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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
========================================================
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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 April 30, 1999, there were 34,558,012, 3,809,363, 1,428,472 and 616,945
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
----
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1998
AND MARCH 31, 1999......................................................................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1998 AND 1999........................................................ 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 1998 AND 1999........................................................ 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS....................................................................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................................21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................................................21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................21
ITEM 5. OTHER INFORMATION................................................................................21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................................21
</TABLE>
2
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,476 $ 15,464
Short-term investments 1,000 1,000
Accounts receivable, net 38,304 44,241
Inventories 6,747 7,627
Prepaid expenses and other current assets 11,010 11,133
------------ ------------
Total current assets 74,537 79,465
Property and equipment, net 274,179 267,716
Narrowband licenses, net 132,555 131,723
Other assets 12,784 15,600
------------ ------------
Total assets $ 494,055 $ 494,504
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 38,703 $ 33,213
Deferred revenue 57,512 59,416
Current maturities of long-term debt 1,238 --
Other current liabilities 23,297 22,903
------------ ------------
Total current liabilities 120,750 115,532
Long-term debt 462,079 492,905
Other long-term liabilities 1,248 1,248
Stockholders' (deficit) equity:
Common stock, $.0001 par value per share, 75,000,000 shares authorized
40,398,292 and 40,412,792 shares issued
at December 31, 1998 and March 31, 1999, respectively 4 4
Additional paid-in capital 228,438 228,461
Accumulated deficit (317,891) (343,094)
Stock subscriptions receivable (573) (552)
------------ ------------
Total stockholders' (deficit) equity (90,022) (115,181)
------------ ------------
Total liabilities and stockholders' (deficit) equity $ 494,055 $ 494,504
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are integral part of these financial statements
3
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1999
----------------------------
<S> <C> <C>
Revenues:
Recurring revenues $ 60,875 $ 64,723
Equipment revenues 16,319 8,731
------------ ------------
Total revenues 77,194 73,454
Cost of equipment sold 20,620 10,927
------------ ------------
56,574 62,527
Operating expenses:
Technical 12,494 18,715
Selling 13,897 13,926
General and administrative 20,160 21,078
Depreciation and amortization 8,602 18,650
------------ ------------
Total operating expenses 55,153 72,369
------------ ------------
Operating income (loss) 1,421 (9,842)
Other (income) expense:
Interest expense 11,609 15,025
Interest income (972) (205)
Other 765 541
------------ ------------
Total other (income) expense 11,402 15,361
------------ ------------
Loss before extraordinary item (9,981) (25,203)
Extraordinary item:
Early retirement of debt (13,808) --
------------ ------------
Net loss $ (23,789) $ (25,203)
============ ============
Net loss per share:
(basic and diluted)
Loss before extraordinary item $ (0.25) $ (0.62)
Extraordinary item (0.34) --
------------ ------------
Net loss $ (0.59) $ (0.62)
============ ============
Weighted average number
of shares outstanding
(basic and diluted) 40,082 40,399
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are integral part of these financial statements
4
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (23,789) $ (25,203)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Extraordinary item 13,808 --
Depreciation and amortization 8,602 18,650
Provision for bad debt 2,542 1,961
Accretion of discount on senior discount notes 10,472 14,273
Amortization of deferred debt issuance costs 268 315
Changes in certain assets and liabilities:
(Increase) decrease in accounts receivable 3,772 (7,898)
(Increase) decrease in inventories 1,216 (880)
(Increase) decrease in prepaid expenses and other current assets 273 (123)
Increase in other assets (684) 13
Increase (decrease) in accounts payable 8,781 (5,490)
Increase in deferred revenue 4,647 1,904
Decrease in other current liabilities (7,928) (394)
------------ ------------
Net cash provided by (used in) operating activities 21,980 (2,872)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (34,205) (11,277)
Other (6) (20)
------------ ------------
Net cash used in investing activities (34,211) (11,297)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock under
the stock option/stock issuance plan 412 23
Payments of stock subscriptions receivable 40 21
Retirement of 12 1/4% Senior Discount Notes (130,689) --
Proceeds from issuance of 11 1/4% Senior Subordinated Discount Notes 249,700 --
Offering Costs related to issuance of 11 1/4% Senior Subordinated
Discount Notes and retirement of 12 1/4% Senior Discount Notes (11,876) --
Deferred debt issuance costs -- (3,202)
Borrowings under Credit Facility -- 25,000
Borrowings on vendor financing arrangement 5,268 539
Payments on vendor financing arrangement (21,249) (10,224)
------------ ------------
Net cash provided by financing activities 91,606 12,157
------------ ------------
Net increase (decrease) in cash and cash equivalents 79,375 (2,012)
Cash and cash equivalents, beginning of period 8,337 17,476
------------ ------------
Cash and cash equivalents, end of period $ 87,712 $ 15,464
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 579 $ 271
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these financial statements
5
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PAGEMART WIRELESS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
(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, Inc. 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, 1998. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three months
ended March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
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 $1.3 million
were capitalized for the three months ended March 31, 1998. The Company did not
capitalize any interest costs for the three months ended March 31, 1999.
4. LONG-TERM DEBT
On March 23, 1999, the Company entered into a four-year credit agreement
with Bankers Trust Company and Morgan Stanley Senior Funding, Inc. which
provides for a $100 million credit facility (the "Credit Facility"). The Credit
Facility replaces the $50 million revolving line of credit the Company
established on May 11, 1995 with BT Commercial Corporation, as Agent, and
Bankers Trust Company, as issuing bank (the "Revolving Credit Agreement"), which
was simultaneously terminated. The Credit Facility provides for $75 million of
multi-draw term loans (the "Term Loans") and $25 million of revolving loans (the
"Revolving Loans"). As of March 23, 1999, $50 million was immediately available
to the Company, $10 million of which was Revolving Loans. On March 24, 1999, the
Company borrowed $25 million in Term Loans pursuant to terms of the Credit
Facility. Approximately $12 million of the initial borrowing was used to repay
amounts outstanding under a vendor financing arrangement and to fund the fees
and expenses of the Credit Facility.
The Credit Facility bears interest at the U.S. prime rate plus 2.75% or at
LIBOR plus 3.75%. The interest rate on the amounts borrowed on March 24, 1999
was 10.5%. Further availability of the Credit Facility beyond the initial $50
million is based on the Company's achievement of certain minimum targets for
advanced messaging subscriber units in service.
6
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The Credit Facility contains 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 requires the Company to maintain certain operating and
financial performance measures and limits the ability of the Company to make
capital expenditures.
5. 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. Under the
provisions of Statement of Financial Accounting Standards No. 128 -- Earning per
Share, dilutive securities are excluded from the calculation of earnings per
share when there is a net loss because their inclusion would be anti-dilutive.
The securities listed below were not included in the computation of dilutive
loss per share for the three months ended March 31, 1998 and 1999, since the
effect from the conversion would be anti-dilutive.
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1999
------------ ------------
<S> <C> <C>
Stock Options 4,190,721 5,933,930
Warrants 786,348 785,198
------------ ------------
4,977,069 6,719,128
============ ============
</TABLE>
6. 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 three months ended March 31, 1999 and 1998; therefore,
comprehensive income is the same as net income for both periods.
7. SEGMENT REPORTING
In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). The Company adopted SFAS
131 for the fiscal year ending December 31, 1998. SFAS 131 establishes
accounting standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers.
The Company's reportable segments are divisions that offer different
products and/or services. They are managed separately because each division
requires different technology and management strategies. The Company reports
segments based on these divisions as management makes operating decisions and
assesses individual performances based on the performance of these segments.
The Company has three reportable segments: PageMart Paging, PageMart PCS and
PageMart International. 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 has constructed and
operates an advanced messaging network as an overlay of its one-way network. As
of March 31, 1999, advanced messaging services are available to approximately
90% of the U.S. population. Through PageMart International, the Company provides
messaging services in selected countries on a seamless international network.
The Company pursues international opportunities through foreign related
entities, interests in joint venture arrangements, or network affiliation
agreements between the Company and the owners of foreign networks.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies presented in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, except for the
allocation of equity and debt by divisions.
7
<PAGE> 8
The Company has allocated proceeds from equity and debt offerings to its
PageMart Paging and PageMart PCS divisions. 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 a division is utilized to reduce its
respective debt allocation. As of March 31, 1999, $156.0 million and $72.5
million of equity and $130.3 million and $362.6 million of debt have been
allocated to PageMart Paging and PageMart PCS, respectively. For the three
months ended March 31, 1999, interest expense of $5.4 million and $9.6 million
was allocated to PageMart Paging and PageMart PCS, respectively.
The following table sets forth segment financial information related to the
Company's various operations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------------------
(UNAUDITED)
PAGEMART PAGEMART PAGEMART
PAGING PCS INTERNATIONAL CONSOLIDATED
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 77,161 $ -- $ 33 $ 77,194
Operating income (loss) 2,526 (941) (164) 1,421
Interest expense 3,977 7,632 -- 11,609
Interest income (32) (940) -- (972)
Loss before extraordinary item (2,184) (7,633) (164) (9,981)
EBITDA 11,008 (821) (164) 10,023
Total assets 249,578 216,530 864 466,972
Capital expenditures 8,823 25,382 -- 34,205
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
------------------------------------------------------------
(UNAUDITED)
PAGEMART PAGEMART PAGEMART
PAGING PCS INTERNATIONAL CONSOLIDATED
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 72,702 $ 653 $ 99 $ 73,454
Operating income (loss) 6,478 (16,168) (152) (9,842)
Interest expense 5,366 9,659 -- 15,025
Interest income -- (205) -- (205)
Net loss 1,068 (25,622) (649) (25,203)
EBITDA 17,403 (8,443) (152) 8,808
Total assets 159,159 332,479 2,866 494,504
Capital expenditures 4,456 6,821 -- 11,277
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the results of operations and financial
condition of the Company for the three months ended March 31, 1999 and 1998.
This discussion should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto included elsewhere in this report.
Certain prior year's 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 1999 and beyond to differ materially from those expressed in any
such forward-looking statements - economic conditions and consumer confidence
generally in the United States; 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 messaging services; the timely development and acceptance of new
products; changes in regulation by the FCC and various state regulatory
agencies; potential technical problems relating to the Company's transmission
network for
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<PAGE> 9
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 has constructed and operates an advanced
messaging network as an overlay of its one-way network. As of March 31, 1999,
the Company had substantially completed the buildout of its advanced messaging
network and now covers approximately 90% of the U.S. population. The Company has
incurred significant capital expenditures and expects to incur significant
operating losses and additional capital expenditures associated with the
implementation and deployment of its advanced messaging services.
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. The Company has sustained consolidated operating losses in each year
of operations from inception through the period ending December 31, 1997.
Although the Company recognized a $2.5 million operating profit for the year
ended December 31, 1998, the Company has sustained an aggregate $12.7 million
operating loss for the three year period ended December 31, 1998 and a $9.8
million operating loss for the three months ended March 31, 1999. The Company
expects to continue to incur operating losses over the next several years as the
Company incurs incremental operating expenses from PageMart PCS, the Company's
new advanced messaging division.
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 January 1, 1992 to March 31, 1999, the
total number of units in service increased from 52,125 to 2,566,194. None of the
Company's growth is attributable to acquisitions. The Company intends to achieve
unit growth by promoting its customized paging and other wireless messaging
services through its sales offices, national retail distribution channels,
private brand strategic alliances with telecommunication companies such as GTE
Corporation, Southwestern Bell Mobile Systems, WorldCom Network Services, Inc.,
Ameritech Mobile Services, Inc., EXCEL Communications, Inc., ALLTEL
Communications, Inc., BellSouth Cellular Corp., Bluegrass Cellular, Inc. and
First Cellular of Southern Illinois, NPCS alliances with companies such as
Metrocall, Inc., AirTouch Paging and Arch Communications Group, Inc., as well as
international expansion. Given the fixed operating costs of its wireless network
and administration and selling and marketing expenses associated with its growth
strategy, the Company generated operating losses for the twelve months ended
December 31, 1997 from its PageMart Paging division. In the third quarter of
1997, the Company began generating operating profits in its PageMart Paging
division. The PageMart Paging division generated operating profits for each
quarter in 1998 and management expects this trend to continue in 1999. The
PageMart PCS division generated operating losses in 1998 and management expects
this trend to continue in 1999.
The Company has historically sold, rather than leased, substantially all
subscriber units used by its subscribers. As a result, the Company has had 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). However, 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 high cost of
advanced messaging subscriber units compared to one-way messaging units.
9
<PAGE> 10
The Company sells and leases its subscriber units through the following
distribution channels: (i) direct sales and third party local resellers through
its Markets Strategic Business Unit ("SBU"), (ii) private brand and narrowband
PCS strategic alliances through its Carrier Services SBU, (iii) national retail
stores through its National Retail SBU and (iv) direct sales through its
National Accounts SBU. At March 31, 1999, 34% of the Company's domestic units in
service originated from the Markets SBU, 37% originated from the Carrier
Services SBU, 25% originated from the National Retail SBU and 4% originated from
the National Accounts 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 sales of equipment, being recorded at the time a unit is sold.
The Company expects its costs 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 of 1998, the Company announced the formation of its
Telemetry SBU and the signing of a strategic alliance with Interactive
Technologies, Inc. for wireless connectivity to home security systems. During
the fourth quarter of 1998, the Company announced the signing of strategic
alliances with Pentech Energy Solutions, Inc. for wireless connectivity to
environmental control systems, Road Trac, LLC to provide telemetry solutions for
vehicle location technology and Monitel Products Corp. to provide remote
monitoring and diagnostic products for the photocopy and imaging industry. The
Company does not expect the Telemetry SBU to generate revenues until late in the
fourth quarter of 1999.
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, 1996, 1997, and 1998 were 2.4%, 2.5% and 3.2%, respectively. For
the three months ended March 31, 1998 and 1999 the Company's average
disconnection rates were 2.6% and 3.1%, respectively. Average monthly disconnect
rates are calculated by dividing the sum of (i) direct subscriber
disconnections, (ii) negative subscriber additions from the local reseller
channel, taken as a whole and (iii) the cumulative negative subscriber additions
from each of the Carrier Services SBU's strategic alliance partners, included in
the Carrier Services SBU's net additions by the total number of units in service
at the beginning of the period. Disconnect rates are stated as the monthly
average of each period presented.
Approximately 90% of the Company's average revenue per unit ("ARPU") is
attributable to fixed fees for airtime, coverage options and features. A portion
of the remainder is primarily dependent on usage. Management anticipates that
the Company's one-way 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, billing, collection
and other administrative costs associated with end-users, the Company incurs
substantially lower marketing and administrative costs with respect to such
subscribers. Management anticipates that the Company's consolidated ARPU will
increase as subscriber additions for its advanced messaging services increase,
since advanced messaging yields a significantly higher ARPU than one-way
messaging.
Earnings (loss) before interest, taxes, depreciation and amortization
("EBITDA") is financial measure commonly used in the paging industry and
excludes other expenses and extraordinary items. 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 commitments of the Company for capital
expenditures and payment of debt and should not be deemed to represent funds
available to the Company.
10
<PAGE> 11
RESULTS OF OPERATIONS
Certain of the following financial information is presented on a per
subscriber unit per month 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.
PAGEMART PAGING DIVISION
The Company's principal operations to date are its 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.
Units in Service
Units in service from domestic one-way messaging operations were, 2,652,443
and 2,527,595 as of March 31, 1998 and 1999, respectively. This represents a
decrease of 4.7% from March 31, 1998. In addition, for the three months ended
March 31, 1998 and 1999, PageMart Canada's units in service were 31,521, and
57,234, 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
18,913 and 34,340 units at March 31, 1998 and 1999, respectively.
The Company's one-way messaging operations experienced a net reduction of 90,932
subscribers in the first quarter of 1999. Management believes this decline is
primarily the result of slowing sales in the local reseller and carrier services
distribution channels and are predominately comprised of lower revenue, local
numeric service subscribers. The mix of the Company's customer base is shifting
toward higher value, higher revenue alpha numeric services. This dynamic has
resulted in an increase in ARPU, see discussion below, and enabled the Company
to maintain traditional messaging profit progression. With the intent of
reducing the rate of decline in local numeric units, the Company has initiated
certain promotional programs with certain carrier services alliance partners and
local resellers.
Historically, the Company has grown its subscriber base at a faster rate
than the overall paging industry's subscriber growth rate. However, management
does not anticipate that the Company's one-way messaging business will continue
to grow at rates that are significantly higher than the overall industry rate.
Management expects the PageMart Paging division to continue experiencing net
subscriber losses in 1999.
Revenues
Total revenues for the three months ended March 31, 1998 and 1999 were $77.2
million and $72.7 million, respectively. Recurring revenues for airtime, voice
mail and other services for the same periods were $60.9 million, and $64.5
million, respectively. Revenues from equipment sales and activation fees for the
three months ending March 31, 1998 and 1999 were $16.3 million and $8.2 million,
respectively. PageMart Paging's ARPU increased from $7.86 in the first quarter
of 1998 to $8.36 in the first quarter of 1999. The decrease in total revenues is
attributable to the decrease in equipment revenue. Equipment revenue decreased
primarily due to lower unit shipments to National Retailers, as their on-hand
inventories were sufficient to meet demand. Recurring revenue increased despite
a decrease in units in service because most of the decline in units was
associated with slowing sales in low-ARPU local numeric service subscribers
offset by increased sales in higher ARPU alphanumeric services and in value
added services such as roaming and nationwide coverage. Management expects ARPU
to continue to increase in the foreseeable future due to continued migration of
the distribution mix to higher value service.
Cost of Equipment Sold
The cost of equipment sold was $10.3 million for the three months ended
March 31, 1999 compared to $20.6 million for the comparable period ended March
31, 1998. The decrease was primarily attributable to lower unit shipments to
National Retailers, as their on-hand inventories were sufficient to meet
demand.. The Company expects pager costs to generally remain constant, with
modest reductions in cost to the Company as a result of volume purchase
discounts. The loss on equipment sold (equipment revenue
11
<PAGE> 12
less cost of equipment sold) is recognized when pagers are shipped to the
retailers, usually before the units are placed into service. The Company has
historically sold rather than leased the majority of units in the PageMart
Paging division.
Operating Expenses
Technical expenses were $12.4 million and $12.6 for the three months ended
March 31, 1998 and 1999, respectively. The increases were primarily due to site
rental, maintenance and telecommunications expenses associated with servicing
the Company's expanded network. Based on an average monthly cost per unit in
service, technical expenses were $1.59 and $1.63 in the first quarter of 1998
and 1999, respectively.
Selling expenses for the three months ended March 31, 1998 and 1999 were
$13.5 million and $12.6 million, respectively. The decrease in selling expense
is the result of the maturation of the PageMart Paging operations. Management
expects this number to remain relatively constant in the near future. During the
first quarter of 1999, the Company incurred $167,000 in selling expenses
associated with international operations.
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) for the three
months ended March 31, 1998 and 1999 were $19.7 and $19.9 million, respectively.
This increase was attributable to the Company's expansion of its information
systems and administrative capabilities to support the domestic one-way
subscriber base. On an average cost per month per unit in service basis, general
and administrative expenses were $2.55 and $2.58 for the first quarter of 1998
and 1999, respectively.
Depreciation and amortization was $10.9 million for the three months ended
March 31, 1999 compared to $8.5 million for the three months ended March 31,
1998. The increases 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 1998. As an average cost per month per unit
in service, depreciation and amortization was $1.09 and $1.42 for the three
months ended March 31, 1998 and 1999, respectively.
PAGEMART PCS DIVISION
The Company's PageMart PCS division is expected to fuel the growth of the
Company in the future. Nationwide coverage was first offered on December 15,
1998 with coverage to 70% of the U.S. population. In the first quarter of 1999,
buildout was continued to substantially overlay the Company's traditional
messaging network. At March 31, 1999, coverage had been extended to
approximately 90% of the U.S. population. The following discussion of results of
operations analyzes the results of the Company's PageMart PCS division (i.e.,
domestic advanced messaging operations), unless otherwise indicated. The periods
compared below are the three months ended December 31, 1998 and March 31, 1999
since minimal operating activities occurred in the three months ended March 31,
1998.
Units in Service
Units in service were 4,259 as of March 31, 1999 as compared to 775 units
for the period ending December 31, 1998. Almost all of the net additions in the
quarter were attributable to the Company's National Sales Offices SBU's direct
sales organization. PageMart's NPCS alliances with Metrocall, Inc., AirTouch
Paging and Arch Communications Group, Inc., are expected to add their first
units in the second and third quarters of this year. PageMart's Carrier Services
SBU is also expected to be a significant contributor in advanced messaging unit
additions through its strategic alliances with other telecommunication
providers. Management expects advanced messaging unit additions to continue to
increase on a sequential, quarter-to-quarter basis throughout 1999.
Revenues
Revenues for the three months ending March 31, 1999 were $653,000 as
compared to $76,000 for the three months ended December 31, 1998. Recurring
revenues for airtime, voicemail and other services for the same periods were
$207,000 and $32,000, respectively. Revenues from equipment sales and activation
fees for the three months ending March 31, 1999 and December 31, 1998 were
$446,000 and $44,000, respectively. ARPU for PageMart PCS was $27.37 for the
period ending March 31, 1999 compared
12
<PAGE> 13
to $19.85 for the period ending December 31, 1998. Management expects advanced
messaging ARPU to decline throughout the year as wholesale-priced distribution
channels and additional local service subscribers contribute to advanced
messaging unit growth.
Cost of Equipment Sold
The cost of equipment sold for the three months ending March 31, 1999 was
$574,000 compared to $181,000 for the three months ended December 31, 1998.
Management expects a substantial portion of new advanced messaging units will be
leased, rather than sold, resulting in a lower cost of equipment sold, and
higher capital expenditures.
Operating Expenses
Technical expenses were $6.1 million for the three months ended March 31,
1999 compared to $2.7 million for the three months ended December 31, 1998.
Technical expenses were lower in 1998 as a result of the capitalizing of costs
associated with the implementation of the nationwide advanced messaging
services. Management expects technical costs to increase over the remainder of
1999 in order to support an expected increase in the advanced messaging
subscriber base.
Selling expenses for the three months ended March 31, 1999 were $1.2 million
compared to $1.1 million for the three months ended December 31, 1998. Selling
expenses should continue to increase as the addition of advanced messaging units
in service increases.
General and administrative expenses (including costs associated with
customer service, field administration and corporate headquarters) for the three
months ended December 31, 1998 and March 31, 1999 were $0.7 and $1.2 million,
respectively. As the number of advanced messaging units in service grows, the
PageMart PCS division will require additional resources to be allocated to
support those customers. This is expected to cause an increase in general and
administrative expenses.
Depreciation and amortization was $7.7 million for the three months ended
March 31, 1999 compared to $4.0 million for the three months ended December 31,
1998. The increase is a result of the completion of the buildout of the
Company's advanced messaging network.
Interest Expense
Consolidated interest expense was $15.0 million for the three months ended
March 31, 1999 compared to $11.6 million for the comparable period ended March
31, 1998. The increase in 1999 was primarily the result of the increased
interest related to the 15% Senior Discount Notes due 2005 (the "15% Notes") and
the 11 1/4% Senior Subordinated Discount Notes due 2008 (the "11 1/4% Notes").
Interest expense related to the 12 1/4% Senior Discount Notes due 2003 (the
"12 1/4% Notes"), which were retired in January 1998 was $1.2 million for the
three months ended March 31, 1998. Interest expense related to the 15% Notes was
$5.9 million and $6.8 million for the three months ended March 31, 1998 and
1999, respectively. Interest expense related to the 11 1/4% Notes was $5.0
million and $7.8 million for the three months ended March 31, 1998 and 1999,
respectively. Total interest expense for the three months ended March 31, 1998,
was reduced by the capitalization of $1.3 million of interest related to the
construction of the Company's advanced messaging network. With the launch of the
Company's advanced messaging network in December 1998, the Company is no longer
capitalizing interest costs associated with the advanced messaging network
buildout.
Net Loss
The Company sustained consolidated losses before extraordinary items for the
three months ended March 31, 1998 and 1999 of $10.0 million and $25.2 million,
respectively. The increased loss was principally due to increased operating
expenses associated with the start-up operations of the Company's advanced
messaging division. A one-time extraordinary charge of $13.8 million was
recognized during the first quarter of 1998 related to the early retirement of
the 12 1/4% Notes. Including the extraordinary items, the Company's consolidated
net loss for the three months ended March 31, 1998 was $23.8 million.
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<PAGE> 14
Allocation of Equity and Debt to Divisions
The Company has allocated equity and debt between its PageMart Paging and
PageMart PCS divisions. The methodology the Company has followed to date results
in the attribution of the proceeds of each equity and debt offering based on the
specific capital and operating requirements of each division. Positive free cash
flow generated by a division is utilized to reduce its respective debt
allocation. As of March 31, 1999, $156.0 million and $72.5 million of equity and
$130.3 million and $362.6 million of debt has been allocated to PageMart Paging
and PageMart PCS, respectively. For the three months ended March 31, 1999,
interest expense of $5.4 million and $9.6 million was allocated to PageMart
Paging and PageMart PCS, respectively.
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<PAGE> 15
SELECTED QUARTERLY RESULTS OF OPERATIONS
The table below sets forth management's presentation of results of PageMart
Paging's and PageMart PCS' operations and other data on a quarterly basis for
the six most recent fiscal quarters. This presentation should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this report and the Company's quarterly
reports on Form 10-Q for the corresponding periods below, and should not be
considered in isolation or as an alternative to results of operations that are
presented in accordance with generally accepted accounting principles ("GAAP").
PAGEMART PAGING STATEMENTS OF OPERATIONS
(Dollars in thousands, except other data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1998 1998 1998 1998 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RECURRING REVENUES $ 56,828 $ 60,872 $ 63,537 $ 65,205 $ 65,154 $ 64,516
Equipment revenues 20,513 16,289 13,164 13,546 13,702 8,186
---------- ---------- ---------- ---------- ---------- -----------
Total revenues 77,341 77,161 76,701 78,751 78,856 72,702
Cost of equipment sold 23,735 20,590 15,915 16,416 15,976 10,269
---------- ---------- ---------- ---------- ---------- -----------
NET REVENUES 53,606 56,571 60,786 62,335 62,880 62,433
Technical expenses 12,397 12,359 13,464 13,364 12,993 12,571
General and administrative expenses 17,911 19,728 20,524 20,862 21,452 19,883
Selling expenses 13,969 13,476 13,716 12,907 12,519 12,576
Depreciation and amortization expense 7,987 8,482 9,046 9,808 10,269 10,925
---------- ---------- ---------- ---------- ---------- -----------
OPERATING INCOME (LOSS): "EBIT" $ 1,342 $ 2,526 $ 4,036 $ 5,394 $ 5,647 $ 6,478
========== ========== ========== ========== ========== ===========
EBITDA $ 9,329 $ 11,008 $ 13,082 $ 15,202 $ 15,916 $ 17,403
========== ========== ========== ========== ========== ===========
OTHER DATA:
EBIT MARGIN (1) 2.5% 4.5% 6.6% 8.7% 9.0% 10.4%
EBITDA MARGIN (1) 17.4% 19.5% 21.5% 24.4% 25.3% 27.9%
Ending units in service 2,513,337 2,652,443 2,752,580 2,767,742 2,618,527 2,527,595
ARPU (2) $ 7.80 $ 7.86 $ 7.84 $ 7.87 $ 8.06 $ 8.36
Capital employed per unit in service (3) $ 34 $ 31 $ 28 $ 27 $ 27 $ 25
RETURN ON CAPITAL EMPLOYED (4) 43.7% 53.6% 67.9% 81.4% 90.0% 110.2%
</TABLE>
PAGEMART PCS STATEMENTS OF OPERATIONS
(Dollars in thousands, except other data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1998 1998 1998 1998 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RECURRING REVENUES $ - $ - $ - $ 14 $ 32 $ 207
Equipment revenues - - - 6 44 446
---------- ---------- ---------- ---------- ---------- -----------
Total revenues - - - 20 76 653
Cost of equipment sold - - - 6 181 574
---------- ---------- ---------- ---------- ---------- -----------
NET REVENUES - - - 14 (105) 79
Technical expenses - 135 219 1,308 2,742 6,144
General and administrative expenses - 432 527 523 695 1,195
Selling expenses - 254 318 381 1,066 1,183
Depreciation and amortization expense 59 120 131 1,601 3,963 7,725
---------- ---------- ---------- ---------- ---------- -----------
OPERATING INCOME (LOSS): "EBIT" ($ 59) ($ 941) ($ 1,195) ($ 3,799) ($ 8,571) ($ 16,168)
========== ========== ========== ========== ========== ===========
EBITDA $ - ($ 821) ($ 1,064) ( $2,198) ($ 4,608) ($ 8,443)
========== ========== ========== ========== ========== ===========
OTHER DATA:
Ending units in service - - - 287 775 4,259
ARPU $ - $ - $ - $ 32.52 $ 19.85 $ 27.37
</TABLE>
- -----------------------
(1) Calculated by dividing quarterly EBIT or EBITDA by net revenues.
(2) 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.
(3) Calculated by dividing consolidated total assets (excluding cash,
narrowband PCS 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.
(4) Calculated by multiplying quarterly EBITDA by four and dividing EBITDA by
total capital employed (capital employed per unit in service multiplied by
units in service).
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<PAGE> 16
SUPPLEMENTARY INFORMATION
The following table sets forth supplementary financial information related
to the Company's various operations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------------------------------------------------
(UNAUDITED)
PAGEMART PAGEMART PAGEMART
PAGING PCS INTERNATIONAL CONSOLIDATED
---------------- --------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Revenues $ 77,161 $ - $ 33 $ 77,194
Operating income (loss) 2,526 (941) (164) 1,421
Interest expense 3,977 7,632 - 11,609
Interest income (32) (940) - (972)
Loss before extraordinary item (2,184) (7,633) (164) (9,981)
EBITDA 11,008 (821) (164) 10,023
Total assets 249,578 216,530 864 466,972
Capital expenditures 8,823 25,382 - 34,205
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
-------------------------------------------------------------------------------
(UNAUDITED)
PAGEMART PAGEMART PAGEMART
PAGING PCS INTERNATIONAL CONSOLIDATED
---------------- --------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Revenues $ 72,702 $ 653 $ 99 $ 73,454
Operating income (loss) 6,478 (16,168) (152) (9,842)
Interest expense 5,366 9,659 - 15,025
Interest income - (205) - (205)
Net loss 1,068 (25,622) (649) (25,203)
EBITDA 17,403 (8,443) (152) 8,808
Total assets 159,159 332,479 2,866 494,504
Capital expenditures 4,456 6,821 - 11,277
</TABLE>
SEASONALITY
Pager usage is slightly higher during the spring and summer months, which is
reflected in higher incremental usage fees earned by the Company. The Company's
retail sales are subject to seasonal fluctuations that affect retail sales
generally. Otherwise, the Company's results are generally not significantly
affected by seasonal factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have historically required substantial capital
investment for the development and installation of its wireless communications
network, the procurement of subscriber units and expansion into new and existing
markets. To date, these investments by the Company have been funded by the
proceeds from the issuance of common stock, preferred stock, the 12 1/4% Notes,
the 15% Notes and the 11 1/4% Notes, as well as borrowings under the Revolving
Credit Agreement, Credit Facility and Vendor Financing Arrangement (as defined
herein).
Capital expenditures (excluding capitalized interest) were $34.2 million and
$11.3 million for the three months ended March 31, 1998 and 1999, respectively.
Capital expenditures for 1998 include approximately $25.4 million related to the
development of advanced messaging services, $3.4 million for the Company's
one-way messaging network, $2.3 million for the computer hardware and software,
$1.2 million for corporate expansion and relocation and $1.2 million for leased
pagers. Capital expenditures for the three months ended March 31, 1999 include
approximately $6.3 million related to the development and expansion of its
advanced messaging network, $0.5 million for the Company's one-way messaging
network, $0.2 million for facilities, $1.5 million for computer hardware and
software and $2.8 million for leased pagers. During December 1995, the Company
committed to purchase $40 million in network infrastructure equipment from
Motorola from December 1, 1995 to October 31, 1999. Through March 31, 1999, the
Company had purchased $32.1 million of network infrastructure under this
purchase commitment.
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<PAGE> 17
The Company capitalized approximately $1.3 million of interest expense for
the narrowband PCS licenses and advanced messaging network costs for those
markets under construction during the three months ended March 31, 1998. With
the launch of the Company's advanced messaging network in December 1998, the
Company is no longer capitalizing interest costs associated with the advanced
messaging network buildout
The Company's net cash provided by operating activities for the three months
ended March 31, 1998 was $22.0 million, compared to net cash used in operating
activities of $2.9 million for the three months ended March 31, 1999. Net cash
used in investing activities was $34.2 million and $11.3 million for the three
months ended March 31, 1998 and 1999, respectively and were primarily for
capital expenditures. Net cash provided by financing activities was $91.6
million and $12.2 million for the three months ended March 31, 1998 and 1999,
respectively. Cash provided by financing activities in 1998 resulted primarily
from the receipt of $107.8 million of net proceeds from the issuance of the
11 1/4% Notes and the retirement of the 12 1/4% Notes. Cash provided by
financing activities in 1999 resulted primarily from the borrowing of $25.0
million under the Company's new Credit Facility.
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 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
has used 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 obligations of the Company,
mature in 2008 and were issued at a substantial discount from their principal
amount at maturity. The accretion of original issue discount on the 11 1/4%
Notes will cause an increase in indebtedness from March 31, 1999 to February 1,
2003 of $147.9 million. From and after August 1, 2003, interest on the 11 1/4%
Notes will be payable semiannually, in cash.
The 15% Notes, which are unsecured senior obligations of the Company, mature
in 2005 and were issued at a substantial discount from their principal amount at
maturity. The accretion of original issue discount on the 15% Notes will cause
an increase in indebtedness from March 31, 1999 to February 1, 2000 of $23.4
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% and the
London interbank offered rate ("LIBOR") as published in The Wall Street Journal
for three-month maturities or the sum of 4.25% and the U.S. prime rate of
interest as published in The Wall Street Journal. The weighted average interest
rate for borrowings outstanding during the three months ended March 31, 1999 was
12.54%.
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.
During the first quarter ended March 31, 1999, the Company repaid the total
amount outstanding of $10.0 million on the Vendor Financing arrangement with
proceeds from the Credit Facility.
In March 1999, the Company entered into a four year credit agreement with
Bankers Trust Company and Morgan Stanley Senior Funding, Inc. which provides for
a $100 million credit facility (the "Credit Facility"). The Credit Facility
replaces the Revolving Credit Agreement, which was simultaneously terminated.
The Credit Facility provides for $75 million of multi-draw term loans (the "Term
Loans") and $25 million of revolving loans (the "Revolving Loans"). As of March
23, 1999, $50 million was immediately
17
<PAGE> 18
available to the Company, $10 million of which was Revolving Loans. On March 24,
1999, the Company borrowed $25 million in Term Loans pursuant to the terms of
the Credit Facility. Approximately $12 million of the initial borrowing was used
to repay amounts outstanding under the Vendor Financing Arrangement and to fund
the fees and expenses of the Credit Facility.
The Credit Facility bears interest at the U.S. prime rate plus 2.75% or at
LIBOR plus 3.75%. The interest rate on the amounts borrowed on March 24, 1999
was 10.5%. Further availability of the Credit Facility beyond the initial $50
million is based on the Company's achievement of certain minimum targets for
advanced messaging subscriber units in service.
As of March 31, 1999, the Company had no amounts outstanding under the
Vendor Financing Arrangement, its indebtedness included $284.1 million under the
11 1/4% Notes, $183.8 million under the 15% Notes and $25 million under the
Credit Facility.
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
Credit Facility 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 Credit Facility requires the Company to maintain
certain operating and financial performance measures 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. On November 26, 1998, the Company received notification from
the third party Canadian investor, which represent the controlling shareholder
interest in PageMart Canada, of its intent to exchange its 1,000,000 shares of
Class A Common Stock in Canada Holding for 714,286 shares of PageMart Wireless
pursuant to rights contained in the Agreement Among Stockholders of PageMart
Canada, dated July 28, 1995. The Agreement Among Stockholders permits the
Company to find a replacement for the Canadian investors in order to comply with
Canadian regulations governing ownership of Canadian paging licenses. The
Company is currently examining alternative arrangements in Canada including the
replacement of the Canadian investors or the ultimate transfer of its investment
in PageMart Canada to another entity. The Company may consider selling its
interest in PageMart Canada in exchange for a network affiliation arrangement
similar to those utilized by the Company in other countries. Regardless of the
Company's ultimate disposition of its investment in PageMart Canada, the Company
expects to make further investments in PageMart Canada to upgrade the network
for advanced messaging.
During the first quarter of 1998, the Company began the implementation of
its advanced messaging services network. The Company has incurred significant
capital expenditures and expects to incur significant operating losses and
additional capital expenditures associated with the implementation and
deployment of its advanced messaging services. The Company incurred capital
expenditures of approximately $6.8 million in the first quarter of 1999 to
substantially complete the overlay of its one-way network. In addition, the
Company funded negative cash flow of $8.7 million to support operations and
marketing in the first quarter of 1999. On December 15, 1998, the Company
launched nationwide advanced messaging services covering approximately 70% of
the U.S. population. As of March 31, 1999, the Company's nationwide advanced
messaging services covered approximately 90% of the U.S. population. The Company
anticipates that the advanced messaging operations will require approximately
$25 million of additional capital expenditures in 1999 to complete the addition
of advanced messaging capabilities, expand its network geographically and make
other enhancements. In addition, the Company expects the advanced messaging
operations to require approximately $25 million to fund operations and marketing
in 1999 as the Company's advanced messaging customer base grows.
As of March 31, 1999, the Company had approximately $16.5 million in cash,
cash equivalents and short-term investments. On March 24, 1999, the Company
borrowed $25 million in Term Loans pursuant to the terms of the Credit Facility.
On March 29, 1999, the Company repaid all amounts outstanding under the Vendor
Financing Arrangement. At March 31, 1999 the borrowings available under the
Vendor Financing Arrangement were approximately $30 million. As of March 31,
1999, the borrowings available under the Credit Facility were $25 million.
Additional availability under the Credit Facility is based on certain minimum
targets on advanced messaging subscriber units in service. The Company
anticipates that its cash balance and amounts available under the Credit
Facility and Vendor Financing Arrangement, 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 1999.
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<PAGE> 19
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 READINESS 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 have been
completed and testing is proceeding. Testing of the Company's information
systems is scheduled to be substantially completed in April 1999, and all Year
2000 problems that were discovered have been or are scheduled to be remediated.
Certain network software is not Year 2000 ready, but the vendor of the software
has informed the Company that a Year 2000 ready version will be released late in
the second quarter of 1999. Testing of the Company's network systems is
scheduled to be substantially completed in the third quarter of 1999. After
remediation of any problems discovered during testing, the Company expects that
critical hardware and software systems that are within its ability to test will
be Year 2000 ready in the third quarter of 1999. The Company then plans to
conduct enterprise-wide, end-to-end testing of its systems during the third
quarter of 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 has been to:
o Create a list of suppliers and vendors;
19
<PAGE> 20
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.
Although the Company has received or expects to receive Year 2000 readiness
certification or information regarding most of these third party products and
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 effort will significantly
reduce the level of uncertainty about the Company's Year 2000 readiness.
Throughout the remainder of 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 ready. From January 1, 1998 through March 31, 1999, the
Company spent approximately $19.9 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's investment policy requires investments in high-quality
investment grade securities including obligations of the U.S. Government
guaranteed by the United States of America, money market deposits and corporate
commercial paper. The Company typically invests its surplus cash in these types
of securities for periods of relatively short duration. Although the Company is
exposed to market risk related to changes in short-term interest rates on these
investments, the Company manages these risks by closely monitoring market
interest rates and the duration of its investments. Due to the short-term
duration and the limited dollar amounts exposed to market interest rates,
management believes that fluctuations in short-term interest rates will not have
a material adverse effect on the Company's results of operations. The Company
does not enter into financial investments for speculation or trading purposes
and is not a party to any financial or commodity derivatives.
The Credit Facility bears interest at the U.S. prime rate plus 2.75% or at
LIBOR plus 3.75%. Therefore, the Credit Facility is subject to short-term
interest rate risk. At March 31, 1999, the balance outstanding under the Credit
Facility was $25.0 million. Consequently, a 100 basis point increase in the U.S.
prime rate or LIBOR would result in a $250,000 increase in interest expense over
a twelve month period.
20
<PAGE> 21
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. For a description of certain outstanding lawsuits, see
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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
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
21
<PAGE> 22
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
PAGEMART WIRELESS, INC.
BY: /s/JOHN D. BELETIC
---------------------------
JOHN D. BELETIC,
MAY 14, 1999 CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
BY: /s/ G. CLAY MYERS
---------------------------
G. CLAY MYERS,
MAY 14, 1999 VICE PRESIDENT, FINANCE,
CHIEF FINANCIAL OFFICER AND
TREASURER (PRINCIPAL FINANCIAL
AND CHIEF ACCOUNTING OFFICER)
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
11.1* Statement regarding computation of per share loss for the three months ended March 31,
1999.
11.2* Statement regarding computation of per share loss for the three months ended March 31,
1998.
12.1* Computation of ratio of earnings to fixed charges.
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 MARCH 31, 1999
----------------------------------------------
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 1,074,725 98.73% 1,061,080
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 110,943 100.00% 110,943
Warrants Exercised 49,450 100.00% 49,450
-------------- -------------
40,412,792 40,399,147
WEIGHTED AVERAGE SHARES OUTSTANDING 40,399,147
NET LOSS ($ 25,203,000)
NET LOSS PER SHARE ($ 0.62)
=============
</TABLE>
<PAGE> 1
EXHIBIT 11.2
PAGEMART WIRELESS, INC.
Computation of per Share Earnings (loss)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 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 828,571 94.10% 779,658
Preferred Stock Converted to Common Stock 15,310,943 100.00% 15,310,943
1994 Common Stock Offerings 11,242,857 100.00% 11,242,857
1995 Common Stock Offerings 4,323,874 100.00% 4,323,874
1996 Common Stock Offering 6,000,000 100.00% 6,000,000
Employee Stock Purchase Plan Shares Issued 75,891 100.00% 75,891
1997 Warrants Exercised 48,300 100.00% 48,300
--------------- --------------
40,130,436 40,081,523
WEIGHTED AVERAGE SHARES OUTSTANDING 40,081,523
LOSS BEFORE EXTRAORDINARY ITEMS $ (9,981,000)
EXTRAORDINARY ITEMS $ (13,808,000)
--------------
NET LOSS $ (23,789,000)
==============
LOSS BEFORE EXTRAORDINARY ITEMS $ (0.25)
EXTRAORDINARY ITEM $ (0.34)
--------------
NET LOSS PER SHARE $ (0.59)
==============
</TABLE>
<PAGE> 1
EXHIBIT 12.1
PAGEMART WIRELESS, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996 1997 1998(1) 1999
------------ ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Net loss.................... $ (45,813) $ (53,113) $ (48,598) $ (43,887) $ (59,316) $ (25,203)
Add: Amount of
previously capitalized
interest amortized....... - - - - 252 572
Add: Fixed charges.......... 12,933 30,720 35,041 38,499 43,798 15,024
------------ ------------ ------------ ------------ ----------- ----------
Adjusted earnings (32,880) (22,393) (13,557) (5,388) (15,266) (9,607)
Fixed charges:
Interest in
indebtedness............. 11,209 28,383 32,368 36,672 52,645 14,668
Amortization of debt
issuance costs........... 800 1,052 2,143 844 1,172 314
Interest portion
of rental and
lease expense............ 924 1,285 530 983 1,428 42
------------ ------------ ------------ ------------- ----------- ----------
Fixed charges 12,933 30,720 35,041 38,499 55,245 15,024
Deficiency of
earnings available to
cover fixed charges......... $ (45,813) $ (53,113) $ (48,598) $ (43,887) $ (70,511) $ (24,631)
============ =========== ============ ============= =========== ==========
Earnings to fixed charges
ratio....................... - - - - - -
</TABLE>
(1) The fixed charge adjustment to earnings excludes $11.4 million of
capitalized interest for the year ended December 31, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S MARCH 31, 1999 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 15,464
<SECURITIES> 1,000
<RECEIVABLES> 51,537
<ALLOWANCES> 7,296
<INVENTORY> 7,627
<CURRENT-ASSETS> 79,465
<PP&E> 401,782
<DEPRECIATION> 134,066
<TOTAL-ASSETS> 494,504
<CURRENT-LIABILITIES> 115,532
<BONDS> 492,905
0
0
<COMMON> 4
<OTHER-SE> (115,185)
<TOTAL-LIABILITY-AND-EQUITY> 494,504
<SALES> 8,731
<TOTAL-REVENUES> 73,454
<CGS> 10,927
<TOTAL-COSTS> 29,642
<OTHER-EXPENSES> 18,650
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,025
<INCOME-PRETAX> (25,203)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,203)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.62)
</TABLE>
