<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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)
14911 QUORUM DRIVE, SUITE 600
DALLAS, TEXAS 75240
(Address of principal executive offices, including zip code)
(972) 801-8000
(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 October 31, 1998
----------------------------- -----------------------------------------
<S> <C>
Common Stock, $ .01 par value 103,640,554
</TABLE>
The Company's Common Stock is publicly traded on the Nasdaq Stock Market
under the symbol "PAGE".
================================================================================
<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
December 31, 1997 and September 30, 1998 (Unaudited) ............................ 3
Paging Network, Inc. Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1997 and 1998 (Unaudited) .... 4
Paging Network, Inc. Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1997 and 1998 (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>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 2,924 $ 14,084
Accounts receivable, less allowance
for doubtful accounts ................................................. 63,288 61,505
Inventories ................................................................ 24,114 22,216
Prepaid expenses and other assets .......................................... 14,888 21,878
------------ -------------
Total current assets .................................................. 105,214 119,683
Property, equipment, and leasehold improvements, at cost ........................ 1,387,560 1,354,901
Less accumulated depreciation .............................................. (469,526) (518,050)
------------ -------------
Net property, equipment, and leasehold improvements ................... 918,034 836,851
Other non-current assets, net ................................................... 573,985 568,965
------------ -------------
$ 1,597,233 $ 1,525,499
============ =============
LIABILITIES AND SHAREOWNERS' DEFICIT
Current liabilities:
Accounts payable ........................................................... $ 42,640 $ 56,604
Accrued interest ........................................................... 40,085 38,167
Accrued expenses ........................................................... 36,854 41,779
Accrued restructuring costs, current portion ............................... -- 19,571
Customer deposits .......................................................... 24,460 23,567
Deferred revenue ........................................................... 11,634 15,537
------------ -------------
Total current liabilities ............................................. 155,673 195,225
------------ -------------
Long-term obligations ........................................................... 1,779,491 1,770,812
Accrued restructuring costs, non-current portion ................................ -- 10,315
Minority interest ............................................................... -- 1,699
Commitments and contingencies ................................................... -- --
Shareowners' deficit:
Common Stock - $.01 par, authorized 250,000,000 shares; 102,659,915 and
103,640,554 shares issued and outstanding as of December 31, 1997
and September 30, 1998, respectively .................................. 1,027 1,036
Paid-in capital ............................................................ 124,908 133,061
Accumulated deficit ........................................................ (464,774) (589,193)
Other comprehensive income ................................................. 908 2,544
------------ -------------
Total shareowners' deficit ............................................ (337,931) (452,552)
------------ -------------
$ 1,597,233 $ 1,525,499
============ =============
</TABLE>
See accompanying notes
3
<PAGE> 4
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share information)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Services, rent and maintenance revenues ................ $ 210,611 $ 239,689 $ 599,075 $ 704,722
Product sales .......................................... 35,753 25,382 105,787 80,600
--------- --------- --------- ---------
Total revenues .................................... 246,364 265,071 704,862 785,322
Cost of products sold .................................. (30,341) (18,276) (90,503) (62,540)
--------- --------- --------- ---------
216,023 246,795 614,359 722,782
Operating expenses:
Services, rent and maintenance .................... 43,417 52,643 125,679 158,011
Selling ........................................... 26,390 27,284 80,088 72,320
General and administrative ........................ 64,498 79,811 187,214 224,035
Depreciation and amortization ..................... 73,455 69,059 207,183 213,220
Restructuring charge .............................. -- -- -- 74,000
--------- --------- --------- ---------
Total operating expenses ..................... 207,760 228,797 600,164 741,586
--------- --------- --------- ---------
Operating income (loss) ............................... 8,263 17,998 14,195 (18,804)
Other income (expense):
Interest expense .................................. (38,411) (35,822) (114,863) (109,353)
Interest income ................................... 901 534 2,799 1,564
Minority interest ................................. 20 862 66 2,174
Equity in loss of an unconsolidated subsidiary .... (174) -- (875) --
--------- --------- --------- ---------
Total other income (expense) ................. (37,664) (34,426) (112,873) (105,615)
--------- --------- --------- ---------
Loss before extraordinary item ......................... (29,401) (16,428) (98,678) (124,419)
Extraordinary loss ..................................... -- -- (15,544) --
--------- --------- --------- ---------
Net loss ............................................... $ (29,401) $ (16,428) $(114,222) $(124,419)
========= ========= ========= =========
Net loss per share (basic and diluted):
Loss before extraordinary item ......................... $ (0.29) $ (0.16) $ (0.96) $ (1.20)
Extraordinary loss ..................................... -- -- (0.15) --
--------- --------- --------- ---------
Net loss per share ..................................... $ (0.29) $ (0.16) $ (1.11) $ (1.20)
========= ========= ========= =========
</TABLE>
See accompanying notes
4
<PAGE> 5
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1997 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net loss ....................................................... $(114,222) $(124,419)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Restructuring charge ............................... -- 74,000
Extraordinary loss ................................. 15,544 --
Depreciation ....................................... 184,676 193,242
Amortization ....................................... 22,507 19,978
Provision for doubtful accounts .................... 13,453 13,780
Amortization of debt issuance costs ................ 6,375 3,316
Minority interest .................................. (66) (2,174)
Other .............................................. 875 4,160
Changes in operating assets and liabilities:
Accounts receivable ................................ (10,815) (11,990)
Inventories ........................................ (17,079) 2,512
Prepaid expenses and other assets .................. (6,967) 2,430
Accounts payable ................................... (7,753) 11,752
Accrued expenses and accrued interest .............. 8,204 3,248
Accrued restructuring costs ........................ -- (2,101)
Customer deposits and deferred revenue ............. 9,579 3,010
--------- ---------
Net cash provided by operating activities ........................... 104,311 190,744
--------- ---------
Investing activities:
Capital expenditures ........................................... (279,374) (171,295)
Payments for spectrum licenses ................................. (92,747) (6,044)
Business acquisitions and joint venture investments ............ (6,503) (6,528)
Restricted cash invested in money market instruments ........... (6,320) --
Other, net ..................................................... 3,596 10,873
--------- ---------
Net cash used in investing activities ............................... (381,348) (172,994)
--------- ---------
Financing activities:
Borrowings of long-term obligations ............................ 499,828 216,710
Repayments of long-term obligations ............................ -- (230,907)
Redemption of $200 million senior subordinated notes ........... (211,750) --
Proceeds from exercise of stock options ........................ 66 7,607
Other .......................................................... 314 --
--------- ---------
Net cash provided by (used in) financing activities ................. 288,458 (6,590)
--------- ---------
Net increase in cash and cash equivalents ........................... 11,421 11,160
Cash and cash equivalents at beginning of period .................... 3,777 2,924
--------- ---------
Cash and cash equivalents at end of period .......................... $ 15,198 $ 14,084
========= =========
</TABLE>
See accompanying notes
5
<PAGE> 6
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
1. THE COMPANY
Paging Network, Inc. (the Company) is a provider of wireless
messaging and information delivery services. The Company provides
service in all 50 states, the District of Columbia, the U.S. Virgin
Islands, Puerto Rico, and Canada, including local service in all of the
largest 100 markets (in population) in the United States, and owns
interests in wireless messaging companies in Spain and Brazil. The
consolidated financial statements include the accounts of all of its
wholly and majority-owned subsidiaries. Effective January 1, 1998, the
Company began consolidating the results of its Spanish subsidiary,
which had previously been accounted for under the equity method of
accounting. All intercompany transactions have been eliminated.
2. UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim consolidated financial information contained
herein is unaudited but, in the opinion of management, includes all
adjustments, which are of a normal recurring nature, except for the
restructuring charge discussed in Note 3 and the extraordinary loss
recorded during the second quarter of 1997, 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, these financial statements
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, 1997, has been derived
from the audited financial statements as of that date. Results of
operations for the periods presented herein are not necessarily
indicative of results of operations for the entire year. These
financial statements and related notes should be read in conjunction
with the financial statements and notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
3. RESTRUCTURING CHARGE
On February 8, 1998, the Company's Board of Directors approved
a restructuring of the Company's domestic operations (the
Restructuring). As part of the Restructuring, the Company is
reorganizing its operations to expand its sales organization, eliminate
local and redundant administrative operations, and consolidate certain
key support functions. The Company expects to eliminate approximately
1,600 positions, net of positions added, through the consolidation of
redundant administrative operations and certain key support functions
today located in offices throughout the country into central facilities
(the Centers of Excellence). As a result of the Restructuring, the
Company recorded a charge of $74.0 million, or $0.72 per share (basic
and diluted), during the quarter ended March 31, 1998. The components
of the charge included (in thousands):
<TABLE>
<S> <C>
Write-down of property and equipment $38,900
Lease obligations and terminations 18,900
Severance and related benefits 12,700
Other 3,500
-------
Total restructuring charge $74,000
=======
</TABLE>
6
<PAGE> 7
The write-down of property and equipment relates to a non-cash
charge to reduce the carrying amount of certain machinery and
equipment, furniture and fixtures, and leasehold improvements, that the
Company will not continue to utilize following the Restructuring, to
their estimated net realizable value as of the date such assets are
projected to be disposed of or abandoned by the Company, allowing for
the recognition of normal depreciation expense on such assets through
their projected disposal date. The net realizable value of these assets
was determined based on management estimates, which considered such
factors as the nature and age of the assets to be disposed of, the
timing of the assets' disposal, and the method and potential costs of
the disposal. Such estimates are subject to change.
The provision for lease obligations and terminations relates
primarily to future lease commitments on local and regional office
facilities that will be closed as part of the Restructuring. The charge
represents future lease obligations, net of projected sublease income,
on such leases past the dates the offices will be closed by the
Company, or, for certain leases, the cost of terminating the leases
prior to their scheduled expiration. Projected sublease income was
based on management estimates, which are subject to change. Cash
payments on the leases and lease terminations will occur over the
remaining lease terms, the majority of which expire prior to 2003.
During the three and nine months ended September 30, 1998, cash
payments totaling approximately $0.2 million and $0.8 million,
respectively, were made for lease termination costs and charged against
accrued restructuring costs.
Through the elimination of certain local and regional
administrative operations and the consolidation of certain support
functions, the Company will eliminate approximately 1,600 net
positions, the majority of which are non-sales related positions in
local and regional offices. As a result of eliminating these positions,
the Company will involuntarily terminate an estimated 2,150 personnel.
All of the severance and benefits costs to be paid by the Company will
be paid during the remainder of 1998 and in 1999.
The Company's restructuring activity through September 30,
1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Utilization of Reserve
Initial ---------------------- Remaining
Charge Cash Non-Cash Reserve
------- ------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed assets impairments $38,900 $ -- $ 38,900 $ --
Lease obligation costs 18,900 762 -- 18,138
Severance costs 12,700 952 -- 11,748
Other 3,500 387 3,113 --
------- ------- ---------- ---------
Total $74,000 $ 2,101 $ 42,013 $ 29,886
======= ======= ========== =========
</TABLE>
4. PROPERTY AND EQUIPMENT AND OTHER ASSETS
Included in inventories, property and equipment, and other
non-current assets as of September 30, 1998, is approximately $30
million of assets which were acquired or developed in connection with
the Company's VoiceNow(R) service. While the Company currently believes
such assets are recoverable, the ultimate recoverability of such assets
is dependent upon the economic viability of the VoiceNow service, which
was introduced in Chicago during the second quarter of 1998, as well as
the extent to which certain of these assets can be utilized for the
Company's advanced messaging network. However, a substantial portion of
such assets will be written-off as of January 1, 1999, under the
provisions of Statement of Position 98-5 discussed below.
7
<PAGE> 8
In April 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued Statement
of Position 98-5 "Reporting on the Costs of Start-Up Activities" (SOP
98-5), effective for years beginning after December 15, 1998. SOP 98-5
requires the expensing of all start-up costs as incurred as well as
writing off the remaining unamortized balance of capitalized start-up
costs at the date of adoption of SOP 98-5 as a cumulative effect of a
change in accounting principle. The Company is required to adopt the
provisions of SOP 98-5 effective January 1, 1999 and will record a
charge of approximately $35 million to $40 million at that date,
representing a cumulative effect of a change in accounting principle to
write-off estimated unamortized start-up costs, including amounts
attributable to VoiceNow, as of January 1, 1999.
5. LONG-TERM OBLIGATIONS
As of September 30, 1998, the Company had $522.0 million of
borrowings outstanding under its domestic $1.0 billion revolving credit
agreement (the Credit Agreement).
6. INCOME TAX PROVISION
No provision or benefit for income taxes has been made for the
three and nine months ended September 30, 1998 and 1997, as the
deferred benefit from operating losses was offset by the increase in
the valuation allowance.
7. COMMON STOCK AND NET LOSS PER SHARE
Net loss per share amounts are computed based on the weighted
average number of common shares outstanding. The number of shares used
to compute per share amounts for the three and nine months ended
September 30, 1998 were 103.6 million and 103.3 million, respectively.
The number of shares used to compute per share amounts for the three
and nine months ended September 30, 1997 was 102.6 million. The average
number of options to purchase shares of the Company's Common Stock
during the three and nine months ended September 30, 1998 were 8.3
million and 7.4 million, respectively, at exercise prices ranging
from $2.67 per share to $25.50 per share. The average number of options
to purchase shares of the Company's Common Stock during the three and
nine months ended September 30, 1997 were 5.5 million and 6.2 million,
respectively, at exercise prices ranging from $2.67 per share to $26.50
per share. These stock options were not included in the computation of
diluted earnings per share because the effect of assuming their
exercise would have been antidilutive.
The Company has 275.0 million authorized shares, of which
250.0 million are Common Stock and 25.0 million are preferred stock. As
of September 30, 1998, there were no preferred shares issued or
outstanding.
On May 21, 1998, the Company's shareowners approved an
amendment to its 1991 Stock Option Plan (1991 Plan) to broaden the
group of employees eligible to receive stock options under such plan to
include all employees of the Company and of its subsidiaries. On May
22, 1998, the Company granted approximately 2.1 million of options
under the 1991 Plan to certain employees at an exercise price of $13.94
per share, which represents the market price of the Company's common
stock at the date of grant.
8
<PAGE> 9
8. COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), which establishes new rules for the reporting and
display of comprehensive income (loss) and its components. SFAS 130
requires certain items, including foreign currency translation
adjustments, which prior to adoption were reported separately in
shareowners' deficit, to be included in other comprehensive income
(loss). The adoption of SFAS 130 had no impact on the Company's net
loss or shareowners' deficit.
Comprehensive loss for the three and nine months ended
September 30, 1997 and 1998, is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $ (29,401) $ (16,428) $(114,222) $(124,419)
Foreign currency
translation adjustments (8) 526 74 1,636
--------- --------- --------- ---------
Comprehensive loss $ (29,409) $ (15,902) $(114,148) $(122,783)
========= ========= ========= =========
</TABLE>
9. 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
September 30, 1998, cash equivalents also include investments in money
market instruments, which are carried at fair market value. Cash
payments made for interest during the nine months ended September 30,
1997 and 1998, were approximately $113.0 million and $108.0 million,
respectively, net of interest capitalized during the nine months ended
September 30, 1997 and 1998 of $9.9 million and $14.5 million,
respectively. There were no significant federal or state income taxes
paid or refunded for the nine months ended September 30, 1997 and 1998.
9
<PAGE> 10
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,
including but not limited to future capital expenditures, future borrowings,
introduction of new services, impact of Year 2000 issues on the Company's
operations, anticipated costs and expenses related to, and the timetable for,
the remediation of Year 2000 issues, expected annual recurring performance
improvements and cost savings as a result of the Restructuring, and sales
productivity increases and incremental annual increases in revenues expected to
result from the Restructuring together with associated price increases, 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 parties, third party Year 2000 remediation plans, new
technologies, and acceptance of the Company's services in the marketplace.
RESULTS OF OPERATIONS
Throughout this section the Company makes reference to earnings before
interest, income taxes, depreciation, amortization, minority interest, equity in
loss of an unconsolidated subsidiary, restructuring charge, and extraordinary
loss (Adjusted EBITDA). EBITDA (earnings before interest, income taxes,
depreciation, and amortization) is a key performance measure used in the
wireless messaging industry. Adjusted EBITDA is one of the financial measures by
which the Company's covenants are calculated under the agreements governing its
debt obligations. EBITDA and Adjusted EBITDA are not measures defined in
generally accepted accounting principles and should not be considered in
isolation or as a substitute for measures of performance in accordance with
generally accepted accounting principles.
The following table presents certain items in the Consolidated
Statements of Operations as a percentage of revenues from services, rent and
maintenance plus product sales less the cost of products sold (Net Revenues) for
the three and nine months ended September 30, 1997 and 1998, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Revenues ............................... 100.0% 100.0% 100.0% 100.0%
Operating expenses (1):
Services, rent and maintenance ........ 20.1 21.3 20.5 21.9
Selling ............................... 12.2 11.1 13.0 10.0
General and administrative ............ 29.9 32.3 30.5 31.0
Depreciation and amortization ......... 34.0 28.0 33.7 29.5
Restructuring charge .................. -- -- -- 10.2
------ ------ ------ ------
Operating income (loss) .................... 3.8 7.3 2.3 (2.6)
Net loss ................................... (13.6) (6.7) (18.6) (17.2)
Adjusted EBITDA ............................ 37.8 35.3 36.0 37.1
Adjusted EBITDA for domestic operations .... 38.7 36.4 37.2 38.3
Adjusted EBITDA for core domestic
operations (2) ........................... 39.5 40.3 38.8 40.4
</TABLE>
(1) Excluding direct costs attributable to the Company's advanced messaging
operations and its Centers of Excellence, services, rent and maintenance
expenses, selling expenses, general and administrative expenses, and
depreciation and amortization expense as a percentage of Net Revenues were
21.0%, 9.4%, 30.5%, and 25.6%, respectively, for the three months ended
September 30, 1998; 19.9%, 11.7%, 29.8%, and 31.4%, respectively, for the
three months ended September 30, 1997; 21.6%, 9.3%, 30.0%, and 27.7%,
respectively, for the nine months ended September 30, 1998; and 20.2%,
11.7%, 30.4%, and 32.4%, respectively, for the nine months ended September
30, 1997.
(2) Represents Adjusted EBITDA for the Company's domestic operations, excluding
its domestic advanced messaging operations and its Centers of Excellence.
10
<PAGE> 11
Net Revenues for the three- and nine-month periods ended September 30,
1998, were $246.8 million and $722.8 million, respectively, representing
increases of 14.2% and 17.6% from $216.0 million and $614.4 million,
respectively, for the comparable periods ended September 30, 1997. Revenues from
services, rent and maintenance, which the Company considers its primary
business, increased 13.8% to $239.7 million for the three months ended September
30, 1998, compared to $210.6 million for the three months ended September 30,
1997. Services, rent and maintenance revenues for the nine months ended
September 30, 1998 increased 17.6% to $704.7 million, compared to $599.1 million
for the nine months ended September 30, 1997. These increases were due to growth
in the number of units in service with subscribers of the Company during the
three and nine months ended September 30, 1998, as compared to the corresponding
periods of 1997, and increases in average revenue per unit resulting from
pricing initiatives and the changing mix of the Company's subscriber base
towards higher revenue products and services. In an effort to reduce the number
of customers utilizing unprofitable services, the Company has instituted certain
price initiatives including setting appropriate minimum pricing levels for new
business. As a result of these initiatives, the Company experienced a net
decrease of approximately 120,000 units placed in service during the third
quarter of 1998, of which a significant portion was attributed to the
cancellation of a few large reseller agreements, with local numeric paging
service representing the majority of the decrease in units. The number of units
in service with subscribers at September 30, 1998 was 10,484,000, compared to
10,604,000 and 10,246,000 units in service with subscribers at June 30, 1998 and
September 30, 1997, respectively. Partially as a result of the Company's
profit-focused strategy, the average revenue per unit for its core domestic
operations increased to $7.59 and $7.52, respectively, for the three and nine
months ended September 30, 1998, compared to $7.01 and $7.06, respectively, for
the corresponding periods of 1997. The Company is continuing to review its
pricing structure for all of its services and anticipates additional price
increases in the fourth quarter of 1998 and the first quarter of 1999. As a
result, the Company expects to experience volatility in its domestic subscriber
base in the next few quarters.
Product sales, less cost of products sold, and the related percentage of
Net Revenues, were relatively flat for the three and nine months ended September
30, 1998, compared to the same periods in 1997. Product sales, less cost of
products sold, were $7.1 million (2.9% of Net Revenues) for the third quarter of
1998, compared to $5.4 million (2.5% of Net Revenues) for the third quarter of
1997, and were $18.1 million (2.5% of Net Revenues) for the first nine months of
1998, compared to $15.3 million (2.5% of Net Revenues) for the first nine months
of 1997.
Services, rent and maintenance expenses increased 21.2% to $52.6 million
(21.3% of Net Revenues) for the three months ended September 30, 1998, compared
to $43.4 million (20.1% of Net Revenues) for the three months ended September
30, 1997. Services, rent and maintenance expenses increased 25.7% to $158.0
million (21.9% of Net Revenues) for the nine months ended September 30, 1998,
compared to $125.7 million (20.5% of Net Revenues) for the nine months ended
September 30, 1997. The increases in services, rent and maintenance expenses and
the increases as a percentage of Net Revenues for the three and nine months
ended September 30, 1998 were partially attributable to an increase in telephone
expenses associated with the enactment of regulation requiring providers of
payphones be compensated for all calls placed from payphones to toll free
numbers. This requirement increased the Company's cost of providing toll free
number service commencing in the fourth quarter of 1997. Also contributing to
the increases were increased contracted dispatch costs related to advanced
messaging units placed in service during these time periods, expenses associated
with an increase in transmitter sites, and expenses related to the Company's
Spanish subsidiary, which had not been included in the Company's consolidated
results prior to January 1, 1998.
Selling expenses increased 3.4% to $27.3 million (11.1% of Net Revenues)
for the three months ended September 30, 1998, from $26.4 million (12.2% of Net
Revenues) for the three months ended September 30, 1997.
11
<PAGE> 12
Selling expenses decreased 9.7% to $72.3 million (10.0% of Net Revenues) for the
nine months ended September 30, 1998, from $80.1 million (13.0% of Net Revenues)
for the nine months ended September 30, 1997. The decrease in selling expenses
for the nine months ended September 30, 1998 and the decreases as a percentage
of Net Revenues for the three and nine months ended September 30, 1998 resulted
partially from a lower amount of sales commissions paid in conjunction with the
decline in net additions in units in service with subscribers of the Company for
the three- and nine-month periods ended September 30, 1998, as compared to the
corresponding periods of 1997. Also contributing to the decreases was a decrease
in certain marketing research, development costs, and advertising expenses
associated with the Company's advanced messaging operations, due to the decline
in such costs related to its VoiceNow service. The marketing research,
development costs, and advertising expenses associated with the Company's
advanced messaging operations are expected to grow in future periods due to the
continued promotion of its new two-way service.
General and administrative expenses increased 23.7% to $79.8 million
(32.3% of Net Revenues) for the third quarter of 1998, compared to $64.5 million
(29.9% of Net Revenues) for the corresponding period of 1997. General and
administrative expenses increased 19.7% to $224.0 million (31.0% of Net
Revenues) for the first nine months of 1998, compared to $187.2 million (30.5%
of Net Revenues) for the same period of 1997. The increases in general and
administrative expenses for the three and nine months ended September 30, 1998
and as a percentage of Net Revenues for the three and nine months ended
September 30, 1998 were primarily related to expenses incurred to support the
growth in the number of units in service with subscribers of the Company during
the three and nine months ended September 30, 1998, as compared to the
corresponding periods of 1997, and expenses associated with the establishment
of the Company's Centers of Excellence.
Depreciation and amortization expense decreased 6.0% to $69.1 million
(28.0% of Net Revenues) for the three months ended September 30, 1998, compared
to $73.5 million (34.0% of Net Revenues) for the three months ended September
30, 1997. Depreciation and amortization expense increased 2.9% to $213.2 million
(29.5% of Net Revenues) for the nine months ended September 30, 1998, compared
to $207.2 million (33.7% of Net Revenues) for the nine months ended September
30, 1997. The decrease in depreciation and amortization expense for the three
months ended September 30, 1998 resulted primarily from certain property and
equipment becoming fully depreciated, certain non-current assets becoming fully
amortized, and the decline in capital expenditures by the Company. The increase
in depreciation and amortization expense for the nine months ended September 30,
1998 was primarily attributable to the increase in the number of subscriber
devices owned by the Company and leased to subscribers during the nine months
ended September 30, 1998, as compared to the corresponding period of 1997, the
expansion of the nationwide transmission networks, and the increase in computer
and wireless messaging equipment used by the Company in its operations. The
Company expects to commence depreciation and amortization of the majority of the
assets related to its advanced messaging services and its Centers of Excellence
in the first quarter of 1999.
The Company recorded a restructuring charge of $74.0 million during the
quarter ended March 31, 1998, as a result of a reorganization of the Company's
administrative and certain key support functions. See further discussion in Note
3 to the Consolidated Financial Statements.
As a result of the above factors, Adjusted EBITDA increased 6.5% to $87.1
million (35.3% of Net Revenues) for the third quarter of 1998, compared to $81.7
million (37.8% of Net Revenues) for the corresponding period in 1997. For the
nine months ended September 30, 1998, Adjusted EBITDA increased 21.2% to $268.4
million (37.1% of Net Revenues) compared to $221.4 million (36.0% of Net
Revenues) for the same period of 1997. Adjusted EBITDA and Adjusted EBITDA as a
percentage of Net Revenues were negatively impacted by the Company's
international operations (see further discussion in Note 1 to the Consolidated
Financial Statements), advanced messaging operations, and the formation of the
Centers of Excellence. Excluding the Company's international operations,
advanced messaging operations, and the formation of the Centers of Excellence,
Adjusted EBITDA for the Company's core domestic operations increased 15.5% to
$97.5 million (40.3% of Net Revenues) for the third quarter of 1998, compared to
$84.4 million (39.5% of Net Revenues) for the third quarter of 1997. Excluding
the Company's international operations, advanced messaging operations, and the
formation of the Centers of Excellence, Adjusted EBITDA for the Company's core
domestic operations increased 21.2% to $286.7 million (40.4% of Net Revenues)
for the first nine months of 1998, compared to $236.5 million (38.8% of Net
Revenues) for the corresponding period of 1997.
Interest expense, net of amounts capitalized, was relatively flat for the
three and nine months ended September 30, 1998, compared to the same periods of
1997. Interest expense, net of amounts capitalized, was $35.8 million for the
third quarter of 1998, compared to $38.4 million for the third quarter of 1997.
Interest expense, net of amounts capitalized, was $109.4 million for the first
nine months of 1998, compared to $114.9 million for the corresponding period of
1997.
12
<PAGE> 13
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations and expansion into new markets and product lines
have required substantial capital investment for the development and
installation of wireless communications systems and for the procurement of
various types and brands of pagers (subscriber devices) and related equipment.
Furthermore, the Company is currently in the process of building an advanced
messaging network over which it can deploy new enhanced messaging services and
customized wireless information. Capital expenditures (excluding payments for
spectrum licenses) for the three and nine months ended September 30, 1998, were
$83.6 million and $171.3 million, respectively, compared to $70.3 million and
$279.4 million, respectively, for the corresponding periods of 1997.
Capital expenditures related to the Company's core domestic operations
decreased from $37.5 million and $180.3 million, respectively, for the three and
nine months ended September 30, 1997, to $24.5 million and $76.8 million,
respectively, for the three and nine months ended September 30, 1998. The
decreases in core domestic capital expenditures in 1998 were primarily due to a
reduction in the Company's network-related expenditures pertaining to geographic
coverage and capacity expansion. The Company believes it offers competitive
geographic coverage and further expansion will be undertaken as it deems
appropriate. The Company has also instituted programs to utilize subscriber
devices more effectively and to more closely control subscriber device capital
expenditures, including efficiencies established in the logistics management of
the subscriber device ordering process. Capital expenditures related to the
Company's buildout of its advanced messaging network were $38.0 million and
$55.0 million, respectively, for the three and nine months ended September 30,
1998, compared to $31.9 million and $94.6 million, respectively, for the
corresponding periods of 1997.
The amount of capital expenditures may fluctuate from quarter to quarter
and on an annual basis due to several factors; however, the Company expects the
total amount of capital expenditures in 1998 (including capital expenditures
made in connection with the Company's expansion of its advanced messaging
network and to establish the Centers of Excellence in connection with the
Company's Restructuring) to be approximately $300 million. The Company
anticipates capital expenditures (including capital expenditures to be incurred
in connection with the Company's expansion of its advanced messaging network and
to establish the Centers of Excellence in connection with the Company's
Restructuring) to decrease in 1999 as compared to 1998.
For the first nine months of 1998, capital expenditures were funded by net
cash provided by operating activities of $190.7 million. Net cash provided by
operating activities increased $86.4 million for the nine months ended September
30, 1998, as compared to the same period of 1997. The increase resulted
primarily from a decrease in net loss before restructuring charge of $63.8
million, a decrease in inventories of $19.6 million, and an increase in accounts
payable of $19.5 million. The decrease in inventories was related to a lower
volume of subscriber device purchases resulting primarily from the programs
instituted to utilize subscriber devices more effectively and efficiencies in
the subscriber device ordering process, as previously discussed. The increase in
accounts payable resulted from timing differences related to the receipt and
payment of invoices.
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 $230 million (including the $45.6 million
auction purchase price), of which $109 million, $93 million, and $6 million,
respectively, was paid in 1996, 1997, and the first nine months of 1998.
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
primarily upon the Company's Adjusted EBITDA for the most recent quarter. As of
September 30, 1998, the Company had $522.0 million of borrowings outstanding
under the Credit Agreement and, under the terms of the Credit Agreement, an
additional $476.8 million was available for borrowings as of that date. As of
October 31, 1998, the Company had $556.0 million of borrowings outstanding under
its Credit Agreement. Based on current and projected levels of Adjusted EBITDA,
the Company expects its maximum available borrowings under the Credit
13
<PAGE> 14
Agreement to remain at approximately $1.0 billion until such maximum borrowings
are permanently reduced beginning on June 30, 2001. The Credit Agreement expires
on December 31, 2004.
The two credit agreements of the Company's Canadian subsidiaries provide
for total borrowings of approximately $69 million. As of September 30, 1998,
approximately $43.2 million of borrowings were outstanding under the credit
facilities. Additional borrowings are available under these facilities, provided
such borrowings are either collateralized or certain financial covenants are
met. Maximum borrowings which may be outstanding under the credit facilities
begin reducing on March 31, 2001. Both credit agreements expire on December 31,
2004.
Free cash flow, defined as Adjusted EBITDA after capital expenditures
(excluding payments for spectrum licenses) and debt service, for the Company's
core domestic operations was $55.0 million and $159.0 million, respectively, for
the three and nine months ended September 30, 1998. Free cash flow is not a
measure defined in generally accepted accounting principles and should not be
considered in isolation or as a substitute for a measure of performance in
accordance with generally accepted accounting principles. Free cash flow for the
Company's core domestic operations for the three months ended September 30, 1997
was $26.3 million. The deficiency in free cash flow for the Company's core
domestic operations for the nine months ended September 30, 1997 was $14.3
million. The deficiency in free cash flow for the Company's consolidated
operations was $31.8 million and $10.7 million, respectively, for the three and
nine months ended September 30, 1998, compared to a deficiency of $26.1 million
and $170.1 million, respectively, for the same periods of 1997. The improvement
in free cash flow for the nine months ended September 30, 1998 was primarily the
result of a decrease in capital expenditures and an increase in Adjusted EBITDA
in the Company's core domestic operations, as previously noted. Payments for
spectrum licenses totaled $1.6 million and $25.8 million, respectively, for the
three months ended September 30, 1998 and 1997, and $6.1 million and $92.1
million, respectively, for the nine months ended September 30, 1998 and 1997.
The amount of capital expenditures and spectrum purchases may fluctuate from
quarter to quarter and on an annual basis due to several factors.
RESTRUCTURING
On February 8, 1998, the Company's Board of Directors approved the
Restructuring. As part of the Restructuring, the Company is reorganizing its
operations to expand its sales organization and eliminate redundant
administrative operations by consolidating certain key support functions. The
Company expects to eliminate approximately 1,600 positions, net of positions
added, through the consolidation of redundant administrative operations and key
support functions today located in offices throughout the country into the
Centers of Excellence. The Company expects to realize annual recurring
performance improvements and cost savings of $45 million to $55 million after
the Restructuring is completed. Additionally, the Company presently estimates
that the Restructuring will result in sales productivity increases that,
together with associated price increases, will total approximately $75 million
in incremental annual revenues upon its completion. As a result of the
Restructuring, the Company recorded a charge of $74.0 million during the quarter
ended March 31, 1998, as discussed in Note 3 to the Consolidated Financial
Statements.
VOICENOW
The Company introduced its VoiceNow service in Dallas/Fort Worth, Atlanta,
and Sacramento during 1997. The VoiceNow service did not meet the Company's
original expectations in those markets. The Company introduced the VoiceNow
service in Chicago under a revised strategy in the second quarter of 1998. The
Company believes that, based on the foreseeable growth in its existing services
and the potential for future services, substantially all of the spectrum and
advanced messaging network constructed for its VoiceNow service can be utilized
for non-VoiceNow services, including existing services and new advanced
information offerings and messaging services.
Included in inventories, property and equipment, and other non-current
assets as of September 30, 1998, is approximately $30 million of assets which
were acquired or developed in connection with the Company's VoiceNow service.
While the Company currently believes such assets are recoverable, the ultimate
recoverability of such assets is dependent upon the economic viability of the
VoiceNow service, as well as the extent to which certain of these assets can be
utilized for the Company's advanced messaging network. However, as discussed in
Note 4 to the Consolidated Financial Statements, a substantial portion of the
assets attributable to VoiceNow will be written-off as of January 1, 1999, under
the provisions of Statement of Position 98-5.
14
<PAGE> 15
YEAR 2000 READINESS DISCLOSURE
Year 2000 issues affects virtually all companies and organizations
throughout the world. Many existing computer programs were designed and
developed to use and store only two digits to identify a calendar year, without
considering the capability of properly recognizing the upcoming change in the
century. If not corrected by January 1, 2000, the Company could potentially
experience system failures or interruptions, such as a temporary inability to
deliver paging transmissions, system generation of erroneous data, or other
disruptions of normal business operations.
The Company has implemented a task force and developed a comprehensive
plan to address Year 2000 issues, and is utilizing both internal and external
resources to identify, renovate, and test its systems. The Company has
identified the status of its computer applications and systems with reference to
Year 2000 issues. Many applications are currently Year 2000 compliant, and those
that are not have been earmarked for retirement, replacement, or remediation.
The Company is in the process of testing its software application systems, and
its embedded systems, such as its paging terminals and paging network. To date,
some of the Company's systems have either been fully tested or partially tested,
while other systems are scheduled to be tested.
The Company is working with Motorola, Inc., Glenayre Technologies, Inc.,
and other primary vendors that currently supply the Company with subscriber
devices, wireless messaging terminals, and network facilities, to assess their
Year 2000 readiness. To date, confirmations have been received from the
Company's primary processing vendors indicating that plans are being implemented
to address Year 2000 issues. There can be no assurance that such third parties,
on which the Company's business relies, will successfully remediate their
systems on a timely basis. Therefore, the Company is currently developing
contingency plans to mitigate the impact of potential third party system
failures related to Year 2000 issues.
The Company anticipates its total costs associated with correcting the
Year 2000 problems, including the expenses necessary to remediate the Company's
existing systems and costs related to ensuring third party Year 2000 compliance,
to be $3 million to $5 million, of which approximately $1 million has been
incurred as of September 30, 1998. In addition, in connection with the
Restructuring, the Company is currently in the process of replacing all of its
core systems for its new Centers of Excellence at an estimated cost of
approximately $80 million to $90 million. Prior to implementing the new core
systems, the Company will test these systems for Year 2000 compliance. The
Company is currently developing contingency plans to mitigate the impact of
potential system failures related to Year 2000 issues.
The cost of the Company's Year 2000 project and the timetable on which the
Company believes it will complete this project are based on management's best
estimates and include assumptions regarding third party modification plans.
However, in particular due to the potential impact of third party modification
plans, there can be no assurance that these estimates and this timetable will be
achieved, and actual results could differ materially from those anticipated. The
Company's business, financial position, or results of operations could be
materially adversely affected by the failure of its computer systems and
applications, or those operated by third parties, to properly operate or manage
dates beyond 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (SFAS 131). The Company will initially
adopt SFAS 131 in its 1998 annual financial statements. SFAS 131 supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise," and requires that a public company report
annual and interim financial and descriptive information about its reportable
operating segments pursuant to criteria that differ from current accounting
practice. Operating segments, as defined, are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision-maker in deciding how to allocate resources and in
assessing performance. Because this statement addresses how supplemental
financial information is disclosed in annual and interim reports, the adoption
of SFAS 131 will have no impact on the Company's financial statements, but may
require the disclosure of segment information.
15
<PAGE> 16
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed For or Obtained
for Internal Use" (SOP 98-1). SOP 98-1 requires the capitalization of certain
costs of developing or acquiring computer software for internal use. The Company
will be required to adopt the provisions of SOP 98-1 effective January 1, 1999;
however, the adoption is not expected to have a material impact on the Company's
results of operations or financial position as the Company's current policy for
accounting for the costs of developing or acquiring computer software for
internal use is generally consistent with the provisions of SOP 98-1.
16
<PAGE> 17
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 business or consolidated financial statements.
ITEM 5. OTHER INFORMATION.
The Board of Directors has set the 1999 Annual Meeting of
Shareowners of the Company for May 19, 1999. All shareowner proposals
that are intended to be presented at the 1999 Annual Meeting of
Shareowners of the Company must be received by the Company, not later
than December 7, 1998, for inclusion in the Board of Directors' proxy
statement and form of proxy relating to the meeting. All shareowners'
proposals that are intended to be presented at the 1999 Annual Meeting
of Shareowners of the Company, but are not intended for inclusion in
the Board of Directors' proxy statement and form of proxy relating to
the meeting, must be received by the Company not later than February
26, 1999. Both proposals must be received by the Company, either by
personal delivery or by United States mail, postage prepaid, addressed
to the attention of the General Counsel and Senior Vice President of
the Company, not later than the said dates.
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.
None.
17
<PAGE> 18
SIGNATURES
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: November 11, 1998 By: /s/ John P. Frazee, Jr.
------------------------
John P. Frazee, Jr.
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 11, 1998 By: /s/ Mark A. Knickrehm
----------------------
Mark A. Knickrehm
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
18
<PAGE> 19
EXHIBIT INDEX
<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 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 (3)
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 Form of Stock Option Agreement executed by recipients of options
granted under the 1991 Stock Option Plan (1)
10.6 Form of Indemnification Agreement executed by recipients of options
granted under the 1991 Stock Option Plan (1)
10.7 Form of First Amendment to Vesting Agreement executed by recipients of
options granted under the 1982 Incentive Stock Option Plan (1)
10.8 Form of First Amendment to Management Agreement executed by recipients
of options granted under the 1982 Incentive Stock Option Plan (1)
10.9 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 (3)
10.10 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 (4)
10.11 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 (5)
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------- ------------------------------------------------------------------------
<S> <C>
10.12 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 (5)
10.13 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 (5)
10.14 1997 Restricted Stock Plan as approved by shareowners on May 22,
1997 (6)
10.15 Employment Agreement dated as of August 4, 1997 among the
Registrant and John P. Frazee, Jr. (7)
10.16 First Amendment dated April 18, 1997 to the 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 (8)
10.17 First Amendment dated April 18, 1997 to the 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 (8)
10.18 1992 Director Compensation Plan, as amended and restated on April
22, 1998 (9)
10.19 Amended and Restated 1991 Stock Option Plan as approved by
shareowners on May 21, 1998 (9)
10.20 Letter dated May 26, 1998 regarding Second Amendments effective
March 31, 1998 to the Loan Agreements dated as of June 5, 1996: (1)
among Paging Network of Canada Inc., The Toronto-Dominion Bank, and
such other financial institutions as become banks (2) among Madison
Telecommunications Holdings, Inc., The Toronto-Dominion Bank, and
such other financial institutions as become banks (9)
12 Ratio of Earnings to Fixed Charges for the three and nine months
ended September 30, 1997 and 1998 (10)
27 Financial Data Schedule (10)
-------------------------------------------------------------------------
(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 Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1995.
(4) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1995.
(5) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1996.
(6) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1997.
(7) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 1997.
</TABLE>
<PAGE> 21
<TABLE>
<S> <C>
(8) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997.
(9) Previously filed as an exhibit to the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1998.
(10) Filed herewith.
</TABLE>
<PAGE> 1
EXHIBIT 12
PAGING NETWORK, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Earnings:
Loss before extraordinary item ...................... $ (29,401) $ (16,428) $ (98,678) $(124,419)
Fixed charges, less interest capitalized ............ 44,257 42,297 132,093 128,718
--------- --------- --------- ---------
Earnings ....................................... $ 14,856 $ 25,869 $ 33,415 $ 4,299
========= ========= ========= =========
Fixed charges:
Interest expense, including interest capitalized .... $ 40,266 $ 39,943 $ 118,388 $ 120,535
Amortization of deferred financing costs ............ 2,045 1,101 6,375 3,316
Interest portion of rental expense .................. 5,846 6,475 17,230 19,365
--------- --------- --------- ---------
Fixed charges .................................. $ 48,157 $ 47,519 $ 141,993 $ 143,216
========= ========= ========= =========
Ratio of earnings to fixed charges ....................... -- -- -- --
========= ========= ========= =========
Deficiency of earnings available to cover
fixed charges ........................................... $ (33,301) $ (21,650) $(108,578) $(138,917)
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 14,084
<SECURITIES> 0
<RECEIVABLES> 69,744
<ALLOWANCES> 8,239
<INVENTORY> 22,216
<CURRENT-ASSETS> 119,683
<PP&E> 1,354,901
<DEPRECIATION> 518,050
<TOTAL-ASSETS> 1,525,499
<CURRENT-LIABILITIES> 195,225
<BONDS> 1,770,812
0
0
<COMMON> 1,036
<OTHER-SE> (453,588)
<TOTAL-LIABILITY-AND-EQUITY> 1,525,499
<SALES> 80,600
<TOTAL-REVENUES> 785,322
<CGS> 62,540
<TOTAL-COSTS> 741,586
<OTHER-EXPENSES> 105,615
<LOSS-PROVISION> 13,780
<INTEREST-EXPENSE> 109,353
<INCOME-PRETAX> (124,419)
<INCOME-TAX> 0
<INCOME-CONTINUING> (124,419)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (124,419)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
