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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
---------------------
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 16, 1996
PAGING NETWORK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-19494 04-2740516
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
4965 PRESTON PARK BOULEVARD
PLANO, TX 75093 75093
(Address of principal executive officers) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 985-4100
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INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS
<TABLE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data for the five years ended December 31,
1995 are derived from the audited Consolidated Financial Statements of the
Company. The financial data for the six-month periods ended June 30, 1995 and
1996, are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring adjustments,
which management considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the six months ended June 30, 1996, are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1996. The
data presented below should be read in conjunction with the Company's
Consolidated Financial Statements, related notes and other financial information
included herein. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Throughout this section the Company makes
reference to EBITDA, which is defined as earnings before interest, income taxes,
depreciation and amortization. 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.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Services, rent and maintenance revenues.... $145,793 $206,198 $294,979 $389,919 $532,079 $240,310 $325,811
Product sales.............................. 20,575 51,600 78,915 99,765 113,943 54,756 59,741
-------- -------- -------- -------- -------- -------- --------
Total revenues............................. 166,368 257,798 373,894 489,684 646,022 295,066 385,552
Cost of product sold....................... (13,126) (35,909) (62,495) (78,102) (93,414) (44,346) (50,476)
-------- -------- -------- -------- -------- -------- --------
153,242 221,889 311,399 411,582 552,608 250,720 335,076
Services, rent and maintenance expenses.... 25,093 37,437 57,343 74,453 109,484 48,727 69,561
Selling expenses........................... 21,491 34,135 44,836 60,555 67,561 31,938 39,081
General and administrative expenses........ 49,397 74,754 108,993 136,539 174,432 81,240 102,867
Depreciation and amortization.............. 41,154 58,683 87,430 107,362 148,997 67,420 96,855
-------- -------- -------- -------- -------- -------- --------
Total operating expenses................... 137,135 205,009 298,602 378,909 500,474 229,325 308,364
-------- -------- -------- -------- -------- -------- --------
Operating income........................... 16,107 16,880 12,797 32,673 52,134 21,395 26,712
Interest expense........................... 25,365 23,638 32,808 53,717 102,846 44,385 59,888
Interest income............................ -- -- -- 3,079 6,511 -- 2,538
-------- -------- -------- -------- -------- -------- --------
Loss before extraordinary item............. (9,258) (6,758) (20,011) (17,965) (44,201) (22,990) (30,638)
Extraordinary item(1)...................... -- (14,884) -- -- -- -- --
-------- -------- -------- -------- -------- -------- ---------
Net loss................................... $ (9,258) $(21,642) $(20,011) $(17,965) $(44,201) $(22,990) $(30,638)
======== ======== ======== ======== ======== ======== =========
Net loss per common share(2):
Before extraordinary item................ $ (0.11) $ (0.06) $ (0.20) $ (0.18) $ (0.43) $ (0.23) $ (0.30)
Extraordinary item....................... -- (0.15) -- -- -- -- --
CONSOLIDATED BALANCE SHEET DATA:
<CAPTION>
DECEMBER 31, JUNE 30, 1996
---------------------------------------------------------- ---------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED(3)
-------- -------- -------- -------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets...................... $190,645 $304,747 $371,556 $706,008 $1,228,338 $1,218,022 $1,443,772
Long-term obligations, including
current maturities.............. 146,029 267,000 342,500 504,000 1,150,000 1,195,516 1,421,266
Total stockholders' equity
(deficit)....................... 16,578 (4,818) (23,366) (39,908) (80,784) (109,233) (109,233)
</TABLE>
2
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<TABLE>
OTHER DATA:
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Pagers in service (at end of period).......... 1,281,643 2,077,954 3,068,569 4,408,842 6,737,907 5,415,269 7,881,764
Pagers in service per employee (at end of
period)..................................... 765 778 974 1,103 1,441 1,301 1,500
EBITDA (in thousands)......................... $ 57,261 $ 75,563 $ 100,227 $ 140,035 $ 201,131 $ 88,815 $ 123,567
Capital expenditures (in thousands)........... $ 71,875 $ 145,970 $ 145,625 $ 213,308 $ 312,289 $ 120,400 $ 191,340
EBITDA as a percentage of Net Revenues(4)..... 37.4% 34.1% 32.2% 34.0% 36.4% 35.4% 36.9%
Ratio of earnings to fixed
charges(5).................................. -- -- -- -- -- -- --
Ratio of EBITDA to interest expense........... 2.26x 3.20x 3.05x 2.61x 1.96x 2.00x 2.06x
Ratio of long-term obligations, including
current maturities, to EBITDA(6)............ 2.55x 3.53x 3.42x 3.60x 5.72x 4.88x 5.07x
<FN>
- ---------------
(1) Represents an extraordinary charge to terminate certain interest rate swaps
and to write-off loan origination fees associated with the Company's prior
credit agreement for its senior bank debt.
(2) Per share amounts have been restated to reflect stock splits in 1991, 1993
and 1995.
(3) As adjusted to give effect to the issuance of the Notes and the application
of the net proceeds thereof. See "Use of Proceeds."
(4) Net Revenues represent revenues from services, rent and maintenance plus
product sales less cost of products sold.
(5) Earnings consist of loss before extraordinary item plus fixed charges. Fixed
charges consist of interest expense, amortization of debt financing costs,
and the portion of rental expense which management believes is
representative of the interest component of rental expense. For the years
ended December 31, 1991, 1992, 1993, 1994, and 1995, and for the six months
ended June 30, 1995 and 1996, earnings were insufficient to cover fixed
charges by $9.3 million, $6.8 million, $20.0 million, $18.0 million, $44.2
million, $23.0 million and $30.6 million, respectively.
(6) The ratios of long-term obligations to EBITDA for the six months ended June
30, 1995 and 1996 have been calculated as long-term obligations outstanding
as of June 30, 1995 and 1996 divided by EBITDA for the twelve months ended
June 30, 1995 and 1996, respectively.
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three years ended December 31, 1995
and the six months ended June 30, 1995 and 1996. It should be read in
conjunction with the Consolidated Financial Statements of the Company and the
related notes included elsewhere herein. Throughout this section the Company
makes reference to EBITDA, which is defined as earnings before interest, income
taxes, depreciation and amortization. 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.
<TABLE>
RESULTS OF OPERATIONS
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 years
ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995
and 1996.
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- ----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Revenues....................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Services, rent and maintenance................... 18.4 18.1 19.8 19.4 20.7
Selling.......................................... 14.4 14.7 12.2 12.8 11.7
General and administrative....................... 35.0 33.2 31.6 32.4 30.7
Depreciation and amortization.................... 28.1 26.1 27.0 26.9 28.9
----- ----- ----- ----- -----
Operating income................................... 4.1 7.9 9.4 8.5 8.0
Net loss........................................... (6.4) (4.4) (8.0) (9.2) (9.1)
EBITDA............................................. 32.2 34.0 36.4 35.4 36.9
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
Net Revenues for the six months ended June 30, 1996 increased 33.6% over
the same period ended June 30, 1995. Revenues from service, rent and
maintenance, which the Company considers its primary business, increased 35.6%
to $325.8 million for the six months ended June 30, 1996 compared to $240.3
million for the six months ended June 30, 1995. The increase was 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 June 30, 1996 was
7,881,764, compared to 5,415,269 pagers in service with subscribers at June 30,
1995, an increase of 45.5%. 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 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
six month periods ended June 30, 1996 and 1995 ($9.3 million and $10.4 million,
respectively).
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Services, rent and maintenance expenses increased 42.8% to $69.6 million
(20.7% of Net Revenues) for the six months ended June 30, 1996, compared to
$48.7 million (19.4% of Net Revenues) for the six months ended June 30, 1995.
This increase in services, rent and maintenance expenses and the increase 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 six months ended June 30, 1996, selling expenses increased 22.4% to
$39.1 million (11.7% of Net Revenues) from $31.9 million (12.8% of Net Revenues)
for the six months ended June 30, 1995. This increase 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 is 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 26.6% to $102.9 million
(30.7% of Net Revenues) for the six months ended June 30, 1996, compared to
$81.2 million (32.4% of Net Revenues) for six months ended June 30, 1995. The
increase in general and administrative expenses occurred to support the growth
in the number of pagers in service with subscribers of the Company. The decline
in general and administrative expenses as a percentage of Net Revenues is
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 43.7% to $96.9 million
(28.9% of Net Revenues) for the first six months of 1996 compared to $67.4
million (26.9% of Net Revenues) for the first six months of 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 other paging equipment, primarily in the number of transmitters,
to support the increase in the number of units in service with subscribers; and
the acquisitions discussed in Note 7 to the consolidated financial statements.
Operating income increased from $21.4 million for the six months ended June
30, 1995 to $26.7 million for the six months ended June 30, 1996.
As a result of the above factors, for the six months ended June 30, 1996,
EBITDA increased 39.1% to $123.6 million (36.9% of Net Revenues) compared to
$88.8 million (35.4% 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. For the six months ended
June 30, 1996, domestic EBITDA increased 41.8% to $125.9 million (37.6% of Net
Revenues).
Interest expense increased $15.5 million for the six month period ended
June 30, 1996, as compared to the corresponding period in 1995, due to a higher
average level of indebtedness outstanding in 1996. The average level of
indebtedness outstanding during the six months ended June 30, 1996 was
approximately $1.2 billion compared to approximately $721.5 million outstanding
during the six months ended June 30, 1995.
Interest income for the six months ended June 30, 1996 was $2.5 million.
The interest income was a result of investing the net proceeds of the 10.125%
Senior Subordinated Notes issued in July 1995.
YEARS ENDED DECEMBER 31, 1995, DECEMBER 31, 1994 AND DECEMBER 31, 1993
Net Revenues for the year ended December 31, 1995 were $552.6 million, an
increase of 34.3% over $411.6 million for the year ended December 31, 1994. Net
Revenues for the year ended December 31, 1994 increased 32.2% from $311.4
million for the year ended December 31, 1993. Revenues from services, rent and
maintenance, which the Company considers its primary business, increased 36.5%
to $532.1 million for the year ended December 31, 1995, compared to $389.9
million for the year ended December 31, 1994. Services, rent and maintenance
revenues for the year ended December 31, 1994 increased 32.2% from $295.0
million for
5
<PAGE> 6
the year ended December 31, 1993. 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 December 31, 1995,
1994 and 1993 was 6,737,907, 4,408,842, and 3,068,569, respectively. The
increase in the pagers in service with subscribers from December 31, 1994 to
December 31, 1995 and from December 31, 1993 to December 31, 1994 was 52.8% and
43.7%, respectively. The net gains in pagers in service in 1995 was 2,329,065,
which includes the impact of the Company's National Accounts Division and
approximately 343,000 pagers from the acquisition of certain paging assets of
Comtech, Inc. -- Paging Division ("Comtech"); SNET Paging, Inc. and its wholly
owned subsidiary, TNI Associates, Inc. ("SNET Paging"); PageAmerica of
California; PageAmerica of Florida; Page Florida; International Paging Corp.;
and Celpage, Inc. -- Atlanta Branch ("Celpage"). The Company's National Accounts
Division represents a new distribution strategy which gives the Company an
opportunity to reach into a broader market, 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.
Product sales, less cost of products sold, was relatively flat for the year
ended December 31, 1995 compared to the year ended December 31, 1994.
Product sales, less cost of products sold, were $20.5 million (3.7% of Net
Revenues) for 1995 compared to $21.7 million (5.3% of Net Revenues) for 1994.
Product sales, less cost of products sold, were $16.4 million (5.3% of Net
Revenues) for the year ended December 31, 1993. The increase in product sales,
less cost of products sold, from 1993 to 1994 was primarily attributable to the
Company's continued expansion through indirect sales channels, which accounted
for 1,994,867 and 1,204,850 pagers in service with subscribers at December 31,
1994 and 1993, respectively, an increase of 65.6%. The decline in product sales,
less cost of products sold, as a percentage of Net Revenues in 1995 is primarily
attributable to a lower product sales margin being derived in 1995 than in 1994
as a result of more competitive pricing for product sales. Management expects
this competitive pricing trend to continue in 1996.
Services, rent and maintenance expenses for the year ended December 31,
1995 increased 47.1% to $109.5 million (19.8% of Net Revenues) compared to $74.5
million (18.1% of Net Revenues) for the year ended December 31, 1994. Services,
rent and maintenance expenses for the year ended December 31, 1994 increased by
29.8% from $57.3 million (18.4% of Net Revenues) for the year ended December 31,
1993. These increases in services, rent and maintenance expenses and the
increase as a percentage of Net Revenues from 1994 to 1995 were a result of
growth in the number of pagers in service with subscribers of the Company
(including pagers added through acquisitions), expenses associated with an
increase in transmitter sites in order to ensure reliable transmission of
enhanced messaging services, and expansion of nationwide transmission networks.
For the year ended December 31, 1995, selling expenses increased 11.6% to
$67.6 million (12.2% of Net Revenues) from $60.6 million (14.7% of Net Revenues)
for the year ended December 31, 1994. Selling expenses for the year ended
December 31, 1994 increased by 35.1% from $44.8 million (14.4% of Net Revenues)
for the year ended December 31, 1993. 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 increase in selling expenses
as a percentage of Net Revenues from 1993 to 1994 was also attributable in part
to additional expenditures for advertising. Advertising expenditures increased
from approximately $2.0 million (0.7% of Net Revenues) in 1993 to $7.8 million
(1.9% of Net Revenues) in 1994. The decline in selling expenses as a percentage
of Net Revenues for 1995 as compared to the prior year was attributable
primarily 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 27.8% to $174.4 million
(31.6% of Net Revenues) for the year ended December 31, 1995, compared to $136.5
million (33.2% of Net Revenues) for the year ended
6
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December 31, 1994. General and administrative expenses for the year ended
December 31, 1994 increased by 25.3% from $109.0 million (35.0% of Net Revenues)
for the year ended December 31, 1993. The increase in general and administrative
expenses occurred to support the growth in the number of pagers in service with
subscribers of the Company including pagers added through acquisitions. The
decline in general and administrative expenses as a percentage of Net Revenues
is primarily attributable to the improved revenue performance of operations
opened in 1992 through 1994. Domestic start-up operations typically require
three to four years to achieve results similar to the Company's more mature
businesses.
Depreciation and amortization expenses increased for the year ended
December 31, 1995, as compared to the prior year by 38.8% from $107.4 million to
$149.0 million. Depreciation and amortization expenses for the year ended
December 31, 1994 increased by 22.8% from $87.4 million for the year ended
December 31, 1993. These 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 other paging equipment,
primarily in the number of transmitters, to support the increase in the number
of units in service with subscribers; and the aforementioned acquisitions.
Operating income increased 59.6% from $32.7 million for the year ended
December 31, 1994 to $52.1 million for the year ended December 31, 1995.
Operating income for the year ended December 31, 1994 increased 155.3% from
$12.8 million for the year ended December 31, 1993.
As a result of the above factors, for the year ended December 31, 1995,
EBITDA increased 43.6% to $201.1 million (36.4% of Net Revenues) compared to
$140.0 million (34.0% of Net Revenues) for 1994. EBITDA for the year ended
December 31, 1994 increased by 39.7% from $100.2 million (32.2% of Net Revenues)
for the year ended December 31, 1993. The increase in EBITDA margins from 1994
to 1995 and from 1993 to 1994 was primarily attributable to the improved revenue
performance of operations opened in 1992 through 1994.
Interest expense for the years ended December 31, 1995, 1994 and 1993 was
$102.8 million, $53.7 million and $32.8 million, respectively. These increases
in interest expense were primarily due to the average level of indebtedness
outstanding during these years. The average level of indebtedness outstanding
during 1995, 1994 and 1993 was approximately $916.6 million, $490.2 million and
$302.0 million, respectively. Included in interest expense for 1995 was the
write-off of approximately $6.6 million of debt issuance costs related to the
amended and restated $450.0 million credit agreement.
Interest income for the year ended December 31, 1995 was $6.5 million,
compared to $3.1 million for 1994. The interest income in 1995 was the result of
investing the remaining net proceeds of the 10.125% Senior Subordinated Notes.
The interest income in 1994 was a result of investing the remaining net proceeds
of the 8.875% Senior Subordinated Notes.
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 (excluding payments for PCS and SMR licenses and
acquisitions) were $191.3 million and $120.4 million for the six months ended
June 30, 1996 and 1995, respectively, and $312.3 million, $213.3 million and
$145.6 million for the years ended December 31, 1995, 1994 and 1993,
respectively. These investments have been funded by net cash provided by
operating activities and borrowings. The Company's net cash provided by
operating activities was $15.5 million and $34.9 million for the six months
ended June 30, 1996 and 1995, respectively, and $160.6 million, $107.7 million
and $81.7 million for the years ended December 31, 1995, 1994 and 1993,
respectively. The increase in net cash provided by operating activities from
1994 to 1995 was $52.9 million, of which $32.3 million was due to an increase in
accounts payable, arising from a significant amount of paging and other
equipment purchased in the fourth quarter of 1995. Inventories increased from
$14.1 million at December 31, 1995 to $32.3 million at June 30, 1996, largely
due to purchases to support the Company's expanding third-party reseller and
marketing affiliate distribution channels.
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<PAGE> 8
In 1994 the Company acquired three nationwide narrowband PCS frequencies in
an FCC auction at a cost of $197 million. In 1996 the Company participated in
the FCC auction of SMR frequency licenses, and ultimately won two to four blocks
of two-way spectrum across the United States for a total of $45.6 million. The
Company is in the process of purchasing exclusive rights to certain of these SMR
frequencies from incumbent operators. Expenditures for such purchases are
estimated to total $200 million in 1996 and 1997.
The Company intends to employ these PCS and SMR frequencies to build a
two-way network over which it can deploy new products such as its new voice
messaging service, VoiceNow[Registered Trademark]. The Company currently
estimates that the capital expenditures to build the two-way network, exclusive
of the costs of acquiring SMR frequencies and of VoiceNow[Registered Trademark]
subscriber devices, may total approximately $200 million over 1996 and 1997.
During 1995, the Company acquired certain paging assets of Comtech, SNET
Paging, two subsidiaries of PageAmerica, Page Florida, International Paging
Corp., and Celpage, including various frequencies and approximately 343,000
pagers in service. The payments for these purchases aggregated approximately
$117.6 million, subject to increase or decrease based on post-closing events of
certain acquisitions.
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 EBITDA for the most recently ended
fiscal quarter multiplied by four. As of September 30, 1996, the Company had
$405.5 million of borrowings outstanding including accrued interest under its
Credit Agreement and had approximately $429.2 million available for additional
borrowings. The Credit Agreement expires on December 31, 2004. The maximum
borrowings which may be outstanding under the Credit Agreement begin reducing on
June 30, 2001.
On July 24, 1995 the Company completed an offering of $400 million of
10.125% Notes, the net proceeds of which were used to repay $68.9 million of
revolving loans under a prior credit agreement and an aggregate of approximately
$47.1 million was paid to complete certain acquisitions, with the balance used
for frequency acquisitions, capital expenditures and general corporate purposes.
The Company initially expects to invest approximately $100 million in its
international operations through 1998, including approximately $32 million
invested to date. 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.
It is anticipated that 1996 net cash from operating activities will be
insufficient to completely fund 1996 capital expenditures (including the costs
to build the two-way network, but excluding frequency purchases and
international opportunities), which are expected to exceed $470 million. A
portion of these expenditures will be funded with existing cash and cash
equivalents and additional borrowings. The Company currently estimates 1996 net
additional borrowings may aggregate in excess of $250 million.
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.
Inflation is not a material factor affecting the Company's business. Paging
system equipment and transmission costs have not increased and pager costs have
actually declined significantly over time; these lower costs have been reflected
in lower prices charged to the Company's subscribers. General operating expenses
such as salaries, employee benefits and occupancy costs are, however, subject to
normal inflationary pressures.
RECENT DEVELOPMENTS
On October 1, 1996, the Company announced that it expects to report
consolidated Net Revenues for the third quarter of 1996 of approximately $180
million and EBITDA of approximately $65 million. EBITDA margins for such period
are expected to be approximately 36 percent. The Company added approximately
8
<PAGE> 9
562,000 net new subscribers in service during the quarter. These results include
the impact from the Company's international operations, which accounted for
approximately $2.5 million in EBITDA losses and approximately 12,000 net new
subscribers in service. The Company's domestic EBITDA margins are expected to be
approximately 37.5 percent.
On October 16, 1996 the Company completed an offering of $500 million of
10% Notes, the net proceeds of which were used to repay approximately $414
million of revolving loans under its Credit Agreement, with the balance to be
used for frequency acquisitions, capital expenditures and general corporate
purposes. These Notes have not been registered under the Securities Act of 1933,
as amended, and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements.
THE COMPANY
The Company is the largest provider of paging services in the United
States. As of June 30, 1996 the Company had approximately 7.9 million pagers in
service in the United States, more than the combined number of pagers in service
of the second and third largest U.S. providers of paging services. The Company
provides paging services in all 50 states, the District of Columbia, the U.S.
Virgin Islands and Puerto Rico, including local paging service in virtually all
of the largest 100 markets (in population) in the United States. The Company
believes that it is one of the fastest growing major providers of paging
services in the United States and that it has the lowest cost operating
structure, which enables it to compete aggressively on price while maintaining
high quality service. See "Business -- Strategy."
The Company provides local, wide area metropolitan, multi-state regional
and nationwide paging service. Its digital transmission system reaches a
geographic area containing more than 90% of the United States population. The
Company currently provides numeric display and alphanumeric display as its
basic types of paging service. All paging services can be used with the
Company's PageMail[Registered Trademark] or PageMail Box[Service Trademark]
voice messaging and personalized/automated answering services. In developing
its paging systems, the Company seeks to achieve optimal building penetration
and wide area coverage. As part of its paging operations, the Company sells,
leases and repairs pagers. The Company is licensed by the FCC to provide
service in the geographic markets in which it conducts paging operations. See
"Business -- Regulation." In 1994 the Company acquired three nationwide
narrowband PCS frequencies in an FCC auction at a cost of $197 million. In 1996
the Company participated in the FCC auction of SMR frequency licenses, and
ultimately won two to four blocks of two-way spectrum across the United States
for a total of $45.6 million. The Company is in the process of purchasing
exclusive rights to certain of these SMR frequencies from incumbent operators.
Expenditures for such purchases are estimated to total $200 million in 1996 and
1997. The Company intends to employ these PCS and SMR frequencies to build a
two-way network over which it can deploy new products such as its new voice
messaging service, VoiceNow[Registered Trademark].
The Company's Net Revenues and the number of pagers in service with its
subscribers have increased rapidly over the past five years. The Company's Net
Revenues have grown from $111.2 million in 1990 to $552.6 million in 1995, a
compound annual rate of approximately 38%, and EBITDA has increased from $39.3
million in 1990 to $201.1 million in 1995, a compound annual rate of
approximately 39%. (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 prepared in accordance with generally
accepted accounting principles.) From January 1, 1990 to December 31, 1995, the
number of pagers in service with subscribers of the Company (net of dispositions
of paging operations) has grown at a compound annual rate of approximately 49%.
The Company has incurred a net loss in each year except the year ended December
31, 1988. A significant contributing factor to these net losses has been the
interest expense on borrowings by the Company to fund its growth and, in periods
prior to 1991, to make cash distributions to stockholders. For the years ended
December 31, 1991, 1992, 1993, 1994 and 1995, the Company had net losses of $9.3
million, $21.6 million, $20.0 million, $18.0 million and $44.2 million,
respectively. For the years ended December 31, 1991, 1992, 1993, 1994 and 1995,
the Company incurred interest expense of $25.4 million, $23.6 million, $32.8
million, $53.7 million and $102.8 million, respectively. At December 31, 1991
the total stockholders' equity of the
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<PAGE> 10
Company was $16.6 million and at December 31, 1992, 1993, 1994 and 1995, the
stockholders' deficit of the Company was $4.8 million, $23.4 million, $39.9
million and $80.8 million, respectively.
<TABLE>
APPROXIMATE NUMBER OF PAGERS IN SERVICE WITH SUBSCRIBERS OF THE COMPANY
<CAPTION>
INCREASE
(DECREASE) INCREASE
PAGERS IN IN PAGERS IN PAGERS PAGERS IN
FOR THE SERVICE AT THROUGH THROUGH SERVICE
YEARS ENDED BEGINNING ACQUISITIONS INTERNAL AT END
DECEMBER 31, OF PERIOD (DISPOSITIONS) GROWTH OF PERIOD
- ------------ ---------- -------------- --------- ---------
<S> <C> <C> <C> <C>
1982............................................ -0- 36,120 -0- 36,120
1983............................................ 36,120 5,150 18,451 59,721
1984............................................ 59,721 -0- 30,474 90,195
1985............................................ 90,195 -0- 28,555 118,750
1986............................................ 118,750 -0- 46,566 165,316
1987............................................ 165,316 (4,910) 100,197 260,603
1988............................................ 260,603 (20,656) 153,817 393,764
1989............................................ 393,764 -0- 230,411 624,175
1990............................................ 624,175 (31,323) 299,537 892,389
1991............................................ 892,389 -0- 389,254 1,281,643
1992............................................ 1,281,643 -0- 796,311 2,077,954
1993............................................ 2,077,954 -0- 990,615 3,068,569
1994............................................ 3,068,569 -0- 1,340,273 4,408,842
1995............................................ 4,408,842 343,412 1,985,653 6,737,907
1996 (through June 30).......................... 6,737,907 -0- 1,143,857 7,881,764
</TABLE>
The Company is organized under the laws of the State of Delaware and
conducts its domestic business through its wholly owned subsidiaries. The term
"Company" as used herein refers to both the Company and its subsidiaries unless
the context otherwise requires. The Company's executive offices are located at
4965 Preston Park Boulevard, Suite 600, Plano, Texas 75093. The telephone number
of the Company's executive offices is (972) 985-4100.
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<PAGE> 11
BUSINESS
HISTORY
The Company commenced paging operations in June 1982 through the
acquisition of established paging operations. Within two years of commencing
operations, the Company had acquired six paging and related communications
services enterprises, having an aggregate of approximately 41,000 pagers in
service with subscribers as of their respective dates of acquisition by the
Company. In 1983, the Company began to build new paging systems in geographic
markets not previously served by the Company and since then has established 49
new independent paging operations in major metropolitan markets and regional
clusters. As a result of its expansion, the Company had approximately 7.9
million pagers in service with its paging subscribers as of June 30, 1996.
PAGING INDUSTRY BACKGROUND
The paging industry has been in existence since 1949 when the FCC allocated
a group of radio frequencies for use in providing one-way and two-way types of
mobile communications services. The industry grew slowly at first as the quality
and reliability of equipment was developed and the market began to perceive the
benefits of mobile communications. Many of the paging industry pioneers started
in the business as an adjunct to their existing telephone answering service or
mobile radio sales and service businesses.
Equipment reliability improved dramatically in the 1970s, and potential
customers gained a better understanding of the time savings and efficiencies
that paging services could provide. In addition, the energy crisis of the early
1970s stimulated industry growth as people sought ways to conserve gasoline and
increase motion efficiency.
The 1980s saw the most significant developments in the industry. First came
the introduction of the numeric display pager which supplanted tone and voice
pagers as the most popular paging product; then the FCC allocated a block of
additional frequencies which expanded the capacity of the industry and allowed
new market entrants in markets where additional frequencies were previously
unavailable; and finally, the industry began consolidating as certain Regional
Bell Operating Companies made significant acquisitions of paging operations.
Historically, the industry has been fragmented, with a large number of
small local operators. Despite the acquisitions made by certain Regional Bell
Operating Companies and the consolidation of the industry in the 1980s, at
present there are still more than 600 licensed paging companies in the United
States. However, management believes that approximately 50% of the pagers in
service in the United States now are served by the six companies in the industry
having the largest subscriber bases, of which the Company has the largest
subscriber base.
Although the growth rate of the paging industry is difficult to determine
precisely, industry sources estimate that the number of pagers in service
increased at a compound annual growth rate of approximately 28% during the five
year period ended December 31, 1995. The Company believes there will be
continued rapid growth in the number of subscribers for paging and other
one-way wireless communications services like VoiceNow[Registered Trademark].
Industry sources estimate there were approximately 34 million pagers in service
in the United States as of December 31, 1995.
PAGING OPERATIONS
In general, paging provides a communications link to a paging service
subscriber throughout the paging service area. Each paging subscriber is
assigned a distinct telephone number which the caller dials to activate the
subscriber's pager. When a telephone call for a subscriber is received at one of
the Company's computerized paging terminals, the Company transmits a radio
signal to the subscriber's pager (a pocket-sized radio receiver carried by the
subscriber), which causes the pager to emit a beep or vibrate and, in most
cases, to provide the subscriber with additional information from the caller.
Depending on the type of pager in use, the subscriber may respond based on
information displayed by the pager, or by calling his or her home or office
11
<PAGE> 12
to receive the message. A pager has an advantage over a landline telephone in
that the pager's reception is not restricted to a single location and, compared
to a cellular portable telephone, a pager is smaller, has a longer battery life,
better building penetration and, most importantly, is substantially less
expensive to use.
The Company currently provides primarily two types of paging service:
numeric display and alphanumeric display. A numeric display pager permits a
caller to transmit to the subscriber a numeric message that may consist of a
telephone number, an account number or coded information, and has the memory
capability to store several such numeric messages that can be recalled by the
subscriber when desired. Alphanumeric display paging service allows subscribers
to receive and store messages consisting of both numbers and letters. The
Company provides numeric display, tone-only and alphanumeric display service in
all its markets.
Numeric display paging service, which was introduced by the paging industry
around 1980, represented approximately 93% of the Company's pagers in service at
December 31, 1995. Alphanumeric display service, which was introduced in the
mid-1980s, but which the Company has only recently begun to market aggressively,
represented 6% of the Company's pagers in service at December 31, 1995.
The effective operating radius of a paging transmitter is approximately 20
to 30 miles from the point of transmission and varies depending upon the terrain
of the coverage area and the characteristics of the transmitter site. The
Company's paging operations link paging transmitters in order to form networks.
The Company's local paging service is offered in almost all United States
population centers of 400,000 or more, which include virtually all of the
largest 100 markets (in population) in the United States. Local paging provides
service in a broad geographic area surrounding the population center and often
includes smaller towns nearby. The Company's regional paging service options
include multi-state areas. The Company's nationwide paging service, which is
marketed under the name PageNet Nationwide[Registered Trademark] Paging,
provides paging transmission service covering a geographic area containing more
than 90% of the United States population in all 50 states, the District of
Columbia, the U.S. Virgin Islands and Puerto Rico. The Company believes that it
offers subscribers a superior nationwide paging service at competitive prices.
In addition to the nationwide narrowband PCS frequencies acquired in the FCC
auction, the Company has acquired three frequencies for its nationwide paging
services.
Primarily in conjunction with its numeric display and alphanumeric display
paging services, the Company also provides voice messaging and personalized/
automated answering services, marketed under the names PageMail[Registered
Trademark]or PageMail Box[Service Mark], enabling a caller to leave a recorded
message that is stored in the Company's computerized message retrieval center.
When a message is left, the subscriber is automatically alerted through a page
and can retrieve the stored voice message by calling the Company's paging
terminal. PageMail[Registered Trademark] or PageMail Box[Service Mark] are in
use in conjunction with approximately 11.7% of the pagers in service with
subscribers of the Company on June 30, 1996.
The Company is working with Motorola, Inc. and Glenayre Technologies, Inc.
to develop a new nationwide digital transmission network for advanced messaging
services ("InFLEXion"). The first product to be introduced on the new network
will be VoiceNow[Registered Trademark], which the Company commenced field
testing in 1996. Unlike PageMail[Registered Trademark] and PageMail Box[Service
Mark], which require that a subscriber call the Company's paging terminal to
retrieve messages, VoiceNow[Registered Trademark] subscribers will carry a
portable receiver, approximately the same size as an alphanumeric pager, that
is capable of receiving, storing and playing brief voice messages.
The Company has three distribution channels -- direct, indirect and its
National Accounts Division. In the direct channel, the Company leases or sells
pagers to customers and charges a monthly service fee for paging service. In the
indirect channel, the Company sells pagers to 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. Through its National Accounts Division, the Company partners with
other companies that are regional or national in scope with large client bases.
These partners market the Company's paging services to their customers or
potential customers, with the Company providing a variety of services, which can
include pager leasing, customer service, order fulfillment, and billing. The
following table sets forth the respective numbers and percentages of pagers that
are (i) serviced directly by the Company, including certain of the units placed
in service through its National Accounts Division,
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<PAGE> 13
(ii) serviced directly by the Company and owned by the subscribers and (iii)
serviced by the Company through resellers and which may be owned by the third
party resellers or by their subscribers.
<TABLE>
OWNERSHIP OF PAGERS IN SERVICE WITH SUBSCRIBERS OF THE COMPANY
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
------------------ ------------------ ------------------ ------------------ -------------------
NUMBER % NUMBER % NUMBER % NUMBER % NUMBER %
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company
owned...... 994,149 77.6% 1,365,278 65.7% 1,741,934 56.8% 2,234,460 50.7% 3,355,449 49.8%
Subscriber
owned...... 96,813 7.5 162,382 7.8 206,086 6.7 232,896 5.3 339,237 5.0
Third
party
reseller... 190,681 14.9 550,294 26.5 1,120,549 36.5 1,941,486 44.0 3,043,221 45.2
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
TOTAL.... 1,281,643 100.0% 2,077,954 100.0% 3,068,569 100.0% 4,408,842 100.0% 6,737,907 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
The increase in the Company's subscriber base serviced and owned by the
Company in 1995 was primarily due to an increase in the Company's units placed
in service by the direct sales force and by the creation of its National
Accounts Division, which began to produce significant subscriber additions in
mid-1995.
The increase in the Company's subscriber base placed in service through
resellers was largely due to the successful expansion of a program begun in 1990
that targeted the use of resellers to sell to market segments that the Company's
direct sales force had been unsuccessful in reaching.
Subscribers who buy pagers pay a monthly paging service fee if they
contract with the Company for paging services, and they may contract
additionally to receive repair service from the Company. For leasing
subscribers, repair is included in the monthly rental charge, which is generally
combined with the paging service charge for an "all-in-one" monthly fee.
Generally there is no separate usage charge in either case. Leasing rates and
purchase prices for pagers vary widely by market region, service type and the
volume of pagers purchased or leased by the subscriber. The Company does not
manufacture any pagers. Instead, it purchases the pagers that it sells and
leases, primarily from a single manufacturer. See "System Equipment and Pagers"
below.
STRATEGY
The Company's strategy is to strengthen its industry leadership by
continuing to provide superior paging and messaging services at prices generally
below those of the competition. The Company intends to significantly increase
its market share and the number of paging units in service in its direct and
indirect sales channels and its National Accounts Division, by focusing on a
variety of new products and services. The Company also intends to enhance the
overall effectiveness of its nationwide digital transmission network for one-way
messaging services. Key components of the Company's strategy include:
LOW-COST STRUCTURE -- Management believes the key to its success in the
paging and wireless communications industry is its ability to provide low-cost,
high-quality service. The Company has achieved its status as a low-cost provider
because of two primary factors. First, because the Company is one of the largest
volume purchasers of pagers and paging infrastructure equipment, it is able to
obtain volume discounts not available to many of its competitors. Second, the
Company has made investments which improve the efficiency of its operations,
including investments in administrative and customer information systems and
high-quality, large-capacity transmission systems which allow the Company to
serve more customers on fewer frequencies and to operate with less manpower.
CONTINUED GROWTH IN CORE PAGING BUSINESS -- The Company currently provides
local, regional and nationwide paging services utilizing primarily numeric
display and alphanumeric display pagers, with voice mail available as a
supplemental service. The Company is also the exclusive wireless provider of CNN
news, sports, and financial market headlines. In 1995, exclusive of
acquisitions, pagers in service with subscribers of the Company grew by
approximately 2 million units, or 45%. Through a combination of increased
penetration and market share gains, the Company believes its core paging
business will continue to provide significant future growth.
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<PAGE> 14
SUPERIOR GEOGRAPHIC COVERAGE AND NETWORK INFRASTRUCTURE -- The Company
believes that its geographic coverage and state-of-the-art paging network
combine to provide a superior paging service. The Company provides paging
services in virtually all of the largest 100 markets (in population) in the
United States and its paging system reaches more than 90 percent of the U.S.
population. The Company utilizes state-of-the-art network infrastructure
equipment which enables it to service a high number of pagers per frequency,
lowering the Company's infrastructure expenditure per subscriber.
SPECTRUM -- The Company believes that it has accumulated sufficient
spectrum to accommodate growth across the country for the foreseeable future and
considers its extensive spectrum holdings to be one of its most important
strategic assets. The Company has five nationwide frequencies for its paging
services, more than any other paging provider, and significant local frequencies
in the major U.S. markets. In addition, in 1994 the Company acquired three
nationwide narrowband PCS frequencies in an FCC auction at a cost of $197
million. In 1996 the Company participated in the FCC auction of SMR frequency
licenses, and ultimately won two to four blocks of two-way spectrum across the
United States for a total of $45.6 million. The Company is in the process of
purchasing exclusive rights to certain of these SMR frequencies from incumbent
operators. Expenditures for such purchases are estimated to total $200 million
in 1996 and 1997. Total SMR frequency acquired is expected to approximate three
times the frequency acquired in the 1994 PCS auctions.
The Company will utilize the PCS and SMR frequencies to offer products
requiring two-way service, such as VoiceNow[Registered Trademark] and low-cost,
nationwide alphanumeric service. To increase network capacity, a paging carrier
can either add additional transmitters to the system or utilize additional
spectrum. The Company believes utilizing SMR frequencies, rather than adding
transmitters, will provide a greater return on investment and allow for
significantly greater numbers of subscribers.
TWO WAY WIRELESS SERVICES -- The Company is working with Motorola, Inc. and
Glenayre Technologies, Inc. to deploy a new nationwide two-way digital
transmission network using its PCS and SMR frequencies which it believes will be
the highest quality, most extensive and most cost-effective network of its kind
in the country. This network will represent the next generation of wireless
messaging technology, with greater speed and capacity than existing networks.
Management believes that this network and the Company's nationwide frequencies
will offer significant strategic opportunities. While paging will remain the
Company's core business, this network will be a strategic asset that allows
further penetration of the business market with new communications services and
new opportunities for growth in the consumer market.
- - VOICENOW[Registered Trademark] -- The new two-way network will initially be
used primarily for VoiceNow[Registered Trademark], the Company's new
digitized voice messaging service, which the Company is currently field
testing. Because of its features, the Company believes VoiceNow[Registered
Trademark] will appeal to the consumer market not traditionally reached by
paging services as well as businesses. VoiceNow[Registered Trademark]
subscribers will carry a portable receiver, approximately the same size as
an alphanumeric pager, that is capable of receiving, storing and playing
brief digitized voice messages. The Company expects to price the VoiceNow
[Registered Trademark] service at approximately $9.95 per month for local
service plus the lease of the subscriber device. Each subscriber will be
assigned a distinct telephone number which the caller dials to leave a voice
message. When the voice message for a subscriber is received at one of the
Company's computer terminals, the terminal directs the network to broadcast
a short radio signal to the VoiceNow[Registered Trademark] device. The device
will send a reply signal which will allow the network to identify the
subscriber's location. The voice message will then be sent to the device
typically via the transmitter closest to the subscriber. The device will
emit a tone or vibrate to alert the subscriber that a voice message has been
received and stored in the device. The subscriber can then listen to the
message at any time. The device will have a volume control so that the
subscriber can listen to the voice message in confidence or can allow other
people to listen to it as well. The VoiceNow[Registered Trademark] network
will be capable of confirming receipt of the message and resending it if it
is not received without subscriber intervention. The Company anticipates that
the initial devices will hold four minutes of messages (with any additional
messages being stored on the Company's network for later delivery) and will
have rewind, fast forward, cueing, pause and delete capabilities and a long
(approximately six weeks) battery life. Once technological and marketing
tests are complete, the Company intends to begin commercial deployment
throughout the country. Based on the
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<PAGE> 15
current schedule from the Company's vendors, the Company anticipates its
product launch could begin by the end of 1996.
- - OTHER NEW TWO-WAY WIRELESS SERVICES -- In addition to the traditional paging
services and VoiceNow[Registered Trademark], the Company expects to
introduce other two-way messaging products, such as a new, low-cost,
nationwide alphanumeric paging and data messaging services. The new
alphanumeric service is expected to be deployed over the Company's new
nationwide two-way network in 1997. The new two-way network uses less
spectrum by determining the location of the alphanumeric pager, and sending
the message via typically the closest transmitter, rather than by all
transmitters simultaneously. By utilizing the closest transmitter to send the
message the costs of providing nationwide alphanumeric service approximates
the cost of providing local alphanumeric service today. The Company expects
that this new low-cost system will enable it to provide nationwide
alphanumeric service to customers at lower prices and that this will
increase the demand for alphanumeric paging and will expand the Company's
market position.
DISTRIBUTION -- The Company believes its distribution channels provide the
broadest marketing reach in the industry. The Company uses three distribution
channels -- direct, indirect and its National Accounts Division. In the direct
channel, the Company leases or sells pagers to customers and charges a monthly
fee for paging service. In the indirect channel, the Company sells pagers to
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. The reseller is responsible
for customer service, billing, and other associated expenses. Through its
National Accounts Division, the Company partners with other companies that are
regional or national in scope with large client bases. These partners market the
Company's paging services to their customers or potential customers, with the
Company providing a variety of services, which can include pager leasing,
customer service, order fulfillment, and billing. Throughout 1995 and 1996 the
Company has been selected by a variety of companies to provide these services,
including Citizens Telecom, Comcast Cellular, Communications Expo, GTE, MCI,
Sprint, and TransNational Communications International. The Company believes
these marketing affiliates, which primarily reach the consumer market, also
offer an excellent means of selling, distributing and servicing its
VoiceNow[Registered Trademark] product.
INTERNATIONAL EXPANSION -- On April 1, 1996, the Company's wholly owned
subsidiary, PageNet Canada, with its Canadian partner, Madison Venture Corp.,
commenced offering paging services in Canada. Based in Toronto, PageNet Canada
currently offers paging services in Montreal, Ottawa, Quebec City, Toronto and
Vancouver and provides paging transmission services covering a geographic area
containing more than 90% of the Canadian population. As of June 30, 1996 PageNet
Canada had approximately 6,000 paging units in service. In September 1996, the
Company announced that it had purchased a 25% interest in Sociedad de
Radiotelefonia Movil, S.A., which owns Compania Europea de Radiobusqueda, S.A.
("CERSA"), a Spanish paging company. The Company also announced that it had
entered into an agreement to provide operational assistance to CERSA. The
Company's agreement includes an option to acquire an additional 26% of CERSA if
Spanish foreign ownership restrictions change to permit such ownership. CERSA,
which began operations in 1993 and is currently the third largest paging carrier
in Spain, with approximately 20% of the total paging units in service in Spain,
provides local and nationwide paging services and has approximately 25,000 units
in service. The Company is considering other opportunities for international
expansion.
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 areas its strategy of low-cost, high quality
service is likely to be successful. The Company's goal is to create a portfolio
of international operations. The Company expects to invest up to $100 million in
this endeavor through 1998, including approximately $32 million invested to
date. 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.
ACQUISITION OF OTHER PAGING PROVIDERS -- The Company believes the paging
industry will experience additional consolidation which may create strategic
acquisition opportunities for the Company in the future. While much of the
Company's future growth will be internally generated, management believes that
the Company's current scale of operations now makes it possible to effectively
and efficiently integrate acquired
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<PAGE> 16
paging operations into its own operations while maintaining its low-cost
structure. The Company will continue to consider strategic acquisitions and
combinations.
MARKETING
The Company's paging services are marketed through a regionally-deployed
direct sales force, some 6,000 nationwide resellers, and several marketing
affiliates such as GTE, MCI, and Sprint. As of December 31, 1995, direct sales
(which includes those from marketing affiliates) accounted for approximately 54%
of the Company's overall pagers in service and the indirect channel (which
include resellers and retailers) represented approximately 46%.
The Company promotes its many products and services through the use of
direct mail, print, radio, television, and Yellow Page advertising,
telemarketing, and co-op programs.
All of the Company's sales representatives that support the direct channel
are located in field locations across the U.S. and Canada. Historically, a
majority of the Company's subscribers were generated through the direct sales
force. The direct sales market should continue to increase and remain an
important source of new subscribers.
The Company provides services under marketing agreements with third-party
marketing organizations, or "resellers," in bulk quantities at wholesale rates
that are lower than the Company's retail rates through its direct sales channel.
The resellers endeavor to resell the Company's services to end users or
retailers who, in turn, market to the end user for a higher price. The Company's
costs of handling and billing bulk reseller accounts are generally lower than
the costs of handling and billing its other accounts. The portion of the
Company's subscriber base placed in service through resellers accounted for
approximately 37% of the Company's pagers in service at December 31, 1993,
approximately 44% at December 31, 1994 and approximately 45% at December 31,
1995. Resellers represented approximately 61% of the Company's net unit
additions during 1994, and approximately 47% of the Company's net unit additions
during 1995. The successful expansion of the reseller program that began in 1990
targeted the use of resellers to those market segments which it was not
cost-effective for the Company's direct sales force to reach. Management
believes that this sales channel generates attractive incremental cash flow
contribution and enables the Company to increase operating efficiencies and
lower per unit costs by further amortizing its network infrastructure investment
over a larger subscriber base. In addition, because other companies bear the
economic burden of pager capital investment, direct selling expense, and certain
administrative costs, management believes that the resulting cash flow stream
from pagers serviced through resellers represents an attractive return on the
Company's total capital investment.
The Company's National Accounts Division represents a large growth area for
the Company. Paging units and services are offered to potential customers
through business arrangements with national companies that have large customer
bases. The Company also handles the fulfillment for the national accounts
through its National Accounts Division locations in Richardson and Plano, Texas.
Subscribers to the Company's paging and other communications services are
generally individuals and organizations whose businesses require a high degree
of mobility or involve multiple work locations. Typical paging subscribers
include, among others, medical personnel, sales and service organizations,
specialty trades, construction and manufacturing companies, and governmental
agencies.
The Company is not dependent on any single customer. No single subscriber
or reseller accounted for more than 2.6% of the Company's Net Revenues in 1995.
SYSTEM EQUIPMENT AND PAGERS
The equipment used in the Company's paging operations is available for
purchase from multiple sources, and the Company anticipates that equipment and
pagers will continue to be available to the Company in the foreseeable future,
consistent with normal manufacturing and delivery lead times. Because of the
high degree of compatibility among different models of transmitters, computers
and other paging equipment manufactured by suppliers, the Company is able to
design its systems without being dependent upon any single source of
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such equipment. The Company continually evaluates new developments in paging
technology in connection with the design and enhancement of its paging systems
and selection of products to be offered to subscribers.
The Company does not manufacture any of the pagers or related transmitting
and computerized paging terminal equipment used in the Company's paging
operations. In order to achieve significant cost savings from volume purchases,
the Company currently purchases a vast majority of its pagers from Motorola,
Inc. The Company purchases its transmitters from three competing sources and
its paging terminals from Glenayre Technologies, Inc., a manufacturer of mobile
communications equipment. Motorola, Inc. will provide VoiceNow[Registered
Trademark] subscriber devices to the Company. Motorola, Inc. and Glenayre
Technologies, Inc. will provide the transmission and network equipment for
VoiceNow[Registered Trademark]. Motorola, Inc. has agreed to sell its
VoiceNow[Registered Trademark] subscriber devices to the Company on a
first-to-market basis in the United States for a period of six months from beta
system acceptance by the Company. After the end of this six-month period,
Motorola, Inc. may provide VoiceNow[Registered Trademark] subscriber devices to
other companies. Glenayre Technologies, Inc. has agreed to a commercial
exclusivity period relating to the deployment of the PCS InFLEXion system,
which is used to provide VoiceNow[Registered Trademark]. Glenayre Technologies,
Inc. agreed to delay the commercial turn-on of InFLEXion systems for other
service providers in the United States, Canada, and Brazil until an InFLEXion
portable pager device is commercially available to paging service providers
other than the Company, or April 1, 1997, whichever is earlier.
The Company's rapid expansion, including greater market share of existing
markets, requires significant capital expenditures, including purchases of
additional transmitters, paging terminals, and new pagers.
COMPETITION
The Company experiences direct competition from one or more competitors in
all the locations in which it operates. Competition for subscribers to the
Company's paging services in most geographic markets is based primarily on
price, quality of services offered and the geographic area covered. The Company
believes that its price, quality of its services and its geographic coverage
areas generally compare favorably with those of its competitors.
Although some of the Company's competitors are small privately-owned
companies serving only one market area, others are subsidiaries or divisions of
larger companies, such as regulated Bell operating companies, that provide
paging services in multiple market areas. In addition, the industry has been
experiencing a significant amount of consolidation over the last year, as
various competitors attempt to expand their service area and market share. Among
the Company's competitors are AT&T Wireless Messaging, Air Touch Communications,
Inc., Arch Communications Group, Inc., and MobileMedia Communications, Inc.
(using the trade name MobileComm via their recent acquisition of the MobileComm
subsidiary of Bell South). Certain of these competitors possess financial
resources greater than those of the Company.
A variety of wireless two-way communication technologies, including
cellular telephone service, narrowband and broadband personal communications
services, Enhanced Specialized Mobile Radio, and mobile satellite services, are
currently in use or under development. Although these technologies currently are
more highly priced than paging services or are not commercially available,
technological improvements could result in increased capacity and efficiency for
wireless two-way communication and, accordingly, could result in increased
competition for the Company. In addition, future technological advances in the
telecommunications industry could create new services or products competitive
with the paging services currently provided by the Company. Recent and proposed
regulatory changes by the FCC are aimed at encouraging such technological
advances and new services, such as narrowband and broadband PCS, which will
increase the amount of spectrum available for paging or similar services. There
can be no assurance that the Company would not be adversely affected in the
event of such technological change.
REGULATION
The Company's paging operations are subject to regulation by the FCC under
the Communications Act of 1934, as amended (the "Communications Act").
Currently, paging services are offered over radio frequencies the FCC has
allocated for either common carrier or private carrier use. A radio common
carrier
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("RCC") is generally licensed with respect to a specific radio frequency in a
particular locality or region. Private carrier paging ("PCP") licenses may be on
either exclusive or shared frequencies, as discussed below. The Company's
operations are all classified as Commercial Mobile Radio Services ("CMRS") and
are subject to common carrier regulation by the FCC. The FCC has granted the
Company RCC and PCP licenses to use the radio frequencies necessary to conduct
its paging operations. Licenses issued by the FCC to the Company set forth the
technical parameters, such as power strength and tower height, under which the
Company is authorized to use those frequencies.
In late 1993, the FCC separated the frequencies used for PCP into two
groups. The larger group of frequencies, which the Company utilizes in its
operations, are available only on an exclusive basis. The FCC has recognized
three types of exclusivity: local, regional and national, each requiring a
specified number of transmission sites to qualify. Licensees granted local and
regional exclusivity will receive the exclusive right to use the specific
frequency in the area served by their system as defined by coverage contours and
separation requirements. Licenses granted nationwide exclusivity will have the
sole right to use that frequency anywhere in the United States, not just in the
specific areas they actually serve. Any exclusivity rights granted by the FCC
are subject to continued sharing with facilities in place or applied for on or
prior to October 14, 1993. Exclusivity rights with respect to a proposed local,
regional or nationwide system may be lost if the licensee fails to actually
build and place the system in operation with the required number of
transmitters.
The Communications Act was amended in August 1993 ("August 1993
Amendments") to permit the FCC to grant applications for new services which are
mutually exclusive by competitive bidding including broadband and narrowband
PCS. The August 1993 Amendments also required the FCC to conduct a rulemaking to
determine whether non-assigned frequencies for existing services will be
auctioned. The August 1993 Amendments do not permit auctions to be used for
license renewals or license modifications. The FCC has initiated a rulemaking
proceeding in which it is considering changes to its application process for RCC
and PCP frequencies. The FCC will likely adopt a competitive bidding process for
all paging frequencies and may choose to rely on geographic parameters rather
than transmitter coverage contours, i.e., market area licensing, for licenses
awarded in the competitive bidding process. Market area licensing proposals will
require additional coverage area for the Company's frequencies to be purchased
at auction. In the interim, subject to the exclusivity rules, the FCC is only
accepting certain applications to enable carriers to modify existing paging
systems. The Company believes that a reasonable process for assigning licenses
by competitive bidding will be beneficial in that the Company will have a
greater degree of control over whether it obtains licenses that it desires in
order to offer additional service(s) than it did under the lottery, comparative
hearing or other assignment processes which the FCC has used.
At the first such auction, held in July 1994, the Company was a successful
bidder for three newly allocated nationwide narrowband PCS frequencies which it
will hold on an exclusive basis. Current FCC regulations do not permit the
Company to acquire more than three narrowband PCS licenses in any market and,
because the Company has already acquired three nationwide narrowband PCS
licenses, prohibit the Company from participating in further narrowband PCS
auctions. In April, 1996, the FCC auctioned frequencies in the 900 MHz range,
which previously have been utilized for SMR services, and the Company acquired
126 such licenses across the United States for a total cost of $45.6 million.
The Company participated in this auction as a method of obtaining additional
frequencies for future needs. The Company is in the process of purchasing
exclusive rights to certain of these frequencies from incumbent operators. Each
FCC license held by the Company has construction and operational requirements.
The FCC licenses granted to the Company are varying terms of up to 10
years, at the end of which time renewal applications must be approved by the
FCC. In the past, FCC renewal applications routinely have been granted in most
cases upon a demonstration of compliance with FCC regulations and adequate
service to the public. The FCC has granted each renewal license the Company has
filed. Although the Company is unaware of any circumstances which would prevent
the grant of any pending or future renewal applications, no assurance can be
given that any of the Company's licenses will be renewed by the FCC.
Furthermore, although revocation and involuntary modification of licenses are
extraordinary regulatory measures, the FCC has the authority to restrict the
operation of licensed facilities or revoke or modify licenses. No license of the
Company has ever been revoked or modified involuntarily.
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The Communications Act requires licensees, such as the Company to obtain
prior approval from the FCC of the transfer of control of any construction
permit or station license, or any rights thereunder. The Communications Act also
requires prior approval by the FCC of acquisitions of other paging companies by
the Company and transfers by the Company of a controlling interest in any of its
licenses or construction permits, or any rights thereunder. The FCC has approved
each acquisition and transfer of control for which the Company has sought
approval. The Company also regularly applies for FCC authority to use additional
frequencies, modify the technical parameters of existing licenses, expand its
service territory, provide new services and modify the conditions under which it
provides service. Although there can be no assurance that any requests for
approval of applications filed by the Company will be approved or acted upon in
a timely manner by the FCC, or that the FCC will grant the relief requested,
subject to the forthcoming rules for competitive bidding, the Company knows of
no reason to believe any such requests, applications or relief will not be
approved or granted. The Company makes no representations, however, about the
continued availability of additional frequencies used to provide paging
services.
The Communications Act also limits foreign ownership of entities that
directly or indirectly hold certain licenses from the FCC, including certain of
those held by the Company. Because the Company holds licenses from the FCC only
through its subsidiaries, up to 25% of the Company's stock can be owned or voted
by aliens or their representatives, a foreign government or its representatives,
or a foreign corporation. If the Company were to directly hold FCC licenses, the
Communications Act would allow up to 20% of the Company's stock to be owned or
voted by aliens or their representatives, a foreign government or its
representatives, or a foreign corporation. Based upon information obtained by
it, the Company believes that substantially less than 25% of its issued and
outstanding common stock is owned by aliens or their representatives, foreign
governments or their representatives or foreign corporations.
The Company obtains telephone numbers for its paging service from the
predominant local telephone company, which is known as the Numbering Plan Area
("NPA") Code Administrator. Under the 1996 Act, the FCC has adopted a process
through which telephone company administrators are intended to be replaced by
neutral third parties in 1997. Increased demand for numbers, particularly in
metropolitan areas, is causing depletion of numbers in certain area codes ("NPA
codes"). As this occurs, the Code Administrator devises a relief plan. Recent
plans have included certain elements that could impact on the Company's
operations including the take-back of numbers already assigned for use and
service-specific plans whereby only certain services, such as paging and
cellular, would be assigned numbers using a new NPA code. The Company, along
with two other paging companies, filed a request for declaratory ruling with the
FCC to establish federal policies that will preclude discriminatory and unfair
elements of relief plans. In January 1995 the FCC issued a declaratory ruling
substantially granting the relief requested by the Company and prohibiting
unreasonable discrimination in assigning numbers. Subsequently, certain
participants to state proceedings continue to advocate numbering relief plans
contrary to the FCC's ruling. The Company can provide no assurance that such
plans will not be adopted by a state commission. In addition, the Company is
actively participating at the state level in proceedings before public service
commissions where individual NPA code relief plans are being filed for approval
and contain objectionable elements.
In addition to potential regulation by the FCC, several states have the
authority to regulate paging services, except where such regulation constitutes
rate or entry, both of which have been preempted by the August 1993 Amendments,
as interpreted by the FCC. Appeals of the FCC action with respect to rate
regulation are pending, but the Company believes the FCC will be upheld in its
preemption of rate regulation by state commissions. A few states have also
indicated that they are considering continuing to assert jurisdiction over
transfers of paging company's assets or operations. Nevertheless, all state
approvals of acquisitions or transfers made by the Company have been approved,
and the Company knows of no reason to believe such approvals will not continue
to be granted in connection with any future requests, even if states exercise
that review. The August 1993 Amendments do not preempt state regulatory
authority over other aspects of the Company's operations, and some states may
choose to exercise such authority.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act")
was signed into law. This new legislation amends the Communications Act of 1934,
as amended, and modifies the Consent Decrees governing the provision of
telecommunications services by the Bell Operating Companies and the GTE
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Companies. The new legislation is intended to promote competition in local
exchange services through the removal of legal or other barriers to entry. Under
the 1996 Act, the Bell Operating Companies and other local exchange carriers may
be permitted to jointly market commercial mobile service in conjunction with
their traditional local exchange services. It imposes upon all
telecommunications carriers the duty to interconnect with the facilities and
equipment of other telecommunications carriers. The FCC has interpreted the 1996
Act to require local exchange carriers to compensate wireless carriers if
terminating LEC originated calls on the wireless carrier's network.
Simultaneously, the FCC found unlawful certain charges levied against paging
carriers in the past that have been assessed on a monthly basis for the use of
certain network facilities, including telephone numbers. These findings by the
FCC will be challenged at the FCC and in the courts. The Company cannot predict
with certainty the ultimate outcome of these proceedings. For paging carriers,
compensation amounts may be determined in subsequent proceedings either at the
federal or state level, or may be determined based on negotiations between the
local exchange companies, and the paging carriers. Any agreements reached
between the local exchange carriers and paging companies may be required to be
submitted to state regulatory commissions for approval. The 1996 Act, as
ultimately interpreted by the appropriate regulatory bodies, may require
commercial mobile service providers such as the Company to contribute to
"Universal Service" or other funds to assure the continued availability of local
exchange service to high costs areas as well as contribute funds to cover the
costs of number portability and dialing parity implementation. It limits the
circumstances under which states and local governments may deny a request by a
commercial mobile service provider to place facilities, and gives the FCC the
authority to preempt the states in some circumstances.
TRADEMARKS
The Company markets its paging and related services under various names and
marks, including PageNet[Registered Trademark], PageMail[Registered Trademark],
PageMate[Registered Trademark], Voice Now[Registered Trademark], PageNet
Nationwide[Registered Trademark], SurePage[Registered Trademark],
FaxNow[Registered Trademark], MessageNow[Registered Trademark] and the
Company's "beeper man" logo, all of which are federally registered service
marks. The Company's federal mark registrations expire at various times between
2000 and 2005, unless they are then renewed by the Company. The Company has
filed applications with the United States Patent and Trademark Office to
register additional names and marks.
CORPORATE ORGANIZATION
The Company conducts its domestic operations through 50 wholly owned
subsidiaries of the Company, each of which operates in a specified geographic
area. The Company's subsidiaries operate as largely independent business units,
consistent with senior management's philosophy that a decentralized organization
is more responsive to market demands and provides greater incentives to
employees. Each subsidiary makes its own staffing, administrative, operational
and marketing decisions within guidelines established by the senior executive
officers of the Company in the annual budget process. Except for his or her
participation in the Company's stock option plans, the General Manager of each
subsidiary is compensated primarily on the basis of the performance of the
subsidiary over which he or she has oversight responsibility without regard to
the performance of other subsidiaries of the Company.
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SIGNATURE
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, thereto duly authorized.
PAGING NETWORK, INC.
By: /S/ KENNETH W. SANDERS
---------------------------------------
Kenneth W. Sanders
Senior Vice President - Finance,
Treasurer, Chief Financial Officer and
Assistant Secretary
Dated: October 22, 1996
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