<PAGE> 1
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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, 1997
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 800
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, 1997
----------------------------- -----------------------------------------
Common Stock, $ .01 par value 102,638,924
The Company's Common Stock is publicly traded under the symbol "PAGE"
through the National Association of Securities Dealers Automated Quotation
National Market System.
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Index to Financial Statements
PAGE
Paging Network, Inc. Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 (Unaudited) . . . . . . . . . . 3
Paging Network, Inc. Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1997 and 1996
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Paging Network, Inc. Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and 1996
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Paging Network, Inc. Notes to Consolidated Financial Statements . . . . . . . 6
2
<PAGE> 3
PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
ASSETS (RESTATED)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 15,198 $ 3,777
Accounts receivable, less allowance
for doubtful accounts . . . . . . . . . . . . . . . . . 57,451 60,089
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 74,769 57,690
Prepaid expenses and other assets . . . . . . . . . . . . . 15,839 8,872
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . 163,257 130,428
Property, equipment, and leasehold improvements, at cost . . . 1,332,993 1,137,729
Less accumulated depreciation . . . . . . . . . . . . . . . (423,245) (319,194)
------------ ------------
Net property, equipment, and leasehold improvements . . 909,748 818,535
Other non-current assets, at cost . . . . . . . . . . . . . . . 650,844 547,067
Less accumulated amortization . . . . . . . . . . . . . . . (76,574) (56,417)
------------ ------------
Net other non-current assets . . . . . . . . . . . . . . 574,270 490,650
------------ ------------
$ 1,647,275 $ 1,439,613
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . $ 52,104 $ 59,857
Accrued interest . . . . . . . . . . . . . . . . . . . . . 36,328 41,853
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 59,777 38,460
Customer deposits . . . . . . . . . . . . . . . . . . . . . 24,421 22,430
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . 172,630 162,600
Long-term obligations . . . . . . . . . . . . . . . . . . . . . 1,759,371 1,459,188
Other long-term liabilities . . . . . . . . . . . . . . . . . . 11,448 -
Commitments and contingencies . . . . . . . . . . . . . . . . . - -
Stockholders' deficit:
Common Stock: $.01 par, 250,000,000 shares authorized,
102,637,644 and 102,621,077 shares issued and
outstanding in 1997 and 1996, respectively... . . . . . 1,026 1,026
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . 124,671 124,522
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (422,049) (307,827)
Foreign currency translation adjustments . . . . . . . . . 178 104
------------ ------------
Total stockholders' deficit . . . . . . . . . . . . . . (296,174) (182,175)
------------ ------------
$ 1,647,275 $ 1,439,613
============ ============
</TABLE>
See accompanying notes
3
<PAGE> 4
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,
----------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Services, rent and maintenance revenues . . . . . . $ 210,611 $ 175,725 $ 599,075 $ 501,536
Product sales . . . . . . . . . . . . . . . . . . . 35,753 35,967 105,787 95,708
---------- ---------- ---------- ---------
Total revenues . . . . . . . . . . . . . . . . 246,364 211,692 704,862 597,244
Cost of products sold . . . . . . . . . . . . . . . (30,341) (30,855) (90,503) (81,331)
---------- ---------- ---------- ---------
216,023 180,837 614,359 515,913
Operating expenses:
Services, rent and maintenance . . . . . . . . 43,417 38,003 125,679 107,564
Selling . . . . . . . . . . . . . . . . . . . . 26,390 21,111 80,088 60,192
General and administrative . . . . . . . . . . 64,498 56,678 187,214 159,545
Depreciation and amortization . . . . . . . . . 73,455 56,185 207,183 153,040
---------- ---------- ---------- ---------
Total operating expenses . . . . . . . . . 207,760 171,977 600,164 480,341
---------- ---------- ---------- ---------
Operating income . . . . . . . . . . . . . . . . . 8,263 8,860 14,195 35,572
Other income (expense):
Interest expense . . . . . . . . . . . . . . . (38,411) (31,046) (114,863) (90,688)
Interest income . . . . . . . . . . . . . . . . 901 412 2,799 2,950
Equity in loss of an unconsolidated subsidiary (154) (220) (809) (466)
---------- ---------- ---------- ---------
Total other income (expense) . . . . . . . (37,664) (30,854) (112,873) (88,204)
---------- ---------- ---------- ---------
Loss before extraordinary item . . . . . . . . . . (29,401) (21,994) (98,678) (52,632)
Extraordinary loss . . . . . . . . . . . . . . . . - - (15,544) -
---------- ---------- ---------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . . $ (29,401) $ (21,994) $ (114,222) $ (52,632)
========== ========== ========== =========
Net loss per share:
Loss before extraordinary item . . . . . . . . $ (0.29) $ (0.21) $ (0.96) $ (0.51)
Extraordinary loss . . . . . . . . . . . . . . - - (0.15) -
---------- ---------- ---------- ---------
Net loss per share . . . . . . . . . . . . . . . . $ (0.29) $ (0.21) $ (1.11) $ (0.51)
========== ========== ========== =========
</TABLE>
See accompanying notes
4
<PAGE> 5
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
--------- ----------
<S> <C> <C>
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (114,222) $ (52,632)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . 15,544 -
Depreciation . . . . . . . . . . . . . . . . . . . . . 184,676 136,475
Amortization . . . . . . . . . . . . . . . . . . . . . 22,507 16,565
Provision for doubtful accounts . . . . . . . . . . . 13,453 9,496
Equity in loss of an unconsolidated subsidiary . . . . 809 466
Amortization of debt issuance costs . . . . . . . . . 6,375 3,800
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . (10,815) (18,327)
Inventories . . . . . . . . . . . . . . . . . . . . . (17,079) (43,816)
Prepaid expenses and other assets . . . . . . . . . . (6,967) (2,368)
Accounts payable . . . . . . . . . . . . . . . . . . . (7,753) (10,846)
Accrued interest . . . . . . . . . . . . . . . . . . . (5,525) (12,147)
Accrued expenses . . . . . . . . . . . . . . . . . . . 21,317 3,078
Customer deposits . . . . . . . . . . . . . . . . . . 1,991 1,507
---------- ----------
Net cash provided by operating activities . . . . . . . . . . . . 104,311 31,251
---------- ----------
Investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . (279,374) (290,923)
Payments for spectrum licenses . . . . . . . . . . . . . . . (92,747) (60,708)
Business acquisitions and joint venture investments . . . . . (6,503) (9,236)
Restricted cash invested in money market instruments . . . . (6,320) (22,591)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,596 (3,862)
---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . (381,348) (387,320)
---------- ----------
Financing activities:
Borrowings under credit agreements . . . . . . . . . . . . . 499,828 178,947
Redemption of $200 million senior subordinated notes . . . . (211,750) -
Proceeds from exercise of Common Stock options . . . . . . . 66 2,347
Debt issuance costs on credit agreements . . . . . . . . . . - (3,545)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 41
---------- ----------
Net cash provided by financing activities . . . . . . . . . . . . 288,458 177,790
---------- ----------
Net increase (decrease) in cash and cash equivalents . . . . . . 11,421 (178,279)
Cash and cash equivalents at beginning of period . . . . . . . . 3,777 198,182
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 15,198 $ 19,903
========== ==========
</TABLE>
See accompanying notes
5
<PAGE> 6
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
1. RESTATEMENT OF FINANCIAL STATEMENTS
During the third quarter of 1997, Paging Network, Inc. (the
Company) restated its consolidated financial statements for the year
ended December 31, 1996 and for the first and second quarters ended
March 31 and June 30, 1997 to reflect a $22.5 million non-cash
write-off of pagers deemed to be unrecoverable as of December 31, 1996.
The decision to restate the Company's financial statements resulted
from a review of the Company's agreements with a national marketing
affiliate and the determination that an earlier judgment that the
Company ultimately would recover or be compensated for certain pagers
distributed through that affiliate to customers who later discontinued
service was not correct.
2. THE COMPANY
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 all of the largest 100 markets (in
population) in the United States, and owns a minority interest in
paging companies in Spain and Brazil. The consolidated financial
statements include the accounts of all of its wholly and majority-owned
subsidiaries. All intercompany transactions have been eliminated.
3. 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, 1996, 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/A for the year ended December 31, 1996.
Certain 1996 amounts have been reclassified to conform with the
1997 presentation.
6
<PAGE> 7
4. PROPERTY AND EQUIPMENT AND OTHER ASSETS
Included in the balance sheet at September 30, 1997, is
approximately $35 million of assets, consisting primarily of messaging
units and deferred start-up costs, which are directly attributable to
the Company's VoiceNow(R) product. These assets have no alternative use
other than in connection with the VoiceNow product and, as such, the
recoverability of these assets is dependent upon the economic viability
of the VoiceNow product, which cannot be determined at this time. As a
result, potential impairment losses, if any, related to these assets
also cannot be determined at this time. For additional information on
the VoiceNow product, see Management's Discussion and Analysis of
Financial Condition and Results of Operations - Other Matters.
Effective January 1, 1997, the Company shortened the depreciable
lives of its pagers from four to three years, and revised the related
residual values. The change had an effect of increasing depreciation
expense by approximately $8 million and $23 million for the three and
nine months ended September 30, 1997, respectively.
5. LONG-TERM OBLIGATIONS
On May 14, 1997, the Company redeemed all $200.0 million of its
outstanding 11.75% Senior Subordinated Notes (11.75% Notes), utilizing
funds borrowed under the Company's domestic $1.0 billion revolving
credit agreement (the Credit Agreement). The Company recorded an
extraordinary loss of $15.5 million in the second quarter of 1997 on the
early retirement of the 11.75% Notes. The extraordinary loss was
comprised of the redemption premium of $11.8 million and the write-off
of unamortized issuance costs of $3.7 million.
As of September 30, 1997, the Company had $521.0 million of
borrowings outstanding under the Credit Agreement.
6. INCOME TAX PROVISION
No provision or benefit for income taxes has been made for the
nine months ended September 30, 1997 and 1996, as the deferred benefit
from operating losses was offset by the increase in the valuation
allowance.
7. 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 and nine months ended
September 30, 1997 was 102.6 million. The number of shares used to
compute per share amounts for the three and nine months ended September
30, 1996 was 102.5 million.
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, 1997, there were no preferred shares issued or
outstanding.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS No. 128), which the Company will be required to
initially adopt in the fourth quarter of 1997. The Company anticipates
the adoption of SFAS No. 128 will have no impact on its reporting of
loss per share for 1997 or prior years.
7
<PAGE> 8
On May 22, 1997, the Company's stockholders approved an
amendment to its 1991 Stock Option Plan (1991 Plan) to increase the
number of shares of the Company's Common Stock issuable pursuant
thereto from 6,450,000 shares to 13,950,000 shares and reserving an
additional 7,500,000 shares of Common Stock for options to be issued
pursuant to the 1991 Plan.
On May 22, 1997, the Company's stockholders approved the
adoption of an additional stock option plan, the "Paging Network, Inc.
1997 Restricted Stock Plan" (Restricted Stock Plan). The maximum number
of shares of Common Stock which may be available for purchase or grant
pursuant to the Restricted Stock Plan is 300,000 shares.
On June 12, 1997, the Company offered an election to its
employees with options granted during 1995 and 1996 under the 1991 Plan
to cancel such options and accept new options at a lower price. As a
result of the election by certain of its employees, the Company
canceled 2.9 million options with exercise prices ranging from $13.69
to $26.50 and granted approximately 1.1 million options to the same
optionees with an exercise price of $8.25 per share.
8. STATEMENT OF CASH FLOWS INFORMATION
Cash and cash equivalents include highly liquid debt
instruments with an original maturity of three months or less. Cash
payments made for interest during the nine months ended September 30,
1997 and 1996 were approximately $122.9 million and $98.9 million,
respectively. There were no significant federal or state income taxes
paid or refunded for the nine months ended September 30, 1997 and 1996.
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, the success of new technologies, 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, amortization, and equity in loss of an
unconsolidated subsidiary (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, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net Revenues . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Services, rent and maintenance . . . . . . . 20.1 (1) 21.0 20.5 (1) 20.8
Selling . . . . . . . . . . . . . . . . . . 12.2 (1) 11.7 13.0 (1) 11.7
General and administrative . . . . . . . . 29.9 31.3 30.5 30.9
Depreciation and amortization . . . . . . . 34.0 (1) 31.1 33.7 (1) 29.7
----- ----- ----- -----
Operating income . . . . . . . . . . . . . . . . 3.8 4.9 2.3 6.9
Net loss . . . . . . . . . . . . . . . . . . . . (13.6) (12.2) (18.6) (10.2)
EBITDA . . . . . . . . . . . . . . . . . . . . . 37.8 36.0 36.0 36.6
EBITDA for domestic operations . . . . . . . . . 38.7 37.5 37.2 37.5
EBITDA for core domestic paging operations . . . 39.5 37.5 38.8 37.5
</TABLE>
(1) Excluding direct costs attributable to the Company's VoiceNow service,
which was introduced during the first quarter of 1997, services, rent and
maintenance expenses, selling expenses, and depreciation and amortization
expenses as a percentage of Net Revenues were 19.9%, 11.7%, and 31.4%,
respectively, for the three months ended September 30, 1997, and were
20.2%, 11.7%, and 32.4%, respectively, for the nine months ended
September 30, 1997.
9
<PAGE> 10
Net Revenues for the three- and nine-month periods ended September 30,
1997, were $216.0 million and $614.4 million, respectively, an increase of 19.5%
and 19.1% from $180.8 million and $515.9 million for the comparable periods
ended September 30, 1996. Revenues from services, rent and maintenance, which
the Company considers its primary business, increased 19.9% to $210.6 million
for the three months ended September 30, 1997, compared to $175.7 million for
the three months ended September 30, 1996. Services, rent and maintenance
revenues for the nine months ended September 30, 1997 increased 19.4% to $599.1
million, compared to $501.5 million for the nine months ended September 30,
1996. 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, 1997 was 10,246,397 compared to
8,444,470 pagers in service with subscribers at September 30, 1996, an increase
of 21.3%, and 8,587,772 pagers in service with subscribers at December 31,
1996, an increase of 19.3%. Contributing to the growth in the number of pagers
in service with subscribers was the Company's local and national
third-party reseller customer base, which includes the impact of the Company's
National Accounts Division. The Company's reliance on distribution of pagers and
paging services through resellers and marketing affiliates could generate
variability in quarterly and annual results relating to the net addition of
pagers. The Company is reviewing its pricing structure along all lines of its
businesses and anticipates increasing its prices, however, the impact of such
increases cannot be determined at this time.
Product sales, less cost of products sold, were relatively flat for the
three and nine months ended September 30, 1997, compared to the same periods
in 1996. Product sales, less cost of products sold, were $5.4 million
(2.5% of Net Revenues) for the third quarter of 1997 compared to $5.1 million
(2.8% of Net Revenues) for the third quarter of 1996 and were $15.3 million
(2.5% of Net Revenues) for the first nine months of 1997 compared to $14.4
million (2.8% of Net Revenues) for the first nine months of 1996.
Services, rent and maintenance expenses increased 14.2% to $43.4 million
(20.1% of Net Revenues) for the three months ended September 30, 1997, compared
to $38.0 million (21.0% of Net Revenues) for the three months ended September
30, 1996. Services, rent and maintenance expenses increased 16.8% to $125.7
million (20.5% of Net Revenues) for the nine months ended September 30, 1997,
compared to $107.6 million (20.8% of Net Revenues) for the nine months ended
September 30, 1996. The increases in services, rent and maintenance expenses
for the three and nine months ended September 30, 1997 were the result of the
continued growth in the number of pagers in service with subscribers of the
Company, expenses associated with an increase in transmitter sites, expansion
of the nationwide transmission networks, costs incurred by the Company's
Canadian operations, and costs associated with the Company's new VoiceNow
service, which was introduced on February 24, 1997.
For the three months ended September 30, 1997, selling expenses increased
25.0% to $26.4 million (12.2% of Net Revenues) from $21.1 million (11.7% of Net
Revenues) for the three months ended September 30, 1996. Selling expenses
increased 33.1% to $80.1 million (13.0% of Net Revenues) for the nine
months ended September 30, 1997, compared to $60.2 million (11.7% of Net
Revenues) for the nine months ended September 30, 1996. The increases in
selling expenses and the increases as a percentage of Net Revenues resulted
primarily from certain VoiceNow marketing research and development costs along
with advertising expenses associated with the Company's new VoiceNow service,
and from the addition of sales personnel to support continued growth in both
Net Revenues and the number of pagers in service with subscribers. The
VoiceNow marketing research and development costs and advertising expenses
associated with the Company's new VoiceNow service were $1.1 million and $8.2
million (0.5% and 1.3% of Net Revenues), respectively, for the three and nine
months ended September 30, 1997.
10
<PAGE> 11
General and administrative expenses increased 13.8% to $64.5 million
(29.9% of Net Revenues) for the third quarter of 1997, compared to $56.7
million (31.3% of Net Revenues) for the corresponding period of 1996. General
and administrative expenses increased 17.3% to $187.2 million (30.5% of Net
Revenues) for the first nine months of 1997, compared to $159.5 million (30.9%
of Net Revenues) for the corresponding period of 1996. 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 decrease in
general and administrative expenses as a percentage of Net Revenues for the
three months ended September 30, 1997 was due to the general and administrative
expenses being absorbed by a larger subscriber base.
Depreciation and amortization expenses increased 30.7% to $73.5 million
(34.0% of Net Revenues) for the three months ended September 30, 1997, compared
to $56.2 million (31.1% of Net Revenues) for the three months ended September
30, 1996. Depreciation and amortization expenses increased 35.4% to $207.2
million (33.7% of Net Revenues) for the nine months ended September 30, 1997,
compared to $153.0 million (29.7% of Net Revenues) for the nine months ended
September 30, 1996. 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, the changes in pager depreciation, and the commencement of
amortization of the licenses for spectrum. Effective January 1, 1997, the
Company shortened the depreciable life of its pagers from four to three years,
and revised the related residual values, in order to better reflect the
estimated periods during which the pagers will remain in service. The change had
an effect of increasing depreciation expense by approximately $8 million in the
third quarter of 1997 and by approximately $23 million for the first nine months
of 1997. The commencement of amortization of the licenses for spectrum and
certain other costs associated with the Company's VoiceNow service increased
amortization expense by approximately $4 million and $7 million for the three
and nine months ended September 30, 1997, respectively.
As a result of the above factors, EBITDA increased 25.6% to $81.7 million
(37.8% of Net Revenues) for the third quarter of 1997 compared to $65.0 million
(36.0% of Net Revenues) for the corresponding period in 1996. For the nine
months ended September 30, 1997, EBITDA increased 17.4% to $221.4 million (36.0%
of Net Revenues) compared to $188.6 million (36.6% of Net Revenues) for the
corresponding period of 1996. As expected, in the third quarter of 1997 and for
the first nine months of 1997, EBITDA and EBITDA as a percentage of Net Revenues
were negatively impacted by the Company's international operations and its new
VoiceNow service. The Company's international operations and its start-up of
the VoiceNow service resulted in a decrease to EBITDA of $1.2 million and $1.6
million, respectively, in the third quarter of 1997. EBITDA for the Company's
domestic operations increased 22.6% to $82.9 million (38.7% of Net Revenues) for
the third quarter of 1997, compared to $67.6 million (37.5% of Net Revenues) for
the third quarter of 1996. Excluding the Company's VoiceNow operations, EBITDA
for the Company's core domestic paging operations increased 24.9% to $84.4
million (39.5% of Net Revenues) for the third quarter of 1997, compared to $67.6
million (37.5% of Net Revenues) for the third quarter of 1996. The Company's
international operations and its start-up of the VoiceNow service resulted in a
decrease to EBITDA of $5.0 million and $10.1 million, respectively, for the nine
months ended September 30, 1997. EBITDA for the Company's domestic operations
increased 17.0% to $226.4 million (37.2% of Net Revenues) for the nine months
ended September 30, 1997, compared to $193.5 million (37.5% of Net Revenues) for
the nine months ended September 30, 1996. Excluding the Company's VoiceNow
operations, EBITDA for the Company's core domestic paging operations increased
22.2% to $236.5 million (38.8% of Net Revenues) for the first nine months of
1997, compared to $193.5 million (37.5% of Net Revenues) for the corresponding
period of 1996.
Interest expense, net of amounts capitalized, increased $7.4 million and
$24.2 million, respectively, from the three- and nine-month periods ended
September 30, 1996, to the corresponding periods in 1997, primarily due to a
higher average level of indebtedness outstanding in 1997. The average level of
indebtedness outstanding during the three and nine months ended September 30,
1997 was approximately $1.7 billion and $1.6 billion, respectively, compared
to approximately $1.3 billion and $1.2 billion, respectively, outstanding
during the three and nine months ended September 30, 1996.
11
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On May 14, 1997, the Company redeemed all $200.0 million of its
outstanding 11.75% Notes, utilizing funds borrowed under the Company's Credit
Agreement. The Company recorded an extraordinary loss of $15.5 million in the
second quarter of 1997 on the early retirement of the 11.75% Notes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations and expansion into new markets and product lines
have required 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
licenses) were $70.3 million and $279.4 million for the three and nine months
ended September 30, 1997 compared to $99.6 million and $290.9 million for the
same periods in 1996, respectively. The Company's VoiceNow capital expenditures
increased from $9.5 million and $19.6 million for the three and nine months
ended September 30, 1996 to $31.9 million and $95.2 million for the three and
nine months ended September 30, 1997, respectively. The increases in VoiceNow
capital expenditures in 1997 were primarily due to the costs associated with the
build-out of the two-way wireless services network in 1997. The Company's core
domestic capital expenditures decreased from $87.7 million and $260.1 million
for the three and nine months ended September 30, 1996 to $37.5 million and
$180.3 million for the corresponding periods in 1997, respectively. The
decreases in core domestic capital expenditures in 1997 were primarily due to
increased efficiencies in the logistics management of the pager ordering
process. For the first nine months of 1997, capital expenditures were funded by
net cash provided by operating activities ($104.3 million) and borrowings.
The amount of capital expenditures may fluctuate from quarter to quarter
and on an annual basis due to several factors. The decrease in capital
expenditures in the third quarter of 1997 may not be representative of amounts
of capital expenditures incurred in future periods.
During April 1996, the Company concluded its participation in a Federal
Communications Commission auction of specialized mobile radio (SMR) frequency
licenses, and ultimately acquired rights to two to four blocks of two-way
spectrum in markets across the United States for a purchase price of $45.6
million. The Company is in the process of purchasing exclusive rights to
certain of these SMR frequencies from incumbent operators. The total cost of the
investment will be less than $250 million (including the $45.6 million auction
purchase price), of which $109 million was paid in 1996 and $92 million was
paid in the first nine months of 1997.
The Company intends to utilize its narrowband personal communications
services and SMR frequencies for additional capacity as needed for its paging
operations, such as digital and alphanumeric, and to build a two-way network
over which it can deploy new products such as its new voice paging service,
VoiceNow, and various data products. The Company has expended $47 million in
1996 and $95 million in the first nine months of 1997 to construct the two-way
network and expects to incur an additional $5 to $10 million during the
remainder of 1997. Additional capital expenditures for the two-way network
after 1997 will be determined based on the market introduction and success of
new products.
Through its wholly-owned subsidiary, Paging Network of Canada Inc., the
Company began offering paging services in Canada in April 1996. In July 1996,
the Company purchased a 25% interest in an existing Spanish paging company. In
December 1996, the Company signed agreements as the operational partner with a
20% interest in a joint venture to provide paging services in Brazil, which
commenced operations during the first quarter of 1997. The Company is
considering other opportunities for international expansion, with the goal of
creating a portfolio of select 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. Additional
12
<PAGE> 13
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.
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 domestic
indebtedness for borrowed monies (as defined) and outstanding letters of
credit. The amount of total indebtedness allowed at the end of each quarter is
equal to 6.5 times annualized domestic EBITDA. As of September 30, 1997, the
Company had $521.0 million of borrowings outstanding under the Credit Agreement
and, under the terms of the Credit Agreement, an additional $433.3 million was
available for borrowings as of that date. Such amount will increase or
decrease during the fourth quarter based on the domestic EBITDA for the fourth
quarter. As of October 31, 1997, the Company had $536.0 million of borrowings
outstanding under its Credit Agreement. The maximum borrowings which may be
outstanding under the Credit Agreement will begin reducing on June 30, 2001,
and the Credit Agreement expires on December 31, 2004.
The two credit agreements of the Company's Canadian subsidiaries provide
for total borrowings of approximately $65 million. As of September 30, 1997,
approximately $38 million of borrowings were outstanding under the credit
facilities. The remaining amounts are available for borrowings provided they
are either collateralized or certain financial covenants are met. The maximum
borrowings which may be outstanding under the credit facilities will begin
reducing on June 30, 1999, and both credit agreements expire on June 30, 2003.
On May 14, 1997, the Company redeemed all $200.0 million of its
outstanding 11.75% Notes, utilizing funds borrowed under the Company's Credit
Agreement. The 11.75% Notes were redeemed to achieve an annual interest cost
savings of approximately $8 million per year for five years based on current
interest rates, including savings of approximately $4 million in 1997.
EBITDA after capital expenditures (excluding the costs of acquiring SMR
frequency licenses) and debt service (free cash flow) for the Company's core
domestic paging operations was $26.3 million for the three months ended
September 30, 1997. This is the first period the Company has achieved a
positive free cash flow in its core domestic paging operations. The deficiency
in free cash flow for the Company's core domestic paging operations for the
three months ended September 30, 1996 was $43.2 million and for the nine months
ended September 30, 1997 and 1996 was $14.3 million and $134.9 million,
respectively. The deficiency in free cash flow for all of the Company's
operations was $26.1 million and $170.1 million for the three and nine months
ended September 30, 1997, respectively, compared to $65.2 million and $190.1
million for the same periods in 1996. The improvements in free cash flow in
1997 was primarily the result of decreases in capital expenditures and
increases in EBITDA in the Company's core domestic paging operations, as
previously noted. Capital expenditures (which includes the costs to continue
the build-out of the two-way network), excludes the costs of acquiring SMR
frequency licenses, which aggregated $25.8 million and $92.1 million for the
three and nine months ended September 30, 1997, respectively, and $53.2 million
and $60.7 million for the three and nine months ended September 30, 1996,
respectively. The amount of capital expenditures and SMR frequency purchases
may fluctuate from quarter to quarter and on an annual basis due to several
factors.
13
<PAGE> 14
OTHER MATTERS
The Company is conducting an on-going review of all aspects of its
business, which began after the appointment of the new Chief Executive Officer
in August. Such review will include the organizational structure, core
processes, and supporting systems of the Company, and is expected to be
completed by the end of 1997, with the Company acting on the recommendations
during the first quarter of 1998 and beyond. The review could result in
significant changes for the Company, in which case a restructuring charge may
be required. However, the timing and the amount of the charge, if any, is not
determinable at this time.
The Company is also in the process of reviewing its strategy for marketing
its VoiceNow product, which has been introduced in three markets: Dallas,
Atlanta, and Sacramento, during 1997. The VoiceNow product has not met the
Company's original expectations in those markets. As a result, the Company
expects to introduce the VoiceNow product in the Chicago market under a revised
strategy in 1998. The Company will also begin to utilize excess capacity in
the spectrum and two-way network initially constructed for use by VoiceNow for
additional paging services offered by the Company. The Company believes that,
based on the growth in its existing and future paging services, substantially
all of any excess capacity in the spectrum and two-way network constructed for
use by VoiceNow can be utilized for existing paging services.
Included in the balance sheet at September 30, 1997, is approximately
$35 million of assets, consisting primarily of messaging units and deferred
start-up costs, which are directly attributable to the VoiceNow product and
thus cannot be utilized for existing core paging services. The recoverability
of such assets is dependent upon the economic viability of the VoiceNow
product, which cannot be determined at this time. As a result, potential
impairment losses, if any, related to the assets directly attributable to
VoiceNow also cannot be determined at this time.
14
<PAGE> 15
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 5. OTHER INFORMATION.
On August 4, 1997, Glenn W. Marschel resigned as President and
Chief Executive Officer of the Company and George M. Perrin resigned as
Chairman of the Board of Directors. Mr. Perrin will remain on the
Company's Board of Directors. On August 5, 1997, the Company announced
that effective August 4, 1997, John P. Frazee, Jr. was elected by its
Board of Directors as Chairman, President and Chief Executive Officer.
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 September 25, 1997, the Company filed a Current Report on
Form 8-K relating to the restatement of the financial
statements for 1996 and the first and second quarters of 1997.
15
<PAGE> 16
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 5, 1997 /s/ John P. Frazee, Jr.
-------------------------------------
John P. Frazee, Jr.
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 5, 1997 /s/ G. Robert Thompson
-------------------------------------
G. Robert Thompson
Vice President-Finance,
Acting Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
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 I 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 directors and officers of
the Registrant (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)
17
<PAGE> 18
EXHIBIT
NO. DESCRIPTION
- ------- -----------
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)
10.17 1991 Stock Option Plan, as amended and approved by stockholders on May
22, 1997 (7)
10.18 1992 Stock Option Plan for Directors, as amended and restated and
approved by stockholders on May 22, 1997 (7)
10.19 1997 Restricted Stock Option Plan and approved by stockholders on May
22, 1997 (7)
10.20 Employment Agreement dated as of August 4, 1997 among the Registrant
and John P. Frazee, Jr. (8)
12 Ratio of Earnings to Fixed Charges for the three and nine months ended
September 30, 1997 and 1996 (8)
27 Financial Data Schedule (8)
----------------------------------------------------------------------
(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) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1997.
(8) Filed herewith.
18
<PAGE> 1
EXHIBIT 10.20
EMPLOYMENT AGREEMENT
This Agreement is made as of the fourth day of August, 1997 (the
"Effective Date"), between Paging Network, Inc., a Delaware corporation
("PageNet"), and John P. Frazee, Jr., of Tallahassee, Florida (the "Executive").
W I T N E S S E T H:
WHEREAS, PageNet and the Executive desire to enter into an employment
relationship upon the terms and conditions hereinafter set forth; and
WHEREAS, the Executive will be employed in a capacity in which he may
receive and contribute to confidential information, as to which PageNet desires
fully to protect its rights;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein set forth, the parties hereto agree as follows:
1. Employment. The Executive hereby agrees to serve as a
corporate officer with the title of Chairman, President and Chief Executive
Officer of PageNet, for the term of this Agreement, subject to the terms set
forth herein and the provisions of the Bylaws of PageNet. During his employment
in such position, Executive shall report directly to the Board of Directors of
PageNet (the "PageNet Board"). During his employment hereunder, the Executive
shall devote his efforts and attention, substantially on a full-time basis, to
the performance of the duties required of him as an executive of PageNet. It is
agreed and understood that the Executive may continue to serve as a director
(or similar position) of those entities for which the Executive presently
serves, and the Executive may serve in such capacities for other entities
provided such service does not materially interfere with the Executive's duties
and responsibilities hereunder.
2. Compensation. As compensation for his services during the term
of this Agreement, the Executive shall receive the amounts and benefits set
forth in subsections (a), (b), (c), (d), (e) and (f) below:
(a) A base salary effective as of the Effective Date of
six hundred fifty thousand dollars ($650,000) per year (the "Base
Salary"), prorated for any partial year of employment, subject to
annual review for increases in the sole discretion of the PageNet
Board after recommendation of the Compensation Committee of the
PageNet Board (the "Compensation Committee"), in light of the
performance of PageNet and the Executive. The Executive's salary shall
be payable semi-monthly, or in accordance with
<PAGE> 2
-2-
PageNet's regular payroll practices in effect from time to time for
senior executives of PageNet.
(b) Annual incentive compensation during the term of
this Agreement with a target of three hundred fifty thousand dollars
($350,000), such incentive compensation hereinafter referred to as
the "Incentive Bonus". The Incentive Bonus shall be determined by the
executive incentive bonus plan, which shall be approved by the PageNet
Board (after recommendation of the Compensation Committee) in its sole
discretion based upon the achievement by PageNet of its overall
corporate objectives for such year. The level of the Incentive Bonus
will depend upon the PageNet Board's determination of the degree to
which the objectives have been met. The objectives, the executive
incentive bonus plan and levels of performance on which the Incentive
Bonus will be determined may be changed from time to time by the
PageNet Board (after recommendation of the Compensation Committee).
The Incentive Bonus shall be payable to the Executive in full only if
the Executive is actively employed on the February 1 following the
calendar year for which the Incentive Bonus is being paid, and
otherwise the Executive shall be considered for a bonus on a pro rata
basis in the discretion of the PageNet Board for any partial calendar
year of employment (so long as the Executive has not been terminated
for "Good Cause," as defined in Section 12 below) and shall be paid in
total no later than the later of: (i) February 1 of the year following
the calendar year for which the Incentive Bonus is being paid, or (ii)
fifteen (15) business days following the determination of the amount
of the Incentive Bonus for the calendar year for which the Incentive
Bonus is to be paid. The Incentive Bonus shall be payable as follows:
(i) no less than forty percent (40%) of the amount of the Incentive
Bonus shall be paid through the original issuance to the Executive of
that number of shares of Paging Network, Inc. Common Stock, $.01 par
value per share (the "Common Stock"), having a value (calculated based
on the market value of the Common Stock on such date as the bonus is
determined) equal to the portion of the Incentive Bonus to be paid in
Common Stock, provided, that the Executive, in his sole discretion,
may elect to increase the percentage of the Incentive Bonus payable in
Common Stock up to a maximum of one hundred percent (100%), and (ii)
the remainder of the Incentive Bonus shall be paid in cash. Any Common
Stock issued to the Executive pursuant to the provisions of this
Section 2(b) shall have been registered under the Securities Act of
1933, as amended (the "Securities Act").
(c) Participation by the Executive in, in accordance with
the terms of, any employee benefit plans maintained from time to time
by PageNet for the purpose of providing retirement, deferred
compensation, health care, life insurance, disability and similar
benefits to senior executives of PageNet.
<PAGE> 3
-3-
(d) The original issuance to the Executive of 11,510
shares of Common Stock pursuant to the Paging Network, Inc.1997
Restricted Stock Plan, which shares have been registered under the
Securities Act.
(e) Participation by the Executive in, in accordance with
the terms of and at the discretion of the PageNet Board (after
recommendation of the Compensation Committee), any employee stock
purchase plan, stock option plan or other incentive plans made
generally available to senior executives of PageNet. Initially, and as
an inducement essential to the Executive's entering into this
Agreement, the Executive shall be granted a stock option for 600,000
shares of Common Stock, such option to be granted at an exercise price
of $8.688, being the fair market value of a share of Common Stock on
the Effective Date. Such option shall be granted, to the extent of
500,000 shares, under the 1991 Stock Option Plan (which shares have
been registered under the Securities Act) and, to the extent of
100,000 shares, in an option not issued under any plan and the shares
of which the Company shall promptly register on Form S-8 under the
Securities Act. Such option shall vest and become exercisable as
follows: (i) 200,000 shares shall vest on the Effective Date, and (ii)
the remaining shares shall vest in equal installments on each of the
first and second anniversaries of the Effective Date so long as the
Executive's employment continues on such anniversary dates, with all
such shares being vested in the event of a Change in Control (as
hereinafter defined), provided, that any such accelerated vesting upon
a Change in Control shall be subject to the Executive's agreement to
remain as President and Chief Executive Officer for a reasonable
period of time (not to exceed three (3) months) after such Change in
Control in order to facilitate any transition occasioned by such
Change in Control.
(f) Reimbursement of ordinary and necessary travel and
other expenses (other than those provided in Section 3 below), subject
to PageNet's standard policies (including required documentation and
approvals).
3. Relocation and Commuting. PageNet will provide the Executive
with the following during the term of this Agreement and the Executive's
employment hereunder:
(a) PageNet will provide a furnished apartment in the
Dallas, Texas metropolitan area for the exclusive use of the Executive
and his family (up to a maximum of $3,000 per month), provided that
the cost of providing such furnished apartment shall be payable to the
Executive if and when he purchases a residence in the Dallas, Texas
metropolitan area.
(b) PageNet shall provide the Executive with private jet
transportation, through a time-sharing arrangement, to and from the
<PAGE> 4
-4-
Executive's primary residence in Florida and to and from Dallas, Texas
or wherever the Executive is conducting PageNet business.
4. Term.
(a) This Agreement and the Executive's employment
hereunder shall be effective as of the Effective Date, and shall
continue until July 31, 1998. This Agreement shall be automatically
renewed for successive one-year periods at the end of the initial
term, unless either party gives notice to the other of its intent to
terminate this Agreement not less than 90 days prior to the
commencement of any such one-year renewal period. In the event such
notice to terminate is properly given, this Agreement shall terminate
at the end of the initial term or the one-year renewal period during
which the notice is given, as the case may be.
(b) The Executive's employment hereunder may be
terminated by either party prior to the end of the term hereof
(including any renewal period) upon written notice to the other
party, provided that, in the event of such termination, PageNet shall
be obligated to make the payments and provide the benefits, if any,
described in Section 5 below. In the event of any termination, the
Executive agrees to resign any offices he holds on such date as an
officer or director of PageNet or any of its subsidiaries and other
affiliates.
5. Termination Payments. Upon termination of the Executive's
employment prior to the end of the term of this Agreement (including any
renewal term), PageNet shall pay to the Executive in cash any amount payable
pursuant to (a) and (b) below, and shall for the period or at the time
specified provide the other benefits described in (c), if any, below:
(a) If: (i) the Executive's employment is terminated by
PageNet other than for "Good Cause," as defined in Section 12 below,
(ii) the Executive's employment is terminated by reason of the
Executive's death or "Disability," as defined in Section 12 below; or
(iii) the Executive elects to terminate his employment for "Good
Reason," as defined in Section 12 below, then the Executive shall be
paid his Base Salary through the end of the initial term or the
one-year renewal period, as the case may be, during which his
employment is terminated, and his pro rata bonus for such calendar
year during which his employment is terminated.
(b) If the Executive's termination of employment is not
described in (a) above, the Executive shall be paid any unpaid Base
Salary through the date of termination.
(c) If the Executive's termination of employment is
described in (a) above, any health care and life insurance benefits
coverage provided to the
<PAGE> 5
-5-
Executive at his date of termination shall be continued at the same
level and in the same manner through the initial term or the relevant
one-year renewal period, as the case may be, during which his
employment is terminated and any additional coverages the Executive
had at termination, including dependent coverage, will also be
continued for such period on the same terms. Any costs the Executive
was paying for such coverages at the time of termination shall
continue to be paid by the Executive. If the terms of any benefit plan
referred to in this section do not permit continued participation by
the Executive, as provided in this subsection, then PageNet will
arrange for other coverage providing substantially similar benefits.
6. Nondisclosure: Confidentiality. The Executive agrees that
during the term of his employment and for a period of two (2) years after
termination, he shall not, directly or indirectly, disclose or give to others
any confidential fact or information not available to the public concerning
PageNet's financial operations and businesses. Such confidential business
information includes any non-public business plans, financial information,
financial systems, financing arrangements, and any other secret or confidential
work, knowledge, know-how, trade secret or confidential business information,
confidential information relating to customer accounts, customer needs, product
mix, organization, strategy, research and development, discoveries, software in
various stages of development, design, drawings, specifications, techniques,
processes, procedures, "know-how," marketing techniques and materials, marketing
and development plans, price lists, pricing policies and other confidential
information relating to customers.
7. Non-Solicitation. The Executive agrees that during the term of
his employment and for a period of one (1) year after termination, he shall
not, directly or indirectly, for himself or on behalf of another, hire any
employee, or solicit or induce any employee to leave his or her employment with
PageNet or any of its subsidiaries or affiliates.
8. Tax Gross-Up.
(a) In the event that any of the benefits provided for in
Section 3 hereof will be subject to income tax imposed by the Internal
Revenue Code of 1986, as amended (the "Code") and any applicable state
and local income tax law (collectively, the "Tax"), the Corporation
shall immediately pay to or to the order of the Executive an
additional amount (the "Gross-up Payment") such that the net amount
retained by the Executive, after deduction of any Tax on such benefits
and any federal, state and local income tax on the payment provided
for by this Section 8(a), shall be equal to the amount of such
benefits, placing the Executive in the same after-tax financial
position in which he would have been if he had not incurred any such
income tax liability for the benefits provided under Section 3 hereof.
For purposes of determining
<PAGE> 6
-6-
the amount of the Gross-up Payment, the Executive shall be deemed to
pay federal income taxes at the highest marginal individual rate of
federal income taxation on compensation in the calendar year in which
the Gross-up Payment is to be made and state and local income taxes at
the highest marginal individual rate of taxation on compensation in
the state and locality of the Executive's residence on the last day of
the calendar year for which the gross-up payment is to be made, net of
the maximum reduction in federal income taxes which could be obtained
from deduction of such state and local taxes.
(b) In the event that the Tax is subsequently determined
to be less than the amount taken into account hereunder at the time of
determination, the Executive shall repay to the Corporation at the
time that the amount of such reduction in Tax is finally determined
the portion of the Gross-up Payment attributable to such reduction
(plus the portion of the Gross-up Payment attributable to the Tax and
federal, state and local income tax imposed on the Gross-up Payment
being repaid by the Executive, if such repayment results in a
reduction in Tax or in federal, state and local income tax deductions)
plus interest on the amount of such repayment at the rate provided in
Section 1274(d) of the Code.
9. Damages and Injunctive Relief. The Executive agrees that the
breach of any of his obligations under Sections 6 or 7 of this Agreement (a)
may cause injury to PageNet and that PageNet is entitled to seek and obtain
compensation and damages, and (b) may cause irreparable injury to PageNet and
that, accordingly, PageNet may seek and obtain injunctive relief against the
breach or threatened breach of those provisions, in addition to other remedies
at law or in equity which may be available.
10. Assignment: Successors.
(a) The rights and benefits of the Executive under this
Agreement, other than accrued and unpaid amounts due hereunder, are
personal to him and shall not be assignable, except with the prior
written consent of PageNet.
(b) This Agreement shall not be assignable by PageNet,
provided, that with the consent of the Executive, PageNet may assign
this Agreement to (i) another corporation wholly-owned by it, either
directly or through one or more other corporations, or (ii) any
corporate successor of PageNet or any such corporation.
(c) Notwithstanding the foregoing, any business entity
succeeding to substantially all of the business of PageNet by
purchase, merger, consolidation, sale of assets or otherwise, shall be
required as a condition to the closing of such transaction to agree to
be bound by and shall adopt and assume this Agreement.
<PAGE> 7
-7-
11. Notices. Any notice or other communications under this
Agreement shall be in writing, signed by the party making the same, and shall
be delivered personally or sent by certified or registered mail, postage
prepaid, addressed as follows:
If to the Executive:
John P. Frazee, Jr.
Quinque Farm
9512 Bull Headley Road
Tallahassee, FL 32312
If to PageNet:
Vice President-Human Resources
Paging Network, Inc.
4965 Preston Park Boulevard, Suite 600
Plano, TX 75093
With a copy to:
Roger D. Feldman, Esq.
Bingham, Dana & Gould LLP
150 Federal Street
Boston, MA 02110
or to such other address or agent as may hereafter be designated by either
party hereto. All such notices shall he deemed given on the date personally
delivered or mailed.
12. Definitions. For purposes of this Agreement, the following
definitions shall apply:
(a) "Change in Control" shall mean:
(i) The acquisition (other than from PageNet) by
any person, entity. or "group," within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act (excluding, for this
purpose, any employee benefit plan of PageNet or its
subsidiaries which acquires beneficial ownership of voting
securities of PageNet) of beneficial ownership (within the
meaning of Rule l3d-3 promulgated under the Exchange Act)
of 25% or more of either the then outstanding shares of Common
Stock or the combined voting power of PageNet's then
<PAGE> 8
-8-
outstanding voting, securities entitled to vote generally in
the election of directors;
(ii) The failure for any reason of individuals who
constitute the Incumbent Board to continue to constitute at
least a majority of the PageNet Board; or
(iii) Approval by the stockholders of PageNet of a
reorganization, merger or consolidation or the issuance of
shares in connection therewith, in each case, with respect to
which persons who were the stockholders of PageNet immediately
prior to such reorganization, merger or consolidation or the
issuance of shares in connection therewith do not, immediately
thereafter, own more than 50% of the combined voting power
entitled to vote generally in the election of directors of the
reorganized, merged or consolidated company's then outstanding
voting securities, or a liquidation or dissolution of PageNet
or of the sale of all or substantially all of the assets of
PageNet.
(b) "Disability" shall mean the total and permanent
inability of the Executive due to illness, accident or other physical
or mental incapacity to perform the usual duties of his employment
under this Agreement for more than one hundred eighty (180) days
during any consecutive twelve (12) month period.
(c) The "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
(d) "Good Cause" shall mean and be limited to (i) an act
or acts of personal dishonesty taken by the Executive and intended to
result in material personal enrichment of the Executive at the expense
of PageNet, (ii) violation by the Executive of the Executive's
obligations under Section 1 of this Agreement or violation by the
Executive of PageNet's Principles of Business Conduct Policy which are
willful and deliberate on the Executive's part, (iii) the conviction
of the Executive of a felony or (iv) the violation by the Executive of
the provisions of Section 6 or 7 or the willful engaging by the
Executive in conduct materially injurious to PageNet.
(e) "Good Reason" shall mean:
(i) The assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting
requirements), authority, duties or responsibilities as
contemplated by Section 1 of this Agreement, or any
<PAGE> 9
-9-
other action by PageNet which results in a diminution in such
position, authority, duties or responsibilities, excluding for
this purpose an isolated, insubstantial and inadvertent action
not taken in bad faith and which is remedied by PageNet
promptly after receipt of notice thereof given by the
Executive;
(ii) A failure to pay any amount due to the
Executive hereunder or a reduction in the Executive's
compensation or benefits or any other material breach of this
Agreement by PageNet; or
(iii) Any purported termination by PageNet of the
Executive's employment otherwise than as expressly permitted
by this Agreement any such purported termination being
ineffective.
(f) The "Incumbent Board" at any time shall mean the
persons who are then members of the PageNet Board and who (a) are
members of the PageNet Board as of the date hereof, or (b) become
members of the PageNet Board hereafter upon nomination for election by
at least a majority of the Incumbent Board (other than an election or
nomination of an individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to
the election of the directors of PageNet, as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Exchange Act).
13. Governing Law. This Agreement shall be interpreted and
enforced in accordance with the substantive laws of the State of Texas.
14. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid, but
if any one or more of the provisions contained in this Agreement shall be
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such provisions in every other respect and
of the remaining provisions of this Agreement shall not be in any way impaired.
15. Entire Agreement. Except as contained in a Stock Option
Agreement of even date herewith and PageNet's Principles of Business Conduct
Policy (collectively the "Other Agreements"), this Agreement contains the
entire agreements of the parties hereto with respect to the subject matter
contained herein. There are no restrictions, promises, covenants, or
undertakings, other than those expressly set forth herein or contained in the
Other Agreements, the PageNet employee benefit or incentive compensation plans,
between PageNet and the Executive. This Agreement supersedes all prior
agreements and understandings between the parties with respect to the matters
set forth herein. This Agreement may not be amended or modified except by a
writing executed by the parties.
<PAGE> 10
-10-
In Witness Whereof, the parties hereto have set their hands and seals
as of the date first written above.
PAGING NETWORK, INC.
By: /s/ RUTH WILLIAMS
------------------------------------
Ruth Williams, Senior Vice President
and General Counsel
EXECUTIVE
/s/ JOHN P. FRAZEE, JR.
---------------------------------------
John P. Frazee, Jr.
<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,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings:
Loss before extraordinary item . . . . . . $ (29,401) $ (21,994) $ (98,678) $ (52,632)
Fixed charges, less capitalized interest . 44,257 36,101 132,093 105,349
---------- ---------- ---------- ----------
Earnings . . . . . . . . . . . . . . . . $ 14,856 $ 14,107 $ 33,415 $ 52,717
========== ========== ========== ==========
Fixed charges:
Interest expense, including interest
capitalized . . . . . . . . . . . . . $ 40,266 $ 29,813 $ 118,388 $ 86,888
Amortization of deferred financing costs . 2,045 1,233 6,375 3,800
Interest portion of rental expense . . . . 5,846 5,055 17,230 14,661
---------- ---------- ---------- ----------
Fixed charges . . . . . . . . . . . . . $ 48,157 $ 36,101 $ 141,993 $ 105,349
========== ========== ========== ==========
Ratio of earnings to fixed charges . . . . - - - -
========== ========== ========== ==========
Deficiency of earnings available to cover
fixed charges . . . . . . . . . . . . . $ (33,301) $ (21,994) $ (108,578) $ (52,632)
========== ========== ========== ==========
</TABLE>
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,198
<SECURITIES> 0
<RECEIVABLES> 64,735
<ALLOWANCES> 7,284
<INVENTORY> 74,769
<CURRENT-ASSETS> 163,257
<PP&E> 1,332,993
<DEPRECIATION> 423,245
<TOTAL-ASSETS> 1,647,275
<CURRENT-LIABILITIES> 172,630
<BONDS> 1,759,371
0
0
<COMMON> 1,026
<OTHER-SE> (297,200)
<TOTAL-LIABILITY-AND-EQUITY> 1,647,275
<SALES> 5,412
<TOTAL-REVENUES> 246,364
<CGS> 30,341
<TOTAL-COSTS> 207,760
<OTHER-EXPENSES> 37,664
<LOSS-PROVISION> 4,520
<INTEREST-EXPENSE> 38,411
<INCOME-PRETAX> (29,401)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,401)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,401)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
