<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1996
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. 0-19494
PAGING NETWORK, INC.
(Exact name of the registrant as specified in charter)
DELAWARE 04-2740516
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4965 PRESTON PARK BOULEVARD, SUITE 600
PLANO, TEXAS 75093
(Address of principal executive offices, including zip code)
(972) 985-4100
(Registrant's telephone number, including area code)
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
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes
of Common Stock, as of the latest practicable date.
Title Shares Outstanding as of October 31, 1996
- ---------------------------- -----------------------------------------
Common Stock, $.01 par value 102,594,567
The Company's Common Stock is publicly traded under the symbol "PAGE" through
the National Association of Securities Dealers Automated Quotation National
Market System.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Paging Network, Inc. Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 (Unaudited) ............................ 3
Paging Network, Inc. Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1996 and 1995 (Unaudited) ..... 4
Paging Network, Inc. Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1996 and 1995 (Unaudited) ............... 5
Paging Network, Inc. Notes to Consolidated Financial Statements ..................... 6
</TABLE>
2
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PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .............................. $ 19,903 $ 198,182
Accounts receivable, less allowance
for doubtful accounts .............................. 50,166 41,335
Inventories ............................................ 57,900 14,084
Prepaid expenses ....................................... 7,863 5,495
------------ ------------
Total current assets ............................... 135,832 259,096
Property, equipment and leasehold improvements, at cost .... 1,069,229 841,022
Less accumulated depreciation .......................... (299,010) (225,413)
------------ ------------
Net property, equipment and leasehold improvements . 770,219 615,609
Other non-current assets:
PCS licenses ........................................... 197,272 197,272
Other licenses, net .................................... 105,972 48,625
Other intangible assets, net ........................... 57,964 67,438
Other non-current assets, net .......................... 71,373 40,298
------------ ------------
Total other non-current assets ..................... 432,581 353,633
------------ ------------
$ 1,338,632 $ 1,228,338
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ....................................... $ 58,930 $ 69,776
Accrued expenses ....................................... 60,022 69,091
Customer deposits ...................................... 21,762 20,255
------------ ------------
Total current liabilities .......................... 140,714 159,122
Long-term obligations ...................................... 1,328,947 1,150,000
Commitments and contingencies .............................. -- --
Stockholders' deficit:
Common Stock: $.01 par, 250,000,000 shares
authorized, 102,553,607 and 102,245,807 shares
issued and outstanding in 1996 and 1995,
respectively ....................................... 1,026 1,022
Paid-in capital ........................................ 124,084 121,701
Accumulated deficit .................................... (256,139) (203,507)
------------ ------------
Total stockholders' deficit ........................ (131,029) (80,784)
------------ ------------
$ 1,338,632 $ 1,228,338
============ ============
</TABLE>
See accompanying notes
3
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PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Services, rent and maintenance revenues ..... $ 175,725 $ 139,771 $ 501,536 $ 380,081
Product sales ............................... 35,967 29,336 95,708 84,092
--------- --------- --------- ---------
Total revenues ......................... 211,692 169,107 597,244 464,173
Cost of products sold ....................... (30,855) (23,607) (81,331) (67,953)
--------- --------- --------- ---------
180,837 145,500 515,913 396,220
Operating expenses:
Services, rent and maintenance ......... 38,003 29,016 107,564 77,743
Selling ................................ 21,111 17,263 60,192 49,201
General and administrative ............. 56,678 45,097 159,545 126,337
Depreciation and amortization .......... 56,185 39,267 153,040 106,687
--------- --------- --------- ---------
Total operating expenses ........... 171,977 130,643 480,341 359,968
--------- --------- --------- ---------
Operating income ............................ 8,860 14,857 35,572 36,252
Other income (expense):
Interest expense ....................... (31,266) (28,097) (91,154) (72,482)
Interest income ........................ 412 3,194 2,950 3,194
--------- --------- --------- ---------
Total other income (expense) ....... (30,854) (24,903) (88,204) (69,288)
--------- --------- --------- ---------
Net loss .................................... $ (21,994) $ (10,046) $ (52,632) $ (33,036)
========= ========= ========= =========
Net loss per share .......................... $ (0.21) $ (0.10) $ (0.51) $ (0.32)
========= ========= ========= =========
</TABLE>
See accompanying notes
4
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PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Operating activities:
Net loss ........................................................ $ (52,632) $ (33,036)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ......................... 153,040 106,687
Provision for doubtful accounts ....................... 9,496 8,010
Write off of debt issuance costs ...................... -- 6,641
Amortization of debt issuance costs ................... 3,800 3,034
Changes in operating assets and liabilities:
Accounts receivable ................................... (18,327) (17,306)
Inventories ........................................... (43,816) (180)
Prepaid expenses ...................................... (2,368) (91)
Accounts payable ...................................... (10,846) 22
Accrued expenses ...................................... (9,069) 16,203
Customer deposits ..................................... 1,507 1,695
---------- ----------
Net cash provided by operating activities ............................ 30,785 91,679
---------- ----------
Investing activities:
Capital expenditures ............................................ (290,923) (196,045)
Payments for licenses ........................................... (60,708) (157,600)
Business acquisitions and joint venture investments ............. (9,236) (103,292)
Restricted cash invested in money market instruments ............ (22,591) --
Other ........................................................... (3,396) (5,348)
---------- ----------
Net cash used in investing activities ................................ (386,854) (462,285)
---------- ----------
Financing activities:
Borrowings under credit agreements .............................. 178,947 564,850
Repayments of long-term obligations ............................. -- (318,850)
Proceeds from Senior Notes offerings ............................ -- 400,000
Debt issuance costs ............................................. (3,545) (23,663)
Proceeds from exercise of Common Stock options .................. 2,347 3,127
Other ........................................................... 41 (1,112)
---------- ----------
Net cash provided by financing activities ............................ 177,790 624,352
---------- ----------
Net increase (decrease) in cash and cash equivalents ................. (178,279) 253,746
Cash and cash equivalents at beginning of period ..................... 198,182 2,451
---------- ----------
Cash and cash equivalents at end of period ........................... $ 19,903 $ 256,197
========== ==========
</TABLE>
See accompanying notes
5
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PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
1. THE COMPANY
Paging Network, Inc. (the Company) is a provider of paging and wireless
messaging services. The Company provides paging services in all 50 states,
the District of Columbia, the U.S. Virgin Islands, Puerto Rico, and Canada,
including local paging service in virtually all of the largest 100 markets
(in population) in the United States. The consolidated financial
statements include the accounts of all of its wholly and majority owned
subsidiaries. All intercompany transactions have been eliminated.
2. UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments,
which are of a normal recurring nature, necessary for a fair presentation
of the financial position, results of operations, and cash flows for the
periods presented. These financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the 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 balance sheet as of December 31, 1995,
has been derived from the audited financial statements as of that date.
Results of operations for the periods presented herein are not necessarily
indicative of results of operations for the entire year. These financial
statements and related notes should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
Certain 1995 amounts have been reclassified to conform with the 1996
presentation.
3. STATEMENT OF CASH FLOWS INFORMATION
Cash and cash equivalents include highly liquid debt instruments with an
original maturity of three months or less and investments in money market
instruments. Cash payments made for interest during the nine months ended
September 30, 1996 and 1995 were approximately $98.9 million and $52.4
million, respectively. There were no significant federal or state income
taxes paid or refunded for the nine months ended September 30, 1996 and
1995.
4. LONG-TERM OBLIGATIONS
On October 16, 1996, the Company completed an offering of $500.0 million of
10% Senior Subordinated Notes due 2008 (10% Notes). The 10% Notes are
redeemable on or after October 15, 2001, at the option of the Company, in
whole or in part from time to time, at prices declining annually to 100% of
the principal amount on or after October 15, 2004, plus accrued interest.
The 10% Notes are general unsecured obligations of the Company that are
subordinated in right of payment to certain senior debt and contain various
covenants that, among other things, limit the ability of the Company and
its subsidiaries to incur indebtedness, pay dividends, engage in
transactions with affiliates, sell assets, and engage in mergers,
consolidations, and other acquisitions. The net proceeds of $488.8 million
from the sale of the 10% Notes were used to repay $417.2 million of
revolving loans and accrued interest as of October 16, 1996 under the
Company's revolving credit agreement. The Company intends to use the
remaining net proceeds from the sale of the 10% Notes for
6
<PAGE> 7
working capital, capital expenditures, and other general corporate
purposes, which may include expansion of its existing business and
acquisitions of new paging frequencies.
On June 5, 1996, the Company amended its credit agreement with its group of
lenders (the Credit Agreement). The Credit Agreement provides for a $1.0
billion revolving loan. Under the Credit Agreement, the Company is able to
borrow, provided it meets certain financial covenants, the lesser of $1.0
billion or an amount based upon a calculation which is reduced by total
outstanding indebtedness for borrowed monies (as defined) and outstanding
letters of credit. The amount available for borrowing is equal to a
specified multiple of annualized earnings before interest, income taxes,
depreciation and amortization based on the most recently ended quarter. As
of September 30, 1996, the Company had $403.3 million of borrowings
outstanding under its Credit Agreement. As of October 31, 1996, no amounts
were outstanding under the Company's Credit Agreement. The Company's
Credit Agreement expires on December 31, 2004. The maximum borrowings
which may be outstanding under the revolving loan begin reducing on June
30, 2001.
On June 5, 1996, the Company's wholly-owned Canadian subsidiary, Paging
Network of Canada Inc. (PageNet Canada), along with its majority-owned
Canadian subsidiary, Madison Telecommunications Holdings, Inc. (MadTel
Holdings), established new credit facilities in Canada. These credit
facilities are denominated in Canadian dollars; however, the amounts
reported herein are the U.S. dollar equivalents as of September 30, 1996.
The credit agreements provide for total borrowings of $40.4 million and
$25.7 million, respectively, of which PageNet Canada and MadTel Holdings
are able to initially borrow 20.2 million and $16.5 million, respectively,
under fully collateralized borrowings. The remaining amounts are available
for borrowings provided they are either collateralized or certain financial
covenants are met. As of September 30, 1996, PageNet Canada had $14.7
million and MadTel Holdings had $11.0 million of borrowings outstanding
under the credit facilities. The Company, along with Madison Venture
Corporation, the minority interest shareholder in MadTel Holdings, is a
guarantor of both credit agreements to the extent of the amounts deposited
with the lenders to collateralize outstanding borrowings under the credit
facilities. As of September 30, 1996, $22.6 million was deposited by the
Company with the lenders to collateralize outstanding borrowings and was
included in other non-current assets. The maximum borrowings which may be
outstanding under the credit facilities begin reducing on June 30, 1999,
and both credit agreements expire on June 30, 2003.
5. INCOME TAX PROVISION
No provision or benefit for income taxes has been made for the three and
nine months ended September 30, 1996 and 1995, as the deferred benefit
from operating losses was offset by the increase in the valuation
allowance.
6. COMMON STOCK AND NET LOSS PER SHARE
Net loss per share amounts are computed based on the weighted average
number of common shares outstanding. The number of shares used to compute
per share amounts for the three months ended September 30, 1996 and 1995
were 102.5 million and 102.1 million, respectively. The number of shares
used to compute per share amounts for the nine months ended September 30,
1996 and 1995 were 102.5 million and 101.8 million, respectively.
The Company has 275.0 million authorized shares, of which 250.0 million are
Common Stock and 25.0 million are preferred stock. As of September 30,
1996, there were no preferred shares issued or outstanding.
7
<PAGE> 8
On May 23, 1996, the Company's stockholders approved an employee stock
purchase plan of up to 2.0 million shares of the Company's Common Stock,
which the Company intends to implement on January 1, 1997.
On September 11, 1996, and subject to stockholder approval, the Board of
Directors of the Company approved an increase in the number of shares of
Common Stock available for grant under its 1991 Stock Option Plan by 7.5
million shares.
7. ACQUISITIONS
During 1995, the Company acquired certain paging assets of Comtech, Inc. -
Paging Division; SNET Paging, Inc. and its wholly owned subsidiary, TNI
Associates, Inc.; two subsidiaries of PageAmerica Group, Inc.; Page
Florida; International Paging Corp.; and Celpage, Inc. - Atlanta Branch,
including various frequencies and approximately 343,000 pagers in service.
The cost of these purchases aggregated approximately $123.6 million,
subject to increase or decrease based on post-closing events of certain
acquisitions.
The following represents the unaudited pro forma results of operations as
if the above acquisitions had occurred as of January 1, 1995, after giving
effect to certain adjustments, including amortization of intangibles
resulting from the allocation of the purchase price and interest expense on
acquisition debt.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1995
-------------------
(In thousands, except
per share information)
<S> <C>
Total revenues $ 483,310
Net revenues 411,430
Operating income 30,814
Net loss (42,909)
Net loss per share (0.42)
</TABLE>
The pro forma results given above are not necessarily indicative of what
actually would have occurred if the acquisitions had been in effect during
the periods presented, and are not intended to be a projection of future
results or trends.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements contained in this filing which are not historical facts, such as
future capital expenditures, future borrowings, international investments
expectations, and introduction of new products are forward-looking statements
that are subject to risks and uncertainties that could cause actual results to
differ materially from those set forth in the forward-looking statements.
Among the factors that could cause actual future results to differ materially
are competitive pressures, growth rates, new market opportunities, supplier
constraints, market conditions, timing and techniques used in marketing by
third-party distributors, and acceptance of the Company's services in the
marketplace.
RESULTS OF OPERATIONS
Throughout this section the Company makes reference to earnings before
interest, income taxes, depreciation and amortization (EBITDA). EBITDA is a
key performance measure used in the paging industry and is one of the financial
measures by which the Company's covenants are calculated under the agreements
governing its debt obligations. EBITDA is not a measure defined in generally
accepted accounting principles and should not be considered in isolation or as
a substitute for measures of performance in accordance with generally accepted
accounting principles.
The following table presents certain items in the Consolidated Statements of
Operations as a percentage of revenues from services, rent and maintenance plus
product sales less the cost of products sold (Net Revenues) for the three and
nine months ended September 30, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Revenues ........................ 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Services, rent and maintenance.. 21.0 19.9 20.8 19.6
Selling ........................ 11.7 11.9 11.7 12.4
General and administrative ..... 31.3 31.0 30.9 31.9
Depreciation and amortization... 31.1 27.0 29.7 26.9
------ ------ ------ ------
Operating income .................... 4.9 10.2 6.9 9.2
Net loss ............................ (12.2) (6.9) (10.2) (8.3)
EBITDA .............................. 36.0 37.2 36.6 36.1
EBITDA for domestic operations ...... 37.5 37.2 37.5 36.1
</TABLE>
Net Revenues for the three- and nine-month periods ended September 30, 1996
increased 24.3% and 30.2%, respectively, over the comparable periods ended
September 30, 1995. Revenues from services, rent and maintenance, which the
Company considers its primary business, increased 25.7 % to $175.7 million for
the three months ended September 30, 1996 compared to $139.8 million for the
three months ended September 30, 1995. Services, rent and maintenance revenues
for the nine months ended September 30, 1996 increased 32.0 % to $501.5
million, compared to $380.1 million for the nine months ended September 30,
1995. These increases were primarily due to continued growth in the number of
pagers in service with subscribers of the Company. The number of pagers in
service with subscribers at September 30, 1996 was 8,444,470 compared to
6,158,802 pagers in service with subscribers at September 30, 1995, an
increase of 37.1%. Contributing to the growth in the number of pagers in
service with subscribers is the Company's expanding local and national
third-party reseller customer base, which
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includes the impact of the Company's National Accounts Division. The Company's
National Accounts Division represents a new distribution strategy which gives
the Company an opportunity to reach into broader markets, including consumers,
by partnering with large companies that are regional or national in scope and
have large client bases. In addition, the Company's National Accounts Division
includes customer relationships with national resellers, where it sells pagers
to major third parties and provides paging service at reduced rates. The
resellers, in turn, lease or resell the pagers to their own subscribers and
resell the Company's paging service under marketing agreements. As the Company
increases reliance on distribution of pagers and paging services through
resellers and marketing affiliates, the Company may experience increased
variability in quarterly results relating to the net addition of pagers.
Product sales, less cost of products sold, remained relatively flat for the
three month periods ended September 30, 1996 and 1995 ($5.1 million and $5.7
million, respectively) and for the nine month periods ended September 30, 1996
and 1995 ($14.4 million and $16.1 million, respectively).
Services, rent and maintenance expenses increased 31.0 % to $38.0 million (21.0
% of Net Revenues) for the three months ended September 30, 1996, compared to
$29.0 million (19.9% of Net Revenues) for the three months ended September 30,
1995. Services, rent and maintenance expenses increased 38.4% to $107.6
million (20.8 % of Net Revenues) for the nine months ended September 30, 1996,
compared to $77.7 million (19.6% of Net Revenues) for the nine months ended
September 30, 1995. These increases in services, rent and maintenance expenses
and the increases as a percentage of Net Revenues were a result of growth in
the number of pagers in service with subscribers of the Company, expenses
associated with an increase in transmitter sites in order to ensure reliable
transmission of enhanced messaging services, and expansion of the nationwide
transmission networks.
For the three months ended September 30, 1996, selling expenses increased 22.3%
to $21.1 million (11.7% of Net Revenues) from $17.3 million (11.9% of Net
Revenues) for the three months ended September 30, 1995. Selling expenses
increased 22.3% to $60.2 million (11.7 % of Net Revenues) for the nine months
ended September 30, 1996, compared to $49.2 million (12.4% of Net Revenues)
for the nine months ended September 30, 1995. These increases resulted from
the addition of sales personnel to support continued growth in both Net
Revenues and the number of pagers in service with subscribers. The decline in
selling expenses as a percentage of Net Revenues for the three and nine months
ended September 30, 1996 was primarily attributable to the expansion of local
and national third-party resellers, for which the Company incurred less selling
costs on units placed in service through this channel than through the direct
channel. In addition, since sales commissions are paid at the time a new unit
is placed in service and not in subsequent months when the unit continues to
generate revenue, the Company's continued growth in the number of pagers in
service results in the decline in selling expenses as a percentage of the Net
Revenues.
General and administrative expenses increased 25.7% to $56.7 million (31.3 % of
Net Revenues) for the third quarter of 1996, compared to $45.1 million (31.0%
of Net Revenues) for the corresponding period of 1995. General and
administrative expenses increased 26.3% to $159.5 million (30.9% of Net
Revenues) for the nine months ended September 30, 1996, compared to $126.3
million (31.9% of Net Revenues) for the nine months ended September 30, 1995.
The increases in general and administrative expenses occurred to support the
growth in the number of pagers in service with subscribers of the Company. The
increase in general and administrative expenses as a percentage of Net Revenues
for the three months ended September 30, 1996 is primarily attributable to
costs incurred by the Company's international operations, which opened in April
1996. These start-ups commenced operations with minimal initial revenues
available to offset their operating expenses, including staffing costs. The
decline in general and administrative expenses as a percentage of Net Revenues
for the nine months ended September 30, 1996 was primarily attributable to the
improved revenue performance of operations opened in 1992 through 1994.
Historically, domestic start-up operations have typically required three to
four years to achieve results similar to the Company's more mature operations.
Depreciation and amortization expenses increased for the third quarter of 1996
as compared to the corresponding period in the prior year by 43.1% from $39.3
million (27.0% of Net Revenues) to $56.2 million (31.1% of Net Revenues).
Depreciation and amortization expenses increased 43.4% to $153.0 million
(29.7% of Net Revenues) for the first nine months of 1996 compared to $106.7
million (26.9% of Net Revenues) for the first nine months of
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1995. The increases in depreciation and amortization expenses were primarily
attributable to the increase in the number of pagers owned by the Company and
leased to subscribers; the increase in computer and paging equipment, and the
acquisitions discussed in Note 7 to the consolidated financial statements.
Operating income decreased from $14.9 million (10.2% of Net Revenues) for the
three months ended September 30, 1995, to $8.9 million (4.9% of Net Revenues)
for the three months ended September 30, 1996. Operating income decreased from
$36.3 million (9.2% of Net Revenues) for the nine months ended September 30,
1995, to $35.6 million (6.9% of Net Revenues) for the nine months ended
September 30, 1996. These decreases in operating income as a percentage of Net
Revenues were primarily the result of operating losses incurred by the
Company's international operations, which opened in April 1996, and increases
in depreciation and amortization.
As a result of the above factors, EBITDA increased 20.2% to $65.0 million
(36.0% of Net Revenues) for the third quarter of 1996 compared to $54.1
million (37.2% of Net Revenues) for the corresponding period in 1995. For the
nine months ended September 30, 1996, EBITDA increased 32.0% to $188.6 million
(36.6% of Net Revenues) compared to $142.9 million (36.1% of Net Revenues) for
the corresponding period in 1995. EBITDA and the percent of Net Revenues were
negatively impacted by the start-up operations in the Company's international
operations. Domestically, EBITDA increased 24.9% to $67.6 million (37.5% of
Net Revenues) for the third quarter of 1996. For the nine months ended
September 30, 1996, domestic EBITDA increased 35.4% to $193.5 million (37.5%
of Net Revenues).
Interest expense increased $3.2 million and $18.7 million, respectively, from
the three and nine month periods ended September 30, 1995, to the corresponding
periods in 1996, due to a higher average level of indebtedness outstanding in
1996. The average level of indebtedness outstanding during the three and nine
months ended September 30, 1996 was approximately $1.3 billion and
approximately $1.2 billion, respectively, compared to approximately $1.1
billion and approximately $837.9 million, respectively, outstanding during the
three and nine months ended September 30, 1995.
Interest income for the three and nine month periods ended September 30, 1996
was $0.4 million and $3.0 million, respectively, compared to $3.2 million for
the three and nine month periods ended September 30, 1995. The interest income
reported for the three and nine months ended September 30, 1995 and 1996 was a
result of investing the net proceeds of the 10.125% Senior Subordinated Notes
(10.125% Notes) issued in July 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations and expansion into new markets and product lines
require substantial capital investment for the development and installation of
wireless communications systems and for the procurement of pagers and paging
equipment. Capital expenditures were $290.9 million for the nine months ended
September 30, 1996 and $196.0 million for the same period in 1995 (excluding
payments for licenses and acquisitions). For the first nine months of 1996,
capital expenditures were funded from the remaining net proceeds of the 10.125%
Notes, net cash provided by operating activities ($30.8 million), and
borrowings. For the first nine months of 1995, capital expenditures were
funded by net cash provided by operating activities ($91.7 million) and
borrowings.
Inventories increased from $14.1 million at December 31, 1995 to $57.9 million
at September 30, 1996, largely due to purchases to support the Company's
expanding number of third-party reseller and marketing affiliate distribution
channels, which has grown substantially in 1996. Many of these affiliates sell
privately labeled units across multiple product lines, resulting in the Company
carrying larger inventories. Inventory purchases have also increased due to
continued strong growth in the Company's alphanumeric product line.
Alphanumeric pagers have a significantly higher unit cost compared to digital
or numeric pagers. The Company's National Accounts Division has recently
opened a state-of-the-art distribution facility in the Dallas area. The fully
automated center will allow the Company to more effectively manage inventory
levels and distribution for its national accounts, resellers, and marketing
affiliates.
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During April 1996, the Company concluded its participation in an auction
conducted by the Federal Communications Commission (FCC) of 900 MHz specialized
mobile radio major trading area based licenses. At the auction, the Company
ultimately won rights to two to four blocks of two-way spectrum across the
United States for a total purchase price of $45.6 million. The Company is in
the process of purchasing exclusive rights to certain of these frequencies
from incumbent operators. Expenditures for such purchases are estimated to
total $200 million in 1996 and 1997.
As a result of an FCC auction in 1994, the Company was awarded three nationwide
narrowband personal communications services (PCS) frequencies for a total
purchase price of $197.0 million. The Company intends to employ these PCS
frequencies to build a two-way network over which it can deploy new products
such as its new voice messaging service, VoiceNow(R). The VoiceNow service
will allow a pocket-sized receiving device to store digitized voice messages
for replay at the subscriber's convenience. Once technological and marketing
tests are complete, the Company intends to begin commercial deployment
throughout the country. The Company expects to have several hundred units
being utilized by selected Commercial Customers by the end of 1996 and a major
launch of the product in the first quarter of 1997. The Company currently
estimates that the capital expenditures to build the two-way network, exclusive
of the costs of acquiring other frequencies and of VoiceNow subscriber devices,
may total approximately $200 million over 1996 and 1997.
Through its subsidiary, Paging Network of Canada Inc., the Company began
offering paging services in Canada in April 1996. In September 1996, the
Company announced that it had purchased a 25% interest in a Spanish paging
company. The Company is considering other opportunities for international
expansion, with the goal of creating a portfolio of international operations.
Paging market penetration in many international markets is relatively low, and
many such markets have only a small number of existing paging providers. The
Company believes that in these markets its strategy of low cost, high quality
service is likely to be successful. The Company may invest up to $100 million
in this endeavor through 1998, including approximately $32.4 million as of
September 30, 1996. Additional investments will depend on such factors as
growth rates, new market opportunities, and execution of financing plans that
maximize value for the Company's stockholders.
On October 16, 1996, the Company completed an offering of $500.0 million of 10%
Notes. The 10% Notes contain various covenants that, among other things, limit
the ability of the Company and its subsidiaries to incur indebtedness, pay
dividends, engage in transactions with affiliates, sell assets, and engage in
mergers, consolidations, and other acquisitions. The net proceeds of $488.8
million from the sale of the 10% Notes were used to repay $417.2 million of
revolving loans and accrued interest as of October 16, 1996 under the Company's
revolving credit agreement. The Company intends to use the remaining net
proceeds from the sale of the 10% Notes for working capital, capital
expenditures, and other general corporate purposes, which may include expansion
of its existing business and acquisitions of new paging frequencies.
It is anticipated that in 1996, net cash provided by operating activities will
be insufficient to completely fund capital expenditures (including the costs to
build the two-way network, but excluding frequency purchases and international
opportunities), which are expected to approximate $400 million. These
expenditures will be funded with existing cash and cash equivalents, and
additional borrowings, which the Company estimates at approximately $50 million
in the fourth quarter of 1996. These capital expenditures primarily relate to
the development of a new nationwide digital transmission network for the
Company's new VoiceNow service and the Company's ongoing paging operations,
including greater market share of existing markets and expansion of the
Company's operations into new markets, including international opportunities.
As of October 31, 1996, the Company had approximately $332.3 million available
for additional borrowings under its Credit Agreement and approximately $41
million of cash and cash equivalents. It is anticipated that 1997 net cash
from operating activities will be insufficient to completely fund 1997 capital
expenditures (including the costs to build the two-way network, but excluding
frequency purchases and international opportunities), which are expected to
exceed $500 million.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in various lawsuits arising in the normal course of
business. In management's opinion, the ultimate outcome of these lawsuits
will not have a material adverse effect on the Company's financial position
or results of operations.
ITEM 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
On October 16, 1996, the Company filed a Current Report on Form
8-K updating certain financial and business information related to
the Company.
13
<PAGE> 14
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.
Paging Network, Inc.
Date: November 7, 1996 /s/ Glenn W. Marschel
----------------------------------------
Glenn W. Marschel
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 1996 /s/ Kenneth W. Sanders
----------------------------------------
Kenneth W. Sanders
Senior Vice President - Finance,
Treasurer, Chief Financial Officer, and
Assistant Secretary (Principal
Financial Officer and Principal
Accounting Officer)
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
4.1 Articles Sixth, Seventh, Eighth, Twelfth, and Thirteenth of
the Restated Certificate of Incorporation of the Registrant,
as amended (1)
4.2 Articles II, III, and VII and Section 1 of Article VIII of the
Registrant's By-laws, as amended (1)
4.3 Form of Indenture (2)
4.4 Article V, Sections I, VI, and VII of the Registrant's By-
laws, as amended (4)
10.1 1982 Incentive Stock Option Plan, as amended and restated (1)
10.2 Form of Stock Option Agreement executed by recipients of
options granted under the 1982 Incentive Stock Option Plan (1)
10.3 Form of Management Agreement executed by recipients of options
granted under the 1982 Incentive Stock Option Plan (1)
10.4 Form of Vesting Agreement executed by recipients of options
granted under the 1982 Incentive Stock Option Plan (1)
10.5 1991 Stock Option Plan (1)
10.6 Form of Stock Option Agreement executed by recipients of
options granted under the 1991 Stock Option Plan (1)
10.7 Form of Indemnification Agreement executed by recipients of
options granted under the 1991 Stock Option Plan (1)
10.8 Form of First Amendment to Vesting Agreement executed by
recipients of options granted under the 1982 Incentive Stock
Option Plan (1)
10.9 Form of First Amendment to Management Agreement executed by
recipients of options granted under the 1982 Incentive Stock
Option Plan (1)
10.10 1992 Stock Option Plan for Directors (3)
10.11 Amended and Restated Credit Agreement dated as of May 2, 1995
among the Registrant, NationsBank of Texas, N.A., Toronto
Dominion (Texas), Inc., The First National Bank of Boston, and
certain other lenders (4)
10.12 Amendment No. 1 dated as of December 12, 1995 to the Amended
and Restated Credit Agreement dated as of May 2, 1995 among
the Registrant, NationsBank of Texas, N.A., Toronto Dominion
(Texas), Inc., The First National Bank of Boston, and certain
other lenders (5)
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.13 Employment Agreement dated as of December 1, 1995 among the
Registrant and Glenn W. Marschel (5)
10.14 Second Amended and Restated Credit Agreement dated as of June
5, 1996, among the Registrant, NationsBank of Texas, N.A.,
Toronto Dominion (Texas), Inc., The First National Bank of
Boston, Chase Securities Inc, and certain other lenders (6)
10.15 Loan Agreement dated as of June 5, 1996 among Paging Network
of Canada Inc., The Toronto-Dominion Bank, and such other
financial institutions as become banks (6)
10.16 Loan Agreement dated as of June 5, 1996 among Madison
Telecommunications Holdings, Inc., The Toronto-Dominion Bank,
and such other financial institutions as become banks (6)
12 Ratio of Earnings to Fixed Charges for the three and nine
months ended September 30, 1996 and 1995 (7)
27 Financial Data Schedule
</TABLE>
(1) Previously filed as an exhibit to Registration Statement No. 33-42253 on
Form S-1 and incorporated herein by reference.
(2) Previously filed as an exhibit to Registration Statement No. 33-46803 on
Form S-1 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
(4) Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1995.
(5) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995.
(6) Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1996.
(7) Filed herewith.
<PAGE> 1
EXHIBIT 12
PAGING NETWORK, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Earnings:
Net loss ............................... $ (21,994) $ (10,046) $ (52,632) $ (33,036)
Fixed charges .......................... 36,321 32,309 105,815 83,796
--------- --------- --------- ---------
Earnings ........................... $ 14,327 $ 22,263 $ 53,183 $ 50,760
========= ========= ========= =========
Fixed charges:
Interest expense ....................... $ 30,033 $ 27,041 $ 87,354 $ 69,448
Amortization of deferred financing costs 1,233 1,056 3,800 3,034
Interest portion of rental expense ..... 5,055 4,212 14,661 11,314
--------- --------- --------- ---------
Fixed charges ...................... $ 36,321 $ 32,309 $ 105,815 $ 83,796
========= ========= ========= =========
Ratio of earnings to fixed charges ........... -- -- -- --
========= ========= ========= =========
Deficiency of earnings available to cover
fixed charges .......................... $ (21,994) $ (10,046) $ (52,632) $ (33,036)
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 19,903
<SECURITIES> 0
<RECEIVABLES> 55,049
<ALLOWANCES> 4,883
<INVENTORY> 57,900
<CURRENT-ASSETS> 135,832
<PP&E> 1,069,229
<DEPRECIATION> 299,010
<TOTAL-ASSETS> 1,338,632
<CURRENT-LIABILITIES> 140,714
<BONDS> 1,328,947
0
0
<COMMON> 1,026
<OTHER-SE> (132,055)
<TOTAL-LIABILITY-AND-EQUITY> 1,338,632
<SALES> 5,112
<TOTAL-REVENUES> 211,692
<CGS> 30,855
<TOTAL-COSTS> 171,977
<OTHER-EXPENSES> 30,854
<LOSS-PROVISION> 3,679
<INTEREST-EXPENSE> 31,266
<INCOME-PRETAX> (21,994)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,994)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
