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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 SEPTEMBER 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 October 31, 1998, there were 34,513,710, 3,809,363, 1,428,472 and 623,945
shares of the registrant's class A, class B, class C and class D common stock
outstanding, respectively.
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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 SEPTEMBER 30, 1998..............................................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND 1998.............................................4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND1998..............................................5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS......................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................10
PART II. OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS........................................................................................22
ITEM 2. CHANGES IN SECURITIES.....................................................................22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...........................................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................22
ITEM 5. OTHER INFORMATION.........................................................................22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..........................................................23
</TABLE>
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, Sept. 30,
1997 1998
------------ ---------
(Unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 8,337 $ 36,387
Accounts receivable, net 61,394 49,283
Inventories 5,359 6,298
Prepaid expenses and other current assets 9,043 11,437
------------ ---------
Total current assets 84,133 103,405
Property and equipment, net 136,727 244,714
Narrowband licenses, net 133,065 132,920
Deferred debt issuance costs, net 5,532 10,835
Other assets 2,419 1,495
------------ ---------
Total assets $ 361,876 $ 493,369
============ =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 28,009 $ 47,255
Deferred revenue 53,469 57,758
Current maturities of long-term debt 2,755 --
Other current liabilities 20,740 23,701
------------ ---------
Total current liabilities 104,973 128,714
Long-term debt 289,344 439,951
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, $.0001 par value per share, 75,000,000
shares authorized 40,032,937 and 40,374,340 shares issued
at December 31, 1997 and September 30, 1998, respectively 4 4
Additional paid-in capital 226,622 228,333
Accumulated deficit (258,575) (303,060)
Stock subscriptions receivable (492) (573)
------------ ---------
Total stockholders' (deficit) equity (32,441) (75,296)
------------ ---------
Total liabilities and stockholders' (deficit) equity $ 361,876 $ 493,369
============ =========
</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
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Recurring revenues $ 53,593 $ 65,219 $ 150,074 $ 189,628
Equipment revenues 19,213 13,565 50,357 43,055
--------- --------- --------- ---------
Total revenues 72,806 78,784 200,431 232,683
Cost of equipment sold 24,055 16,430 62,437 52,963
--------- --------- --------- ---------
48,751 62,354 137,994 179,720
Operating expenses:
Technical 11,963 14,672 34,116 40,849
Selling 12,251 13,471 37,256 41,557
General and administrative 16,957 21,385 48,547 62,596
Depreciation and amortization 7,672 11,409 21,806 29,188
--------- --------- --------- ---------
Total operating expenses 48,843 60,937 141,725 174,190
--------- --------- --------- ---------
Operating (loss) income (92) 1,417 (3,731) 5,530
Other (income) expense:
Interest expense 9,812 10,434 28,147 32,357
Interest income (87) (787) (387) (2,847)
Other 784 752 2,270 2,899
--------- --------- --------- ---------
Total other (income) expense 10,509 10,399 30,030 32,409
--------- --------- --------- ---------
Net loss before extraordinary items (10,601) (8,982) (33,761) (26,879)
Extraordinary items:
Early retirement of debt -- -- -- (13,808)
Satellite failure -- -- -- (3,798)
--------- --------- --------- ---------
Net loss $ (10,601) $ (8,982) $ (33,761) $ (44,485)
========= ========= ========= =========
Net loss per share (basic and diluted)
Net loss before extraordinary items $ (0.27) $ (0.22) $ (0.85) $ (0.67)
Extraordinary items -- -- -- (0.44)
--------- --------- --------- ---------
Net loss $ (0.27) $ (0.22) $ (0.85) $ (1.11)
========= ========= ========= =========
Weighted average number
of shares outstanding
(basic and diluted) 39,955 40,326 39,894 40,203
========= ========= ========= =========
</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>
Nine Months Ended Sept. 30,
---------------------------
1997 1998
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Cash flows from operating activities:
Net loss $ (33,761) $ (44,485)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Extraordinary items -- 17,606
Depreciation and amortization 21,806 29,188
Provision for bad debt 8,095 8,132
Accretion of discount on senior discount notes 26,123 29,815
Amortization of deferred debt issuance costs 634 871
Changes in certain assets and liabilities:
(Increase) decrease in accounts receivable (29,397) 3,979
(Increase) decrease in inventories 5,739 (939)
Increase in prepaid expenses and other current assets (3,044) (2,394)
Decrease in other assets 2,276 653
Increase (decrease) in accounts payable (6,036) 19,246
Increase in deferred revenue 19,746 4,289
Increase (decrease) in other current liabilities 4,055 (1,951)
--------- ---------
Net cash provided by operating activities 16,236 64,010
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment related to one-way messaging (23,119) (30,034)
Purchases of property and equipment related to advanced messaging (17,422) (98,433)
Other (984) (57)
--------- ---------
Net cash used in investing activities (41,525) (128,524)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock under
the stock option/stock issuance plan 575 1,572
Proceeds from conversion of common stock warrants 157 --
Payments of stock subscriptions receivable 100 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 -- (12,096)
Payments on vendor financing arrangement (499) (21,249)
Borrowings on vendor financing arrangement 9,933 5,268
--------- ---------
Net cash provided by financing activities 10,266 92,564
--------- ---------
Net (decrease) increase in cash and cash equivalents (15,023) 28,050
Cash and cash equivalents, beginning of period 22,603 8,337
--------- ---------
Cash and cash equivalents, end of period $ 7,580 $ 36,387
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 699 $ 719
</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 NINE MONTHS ENDED SEPTEMBER 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 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 nine months ended September 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. 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 $3.7 million and
$8.2 million were capitalized for the three and nine months ended September 30,
1998. The Company did not capitalize any interest costs for the three and nine
months ended September 30, 1997.
4. LONG-TERM DEBT
On January 28, 1998, the Company received 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
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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.
5. 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 leased 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.
6. 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.
7. START-UP COSTS
In April, 1998, the AICPA (AcSEC--Accounting Standards Executive
Committee) issued Statement of Position 98-5 -- Reporting on the Costs of
Start-Up Activities ("SOP 98-5"). The intent of SOP 98-5 is to have all
companies account for start-up costs consistently. This SOP requires costs of
start-up activities to be expensed as incurred and to expense all start-up costs
previously capitalized. According to SOP 98-5, start-up activities are defined
as those one-time activities related to the opening of a new facility, the
introduction of a new product or service, the commencement of business in a new
territory, the establishment of business with a new class of customer, the
initiation of a new process in an existing facility or the commencement of a new
operation. Certain costs that may be incurred in conjunction with start-up
activities are not subject to the provisions of SOP 98-5. Such costs should be
accounted for in accordance with other existing authoritative accounting
literature. These costs would include those capitalized in association with
long-lived assets. The SOP is effective for financial statements for fiscal
years beginning after December 15, 1998. The initial application of this SOP is
reported as the cumulative effect of change in accounting principle as described
in Accounting Principles Board Opinion No. 20, Accounting Changes.
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The Company has not capitalized "start-up" costs as defined by SOP 98-5.
Therefore, the adoption of SOP 98-5 will have no effect on the Company's
financial statements.
8. COMPREHENSIVE INCOME (LOSS)
In January 1998, the Company adopted the Financial Accounting Standards
Board Statement No. 130--Reporting Comprehensive Income ("SFAS 130"), which
establishes standards for reporting comprehensive income and its components
within the financial statements. Comprehensive income is defined as all changes
in the equity of a business enterprise from transactions and other events and
circumstances, except those resulting from investments by owners and
distributions to owners. The Company's comprehensive income components are
immaterial for the nine months ended September 31, 1998 and 1997; therefore,
comprehensive income is the same as net income for both periods.
9. YEAR 2000 DISCLOSURE
In 1997, the Company began an evaluation of its computer systems and
network infrastructure for Year 2000 readiness. 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 malfunctions or 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 upgrading, modifying or replacing
software or equipment where necessary. To support the Company's assessment,
executive management has appointed a cross-functional steering committee to
address potential Year 2000 problems and to formulate and guide the Company's
Year 2000 enterprise readiness plans.
The Company has divided its Year 2000 efforts into two primary areas:
its administrative and network systems, and third party suppliers and vendors.
The Company's administrative and network systems consist of software
and hardware systems that are a combination of internally developed software and
third party software and hardware. The Company's approach is to:
o Create an inventory of items that must be assessed and prioritize the
items by how critical they are to the operations of the Company;
o Assess their readiness through testing;
o Plan and implement corrective actions;
o Develop contingency plans.
The Company intends to include third party software and hardware in
this assessment process to the extent practicable, even though it may have
obtained Year 2000 readiness information from the vendor or supplier of the
software or hardware. As of the date of this report, the Company has materially
completed the inventory and prioritization of items. Certain administrative
software that was not Year 2000 ready had to be upgraded before extensive
testing could begin. The upgraded software was installed in October 1998.
Testing plans are being completed and testing is planned to be substantially
completed in the first quarter of 1999. The Company expects that critical
hardware and software systems that are within its ability to test will be Year
2000 ready by mid 1999. Although the Company's contingency plans are not fully
developed, the Company expects to develop contingency plans to mitigate, to the
extent possible, the effects of any significant Year 2000 problem that is not
corrected.
The Company uses hardware, software and services supplied by third
party vendors in most of its operations. The Company's approach is to:
o Create a list of suppliers and vendors;
o Communicate with each supplier and vendor to try to obtain information
about the Year 2000 readiness of its products and services;
o Work cooperatively with vendors and suppliers whose products or services
are not Year 2000 ready to resolve the problems.
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Some third party products can be tested by the Company for Year 2000
readiness and will be included in the assessment described above. Other third
party products and services cannot be independently tested by the Company, some
of which are critical to the operations of the Company, such as satellite and
other third party telecommunications services and electric utility services. The
Company can make no representation that all third party products and services
will be Year 2000 ready.
The Company believes that its Year 2000 readiness efforts will
significantly reduce the level of uncertainty about the Company's Year 2000
readiness. Throughout the remainder of 1998 and 1999, the Company will continue
to assess its Year 2000 readiness. However, due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third party suppliers and vendors, the Company cannot
currently determine whether all Year 2000 problems material to its operations
will be corrected. A failure to correct a material Year 2000 problem could
result in the interruption or failure of certain normal business operations,
such as the Company's paging and messaging services, customer activations and
services, or customer invoicing and collections. Such failures, if prolonged,
could materially and adversely affect the Company's results of operations,
liquidity or financial condition.
The Company's program to upgrade, modify or replace software and
hardware has two objectives, to increase functionality and efficiency and to
make the Company Year 2000 compliant. To date, the Company has spent
approximately $12.3 million to upgrade, modify or replace hardware and software,
most of which relates to the increased functionality and efficiency. An
ancillary benefit of these upgrades was Year 2000 readiness, the cost of which
was not significant. The Company has not fully determined the final aggregate
costs of its Year 2000 readiness activities.
10. 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. Plaintiffs have appealed 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 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
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going to fail but continued to allow their names to be used to solicit
customers. Plaintiffs filed a second amended complaint that states only a
statutory violation cause of action against defendants. The Company has demurred
to the second amended complaint on grounds similar to the demurrer to the
original complaint. Plaintiffs have requested leave of the court to file a third
amended complaint that would add a request to proceed with a representative
action under Section 17200 of the California Business and Professions Code. The
court has taken no action with respect to either the demurrer or the request for
leave to amend. 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 nine months ended September
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 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 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;
potential delays in construction or technical problems relating to the Company's
transmission network for advanced messaging services; and the cost and ability
of the Company and third parties upon whose products and services the Company
depends to be Year 2000 ready in a timely manner.
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. Advanced messaging services were launched in more than
250 cities across the country during the third quarter.
The Company sells and leases wireless messaging end-user devices 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.
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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 September 30, 1998,
the number of domestic one-way units in service increased from 1,851,445 to
2,767,742. 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 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 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
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 September 30, 1998, 26% of the
Company's total units in service originated from the National Retail SBU, 37%
originated from the Carrier Services SBU and 37% originated from the National
Sales Offices SBU. 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.
In the third quarter, the Company announced the formation of its
Telemetry Strategic Business Unit and the signing of strategic alliances with
Interactive Technologies, Inc. and Pentech Energy Solutions, Inc. for wireless
connectivity to home security systems and environmental control systems,
respectively. During October, 1998, the Company signed an agreement with
RoadTrac(TM), LLC to provide telemetry solutions for vehicle locatiON
technology. The Company does not expect the Telemetry SBU to originate any units
in service until the second half of 1999.
11
<PAGE> 12
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 September 30, 1998
were 2.5%, 2.4%, 2.5% and 3.1%, 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 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.
On October 26, 1998, the Company announced a five year strategic
alliance with Metrocall, Inc., which will provide advanced messaging services on
the Company's advanced messaging network. The agreement is organized into two
phases. Initially Metrocall will market its switch-based advanced messaging
services utilizing the Company's advanced messaging network. During the second
phase, Metrocall will install its own outbound Narrowband PCS frequency on its
existing nationwide transmitter network and the Company will provide turnkey
deployment and operation of a Metrocall receiver network. Under the agreement,
the two companies will share certain capital and operating expenses, which will
significantly lower costs for both companies.
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.
12
<PAGE> 13
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
Units in Service
Units in service from domestic one-way operations were 2,343,299 and
2,767,742 as of September 30, 1997 and 1998, respectively, representing an
annual growth rate of 18%. The net subscriber additions for the Company's
domestic one-way messaging operations have ranged from 15,000 to 170,000 for
each of the last four fiscal quarters. In the three and nine months ended
September 30, 1998, the Company's domestic one-way messaging operations
generated 15,162 and 254,405 net subscriber additions, respectively,
representing an annualized growth rate of approximately 13.5% for the nine month
period. In addition, for the nine months ended September 30, 1997 and 1998,
PageMart Canada Limited's ("PageMart Canada") units in service were 31,186 and
44,885, 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
18,712 and 26,931 at September 30, 1997 and 1998, respectively.
The Company experienced a historically weak quarter in terms of net
subscriber additions in the third quarter of 1998. Management believes that a
substantial part of the reasons are specific to the Company, however, a general
slowing in the market for traditional one-way paging services was also a
contributing factor. In the opinion of management, demand appears to be shifting
away from traditional one-way paging services to the higher quality and greater
benefits of advanced messaging services.
Several things contributed to the Company specific reasons for the
decline in net subscriber additions in the third quarter of 1998. The Company's
primary pager supplier, Motorola, Inc., experienced significant manufacturing
problems in the production of the Synapse(TM) pager card for the PalmPilot and
delays in tHE introduction of a new pager product line that negatively affected
the Company's sales. Also contributing to reduced net subscriber additions was
an increase in the Company's composite churn rate from 2.8% in second quarter to
3.1% in third quarter of 1998. There were several reasons for this increase
aside from the general slowing of the market. Additional disconnects resulted
from a price increase implemented for direct bill customers that were below the
Company's standard pricing and profitability levels. The local reseller channel
continued to experience volatility. Also, higher volatility was experienced in
the strategic alliance distribution channel during the third quarter, primarily
as a result of a review and update of customer database information by strategic
alliance partners. The volatility in the local reseller and strategic alliance
channels is expected to continue in the fourth quarter of 1998.
Historically, the Company has grown its subscriber base at a faster
rate than the overall paging industry's subscriber growth rate. Management does
not anticipate that the Company's one-way paging business will continue to grow
at rates that are significantly higher than the overall industry rate.
Traditionally, the fourth quarter has been a strong quarter in terms of net
subscriber additions due in a large part to significant additions associated
with the holiday buying season in the national retail channel. However, the
expected continuation of volatility in the strategic alliance and local reseller
distribution channels, coupled with a general market slowdown in one-way paging,
may reduce fourth quarter net subscriber additions to levels comparable with
those experienced during third quarter of 1998. Although management does not
expect net subscriber additions to be negative in the fourth quarter of 1998 or
any quarter of 1999, certain factors may cause such an outcome to occur
including slower than expected holiday season buying, more severe volatility in
local reseller and strategic alliance channels and increased churn rates.
Revenues
Revenues were $78.8 million and $232.6 million for the three and nine
months ended September 30, 1998 compared to $72.7 million and $200.3 million for
the three and nine months ended September 30, 1997. Recurring revenues for
airtime, voice mail and other services were $65.2 million and $189.6 million for
the three and nine months ended September 30, 1998 compared to $53.6 million and
$150.1 million for the comparable period ended September 30, 1997. Revenues from
equipment sales were $13.5 million and $43.0 million for the three and nine
months ended September 30, 1998 compared to $19.1 million and $50.2 million for
the comparable period ended September 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 nine months ended
September 30, 1998 was
13
<PAGE> 14
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 $7.90 to $7.80 during the past five
fiscal quarters. Over the past five quarters, the Company's ARPU has varied by
less than 1.3 percent. Management expects ARPU to remain relatively stable in
the foreseeable future with minor variations from changes in distribution mix.
Cost of Equipment Sold
The cost of equipment sold was $16.4 million and $52.9 million for the
three and nine months ended September 30, 1998 compared to $24.0 million and
$62.3 million for the three and nine months ended September 30, 1997,
respectively. The decrease in 1998 was primarily attributable to a decrease in
the number of units sold along with a decline in the rate of growth in national
retail outlets. During the nine months ended September 30, 1997 and 1998, the
Company added 6,641 and 2,696 new national retail outlets, respectively. In
1997, the Company made a concerted effort to expand its retail distribution
capabilities by aggressively increasing the number of retail outlets. However,
in 1998, the number of retail outlets has stabilized as a result of the Company
obtaining sufficient market share. 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 $13.4 million and $39.2 million for the three
and nine months ended September 30, 1998 compared to $12.0 million and $34.1
million for the three and nine months ended September 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 $1.76 and
$1.61 in the third quarter of 1997 and 1998, respectively, compared to $1.81 and
$1.65 for the nine months ended September 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 nine months ended September 30, 1998, the Company incurred
$1.3 million and $1.7 million in technical expenses associated with the
development of its advanced messaging services.
Selling expenses were $12.9 million and $40.1 million for the three and
nine months ended September 30, 1998 compared to $12.1 million and $36.9 million
for the three and nine months ended September 30, 1997. This increase resulted
from greater marketing and advertising costs related to a larger base of retail
outlets. During the three and nine months ended September 30, 1998, the Company
incurred $183,000 and $505,000 in selling expenses associated its international
operations and $381,000 and $953,000 in its development of advanced messaging
services, respectively.
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) were $20.9
million and $61.1 million for the three and nine months ended September 30, 1998
compared to $17.0 million and $48.5 million for the three and nine months ended
September 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 $2.50 and $2.52 in the third quarter of 1997
and 1998, respectively, compared to $2.57 and $2.57 for the nine months ended
September 30, 1997 and 1998, respectively. During the three and nine months
ended September 30, 1998, the Company incurred $523,000 and $1.5 million in
general and administrative expenses associated with the development of its
advanced messaging services.
Depreciation and amortization expense was $9.8 million and $27.3
million for the three and nine months ended September 30, 1998 compared to $7.6
million and $21.7 million for the three and nine months ended September 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 nine months of 1998. The
increase also resulted from the depreciation and amortization of the advanced
messaging equipment which has been deployed and
14
<PAGE> 15
the percentage of the narrowband licenses in use at September 30, 1998. As an
average cost per month per unit in service, depreciation and amortization was
$1.12 and $1.18 in the third quarter of 1997 and 1998, respectively, compared to
$1.15 and $1.15 for the nine months ended September 30, 1997 and 1998,
respectively. During the three and nine months ended September 30, 1998, the
Company incurred $1.6 million and $1.9 million in depreciation expenses
associated with the development of its advanced messaging services.
Interest Expense
Consolidated interest expense was $10.4 million and $32.4 million for
the three and nine months ended September 30, 1998 compared to $9.8 million and
$28.1 million for the comparable period ended September 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 $7.4 million and
$19.5 million for the three and nine months endED September 30, 1998. Interest
expense related to the 15% Notes was $5.4 million and $6.3 million for the three
months ended September 30, 1997 and 1998, respectively, and was $15.6 million
and $18.2 million for the nine months ended September 30, 1997 and 1998,
respectively. Interest expense for the nine months ended September 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
$11.1 million and $1.2 million, respectively. Total interest expense for the
nine months ended September 30, 1998 was reduced by the capitalization of $8.2
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 $9.0 million and $26.9 million for the three and nine months ended
September 30, 1998 compared to $10.6 million and $33.8 million for the three and
nine months ended September 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 nine months ended September 30, 1998 was $9.0 million and
$44.5 million, respectively.
Allocation of Debt to Divisions
The Company has allocated proceeds from equity and debt offerings to
its PageMart Paging and PageMart PCS division. The methodology the Company has
followed to date results in the attribution of the proceeds of each offering
based on the specific capital and operating requirements of each division.
Positive free cash flow generated by the division are credited to that division
periodically in the form of debt reduction. As of September 30, 1998, $154.7
million and $72.5 million of equity offerings and $129.6 million and $296.9
million of debt offerings have been allocated to PageMart Paging and PageMart
PCS, respectively. For the nine months ended September 30, 1998, interest
expense of $13.0 million and $19.4 million was allocated to PageMart Paging and
PageMart PCS, respectively.
15
<PAGE> 16
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
- ------------------------------------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1997 1997 1997 1998 1998 1998
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
RECURRING REVENUES $ 50,004 $ 53,593 $ 56,828 $ 60,872 $ 63,537 $ 65,205
Equipment revenues 15,867 19,142 20,513 16,289 13,164 13,546
----------- ----------- ----------- ----------- ----------- -----------
65,871 72,735 77,341 77,161 76,701 78,751
Cost of equipment sold 20,234 24,008 23,735 20,590 15,915 16,416
----------- ----------- ----------- ----------- ----------- -----------
NET REVENUES 45,637 48,727 53,606 56,571 60,786 62,335
Technical expenses 11,385 11,963 12,397 12,359 13,464 13,364
G&A expenses 15,814 16,957 17,911 19,728 20,524 20,862
Selling expenses 12,189 12,115 13,969 13,476 13,716 12,907
Depreciation and
amortization expense 7,240 7,626 7,987 8,482 9,046 9,808
----------- ----------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS): EBIT ($991) $ 66 $ 1,342 $ 2,526 $ 4,036 $ 5,394
=========== =========== =========== =========== =========== ===========
EBITDA (1) $ 6,249 $ 7,692 $ 9,329 $ 11,008 $ 13,082 $ 15,202
=========== =========== =========== =========== =========== ===========
OTHER DATA:
EBIT MARGIN (2) (2.2%) 0.1% 2.5% 4.5% 6.6% 8.7
EBITDA MARGIN (3) 13.7% 15.8% 17.4% 19.5% 21.5% 24.4
Ending units in service 2,181,775 2,343,299 2,513,337 2,652,443 2,752,580 2,767,742
ARPU (4) $ 7.97 $ 7.90 $ 7.80 $ 7.86 $ 7.84 $ 7.87
Capital employed per
unit in service (5) $ 40 $ 36 $ 34 $ 31 $ 28 $ 27
RETURN ON
CAPITAL EMPLOYED (6) 28.6% 36.5% 43.7% 53.6% 67.9% 81.4%
</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.)
16
<PAGE> 17
Supplementary Information
The following table sets forth supplementary financial information
related to the Company's various operations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------
(Unaudited)
PAGEMART PAGEMART PAGEMART
PAGING PCS INTERNATIONAL (1) TOTAL
-----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 78,751 $ 20 $ 13 $ 78,784
Technical expense 13,364 1,308 -- 14,672
Selling expense 12,907 381 183 13,471
General and administrative expense 20,862 523 -- 21,385
Depreciation and amortization expense 9,808 1,601 -- 11,409
Operating income (loss) 5,394 (3,799) (178) 1,417
EBITDA 15,202 (2,198) (178) 12,826
Total assets 200,412 296,295 (3,338) 493,369
Capital expenditures 10,193 39,089 -- 49,282
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------------------
(Unaudited)
PAGEMART PAGEMART PAGEMART
PAGING PCS INTERNATIONAL (1) TOTAL
-----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 232,613 $ 20 $ 50 $ 232,683
Technical expense 39,187 1,662 -- 40,849
Selling expense 40,099 953 505 41,557
General and administrative expense 61,114 1,482 -- 62,596
Depreciation and amortization expense 27,336 1,852 -- 29,188
Operating income (loss) 11,956 (5,935) (491) 5,530
EBITDA 39,292 (4,083) (491) 34,718
Total assets 200,412 296,295 (3,338) 493,369
Capital expenditures 30,034 98,433 -- 128,467
</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.
17
<PAGE> 18
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 121/4% Notes,
the 15% Notes and the 111/4% Notes, as well as borrowings under the Vendor
Financing Arrangement and the Revolving Credit Agreement (both as defined
herein).
Capital expenditures for the nine months ended September 30, 1998 were
$128.5 million compared to $40.5 million for the nine months ended September 30,
1997. Capital expenditures for the nine months ended September 30, 1998 include
approximately $98.4 million related to the development of its advanced messaging
network, $9.4 million for the Company's one-way messaging network, $12.3 million
for computer hardware and software, $2.2 million for corporate expansion and
relocation and $6.1 million for pagers. Capital expenditures for the nine months
ended September 30, 1997 included approximately $17.4 million related to the
development of advanced messaging services, $16.1 million for the Company's
one-way messaging network and $7.0 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 September 30, 1998, the Company
has purchased $27.4 million of network infrastructure under this purchase
commitment. The Company also capitalized approximately $8.2 million of interest
expense for the narrowband personal communication services ("NPCS") licenses and
advanced messaging network costs for those markets under construction during the
nine months ended September 30, 1998.
The Company's net cash provided by operating activities for the nine
months ended September 30, 1998 was $64.0 million compared with $16.2 million
for the nine months ended September 30, 1997. Net cash provided by operating
activities for the nine months ended September 30, 1998 was increased by $14.1
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 $128.5 million for the nine months ended September
30, 1998 compared with $41.5 million for the comparable 1997 period. The $128.5
million and $41.5 million used in investing activities in the first nine months
of 1998 and 1997, respectively, were primarily for capital expenditures. Net
cash provided by financing activities was $92.6 million for the nine months
ended September 30, 1998 compared with the $10.3 million for the nine months
ended September 30, 1997. The increase in net cash provided from financing
activities for the nine months ended September 30, 1998 was primarily due to the
receipt of $107.8 million of net proceeds from the issuance of the 111/4% 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 111/4% 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 121/4% 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 121/4% 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 111/4% 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
111/4% Notes will cause an increase in indebtedness from September 30, 1998 to
February 1, 2003 of $163.1 million. From and after August 1, 2003, interest on
the 111/4% Notes will be paid semiannually, in cash.
18
<PAGE> 19
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 September 30, 1998 to February 1,
2000 of $36.3 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 September 30, 1998, the Company had no amounts outstanding under
the Vendor Financing Arrangement and its indebtedness under the 15% Notes was
$171.0 million and its indebtedness under the 111/4% Notes was $268.9 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 September 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 October 31, 1998, the Company estimates the amount available under the
Revolving Credit Agreement was approximately $33.4 million.
The indenture under which the 15% Notes were issued, the indenture under
which the 111/4% 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 $115 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 approximately $35-$45 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 approximately $30 million to fund operations and marketing
in 1999 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
19
<PAGE> 20
construction underway in most major cities in the United States. PageMart PCS
was launched in June 1998 in the Austin, Texas and San Antonio, Texas markets.
Advanced messaging services were launched in more than 250 cities across the
country during the third quarter. Nationwide services covering 70 percent of the
U.S. population is expected by year-end 1998.
As of September 30, 1998, the Company had approximately $36.4 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 October 31, 1998, the Company estimates that
borrowings available under the Revolving Credit Agreement were approximately
$33.4 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 111/4% 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.
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.
Year 2000 Disclosure
In 1997, the Company began an evaluation of its computer systems and
network infrastructure for Year 2000 readiness. 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 malfunctions or 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 upgrading, modifying or replacing
software or equipment where necessary. To support the Company's assessment,
executive management has appointed a cross-functional steering committee to
address potential Year 2000 problems and to formulate and guide the Company's
Year 2000 enterprise readiness plans.
The Company has divided its Year 2000 efforts into two primary areas:
its administrative and network systems, and third party suppliers and vendors.
The Company's administrative and network systems consist of software and
hardware systems that are a combination of internally developed software and
third party software and hardware. The Company's approach is to:
o Create an inventory of items that must be assessed and prioritize the
items by how critical they are to the operations of the Company;
o Assess their readiness through testing;
o Plan and implement corrective actions;
o Develop contingency plans.
The Company intends to include third party software and hardware in this
assessment process to the extent practicable, even though it may have obtained
Year 2000 readiness information from the vendor or supplier of the
20
<PAGE> 21
software or hardware. As of the date of this report, the Company has materially
completed the inventory and prioritization of items. Certain administrative
software that was not Year 2000 ready had to be upgraded before extensive
testing could begin. The upgraded software was installed in October 1998.
Testing plans are being completed and testing is planned to be substantially
completed in the first quarter of 1999. The Company expects that critical
hardware and software systems that are within its ability to test will be Year
2000 ready by mid 1999. Although, the Company's contingency plans are not fully
developed, the Company expects to develop contingency plans to mitigate, to the
extent possible, the effects of any significant Year 2000 problem that is not
corrected.
The Company uses hardware, software and services supplied by third party vendors
in most of its operations. The Company's approach is to:
o Create a list of suppliers and vendors;
o Communicate with each supplier and vendor to try to obtain information
about the Year 2000 readiness of its products and services;
o Work cooperatively with vendors and suppliers whose products or services
are not Year 2000 ready to resolve the problems.
Some third party products can be tested by the Company for Year 2000
readiness and will be included in the assessment described above. Other third
party products and services cannot be independently tested by the Company, some
of which are critical to the operations of the Company, such as satellite and
other third party telecommunications services and electric utility services. The
Company can make no representation that all third party products and services
will be Year 2000 ready.
The Company believes that its Year 2000 readiness efforts will
significantly reduce the level of uncertainty about the Company's Year 2000
readiness. Throughout the remainder of 1998 and 1999, the Company will continue
to assess its Year 2000 readiness. However, due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third party suppliers and vendors, the Company cannot
currently determine whether all Year 2000 problems material to its operations
will be corrected. A failure to correct a material Year 2000 problem could
result in the interruption or failure of certain normal business operations,
such as the Company's paging and messaging services, customer activations and
services, or customer invoicing and collections. Such failures, if prolonged,
could materially and adversely affect the Company's results of operations,
liquidity or financial condition.
The Company's program to upgrade, modify or replace software and hardware
has two objectives, to increase functionality and efficiency and to make the
Company Year 2000 compliant. To date, the Company has spent approximately $12.3
million to upgrade, modify or replace hardware and software, most of which
relates to the increased functionality and efficiency. An ancillary benefit of
these upgrades was Year 2000 readiness, the cost of which was not significant.
The Company has not fully determined the final aggregate costs of its Year 2000
readiness activities.
21
<PAGE> 22
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. Plaintiffs have appealed 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 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 filed
a second amended complaint that states only a statutory violation cause of
action against defendants. The Company has demurred to the second amended
complaint on grounds similar to the demurrer to the original complaint.
Plaintiffs have requested leave of the court to file a third amended complaint
that would add a request to proceed with a representative action under Section
17200 of the California Business and Professions Code. The court has taken no
action with respect to either the demurrer or the request for leave to amend.
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. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
None
22
<PAGE> 23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the accompanying index to exhibits are
filed as part of this quarterly report.
(b) Reports on Form 8-K
None
23
<PAGE> 24
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,
November 13, 1998 Chairman and
Chief Executive Officer
By: /s/ G. Clay Myers
------------------
G. Clay Myers,
November 13, 1998 Vice President, Finance,
Chief Financial Officer and
Treasurer (principal financial
and chief accounting officer)
24
<PAGE> 25
EXHIBIT INDEX
Exhibit No. Description
11.1 * Statement regarding computation of per share loss for
the three months ended September 30, 1998.
11.2 * Statement regarding computation of per share loss for
the three months ended September 30, 1997.
11.3* Statement regarding computation of per share loss for
the nine months ended September 30, 1998.
11.4* Statement regarding computation of per share loss for
the nine months ended September 30, 1997.
12.1* Computation of ratio of earnings to fixed charges.
27.1 * Financial Data Schedule.
* Filed herewith
<PAGE> 1
Exhibit 11.1
PAGEMART WIRELESS, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 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 1,057,725 95.47% 1,009,840
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 90,641 100.00% 90,641
1997 Warrants Exercised 48,300 100.00% 48,300
------------- -----------
40,374,340 40,326,455
WEIGHTED AVERAGE SHARES OUTSTANDING 40,326,455
NET LOSS ($8,982,341)
NET LOSS PER SHARE ($0.22)
===========
</TABLE>
<PAGE> 1
Exhibit 11.2
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 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 702,486 95.45% 670,519
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 58,431 100.00% 58,431
1997 Warrants Exercised 48,300 100.00% 48,300
------------- ------------
39,986,891 39,954,924
WEIGHTED AVERAGE SHARES OUTSTANDING 39,954,924
NET LOSS ($10,600,389)
NET LOSS PER SHARE ($0.27)
============
</TABLE>
<PAGE> 1
Exhibit 11.3
PAGEMART WIRELESS, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 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 1,057,725 84.70% 895,871
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 89.27% 80,916
1997 Warrants Exercised 48,300 100.00% 48,300
------------- ------------
40,374,340 40,202,761
WEIGHTED AVERAGE SHARES OUTSTANDING 40,202,761
NET LOSS ($44,485,195)
NET LOSS PER SHARE ($1.11)
============
</TABLE>
<PAGE> 1
Exhibit 11.4
PAGEMART WIRELESS, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 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 702,486 90.83% 638,067
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 69.36% 40,526
1997 Warrants Exercised 48,300 79.05% 38,182
------------- ------------
39,986,891 39,894,449
WEIGHTED AVERAGE SHARES OUTSTANDING 39,894,449
NET LOSS ($33,760,263)
NET LOSS PER SHARE ($0.85)
============
</TABLE>
<PAGE> 1
EXHIBIT 12.1
PAGEMART WIRELESS, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1996 1997 1998 (1) 1998 (1)
------------ ------------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Net loss $ (31,121) $ (45,813) $ (53,113) $ (48,598) $ (43,887) $ (8,982) $ (44,485)
Add: Amount of
previously capitalized
interest amortized -- -- -- -- -- 56 56
Add: Fixed charges 6,538 12,933 30,720 35,041 38,499 10,434 32,357
------------ ------------ ------------ ------------ ------------ ------------- -------------
Adjusted earnings (24,583) (32,880) (22,393) (13,557) (5,388) 1,508 (12,072)
Fixed charges:
Interest in
indebtedness 5,785 11,209 28,383 32,368 36,672 13,480 38,804
Amortization of debt
issuance costs 159 800 1,052 2,143 844 303 866
Interest portion
of rental and
lease expense 594 924 1,285 530 983 342 922
------------ ------------ ------------ ------------ ------------ ------------- -------------
Fixed charges 6,538 12,933 30,720 35,041 38,499 14,125 40,592
Deficiency of
earnings available to
cover fixed charges $ (31,121) $ (45,813) $ (53,113) $ (48,598) $ (43,887) $ (12,617) $ (52,664)
============ ============ ============ ============ ============ ============= =============
Earnings to fixed charges ratio -- -- -- -- -- 0.11 --
</TABLE>
(1) The fixed charge adjustment to earnings excludes $3.7 million and $8.2
million of capitalized interest for the three and nine months ended
September 30, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S SEPTEMBER 30, 1998 CONDENSED CONSOLIDATED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 36,387
<SECURITIES> 0
<RECEIVABLES> 60,884
<ALLOWANCES> 11,601
<INVENTORY> 6,298
<CURRENT-ASSETS> 103,405
<PP&E> 347,350
<DEPRECIATION> 102,636
<TOTAL-ASSETS> 493,369
<CURRENT-LIABILITIES> 128,714
<BONDS> 439,951
0
0
<COMMON> 4
<OTHER-SE> (75,300)
<TOTAL-LIABILITY-AND-EQUITY> 493,369
<SALES> 43,055
<TOTAL-REVENUES> 232,683
<CGS> 52,963
<TOTAL-COSTS> 93,812
<OTHER-EXPENSES> 29,188
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,357
<INCOME-PRETAX> (26,879)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,879)
<DISCONTINUED> 0
<EXTRAORDINARY> (17,606)
<CHANGES> 0
<NET-INCOME> (44,485)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
