<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q/A (AMENDMENT NUMBER 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
COMMISSION FILE NO. 0-19494
PAGING NETWORK, INC.
(Exact name of the Registrant as specified in charter)
DELAWARE 04-2740516
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4965 PRESTON PARK BOULEVARD, SUITE 800
PLANO, TEXAS 75093
(Address of principal executive offices, including zip code)
(972) 985-4100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes
of Common Stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Title Shares Outstanding as of July 31, 1997
- --------------------------------- --------------------------------------
<S> <C>
Common Stock, $.01 par value 102,624,232
</TABLE>
The Company's Common Stock is publicly traded under the symbol "PAGE" through
the National Association of Securities Dealers Automated Quotation National
Market System.
===============================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Paging Network, Inc. Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 (Unaudited) ..................... 3
Paging Network, Inc. Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1997 and 1996
(Unaudited) ......................................................... 4
Paging Network, Inc. Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1997 and 1996 (Unaudited) ......... 5
Paging Network, Inc. Notes to Consolidated Financial Statements .......... 6
</TABLE>
2
<PAGE> 3
PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Restated) (Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 2,020 $ 3,777
Accounts receivable, less allowance
for doubtful accounts ................................. 74,567 60,089
Inventories .............................................. 69,210 57,690
Prepaid expenses and other assets ........................ 14,825 8,872
----------- -----------
Total current assets .................................. 160,622 130,428
Property, equipment, and leasehold improvements, at cost ..... 1,300,003 1,137,729
Less accumulated depreciation ............................ (392,554) (319,194)
----------- -----------
Net property, equipment, and leasehold improvements ... 907,449 818,535
Other non-current assets, at cost ............................ 632,978 547,067
Less accumulated amortization ............................ (65,825) (56,417)
----------- -----------
Net other non-current assets .......................... 567,153 490,650
----------- -----------
$ 1,635,224 $ 1,439,613
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ......................................... $ 69,491 $ 59,857
Accrued interest ......................................... 42,124 41,853
Accrued expenses ......................................... 51,870 38,460
Customer deposits ........................................ 23,866 22,430
----------- -----------
Total current liabilities ............................. 187,351 162,600
Long-term obligations ........................................ 1,702,598 1,459,188
Other long-term liabilities .................................. 12,189 -
Commitments and contingencies ................................ - -
Stockholders' deficit:
Common Stock: $.01 par, 250,000,000 shares
authorized, 102,621,077 shares issued and
outstanding in 1997 and 1996, respectively ............ 1,026 1,026
Paid-in capital .......................................... 124,522 124,522
Accumulated deficit ...................................... (392,648) (307,827)
Foreign currency translation adjustments ................. 186 104
----------- -----------
Total stockholders' deficit ..................... (266,914) (182,175)
----------- -----------
$ 1,635,224 $ 1,439,613
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 4
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Services, rent and maintenance revenues ................ $ 199,584 $ 167,036 $ 388,464 $ 325,811
Product sales .......................................... 33,666 32,143 70,034 59,741
--------- --------- --------- ---------
Total revenues ..................................... 233,250 199,179 458,498 385,552
Cost of products sold .................................. (28,805) (27,124) (60,162) (50,476)
--------- --------- --------- ---------
204,445 172,055 398,336 335,076
Operating expenses:
Services, rent and maintenance ..................... 41,320 35,910 82,262 69,561
Selling ............................................ 25,427 20,570 53,698 39,081
General and administrative ......................... 62,318 53,071 122,716 102,867
Depreciation and amortization ...................... 69,260 51,517 133,728 96,855
--------- --------- --------- ---------
Total operating expenses ...................... 198,325 161,068 392,404 308,364
--------- --------- --------- ---------
Operating income ....................................... 6,120 10,987 5,932 26,712
Other income (expense):
Interest expense ................................... (38,626) (29,907) (76,452) (59,642)
Interest income .................................... 906 519 1,898 2,538
Equity in loss of an unconsolidated subsidiary ..... (363) (131) (655) (246)
--------- --------- --------- ---------
Total other income (expense) .................. (38,083) (29,519) (75,209) (57,350)
--------- --------- --------- ---------
Loss before extraordinary item ......................... (31,963) (18,532) (69,277) (30,638)
Extraordinary loss ..................................... (15,544) - (15,544) -
--------- --------- --------- ---------
Net loss .............................................. $ (47,507) $ (18,532) $ (84,821) $ (30,638)
========= ========= ========= =========
Net loss per share:
Loss before extraordinary item ..................... $ (0.31) $ (0.18) $ (0.68) $ (0.30)
Extraordinary loss ................................. (0.15) - (0.15) -
--------- --------- --------- ---------
Net loss per share ..................................... $ (0.46) $ (0.18) $ (0.83) $ (0.30)
========= ========= ========= =========
</TABLE>
See accompanying notes
4
<PAGE> 5
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1997 1996
--------- ---------
(Restated)
<S> <C> <C>
Operating activities:
Net loss ................................................ $ (84,821) $ (30,638)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary loss ............................... 15,544 -
Depreciation ..................................... 120,953 85,980
Amortization ..................................... 12,775 10,875
Provision for doubtful accounts .................. 8,933 5,817
Equity in loss of an unconsolidated subsidiary ... 655 246
Amortization of debt issuance costs .............. 4,330 2,567
Changes in operating assets and liabilities:
Accounts receivable .............................. (23,411) (8,198)
Inventories ...................................... (11,520) (18,180)
Prepaid expenses and other assets ................ (5,953) (1,957)
Accounts payable ................................. 9,634 (26,875)
Accrued interest ................................. 271 (2,444)
Accrued expenses ................................. 13,410 1,200
Customer deposits ................................ 1,436 736
--------- ---------
Net cash provided by operating activities ................... 62,236 19,129
--------- ---------
Investing activities:
Capital expenditures .................................... (209,110) (191,340)
Payments for spectrum licenses .......................... (66,905) (7,683)
Business acquisitions and joint venture investments ..... (4,806) (5,276)
Restricted cash invested in money market instruments .... (4,619) (19,200)
Other ................................................... (10,234) (3,710)
--------- ---------
Net cash used in investing activities ....................... (295,674) (227,209)
--------- ---------
Financing activities:
Borrowings under credit agreements ...................... 443,207 45,516
Redemption of $200 million senior subordinated notes .... (211,750) -
Increase in capital lease obligations ................... 203 -
Proceeds from exercise of Common Stock options .......... - 2,149
Debt issuance costs on credit agreements ................ - (3,432)
Other ................................................... 21 (2)
--------- ---------
Net cash provided by financing activities ................... 231,681 44,231
--------- ---------
Net decrease in cash and cash equivalents .................. (1,757) (163,849)
Cash and cash equivalents at beginning of period ............ 3,777 198,182
--------- ---------
Cash and cash equivalents at end of period .................. $ 2,020 $ 34,333
========= =========
</TABLE>
See accompanying notes
5
<PAGE> 6
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
1. RESTATEMENT OF FINANCIAL STATEMENTS
During the third quarter of 1997, management of Paging Network, Inc.
(the Company) reviewed agreements with a national marketing affiliate
entered into prior to the issuance of the December 31, 1996 financial
statements. This review resulted in the determination that an earlier
judgment that the Company ultimately would recover or be compensated for
certain pagers distributed through that affiliate to customers who later
discontinued service was not correct. Accordingly, the Company has
restated its financial statements for 1996 to reflect a provision of $22.5
million to write-off the pagers deemed to be unrecoverable as of December
31, 1996.
The financial statements for the three and six months ended June 30,
1997, have also been restated as a result of the restatement of the 1996
financial statements discussed above to (i) write-off the pagers that
have been deemed to be unrecoverable, (ii) reduce depreciation expense
for the three and six months ended June 30, 1997 by $2.6 million and $5.2
million, respectively, to eliminate depreciation previously recorded on
the pagers now deemed unrecoverable, (iii) reduce services, rent, and
maintenance revenues by $1.0 million and services, rent, and maintenance
expenses by $1.3 million for the three and six months ended June 30, 1997,
to eliminate amounts previously recognized related to the agreements
discussed above, and (iv) record assets and liabilities of the same
amount, $18.2 million as of June 30, 1997, related to the amounts
receivable and payable under the agreements discussed above and to accrete
the related interest expense and interest income.
The impact of the restatements on the consolidated statement of
operations for the three and six months ended June 30, 1997, is as
follows:
<TABLE>
<CAPTION>
As Previously Reported As Restated
------------------------ ------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1997 1997 1997
------------ --------- ------------ ----------
<S> <C> <C> <C> <C>
Services, rent and maintenance revenues $200,561 $389,441 $199,584 $388,464
Services, rent and maintenance expense 42,653 83,595 41,320 82,262
Depreciation and amortization 71,860 138,928 69,260 133,728
Operating income 3,164 376 6,120 5,932
Interest expense (38,281) (75,860) (38,626) (76,452)
Interest income 561 1,306 906 1,898
Loss before extraordinary item (34,919) (74,833) (31,963) (69,277)
Net loss (50,463) (90,377) (47,507) (84,821)
Loss per share before extraordinary item (0.34) (0.73) (0.31) (0.68)
Net loss per share (0.49) (0.88) (0.46) (0.83)
</TABLE>
The impact of the restatements on the consolidated balance sheets as
of June 30, 1997, and December 31, 1996, is as follows:
<TABLE>
<CAPTION>
As Previously Reported As Restated
------------------------ -------------------------
June 30, December 31, June 30, December 31,
(IN THOUSANDS) 1997 1996 1997 1996
---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Prepaid expenses and other assets $ 8,834 $ 8,872 $ 14,825 $ 8,872
Net property, equipment, and leasehold
improvements 924,393 841,035 907,449 818,535
Net other non-current assets 554,964 490,650 567,153 490,650
Accounts payable 63,500 59,857 69,491 59,857
Other long-term liabilities -- -- 12,189 --
Accumulated deficit (375,704) (285,327) (392,648) (307,827)
</TABLE>
In addition, the impact of the restatement also resulted in changes to
the consolidated statement of cash flows for the six months ended June 30,
1997.
2. THE COMPANY
The Company is a provider of paging and wireless messaging services.
The Company provides paging services in all 50 states, the District of
Columbia, the U.S. Virgin Islands, Puerto Rico, and Canada, including
local paging service in all of the largest 100 markets (in population) in
the United States, and owns a minority interest in paging companies in
Spain and Brazil. The consolidated financial statements include the
accounts of all of its wholly and majority-owned subsidiaries. All
intercompany transactions have been eliminated.
3. UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim consolidated financial information contained herein is
unaudited but, in the opinion of management, includes all adjustments,
which are of a normal recurring nature, necessary for a fair presentation
of the financial position, results of operations, and cash flows for the
periods presented. These financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. The balance sheet as of December 31, 1996,
has been derived from the audited financial statements as of that date.
Results of operations for the periods presented herein are not necessarily
indicative of results of operations for the entire year. These financial
statements and related notes should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1996.
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
4. LONG-TERM OBLIGATIONS
On May 14, 1997, the Company redeemed all $200.0 million of its
outstanding 11.75% Senior Subordinated Notes (11.75% Notes), utilizing
funds borrowed under the Company's domestic $1.0 billion revolving credit
agreement (the Credit Agreement). The Company recorded an extraordinary
loss of $15.5 million in the second quarter of 1997 on the early
retirement of the 11.75% Notes. The extraordinary loss was comprised of
the redemption premium of $11.8 million and the write-off of unamortized
issuance costs of $3.7 million.
As of June 30, 1997, the Company had $468.0 million of borrowings
outstanding under the Credit Agreement.
5. DEPRECIATION EXPENSE
Effective January 1, 1997, the Company shortened the depreciable
lives of its pagers from
6
<PAGE> 7
four to three years, and revised the related residual values. The change
had an effect of increasing depreciation expense by approximately $7
million and $15 million for the three and six months ended June 30, 1997,
respectively.
6. INCOME TAX PROVISION
No provision or benefit for income taxes has been made for the six
months ended June 30, 1997 and 1996, as the deferred benefit from
operating losses was offset by the increase in the valuation allowance.
7. COMMON STOCK AND NET LOSS PER SHARE
Net loss per share amounts are computed based on the weighted average
number of common shares outstanding. The number of shares used to compute
per share amounts for the three and six months ended June 30, 1997 was
102.6 million. The number of shares used to compute per share amounts for
the three and six months ended June 30, 1996 were 102.5 million and 102.4
million, respectively.
The Company has 275.0 million authorized shares, of which 250.0
million are Common Stock and 25.0 million are preferred stock. As of
June 30, 1997, there were no preferred shares issued or outstanding.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128), which the Company will be required to initially adopt in
the fourth quarter of 1997. The Company anticipates the adoption of SFAS
No. 128 will have no impact on its reporting of loss per share for 1997 or
prior years.
On May 22, 1997, the Company's stockholders approved an amendment to
its 1991 Stock Option Plan (1991 Plan) to increase the number of the
Company's Common Stock issuable pursuant thereto from 6,450,000 shares to
13,950,000 shares and reserving an additional 7,500,000 shares of Common
Stock for options to be issued pursuant to the 1991 Plan.
On May 22, 1997, the Company's stockholders approved the adoption of
an additional stock option plan, the "Paging Network, Inc. 1997 Restricted
Stock Plan" (Restricted Stock Plan). The maximum number of shares of
Common Stock which may be available for purchase or grant pursuant to the
Restricted Stock Plan is 300,000 shares.
On June 12, 1997, the Company offered an election to its employees
with options granted during 1995 and 1996 under the 1991 Plan to cancel
such options and accept new options at a lower price. As a result of the
election by certain of its employees, the Company canceled 2.9 million
options with exercise prices ranging from $13.69 to $26.50 and granted
approximately 1.1 million options to the same optionees with an exercise
price of $8.25 per share.
8. STATEMENT OF CASH FLOWS INFORMATION
Cash and cash equivalents include highly liquid debt instruments with
an original maturity of three months or less. Cash payments made for
interest during the six months ended June 30, 1997 and 1996 were
approximately $77.2 million and $59.4 million, respectively. There were no
significant federal or state income taxes paid or refunded for the six
months ended June 30, 1997 and 1996.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The statements contained in this filing which are not historical
facts, such as future capital expenditures, future borrowings, international
investments expectations, and introduction of new products are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in the forward-looking
statements. Among the factors that could cause actual future results to differ
materially are competitive pressures, growth rates, new market opportunities,
supplier constraints, market conditions, timing and techniques used in
marketing by third-party distributors, and acceptance of the Company's services
in the marketplace.
RESULTS OF OPERATIONS
Throughout this section the Company makes reference to earnings
before interest, income taxes, depreciation, amortization, and equity in loss
of an unconsolidated subsidiary (EBITDA). EBITDA is a key performance measure
used in the paging industry and is one of the financial measures by which the
Company's covenants are calculated under the agreements governing its debt
obligations. EBITDA is not a measure defined in generally accepted accounting
principles and should not be considered in isolation or as a substitute for
measures of performance in accordance with generally accepted accounting
principles.
The following table presents certain items in the Consolidated
Statements of Operations as a percentage of revenues from services, rent and
maintenance plus product sales less the cost of products sold (Net Revenues)
for the three and six months ended June 30, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
----- ----- ----- -----
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net Revenues ................................ 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Services, rent and maintenance ........ 20.2(1) 20.9 20.6(1) 20.7
Selling ............................... 12.4(1) 12.0 13.5(1) 11.7
General and administrative ............ 30.5 30.8 30.8 30.7
Depreciation and amortization ......... 33.9(1) 29.9 33.6(1) 28.9
----- ----- ----- -----
Operating income ............................ 3.0 6.4 1.5 8.0
Net loss .................................... (23.2) (10.8) (21.3) (9.1)
EBITDA ...................................... 36.9 36.3 35.1 36.9
EBITDA for domestic operations .............. 38.1 37.5 36.3 37.6
EBITDA for core domestic paging operations... 39.1 37.5 38.5 37.6
</TABLE>
(1) Excluding expenses related to the launch of the Company's new VoiceNow(R)
service, which was introduced during the first quarter of 1997, services,
rent and maintenance expenses, selling expenses, and depreciation and
amortization expenses as a percentage of Net Revenues were 20.0%, 11.6%,
and 32.6%, respectively, for the three months ended June 30, 1997, and were
20.3%, 11.7%, and 32.9%, respectively, for the six months ended June 30,
1997.
8
<PAGE> 9
Net Revenues for the three- and six-month periods ended June 30, 1997,
were $204.4 million and $398.3 million, respectively, an increase of 18.8% and
18.9% from $172.1 million and $335.1 million for the comparable periods ended
June 30, 1996. Revenues from services, rent and maintenance, which the Company
considers its primary business, increased 19.5% to $199.6 million for the three
months ended June 30, 1997, compared to $167.0 million for the three months
ended June 30, 1996. Services, rent and maintenance revenues for the six months
ended June 30, 1997 increased 19.2% to $388.5 million, compared to $325.8
million for the six months ended June 30, 1996. These increases were primarily
due to continued growth in the number of pagers in service with subscribers of
the Company. The number of pagers in service with subscribers at June 30, 1997
was 9,753,636 compared to 7,881,764 pagers in service with subscribers at
June 30, 1996, an increase of 23.7%, and 8,587,772 pagers in service with
subscribers at December 31, 1996, an increase of 13.6%. Contributing to the
growth in the number of pagers in service with subscribers is the Company's
expanding local and national third-party reseller customer base, which includes
the impact of the Company's National Accounts Division. The Company's increased
reliance on distribution of pagers and paging services through resellers and
marketing affiliates could generate variability in quarterly and annual results
relating to the net addition of pagers.
Product sales, less cost of products sold, were relatively flat for the
three and six months ended June 30, 1997, compared to the same periods in 1996.
Product sales, less cost of products sold, were $4.9 million (2.4% of Net
Revenues) for the second quarter of 1997 compared to $5.0 million (2.9% of Net
Revenues) for the second quarter of 1996 and were $9.9 million (2.5% of Net
Revenues) for the first six months of 1997 compared to $9.3 million (2.8% of
Net Revenues) for the first six months of 1996.
Services, rent and maintenance expenses increased 15.1% to $41.3 million
(20.2% of Net Revenues) for the three months ended June 30, 1997, compared to
$35.9 million (20.9% of Net Revenues) for the three months ended June 30, 1996.
Services, rent and maintenance expenses increased 18.3% to $82.3 million (20.6%
of Net Revenues) for the six months ended June 30, 1997, compared to $69.6
million (20.7% of Net Revenues) for the six months ended June 30, 1996. The
increases in services, rent and maintenance expenses for the three and six
months ended June 30, 1997 were the result of the continued growth in the
number of pagers in service with subscribers of the Company, expenses
associated with an increase in transmitter sites, expansion of the nationwide
transmission networks, costs incurred by the Company's Canadian operations, and
costs associated with the Company's new VoiceNow service, which was introduced
on February 24, 1997.
For the three months ended June 30, 1997, selling expenses increased
23.6% to $25.4 million (12.4% of Net Revenues) from $20.6 million (12.0% of Net
Revenues) for the three months ended June 30, 1996. Selling expenses increased
37.4% to $53.7 million (13.5% of Net Revenues) for the six months ended June
30, 1997, compared to $39.1 million (11.7% of Net Revenues) for the six months
ended June 30, 1996. The increases in selling expenses and the increases as a
percentage of Net Revenues resulted primarily from certain VoiceNow marketing
research and development costs along with advertising expenses associated with
the Company's new VoiceNow service, and from the addition of sales personnel to
support continued growth in both Net Revenues and the number of pagers in
service with subscribers. The VoiceNow marketing research and development costs
and advertising expenses associated with the Company's new VoiceNow service
were $1.7 million and $7.2 million (0.8% and 1.8% of Net Revenues),
respectively, for the three and six months ended June 30, 1997.
General and administrative expenses increased 17.4% to $62.3 million
(30.5% of Net Revenues) for the second quarter of 1997, compared to $53.1
million (30.8% of Net Revenues) for the corresponding period of 1996. General
and administrative expenses increased 19.3% to $122.7 million (30.8% of Net
Revenues) for the first six months of 1997, compared to $102.9 million (30.7%
of Net Revenues) for the corresponding period of 1996. The increases in general
and administrative expenses occurred to support the growth in the number of
pagers in service with subscribers of the Company. The decrease in general and
administrative
9
<PAGE> 10
expenses as a percentage of Net Revenues for the three months ended June 30,
1997 was due to the general and administrative expenses being absorbed by a
larger subscriber base.
Depreciation and amortization expenses increased by 34.4% for the second
quarter of 1997 as compared to the corresponding period in the prior year from
$51.5 million (29.9% of Net Revenues) to $69.3 million (33.9% of Net Revenues).
Depreciation and amortization expenses increased 38.1% to $133.7 million (33.6%
of Net Revenues) for the six months ended June 30, 1997, compared to $96.9
million (28.9% of Net Revenues) for the six months ended June 30, 1996. The
increases in depreciation and amortization expenses were primarily attributable
to the increase in the number of pagers owned by the Company and leased to
subscribers, the increase in computer and paging equipment, the changes in
pager depreciation, and the commencement of amortization of the licenses for
spectrum. Effective January 1, 1997, the Company shortened the depreciable life
of its pagers from four to three years, and revised the related residual
values, in order to better reflect the estimated periods during which the
pagers will remain in service. The change had an effect of increasing
depreciation expense by approximately $7 million in the second quarter of 1997
and by approximately $15 million for the first six months of 1997. The
commencement of amortization of the licenses for spectrum and certain other
costs associated with the Company's VoiceNow service increased amortization
expense by approximately $2.3 million for the three months ended June 30, 1997.
As previously reported, depreciation and amortization expenses will increase
significantly for the year ended December 31, 1997 due to the shorter
depreciable lives for pagers (which is expected to increase depreciation
expense by approximately $30 million for the year ended December 31, 1997) and
the commencement of amortization of the licenses for spectrum and certain other
costs associated with the introduction of the Company's VoiceNow service (which
is expected to increase amortization expense by approximately $19 million for
the year ended December 31, 1997).
As a result of the above factors, EBITDA increased 20.6% to $75.4 million
(36.9% of Net Revenues) for the second quarter of 1997 compared to $62.5
million (36.3% of Net Revenues) for the corresponding period in 1996. For the
six months ended June 30, 1997, EBITDA increased 13.0% to $139.7 million (35.1%
of Net Revenues) compared to $123.6 million (36.9% of Net Revenues) for the
corresponding period of 1996. As expected, in the second quarter of 1997 and
for the first six months of 1997, EBITDA and EBITDA as a percentage of Net
Revenues were negatively impacted by the Company's international operations and
its new VoiceNow service. The Company's international operations and its
start-up of the VoiceNow service resulted in a decrease to EBITDA of $1.8
million and $2.1 million, respectively, in the second quarter of 1997. EBITDA
for the Company's domestic operations increased 19.5% to $77.2 million (38.1%
of Net Revenues) for the second quarter of 1997, compared to $64.6 million
(37.5% of Net Revenues) for the second quarter of 1996. Excluding the Company's
VoiceNow operations, EBITDA for the Company's core domestic paging operations
increased 22.8% to $79.3 million (39.1% of Net Revenues) for the second quarter
of 1997, compared to $64.6 million (37.5% of Net Revenues) for the second
quarter of 1996. The Company's international operations and its start-up of the
VoiceNow service resulted in a decrease to EBITDA of $3.9 million and $8.6
million, respectively, for the six months ended June 30, 1997. EBITDA for the
Company's domestic operations increased 14.0% to $143.5 million (36.3% of Net
Revenues) for the six months ended June 30, 1997, compared to $125.9 million
(37.6% of Net Revenues) for the six months ended June 30, 1996. Excluding the
Company's VoiceNow operations, EBITDA for the Company's core domestic paging
operations increased 20.8% to $152.1 million (38.5% of Net Revenues) for the
first six months of 1997, compared to $125.9 million (37.6% of Net Revenues)
for the corresponding period of 1996. The Company anticipates that during 1997
its VoiceNow service will have an incremental negative impact of less than $15
million on consolidated EBITDA.
Interest expense, net of amounts capitalized, increased $8.7 million and $16.8
million, respectively, from the three- and six-month periods ended June 30,
1996, to the corresponding periods in 1997, primarily due to a higher average
level of indebtedness outstanding in 1997. The average level of indebtedness
outstanding during the three and six months ended June 30, 1997 was
approximately $1.66 billion and $1.60 billion, respectively, compared to
10
<PAGE> 11
approximately $1.16 billion and $1.15 billion, respectively, outstanding during
the three and six months ended June 30, 1996.
On May 14, 1997, the Company redeemed all $200.0 million of its
outstanding 11.75% Notes, utilizing funds borrowed under the Company's Credit
Agreement. The Company recorded an extraordinary loss of $15.5 million in the
second quarter of 1997 on the early retirement of the 11.75% Notes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations and expansion into new markets and product lines
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) were $209.1
million for the six months ended June 30, 1997 and $191.3 million for the same
period in 1996. For the first six months of 1997, capital expenditures were
funded by net cash provided by operating activities ($62.2 million) and
borrowings.
During April 1996, the Company concluded its participation in a Federal
Communications Commission auction of specialized mobile radio (SMR) frequency
licenses, and ultimately acquired rights to two to four blocks of two-way
spectrum in markets across the United States for a purchase price of $45.6
million. The Company is in the process of purchasing exclusive rights to
certain of these SMR frequencies from incumbent operators. The total cost of
the investment will be approximately $250 million (including the $45.6 million
auction purchase price), of which $109 million was paid in 1996 and $66 million
was paid in the first six months of 1997, and the remainder will be paid in the
last six months of 1997 and in 1998.
The Company intends to utilize its narrowband personal communications
services and SMR frequencies for additional capacity as needed for its paging
operations, such as digital and alphanumeric, and to build a two-way network
over which it can deploy new products such as its new voice paging service,
VoiceNow, and various data products. The Company has expended $47 million in
1996 and $63 million in the first six months of 1997 to construct the two-way
network and expects to incur an additional $40 million during the remainder of
1997. Additional capital expenditures for the two-way network after 1997 will be
determined based on the market introduction and success of new products.
Through its wholly-owned subsidiary, Paging Network of Canada Inc., the
Company began offering paging services in Canada in April 1996. In July 1996,
the Company purchased a 25% interest in an existing Spanish paging company. In
December 1996, the Company signed agreements as the operational partner with a
20% interest in a joint venture to provide paging services in Brazil which
commenced operations during the first quarter of 1997. The Company is
considering other opportunities for international expansion, with the goal of
creating a portfolio of select international operations. Paging market
penetration in many international markets is relatively low, and many such
markets have only a small number of existing paging providers. Additional
investments will depend on such factors as growth rates, new market
opportunities, and execution of financing plans that maximize value for the
Company's stockholders.
Under the Credit Agreement, the Company is able to borrow, provided it
meets certain financial covenants, the lesser of $1.0 billion or an amount
based upon a calculation which is reduced by total outstanding domestic
indebtedness for borrowed monies (as defined) and outstanding letters of
credit. The amount of total indebtedness allowed at the end of each quarter is
equal to 6.5 times annualized domestic EBITDA. As of June 30, 1997, the Company
had $468.0 million of borrowings outstanding under the Credit Agreement and,
under the terms of the Credit Agreement, an additional $337.9 million was
available for borrowings as of that date. Such amount will increase or decrease
during the third quarter based on the
11
<PAGE> 12
domestic EBITDA for the third quarter. As of July 31, 1997, the Company had
$487.0 million of borrowings outstanding under its Credit Agreement. The
maximum borrowings which may be outstanding under the Credit Agreement will
begin reducing on June 30, 2001, and the Credit Agreement expires on December
31, 2004.
The two credit agreements of the Company's Canadian subsidiaries provide
for total borrowings of approximately $65 million, of which approximately $36
million was initially available under fully collateralized borrowings. The
remaining amounts are available for borrowings provided they are either
collateralized or certain financial covenants are met. As of June 30, 1997,
approximately $34 million of borrowings were outstanding under the credit
facilities. The maximum borrowings which may be outstanding under the credit
facilities will begin reducing on June 30, 1999, and both credit agreements
expire on June 30, 2003.
On May 14, 1997, the Company redeemed all $200.0 million of its
outstanding 11.75% Notes, utilizing funds borrowed under the Company's Credit
Agreement. The 11.75% Notes were redeemed to achieve an annual interest cost
savings of approximately $8 million per year for five years based on current
interest rates, including savings of approximately $4 million in 1997.
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 approximate $500 million, primarily relate to the development of a
new digital transmission network and the Company's ongoing paging operations,
including greater market share of existing markets. These expenditures will be
funded through the Company's operating cash flow and from borrowings under its
credit facility. The Company currently estimates 1997 incremental indebtedness
may aggregate in excess of $400 million.
Relative to amounts previously disclosed, the reductions in projected
1997 capital expenditures and incremental indebtedness are the result of
revisions in the Company's strategy for its new VoiceNow product. The Company
will continue to offer VoiceNow service in its three existing markets and
initiate service in one additional market, Chicago, in 1997. The Company will
also begin to utilize, where economically feasible, excess capacity in the
spectrum and two-way network constructed for use for VoiceNow for certain
existing paging services offered by the Company.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in various lawsuits arising in the normal
course of business. In management's opinion, the ultimate outcome of these
lawsuits will not have a material adverse effect on the Company's
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 22, 1997, the Company held its Annual Meeting of Stockholders,
at which all of the matters listed below were approved.
(a) Mr. Bryan C. Cressey was elected as a Class III Director for a three
year term to expire in 2000 (83,814,979 voting for and 1,194,045
withholding authority). Mr. Richard C. Alberding was elected as a
Class III Director for a three year term to expire in 2000
(83,758,826 voting for and 1,250,198 withholding authority). Mr. Lee
M. Mitchell was elected as a Class III Director for a three year term
to expire in 2000 (83,812,623 voting for and 1,196,401 withholding
authority).
(b) The adoption of an amendment to the Company's 1991 Stock Option Plan
to increase the number of shares of common stock issuable pursuant
thereto from 6,450,000 shares to 13,950,000 shares was approved
(50,994,494 voting for, 20,129,665 voting against, and 13,884,865
abstaining or not voting).
(c) The adoption of the Company's amended and restated 1992 Stock Option
Plan for Directors was approved (69,801,000 voting for, 5,125,054
voting against, and 10,082,970 abstaining or not voting).
(d) The adoption of the Company's 1997 Restricted Stock Plan was approved
(70,094,694 voting for, 4,830,276 voting against, and 10,084,054
abstaining or not voting).
As of the record date there were 102,621,077 shares of common stock
issued and outstanding and entitled to vote.
ITEM 5. OTHER INFORMATION
On August 4, 1997, Glenn W. Marschel resigned as President and Chief
Executive Officer of the Company and George M. Perrin resigned as Chairman
of the Board of Directors. Mr. Perrin will remain on the Company's Board
of Directors. On August 5, 1997, the Company announced that effective
August 4, 1997, John P. Frazee, Jr. was elected by its Board of Directors
as Chairman, President and Chief Executive Officer.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits listed on the accompanying index to exhibits are filed
as part of this quarterly report.
(b) Reports on Form 8-K
On May 20, 1997, the Company filed a Current Report on Form 8-K
relating to the redemption of all of its outstanding $200 million
11.75% Senior Subordinated Notes due May 15, 2002.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Paging Network, Inc.
Date: September 29, 1997 /s/ JOHN P. FRAZEE, JR.
-----------------------------------------------
John P. Frazee, Jr.
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: September 29, 1997 /s/ G. ROBERT THOMPSON
-----------------------------------------------
G. Robert Thompson
Vice President - Finance and Acting
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
4.1 Articles Sixth, Seventh, Eighth, Twelfth, and Thirteenth of the
Restated Certificate of Incorporation of the Registrant, as
amended(1)
4.2 Articles II, III, and VII and Section I of Article VIII of the
Registrant's By-laws, as amended(1)
4.3 Form of Indenture(2)
4.4 Article V, Sections I, VI, and VII of the Registrant's By-Laws,
as amended(4)
10.1 1982 Incentive Stock Option Plan, as amended and restated(1)
10.2 Form of Stock Option Agreement executed by recipients of options
granted under the 1982 Incentive Stock Option Plan(1)
10.3 Form of Management Agreement executed by recipients of options
granted under the 1982 Incentive Stock Option Plan(1)
10.4 Form of Vesting Agreement executed by recipients of options
granted under the 1982 Incentive Stock option Plan(1)
10.5 1991 Stock Option Plan(1)
10.6 Form of Stock Option Agreement executed by recipients of options
granted under the 1991 Stock Option Plan(1)
10.7 Form of Indemnification Agreement executed by directors and
officers of the Registrant(1)
10.8 Form of First Amendment to Vesting Agreement executed by
recipients of options granted under the 1982 Incentive Stock
Option Plan(1)
10.9 Form of First Amendment to Management Agreement executed by
recipients of options granted under the 1982 Incentive Stock
Option Plan(1)
10.10 1992 Stock Option Plan for Directors(3)
10.11 Amended and Restated Credit Agreement dated as of May 2, 1995
among the Registrant, NationsBank of Texas, N.A., Toronto
Dominion (Texas), Inc., The First National Bank of Boston, and
certain other lenders(4)
10.12 Amendment No. 1 dated as of December 12, 1995 to the Amended and
Restated Credit Agreement dated as of May 2, 1995 among the
Registrant, NationsBank of Texas, N.A., Toronto Dominion
(Texas), Inc., The First National Bank of Boston, and certain
other lenders(5)
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10.13 Employment Agreement dated as of December 1, 1995 among the
Registrant and Glenn W. Marschel(5)
10.14 Second Amended and Restated Credit Agreement dated as of June 5,
1996, among the Registrant, NationsBank of Texas, N.A., Toronto
Dominion (Texas), Inc., The First National Bank of Boston, Chase
Securities Inc., and certain other lenders(6)
10.15 Loan Agreement dated as of June 5, 1996 among Paging Network of
Canada Inc., The Toronto-Dominion Bank, and such other financial
institutions as become banks(6)
10.16 Loan Agreement dated as of June 5, 1996 among Madison
Telecommunications Holdings, Inc., The Toronto-Dominion Bank,
and such other financial institutions as become banks(6)
10.17 1991 Stock Option Plan, as amended and approved by stockholders
on May 22, 1997(7)
10.18 1992 Stock Option Plan for Directors, as amended and restated
and approved by stockholders on May 22, 1997(7)
10.19 1997 Restricted Stock Option Plan and approved by stockholders
on May 22, 1997(7)
12 Ratio of Earnings to Fixed Charges for the three and six months
ended June 30, 1997 and 1996 (restated)(8)
27 Financial Data Schedule (restated)(8)
</TABLE>
---------------------------------------------------------------
(1) Previously filed as an exhibit to Registration Statement
No. 33-42253 on Form S-1 and incorporated herein by
reference.
(2) Previously filed as an exhibit to Registration Statement
No. 33-46803 on Form S-1 and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1991.
(4) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1995.
(5) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1995.
(6) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1996.
(7) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997.
(8) Filed herewith.
17
<PAGE> 1
EXHIBIT 12
PAGING NETWORK, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Earnings:
Loss before extraordinary item .............. $(31,963) $(18,532) $(69,277) $(30,638)
Fixed charges, less interest capitalized .... 44,376 34,785 87,836 69,248
-------- -------- -------- --------
Earnings ................................. $ 12,413 $ 16,253 $ 18,559 $ 38,610
======== ======== ======== ========
Fixed charges:
Interest expense, including interest
capitalized................................ $ 39,767 $ 28,623 $ 78,122 $ 57,075
Amortization of deferred financing costs .... 1,859 1,284 4,330 2,567
Interest portion of rental expense .......... 5,750 4,878 11,384 9,606
-------- -------- -------- --------
Fixed charges ............................ $ 47,376 $ 34,785 $ 93,836 $ 69,248
======== ======== ======== ========
Ratio of earnings to fixed charges .......... - - - -
======== ======== ======== ========
Deficiency of earnings available to cover
fixed charges ............................. $(34,963) $(18,532) $(75,277) $(30,638)
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,020
<SECURITIES> 0
<RECEIVABLES> 81,296
<ALLOWANCES> 6,729
<INVENTORY> 69,210
<CURRENT-ASSETS> 160,622
<PP&E> 1,300,003
<DEPRECIATION> 392,554
<TOTAL-ASSETS> 1,635,224
<CURRENT-LIABILITIES> 187,351
<BONDS> 1,702,598
0
0
<COMMON> 1,026
<OTHER-SE> (267,940)
<TOTAL-LIABILITY-AND-EQUITY> 1,635,224
<SALES> 4,861
<TOTAL-REVENUES> 233,250
<CGS> 28,805
<TOTAL-COSTS> 198,325
<OTHER-EXPENSES> 38,083
<LOSS-PROVISION> 4,770
<INTEREST-EXPENSE> 38,626
<INCOME-PRETAX> (31,963)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,963)
<DISCONTINUED> 0
<EXTRAORDINARY> (15,544)
<CHANGES> 0
<NET-INCOME> (47,507)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
