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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-19494
PAGING NETWORK, INC.
(Exact name of Registrant as specified in charter)
DELAWARE 04-2740516
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4965 PRESTON PARK BOULEVARD, SUITE 600
PLANO, TEXAS 75093
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (972) 985-4100
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, $.01 PAR VALUE NATIONAL ASSOCIATION OF SECURITIES DEALERS
AUTOMATED QUOTATION NATIONAL MARKET SYSTEM
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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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
As of March 7, 1997, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $1,335,629,803.
As of March 7, 1997, 102,621,077 shares of the Registrant's Common
Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of the
Registrant to be held during 1997 are incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Paging Network, Inc. (the Company) is a provider of paging and wireless
messaging services and is recognized as a leader in the broader wireless
communications industry with 9,002,733 pagers in service as of December 31,
1996. 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. The Company believes that it is one of the fastest growing major
providers of paging and wireless messaging 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 services. All paging services can be used with the
Company's PageMail(R) or Page Mailbox(SM) 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 Federal Communications
Commission (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 personal communications services (PCS)
frequencies in an FCC auction at a cost of $197 million. During April 1996, the
Company concluded its participation in the FCC 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 total 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
this investment will be approximately $250 million, of which $109 million was
paid in 1996 and the remainder will be paid in 1997 and 1998. 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 paging service,
VoiceNow(R). In addition to the nationwide narrowband PCS frequencies acquired
in the FCC auction, the Company is licensed by the FCC to use five nationwide
frequencies for its paging services.
The Company's net revenues from services, rent and maintenance plus
product sales, less the cost of products sold (Net Revenues), and the number of
pagers in service with its subscribers have increased at a rapid rate over the
past five years. The Company's Net Revenues have grown from $153.2 million in
1991 to $705.8 million in 1996, a compound annual rate of approximately 36%,
and earnings before interest, income taxes, depreciation, amortization, and
equity in loss of an unconsolidated subsidiary (EBITDA) have increased from
$57.3 million in 1991 to $256.8
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million in 1996, a compound annual rate of approximately 35%. (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 December
31, 1991 to December 31, 1996, 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 48%. The Company has incurred a net loss
in each of the last five years. A significant contributing factor to these net
losses has been the interest expense on borrowings by the Company to fund its
growth. For the years ended December 31, 1992, 1993, 1994, 1995, and 1996, the
Company had net losses $21.6 million, $20.0 million, $18.0 million, $44.2
million, and $81.8 million, respectively. For the years ended December 31,
1992, 1993, 1994, 1995, and 1996, the Company incurred interest expense of
$23.6 million, $32.8 million, $53.7 million, $102.8 million, and $128.0
million, respectively. At December 31, 1992, 1993, 1994, 1995, and 1996, the
stockholders' deficit of the Company was $4.8 million, $23.4 million, $39.9
million, $80.8 million, and $159.7 million, respectively.
PAGERS IN SERVICE WITH SUBSCRIBERS OF THE COMPANY
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<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 . . . . . . . . . . . 6,737,907 -0- 2,264,826 9,002,733
</TABLE>
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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
the original 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 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, 1996. The Company believes there will be
continued rapid growth in the number of subscribers for paging and other
one-way wireless communication services and for new services like VoiceNow.
Industry sources estimate there were approximately 40 million pagers in service
in the United States as of December 31, 1996.
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
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subscriber may respond based on information displayed by the pager, or by
calling his or her home or office 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 services:
numeric display and alphanumeric display. A numeric display pager permits a
caller to transmit a numeric message to the subscriber and has the memory
capability to store several such numeric messages that can be recalled by the
subscriber when desired. The message may consist of a telephone number, an
account number, or coded information. Alphanumeric display paging service
allows subscribers to receive and store messages consisting of both numbers and
letters. The Company provides numeric display and alphanumeric display service
in all of its markets.
Numeric display paging service, which was introduced by the paging
industry around 1980, represents approximately 90.3% of the Company's pagers in
service at December 31, 1996. Alphanumeric display service, which was
introduced in the mid-1980s, but which the Company has only recently begun to
market aggressively, represents approximately 9.2% of the Company's pagers in
service at December 31, 1996.
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, including 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(R) Paging, provides paging transmission
service covering a geographical 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
superior paging services at competitive prices.
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 or
Page Mailbox, 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 or
Page Mailbox were in use in conjunction with approximately 13.7% of the pagers
in service with subscribers of the Company at December 31, 1996.
The Company is working with Motorola, Inc. (Motorola) and Glenayre
Technologies, Inc.
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(Glenayre) to develop a new nationwide digital transmission network for
advanced messaging services. The first product to be introduced on the new
network will be VoiceNow, which the Company first offered on February 24, 1997
in the Dallas/Fort Worth metropolitan area. Unlike PageMail and Page Mailbox,
which require that a subscriber call the Company's paging terminal to retrieve
messages, VoiceNow subscribers carry a VoiceNow pager that receives, stores,
and plays brief voice messages. The Company expects to offer the VoiceNow
service in markets across the United States by the end of 1997.
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
customer 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. During 1996, the Company expanded the functionality of the
National Accounts Division, using its infrastructure to service more than 20
national resellers as well as large corporate and governmental accounts that
prefer central buying and service for their messaging needs. 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 and (ii) serviced directly by
the Company and owned by the subscribers, or serviced by the Company through
resellers and which may be owned by the third party resellers or by their
subscribers.
OWNERSHIP OF PAGERS IN SERVICE WITH SUBSCRIBERS OF THE COMPANY
DECEMBER 31,
- - --------------------------------------------------------------------------------
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1992 1993 1994 1995 1996
---------------- ----------------- ---------------- ---------------- ----------------
NUMBER % NUMBER % NUMBER % NUMBER % NUMBER %
--------- ----- --------- ----- --------- ----- --------- ----- --------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Company owned 1,365,278 65.7% 1,741,934 56.8% 2,234,460 50.7% 3,355,449 49.8% 4,267,204 47.4%
Subscriber or third
party owned 712,676 34.3% 1,326,635 43.2% 2,174,382 49.3% 3,382,458 50.2% 4,735,529 52.6%
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total 2,077,954 100.0% 3,068,569 100.0% 4,408,842 100.0% 6,737,907 100.0% 9,002,733 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
The increase in the Company's subscriber base serviced and owned by the
Company in 1996 was primarily due to an increase in the Company's units placed
in service by the direct sales force and through marketing affiliates serviced
by its National Accounts Division.
The increase in 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 could not reach in a cost-effective manner.
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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, service type, and
the volume of pagers purchased or leased by the subscriber. The Company does
not manufacture any pagers. Instead, the Company purchases the pagers that it
sells and leases primarily from Motorola. See "System Equipment and Pagers."
STRATEGY
The Company's strategy is to strengthen its industry leadership position
by continuing to utilize its low cost structure to provide superior paging and
messaging services at prices generally below those of the competition while
maintaining high EBITDA margins. 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 several key 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, high-quality, large-capacity transmission systems allow the Company to
serve more customers on fewer frequencies and to operate with less manpower.
Third, the Company has made investments which improve the efficiency of its
operations, including investments in administrative and customer information
systems and a high-volume distribution facility.
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 1996, pagers in service
with subscribers of the Company grew by approximately 2.3 million units, or
33.6%. Through a combination of increased penetration and market share gains,
the Company believes its core paging business will continue to provide
significant future growth.
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 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.
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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 is licensed by the FCC to use five nationwide
frequencies for its paging services, more than any other paging provider, and
has significant local and regional frequencies. In addition, in 1994 the
Company acquired three two-way nationwide narrowband PCS frequencies in an FCC
auction at a cost of $197 million. During April 1996, the Company concluded
its participation in the FCC auction of SMR frequency licenses, and ultimately
acquired rights to two to four blocks of two-way spectrum in markets across the
United States for a total purchase price of $45.6 million. The Company is in
the process of purchasing exclusive rights to certain of these SMR frequencies
from incumbent operators. Total SMR frequency acquired is expected to
approximate two to three times the frequency acquired in the 1994 PCS auction.
The Company expects to utilize the PCS and SMR frequencies, which are
functionally interchangeable, to offer products requiring two-way service, such
as VoiceNow and a new low-cost, nationwide alphanumeric service. To increase
the total capacity of a two-way network, a paging carrier can either add
additional transmitters to the system or utilize additional spectrum. The
Company believes utilizing additional frequencies, rather than adding
transmitters, will provide a greater return on investment and allow for
significantly greater numbers of subscribers. The Company, therefore,
aggressively participated in the aforementioned FCC auction of SMR frequencies.
The total cost of this investment will be approximately $250 million, of which
$109 million was paid in 1996 and the remainder will be paid in 1997 and 1998.
TWO WAY WIRELESS SERVICES - The Company is working with Motorola and
Glenayre to deploy a new nationwide two-way digital transmission network using
its two-way frequencies which it believes will be the highest quality, most
extensive, and most cost-effective network of its kind in the country. This
network is expected to provide 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 is expected to be a strategic asset that allows
further penetration of the business and consumer markets.
VOICENOW - The new two-way network will initially be used primarily for
VoiceNow, the Company's new voice paging service, which the Company introduced
in the Dallas/Fort Worth metropolitan area on February 24, 1997. The Company
expects to offer the VoiceNow service in markets across the United States by
the end of 1997. Because of its unique features, the Company believes VoiceNow
will appeal equally to consumers and business users. VoiceNow subscribers
carry a new VoiceNow pager that receives, stores, and plays voice messages.
Each subscriber is 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 locate the subscriber's VoiceNow pager. The
pager sends a reply signal which allows the network to identify the
subscriber's location. The voice message is typically sent to the VoiceNow
pager via the transmitter closest to
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the subscriber. The pager emits a tone or vibrates to alert the subscriber
that a voice message has been received and stored in the pager. The subscriber
can then listen to the message at any time. The pager has 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. Without subscriber intervention, the
VoiceNow network confirms receipt of the message and re-sends it if receipt is
not confirmed. VoiceNow pagers hold approximately three minutes of messages
(with any additional messages being stored on the Company's network for later
delivery) and have rewind, fast forward, cueing, pause, and delete capabilities
and a battery life of approximately six weeks.
The Company offers VoiceNow service at various pricing packages depending
upon the volume of messages received each month and usage of other enhanced
services, such as nationwide coverage or 800 number service. The Company
expects to generate an average revenue of $10 per unit per month for the
service plus the lease of the VoiceNow pager. The Company anticipates that
during 1997 its VoiceNow service will have an incremental negative impact of
$30 million to $40 million on consolidated operating cash flow.
OTHER NEW TWO-WAY WIRELESS SERVICES - In addition to traditional paging
services and VoiceNow, the Company expects to introduce other two-way messaging
products, such as a new, low-cost, nationwide alphanumeric paging and data
messaging service. The new alphanumeric service is expected to be deployed
over the Company's new nationwide two-way network beginning in 1997. The new
two-way network uses less spectrum by determining the location of the
alphanumeric pager, and typically sending the message via 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 prices below
today's alphanumeric rates, producing increased demand for alphanumeric paging
and, thus, expanding the Company's overall market position.
INTERNATIONAL EXPANSION - On April 1, 1996, the Company's wholly owned
subsidiary, Paging Network of Canada Inc. (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 its affiliated company, Madison
Telecommunications, Inc., provides paging transmission services covering a
geographic area containing more than 90% of the Canadian population. As of
December 31, 1996, PageNet Canada had approximately 36,000 paging units in
service. In July 1996, the Company 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 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.
In December 1996, the Company signed agreements to enter the Brazilian market
as the operational partner with a 20% interest in a joint venture with
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Warburg, Pincus Ventures, L.P.; TVA Sistema de Televisao, S.A.; International
Venture Partners, L.P.; and Multiponto Telecommunications Ltda. The Company
commenced operations in Brazil during the first quarter of 1997. 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 select international operations. Future 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 paging operations into its own operations
while maintaining its low-cost structure. The Company will continue to
consider strategic acquisitions and combinations.
SALES AND DISTRIBUTION
The Company believes its distribution channels provide the broadest reach
in the industry. The Company's paging services are sold through a
regionally-deployed direct sales force, some 6,000 nationwide resellers, and
its National Accounts Division. As of December 31, 1996, direct sales (which
includes those from the Company's sales force and marketing affiliates)
accounted for approximately 51.2% of the Company's overall pagers in service
and the indirect channel (which includes resellers and retailers) represented
approximately 48.8%.
All of the Company's sales representatives that support the direct channel
are located in field locations across the United States and Canada.
Historically, a majority of the Company's subscribers have been generated
through the direct sales force. In the direct channel, the Company leases or
sells pagers to customers and charges a monthly fee for its paging service.
The direct sales market is expected to continue to increase and remain an
important source of new subscribers.
In the indirect channel, the Company provides services under marketing
agreements with third-party organizations, or "resellers," in bulk quantities
at wholesale monthly rates that are lower than the Company's retail rates
through its direct sales channel. The resellers, in turn, lease or resell the
pagers to their own subscribers and resell the Company's paging service under
marketing agreements. The Company's costs of handling and billing bulk reseller
accounts are generally lower than the costs of handling and billing its other
accounts and, therefore, higher margins are produced through the Company's
reseller channel than through its direct channel, since the reseller is
responsible for customer service, billing, and other associated expenses. The
portion of the Company's subscriber base placed in service through resellers
accounted for
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approximately 44% of the Company's pagers in service at December 31, 1994,
approximately 45% at December 31, 1995, and approximately 48% at December 31,
1996. Resellers represented approximately 47% of the Company's net unit
additions during 1995 and approximately 58% of the Company's net unit additions
during 1996 as a result of the successful expansion of the reseller program
that began in 1990. This program targets those market segments which the
Company's direct sales force cannot reach in a cost-effective manner.
Management believes that this sales channel generates an attractive incremental
cash flow contribution and enables the Company to increase its 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 high volume,
low-cost distribution channel for the Company. Paging units and services are
offered to potential customers through business arrangements with national
companies that have large customer 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
was selected to provide these services by a variety of companies, including
Citizens Telecom, Comcast Cellular, Communications Expo, GTE, MCI, Sprint PCS,
and TransNational Communications International. The Company believes that
marketing affiliates, which primarily reach the consumer market, may also offer
an excellent means of selling, distributing, and servicing its VoiceNow
product. During 1996, the Company expanded the National Account Division's
functionality, using its infrastructure to service more than 20 national
resellers as well as large corporate and governmental accounts that prefer
central buying and service for their messaging needs.
Subscribers to the Company's paging 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. In
addition, an increasing percentage of consumers with mobile messaging needs are
becoming paging subscribers.
The Company is not dependent on any single customer. No single subscriber
or reseller accounted for more than 3.2% of the Company's Net Revenues in 1996.
MARKETING
The Company promotes its products and services through a variety of
programs, including: television, print, radio, newspaper, and yellow pages
advertising; direct mail; telemarketing; and co-op programs.
Traditionally, the Company has focused its marketing efforts primarily at
business users who have represented the majority of paging subscribers.
However, recent industry growth trends
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<PAGE> 12
include an increasing percentage of consumer, or personal, users. In addition,
the Company believes VoiceNow, its voice paging service, will appeal equally to
consumers and business users.
The Company plans to spur continued growth in paging through a number of
marketing strategies, including advertising, new products and services,
distribution channel expansion, and continued growth in its National Accounts
Division.
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 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 its pagers primarily from Motorola.
The Company has historically purchased its transmitters from three competing
sources and its paging terminals from Glenayre. Motorola is currently the sole
supplier of VoiceNow pagers to the Company. Motorola has agreed to sell its
VoiceNow pagers to the Company on a first-to-market basis in the United States
for a period of six months from March 1, 1997 to August 31, 1997. After such
time, Motorola may provide VoiceNow pagers to other companies. The
transmission and network equipment for VoiceNow is manufactured by Motorola and
Glenayre.
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 its 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 servicing 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
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<PAGE> 13
addition, the industry has been experiencing a significant amount of
consolidation over the last few years as various competitors attempt to expand
their service area and market share. Among the Company's competitors are AT&T
Wireless Messaging, AirTouch Communications, Inc., Arch Communications Group
Inc., and MobileMedia Communications, Inc. (using the trade name MobileComm via
their acquisition of the MobileComm subsidiary of Bell South). Certain of
these competitors possess financial resources greater than those of the
Company.
Additional competition is provided from a variety of wireless two-way
communication technologies, including cellular telephone service, narrowband
and broadband PCS, Enhanced Specialized Mobile Radio, and mobile satellite
services, which are currently in use or under development. Although these
technologies currently are more highly priced than paging services or are not
widely 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. However,
the Company continuously evaluates new technologies and applications to deliver
unique benefits to users of wireless messaging services.
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 (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 receive the exclusive right to use the specific frequency
in the area served by their system as defined by coverage contours and
separation requirements. Licensees granted nationwide exclusivity 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
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<PAGE> 14
subject to continued sharing with facilities in place or applied for on or
before 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 certain applications for licenses, including
broadband and narrowband PCS licenses, which are mutually exclusive by
competitive bidding. 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
now holds 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 in markets 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 have 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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<PAGE> 15
The Communications Act requires licensees, such as the Company, to obtain
prior approval from the FCC for 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 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
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<PAGE> 16
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. A few state and local governments have
discussed the possibility of imposing additional taxes or fees upon certain
activities in which the Company is engaged.
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
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 (LEC's) 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 have been 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 cost 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.
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<PAGE> 17
TRADEMARKS
The Company markets its paging and related services under various names
and marks, including PageNet(R), PageMail(R), PageMate(R), VoiceNow(R), PageNet
Nationwide(R), SurePage(R), FaxNow(R), MessageNow(R), and the Company's "beeper
man" logo, all of which are federally registered service marks. The Company's
federal mark registrations must be renewed at various times between 1999 and
2005, or they would otherwise expire. 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 operations in the United States through 27 wholly
owned subsidiaries of the Company, each of which operates in a specified
geographic area. The Company's subsidiaries operate largely as 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.
The Company conducts its international operations through 10 wholly and
partially owned subsidiaries.
SEASONALITY
Generally, the Company's results of operations are not significantly
affected by seasonal factors. However, historically, because of the number of
holidays during the fourth quarter of the year and adverse winter weather in
the fourth and first quarters of the year, which results in fewer selling days,
the growth rate of pagers placed in service has been somewhat lower during
these periods.
EMPLOYEES
The Company employed a total of 5,728 persons as of December 31, 1996. Of
these, 457 were engaged in general administration at the Company's
headquarters, and 5,271, of whom approximately 1,611 were sales and marketing
personnel, were employed in the Company's operating offices. None of the
Company's employees are represented by a labor union, and management believes
that the Company's employee relations are good.
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ITEM 2. PROPERTIES.
In July 1996, the Company purchased 44 acres of land in Plano, Texas for
its new corporate headquarters, and construction began in March 1997. The
Company expects the first phase of construction on its new headquarters to be
completed in the third quarter of 1998 at a total cost of approximately $60
million (including the cost of the land). In September 1995, the Company
purchased approximately four acres of land and a building with approximately
37,000 square feet in Dallas, Texas. The property is currently being utilized
as a 24-hour customer service call center for the Company's National Accounts
Division.
At December 31, 1996, the Company leased office space in 114 cities in 35
states in the United States and the District of Columbia as well as in 7 cities
in 3 provinces in Canada, which are used in conjunction with its paging
operations. These office leases have monthly rentals ranging from $243 to
$180,650 and expire, subject to renewal options, on various dates through April
30, 2006. As of December 31, 1996, the Company was obligated to pay a total of
approximately $21.7 million under such leases in 1997. Management believes that
the Company will be able to obtain additional space as needed at reasonable
cost.
The Company also leases sites for its transmitters on commercial broadcast
towers, buildings, and other fixed structures. As of December 31, 1996, the
Company leased transmitter sites for approximately 9,000 transmitters. A few
local municipalities have imposed moratoria on transmitter locations or on the
addition of new towers which could, in the future, be used to place
transmitters such as the Company's. Should these moratoria, or others,
continue for extended periods of time, it could affect the Company's and other
wireless carriers' ability to offer seamless coverage in those areas during the
pendency of such moratoria.
As of December 31, 1996, the Company owned pagers having a net book value
of approximately $437.1 million.
ITEM 3. LEGAL PROCEEDINGS.
LITIGATION
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 business or
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 1996.
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DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Age Position
- - ---- --- --------
<S> <C> <C>
George M. Perrin 51 Chairman of the Board of Directors (3)
Glenn W. Marschel 50 President, Chief Executive Officer and Director
Richard C. Alberding 65 Director (2)
Bryan C. Cressey 47 Director (1)
John P. Frazee, Jr. 52 Director (3)
Lee M. Mitchell 53 Director (1) (3)
Carl D. Thoma 48 Director (2)
Leigh Alexander 39 Senior Vice President - Marketing and Strategic Planning
Michael A. DiMarco 38 Senior Vice President - Operations
Barry A. Fromberg 41 Senior Vice President - International of the Company and
Chairman and Chief Executive Officer of Paging Network
International, Inc.
Kenneth W. Sanders 40 Senior Vice President - Finance, Treasurer, Chief Financial
Officer and Assistant Secretary
William G. Scott 40 Senior Vice President - Systems and Technology
G. Robert Thompson 34 Vice President - Finance
</TABLE>
(1) Member of Audit Committee of the Board of Directors.
(2) Member of the Stock Option/Compensation Committee of the Board of
Directors.
(3) Member of the Nominating Committee of the Board of Directors.
The Company has a classified Board of Directors (the Board) composed of
three classes, each of which serves for three years, with one class being
elected each year. The terms of Messrs. Mitchell, Cressey, and Alberding will
expire at the 1997 Annual Meeting of Stockholders to be held on May 22, 1997.
The terms of Messrs. Frazee and Perrin will expire at the 1998 Annual Meeting
of Stockholders and the terms of Messrs. Marschel and Thoma will expire at the
1999 Annual Meeting of Stockholders. Executive officers are elected to hold
office until the next Annual Meeting of the Board or until their respective
successors are elected and qualified but may be removed by the Board at will.
There are no family relationships among any of the Directors and executive
officers of the Company.
Directors who are full-time officers of the Company receive no additional
compensation for serving on the Board or its committees. Directors who are not
full-time officers of the Company receive an annual fee of $5,000, plus $3,750
for each Board meeting they attend and reimbursement for traveling costs and
other out-of-pocket expenses incurred in attending such meetings. Directors
who serve on one or more of the Audit Committee, the Stock Option/Compensation
Committee, or the Nominating Committee, receive no additional compensation,
unless the committee meeting is not held in conjunction with a meeting of the
Board of Directors. In that case, the Directors in attendance at any of those
committee meetings would receive $1,875 and reimbursement for traveling costs
and other out-of-pocket expenses
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incurred in attending such meetings. For a description of an option
plan whereby options will be granted to non-employee Directors, see Note 6 to
the consolidated financial statements entitled "Stock Options".
George M. Perrin has served as a Director of the Company since 1981 and
as Chairman of the Company since January 1, 1994. Mr. Perrin served as
Chairman and Chief Executive Officer of the Company from February 1, 1993 to
December 31, 1993 and as President and Chief Executive Officer of the Company
from 1981 to 1993. Mr. Perrin also serves as a Director of LCI International,
Inc.
Glenn W. Marschel has served as President, Chief Executive Officer and
Director of the Company since December 1, 1995. Prior thereto, Mr. Marschel
had been Vice Chairman and Chief Operating Officer for the image and health
care business of First Financial Management Corporation from April 1995 to
November 1995. Mr. Marschel served as Group President, Payroll and Related
Services, for Automated Data Processing, Inc. from 1989 to December 1994. Mr.
Marschel also serves as a Director of The SABRE Group Holdings, Inc.
Richard C. Alberding has served as a Director of the Company since 1994.
Mr. Alberding was employed by the Hewlett-Packard Company from 1958 to 1991, at
which time he retired as Executive Vice President. Mr. Alberding also serves
as a Director of Digital Microwave Corporation, Kennametal Inc., Sybase, Inc.,
Quickturn Design Systems, Inc., Digital Link Corp., Storm Technology, Inc., and
Walker Interactive Systems, Inc.
Bryan C. Cressey has served as a Director of the Company since 1993. Mr.
Cressey has been a Principal of Golder, Thoma, Cressey, Rauner, Inc. and a
General Partner of Golder, Thoma & Cressey, an investment firm, since 1980.
Mr. Cressey also serves as a Director of Cable Design Technologies Corp. and
American Medserve Corp.
John P. Frazee, Jr., has served as a Director of the Company since 1995.
Mr. Frazee is a private investor who previously was President and Chief
Operating Officer of Sprint Corporation from March 1993 to August 1993. Mr.
Frazee had been Chairman and Chief Executive Officer of Centel Corporation, a
telecommunications company, from 1989 to January 1993. Mr. Frazee also serves
as a Director of Security Capital Group, Inc., Dean Foods Company, Homestead
Village Properties, and Nalco Chemical Company, Inc.
Lee M. Mitchell has served as a Director of the Company since 1991. Mr.
Mitchell has been a Principal of Golder, Thoma, Cressey, Rauner, Inc., since
1994. Prior thereto, Mr. Mitchell served as a Partner of Sidley and Austin, a
law firm, from 1992 to 1994 and as President and Chief Executive Officer of The
Field Corporation, a management and holding company, from 1984 to 1992. Mr.
Mitchell also serves as a Director of Washington National Corporation,
American Medserve Corp., ERO, Inc., and the Chicago Stock Exchange.
Carl D. Thoma has served as a Director of the Company since 1981. Mr.
Thoma also served as Vice Chairman of the Board from February 1, 1993 to
December 31, 1993 and as Chairman of the Board from 1981 to February 1, 1993.
Mr. Thoma has been a Principal of Golder, Thoma,
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Cressey, Rauner, Inc., and a General Partner of Golder, Thoma & Cressey, an
investment firm, since 1980. Mr. Thoma also serves as a Director of MS
Financial, Inc.
Leigh Alexander has served as Senior Vice President - Marketing and
Strategic Planning for the Company since July 1996. Prior thereto, Ms.
Alexander was Senior Vice President - Marketing and Business Development for
the Philips Media division of Philips Electronics N.V. from June 1995 to July
1996. Ms. Alexander also held various management positions with Norelco
Consumer Products Company, a division of Philips, from 1988 to 1995, most
recently as Vice President - Marketing.
Michael A. DiMarco has served as Senior Vice President - Operations for
the Company since February 1997. Mr. DiMarco served as Senior Vice President,
National Accounts Division for the Company from December 1995 to February 1997
and was Vice President - Corporate Development for the Company from July 1994
to December 1995. Mr. DiMarco served as President of Paging Network - Atlantic
Region, Inc., a subsidiary of the Company, from September 1992 to July 1994 and
was Vice President and General Manager of the Company's operations in Burbank,
California from 1991 to 1992.
Barry A. Fromberg has served as Senior Vice President - International of
the Company and Chairman and Chief Executive Officer of Paging Network
International, Inc. since December 1995. Mr. Fromberg had served as Senior
Vice President - Finance and Administration, Chief Financial Officer, Treasurer
and Assistant Secretary for the Company from May 1993 to December 1995. Prior
thereto, Mr. Fromberg served as Executive Vice President and Chief Financial
Officer for Simmons Communications, Inc. from 1987 to 1993.
Kenneth W. Sanders has served as Senior Vice President - Finance,
Treasurer, Chief Financial Officer, and Assistant Secretary for the Company
since January 1996. Prior thereto, Mr. Sanders was Executive Vice President,
Chief Financial Officer and Director of CellStar Corporation from May 1993 to
January 1996. Prior to joining CellStar, Mr. Sanders was an Audit Partner of
KPMG Peat Marwick and had been with that firm from 1979 to 1993.
William G. Scott has served as Senior Vice President - Systems and
Technology for the Company since February 1997 and as Vice President - Systems
and Technology from December 1995 to February 1997. Prior thereto, Mr. Scott
had served as President of Lion Software, Inc. from 1993 to 1995 and as
Director of Product Management for GTE Spacenet from 1991 to 1993.
G. Robert Thompson has served as Vice President - Finance for the Company
since February 1995 and was Corporate Controller for the Company from 1990 to
1995.
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---------------------
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock, $0.01 par value (the Common Stock) was
initially offered to the public on October 1, 1991, and is listed on the NASDAQ
National Market System under the symbol PAGE. Prior to that offering there was
no public market for the Common Stock of the Company. The high and low trading
prices for 1995 and 1996 for the Common of the Company are set forth below.
The trading prices for 1995 in the table below have been adjusted to reflect a
two-for-one stock split of the Company's Common Stock effected on September
15, 1995.
<TABLE>
<CAPTION>
Price Range
-----------
High Low
---- ---
1995
<S> <C> <C>
First Quarter 18 1/4 15 3/4
Second Quarter 17 1/4 12 1/2
Third Quarter 24 3/8 16 7/8
Fourth Quarter 26 20 3/4
1996
First Quarter 29 1/4 22 1/4
Second Quarter 28 20 1/4
Third Quarter 24 16 1/2
Fourth Quarter 20 1/8 14 3/8
</TABLE>
As of March 7, 1997, there were approximately 411 stockholders of
record. The Company did not pay dividends on its Common Stock for the years
ended December 31, 1996 and 1995. While prior to 1991 the Company made
significant cash distributions to stockholders, the Company currently intends
to follow a policy of retaining all funds to finance the continued growth of
the Company's business and does not anticipate paying cash dividends or making
other cash distributions to stockholders in the foreseeable future. Certain
covenants in the Company's debt agreements restrict the payment of cash
dividends by the Company.
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<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data for the five years ended December
31, 1996, are derived from the Consolidated Financial Statements of the
Company. 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 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.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Services, rent and maintenance revenues $206,198 $294,979 $389,919 $532,079 $685,960
Product sales 51,600 78,915 99,765 113,943 136,527
-------- -------- -------- -------- --------
Total revenues 257,798 373,894 489,684 646,022 822,487
Cost of products sold (35,909) (62,495) (78,102) (93,414) (116,647)
-------- -------- -------- -------- --------
Net Revenues 221,889 311,399 411,582 552,608 705,840
Services, rent and maintenance expenses 37,437 57,343 74,453 109,484 146,896
Selling expenses 34,135 44,836 60,555 67,561 82,790
General and administrative expenses 74,754 108,993 136,539 174,432 219,317
Depreciation and amortization 58,683 87,430 107,362 148,997 213,440
-------- -------- -------- -------- --------
Total operating expenses 205,009 298,602 378,909 500,474 662,443
-------- -------- -------- -------- --------
Operating income 16,880 12,797 32,673 52,134 43,397
Interest expense 23,638 32,808 53,717 102,846 128,014
Interest income - - 3,079 6,511 3,679
Equity in loss of an unconsolidated
subsidiary - - - - 882
-------- -------- -------- -------- --------
Loss before extraordinary item (6,758) (20,011) (17,965) (44,201) (81,820)
Extraordinary item (1) (14,884) - - - -
-------- -------- -------- -------- --------
Net loss $(21,642) $(20,011) $(17,965) $(44,201) $(81,820)
======== ======== ======== ======== ========
Per common share data (2):
Loss before extraordinary item $ (0.06) $ (0.20) $ (0.18) $ (0.43) $ (0.80)
Extraordinary item (0.15) - - - -
</TABLE>
(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 the two-for-one stock
split effective September 15, 1995.
23
<PAGE> 24
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
OTHER DATA:
(IN THOUSANDS, EXCEPT PAGER DATA)
<S> <C> <C> <C> <C> <C>
EBITDA $ 75,563 $ 100,227 $ 140,035 $ 201,131 $ 256,837
Pagers in service
(at end of period) 2,077,954 3,068,569 4,408,842 6,737,907 9,002,733
Pagers in service per
employee
(at end of period) 778 974 1,103 1,441 1,572
Capital expenditures $ 145,970 $ 145,625 $ 213,308 $ 312,289 $ 402,510
CONSOLIDATED BALANCE SHEET DATA:
(IN THOUSANDS) DECEMBER 31,
Current assets $ 29,821 $ 29,000 $ 39,375 $ 262,415 $ 130,428
Total assets 304,747 371,556 706,008 1,228,338 1,462,113
Long-term obligations,
less current maturities 267,000 342,500 504,000 1,150,000 1,459,188
Total stockholders' deficit (4,818) (23,366) (39,908) (80,784) (159,675)
</TABLE>
24
<PAGE> 25
ITEM 7. 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
investment expectations, and introduction of new products are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in the forward-looking
statements. Among the factors that could cause actual future results to differ
materially are competitive pressures, growth rates, new market opportunities,
supplier constraints, market conditions, timing and techniques used in
marketing by third-party distributors, and acceptance of the Company's services
in the marketplace.
RESULTS OF OPERATIONS
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, 1994, 1995, and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0%
Operating expenses:
Services, rent and maintenance 18.1 19.8 20.8
Selling 14.7 12.2 11.7
General and administrative 33.2 31.6 31.1
Depreciation and amortization 26.1 27.0 30.3
---- ---- ----
Operating income 7.9 9.4 6.1
Net loss (4.4) (8.0) (11.6)
EBITDA 34.0 36.4 36.4
EBITDA for domestic operations 34.0 36.4 37.5
</TABLE>
25
<PAGE> 26
Net Revenues for the year ended December 31, 1996 were $705.8 million, an
increase of 27.7% over $552.6 million for the year ended December 31, 1995.
Net Revenues for the year ended December 31, 1995 increased 34.3% from $411.6
million for the year ended December 31, 1994. Revenues from services, rent,
and maintenance, which the Company considers its primary business, increased
28.9% to $686.0 million for the year ended December 31, 1996, compared to
$532.1 million for the year ended December 31, 1995. Services, rent, and
maintenance revenues for the year ended December 31, 1995 increased 36.5% from
$389.9 million for the year ended December 31, 1994. 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, 1996, 1995, and 1994 was 9,002,733, 6,737,907, and 4,408,842,
respectively. The increase in the pagers in service with subscribers from
December 31, 1995 to December 31, 1996 and from December 31, 1994 to December
31, 1995 was 33.6% and 52.8%, respectively. 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 and, during 1995, acquisitions of
certain paging assets, including approximately 343,000 pagers in service. 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 customer 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 and annual results relating to the net
addition of pagers.
Product sales, less cost of products sold, were relatively flat for the
year ended December 31, 1996 compared to the year ended December 31, 1995.
Product sales, less cost of products sold, were $19.9 million (2.8% of Net
Revenues) for 1996 compared to $20.5 million (3.7% of Net Revenues) for 1995.
Product sales, less cost of products sold, were $21.7 million (5.3% of Net
Revenues) for the year ended December 31, 1994. The decreases in product sales,
less cost of products sold, as a percentage of Net Revenues were primarily
attributable to lower product sales margins being derived as a result of more
competitive pricing for product sales. Management expects this competitive
pricing trend to continue in 1997.
Services, rent, and maintenance expenses for the year ended December 31,
1996 increased 34.2% to $146.9 million (20.8% of Net Revenues) compared to
$109.5 million (19.8% of Net Revenues) for the year ended December 31, 1995.
Services, rent, and maintenance expenses for the year ended December 31, 1995
increased by 47.1% from $74.5 million (18.1% of Net Revenues) for the year
ended December 31, 1994. These increases in services, rent and maintenance
expenses and the increases as a percentage of Net Revenues were a result of
growth in the number of pagers in service with subscribers of the Company,
expenses associated with an increase in transmitter sites in order to ensure
reliable transmission of enhanced messaging services, and expansion of
nationwide transmission networks.
26
<PAGE> 27
For the year ended December 31, 1996, selling expenses increased 22.5% to
$82.8 million (11.7% of Net Revenues) from $67.6 million (12.2% of Net
Revenues) for the year ended December 31, 1995. Selling expenses for the year
ended December 31, 1995 increased by 11.6% from $60.6 million (14.7% of Net
Revenues) for the year ended December 31, 1994. The increase in selling
expenses 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
was primarily attributable to the expansion of local and national third-party
resellers, for which the Company incurred less selling costs on units placed in
service through this channel than through the direct channel. In addition,
since sales commissions are paid to the direct sales force 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 a decline in selling expenses as a percentage of the Net
Revenues.
General and administrative expenses increased 25.7% to $219.3 million
(31.1% of Net Revenues) for the year ended December 31, 1996, compared to
$174.4 million (31.6% of Net Revenues) for the year ended December 31, 1995.
General and administrative expenses for the year ended December 31, 1995
increased by 27.8% from $136.5 million (33.2% of Net Revenues) for the year
ended December 31, 1994. 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 for the year ended
December 31, 1996, as compared to the prior year by 43.3% from $149.0 million
to $213.4 million. Depreciation and amortization expenses for the year ended
December 31, 1995 increased by 38.8% from $107.4 million for the year ended
December 31, 1994. These increases in depreciation and amortization expenses
were primarily due to the increase in the number of pagers owned by the Company
and leased to subscribers, the increase in computer and paging equipment, and
the acquisitions discussed in Note 13 to the consolidated financial statements.
Depreciation and amortization expenses will increase significantly in 1997 due
to changes in pager depreciation and the commencement of amortization of PCS
and SMR licenses and certain other costs upon the introduction of VoiceNow
(including the depreciation of the Company's VoiceNow pagers), which occurred
on February 24, 1997. Effective January 1, 1997, the Company is shortening the
depreciable life of its pagers from four to three years, and revising the
related residual values. The change is being made to better reflect the
estimated periods during which the pagers will remain in service. The change
will have an effect of increasing depreciation expense by approximately $35
million in 1997.
Operating income decreased 16.8% from $52.1 million (9.4% of Net Revenues)
for the year ended December 31, 1995 to $43.4 million (6.1% of Net Revenues)
for the year ended December 31, 1996. Operating income for the year ended
December 31, 1995 increased 59.6% from $32.7 million (7.9% of Net Revenues) for
the year ended December 31, 1994.
27
<PAGE> 28
As a result of the above factors, EBITDA increased 27.7% to $256.8
million (36.4% of Net Revenues) for 1996 compared to $201.1 million (36.4% of
Net Revenues) for 1995. EBITDA for the year ended December 31, 1995 increased
by 43.6% from $140.0 million (34.0% of Net Revenues) for the year ended
December 31, 1994. In 1996, EBITDA and the percentage of Net Revenues were
negatively impacted by the Company's international start-up operations. EBITDA
for the Company's domestic operations increased 31.5% to $264.6 million (37.5%
of Net Revenues) for 1996 compared to $201.1 million (36.4% of Net Revenues)
for 1995. The Company anticipates that during 1997 its VoiceNow service will
have an incremental negative impact of $30 million to $40 million on
consolidated operating cash flow.
Interest expense for the years ended December 31, 1996, 1995, and 1994 was
$128.0 million, $102.8 million, and $53.7 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 1996, 1995, and 1994 was approximately $1.2 billion, $916.6
million, and $490.2 million, respectively. Interest expense for 1995 included
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, 1996 was $3.7 million
compared to $6.5 million for 1995. The interest income in 1996 was the result
of investing the remaining net proceeds of the 10% Senior Subordinated Notes
(10% Notes) issued in October 1996 and the remaining net proceeds of the
10.125% Senior Subordinated Notes (10.125% Notes) issued in July 1995. The
interest income in 1995 was the result of investing the remaining net proceeds
of the 10.125% 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 licenses and
acquisitions) were $402.5 million, $312.3 million, and $213.3 million for the
years ended December 31, 1996, 1995, and 1994, respectively. For 1996, capital
expenditures were funded from the remaining net proceeds of the 10% Notes and
10.125% Notes, net cash provided by operating activities ($75.5 million), and
borrowings under the Company's credit agreements. For 1995, capital
expenditures were funded from the remaining net proceeds of the 10.125% Notes,
net cash provided by operating activities ($160.6 million), and borrowings
under the Company's credit agreements. For 1994, capital expenditures were
funded from the remaining net proceeds of the 8.875% Senior Subordinated Notes
(8.875% Notes), net cash provided by operating activities ($107.7 million), and
borrowings under the Company's credit agreement. 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 fourth quarter of
1995. The subsequent payments for this paging and other equipment in 1996 and
the increase in inventories contributed to a decrease in net cash provided by
operating activities of $85.1 million from 1995 to 1996.
28
<PAGE> 29
Inventories increased from $14.1 million at December 31, 1995 to $57.7
million at December 31, 1996, largely due to purchases to support the Company's
expanding number of third-party resellers and marketing affiliates serviced
through the Company's National Accounts Division. Many of these affiliates sell
privately labeled units across multiple product lines, resulting in the Company
carrying larger inventories. Inventory purchases have also increased due to
continued strong growth in the Company's alphanumeric product line.
Alphanumeric pagers have a significantly higher unit cost compared to numeric
display pagers. In 1996, the Company's National Accounts Division opened a
state-of-the-art distribution facility in the Dallas area. The fully automated
center will allow the Company to more effectively manage inventory levels.
In 1994, the Company acquired three nationwide narrowband personal
communications services (PCS) frequencies in a Federal Communications
Commission (FCC) auction at a cost of $197 million. During April 1996, the
Company concluded its participation in an FCC 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 total
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 approximately $250 million, of which
$109 million was paid in 1996 and the remainder will be paid in 1997 and 1998.
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
paging service, VoiceNow. 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 pagers, may total approximately $200 million,
of which $47 million was incurred during 1996.
During 1995, the Company acquired certain paging assets of Comtech, Inc. -
Paging Division; SNET Paging, Inc. and its wholly owned subsidiary, TNI
Associates, Inc.; two subsidiaries of PageAmerica; Page Florida; International
Paging Corp.; and Celpage, Inc. - Atlanta Branch, 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.
Through its 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. The Company
commenced operations in Brazil 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. The Company
believes that in these markets its strategy of low-cost, high quality service
is likely to be successful. Additional investments will depend on such factors
as growth rates, new market
29
<PAGE> 30
opportunities, and execution of financing plans that maximize value for the
Company's stockholders.
On June 5, 1996, the Company amended its credit agreement with its group
of lenders (the Credit Agreement). The Credit Agreement provides for a $1.0
billion revolving loan. Under the Credit Agreement, the Company is able to
borrow, provided it meets certain financial covenants, the lesser of $1.0
billion or an amount based upon a calculation which is reduced by total
outstanding indebtedness for borrowed monies (as defined) and outstanding
letters of credit. The amount available for borrowing is equal to a specified
multiple of EBITDA for the most recently ended fiscal quarter multiplied by
four. As of February 28, 1997, the Company had $144.0 million of borrowings
outstanding under its Credit Agreement and approximately $274.4 million was
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 June 5, 1996, the Company's wholly-owned Canadian subsidiary, Paging
Network of Canada Inc. (PageNet Canada), along with the Company's
majority-owned Canadian subsidiary, Madison Telecommunications Holdings, Inc.
(MadTel Holdings), established new credit facilities in Canada. These credit
facilities are denominated in Canadian dollars; however, the amounts reported
herein are the U.S. dollar equivalents as of December 31, 1996. The credit
agreements provide for total borrowings of approximately $40 million by PageNet
Canada and approximately $25 million by MadTel Holdings, of which PageNet
Canada and MadTel Holdings are able to initially borrow approximately $20
million and approximately $16 million, respectively, under fully collateralized
borrowings. The remaining amounts are available for borrowings provided they
are either collateralized or certain financial covenants are met. As of
December 31, 1996, PageNet Canada had approximately $18 million and MadTel
Holdings had approximately $11 million of borrowings outstanding under the
credit facilities. The maximum borrowings which may be outstanding under the
credit facilities begin reducing on June 30, 1999, and both credit agreements
expire on June 30, 2003.
On October 16, 1996, the Company completed an offering of $500.0 million
of 10% Notes which contain various covenants that, among other things, limit
the ability of the Company and its subsidiaries to incur indebtedness; pay
dividends; engage in transactions with affiliates; sell assets; and engage in
mergers, consolidations, and other acquisitions. The net proceeds of $488.8
million from the sale of the 10% Notes were used to repay $417.2 million of
revolving loans and accrued interest as of October 16, 1996 under the Company's
revolving credit agreement. The Company used the remaining net proceeds from
the sale of the 10% Notes for working capital, capital expenditures, and other
general corporate purposes, which included expansion of its existing business
and acquisition of new paging frequencies.
On February 19, 1997, the Board of Directors of the Company voted to
redeem all of the Company's outstanding 11.75% Senior Subordinated Notes
(11.75% Notes). The redemption will occur on May 15, 1997 utilizing funds to
be borrowed under the Company's Credit Agreement. The Company expects to record
an extraordinary loss on the early retirement of the 11.75% Notes of
approximately $15 million in the second quarter of 1997. As a result of the
redemption of the
30
<PAGE> 31
11.75% Notes, the Company anticipates an incremental savings in interest
expense of approximately $4 million in 1997.
It is anticipated that 1997 net cash from operating activities will be
insufficient to fund 1997 capital expenditures (including the costs to build
the two-way network) and frequency purchases. These expenditures, which are
expected to exceed $600 million, primarily relate to the development of a new
nationwide digital transmission network for the Company's new VoiceNow service
and the Company's ongoing paging operations, including greater market share of
existing markets and expansion of the Company's operations into new markets.
These expenditures will be funded with additional borrowings. The Company
currently estimates 1997 incremental indebtedness may aggregate in excess of
$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.
31
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 33
Paging Network, Inc. Consolidated Statements of Operations
for the years ended December 31, 1996, 1995, and 1994 34
Paging Network, Inc. Consolidated Balance Sheets as of
December 31, 1996 and 1995 35
Paging Network, Inc. Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995, and 1994 36
Paging Network, Inc. Consolidated Statements of Stockholders' Deficit
for the years ended December 31, 1996, 1995, and 1994 37
Paging Network, Inc. Notes to Consolidated Financial Statements 38
</TABLE>
32
<PAGE> 33
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Paging Network, Inc.
We have audited the accompanying consolidated balance sheets of Paging Network,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, cash flows and stockholders' deficit for each of the three years
in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Paging Network,
Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 19, 1997
33
<PAGE> 34
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Information)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Services, rent and maintenance revenues $ 389,919 $ 532,079 $ 685,960
Product sales 99,765 113,943 136,527
--------- --------- ---------
Total revenues 489,684 646,022 822,487
Cost of products sold (78,102) (93,414) (116,647)
--------- --------- ---------
411,582 552,608 705,840
Operating expenses:
Services, rent and maintenance 74,453 109,484 146,896
Selling 60,555 67,561 82,790
General and administrative 136,539 174,432 219,317
Depreciation and amortization 107,362 148,997 213,440
--------- --------- ---------
Total operating expenses 378,909 500,474 662,443
--------- --------- ---------
Operating income 32,673 52,134 43,397
Other income (expense):
Interest expense (53,717) (102,846) (128,014)
Interest income 3,079 6,511 3,679
Equity in loss of an unconsolidated
subsidiary -- -- (882)
--------- --------- ---------
Total other income (expense) (50,638) (96,335) (125,217)
--------- --------- ---------
Net loss $ (17,965) $ (44,201) $ (81,820)
========= ========= =========
Net loss per share $ (0.18) $ (0.43) $ (0.80)
========= ========= =========
</TABLE>
See accompanying notes
34
<PAGE> 35
PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Information)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 198,182 $ 3,777
Accounts receivable (less allowance for doubtful accounts of
$4,704 and $4,994 in 1995 and 1996, respectively) 41,335 60,089
Inventories 14,084 57,690
Prepaid expenses 5,495 8,872
----------- -----------
Total current assets 259,096 130,428
Property, equipment, and leasehold improvements, at cost 841,022 1,171,090
Less accumulated depreciation (225,413) (330,055)
----------- -----------
Net property, equipment, and leasehold improvements 615,609 841,035
Other non-current assets, at cost 384,098 547,067
Less accumulated amortization (30,465) (56,417)
----------- -----------
Net other non-current assets 353,633 490,650
----------- -----------
$ 1,228,338 $ 1,462,113
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 69,776 $ 59,857
Accrued interest 34,670 41,853
Accrued expenses 34,421 38,460
Customer deposits 20,255 22,430
----------- -----------
Total current liabilities 159,122 162,600
----------- -----------
Long-term obligations 1,150,000 1,459,188
Commitments and contingencies -- --
Stockholders' deficit:
Common Stock - $.01 par, authorized 250,000,000 shares;
issued and outstanding 102,245,807 shares at December 31,
1995 and 102,621,077 shares at December 31, 1996 1,022 1,026
Paid-in capital 121,701 124,522
Accumulated deficit (203,507) (285,327)
Foreign currency translation adjustments -- 104
----------- -----------
Total stockholders' deficit (80,784) (159,675)
----------- -----------
$ 1,228,338 $ 1,462,113
=========== ===========
</TABLE>
See accompanying notes
35
<PAGE> 36
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss $ (17,965) $ (44,201) $ (81,820)
Adjustments to reconcile net loss
to cash provided by operating activities:
Depreciation and amortization 107,362 148,997 213,440
Provision for doubtful accounts 11,664 12,209 14,033
Equity in loss of an unconsolidated subsidiary -- -- 882
Write-off of debt issuance costs -- 6,641 --
Amortization of debt issuance costs 2,764 4,313 5,261
Payment of consent solicitation
on 11.75% Senior Notes (5,896) -- --
Changes in operating assets and
liabilities:
Accounts receivable (20,289) (28,393) (32,787)
Inventories (2,501) (3,495) (43,606)
Prepaid expenses 711 (4,144) (3,377)
Accounts payable 9,532 41,860 (9,919)
Accrued expenses 18,941 24,715 11,222
Customer deposits 3,421 2,127 2,175
--------- --------- ---------
Net cash provided by operating activities 107,744 160,629 75,504
--------- --------- ---------
Investing activities:
Capital expenditures (213,308) (312,289) (402,510)
Payments for spectrum licenses (39,672) (157,600) (109,236)
Business acquisitions and joint venture investments (5,705) (111,872) (9,352)
Restricted cash invested in money market instruments -- -- (27,039)
Other (2,154) (7,626) (18,107)
--------- --------- ---------
Net cash used in investing activities (260,839) (589,387) (566,244)
--------- --------- ---------
Financing activities:
Borrowings under credit agreements 4,000 564,850 223,438
Repayments of long-term obligations (142,500) (318,850) (414,250)
Proceeds from Senior Notes offerings 300,000 400,000 500,000
Debt issuance costs on Senior Notes offerings (8,250) (10,132) (11,250)
Debt issuance costs on credit agreements -- (13,531) (3,766)
Proceeds from exercise of Common Stock options 1,423 3,325 2,825
Other (1,618) (1,173) (662)
--------- --------- ---------
Net cash provided by financing activities 153,055 624,489 296,335
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (40) 195,731 (194,405)
Cash and cash equivalents at beginning of year 2,491 2,451 198,182
--------- --------- ---------
Cash and cash equivalents at end of year $ 2,451 $ 198,182 $ 3,777
========= ========= =========
</TABLE>
See accompanying notes
36
<PAGE> 37
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Year ended December 31, 1994, 1995, and 1996
(In Thousands, Except Share Information)
<TABLE>
<CAPTION>
Foreign
Currency
Common Paid-in Accumulated Translation Stockholders'
Stock Capital Deficit Adjustments Deficit
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 1,011 $ 116,964 $(141,341) $ -- $ (23,366)
Issuance of 319,302 shares of
Common Stock upon exercise
of stock options 3 1,420 -- -- 1,423
Net loss -- -- (17,965) -- (17,965)
--------- --------- --------- --------- ---------
Balance, December 31, 1994 1,014 118,384 (159,306) -- (39,908)
Issuance of 840,007 shares of
Common Stock upon exercise
of stock options 8 3,317 -- -- 3,325
Net loss -- -- (44,201) -- (44,201)
--------- --------- --------- --------- ---------
Balance, December 31, 1995 1,022 121,701 (203,507) -- (80,784)
Issuance of 375,270 shares of
Common Stock upon exercise
of stock options 4 2,821 -- -- 2,825
Net loss -- -- (81,820) -- (81,820)
Foreign currency translation
adjustments -- -- -- 104 104
--------- --------- --------- --------- ---------
Balance, December 31, 1996 $ 1,026 $ 124,522 $(285,327) $ 104 $(159,675)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes
37
<PAGE> 38
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Paging Network, Inc. (the Company) is a provider of paging and wireless
messaging services. The Company provides paging services in all 50 states, the
District of Columbia, the U.S. Virgin Islands, Puerto Rico, and Canada,
including local paging service in all of the largest 100 markets (in
population) in the United States, and owns a minority interest in joint
ventures of paging companies in Spain and Brazil. The consolidated financial
statements of the Company include the accounts of all of its wholly and
majority-owned subsidiaries. All intercompany transactions have been
eliminated.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Inventories - Inventories consist of pagers which are held specifically
for resale. Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out basis.
Property, equipment, and leasehold improvements - Property, equipment, and
leasehold improvements are stated at cost, less accumulated depreciation.
Expenditures for maintenance are charged to expense as incurred. Upon
retirement of units of equipment, the costs of units retired and the related
accumulated depreciation amounts are removed from the accounts. Depreciation
is computed using the straight-line method based on the following estimated
useful lives:
<TABLE>
<S> <C>
Machinery and equipment 3 to 7 years
Pagers 4 years (1)
Furniture and fixtures 7 years
Leasehold improvements 5 years (2)
Buildings and building improvements 20 years
</TABLE>
(1) Effective January 1, 1997, the Company changed the estimated useful life
of pagers to 3 years, with estimated residual values ranging to $20.
(2) Or term of lease if shorter.
The Company does not manufacture any of the pagers or related transmitting
and computerized paging terminal equipment used in the Company's paging
operations. The Company purchases its pagers primarily from Motorola, Inc.
However, pagers are available for purchase from multiple sources, consistent
with normal manufacturing and delivery lead times.
38
<PAGE> 39
Other non-current assets - Other non-current assets are stated at cost,
less accumulated amortization. Amortization is computed using the
straight-line method based upon the following estimated useful lives:
<TABLE>
<S> <C>
Licenses and frequencies 40 years
Excess of cost over fair market
value of net assets acquired 20 years
Other intangible assets 18 months - 12 years
Other non-current assets 18 months - 12 years
</TABLE>
The Company continually evaluates other non-current assets to determine
whether current events and circumstances warrant adjustment to the carrying
values or amortization periods. Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS No. 121). The adoption of SFAS No. 121 did not have any impact on the
Company.
Income taxes - Income taxes are provided based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." If it is more likely than not that some portion
or all of a deferred tax asset will not be realized, a valuation allowance is
recognized.
Reclassifications - Certain 1994 and 1995 amounts have been reclassified to
conform with the 1996 presentation.
2. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
The cost of property, equipment, and leasehold improvements consisted of
the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1995 1996
---- ----
<S> <C> <C>
Machinery and equipment $394,331 $ 571,963
Pagers 372,128 489,427
Furniture and fixtures 46,189 57,550
Leasehold improvements 25,036 35,130
Land, buildings, and building improvements 3,338 17,020
-------- ----------
Total cost $841,022 $1,171,090
======== ==========
</TABLE>
39
<PAGE> 40
3. OTHER NON-CURRENT ASSETS
The cost of other non-current assets consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1995 1996
---- ----
<S> <C> <C>
Licenses and frequencies $249,058 $358,272
Excess of cost over fair market value
of assets acquired 34,543 34,899
Other intangible assets 53,741 55,893
Restricted cash invested in money
market instruments, at fair value - 27,039
Other non-current assets 46,756 70,964
-------- ---------
Total $384,098 $547,067
======== =========
</TABLE>
Licenses and frequencies consist of amounts paid in conjunction with the
purchase of three nationwide narrowband PCS frequencies at a Federal
Communications Commission (FCC) auction held in 1994, amounts paid in
conjunction with the purchase of two to four blocks of two-way 900 MHz
specialized mobile radio (SMR) major trading area based licenses, amounts paid
to purchase exclusive rights to certain of the SMR frequencies from incumbent
operators, and amounts paid to secure other paging licenses. Amortization of
certain of these costs commenced during the first quarter of 1997 when the
related frequencies were placed into service.
Other intangible assets generally consist of customer lists, start-up
costs, and FCC application costs.
4. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1995 1996
---- ----
<S> <C> <C>
Revolving loans $ - $ 59,188
Term loans due March 31, 2002 250,000 -
11.75% Senior Subordinated Notes due May 15, 2002 200,000 200,000
8.875% Senior Subordinated Notes due February 1, 2006 300,000 300,000
10.125% Senior Subordinated Notes due August 1, 2007 400,000 400,000
10% Senior Subordinated Notes due October 15, 2008 - 500,000
---------- ----------
Total long-term obligations $1,150,000 $1,459,188
========== ==========
</TABLE>
40
<PAGE> 41
On June 5, 1996, the Company amended its credit agreement with its group of
lenders (the Credit Agreement). The Credit Agreement provides for a $1.0
billion revolving loan. Under the Credit Agreement, the Company is able to
borrow, provided it meets certain financial covenants, the lesser of $1.0
billion or an amount based upon a calculation which is reduced by total
outstanding indebtedness for borrowed monies (as defined) and outstanding
letters of credit. The amount available for borrowing is equal to a specified
multiple of annualized earnings before interest, income taxes, depreciation,
and amortization based on the most recently ended quarter. As of December 31,
1996, the Company had $30.0 million of borrowings outstanding under its Credit
Agreement and approximately $390.4 million was available for additional
borrowings. The Company's Credit Agreement expires on December 31, 2004. The
maximum borrowings which may be outstanding under the revolving loan are
permanently reduced beginning on June 30, 2001, as follows: 2001 - $150.0
million; 2002 - $200.0 million; 2003 - $250.0 million; and 2004 - $400.0
million. In 1995, the Company expensed debt issuance costs of approximately
$6.6 million related to a prior $450.0 million credit agreement.
Under the Credit Agreement, the Company may designate all or a portion of
the revolving loan to be either a Base Rate Loan or a London Interbank Offered
Rate (LIBOR) loan. As of December 31, 1996, the Company had designated $22.0
million of the revolving loan as a LIBOR Rate loan which bears interest at a
rate equal to the LIBOR rate plus a spread of 1.50% based on the Company's
total leverage ratio as defined. As of December 31, 1996, the Company had
designated $8.0 million of the revolving loan as a Base Rate Loan which bears
interest at a rate equal to the sum of the Applicable Margin plus the higher of
(i) the rate established by the Administrative Agent from time to time as its
reference rate for the determination of interest rates for loans of varying
maturities in U.S. Dollars to U.S. persons, and (ii) the Federal funds rate
plus 0.50%. The interest rates for the $22.0 million LIBOR Rate loan and the
$8.0 million Base Rate Loan at December 31, 1996 were 7.00% and 8.75%,
respectively.
The Credit Agreement prohibits the Company from paying cash dividends or
other cash distributions to stockholders. The Credit Agreement also prohibits
the Company from paying more than a total $2.0 million in connection with the
purchase of Common Stock owned by employees whose employment with the Company
is terminated (see Note 6). The Credit Agreement contains other covenants
that, among other things, limit the ability of the Company and its subsidiaries
to incur indebtedness, engage in transactions with affiliates, dispose of
assets, and engage in mergers, consolidations, and other acquisitions. Amounts
owing under the Credit Agreement are secured by a security interest in
substantially all of the Company's assets, the assets of the Company's
subsidiaries, and the capital stock of the subsidiaries of the Company.
On June 5, 1996, the Company's wholly-owned Canadian subsidiary, Paging
Network of Canada Inc. (PageNet Canada), along with the Company's
majority-owned Canadian subsidiary, Madison Telecommunications Holdings, Inc.
(MadTel Holdings), established new credit facilities in Canada. These credit
facilities are denominated in Canadian dollars; however, the amounts reported
herein are the U.S. dollar equivalents as of December 31, 1996. The credit
agreements provide for total borrowings of approximately $40 million by PageNet
Canada and approximately $25 million by MadTel Holdings, of which PageNet
Canada and MadTel Holdings are able to initially borrow approximately $20
million and approximately $16 million, respectively, under
41
<PAGE> 42
fully collateralized borrowings. The remaining amounts are available for
borrowings provided they are either collateralized or certain financial
covenants are met. As of December 31, 1996, PageNet Canada had approximately
$18 million and MadTel Holdings had approximately $11 million of borrowings
outstanding under the credit facilities. The Company, along with Madison
Venture Corporation, the minority interest shareholder in MadTel Holdings, is a
guarantor of both credit agreements to the extent of the amounts deposited with
the lenders to collateralize outstanding borrowings under the credit
facilities. As of December 31, 1996, $27.0 million was deposited by the
Company with the lenders to collateralize outstanding borrowings and was
included in other non-current assets. The maximum borrowings which may be
outstanding under the credit facilities begin reducing on June 30, 1999, and
both credit agreements expire on June 30, 2003.
The 11.75% Senior Subordinated Notes (11.75% Notes), the 8.875% Senior
Subordinated Notes (8.875% Notes), the 10.125% Senior Subordinated Notes
(10.125% Notes), and the 10% Senior Subordinated Notes (10% Notes) are
redeemable on or after May 15, 1997, February 1, 1999, August 1, 2000, and
October 15, 2001, respectively, at the option of the Company, in whole or in
part from time to time, at certain prices declining annually to 100 percent of
the principal amount on or after May 15, 1999, February 1, 2002, August 1,
2003, and October 15, 2004, respectively, plus accrued interest. The 11.75%
Notes, the 8.875% Notes, the 10.125% Notes, and the 10% Notes are subordinated
in right of payment to all senior debt, and contain various covenants that,
among other things, limit the ability of the Company and its subsidiaries to
incur indebtedness, pay dividends, engage in transactions with affiliates, sell
assets, and engage in mergers, consolidations, and other acquisitions.
On February 19, 1997, the Board of Directors of the Company voted to redeem
all of the Company's outstanding 11.75% Notes. The redemption will occur on
May 15, 1997 utilizing funds to be borrowed under the Company's Credit
Agreement. The Company expects to record an extraordinary loss on the early
retirement of the 11.75% Notes of approximately $15 million in the second
quarter of 1997.
Based on quoted market prices, the fair value of the 11.75% Notes, the
8.875% Notes, the 10.125% Notes, and the 10% Notes at December 31, 1996 was
$215.0 million, $286.1 million, $409.5 million, and $506.3 million,
respectively.
In November 1994, the Company received consent from holders of its 11.75%
Notes to amend the indenture governing the 11.75% Notes (the Indenture). The
purpose of this amendment was to provide the Company with greater flexibility
in pursuing corporate opportunities (including the incurrence of additional
debt) and to conform certain covenants in the Indenture to the less restrictive
covenants contained in the indenture governing the Company's 8.875% Notes. The
Company paid an aggregate of $5.9 million to the holders of the 11.75% Notes
who had given consent and the Indenture was amended accordingly.
42
<PAGE> 43
5. INCOME TAXES
For the years ended December 31, 1994, 1995, and 1996, the Company had no
provision or benefit for income taxes because the deferred benefit from the
operating losses was offset by an increase in the valuation allowance of $6.8
million, $14.6 million, and $28.1 million, respectively. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 74,038 $ 112,353
Deferred revenue 2,003 3,386
Bad debt reserve 1,834 1,933
Other tax credit carryforwards 691 691
Other 3,907 4,354
---------- -----------
Total deferred tax assets 82,473 122,717
Valuation allowance (50,642) (78,757)
---------- -----------
Net deferred tax assets 31,831 43,960
Deferred tax liabilities:
Depreciation (28,122) (38,345)
Amortization (3,709) (5,615)
---------- -----------
Total deferred tax liabilities (31,831) (43,960)
---------- -----------
$ - $ -
========== ===========
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards of
approximately $288 million that expire in years 1999 through 2011.
6. STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock option plans. Under APB
25, because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
The 1982 Incentive Stock Option Plan, as amended (1982 Plan), for officers
and key employees of the Company provides for the granting of stock options
intended to qualify as Incentive Stock Options (ISOs) to purchase Common Stock
at not less than 100% of the fair market value on the date the option is
granted, as determined by the Board of Directors. No further options may be
granted under the 1982 Plan. At December 31, 1996, options for 333,381 shares
were exercisable under the 1982 Plan. All options outstanding and exercisable
under the 1982 Plan are fully vested.
43
<PAGE> 44
Options granted were exercisable immediately, or in installments as the
Board of Directors determined at the time it granted such options, and have a
duration of ten years from the date of grant. Any stock issued is subject to
repurchase at the option of the Company which occurs at the exercise price for
the unvested portion of the shares issued and at fair market value, as defined
or allowed in the Stock Option Agreement, for the vested portion. Such options
vest ratably over a five-year period from the date they first become
exercisable. However, in the event of a change in ownership control of the
Company, all options vest immediately.
The 1991 Stock Option Plan (1991 Plan) for officers and key employees of
the Company provides for the granting of ISOs and non-statutory options to
purchase Common Stock at not less than 100% of the fair market value on the
date the options are granted. The 1991 Plan is administered by a committee
consisting of two members of the Board (the Committee). Approximately 370,000
shares remain available for grant under the 1991 Plan at December 31, 1996. A
total of 1.47 million shares were vested and exercisable under the 1991 Plan at
December 31, 1996. Options granted under the 1991 Plan are non-transferable
except by the laws of descent and distribution and are exercisable upon
vesting, which occurs either immediately or in installments, as the Board of
Directors or the Committee may determine at the time it grants such options.
The 1992 Stock Option Plan for Directors (Directors' Plan), for
non-employee Directors of the Company, provides for the granting of
non-statutory options to purchase Common Stock at not less than 100% of the
fair market value on the date the options are granted. The Directors' Plan is
administered by the Committee. The total number of shares of Common Stock with
respect to which options may be granted under the Directors' Plan may not
exceed 750,000. Approximately 480,000 shares remain available for grant under
the Directors' Plan at December 31, 1996. A total of 117,000 shares were
vested and exercisable at December 31, 1996. Options granted under the
Directors' Plan are non- transferable except by the laws of descent and
distribution and are exercisable upon vesting, which occurs either immediately
or in installments, as the Board of Directors or the Committee may determine at
the time it grants such options.
With respect to the 1991 Plan and Directors' Plan, notwithstanding the
above, ten business days before a merger or a change in the ownership control
of the Company or a sale of substantially all the assets of the Company, all
options issued vest immediately and become exercisable in full; upon a merger
or a change in ownership control of the Company or the sale of substantially
all the assets of the Company, all options issued under the 1991 Plan and
Directors' Plan which have not been exercised terminate.
On September 11, 1996, the Board of Directors of the Company approved an
amendment to the 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 that an additional 7,500,000 shares of Common Stock are reserved for
options to be issued pursuant to the 1991 Plan. Adoption of this amendment to
the 1991 Plan is subject to stockholder approval.
44
<PAGE> 45
On January 9, 1997, the Board of Directors of the Company approved the
adoption of an additional stock option plan, the "Paging Network, Inc. 1997
Stock Option 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. Adoption of the Restricted Stock Plan
is subject to stockholder approval.
Information concerning options at December 31, 1994, 1995, and 1996 is as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Outstanding January 1 4,773,106 4,737,420 4,664,735
Granted 522,400 1,605,800 2,307,100
Canceled (238,784) (838,478) (627,960)
Exercised (319,302) (840,007) (375,270)
--------- --------- ---------
Outstanding December 31 4,737,420 4,664,735 5,968,605
========= ========= =========
Options exercisable 1,862,826 1,601,440 1,920,085
========= ========= =========
Option price range-options outstanding $0.40-$16.50 $2.67-$23.56 $2.67-$26.50
Option price range-options exercised $0.40-$ 9.59 $0.40-$14.38 $2.73-$14.38
</TABLE>
Weighted-average exercise prices are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at January 1 $ 6.87 $ 7.83 $ 12.22
Granted 14.79 19.22 22.33
Canceled 8.26 9.13 17.19
Exercised 4.46 3.96 7.53
Outstanding at December 31 7.83 12.22 15.90
Exercisable at December 31 4.76 7.47 9.65
</TABLE>
Certain information is being presented based on a range of exercise prices
as of December 31, 1996, as follows:
<TABLE>
<CAPTION>
$2.67-$9.25 $9.50-$17.13 $17.63-$22.75 $23.00-$26.50
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Number of shares outstanding 1,649,669 1,496,036 1,668,000 1,154,900
Weighted-average exercise price $6.74 $13.19 $21.35 $24.61
Weighted-average remaining
contractual life 5.1 yrs. 7.6 yrs. 9.2 yrs. 9.1 yrs.
Number of shares exercisable 1,297,529 399,416 169,600 53,540
Weighted-average exercise
price of shares exercisable $6.39 $13.40 $21.34 $23.54
</TABLE>
45
<PAGE> 46
The Company has adopted the pro forma disclosure provisions of the
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123). As required by SFAS No. 123, pro
forma information regarding net loss and net loss per share has been determined
as if the Company had accounted for employee stock options and stock-based
awards granted subsequent to December 31, 1994 under the fair value method
provided for under SFAS No. 123. The weighted-average fair value of stock
options granted during 1995 and 1996 was $11.65 and $13.58, respectively. The
fair value for the stock options granted to officers and key employees of the
Company after January 1, 1995 was estimated at the date of the grant using the
Black-Scholes option pricing model with the following assumptions: risk- free
interest rates ranging from 5.63% to 7.79% for 1995 and ranging from 5.54% to
6.83% for 1996; a dividend yield of 0%; volatility factors of the expected
market price of the Company's Common Stock ranging from 52.9% to 55.1% for 1995
and ranging from 53.2% to 54.4% for 1996; and a weighted-average expected life
of each option ranging from 6.7 years to 7.0 years for both 1995 and 1996.
For purposes of the pro forma disclosures, the estimated fair value of the
options and stock-based awards is amortized to expense over the vesting period.
The Company's pro forma information is as follows (in thousands, except for net
loss per common share information):
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C> <C>
Net loss As reported $(44,201) $(81,820)
Pro forma $(45,830) $(88,033)
Net loss per common share As reported $ (0.43) $ (0.80)
Pro forma $ (0.45) $ (0.86)
</TABLE>
Because SFAS No. 123 is applicable only to options and stock-based awards
granted subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 2001.
7. COMMITMENTS
The Company has operating leases for office and transmitting sites with
lease terms ranging from a month to approximately ten years. There are no
significant renewal or purchase options. In most cases, the Company expects
that in the normal course of business, leases will be renewed or replaced by
other leases. Total rent expense for 1994, 1995, and 1996 was approximately
$31.2 million, $47.9 million, and $60.7 million, respectively.
46
<PAGE> 47
The following is a schedule by year of future minimum rental payments
required under operating leases that have remaining noncancelable lease terms
in excess of one year at December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: (IN THOUSANDS)
<S> <C>
1997 $21,727
1998 16,188
1999 13,447
2000 9,264
2001 4,608
Later years 1,734
-------
Total minimum payments required $66,968
=======
</TABLE>
8. CONTINGENCIES
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.
9. 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 years ended December 31, 1994, 1995, and 1996, was 101.2
million, 101.9 million, and 102.5 million, respectively.
The number of authorized shares of stock is 275.0 million, of which 250.0
million are Common Stock and 25.0 million are preferred stock. As of December
31, 1996, there were no preferred shares issued or outstanding.
On May 23, 1996, the Company's stockholders approved an employee stock
purchase plan of up to 2.0 million shares of the Company's Common Stock, which
the Company implemented on January 1, 1997. Under the employee stock purchase
plan, an employee may elect to purchase shares of the Company's Common Stock at
the end of a two-year period at a price equal to 85% of the fair market value
of the Company's Common Stock at the beginning or end of such two-year period,
whichever is lower.
10. STATEMENT OF CASH FLOWS INFORMATION
Cash and cash equivalents include highly liquid debt instruments with an
original maturity of three months or less. As of December 31, 1996, cash
equivalents also include investments in money market instruments, which are
carried at fair market value. Cash payments made for interest for the years
ended December 31, 1996, 1995, and 1994 were approximately $115.5 million,
$71.2 million, and $40.5 million, respectively. There were no significant
federal or state
47
<PAGE> 48
income taxes paid or refunded for the years ended December 31, 1996, 1995, and
1994.
11. EMPLOYEE BENEFIT PLANS
The Company has adopted a plan to provide retirement benefits under the
provisions of Section 401(k) of the Internal Revenue Code (the Code) for all
employees who have completed a specified term of service. As of December 31,
1996, the Company's contributions equaled 50% of employee contributions up to a
maximum of 6% of the employee's compensation. Employees may elect to
contribute up to 15% of their compensation on a pre-tax basis, not to exceed
the maximum amount allowed as determined by the Code. The Company's
contributions aggregated approximately $400,000 in 1994, $460,000 in 1995, and
$1,940,000 in 1996.
12. STOCK PURCHASE RIGHTS
In September 1994, the Board of Directors of the Company adopted a Stock
Purchase Rights Plan and declared a distribution of one common share purchase
right for each outstanding share of the Company's Common Stock. This dividend
distribution occurred on September 28, 1994 to shareholders of record as of the
close of business on that date.
Generally, the rights will become exercisable only if a person or group (i)
acquires 20% or more of the Company's Common Stock or (ii) announces a tender
offer that would result in ownership of 20% or more of the Company's Common
Stock or (iii) is declared to be an "Adverse Person" by the Board of Directors.
Adverse Person includes any person or group who owns at least 10% of the
Company's Common Stock and attempts an action that would adversely impact the
Company.
Once a person or group has acquired 20% or more of the outstanding Common
Stock of the Company, each right may entitle its holder (other than the 20%
person or group) to purchase, at an exercise price of $150, shares of Common
Stock of the Company (or of any company that acquires the Company) at a price
equal to 50% of their current market price. Under certain circumstances, the
Continuing Directors (as defined in the rights plan) may exchange the rights
for Common Stock (or equivalent securities) on a one-for-one basis.
Until declaration of an Adverse Person, or ten (10) days after public
announcement that any person or group has acquired 20% or more of the Common
Stock of the Company, the rights are redeemable at the option of the Board of
Directors, in certain cases with the concurrence of the Continuing Directors.
Thereafter, they may be redeemed by the Continuing Directors in connection with
certain acquisitions not involving any acquiring person or Adverse Person or in
certain circumstances following a disposition of shares by the acquiring person
or Adverse Person. The redemption price is $0.01 per right. The rights will
expire on September 27, 2004, unless redeemed prior to that date.
48
<PAGE> 49
13. ACQUISITIONS
During 1995, the Company acquired certain paging assets of Comtech, Inc. -
Paging Division; SNET Paging, Inc. and its wholly owned subsidiary, TNI
Associates, Inc.; two subsidiaries of PageAmerica Group, Inc.; Page Florida;
International Paging Corp.; and Celpage, Inc. - Atlanta Branch, including
various frequencies and approximately 343,000 pagers in service for an
aggregate cost of approximately $123.6 million, subject to increase or decrease
based on post- closing events of certain acquisitions.
The following represents the unaudited pro forma results of operations as if
the above acquisitions had occurred as of January 1, 1995, after giving effect
to certain adjustments, including amortization of intangibles resulting from
the allocation of the purchase price and interest expense on acquisition debt.
<TABLE>
<CAPTION>
Year Ended
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) December 31, 1995
-----------------
<S> <C>
Total revenues $ 665,235
Net revenues 567,847
Operating income 46,411
Net loss (54,422)
Net loss per share (0.53)
</TABLE>
The pro forma results given above are not necessarily indicative of what
actually would have occurred if the acquisitions had been in effect during the
period presented, and is not intended to be a projection of future results or
trends.
49
<PAGE> 50
14. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial information for the two years ended December 31, 1996
is summarized below.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
1996
- - ----
<S> <C> <C> <C> <C>
Services, rent and maintenance
revenues $158,775 $167,036 $175,725 $184,424
Product sales 27,598 32,143 35,967 40,819
-------- -------- -------- --------
Total revenues 186,373 199,179 211,692 225,243
Cost of products sold (23,352) (27,124) (30,855) (35,316)
-------- -------- -------- --------
163,021 172,055 180,837 189,927
Operating income 15,725 10,987 8,860 7,825
Net loss (12,106) (18,532) (21,994) (29,188)
Net loss per share (0.12) (0.18) (0.21) (0.28)
1995
- - ----
Services, rent and maintenance
revenues $116,132 $124,178 $139,771 $151,998
Product sales 25,973 28,783 29,336 29,851
-------- -------- -------- --------
Total revenues 142,105 152,961 169,107 181,849
Cost of products sold (20,646) (23,700) (23,607) (25,461)
-------- -------- -------- --------
121,459 129,261 145,500 156,388
Operating income 10,696 10,699 14,857 15,882
Net loss (6,821) (1) (16,169) (1)(2) (10,046) (11,165)
Net loss per share (0.07) (1) (0.16) (1)(2) (0.10) (0.11)
</TABLE>
(1) Effective September 15, 1995, the Company effected a two-for-one stock
split recorded in the form of a 100% stock dividend paid September 29,
1995. Share and per share amounts for periods indicated have been restated
to reflect the stock split.
(2) Includes the write-off of debt issuance costs of approximately $6.6 million
related to a prior credit agreement (see Note 4).
50
<PAGE> 51
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
No disclosure required.
---------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference from the Registrant's definitive proxy
statement for the Annual Meeting of Stockholders on May 22, 1997, pages 3
through 7, under the caption "Proposal No. 1 - Election of Three
Directors."
Information regarding the executive officers is included in Item 4 of this
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference from the Registrant's definitive proxy
statement for the Annual Meeting of Stockholders on May 22, 1997, pages 7
through 11, under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference from the Registrant's definitive proxy
statement for the Annual Meeting of Stockholders on May 22, 1997, pages 2
through 3, under the caption "Beneficial Ownership of Common Stock," and pages 3
through 7, under the caption "Proposal No. 1 - Election of Three Directors."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference from the Registrant's definitive proxy
statement for the Annual Meeting of Stockholders on May 22, 1997, pages 11
through 12, under the caption "Contracts relating to Employment."
51
<PAGE> 52
---------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The financial statements listed in the accompanying index to financial
statements and financial statement schedules are filed as part of this
report.
2. Financial Statements Schedules.
The schedule listed in the accompanying index to financial statements
and financial statement schedules is filed as part of this report.
3. Exhibits.
The exhibits listed in the accompanying index to exhibits are filed
as part of this annual report.
(b) Reports on Form 8-K
On October 16, 1996, the Company filed a Current report on Form 8-K
updating certain financial and business information related to the
Company.
52
<PAGE> 53
PAGING NETWORK, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[ITEM 14 (a)]
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 33
Consolidated Balance Sheets at
December 31, 1996 and 1995 35
For each of the three years in the
period ended December 31, 1996:
Consolidated Statements of Operations 34
Consolidated Statements of Cash Flows 36
Consolidated Statements of Stockholders' Deficit 37
Notes to Consolidated Financial Statements 38
Consolidated financial statement schedule for each
of the three years in the period ended
December 31, 1996:
II- Valuation and qualifying accounts 54
Report of Independent Auditors 55
</TABLE>
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements, including the notes thereto.
53
<PAGE> 54
PAGING NETWORK, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 1994, 1995, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Balance at
of Period Expenses Deductions End of Period
--------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1994 $2,819 $11,664 $10,677 $3,806
1995 3,806 12,209 11,311 4,704
1996 4,704 14,033 13,743 4,994
</TABLE>
54
<PAGE> 55
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Paging Network, Inc.
We have audited the consolidated financial statements of Paging Network,
Inc. as of December 31, 1996 and 1995, and for each of the three years in
the period ended December 31, 1996, and have issued our report thereon
dated February 19, 1997. Our audits also included Schedule II - Valuation
and Qualifying Accounts. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
February 19, 1997
55
<PAGE> 56
PAGING NETWORK, INC.
INDEX TO EXHIBITS
[ITEM 14 (a)]
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant, as amended (1)
3.3 By-laws of the Registrant, as amended (1)
4.1 Articles Sixth, Seventh, Eighth, Twelfth and Thirteenth of the Restated Certificate of Incorporation of the
Registrant, as amended (1)
4.2 Articles II, III, and VII and Section 1 of Article VIII of the Registrant's Bylaws, 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)
9 None
10.1 1982 Incentive Stock Option Plan, as amended and restated (1)
10.2 Form of Stock Option Agreement executed by recipients of options granted under the 1982 Incentive Stock Option
Plan (1)
10.3 Form of Management Agreement executed by recipients of options granted under the 1982 Incentive Stock Option
Plan (1)
10.4 Form of Vesting Agreement executed by recipients of options granted under the 1982 Incentive Stock Option Plan
(1)
10.5 1991 Stock Option Plan (1)
10.6 Form of Stock Option Agreement executed by recipients of options granted under the 1991 Stock Option Plan (1)
10.7 Form of Indemnification Agreement executed by recipients of options granted under the 1991 Stock Option Plan
(1)
10.8 Form of First Amendment to Vesting Agreement executed by recipients of options granted under the 1982
Incentive Stock Option Plan (1)
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C>
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)
10.13 Employment Agreement dated as of December 1, 1995 among the Registrant and Glenn W. Marschel (5)
10.14 Second Amended and Restated Credit Agreement dated as of June 5, 1996, among the Registrant, NationsBank of
Texas, N.A., Toronto Dominion (Texas), Inc., The First National Bank of Boston, Chase Securities Inc, and
certain other lenders (6)
10.15 Loan Agreement dated as of June 5, 1996 among Paging Network of Canada Inc., The Toronto-Dominion Bank, and
such other financial institutions as become banks (6)
10.16 Loan Agreement dated as of June 5, 1996 among Madison Telecommunications Holdings, Inc., The Toronto-Dominion
Bank, and such other financial institutions as become banks (6)
12 Ratio of Earnings to Fixed Charges for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 (7)
22 List of the Registrant's Subsidiaries (7)
23 Consent of Independent Auditors (7)
</TABLE>
________________________________________________________________
(1) Previously filed as an exhibit to Registration Statement No.
33-42253 on Form S-1 and incorporated herein by reference.
(2) Previously filed as an exhibit to Registration Statement No.
33-46803 on Form S-1 and incorporated herein by reference.
57
<PAGE> 58
(3) Previously filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991.
(4) Previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1995.
(5) Previously filed as an exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(6) Previously filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1996.
(7) Filed herewith.
58
<PAGE> 59
Pursuant to the requirements of Section 13 or 15(d) 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: March 19, 1997 By: /s/ GLENN W. MARSCHEL
-------------------------------------
Glenn W. Marschel
President and Chief Executive
Officer (Principal Executive Officer)
Date: March 19, 1997 By: /s/ KENNETH W. SANDERS
-------------------------------------
Kenneth W. Sanders
Senior Vice President - Finance,
Treasurer, Chief Financial Officer
and Assistant Secretary (Principal
Financial Officer and Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
Date: March 19, 1997 By: /s/ RICHARD C. ALBERDING
-------------------------------------
Richard C. Alberding, Director
Date: March 19, 1997 By: /s/ BRYAN C. CRESSEY
-------------------------------------
Bryan C. Cressey, Director
Date: March 19, 1997 By: /s/ JOHN P. FRAZEE, JR.
-------------------------------------
John P. Frazee, Jr., Director
Date: March 19, 1997 By: /s/ LEE M. MITCHELL
-------------------------------------
Lee M. Mitchell, Director
Date: March 19, 1997 By: /s/ GEORGE M. PERRIN
-------------------------------------
George M. Perrin, Chairman of
the Board of Directors
Date: March 19, 1997 By: /s/ GLENN W. MARSCHEL
-------------------------------------
Glenn W. Marschel, President,
Chief Executive Officer and
Director
Date: March 19, 1997 By: /s/ CARL D. THOMA
-------------------------------------
Carl D. Thoma, Director
61
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
12 Ratio of Earnings to Fixed Charges for the years ended December 31, 1996, 1995,
1994, 1993 and 1992
22 List of the Registrant's Subsidiaries
23 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 12
PAGING NETWORK, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings:
Loss before extraordinary item $(6,758) $(20,011) $(17,965) $(44,201) $(81,820)
Fixed charges 28,668 40,479 64,007 118,666 148,055
------- -------- -------- -------- --------
Earnings $21,910 $20,468 $46,042 $74,465 $66,235
======= ======== ======== ======== ========
Fixed charges:
Interest expense $22,504 $30,225 $50,694 $98,533 $122,753
Amortization of deferred
financing cost 1,134 2,583 3,023 4,313 5,261
Interest portion of rental
expense 5,030 7,671 10,290 15,820 20,041
------- -------- -------- -------- --------
Fixed charges $28,668 $40,479 $64,007 $118,666 $148,055
======= ======== ======== ======== ========
Ratio of earnings to fixed charges - - - - -
Deficiency of earnings available
to cover fixed charges $(6,758) $(20,011) $(17,965) $(44,201) $(81,820)
======= ======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of Paging Network, Inc., the
Registrant.
<TABLE>
<CAPTION>
Ownership
Name of Subsidiary Jurisdiction of Incorporation Percentage
------------------ ----------------------------- ----------
<S> <C> <C>
Paging Network of America, Inc. Delaware 100%
Paging Network Canadian Holdings, Inc. Delaware 100%
Paging Network of Colorado, Inc. Delaware 100%
Paging Network of Dallas/Fort Worth, Inc. Delaware 100%
Paging Network Equipment Company, Inc. Delaware 100%
Paging Network Finance Corp. Delaware 100%
Paging Network of Hartford/Springfield, Inc. Delaware 100%
Paging Network of Illinois, Inc. Delaware 100%
Paging Network International, Inc. Delaware 100%
Paging Network of Los Angeles, Inc. Delaware 100%
Paging Network of Massachusetts, Inc. Delaware 100%
Paging Network of Michigan, Inc. Delaware 100%
Paging Network of Minnesota, Inc. Delaware 100%
Paging Network of New Jersey, Inc. Delaware 100%
Paging Network of New York, Inc. New York 100%
Paging Network of Northern California, Inc. Delaware 100%
Paging Network of Ohio, Inc. Delaware 100%
Paging Network of Oregon, Inc. Delaware 100%
Paging Network of Philadelphia, Inc. Delaware 100%
Paging Network of San Antonio, Inc. Delaware 100%
Paging Network of San Francisco, Inc. Delaware 100%
Paging Network Satellite Company, Inc. Delaware 100%
Paging Network Services, Inc. Delaware 100%
Paging Network of Tennessee, Inc. Delaware 100%
Paging Network of Utah, Inc. Delaware 100%
Paging Network of Washington, Inc. Virginia 100%
Paging Network - Central Region, Inc. Delaware 100%
Paging Network - Northeastern Region, Inc. Delaware 100%
Paging Network - Northwestern Region, Inc. Delaware 100%
PageNet de Argentina S.A. Argentina 99%
Paging Network do Brasil S.A. Brazil 20%
Paging Network of Canada Inc. Canada 100%
PageNet Chile S.A. Chile 100%
Paging Network International N.V. The Netherlands 100%
Paging Network (UK), Limited England 100%
Madison Telecommunications Holdings, Inc. Canada 80%
Sociedad de Radiotelefonia Movil, S.A. Spain 25%
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-45465, Form S-8 No. 33- 45690, Form S-8 No. 33-63230, Form S-8
No. 33-76650, Form S-3 No. 33-72456, Form S-3 No. 33-87224, and Form S-8 No.
333-18587) of Paging Network, Inc. and in the related Prospectuses of our
reports dated February 19, 1997, with respect to the consolidated financial
statements and financial statement schedule of Paging Network, Inc. included in
this Annual Report on Form 10-K for the year ended December 31, 1996.
ERNST & YOUNG LLP
Dallas, Texas
March 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,777
<SECURITIES> 0
<RECEIVABLES> 65,083
<ALLOWANCES> 4,994
<INVENTORY> 57,690
<CURRENT-ASSETS> 130,428
<PP&E> 1,171,090
<DEPRECIATION> 330,055
<TOTAL-ASSETS> 1,462,113
<CURRENT-LIABILITIES> 162,600
<BONDS> 1,459,188
0
0
<COMMON> 1,026
<OTHER-SE> (160,701)
<TOTAL-LIABILITY-AND-EQUITY> 1,462,113
<SALES> 19,880
<TOTAL-REVENUES> 822,487
<CGS> 116,647
<TOTAL-COSTS> 662,443
<OTHER-EXPENSES> 125,217
<LOSS-PROVISION> 14,033
<INTEREST-EXPENSE> 128,014
<INCOME-PRETAX> (81,820)
<INCOME-TAX> 0
<INCOME-CONTINUING> (81,820)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (81,820)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
