with a two-day airtime credit to compensate them for the
10
<PAGE> 11
period when they were unable to receive messages. The Company incurred $3.8
million of costs (including the airtime credit) during the three months ended
June 30, 1998 and has recorded these costs as an extraordinary charge.
RESULTS OF OPERATIONS
The Company's principal operations to date are the domestic one-way
wireless operations of its PageMart Paging division. The following discussion of
results of operations analyzes the results of the Company's PageMart Paging
division (i.e., 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 AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
Units in Service
Units in service from domestic one-way operations were 2,181,775 and
2,752,580 as of June 30, 1997 and 1998, respectively, representing an annual
growth rate of 26%. The net subscriber additions for the Company's domestic
one-way messaging operations have ranged from 100,000 to 170,000 for each of the
last four fiscal quarters. In the six months ended June 30, 1998, the Company's
domestic one-way messaging operations generated 239,243 net subscriber
additions, representing an annualized growth rate of approximately 19%.
Management expects the domestic one-way messaging operations to generate an
annual growth rate in net subscriber additions ranging from 15%-18% for 1998,
which would result in net subscriber additions ranging from approximately
140,000 to 220,000 for the remaining six months of 1998. In addition, for the
six months ended June 30, 1997 and 1998, PageMart Canada Limited's ("PageMart
Canada") units in service were 24,991 and 36,610, 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 14,995 and 21,966 at June 30, 1997
and 1998, respectively.
The Company has a strategic alliance arrangement with AT&T Wireless
Services ("AT&T"). AT&T has agreed to sell its paging operations to Metrocall,
Inc. The sale has not yet closed, and it is uncertain what effect the sale will
have on the approximately 90,000 AT&T units in service with the Company. In
addition, during the second quarter 1998, the Company's retail relationship with
Best Buy, Inc. ("Best Buy") changed such that the Company is no longer the
primary paging products provider to Best Buy. Management expects this change to
reduce the number of net subscriber additions realized by the Company's National
Retail SBU in the foreseeable future.
Revenues
Revenues were $76.7 million and $153.9 million for the three and six
months ended June 30, 1998 compared to $65.9 million and $127.5 million for the
three and six months ended June 30, 1997. Recurring revenues for airtime, voice
mail and other services were $63.5 million and $124.4 million for the three and
six months ended June 30, 1998 compared to $50.0 million and $96.5 million for
the comparable period ended June 30, 1997. Revenues from equipment sales were
$13.2 million and $29.5 million for the three and six months ended June 30, 1998
compared to $15.9 million and $31.1 million for the comparable period ended June
30, 1997. The increases in recurring revenues were primarily due to the increase
in the total number of units in service. The decrease in equipment sales during
the three and six months ended June 30, 1998 was primarily due to a decrease in
the number of units sold along with a decline in the rate of growth in national
retail outlets.
The Company's ARPU has ranged from $7.97 to $7.80 in the past five
quarters. Over the past five quarters, the Company's ARPU has varied by less
than 3 percent. Management expects ARPU to remain relatively stable in the
foreseeable future with minor variations from changes in product mix.
Cost of Equipment Sold
The cost of equipment sold was $15.9 million and $36.5 million for the
three and six months ended June 30, 1998 compared to $20.2 million and $38.3
million for the three and six months ended June 30, 1997, respectively. The
decrease in 1998 was primarily attributable to a decrease in the number of units
sold along with a
11
<PAGE> 12
decline in the rate of growth in National Retail outlets. During the six months
ended June 30, 1997 and 1998, the Company added 4,882 and 2,696 new national
retail outlets, respectively. The Company expects pager costs generally to
remain constant, with modest reductions in cost to the Company as a result of
volume purchase discounts. The loss on equipment sold, equipment revenue less
cost of equipment sold, is recognized when pagers are shipped to the retailers,
usually before the units are placed into service.
Operating Expenses
Technical expenses were $13.5 million and $25.8 million for the three
and six months ended June 30, 1998 compared to $11.4 million and $22.2 million
for the three and six months ended June 30, 1997. The increase was primarily due
to increased telecommunications and site expenses associated with servicing the
Company's expanded network and larger subscriber base. Based on an average
monthly cost per unit in service, technical expenses were $1.81 and $1.66 in the
second quarter of 1997 and 1998, respectively, compared to $1.83 and $1.63 for
the six months ended June 30, 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
and six months ended June 30, 1998, the Company incurred $219,000 and $354,000
in technical expenses associated with the development of its advanced messaging
services.
Selling expenses were $13.7 million and $27.2 million for the three and
six months ended June 30, 1998 compared to $12.2 million and $24.8 million for
the three and six months ended June 30, 1997. This increase resulted from
greater marketing and advertising costs related to a larger base of retail
outlets. During the three and six months ended June 30, 1998, the Company
incurred $156,000 and $322,000 in selling expenses associated with the
development of new international ventures and $318,000 and $572,000 in its
development of advanced messaging services, respectively.
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) were $20.5
million and $40.3 million for the three and six months ended June 30, 1998
compared to $15.8 million and $31.6 million for the three and six months ended
June 30, 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 domestic one-way 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 $2.52 and $2.53 in the second quarter of 1997
and 1998, respectively, compared to $2.61 and $2.55 for the six months ended
June 30, 1997 and 1998, respectively. The per unit decrease for the six months
was a result of increased operating efficiencies and economies of scale achieved
through the growth of the Company's subscriber base. During the three and six
months ended June 30, 1998, the Company incurred $527,000 and $959,000 in
general and administrative expenses associated with the development of its
advanced messaging services.
Depreciation and amortization expense was $9.0 million and $17.5
million for the three and six months ended June 30, 1998 compared to $7.2
million and $14.0 million for the three and six months ended June 30, 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 six months of 1998. As an average
cost per month per unit in service, depreciation and amortization was $1.15 and
$1.12 in the second quarter of 1997 and 1998, respectively, compared to $1.16
and $1.11 for the six months ended June 30, 1997 and 1998, respectively. During
the three and six months ended June 30, 1998, the Company incurred $131,000 and
$251,000 in depreciation expenses associated with the development of its
advanced messaging services.
Interest Expense
Consolidated interest expense was $10.3 million and $21.9 million for
the three and six months ended June 30, 1998 compared to $9.3 million and $18.3
million for the comparable period ended June 30, 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 $7.1 million and $12.1 million
for the three and six months ended June 30, 1998. Interest expense related to
the 15% Notes was $5.4 million and $6.0 million for the three months ended June
30, 1997 and 1998, respectively, and was $10.2 million and $11.9 million for the
six months ended June 30,
12
<PAGE> 13
1997 and 1998, respectively. Interest expense for the six months ended June 30,
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 $7.3 million and $1.2 million, respectively. Total interest expense for the
six months ended June 30, 1998 was reduced by the capitalization of $4.5 million
of interest related to the construction of the Company's advanced messaging
network.
Net Loss
The Company sustained a consolidated net loss before extraordinary
items of $7.9 million and $17.9 million for the three and six months ended June
30, 1998 compared to $11.1 million and $23.2 million for the three and six
months ended June 30, 1997, principally due to the cost of funding the growth of
the Company's subscriber base. 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. Also, a one-time extraordinary charge of $3.8 milliON was
recognized during the second quarter of 1998 related to the interruption in
service experienced by the Company when the Galaxy IV satellite failed.
Including the extraordinary items, the Company's consolidated net loss for the
three and six months ended June 30, 1998 was $11.7 million and $35.5 million,
respectively.
13
<PAGE> 14
Selected Quarterly Results of Operations
The table below sets forth management's presentation of results of
PageMart Paging's operations and other data on a quarterly basis for the six
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 (in thousands, except
other data).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1997 1997 1998 1998
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
RECURRING REVENUES $ 46,475 $ 50,004 $ 53,593 $ 56,828 $ 60,872 $ 63,537
Equipment revenues 15,183 15,867 19,142 20,513 16,289 13,164
----------- ----------- ----------- ----------- ----------- -----------
61,658 65,871 72,735 77,341 77,161 76,701
Cost of equipment sold 18,054 20,234 24,008 23,735 20,590 15,915
----------- ----------- ----------- ----------- ----------- -----------
NET REVENUES 43,604 45,637 48,727 53,606 56,571 60,786
Technical expenses 10,765 11,385 11,963 12,397 12,359 13,464
G&A expenses 15,763 15,814 16,957 17,911 19,728 20,524
Selling expenses 12,572 12,189 12,115 13,969 13,476 13,716
Depreciation and
amortization expense 6,808 7,240 7,626 7,987 8,482 9,046
----------- ----------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS): EBIT $ (2,304) $ (991) $ 66 $ 1,342 $ 2,526 $ 4,036
=========== =========== =========== =========== =========== ===========
EBITDA(1) $ 4,504 $ 6,249 $ 7,692 $ 9,329 $ 11,008 $ 13,082
=========== =========== =========== =========== =========== ===========
OTHER DATA:
EBIT MARGIN(2) (5.3)% (2.2)% 0.1% 2.5% 4.5% 6.6%
EBITDA MARGIN(3) 10.3% 13.7% 15.8% 17.4% 19.5% 21.5%
Ending units in service 2,001,525 2,181,775 2,343,299 2,513,337 2,652,443 2,752,580
ARPU(4) $ 8.04 $ 7.97 $ 7.90 $ 7.80 $ 7.86 $ 7.84
Capital employed per
unit in service(5) $ 41 $ 40 $ 36 $ 34 $ 31 $ 28
RETURN ON
CAPITAL EMPLOYED(6) 22.0% 28.6% 36.5% 43.7% 53.6% 67.9%
</TABLE>
- ----------
(1) 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 generally accepted accounting
principles ("GAAP"), and therefore should not be construed 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.
(2) Calculated by dividing quarterly EBIT by net revenues.
(3) Calculated by dividing quarterly EBITDA by net revenues.
(4) Calculated by dividing domestic recurring revenues for the quarter by the
simple average number of domestic units in service during that quarter.
Stated as the monthly average for the quarter.
(5) Calculated by dividing consolidated total assets (excluding cash, advanced
messaging services assets and international investments) minus non-interest
bearing current liabilities, at the end of the period by domestic units in
service at the end of the period.
(6) Calculated by multiplying quarterly EBITDA by four and dividing by total
capital employed (capital employed per unit in service multiplied by
domestic units in service.)
14
<PAGE> 15
Supplementary Information
The following table sets forth supplementary financial information
related to the Company's various operations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
(UNAUDITED)
PAGEMART PAGEMART PAGEMART
PAGING PCS INTERNATIONAL (1) TOTAL
------------ ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 76,701 $ -- $ 7 $ 76,708
Technical expense 13,464 219 -- 13,683
Selling expense 13,716 318 156 14,190
General and administrative expense 20,524 527 -- 21,051
Depreciation and amortization expense 9,046 131 -- 9,177
Operating income (loss) 4,036 (1,195) (149) 2,692
EBITDA 13,082 (1,064) (149) 11,869
Total assets 227,923 252,435 (2,591) 477,767
Capital expenditures 11,018 33,962 -- 44,980
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
(UNAUDITED)
PAGEMART PAGEMART PAGEMART
PAGING PCS INTERNATIONAL (1) TOTAL
------------ ------------ ----------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 153,862 $ -- $ 37 $ 153,899
Technical expense 25,823 354 -- 26,177
Selling expense 27,192 572 322 28,086
General and administrative expense 40,252 959 -- 41,211
Depreciation and amortization expense 17,528 251 -- 17,779
Operating income (loss) 6,562 (2,136) (313) 4,113
EBITDA 24,090 (1,885) (313) 21,892
Total assets 227,923 252,435 (2,591) 477,767
Capital expenditures 19,841 59,344 -- 79,185
</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 losses 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.
15
<PAGE> 16
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 six months ended June 30, 1998 were $79.2
million compared to $23.4 million for the six months ended June 30, 1997.
Capital expenditures for the six months ended June 30, 1998 include
approximately $59.3 million related to the development of its advanced messaging
network, $5.6 million for the Company's one-way messaging network, $6.9 million
for computer hardware and software, $1.7 million for corporate expansion and
relocation and $3.9 million for pagers. Capital expenditures for the six months
ended June 30, 1997 included approximately $9.9 million related to the
development of advanced messaging services, $8.9 million for the Company's
one-way messaging network and $4.6 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 June 30, 1998, the Company has
purchased $25.4 million of network infrastructure under this purchase
commitment. The Company also capitalized approximately $4.5 million of interest
expense for the narrowband personal communication services ("NPCS") licenses and
advanced messaging network costs for those markets under construction during the
six months ended June 30, 1998.
The Company's net cash provided by operating activities for the six
months ended June 30, 1998 was $44.5 million compared with $2.3 million for the
six months ended June 30, 1997. Net cash provided by operations for the six
months ended June 30, 1998 was increased by $13.9 million due to increases in
current liabilities related to capital expenditures for the construction of the
Company's advanced messaging network. Net cash used in investing activities was
$79.2 million for the six months ended June 30, 1998 compared with $24.1 million
for the comparable 1997 period. The $79.2 million and $24.1 million used in
investing activities in the first six months of 1998 and 1997, respectively,
were primarily for capital expenditures. Net cash provided by financing
activities was $92.1 million for the six months ended June 30, 1998 compared
with the $6.1 million for the six months ended June 30, 1997. The increase in
net cash provided from financing activities for the six months ended June 30,
1998 was primarily due to the receipt of $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 June 30, 1998 to
February 1, 2003 of $170.4 million. From and after August 1, 2003, interest on
the 11 1/4% Notes will be paid semiannually, in cash.
16
<PAGE> 17
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 June 30, 1998 to February 1, 2000 of
$42.4 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. 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 June 30, 1998, the Company had no amounts outstanding under the
Vendor Financing Arrangement and its indebtedness under the 15% Notes was $164.9
million and its indebtedness under the 11 1/4% Notes was $261.6 million.
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 June 30, 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 June 30, 1998, the amount available under the Revolving Credit Agreement was
$30.3 million.
The indenture under which the 15% Notes were issued, the indenture
under which the 11 1/4% Notes were issued, 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 of its advanced messaging services. The
Company anticipates capital expenditures of approximately $95 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. The Company is moving
forward with the overlay of advanced messaging technology on its nationwide
one-way paging infrastructure, with construction underway in most major cities
in the United States. PageMart PCS was launched in June 1998 in the Austin,
Texas
17
<PAGE> 18
and San Antonio, Texas markets and is expected to be launched in multiple
markets in sixteen states during August, with nationwide services covering 60
percent of the U.S. population expected by year-end 1998.
As of June 30, 1998, the Company had approximately $65.7 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 June 30, 1998, the Company's borrowings available
under the Revolving Credit Agreement were $30.3 million. Management anticipates
amending or modifying its revolving credit facility to increase its capacity to
accommodate future capital needs. The indentures governing the 15% Notes and the
11 1/4% Notes provide for up to $150 million of such borrowings under the
Revolving Credit Agreement. 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 PageMart Paging
division will generate sufficient cash flows to fund one-way capital
expenditures and working capital requirements for 1998 and 1999.
The Company anticipates that its capital resources, combined with
anticipated excess cash flows from the Company's PageMart Paging division, will
be sufficient to fund the Company's consolidated operations and capital
expenditures through 1998 and 1999.
In 1997, the Company began an evaluation of its computer systems and
network infrastructure 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 expects
the large majority of upgrades to take place in 1998. The potential scope of
Year 2000 problems is very broad. The Company cannot guarantee that its
operations will not be disrupted if services, products and systems of third
parties that are used by or interface with the Company's networks and systems
fail to properly operate and exchange date data. To minimize this risk, the
Company is polling its vendors on Year 2000 compliance and requiring Year 2000
compliance information from each vendor. The Company is also working with
vendors whose products and services, if not Year 2000 compliant, would have a
materially adverse affect on the Company's results of operations, as well as
evaluating alternative solutions to these issues.
Final cost estimates to correct Year 2000 issues have not been fully
determined by the Company. As of June 30, 1998, the costs have not been material
to the Company's results of operations or financial position. The total costs
could ultimately be material to the Company's results of operations or financial
position. In addition, 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.
18
<PAGE> 19
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 October 27, 1997, an action against PageMart and another major paging
carrier was filed in Superior Court of the State of California, County of San
Francisco, by two customers of EconoPage, Inc. ("EconoPage"), a reseller of the
Company's services that had resold PageMart's paging services to approximately
38,000 customers. PageMart terminated the reseller agreement due to monetary
default by EconoPage. In the complaint, plaintiffs requested class action status
on behalf of EconoPage customers and alleged that EconoPage was an agent of
PageMart, that PageMart was aware that EconoPage's pricing would not permit it
to sustain its business and PageMart permitted EconoPage to continue to enter
into service contracts with customers while EconoPage was having serious
financial difficulties. The complaint alleged violation of statute, fraud and
negligent misrepresentation by PageMart, and requested injunctive relief as well
as compensatory, punitive, special and incidental damages in an unspecified
amount. PageMart denies all claims. Discovery has proceeded and plaintiffs filed
a motion for class certification. After briefing and oral arguments, the court
denied plaintiff's motion. Plaintiff's counsel has informed the Company that
plaintiffs intend to appeal the denial of class certification. The Company will
continue to defend this action vigorously. 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.
On March 20, 1998, an action against the Company and another major
paging carrier 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
alleged violation of statute, fraud and negligent misrepresentation by the
Company, and requested injunctive relief as well as compensatory, punitive,
special and incidental damages in an unspecified amount. The other major paging
carrier demurred to plaintiff's complaint on the grounds that it did not state
facts sufficient to constitute a cause of action. The court sustained the
demurrer without leave to amend the fraud and negligent misrepresentation causes
of action, and it sustained with leave to amend the statutory violation cause of
action if plaintiffs could allege that defendants knew EPSC was going to fail
but continued to allow their names to be used to solicit customers. Plaintiffs
have filed an amended complaint that states only a statutory violation cause of
action against defendants. The Company denies all claims and will defend this
action vigorously. 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.
19
<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on April 8, 1998,
the following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
Withheld/ Broker
Proposal For Against Abstain Non-Votes
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1) Election of directors
a) John D. Beletic 27,551,914 75,486 - -
b) Robert A. Niehaus 27,553,546 73,854 - -
c) Guy L. de Chazal 27,553,896 73,504 - -
d) Arthur Patterson 27,553,896 73,504 - -
e) Alejandro Perez Elizondo 27,553,614 73,786 - -
f) Leigh J. Abramson 27,553,896 73,504 - -
g) Pamela D. A. Reeve 27,553,614 73,786 - -
2) Ratification of
Arthur Andersen,
LLP as independent
public accountants 27,615,759 3,357 8,284 -
</TABLE>
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 June 30, 1998:
Current Report on Form 8-K dated May 18, 1998 reporting under
Item 5 "Other Event" the filing of exhibits in connection with
the issuance of the Company's Registration statement on Form
S-4. On May 19, 1998, the Company exchanged all of its
outstanding 11 1/4% Senior Subordinated Discount Notes due
2008 for its 11 1/4% Senior Subordinated Discount Exchange
Notes due 2008.
20
<PAGE> 21
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,
AUGUST 10, 1998 CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
BY: /s/ G. CLAY MYERS
----------------------------
G. CLAY MYERS,
AUGUST 10, 1998 VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND
TREASURER (PRINCIPAL FINANCIAL
AND CHIEF ACCOUNTING OFFICER)
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
11.1 * Statement regarding computation of per share loss for the three months ended June 30,
1998.
11.2 * Statement regarding computation of per share loss for the three months ended June 30,
1997.
11.3* Statement regarding computation of per share loss for the six months ended June 30,
1998.
11.4* Statement regarding computation of per share loss for the six months ended June 30,
1997.
27.1 * Financial Data Schedule.
</TABLE>
* Filed herewith
<PAGE> 1
Exhibit 11.1
PAGEMART WIRELESS, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
------------------------------------------------------
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 958,269 93.46% 895,585
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 90,641 83.91% 76,053
1997 Warrants Exercised 48,300 100.00% 48,300
-------------- --------------
40,274,884 40,197,612
WEIGHTED AVERAGE SHARES OUTSTANDING 40,197,612
NET LOSS $ (11,714,165)
NET LOSS PER SHARE $ (0.29)
==============
</TABLE>
<PAGE> 1
Exhibit 11.2
PAGEMART WIRELESS, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 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 642,233 96.99% 622,916
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 58,431 54.03% 31,573
1997 Warrants Exercised 48,300 97.59% 47,137
-------------- --------------
39,926,638 39,879,300
WEIGHTED AVERAGE SHARES OUTSTANDING 39,879,300
NET LOSS $ (11,104,845)
NET LOSS PER SHARE $ (0.28)
==============
</TABLE>
<PAGE> 1
Exhibit 11.3
PAGEMART WIRELESS, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------------
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 958,269 87.44% 837,941
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 90,641 83.82% 75,972
1997 Warrants Exercised 48,300 100.00% 48,300
------------- -------------
40,274,884 40,139,887
WEIGHTED AVERAGE SHARES OUTSTANDING 40,139,887
NET LOSS $(35,502,854)
NET LOSS PER SHARE $ (0.88)
============
</TABLE>
<PAGE> 1
Exhibit 11.4
PAGEMART WIRELESS, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 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 642,233 96.78% 621,571
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 58,431 53.78% 31,425
1997 Warrants Exercised 48,300 68.40% 33,039
------------- ------------
39,926,638 39,863,709
WEIGHTED AVERAGE SHARES OUTSTANDING 39,863,709
NET LOSS $(23,159,874)
NET LOSS PER SHARE $ (0.58)
============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S JUNE 30, 1998 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 65,662
<SECURITIES> 0
<RECEIVABLES> 51,482
<ALLOWANCES> 5,076
<INVENTORY> 6,063
<CURRENT-ASSETS> 128,131
<PP&E> 295,501
<DEPRECIATION> 92,548
<TOTAL-ASSETS> 477,767
<CURRENT-LIABILITIES> 118,070
<BONDS> 426,547
0
0
<COMMON> 4
<OTHER-SE> (66,850)
<TOTAL-LIABILITY-AND-EQUITY> 477,767
<SALES> 29,490
<TOTAL-REVENUES> 153,899
<CGS> 36,533
<TOTAL-COSTS> 62,710
<OTHER-EXPENSES> 17,779
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,923
<INCOME-PRETAX> (17,897)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,897)
<DISCONTINUED> 0
<EXTRAORDINARY> (17,606)
<CHANGES> 0
<NET-INCOME> (35,503)
<EPS-PRIMARY> (0.88)
<EPS-DILUTED> (0.88)
</TABLE>
