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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
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COMMISSION FILE NO. 0-19494
PAGING NETWORK, INC.
(Exact name of Registrant as specified in charter)
DELAWARE 04-2740516
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4965 PRESTON PARK BOULEVARD, SUITE 800
PLANO, TEXAS 75093
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (972) 985-4100
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value The Nasdaq Stock Market
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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As of March 23, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $1,585,616,384.
As of March 23, 1998, 103,309,788 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of the Registrant to
be held during 1998 are incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Paging Network, Inc. (the Company) is the largest provider of wireless
messaging in the world and is recognized as a leader in the broader wireless
communications industry. The Company provides service in all 50 states, the
District of Columbia, the U.S. Virgin Islands, Puerto Rico, and Canada,
including service in all of the largest 100 markets (in population) in the
United States, and owns a minority interest in wireless messaging companies in
Spain and Brazil.
The main services of the Company today are display and alphanumeric
messaging services. In early 1998, the Company announced its intention to
utilize its strategic advantages to create a world-class organization to
improve the fundamentals of its core messaging business, achieve long-term
profitable growth, and improve customer service. To achieve these objectives,
the Company announced a restructuring of its domestic operations (the
Restructuring) and embarked on a major initiative to develop, market, and
distribute branded, customized, value-added wireless information. As a result
of the Restructuring, the Company's operations will be reorganized to expand
its sales organization, eliminate local and redundant administrative
operations, and consolidate certain key support functions for the entire
Company into central facilities (the Centers of Excellence). Support functions
to be consolidated into these Centers of Excellence include customer service,
billing and accounting, order fulfillment and inventory management, and certain
technical operations.
The Company's revenues from services, rent and maintenance plus product
sales less cost of products sold (Net Revenues) have grown from $221.9 million
in 1992 to $839.5 million in 1997, a compound annual rate of approximately
30.5%. The Company has incurred a net loss in each of the last five years.
Significant contributing factors to these net losses have been depreciation and
amortization expense and interest expense on borrowings by the Company to fund
its growth. For the years ended December 31, 1993, 1994, 1995, 1996, and 1997,
the Company had net losses of $20.0 million, $18.0 million, $44.2 million,
$104.3 million, and $156.9 million, respectively. For the years ended December
31, 1993, 1994, 1995, 1996, and 1997, the Company recorded depreciation and
amortization expense of $87.4 million, $107.4 million, $149.0 million, $213.4
million, and $289.4 million, respectively. For the years ended December 31,
1993, 1994, 1995, 1996, and 1997, the Company incurred interest expense of $32.8
million, $53.7 million, $102.8 million, $128.0 million, and $151.4 million,
respectively. At December 31, 1993, 1994, 1995, 1996, and 1997, the shareowners'
deficit of the Company was $23.4 million, $39.9 million, $80.8 million, $182.2
million, and $337.9 million, respectively. Earnings before interest, income
taxes, depreciation, amortization, and equity in loss of an unconsolidated
subsidiary (EBITDA) have increased from $75.6 million in 1992 to $297.0 million
in 1997, a compound annual rate of approximately 31.5%. EBITDA after capital
expenditures [excluding the costs of acquiring specialized mobile radio (SMR)
frequency licenses] and debt service (free cash flow) was a deficiency in each
of the years ended December 31, 1993, 1994, 1995, 1996, and 1997, in the amount
of $78.2 million, $123.9 million, $207.5 million, $327.4 million, and $179.1
million, respectively. EBITDA was negatively impacted by a non-recurring charge
in 1997 of $12.6 million to write down certain types and brands of pagers
(subscriber devices) to their net realizable value and by a non-recurring charge
in 1996 of $22.5 million to write off subscriber devices deemed unrecoverable as
of December 31, 1996. (EBITDA and free cash flow are not measures defined in
generally accepted accounting principles and should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.) From December 31, 1992 to
December 31, 1997, the number of units in service with subscribers of the
Company has grown at a compound annual rate of approximately 37.9%.
STRATEGY
The Company is the largest wireless messaging company in the world. At the
end of 1997, the Company had 10,343,753 units in service, a nationwide wireless
transmission network, more spectrum resources than any of its competitors, and a
nationwide sales and distribution organization - significant strategic
achievements. To finance its growth in subscribers, spectrum purchases, and the
geographic expansion of the coverage of its
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transmission network, the Company had incurred approximately $1.8 billion in
long-term debt obligations as of December 31, 1997.
In early 1998, the Company announced its intention to utilize its strategic
advantages to create a world-class organization to improve the fundamentals of
its core messaging business, achieve long-term profitable growth, and improve
customer service. To achieve these objectives, the Company announced the
Restructuring and embarked on a major initiative to develop, market, and
distribute branded, customized, value-added wireless information. As a result of
the Restructuring, the Company's operations will be reorganized to expand its
sales organization, eliminate local and redundant administrative operations, and
consolidate certain key support functions for the entire Company into the
Centers of Excellence. Support functions to be consolidated into these Centers
of Excellence include customer service, billing and accounting, order
fulfillment and inventory management, and certain technical operations.
In connection with the Restructuring, the Company will record a charge of
between $65 million and $80 million during the first quarter of 1998. The
Company expects to realize annual recurring performance improvements and cost
savings of $45 million to $55 million when the Restructuring is completed in
1999. 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. Finally, the Company has implemented selective price
increases for existing business, rationalized pricing for new business, and is
educating its third party resellers about the expanding array of branded,
customized, value-added wireless information the Company expects to offer.
The offering of new wireless information products is designed to
differentiate the Company from its competitors and provide additional revenue.
The Company has already begun exploring alliances with select companies and
organizations to provide information in the fields of sports and entertainment,
government and education, business and finance, and information oriented to
consumers and to individual corporations. The first strategic partnership was
announced in February 1998 with The Golf Channel, the world's only 24-hour
television network devoted exclusively to golf programming.
In addition, the Company has instituted a wide variety of new human
resources policies and programs designed to attract and retain employees
dedicated to achieving the Company's goals. These programs are expected to
significantly reduce the high employee turnover rate of recent years and thereby
increase overall Company productivity and improve customer service.
SALES AND DISTRIBUTION
The Company's services are sold through a locally deployed direct sales
force and resellers that range from small local businesses to major
corporations. The Company believes its distribution channels provide the
broadest reach in the industry today. In 1998, the Company began taking steps to
expand and improve its distribution capabilities.
As part of the Restructuring, the Company will transfer customer service,
billing and accounting, order fulfillment and inventory management, and certain
technical operations from its field operations to one of four Centers of
Excellence, each dedicated to a specific function. This Restructuring will allow
the field operations to focus solely on sales. 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. In addition, the Company has
commenced a thorough review of its sales organization, which should be complete
in mid-1998, aimed at creating an expanded and improved distribution network to
reach additional market opportunities the Company believes are available to it.
As of December 31, 1997, direct sales accounted for approximately 47.0% of
the Company's overall units in service and the indirect channel (which includes
resellers and retailers) represented approximately 53.0%. In the direct channel,
the Company charges a monthly fee for its services and leases or sells
subscriber devices to
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customers. In the indirect channel, the Company provides services under
marketing agreements to third party resellers at wholesale monthly service
rates. In addition, the Company sells, or in a limited number of cases, leases
the subscriber devices to the resellers. The resellers, in turn, sell the
Company's services to the end user. Resellers are responsible for all costs
associated with servicing their customers, including billing and collections,
although in some situations resellers contract with the Company to provide
various fulfillment, billing, and customer service functions.
Subscribers to the Company's services range from individual consumers to
large corporations or government agencies that need the reliability and
convenience of mobile information for their personal or business needs.
The Company is not dependent on any single customer. No single subscriber
or reseller accounted for more than 1.2% of the Company's Net Revenues in 1997.
MARKETING
The Company promotes its products and services through a variety of
programs, including television, print, radio, newspaper, and yellow pages
advertising; direct mail; telemarketing; and co-op programs.
Traditionally, the Company has focused its marketing efforts primarily at
business users who have represented the majority of subscribers. However, recent
industry growth trends include an increasing percentage of consumer, or
personal, users. The Company plans to spur continued growth through a number of
marketing strategies, including advertising, new products and services, and
distribution channel expansion.
TRANSMISSION EQUIPMENT AND SUBSCRIBER DEVICES
The Company is a sales and marketing organization that purchases the
wireless transmission equipment and subscriber devices used in its operations
from vendors. The Company's own technical functions include testing new
subscriber devices and transmission equipment, designing wireless transmission
systems utilizing communications equipment and software purchased from vendors,
and installing and maintaining transmitters and associated communications
equipment to support the transmission system. Because of the high degree of
compatibility among different models of transmitters, computers, and other
messaging equipment manufactured by suppliers, the Company is able to design its
systems without being dependent upon any single source of such equipment.
The Company currently purchases its subscriber devices primarily from
Motorola, Inc. (Motorola). The Company has historically purchased its
transmitters from two competing sources and its wireless messaging terminals
from Glenayre Technologies, Inc. (Glenayre). The Company anticipates that
transmission equipment and subscriber devices will continue to be available for
purchase from multiple sources, consistent with normal manufacturing and
delivery lead times.
WIRELESS MESSAGING AND INFORMATION
The Company's services range from a simple tone alert that notifies the
subscriber to call a pre-determined phone number to advanced two-way messaging
services which allow subscribers to send and receive wireless e-mail messages.
Numeric messaging service delivered over a display pager represented
87.2% of the Company's units in service at December 31, 1997. Using this
service, subscribers can receive a variety of numeric messages, including
telephone or account numbers, or coded information.
The fastest growing service is full numeric and text messaging typically
delivered over alphanumeric subscriber devices, but which can also be delivered
to laptop or palmtop computers. These services represented
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12.4% of the units in service at December 31, 1997. Alphanumeric units in
service increased by 54.5% from December 31, 1996 to December 31, 1997.
Utilizing this service, subscribers can also receive news, sports, and financial
market information via the Company's exclusive arrangement with Cable News
Network (CNN).
The Company is in the process of creating a broad menu of additional
content alternatives from which subscribers can select to create their own
customized wireless information. In February 1998, the Company entered into an
agreement with The Golf Channel, the first of many anticipated strategic
partnerships, to create such a content alternative. The Golf Channel, the
world's only 24-hour television network devoted exclusively to golf programming,
will create and deliver value-added information to the Company's wireless
customers who opt to subscribe to this service. The Company expects to announce
additional partnerships with content providers in the areas of business and
finance, government and education, sports and entertainment, and with
corporations that wish to provide information to consumers or to their own
employees.
Subscribers to the Company's services choose from local, regional, or
nationwide coverage options. Local service covers a broad geographic area
surrounding a population center. Regional service includes multi-state areas.
Nationwide service reaches approximately 90% of the United States population,
including all 50 states, the District of Columbia, the U.S. Virgin Islands, and
Puerto Rico.
In 1997, the Company introduced VoiceNow(R), a service that receives,
stores, and plays voice messages, in three test cities. The product has not met
the Company's original expectations in those markets, and the Company plans to
introduce it in Chicago with a revised strategy in 1998. Based on the results in
Chicago, the Company will determine its strategy for this service in the future.
VoiceNow uses two-way spectrum and a two-way messaging protocol and transmission
network that is optimized for voice. 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 two-way network investments for
VoiceNow can be utilized for non-VoiceNow services, including existing services
and new advanced information offerings and messaging services.
The Company also provides such ancillary services as voice messaging and
personalized/automated answering.
INTERNATIONAL OPERATIONS
The Company's wholly owned subsidiary, Paging Network of Canada Inc.
(PageNet Canada) with its Canadian partner, Madison Venture Corp., provides
services similar to those offered in the United States, with sales operations in
Montreal, Ottawa, Quebec City, Toronto, and Vancouver. Services cover a
geographic area containing more than 75% of the Canadian population. The Company
is also a minority owner of wireless messaging companies in Spain and Brazil.
The Company, through its subsidiaries, owns frequency licenses in the United
Kingdom and Argentina.
The Company is considering other opportunities for international expansion,
with the goal of creating a portfolio of select international operations.
Wireless messaging market penetration in many international markets is
relatively low, and many such markets have only a small number of existing
wireless messaging 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 shareowners.
COMPETITION
The Company experiences direct competition from one or more competitors in
all the locations in which it operates. Competition for subscribers to the
Company's services in most geographic markets is based primarily on
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price, quality of services offered, and the geographic area covered. The
Company believes that its price, quality of its services, and its geographic
coverage areas generally compare favorably with those of its competitors.
Among the Company's competitors are AT&T Wireless Messaging, AirTouch
Communications, Inc., Arch Communications Group Inc., Metrocall, Inc., Mobile
Telecommunications Technologies Corp., and PageMart Wireless, Inc. Certain of
these competitors possess financial resources greater than those of the Company.
While not in direct competition, other services such as cellular telephone
service (cellular) and broadband personal communications services (PCS), which
provide real-time voice wireless communications, in some cases also offer
messaging services. In addition to technical and performance limitations
associated with message delivery utilizing these voice systems, these
technologies are generally more highly priced than the Company's services and
their marketing and sales efforts are focused on voice, not messaging services.
The Company's initiative to provide branded, customized, value-added
wireless information, which began in early 1998, is intended to further
distinguish the Company from cellular and PCS as well as other paging/messaging
companies. The delivery of information requires access to a significant amount
of spectrum. The Company has significantly more spectrum than any of its
competitors, with three nationwide, two-way narrowband PCS frequencies; six
nationwide and numerous regional and local one-way frequencies; and rights to
two to four blocks of two-way SMR frequencies located throughout the country.
Future technological advances in the telecommunications industry could
create new services or products which could be competitive to the services
provided by the Company. The Company continuously evaluates new technologies and
applications in wireless services, although there can be no assurance that the
Company will not be adversely affected in the event of technological changes in
the marketplace.
REGULATION
The Company's wireless messaging operations are subject to regulation by
the Federal Communications Commission (FCC) under the Communications Act of
1934, as amended (the Communications Act). The Company's operations are all
classified as Commercial Mobile Radio Services (CMRS) and are subject to common
carrier regulation by the FCC. The FCC has granted the Company licenses to use
the radio frequencies necessary to conduct its CMRS operations. Licenses issued
by the FCC to the Company set forth the technical parameters, such as power
strength and tower height, under which the Company is authorized to use those
frequencies. Each FCC license held by the Company has construction and
operational requirements within set time frames.
The Communications Act was amended in August 1993 (August 1993 Amendments)
to permit the FCC to grant certain applications for licenses which are mutually
exclusive by competitive bidding. The August 1993 Amendments do not permit
auctions to be used for license renewals or license modifications. The FCC will
likely use auctions to assign all new licenses over which CMRS can be offered.
Prior to auctions, the FCC is only accepting certain applications to enable
carriers to modify existing transmission systems. The Company believes that a
reasonable process for assigning licenses by competitive bidding will be
beneficial in that the Company will have a greater degree of control over
whether it obtains licenses that it desires in order to offer additional
service(s) than it did under the lottery, comparative hearing, or other
assignment processes which the FCC has used.
The FCC licenses granted to the Company have varying terms of up to 10
years, at the end of which time renewal applications must be approved by the
FCC. In the past, FCC renewal applications have been routinely granted in most
cases upon a demonstration of compliance with FCC regulations and adequate
service to the public. The FCC has granted each renewal license the Company has
filed. Although the Company is unaware of any circumstances which would prevent
the grant of any pending or future renewal applications, no assurance can be
given that any of the Company's licenses will be renewed by the FCC.
Furthermore, although revocation and involuntary modification of licenses are
extraordinary regulatory measures, the FCC has the authority to restrict the
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operation of licensed facilities or revoke or modify licenses. No license of the
Company has ever been revoked or modified involuntarily.
The Communications Act requires licensees, such as the Company, to obtain
prior approval from the FCC for the transfer of control of any construction
permit or station license, or any rights thereunder. The Communications Act also
requires prior approval by the FCC of acquisitions of other CMRS companies by
the Company and transfers by the Company of a controlling interest in any of its
licenses or construction permits, or any rights thereunder. The FCC has approved
each acquisition and transfer of control for which the Company has sought
approval. The Company also regularly applies for FCC authority to use additional
frequencies, modify the technical parameters of existing licenses, expand its
service territory, provide new services, and modify the conditions under which
it provides service. Although there can be no assurance that any requests for
approval of applications filed by the Company will be approved or acted upon in
a timely manner by the FCC, or that the FCC will grant the relief requested,
subject to the forthcoming rules for competitive bidding, the Company knows of
no reason to believe any such requests, applications, or relief will not be
approved or granted. The Company makes no representations, however, about the
continued availability of additional frequencies used to provide its services.
The Communications Act also limits foreign ownership of entities that
directly or indirectly hold certain licenses from the FCC, including certain of
those held by the Company. Because the Company holds licenses from the FCC only
through its subsidiaries, up to 25% of the Company's common stock can be owned
or voted by aliens or their representatives, a foreign government or its
representatives, or a foreign corporation, without restriction. The prohibition
against greater than 25% foreign ownership was removed in the Telecommunications
Act of 1996 (the 1996 Act), which was signed into law on February 8, 1996.
However, if more than 25% of the Company's common stock is owned or voted by
aliens or their representatives, a foreign corporation, or a foreign government
or its representatives, the 1996 Act gives the FCC the right to revoke or refuse
to grant licenses if the FCC finds that such revocation or refusal serves the
public interest. Based upon information obtained by it, the Company believes
that substantially less than 25% of its issued and outstanding common stock is
owned by aliens or their representatives, foreign governments or their
representatives, or foreign corporations.
The Company obtains telephone numbers for its services from the predominant
local telephone company, which is known as the Numbering Plan Area (NPA) Code
Administrator. Under the 1996 Act, the FCC has adopted a process through which
telephone company administrators will be replaced by a neutral third party in
1998. Increased demand for numbers, particularly in metropolitan areas, is
causing depletion of numbers in certain area codes (NPA codes). Recent plans for
NPA code relief have included certain elements that could impact the Company's
operations, including the take-back of numbers already assigned for use and
service-specific plans whereby only certain services, such as paging and
cellular, would be assigned numbers using a new NPA code, or plans which require
the pooling of blocks of numbers for use by multiple carriers. The Company can
provide no assurance that such plans will not be adopted by a federal or state
commission. In addition, the Company is actively participating in proceedings
before public service commissions where individual NPA code relief plans are
being considered and contain objectionable elements.
In addition to potential regulation by the FCC, several states have the
authority to regulate messaging services, except where such regulation
constitutes rate or entry, both of which have been preempted by the August 1993
Amendments, as interpreted by the FCC. A few states have also indicated that
they are considering continuing to assert jurisdiction over transfers of a
messaging company's assets or operations. Nevertheless, all state approvals of
acquisitions or transfers made by the Company have been approved, and the
Company knows of no reason to believe such approvals will not continue to be
granted in connection with any future requests, even if states exercise that
review. The August 1993 Amendments do not preempt state regulatory authority
over other aspects of the Company's operations, and some states may choose to
exercise such authority. A few state and local governments have imposed
additional taxes or fees upon certain activities in which the Company is engaged
and the Company is contesting some of these taxes or fees.
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The 1996 Act amends the Communications Act of 1934 and modifies the Consent
Decrees governing the provision of telecommunications services by the Regional
Bell Operating Companies and the GTE companies. The new legislation is intended
to promote competition in local exchange services through the removal of legal
or other barriers to entry. Under the 1996 Act, the Regional Bell Operating
Companies and other local exchange carriers (LECs) may be permitted to jointly
market commercial mobile service in conjunction with their traditional local
exchange services. It imposes upon all telecommunications carriers the duty to
interconnect with the facilities and equipment of other telecommunications
carriers. The FCC has interpreted the 1996 Act to require LECs to compensate
wireless carriers for calls originated by customers of the LECs which terminate
on a wireless carrier's network. Simultaneously, the FCC found unlawful certain
charges levied against messaging carriers in the past that have been assessed on
a monthly basis by the LECs for the use of certain network facilities, including
telephone numbers. These findings by the FCC have been challenged at the FCC and
in the courts. The Company cannot predict with certainty the ultimate outcome of
these proceedings. For messaging companies, compensation amounts may be
determined in subsequent proceedings either at the federal or state level, or
may be determined based on negotiations between the LECs and the messaging
companies. Any agreements reached between the LECs and messaging companies may
be required to be submitted to state regulatory commissions for approval.
The 1996 Act, as interpreted by the appropriate regulatory bodies, requires
commercial mobile service providers such as the Company to contribute to
"Universal Service" or other funds to assure the continued availability of local
exchange service to high cost areas, as well as contribute funds to cover the
costs of number portability and dialing parity implementation. The 1996 Act also
limits the circumstances under which states and local governments may deny a
request by a commercial mobile service provider to place facilities, and gives
the FCC the authority to preempt the states in some circumstances. Further, the
1996 Act requires that providers of payphones be compensated for all calls
placed from pay telephones to toll free numbers. This requirement increases the
Company's costs of providing toll free number service. The Company and others
are protesting the level of compensation established by the FCC.
The Communications Assistance for Law Enforcement Act (CALEA) requires
certain telecommunications companies, including the Company, to modify the
design of their equipment or services to ensure that electronic surveillance or
interceptions can be performed. Technical parameters applicable to the messaging
industry have not been established to date, so the Company cannot determine at
this time what compliance measures will be required or the costs thereof.
TRADEMARKS
The Company markets its services under various names and marks, including
PageNet(R), PageMail(R), PageMate(R), VoiceNow(R), PageNet Nationwide(R),
SurePage(R), FaxNow(R), and MessageNow(R), all of which are federally registered
service marks. The Company's federal mark registrations must be renewed at
various times between 1999 and 2005, in order to avoid expiration. The Company
has filed applications with the United States Patent and Trademark office to
register additional names and marks.
CORPORATE ORGANIZATION
The Company conducts its operations in the United States through 27 wholly
owned subsidiaries, each of which operates in a specified geographic area.
Historically the Company's subsidiaries have operated largely as independent
business units making their own staffing, administrative, operational, and
marketing decisions within guidelines established by the senior executive
officers of the Company. The Company is reorganizing its operations to, among
other things, create an enhanced and expanded sales organization in the United
States and consolidate certain key support functions for the entire Company into
large-scale Centers of Excellence. The Restructuring is expected to be completed
in 1999. See "Business-Strategy" for an expanded discussion on the
Restructuring of the Company. Except for his or her participation in the
Company's stock option plans, the General Manager of each subsidiary is
compensated primarily on the basis of the performance of the
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subsidiary over which he or she has oversight responsibility without regard to
the performance of other subsidiaries of the Company.
The Company conducts its international operations through 10 wholly and
partially owned subsidiaries.
SEASONALITY
Generally, the Company's results of operations are not significantly
affected by seasonal factors. However, historically, because of the number of
holidays during the fourth quarter of the year and adverse winter weather in the
fourth and first quarters of the year, which results in fewer selling days, the
growth rate of units placed in service has been somewhat lower during these
periods.
EMPLOYEES
The Company employed a total of 6,001 persons as of December 31, 1997. Of
these, 482 were engaged in general administration at the Company's headquarters,
and 5,519, including approximately 600 sales personnel, were employed in the
Company's operating offices located across the country. The Company expects to
eliminate approximately 1,800 positions, net of positions added, through the
consolidation of redundant administrative operations and certain key support
functions into large-scale Centers of Excellence. The Company will also expand
its sales organization. None of the Company's employees are represented by a
labor union, and management believes that the Company's employee relations are
good.
ITEM 2. PROPERTIES.
In July 1996, the Company purchased 44 acres of undeveloped land in Plano,
Texas for a new corporate headquarters. However, the Company currently does not
intend to construct a new corporate headquarters at this site and does not have
specific plans regarding future utilization of this property. In September 1995,
the Company purchased approximately four acres of land and a building with
approximately 37,000 square feet in Dallas, Texas. This property is currently
being utilized as a 24-hour customer service call center.
At December 31, 1997, the Company leased office space in 135 cities in 36
states in the United States and the District of Columbia as well as in 5 cities
in 3 provinces in Canada, which are used in conjunction with its operations.
These office leases expire, subject to renewal options, on various dates through
December 31, 2007. As of December 31, 1997, the Company was obligated to pay a
total of approximately $22.7 million under such leases in 1998. As part of the
Company's Restructuring, certain leases will be terminated prior to their
scheduled expiration, generally upon the payment of a termination fee, and
certain office space and facilities will be subleased through the expiration of
the related leases, generally for amounts less than the Company's lease
commitments for such space. The cost of these lease terminations will be
recorded in the first quarter of 1998 as part of the Restructuring charge
discussed in Note 2 to the Consolidated Financial Statements.
The Company also leases sites for its transmitters on commercial broadcast
towers, buildings, and other fixed structures. As of December 31, 1997, the
Company leased transmitter sites for approximately 9,500 transmitters. A few
local municipalities have imposed moratoria on the designation of new
transmitter locations or on the addition of new towers. Should these moratoria,
or others, continue for extended periods of time, it could affect the Company's
and other wireless carriers' ability to offer seamless coverage in those areas
during the pendency of such moratoria.
As of December 31, 1997, the Company owned subscriber devices having a net
book value of approximately $372.9 million.
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ITEM 3. LEGAL PROCEEDINGS.
LITIGATION
The Company is involved in various lawsuits arising in the normal course of
business. In management's opinion, the ultimate outcome of these lawsuits will
not have a material adverse effect on the Company's business or consolidated
financial statements.
10
<PAGE> 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 1997.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY(1)
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John P. Frazee, Jr. 53 Chairman of the Board of Directors, President and Chief
Executive Officer
Richard C. Alberding 67 Director (3)
Bryan C. Cressey 48 Director (2)
John S. Llewellyn, Jr. 63 Director (3) (4)
Lee M. Mitchell 54 Director (2) (4)
Carl D. Thoma 49 Director (3)
Roy A. Wilkens 55 Director (2) (3)
Michael A. DiMarco 40 Executive Vice President -- Sales
Barry A. Fromberg 42 Executive Vice President -- International
Mark A. Knickrehm 35 Executive Vice President and Chief Financial Officer
Edward W. Mullinix, Jr. 44 Executive Vice President -- Operations
Timothy J. Paine 43 Senior Vice President -- Customer Service
Douglas R. Ritter 39 Senior Vice President -- Corporate Development
William G. Scott 41 Senior Vice President -- Systems and Technology
Ruth Williams 41 Senior Vice President and General Counsel
G. Robert Thompson 35 Vice President -- Finance
</TABLE>
(1) The executive officers listed and their respective positions are as of
March 16, 1998. During 1997, certain of these officers were not
employed by the Company or held different positions than those listed.
(2) Member of Audit Committee of the Board of Directors.
(3) Member of the Stock Option/Compensation Committee of the Board of
Directors.
(4) Member of the Nominating Committee of the Board of Directors.
The Company has a classified Board of Directors (the Board) composed of
three classes, each of which serves for three years, with one class being
elected each year. The terms of Messrs. Frazee and Llewellyn will expire at the
1998 Annual Meeting of Shareowners to be held on May 21, 1998. The terms of
Messrs. Thoma and Wilkens will expire at the 1999 Annual Meeting of Shareowners
and the terms of Messrs. Alberding, Cressey, and Mitchell will expire at the
2000 Annual Meeting of Shareowners. Executive officers are elected to hold
office until the next Annual Meeting of the Board or until their respective
successors are elected and qualified but may be removed by the Board at will.
There are no family relationships among any of the Directors and executive
officers of the Company.
Directors who are full-time officers of the Company receive no additional
compensation for serving on the Board of Directors or its committees. Effective
January 1, 1998, directors who are not full-time officers receive an annual
retainer of $20,000 plus $1,500 for each attended meeting of the Board of
Directors, $1,000 for each teleconference meeting of the Board of Directors, and
reimbursement for traveling costs and other out-of-pocket expenses incurred in
attending such meetings. Directors who serve on one or more of the Audit
Committee, the Stock Option/Compensation Committee, or the Nominating Committee,
receive $5,000 per year for service. Directors who serve as chairman of one or
more of these committees receive an additional $5,000 per year.
11
<PAGE> 12
In addition, pursuant to the Company's Amended and Restated 1992 Stock
Option Plan for Directors (the Directors Plan), each non-employee director is
granted an option, following his initial election as a director, to purchase
45,000 shares of Common Stock. The option exercise price is the fair market
value of the underlying Common Stock on the date of grant. The options granted
become exercisable in five equal annual installments beginning on the first
anniversary of the date of grant and continuing so long as the person remains a
director of the Company.
In addition to the initial grants described above, subsequent grants will
be made to each eligible director on the date immediately following the date
that the option most recently granted such director under the Directors Plan
becomes exercisable in full. The exercise price for these options will also be
at the fair market value of the underlying Common Stock on the date of grant and
it is anticipated that such options would become exercisable in five equal
annual installments beginning on the first anniversary of the date of grant and
continuing so long as the person remains a director of the Company. The
Directors Plan also provides that by January 1 of each calendar year, a director
may waive his rights to payment of all cash retainers and meeting fees for such
year and receive, in lieu thereof, either: (i) that number of shares of Common
Stock having a value (calculated based on the market value of the Common Stock
on the dates of each such meeting) equal to the dollar amount of the annual cash
retainer and meeting fees due for such year, or (ii) an option for that number
of shares which produces an option having a value under the Black-Scholes
pricing model, equal to the dollar amount of the annual cash retainer and
meeting fees due for such year, which grants would become exercisable as to
one-twelfth of the shares covered by each on the last day of each calendar month
ending after grant. With respect to 1997 and 1998, each director has waived his
rights to cash payments and has elected to receive shares of Common Stock
instead.
John P. Frazee, Jr., has been a Director of the Company since 1995 and has
served as Chairman of the Board of Directors, President and Chief Executive
Officer since August 4, 1997. Mr. Frazee was a private investor from August 1993
to August 1997 and served as President and Chief Operating Officer of Sprint
Corporation from March 1993 to August 1993. Prior thereto, Mr. Frazee had been
Chairman and Chief Executive Officer of Centel Corporation, a telecommunications
company, from April 1988 to January 1993, at which time it merged with Sprint
Corporation. Mr. Frazee also serves as a Director of Security Capital Group,
Inc., Dean Foods Company, Homestead Village Incorporated, and Nalco Chemical
Company, Inc.
Richard C. Alberding has served as a Director of the Company since 1994.
Mr. Alberding held various positions for Hewlett-Packard Company from 1958 to
1991, at which time he retired as Executive Vice President. Mr. Alberding also
serves as a Director of Digital Microwave Corporation, Kennametal Inc., Sybase,
Inc., Quickturn Design Systems, Inc., Digital Link Corp., Storm Technology,
Inc., and Walker Interactive Systems, Inc.
Bryan C. Cressey has served as a Director of the Company since 1993. Mr.
Cressey is Co-Founder and Partner in Thoma Cressey Equity Partners, successor to
Golder, Thoma, Cressey, Rauner, Inc., an investment firm co-founded by Mr.
Cressey in 1980. Mr. Cressey also serves as a Director of Cable Design
Technologies Corp. and American Medserve Corp.
John S. Llewellyn, Jr., has served as Director of the Company since
December 1997. Mr. Llewellyn was Chief Executive Officer for Ocean Spray
Cranberries, Inc., from 1987 to February 1997, at which time he retired. Mr.
Llewellyn also serves as a Director of Dean Foods Company.
Lee M. Mitchell has served as a Director of the Company since 1991. Mr.
Mitchell is a Partner in Thoma Cressey Equity Partners, successor to Golder,
Thoma, Cressey, Rauner, Inc., an investment firm for which Mr. Mitchell has
served as a Principal since 1994. Prior thereto, Mr. Mitchell served as a
Partner of Sidley and Austin, a law firm, from 1992 to 1994. Mr. Mitchell also
serves as a Director of Washington National Corporation, American Medserve
Corp., ERO, Inc., and the Chicago Stock Exchange.
Carl D. Thoma has served as a Director of the Company since 1981. Mr. Thoma
also served as Vice Chairman of the Board from February 1, 1993 to December 31,
1993 and as Chairman of the Board from 1981 to February 1, 1993. Mr. Thoma is
Co-Founder and Managing Partner of Thoma Cressey Equity Partners, successor to
Golder, Thoma, Cressey, Rauner, Inc., an investment firm co-founded by Mr. Thoma
in 1980. Mr. Thoma also serves as a Director of MS Financial, Inc.
12
<PAGE> 13
Roy A. Wilkens has served as a Director of the Company since May 1997. Mr.
Wilkens was President and Chief Executive Officer of WilTel and its successor
company, WorldCom Network Services, from 1985 to February 1997, at which time he
retired. Mr. Wilkens also serves as a Director of Unidial, Inc., Invensys
Corporation, Inc. and Qwest Communications International Inc.
Michael A. DiMarco has served as Executive Vice President - Sales for the
Company since February 4, 1998. Mr. DiMarco served as Senior Vice President -
Operations for the Company from February 1997 to February 1998 and as Senior
Vice President, National Accounts Division, for the Company from December 1995
to February 1997. Mr. DiMarco served as Vice President - Corporate Development
for the Company from July 1994 to December 1995 and as President of Paging
Network - Atlantic Region, Inc., a subsidiary of the Company, from September
1992 to July 1994.
Barry A. Fromberg has served as Executive Vice President - International
for the Company since February 4, 1998 and as Senior Vice President -
International for the Company from December 1995 to February 1998. Mr. Fromberg
served as Senior Vice President - Finance and Administration, Chief Financial
Officer, Treasurer and Assistant Secretary for the Company from May 1993 to
December 1995. Prior thereto, Mr. Fromberg served as Executive Vice President
and Chief Financial Officer for Simmons Communications, Inc. from 1987 to 1993.
Mark A. Knickrehm has served as Executive Vice President and Chief
Financial Officer for the Company since February 4, 1998. Prior thereto, Mr.
Knickrehm was employed by McKinsey & Company, an international consulting firm,
from 1989 to February, 1998, serving as a Partner since 1995.
Edward W. Mullinix, Jr., has served as Executive Vice President -
Operations for the Company since February 4, 1998, and as Senior Vice President
- - Strategic Planning for the Company from November 1997 to February 1998. Prior
thereto, Mr. Mullinix served as Senior Vice President of Finance and
Administration and Chief Financial Officer and was a Director of The Haskell
Company, from September 1995 to October 1997. Mr. Mullinix served as Vice
President - Finance for LCI, Ltd. from August 1994 to April 1995 and as Chief
Financial Officer for Mitchell Construction Company from September 1993 to April
1994.
Timothy J. Paine has served as Senior Vice President - Customer Service for
the Company since March 16, 1998. Prior thereto, Mr. Paine served in various
positions for American Express Travel Related Services, Inc. from 1982 to March,
1998, most recently as Vice President of Credit and Operations for the new
accounts branch of American Express Centurion Bank.
Douglas R. Ritter has served as Senior Vice President - Corporate
Development for the Company since February 4, 1998. Mr. Ritter served as Vice
President - Corporate Development for the Company from December 1997 to February
1998 and as Vice President - Business Planning for the Company from January 1996
to December 1997. Mr. Ritter served as Vice President - New Business Development
for the Company from July 1993 to January 1996 and as President of Paging
Network - Central Region, Inc., a subsidiary of the Company, from 1990 to July
1993.
William G. Scott has served as Senior Vice President - Systems and
Technology for the Company since February 1997 and as Vice President - Systems
and Technology for the Company from December 1995 to February 1997. Prior
thereto, Mr. Scott served as President of Lion Software, Inc. from 1993 to 1995
and as Director of Product Management for GTE Spacenet from 1991 to 1993.
Ruth Williams has served as Senior Vice President and General Counsel for
the Company since May 1997. Prior thereto, Ms. Williams was Associate General
Counsel for First Data Corporation from September 1996 to April 1997. Ms.
Williams was employed by Automatic Data Processing, Inc. from 1986 to May 1996,
most recently as Staff Vice President and Associate General Counsel.
G. Robert Thompson has served as Vice President - Finance for the Company
since February 1995 and was Corporate Controller for the Company from 1990 to
1995.
13
<PAGE> 14
----------------------
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREOWNER
MATTERS.
The Company's Common Stock, $.01 par value (the Common Stock), is listed
on the Nasdaq Stock Market under the symbol PAGE. The high and low trading
prices for each quarterly period of 1996 and 1997 for the Common Stock of the
Company are set forth below.
<TABLE>
<CAPTION>
PRICE RANGE
----------------
HIGH LOW
---- ---
<S> <C> <C>
1996
- ----
First Quarter 29 1/4 22 1/2
Second Quarter 28 20 1/4
Third Quarter 24 16 1/2
Fourth Quarter 20 1/8 14 3/8
1997
- ----
First Quarter 15 7/8 7 5/8
Second Quarter 9 3/4 5 3/4
Third Quarter 13 9/16 7 7/8
Fourth Quarter 14 1/8 10 3/8
</TABLE>
As of March 16, 1998, there were approximately 446 shareowners of record.
From January 1, 1996 through the date hereof, the Company has declared no cash
dividends on its Common Stock. The Company currently intends to follow a policy
of retaining all funds to finance the continued growth of the Company's business
and does not anticipate paying cash dividends or making other cash distributions
to shareowners in the foreseeable future. Certain covenants in the Company's
debt agreements restrict the payment of cash dividends by the Company.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data for the five years ended December 31,
1997, are derived from the Consolidated Financial Statements of the Company. The
data presented below should be read in conjunction with the Company's
Consolidated Financial Statements, related Notes, and other financial
information included herein. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Throughout this section the
Company makes reference to earnings before interest, income taxes, depreciation,
amortization, and equity in loss of an unconsolidated subsidiary (EBITDA).
EBITDA is a key performance measure used in the wireless messaging 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 a measure of performance in accordance with
generally accepted accounting principles.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Services, rent and maintenance revenues $ 294,979 $ 389,919 $ 532,079 $ 685,960 $ 818,461
Product sales 78,915 99,765 113,943 136,527 142,515
--------- --------- --------- --------- ---------
Total revenues 373,894 489,684 646,022 822,487 960,976
Cost of products sold (62,495) (78,102) (93,414) (116,647) (121,487)
--------- --------- --------- --------- ---------
311,399 411,582 552,608 705,840 839,489
Services, rent and maintenance expenses 57,343 74,453 109,484 146,896 173,058
Selling expenses 44,836 60,555 67,561 82,790 102,995
General and administrative expenses 108,993 136,539 174,432 219,317 253,886
Depreciation and amortization expense 87,430 107,362 148,997 213,440 289,442
Non-recurring charges (1) -- -- -- 22,500 12,600
--------- --------- --------- --------- ---------
Total operating expenses 298,602 378,909 500,474 684,943 831,981
--------- --------- --------- --------- ---------
Operating income 12,797 32,673 52,134 20,897 7,508
Interest expense (32,808) (53,717) (102,846) (128,014) (151,380)
Interest income -- 3,079 6,511 3,679 3,689
Equity in loss of an unconsolidated
subsidiary -- -- -- (882) (1,220)
--------- --------- --------- --------- ---------
Loss before extraordinary item (20,011) (17,965) (44,201) (104,320) (141,403)
Extraordinary item (2) -- -- -- -- (15,544)
--------- --------- --------- --------- ---------
Net loss $ (20,011) $ (17,965) $ (44,201) $(104,320) $(156,947)
========= ========= ========= ========= =========
Per common share data (basic and diluted):
Loss before extraordinary item $ (0.20) $ (0.18) $ (0.43) $ (1.02) $ (1.38)
Extraordinary item -- -- -- -- (0.15)
--------- --------- --------- --------- ---------
Net loss per share $ (0.20) $ (0.18) $ (0.43) $ (1.02) $ (1.53)
========= ========= ========= ========= =========
</TABLE>
(1) Amount in 1997 represents a provision to write down certain subscriber
devices to their net realizable value; amount in 1996 relates to subscriber
devices leased by the Company to customers under an agreement with a
national marketing affiliate which were deemed to be unrecoverable from the
former customers of this marketing affiliate.
(2) Represents an extraordinary charge on the early retirement of certain
indebtedness.
15
<PAGE> 16
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
(IN THOUSANDS, EXCEPT UNIT DATA)
EBITDA $ 100,227 $ 140,035 $ 201,131 $ 234,337 $ 296,950
EBITDA excluding
non-recurring charges 100,227 140,035 201,131 256,837 309,550
Units in service
(at end of period) 3,068,569 4,408,842 6,737,907 8,587,772 10,343,753
Units in service per
employee
(at end of period) 974 1,103 1,441 1,499 1,724
Capital expenditures $ 145,625 $ 213,308 $ 312,289 $ 437,388 $ 328,365
CONSOLIDATED BALANCE SHEET DATA:
(IN THOUSANDS) DECEMBER 31,
Current assets $ 29,000 $ 39,375 $ 262,415 $ 95,550 $ 105,214
Total assets 371,556 706,008 1,228,338 1,439,613 1,597,233
Long-term obligations,
less current maturities 342,500 504,000 1,150,000 1,459,188 1,779,491
Total shareowners' deficit (23,366) (39,908) (80,784) (182,175) (337,931)
</TABLE>
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
The statements contained in this filing which are not historical facts,
including but not limited to future capital expenditures, future borrowings,
international investment expectations, introduction of new services, expected
improvements in the fundamentals of its core messaging business and annual
recurring performance improvements and cost savings as a result of a
restructuring of the Company's domestic operations (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, new technologies, and
acceptance of the Company's services in the marketplace.
RESULTS OF OPERATIONS
The following table presents certain items in the Consolidated Statements
of Operations as a percentage of revenues from services, rent and maintenance
plus product sales less the cost of products sold (Net Revenues) for the years
ended December 31, 1995, 1996, and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0%
Operating expenses:
Services, rent and maintenance 19.8 20.8 20.6(1)
Selling 12.2 11.7 12.3(1)
General and administrative 31.6 31.1 30.2
Depreciation and amortization 27.0 30.2 34.5(1)
Non-recurring charges -- 3.2 1.5
----- ----- -----
Operating income 9.4 3.0 0.9
Net loss (8.0) (14.8) (18.7)
EBITDA 36.4 33.2 35.4
EBITDA for domestic operations 36.4 34.3 36.4
EBITDA for core domestic operations (2) 36.4 34.3 37.7
EBITDA for core domestic operations,
excluding non-recurring charges 36.4 37.5 39.2
</TABLE>
(1) Excluding direct costs attributable to the Company's voice messaging
(VoiceNow) service, which was introduced during the first quarter of
1997, services, rent and maintenance expenses, selling expenses, and
depreciation and amortization expense as a percentage of Net Revenues
were 20.3%, 11.3%, and 33.0% for the year ended December 31, 1997.
(2) Represents EBITDA for the Company's domestic operations, excluding its
domestic advanced messaging services (primarily VoiceNow service).
17
<PAGE> 18
Net Revenues for the year ended December 31, 1997 were $839.5 million, an
increase of 18.9% over $705.8 million for the year ended December 31, 1996. Net
Revenues for the year ended December 31, 1996 increased 27.7% from $552.6
million for the year ended December 31, 1995. Revenues from services, rent and
maintenance, which the Company considers its primary business, increased 19.3%
to $818.5 million for the year ended December 31, 1997, compared to $686.0
million for the year ended December 31, 1996. Services, rent and maintenance
revenues for the year ended December 31, 1996 increased 28.9% from $532.1
million for the year ended December 31, 1995. These increases were primarily due
to continued growth in the number of units in service with subscribers of the
Company. The number of units in service with subscribers at December 31, 1997,
1996, and 1995 was 10,343,753, 8,587,772 and 6,737,907, respectively. The
increases in units in service with subscribers from December 31, 1996 to
December 31, 1997 and from December 31, 1995 to December 31, 1996 were 20.4% and
27.5%, respectively. The Company's local and national third-party resellers
represented 62.4% and 71.2%, respectively, of the Company's net unit additions
in 1997 and 1996. The 1997 increase in units in service was negatively impacted
by the removal of approximately 95,000 units from service, net of
re-activations, in the fourth quarter of 1997, as the result of a major
reseller ceasing business operations. The Company is reviewing its pricing
structure along all lines of its businesses, has instituted certain price
increases for existing customers, anticipates certain additional increases, and
has set appropriate minimum pricing levels for new business; however, the
impact of such actions cannot be determined at this time. In the fourth quarter
of 1997, the Company initiated steps that may decrease the distribution of
certain types and brands of pagers (the subscriber devices), and services
through third parties.
Product sales, less cost of products sold, were relatively flat for the
year ended December 31, 1997 compared to the year ended December 31, 1996.
Product sales, less cost of products sold, were $21.0 million (2.5% of Net
Revenues) for 1997 compared to $19.9 million (2.8% of Net Revenues) for 1996.
Product sales, less cost of products sold, were $20.5 million (3.7% of Net
Revenues) for the year ended December 31, 1995. Products consist of subscriber
devices.
Services, rent, and maintenance expenses for the year ended December 31,
1997 increased 17.8% to $173.1 million (20.6% of Net Revenues) compared to
$146.9 million (20.8% of Net Revenues) for the year ended December 31, 1996.
Services, rent, and maintenance expenses for the year ended December 31, 1996
increased by 34.2% from $109.5 million (19.8% of Net Revenues) for the year
ended December 31, 1995. The increases in services, rent, and maintenance
expenses and the increase as a percentage of Net Revenues from 1995 to 1996 were
a result of growth in the number of units in service with subscribers of the
Company, expenses associated with an increase in transmitter sites, expansion of
nationwide transmission networks, and costs incurred by the Company's Canadian
operations. In addition to these items, the increase in services, rent, and
maintenance expenses from 1996 to 1997 was also attributable to the costs
associated with the Company's new VoiceNow service, which was introduced on
February 24, 1997.
For the year ended December 31, 1997, selling expenses increased 24.4% to
$103.0 million (12.3% of Net Revenues) from $82.8 million (11.7% of Net
Revenues) for the year ended December 31, 1996. Selling expenses for the year
ended December 31, 1996 increased by 22.5% from $67.6 million (12.2% of Net
Revenues) for the year ended December 31, 1995. The increases in selling
expenses and the increase as a percentage of Net Revenues from 1996 to 1997
resulted primarily from certain marketing research, development costs, and
advertising expenses associated with the Company's VoiceNow service, and from
the addition of sales personnel to support continued growth in both Net Revenues
and the number of units in service with subscribers. The marketing research,
development costs, and advertising expenses associated with the Company's
VoiceNow service were $8.5 million (1.0% of Net Revenues) for 1997. The decline
in selling expenses as a percentage of Net Revenues from 1995 to 1996 was
primarily attributable to the expansion of local and national third-party
resellers, for which the Company incurred less selling costs on units placed in
service through this channel than through its direct sales channel. In addition,
since sales commissions are paid to the direct sales force when a new unit is
placed in service and not in subsequent months when the unit continues to
generate revenue, the Company's continued growth in the number of units in
service resulted in a decline in selling expenses as a percentage of Net
Revenues.
18
<PAGE> 19
General and administrative expenses increased 15.8% to $253.9 million
(30.2% of Net Revenues) for the year ended December 31, 1997, compared to $219.3
million (31.1% of Net Revenues) for the year ended December 31, 1996. General
and administrative expenses for the year ended December 31, 1996 increased by
25.7% from $174.4 million (31.6% of Net Revenues) for the year ended December
31, 1995. The increases in general and administrative expenses occurred to
support the growth in the number of units in service with subscribers of the
Company. The decreases in general and administrative expenses as a percentage of
Net Revenues were due to the general and administrative expenses being absorbed
by a larger subscriber base.
Depreciation and amortization expense increased 35.6% to $289.4 million
(34.5% of Net Revenues) for the year ended December 31, 1997, compared to $213.4
million (30.2% of Net Revenues) for the year ended December 31, 1996.
Depreciation and amortization expense for the year ended December 31, 1996
increased by 43.3% from $149.0 million (27.0% of Net Revenues) for the year
ended December 31, 1995. The increases in depreciation and amortization expense
were primarily attributable to the increase in the number of subscriber devices
owned by the Company and leased to subscribers, the increase in computer and
wireless messaging equipment used by the Company in its operations, changes in
subscriber device depreciation, the commencement of spectrum license
amortization, and depreciation and amortization expense associated with the
acquisitions discussed in Note 15 to the Consolidated Financial Statements.
Effective January 1, 1997, the Company shortened the depreciable life of its
subscriber devices from four to three years, and revised the related residual
values, in order to better reflect the estimated periods during which the
subscriber devices will remain in service. The change in depreciable lives and
residual values and the commencement of spectrum license amortization and
certain other costs associated with the introduction of the Company's VoiceNow
service increased net loss by approximately $27 million for the year ended
December 31, 1997.
The non-recurring charge of $12.6 million in 1997 represents a write down
of certain subscriber devices to their net realizable value. The non-recurring
charge of $22.5 million in 1996 represents a provision to write off in excess of
400,000 subscriber devices leased by the Company to customers under an agreement
with a national marketing affiliate. During 1996, the Company experienced
significant cancellations by the customer base developed through this affiliate
and, as a result, did not expect to recover such subscriber devices from the
former customers of this marketing affiliate.
As a result of the above factors, EBITDA increased 26.7% to $297.0 million
(35.4% of Net Revenues) for 1997 compared to $234.3 million (33.2% of Net
Revenues) for 1996. EBITDA for 1996 increased by 16.5% from $201.1 million
(36.4% of Net Revenues) for 1995. In 1997, EBITDA and EBITDA as a percentage of
Net Revenues were negatively impacted by the non-recurring charge to write down
certain subscriber devices to their net realizable value, the introduction of
the Company's new VoiceNow service, and its international operations. In 1996,
EBITDA and EBITDA as a percentage of Net Revenues were negatively impacted by
the non-recurring charge to write off subscriber devices and the Company's
international operations. The Company's start-up of its VoiceNow service
resulted in a decrease to EBITDA of $11.0 million for the year ended December
31, 1997. The Company's international operations resulted in a decrease to
EBITDA of $5.7 million and $7.7 million for the years ended December 31, 1997
and 1996, respectively. EBITDA for the Company's domestic operations increased
25.0% to $302.7 million (36.4% of Net Revenues) for 1997 compared to $242.1
million (34.3% of Net Revenues) for 1996. EBITDA for the Company's domestic
operations for 1996 increased by 20.4% from $201.1 million (36.4% of Net
Revenues) for 1995. Excluding the Company's advanced messaging services
(primarily VoiceNow), EBITDA for the Company's core domestic operations
increased 29.6% to $313.7 million (37.7% of Net Revenues) for the year ended
December 31, 1997, compared to $242.1 million (34.3% of Net Revenues) for the
year ended December 31, 1996. EBITDA for the Company's core domestic operations
for the year ended December 31, 1996 increased by 20.4% from $201.1 million
(36.4% of Net Revenues) for the year ended December 31, 1995.
Interest expense for the years ended December 31, 1997, 1996, and 1995 was
$151.4 million, $128.0 million, and $102.8 million, respectively. These
increases in interest expense were primarily due to the higher average level of
indebtedness outstanding during these years. The average level of indebtedness
outstanding during 1997, 1996, and 1995 was approximately $1.7 billion, $1.2
billion, and $0.9 billion, respectively. Interest expense
19
<PAGE> 20
for 1995 included the write-off of approximately $6.6 million of debt issuance
costs related to the prior amended and restated $450.0 million credit agreement.
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 $1.0 billion domestic 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations and expansion into new markets and product lines
required substantial capital investment for the development and installation of
wireless communications systems and for the procurement of subscriber devices
and related equipment. Capital expenditures (excluding payments for licenses
and acquisitions) were $328.4 million, $437.4 million, and $312.3 million,
respectively, for the years ended December 31, 1997, 1996, and 1995. The
Company's capital expenditures related to the build-out of the advanced two-way
wireless network to be utilized as a platform for new enhanced messaging
services increased from $46.7 million for the year ended December 31, 1996 to
$103.9 million for the year ended December 31, 1997. The Company's core
domestic capital expenditures decreased from $376.9 million for the year ended
December 31, 1996 to $219.7 million for the year ended December 31, 1997. The
decrease in core domestic capital expenditures in 1997 was primarily due to
increased efficiencies in infrastructure deployment and in the logistics
management of the subscriber device ordering process. For the year ended
December 31, 1997, capital expenditures were funded by net cash provided by
operating activities ($150.5 million) and incremental borrowings.
The amount of capital expenditures may fluctuate from quarter to quarter
and on an annual basis due to several factors; however, the Company anticipates
the total amount of capital expenditures in 1998 (including capital
expenditures to expand the two-way advanced network and to establish the
Centers of Excellence in connection with the Company's 1998 Restructuring) to
be relatively consistent with the amount incurred in 1997.
During April 1996, the Company concluded its participation in a Federal
Communications Commission (FCC) auction of specialized mobile radio (SMR)
frequency licenses, and ultimately acquired rights to two to four blocks of
two-way spectrum in markets across the United States for a total purchase price
of $45.6 million. The Company is in the process of purchasing exclusive rights
to certain of these SMR frequencies from incumbent operators. The total cost of
the investment will be approximately $240 million (including the $45.6 million
auction purchase price), of which $109 million was paid in 1996 and $93 million
was paid in 1997.
The Company intends to utilize its narrowband personal communications
services (PCS) and SMR frequencies for additional capacity as needed for its
existing operations, such as digital and alphanumeric services, and to build an
advanced two-way network over which it can deploy new enhanced messaging
services and customized wireless information. The Company expended $47 million
in 1996 and $104 million in 1997 to construct the advanced two-way network. The
Company expects to spend an additional $75 million to $100 million in total in
1998 and 1999 to achieve nationwide coverage with its advanced two-way network.
Additional capital expenditures for the advanced two-way network will be
determined based on the market introduction and success of new products.
During 1995, the Company acquired certain paging assets of Comtech, Inc. -
Paging Division; SNET Paging, Inc. and its wholly owned subsidiary, TNI
Associates, Inc.; two subsidiaries of PageAmerica; Page Florida; International
Paging Corp.; and Celpage, Inc. - Atlanta Branch, including various frequencies
and approximately 343,000 units in service. The payments for these purchases
aggregated approximately $117.6 million.
Through its wholly-owned subsidiary, Paging Network of Canada Inc., the
Company began offering wireless messaging services in Canada in April 1996. In
September 1996, the Company purchased a 25% interest
20
<PAGE> 21
in an existing Spanish wireless messaging company. In December 1996, the Company
signed agreements as the operational partner with a 17.5% interest in a joint
venture to provide wireless messaging services in Brazil, which commenced
operations in March 1997. The Company, through its subsidiaries, owns frequency
licenses in the United Kingdom and Argentina. The Company is considering other
opportunities for international expansion, with the goal of creating a portfolio
of select international operations. Wireless messaging market penetration in
many international markets is relatively low, and many such markets have only a
small number of existing wireless messaging 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 shareowners.
Under the Credit Agreement, the Company is able to borrow, provided it
meets certain financial covenants, the lesser of $1.0 billion or an amount based
upon a calculation which is reduced by total outstanding indebtedness for
borrowed monies (as defined) and outstanding letters of credit. The amount of
total indebtedness allowed is equal to 6.5 times last quarter's annualized
domestic EBITDA. As of December 31, 1997, the Company had $539.0 million of
borrowings outstanding under its Credit Agreement and, under the terms of the
Credit Agreement, an additional $461.0 million was available for borrowings as
of that date. Such amount may fluctuate from quarter to quarter during 1998
based on the domestic EBITDA for the respective quarter of 1998. As of February
28, 1998, the Company had $558.0 million of borrowings outstanding under its
Credit Agreement. Maximum borrowings which may be outstanding under the Credit
Agreement are permanently reduced beginning 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 $75 million. As of December 31, 1997,
approximately $40 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, and both credit agreements expire on December
31, 2004.
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.
Free cash flow, defined as EBITDA after capital expenditures (excluding
the costs of acquiring SMR frequency licenses and deposits for purchase of
subscriber devices) and debt service, for the Company's core domestic operations
was $6.4 million for the year ended December 31, 1997. 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 1996 and 1995 were deficiencies of $229.8
million and $180.7 million, respectively. The deficiency in free cash flow for
the Company's consolidated operations for the years ended December 31, 1997,
1996, and 1995 was $179.1 million, $327.4 million, and $207.5 million,
respectively. The improvements in free cash flow in 1997 were primarily the
result of decreases in capital expenditures and increases in EBITDA in the
Company's core domestic operations, as previously noted. The costs of acquiring
SMR frequency licenses totaled $92.9 million for 1997, $109.2 million for 1996,
and $3.2 million for 1995. The amount of capital expenditures and SMR frequency
purchases may fluctuate from quarter to quarter and on an annual basis due to
several factors.
Inflation is not a material factor affecting the Company's business. System
equipment and transmission costs have not increased and subscriber device costs
have declined significantly over time; these lower costs have been reflected in
lower prices charged to the Company's subscribers. General operating expenses
such as salaries, employee benefits, and occupancy costs are, however, subject
to normal inflationary pressures.
1998 RESTRUCTURING
On February 8, 1998 the Company's Board of Directors approved the
Restructuring. As part of the Restructuring, the Company will reorganize its
operations to expand its sales organization, eliminate local and redundant
administrative operations, and consolidate certain key support functions. The
Company expects to
21
<PAGE> 22
eliminate approximately 1,800 positions, net of positions added, through the
consolidation of redundant administrative operations and key support functions
today located in offices throughout the country into central facilities (the
Centers of Excellence). The Company will also expand its sales organization. The
Company expects to realize annual recurring performance improvements and cost
savings of $45 million to $55 million when the Restructuring is completed in
nine to fifteen months. 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 will record a charge of between $65 million to $80 million during the
quarter ending March 31, 1998.
VOICENOW
The Company is in the process of reviewing its strategy for marketing its
VoiceNow service, which was introduced in Dallas/Ft. Worth, Atlanta, and
Sacramento during 1997. The VoiceNow service has not met the Company's original
expectations in those markets. As a result, the Company expects to introduce the
VoiceNow service in the Chicago market under a revised strategy in 1998. The
Company believes that, based on the forseeable growth in its existing services
and the potential for future services, substantially all of the spectrum and
advanced two-way 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 at December 31, 1997, is approximately $33 million of assets which are
directly attributable to the Company's VoiceNow service and thus cannot be
utilized for other wireless communications services. 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.
The Company will reassess the recoverability of the assets directly
attributable to the VoiceNow service following the introduction of the
VoiceNow service in the Chicago market in 1998.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The Year
2000 problem is pervasive and complex and virtually every computer operation in
the country will be affected in some way by the rollover of the two-digit year
value to 00. The Company has identified the status of all computer applications
and systems with reference to Year 2000 compliance. Most applications are
already compliant, and those that are not have been earmarked for retirement,
replacement, or modification to ensure uninterrupted service to the Company's
subscribers. In addition, a task force of Company personnel is working closely
with Motorola Inc., Glenayre Technologies Inc., and certain other vendors that
currently supply the Company with subscriber devices, wireless messaging
terminals, and network facilities to ensure that all of their products and
services are Year 2000 compliant as well.
The Company is committed to having its systems Year 2000 compliant well in
advance of January 1, 2000, and is utilizing both internal and external
resources to identify, correct or reprogram, and test its systems. At the
present time, the expense associated with the Year 2000 compliance program has
not been fully assessed. It is anticipated that all reprogramming efforts will
be completed in sufficient time to allow for proper testing of the systems. To
date, confirmations have been received from the Company's primary processing
vendors that plans are being developed to address processing of transactions in
the Year 2000. The Company believes its planning efforts are adequate to address
the Year 2000 compliance. However, 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 other 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. 130, "Reporting Comprehensive
Income" (SFAS 130), effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its
22
<PAGE> 23
components in a full set of general-purpose financial statements. The adoption
of SFAS 130 will have no impact on the Company's financial position or results
of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131), effective for years beginning after December 15, 1997. 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.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors 25
Paging Network, Inc. Consolidated Statements of Operations
for the years ended December 31, 1997, 1996, and 1995 26
Paging Network, Inc. Consolidated Balance Sheets as of
December 31, 1997 and 1996 27
Paging Network, Inc. Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996, and 1995 28
Paging Network, Inc. Consolidated Statements of Shareowners' Deficit
for the years ended December 31, 1997, 1996, and 1995 29
Paging Network, Inc. Notes to Consolidated Financial Statements 30
</TABLE>
24
<PAGE> 25
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareowners
Paging Network, Inc.
We have audited the accompanying consolidated balance sheets of Paging Network,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, cash flows and shareowners' deficit for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Paging Network,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 9, 1998
25
<PAGE> 26
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Services, rent and maintenance revenues $ 532,079 $ 685,960 $ 818,461
Product sales 113,943 136,527 142,515
--------- --------- ---------
Total revenues 646,022 822,487 960,976
Cost of products sold (93,414) (116,647) (121,487)
--------- --------- ---------
552,608 705,840 839,489
Operating expenses:
Services, rent and maintenance 109,484 146,896 173,058
Selling 67,561 82,790 102,995
General and administrative 174,432 219,317 253,886
Depreciation and amortization 148,997 213,440 289,442
Non-recurring charges -- 22,500 12,600
--------- --------- ---------
Total operating expenses 500,474 684,943 831,981
--------- --------- ---------
Operating income 52,134 20,897 7,508
Other income (expense):
Interest expense (102,846) (128,014) (151,380)
Interest income 6,511 3,679 3,689
Equity in loss of an unconsolidated
subsidiary -- (882) (1,220)
--------- --------- ---------
Total other income (expense) (96,335) (125,217) (148,911)
--------- --------- ---------
Loss before extraordinary item (44,201) (104,320) (141,403)
Extraordinary loss -- -- (15,544)
--------- --------- ---------
Net loss $ (44,201) $(104,320) $(156,947)
========= ========= =========
Net loss per share (basic and diluted):
Loss before extraordinary item $ (0.43) $ (1.02) $ (1.38)
Extraordinary loss -- -- (0.15)
--------- --------- ---------
Net loss per share $ (0.43) $ (1.02) $ (1.53)
========= ========= =========
</TABLE>
See accompanying notes
26
<PAGE> 27
PAGING NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,777 $ 2,924
Accounts receivable (less allowance for doubtful accounts of
$4,994 and $6,670 in 1996 and 1997, respectively) 60,089 63,288
Inventories 22,812 24,114
Prepaid expenses and other assets 8,872 14,888
----------- -----------
Total current assets 95,550 105,214
Property, equipment, and leasehold improvements, at cost 1,172,607 1,387,560
Less accumulated depreciation (319,194) (469,526)
----------- -----------
Net property, equipment, and leasehold improvements 853,413 918,034
Other non-current assets, at cost 547,067 659,661
Less accumulated amortization (56,417) (85,676)
----------- -----------
Net other non-current assets 490,650 573,985
----------- -----------
$ 1,439,613 $ 1,597,233
=========== ===========
LIABILITIES AND SHAREOWNERS' DEFICIT
Current liabilities:
Accounts payable $ 59,857 $ 42,640
Accrued interest 41,853 40,085
Accrued expenses 29,650 36,854
Customer deposits 22,430 24,460
Deferred revenue 8,810 11,634
----------- -----------
Total current liabilities 162,600 155,673
----------- -----------
Long-term obligations 1,459,188 1,779,491
Commitments and contingencies -- --
Shareowners' deficit:
Common Stock - $.01 par, authorized 250,000,000 shares; issued and
outstanding 102,621,077 shares at December 31, 1996 and
102,659,915 shares at December 31, 1997 1,026 1,027
Paid-in capital 124,522 124,908
Accumulated deficit (307,827) (464,774)
Foreign currency translation adjustments 104 908
----------- -----------
Total shareowners' deficit (182,175) (337,931)
----------- -----------
$ 1,439,613 $ 1,597,233
=========== ===========
</TABLE>
See accompanying notes
27
<PAGE> 28
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss $ (44,201) $(104,320) $(156,947)
Adjustments to reconcile net loss
to cash provided by operating activities:
Extraordinary loss -- -- 15,544
Depreciation 136,069 191,471 258,798
Amortization 12,928 21,969 30,644
Non-recurring charges -- 22,500 12,600
Provision for doubtful accounts 12,209 14,033 18,343
Equity in loss of an unconsolidated subsidiary -- 882 1,220
Write-off of debt issuance costs 6,641 -- --
Amortization of debt issuance costs 4,313 5,261 8,418
Changes in operating assets and liabilities:
Accounts receivable (28,393) (32,787) (21,542)
Inventories (3,495) (8,728) (1,302)
Prepaid expenses and other assets (4,144) (3,377) (6,016)
Accounts payable 41,860 (9,919) (18,397)
Accrued expenses and accrued interest 22,220 7,548 4,286
Customer deposits and deferred revenue 4,622 5,849 4,854
--------- --------- ---------
Net cash provided by operating activities 160,629 110,382 150,503
--------- --------- ---------
Investing activities:
Capital expenditures (312,289) (437,388) (328,365)
Payments for spectrum licenses (157,600) (109,236) (92,856)
Deposits for purchase of subscriber devices -- -- (13,493)
Business acquisitions and joint venture investments (111,872) (9,352) (7,253)
Restricted cash invested in money market instruments -- (27,039) (6,422)
Other (7,626) (18,107) (11,540)
--------- --------- ---------
Net cash used in investing activities (589,387) (601,122) (459,929)
--------- --------- ---------
Financing activities:
Borrowings under credit agreements 564,850 223,438 558,317
Redemption of $200 million senior subordinated notes -- -- (211,750)
Repayments of long-term obligations (318,850) (414,250) (39,000)
Proceeds from Senior Notes offerings 400,000 500,000 --
Debt issuance costs on Senior Notes offerings (10,132) (11,250) --
Debt issuance costs on credit agreements (13,531) (3,766) --
Proceeds from exercise of common stock options 3,325 2,825 87
Other (1,173) (662) 919
--------- --------- ---------
Net cash provided by financing activities 624,489 296,335 308,573
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 195,731 (194,405) (853)
Cash and cash equivalents at beginning of year 2,451 198,182 3,777
--------- --------- ---------
Cash and cash equivalents at end of year $ 198,182 $ 3,777 $ 2,924
========= ========= =========
</TABLE>
See accompanying notes
28
<PAGE> 29
PAGING NETWORK, INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' DEFICIT
YEAR ENDED DECEMBER 31, 1995, 1996, AND 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
COMMON PAID-IN ACCUMULATED TRANSLATION SHAREOWNERS'
STOCK CAPITAL DEFICIT ADJUSTMENTS DEFICIT
--------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 1,014 $ 118,384 $(159,306) $ -- $ (39,908)
Issuance of 840,007 shares of
Common Stock pursuant to
stock option plans 8 3,317 -- -- 3,325
Net loss -- -- (44,201) -- (44,201)
--------- --------- --------- --------- ---------
Balance, December 31, 1995 1,022 121,701 (203,507) -- (80,784)
Issuance of 375,270 shares of
Common Stock pursuant to
stock option plans 4 2,821 -- -- 2,825
Net loss -- -- (104,320) -- (104,320)
Foreign currency translation
adjustments -- -- -- 104 104
--------- --------- --------- --------- ---------
Balance, December 31, 1996 1,026 124,522 (307,827) 104 (182,175)
Issuance of 38,838 shares of
Common Stock pursuant to stock
option and compensation plans 1 386 -- -- 387
Net loss -- -- (156,947) -- (156,947)
Foreign currency translation
adjustments -- -- -- 804 804
--------- --------- --------- --------- ---------
Balance, December 31, 1997 $ 1,027 $ 124,908 $(464,774) $ 908 $(337,931)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes
29
<PAGE> 30
PAGING NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
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 a minority interest in wireless messaging 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.
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Inventories -- Inventories consist of certain types and brands of pagers
(the subscriber devices) which are held specifically for resale. Inventories are
stated at the lower of cost or market, with cost determined on a first-in,
first-out basis.
Property, equipment, and leasehold improvements -- Property, equipment, and
leasehold improvements are stated at cost, less accumulated depreciation.
Expenditures for maintenance are charged to expense as incurred. Upon retirement
of units of equipment, the costs of units retired and the related accumulated
depreciation amounts are removed from the accounts. Depreciation is computed
using the straight-line method based on the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment 3 to 7 years
Subscriber devices 3 years (1)
Furniture and fixtures 7 years
Leasehold improvements 5 years (2)
Building and building improvements 20 years
</TABLE>
(1) Effective January 1, 1997, the Company changed the estimated useful life of
subscriber devices from 4 years to 3 years, with estimated residual value
ranging up to $20 (see Note 3).
(2) Or term of lease if shorter.
The Company does not manufacture any of the subscriber devices or related
transmitting and computerized terminal equipment used in the Company's
operations. The Company purchases its subscriber devices primarily from
Motorola, Inc.; however, these devices are available for purchase from multiple
sources, consistent with normal manufacturing and delivery lead times.
Other non-current assets -- Other non-current assets are stated at cost,
less accumulated amortization. Amortization is computed using the straight-line
method based upon the following estimated useful lives:
<TABLE>
<CAPTION>
<S> <C>
Licenses and frequencies 40 years
Excess of cost over fair market
value of net assets acquired 20 years
Other intangible assets 18 months to 9 years
Other non-current assets 7 years to 20 years
</TABLE>
The Company continually evaluates other non-current assets to determine
whether current events and circumstances warrant adjustment to the carrying
values or amortization periods.
30
<PAGE> 31
Deferred revenues and customer deposits -- Deferred revenues represent
billing to customers in advance for services not yet performed and are
recognized as revenue in the month the service is provided. Deposits are
received from some customers at the time a service agreement is signed and are
recognized as a liability of the Company until such time as the deposits are
applied, generally against the customer's final bill.
Revenue recognition -- Services, rent and maintenance revenues are
recognized in the month the related services are performed. Product sales are
recognized upon delivery of product to the customer.
Employee stock options -- The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related interpretations in accounting for its employee stock option
plans. Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Advertising costs -- The Company expenses the costs of advertising as
incurred. Advertising expense for the years ended December 31, 1997, 1996, and
1995, was $21.9 million, $12.5 million, and $8.5 million, respectively.
Reclassifications -- Certain 1995 and 1996 amounts have been reclassified
to conform with the 1997 presentation.
Restatement of financial statements -- The consolidated financial
statements for the year ended December 31, 1996 have been previously restated to
reflect a $22.5 million non-cash write off of subscriber devices deemed to be
unrecoverable as of December 31, 1996. The decision to restate the Company's
financial statements resulted from a review of the Company's agreements with a
national marketing affiliate and the determination that an earlier judgment that
the Company ultimately would recover or be compensated for certain subscriber
devices distributed through that affiliate to customers who later discontinued
service was not correct.
The impact of the restatement on the consolidated balance sheet as of
December 31, 1996, and on the consolidated statement of operations for the year
then ended is as follows:
<TABLE>
<CAPTION>
AMOUNTS PREVIOUSLY RESTATED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REPORTED AMOUNTS
------------------ ---------
<S> <C> <C>
Operating income $ 43,397 $ 20,897
Net loss (81,820) (104,320)
Net loss per share (basic and diluted) (0.80) (1.02)
Net property, equipment,
and leasehold improvements 841,035 818,535
Accumulated deficit (285,327) (307,827)
</TABLE>
2. RESTRUCTURING
On February 8, 1998, the Company's Board of Directors approved a
restructuring of its domestic operations (the Restructuring). As part of the
Restructuring, the Company will expand its sales organization, eliminate local
and redundant administrative operations, and consolidate certain key support
functions. The Company expects to eliminate approximately 1,800 positions, net
of positions added, through the consolidation of redundant administrative
operations and certain key support functions located in offices throughout the
country into central facilities. As a result of the Restructuring, the Company
will record a charge of between $65 million to $80 million related to the
office closures, severance, and asset impairments during the quarter ending
March 31, 1998.
31
<PAGE> 32
3. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
The cost of property, equipment, and leasehold improvements consisted of
the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1996 1997
---- ----
<S> <C> <C>
Machinery and equipment $ 571,963 $ 761,208
Subscriber devices 490,944 506,026
Furniture and fixtures 57,550 63,772
Leasehold improvements 35,130 36,704
Land, buildings, and building improvements 17,020 19,850
------------ ------------
Total cost $ 1,172,607 $ 1,387,560
============ ============
</TABLE>
Effective January 1, 1997, the Company shortened the depreciable lives of
its subscriber devices from four to three years, and revised the related
residual values. This change increased net loss for the year ended December 31,
1997 by $16.5 million and net loss per share by $0.16.
Included in inventories, property and equipment, and other non-current
assets at December 31, 1997, is approximately $33 million of assets which are
directly attributable to the Company's VoiceNow service and thus cannot be
utilized for other wireless communications services. 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.
The Company expects to reintroduce the VoiceNow service under a revised
strategy in 1998, after which the Company will reassess the recoverability of
the assets directly attributable to the VoiceNow service.
4. OTHER NON-CURRENT ASSETS
The cost of other non-current assets consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1996 1997
---- ----
<S> <C> <C>
Licenses and frequencies $ 358,272 $ 452,551
Excess of cost over fair market value
of assets acquired 34,899 34,299
Other intangible assets 55,893 61,960
Restricted cash invested in money
market instruments, at fair value 27,039 33,461
Deposits for purchase of subscriber devices -- 13,493
Other non-current assets 70,964 63,897
------------ ------------
Total cost $ 547,067 $ 659,661
============ ============
</TABLE>
Licenses and frequencies consist of amounts paid in conjunction with the
purchase of three nationwide narrowband personal communications services (PCS)
frequencies at a Federal Communications Commission (FCC) auction held in 1994,
amounts paid in conjunction with the purchase of two to four blocks of two-way
900 MHz specialized mobile radio (SMR) major trading area based licenses,
amounts paid to purchase exclusive rights to certain of the SMR frequencies from
incumbent operators, and amounts paid to secure other licenses. Amortization of
certain of these costs commenced during the first quarter of 1997 when the
related frequencies were placed into service.
Other intangible assets generally consist of customer lists, start-up
costs, and FCC application costs.
32
<PAGE> 33
5. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1996 1997
---- ----
<S> <C> <C>
Borrowings under Credit Agreement $ 30,000 $ 539,000
10% Senior Subordinated Notes due October 15, 2008 500,000 500,000
10.125% Senior Subordinated Notes due August 1, 2007 400,000 400,000
8.875% Senior Subordinated Notes due February 1, 2006 300,000 300,000
11.75% Senior Subordinated Notes redeemed May 14, 1997 200,000 --
Other 29,188 40,491
------------ -----------
Total long-term obligations $ 1,459,188 $ 1,779,491
============ ===========
</TABLE>
Under the Company's $1.0 billion domestic revolving credit agreement (the
Credit Agreement), the Company is able to borrow, provided it meets certain
financial covenants, the lesser of $1.0 billion or an amount based upon a
calculation which is reduced by total outstanding indebtedness for borrowed
monies (as defined) and outstanding letters of credit. The amount of total
indebtedness allowed is equal to 6.5 times last quarter's annualized domestic
earnings before interest, income taxes, depreciation, amortization, and equity
in loss of an unconsolidated subsidiary (EBITDA). As of December 31, 1997, the
Company had $539.0 million of borrowings outstanding under the Credit Agreement
and, under the terms of the Credit Agreement, an additional $461.0 million was
available for borrowings as of that date. Such amount may fluctuate from quarter
to quarter during 1998 based on the domestic EBITDA for the respective quarter
of 1998. Maximum borrowings which may be outstanding under the Credit Agreement
are permanently reduced beginning on June 30, 2001, as follows: 2001-$150.0
million; 2002-$200.0 million; 2003-$250.0 million; and 2004-$400.0 million. The
Company's Credit Agreement expires on December 31, 2004.
Under the Credit Agreement, the Company may designate all or a portion of
outstanding borrowings to be either a Base Rate Loan or a London Interbank
Offered Rate (LIBOR) loan. As of December 31, 1997, the Company had designated
$517.0 million of borrowings as LIBOR Rate loans which bears interest at a rate
equal to the LIBOR rate plus a spread of 1.75% based on the Company's total
leverage ratio as defined. As of December 31, 1997, the Company had designated
$22.0 million of borrowings as a Base Rate Loan which bears interest at a rate
equal to the sum of the Applicable Margin plus the higher of (i) the rate
established by the Administrative Agent from time to time as its reference rate
for the determination of interest rates for loans of varying maturities in U.S.
Dollars to U.S. persons, and (ii) the Federal funds rate plus 0.50%. The
interest rates for the $517.0 million of LIBOR Rate loans at December 31, 1997
ranged from 7.71% to 7.75%. The interest rate for the $22.0 million Base Rate
Loan at December 31, 1997 was 9.25%.
The Credit Agreement prohibits the Company from paying cash dividends or
other cash distributions to shareowners. The Credit Agreement also prohibits the
Company from paying more than a total of $2.0 million in connection with the
purchase of Common Stock owned by employees whose employment with the Company is
terminated (see Note 7). The Credit Agreement contains other covenants that,
among other things, limit the ability of the Company and its subsidiaries to
incur indebtedness, engage in transactions with affiliates, dispose of assets,
and engage in mergers, consolidations, and other acquisitions. Amounts owing
under the Credit Agreement are secured by a security interest in substantially
all of the Company's assets, the assets of the Company's subsidiaries, and the
capital stock of the subsidiaries of the Company.
The credit agreements of the Company's Canadian subsidiaries provide for
total borrowings of approximately $75 million. As of December 31, 1997,
approximately $40 million of borrowings were outstanding under the credit
facilities. Additional borrowings are
33
<PAGE> 34
available under these facilities, provided such borrowings are either
collaterized or certain financial conditions are met. Maximum borrowings which
may be outstanding under the credit facilities begin reducing on March 31, 2001,
and both credit agreements expire on December 31, 2004.
The 8.875% Senior Subordinated Notes (8.875% Notes), the 10.125% Senior
Subordinated Notes (10.125% Notes), and the 10% Senior Subordinated Notes (10%
Notes) are redeemable on or after February 1, 1999, August 1, 2000, and October
15, 2001, respectively, at the option of the Company, in whole or in part from
time to time, at certain prices declining annually to 100 percent of the
principal amount on or after February 1, 2002, August 1, 2003, and October 15,
2004, respectively, plus accrued interest. The 8.875% Notes, the 10.125% Notes,
and the 10% Notes are subordinated in right of payment to all senior debt, and
contain various covenants that, among other things, limit the ability of the
Company and its subsidiaries to incur indebtedness, pay dividends, engage in
transactions with affiliates, sell assets, and engage in mergers,
consolidations, and other acquisitions.
On 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.
Based on quoted market prices, the fair value of the 8.875% Notes, the
10.125% Notes, and the 10% Notes at December 31, 1997 was $295.8 million, $418.1
million, and $517.9 million, respectively. The carrying values of the borrowings
outstanding under the Company's credit agreements approximate their fair values.
6. INCOME TAXES
For the years ended December 31, 1995, 1996, and 1997, the Company had no
provision or benefit for income taxes because the deferred benefit from the
operating losses was offset by an increase in the valuation allowance of $14.6
million, $36.9 million, and $56.4 million, respectively. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1996 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 118,384 $ 167,330
Deferred revenue 3,386 4,394
Bad debt reserve 1,933 2,561
Other tax credit carryforwards 691 691
Other 4,354 6,445
--------- ---------
Total deferred tax assets 128,748 181,421
Valuation allowance (87,532) (143,897)
--------- ---------
Net deferred tax assets 41,216 37,524
Deferred tax liabilities:
Depreciation (35,601) (29,232)
Amortization (5,615) (8,292)
--------- ---------
Total deferred tax liabilities (41,216) (37,524)
--------- ---------
$ -- $ --
========= =========
</TABLE>
At December 31,1997, the Company has net operating loss carryforwards of
approximately $429 million that expire in years 1999 through 2012.
34
<PAGE> 35
7. STOCK OPTIONS
The 1982 Incentive Stock Option Plan, as amended (1982 Plan), for officers
and key employees of the Company provides for the granting of stock options
intended to qualify as Incentive Stock Options (ISOs) to purchase Common Stock
at not less than 100% of the fair market value on the date the option is
granted, as determined by the Board of Directors. No further options may be
granted under the 1982 Plan. At December 31, 1997, options for 330,267 shares
were exercisable under the 1982 Plan. All options outstanding and exercisable
under the 1982 Plan are fully vested.
Options granted were exercisable immediately, or in installments as the
Board of Directors determined at the time it granted such options, and have a
duration of ten years from the date of grant. Any stock issued is subject to
repurchase at the option of the Company which occurs at the exercise price for
the unvested portion of the shares issued and at fair market value, as defined
or allowed in the Stock Option Agreement, for the vested portion. Such options
vest ratably over a five-year period from the date they first become
exercisable. However, in the event of a change in ownership control of the
Company, all options vest immediately.
The 1991 Stock Option Plan (1991 Plan) for officers and key employees of
the Company provides for the granting of ISOs and non-statutory options to
purchase Common Stock at not less than 100% of the fair market value on the date
the options are granted. The 1991 Plan is administered by the stock
option/compensation committee, consisting of three members of the Board (the
Committee). Approximately 8.4 million shares remained available for grant under
the 1991 Plan at December 31, 1997. A total of 1,949,528 shares were vested and
exercisable under the 1991 Plan at December 31, 1997. Options granted under the
1991 Plan are non-transferable except by the laws of descent and distribution
and are exercisable upon vesting, which occurs either immediately or in
installments, as the Board of Directors or the Committee may determine at the
time it grants such options. On February 4, 1998, the Board of Directors of the
Company approved an amendment to the 1991 Plan to broaden the group of employees
to be eligible to receive stock options under such plan to include all employees
of the Company and of its subsidiaries. Adoption of this amendment to the 1991
Plan is subject to shareowner approval.
The 1992 Amended and Restated Stock Option Plan for Directors (Directors'
Plan), for non-employee Directors of the Company, provides for the granting of
non-statutory options to purchase Common Stock at not less than 100% of the fair
market value on the date the options are granted. The Directors' Plan is
administered by the Committee. The total number of shares of Common Stock with
respect to which options may be granted under the Directors' Plan may not exceed
750,000. Approximately 284,000 shares remain available for grant under the
Directors' Plan at December 31, 1997. A total of 171,000 shares were vested and
exercisable at December 31, 1997. Options granted under the Directors' Plan are
non-transferable except by the laws of descent and distribution and are
exercisable upon vesting, which occurs either immediately or in installments, as
the Board of Directors or the Committee may determine at the time it grants such
options.
With respect to the 1991 Plan and the Directors' Plan, notwithstanding the
above, ten business days before a merger or a change in the ownership control of
the Company or a sale of substantially all the assets of the Company, all
options issued vest immediately and become exercisable in full; upon a merger or
a change in ownership control of the Company or the sale of substantially all
the assets of the Company, all options issued under the 1991 Plan and Directors'
Plan which have not been exercised terminate.
On 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 a lesser number of new options at a lower exercise price, with the
vesting dates being restarted with the new grant dates. As a result of the
election by certain of its employees, the Company canceled 2.9 million of
options with exercise prices ranging from $13.69 to $26.50 and granted
approximately 1.1 million of options to the same optionees with an exercise
price of $8.25 per share.
35
<PAGE> 36
Information concerning options at December 31, 1995, 1996, and 1997 is as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Outstanding at January 1 4,737,420 4,664,735 5,968,605
Granted 1,605,800 2,307,100 3,435,873
Canceled (838,478) (627,960) (3,705,609)
Exercised (840,007) (375,270) (11,534)
-------------- -------------- --------------
Outstanding at December 31 4,664,735 5,968,605 5,687,335
============== ============== ==============
Exercisable at December 31 1,601,440 1,920,085 2,450,795
============== ============== ==============
Option price range-options outstanding $2.67 - $23.56 $2.67 - $26.50 $2.67 - $25.50
Option price range-options exercised $0.40 - $14.38 $2.73 - $14.38 $2.73 - $ 9.25
</TABLE>
Weighted-average exercise prices are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Outstanding at January 1 $ 7.83 $ 12.22 $ 15.90
Granted 19.22 22.33 9.54
Canceled 9.13 17.19 19.89
Exercised 3.96 7.53 7.49
Outstanding at December 31 12.22 15.90 9.47
Exercisable at December 31 7.47 9.65 9.12
</TABLE>
Certain information is being presented based on a range of exercise
prices as of December 31, 1997, as follows:
<TABLE>
<CAPTION>
$ 2.67 - $7.75 $8.05 - $8.69 $9.06 - $12.38 $12.59 - $25.50
-------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Number of shares outstanding 1,645,267 1,636,940 1,636,510 768,618
Weighted-average exercise price $ 6.49 $ 8.39 $ 10.77 $ 15.37
Weighted-average remaining
contractual life 4.9 years 9.1 years 8.0 years 6.9 years
Number of shares exercisable 1,258,917 320,980 386,940 483,958
Weighted-average exercise
price of shares exercisable $ 6.22 $ 8.45 $ 10.21 $ 16.23
</TABLE>
The Company adopted the pro forma disclosure provisions of the Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) in 1996. As required by SFAS 123, pro forma information
regarding net loss and net loss per share has been determined as if the Company
had accounted for employee stock options and stock-based awards granted
subsequent to December 31, 1994 under the fair value method provided for under
SFAS 123. The weighted-average fair value of stock options granted during 1995,
1996, and 1997 was $11.65, $13.58, and $5.98, respectively. The fair value for
the stock options granted to officers and key employees of the Company after
January 1, 1995 was estimated at the date of the grant using the Black-Scholes
option pricing model with the following assumptions: risk-free interest rates
ranging from 5.63% to 7.79% for 1995, ranging from 5.54% to 6.83% for 1996, and
ranging from 5.46% to 6.89% for 1997; a dividend yield of 0%; volatility factors
of the expected market price of the Company's Common Stock ranging from 52.9% to
55.1% for 1995, ranging from 53.2% to 54.4% for 1996 and ranging from 54.4% to
57.6% for 1997; and a weighted average expected life of each option ranging from
6.7 years to 7.0 years for 1995, 1996, and 1997.
36
<PAGE> 37
For purposes of the pro forma disclosures, the estimated fair value of the
options and stock-based awards is amortized to expense over the vesting period.
The Company's pro forma information is as follows (in thousands, except for net
loss per common share information):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net loss As reported $(44,201) $(104,320) $(156,947)
Pro forma $(45,830) $(110,533) $(172,884)
Net loss per common share As reported $ (0.43) $ (1.02) $ (1.53)
Pro forma $ (0.45) $ (1.08) $ (1.68)
</TABLE>
Because SFAS 123 is applicable only to options and stock-based awards
granted subsequent to December 31, 1994, its pro forma effect will not be fully
reflected until 2001.
8. COMMITMENTS
The Company has operating leases for office and transmitting sites with
lease terms ranging from a month to approximately ten years. There are no
significant renewal or purchase options. Total rent expense for 1995, 1996, and
1997 was approximately $47.9 million, $60.7 million, and $69.5 million,
respectively.
The following is a schedule by year of future minimum rental payments
required under operating leases that have remaining noncancelable lease terms in
excess of one year at December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: (IN THOUSANDS)
<S> <C>
1998 $ 22,658
1999 19,153
2000 14,326
2001 9,358
2002 4,592
Later years 4,360
----------
Total minimum payments required $ 74,447
==========
</TABLE>
As part of the Company's Restructuring, certain leases will be terminated
prior to their scheduled expiration, generally upon the payment of a termination
fee, and certain office space and facilities will be subleased through the
expiration of the related leases, generally for amounts less than the Company's
lease commitments for such space. The cost of these lease terminations will be
recorded in the first quarter of 1998 as part of the Restructuring charge
discussed in Note 2.
9. CONTINGENCIES
The Company is involved in various lawsuits arising in the normal course of
business. In management's opinion, the ultimate outcome of these lawsuits will
not have a material adverse effect on the Company's financial position or
results of operations.
37
<PAGE> 38
10. COMMON STOCK AND NET LOSS PER SHARE
Net loss per share amounts are computed based on the weighted average
number of common shares outstanding. The number of shares used to compute per
share amounts for the years ended December 31, 1995, 1996, and 1997, was 101.9
million, 102.5 million, and 102.6 million, respectively. The average number of
options to purchase shares of the Company's Common Stock during the years ended
December 31, 1995, 1996, and 1997, were 4.4 million, 5.6 million, and 6.0
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. During the fourth quarter of 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). The
Company's adoption of SFAS 128 had no impact on its reporting of loss per share
for 1997 or prior years.
The Company has 275.0 million of authorized shares, of which 250.0 million
are Common Stock and 25.0 million are preferred stock. As of December 31, 1997,
there were no preferred shares issued or outstanding.
On May 23, 1996, the Company's shareowners approved an employee stock
purchase plan of up to 2.0 million shares of the Company's Common Stock, which
the Company implemented on January 1, 1997. Under the employee stock purchase
plan, an employee may elect to purchase shares of the Company's Common Stock at
the end of a two-year period at a price equal to 85% of the fair market value of
the Company's Common Stock at the beginning or end of such two-year period,
whichever is lower.
11. NON-RECURRING CHARGES
During the year ended December 31, 1997, the Company recorded a provision
of $12.6 million to write down certain subscriber devices to their net
realizable value. During the year ended December 31, 1996, the Company recorded
a provision of $22.5 million to write off subscriber devices deemed to be
unrecoverable as of December 31, 1996.
12. STATEMENT OF CASH FLOWS INFORMATION
Cash and cash equivalents include highly liquid debt instruments with an
original maturity of three months or less. As of December 31, 1997, cash
equivalents also include investments in money market instruments, which are
carried at fair market value. Cash payments made for interest for the years
ended December 31, 1995, 1996, and 1997 were approximately $71.2 million, $115.5
million, and $143.5 million, respectively, net of $15.9 million of interest
capitalized during the year ended December 31, 1997. There were no significant
federal or state income taxes paid or refunded for the years ended December 31,
1995, 1996, and 1997.
13. EMPLOYEE BENEFIT PLANS
The Company has adopted a plan to provide retirement benefits under the
provisions of Section 401(k) of the Internal Revenue Code (the Code) for all
employees who have completed a specified term of service. Effective January 1,
1996, Company contributions equaled 50% of employee contributions up to a
maximum of 6% of the employee's compensation. Employees may elect to contribute
up to 15% of their compensation on a pre-tax basis, not to exceed the maximum
amount allowed as determined by the Code. The Company's contributions aggregated
approximately $0.5 million in 1995, $1.9 million in 1996, and $2.2 million in
1997.
14. STOCK PURCHASE RIGHTS
In September 1994, the Board of Directors of the Company adopted a Stock
Purchase Rights Plan and declared a distribution of one common share purchase
right for each outstanding share of the Company's Common
38
<PAGE> 39
Stock. As of September 28, 1994, certificates representing shares of the
Company's Common Stock also represent ownership of one common share purchase
right.
Generally, the rights will become exercisable only if a person or group (i)
acquires 20% or more of the Company's Common Stock or (ii) announces a tender
offer that would result in ownership of 20% or more of the Company's Common
Stock or (iii) is declared to be an "Adverse Person" by the Board of Directors.
Adverse Person includes any person or group who owns at least 10% of the
Company's Common Stock and attempts an action that would adversely impact the
Company.
Once a person or group has acquired 20% or more of the outstanding Common
Stock of the Company, each right may entitle its holder (other than the 20%
person or group) to purchase, at an exercise price of $150, shares of Common
Stock of the Company (or of any company that acquires the Company) at a price
equal to 50% of their current market price. Under certain circumstances, the
Continuing Directors (as defined in the rights plan) may exchange the rights for
Common Stock (or equivalent securities) on a one-for-one basis.
Until declaration of an Adverse Person, or ten (10) days after public
announcement that any person or group has acquired 20% or more of the Common
Stock of the Company, the rights are redeemable at the option of the Board of
Directors, in certain cases with the concurrence of the Continuing Directors.
Thereafter, they may be redeemed by the Continuing Directors in connection with
certain acquisitions not involving any acquiring person or Adverse Person or in
certain circumstances following a disposition of shares by the acquiring person
or Adverse Person. The redemption price is $0.01 per right. The rights will
expire on September 27, 2004, unless redeemed prior to that date.
15. ACQUISITIONS
During 1995, the Company acquired certain paging assets of Comtech, Inc. --
Paging Division; SNET Paging, Inc. and its wholly owned subsidiary, TNI
Associates, Inc.; two subsidiaries of PageAmerica Group, Inc.; Page Florida;
International Paging Corp.; and Celpage, Inc. -- Atlanta Branch, including
various frequencies and approximately 343,000 units in service for an aggregate
cost of approximately $123.6 million.
The following represents the unaudited pro forma results of operations as
if the above acquisitions had occurred as of January 1, 1995, after giving
effect to certain adjustments, including amortization of intangibles resulting
from the allocation of the purchase price and interest expense on acquisition
debt.
<TABLE>
<CAPTION>
YEAR ENDED
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) DECEMBER 31, 1995
-----------------
<S> <C>
Total revenues $ 665,235
Operating income 46,411
Net loss (54,422)
Net loss per share (basic and diluted) (0.53)
</TABLE>
The pro forma results given above are not necessarily indicative of what
actually would have occurred if the acquisitions had been in effect during the
period presented, and is not intended to be a projection of future results or
trends.
39
<PAGE> 40
16. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial information for the two years ended December 31, 1997
is summarized below.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
1997
- ----
<S> <C> <C> <C> <C>
Services, rent and maintenance
revenues $ 188,880 $ 199,584 $ 210,611 $ 219,386
Product sales 36,368 33,666 35,753 36,728
--------- --------- --------- ---------
Total revenues 225,248 233,250 246,364 256,114
Cost of products sold (31,357) (28,805) (30,341) (30,984)
--------- --------- --------- ---------
193,891 204,445 216,023 225,130
Operating income (loss) (188) 6,120 8,263 (6,687)(1)
Loss before extraordinary item (37,314) (31,963) (29,401) (42,725)(1)
Extraordinary loss -- (15,544) -- --
Net loss (37,314) (47,507) (29,401) (42,725)(1)
Net loss per share (basic and diluted):
Loss before extraordinary item (0.36) (0.31) (0.29) (0.42)(1)
Extraordinary loss -- (0.15) -- --
Net loss per share (0.36) (0.46) (0.29) (0.42)(1)
1996
- ----
Services, rent and maintenance
revenues $ 158,775 $ 167,036 $ 175,725 $ 184,424
Product sales 27,598 32,143 35,967 40,819
--------- --------- --------- ---------
Total revenues 186,373 199,179 211,692 225,243
Cost of products sold (23,352) (27,124) (30,855) (35,316)
--------- --------- --------- ---------
163,021 172,055 180,837 189,927
Operating income (loss) 15,725 10,987 8,860 (14,675)(2)
Net loss (12,106) (18,532) (21,994) (51,688)(2)
Net loss per share (basic and diluted) (0.12) (0.18) (0.21) (0.50)(2)
</TABLE>
(1) Operating loss includes a $12.6 million non-recurring charge related to the
write down of certain subscriber devices to their net realizable value.
(2) Operating loss includes a $22.5 million non-recurring charge related to
the provision to write off subscriber devices.
40
<PAGE> 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No disclosure required.
---------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference from the Registrant's definitive proxy
statement for the Annual Meeting of Shareowners on May 21, 1998, pages 3 through
5, under the caption "Proposal No. 1 -- Election of Two Directors."
Information regarding the executive officers is included in Item 4 of this
Form 10-K.
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, is incorporated herein by reference from the
Registrant's definitive proxy statement for the Annual Meeting of Shareowners on
May 21, 1998, page 17, under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference from the Registrant's definitive proxy
statement for the Annual Meeting of Shareowners on May 21, 1998, pages 5
through 12, under the captions "Proposal No. 1 -- Election of Two Directors
- -- Compensation of Directors" and "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference from the Registrant's definitive proxy
statement for the Annual Meeting of Shareowners on May 21, 1998, pages 2 through
5, under the captions "Beneficial Ownership of Common Stock" and "Proposal
No. 1 -- Election of Two Directors."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference from the Registrant's definitive proxy
statement for the Annual Meeting of Shareowners on May 21, 1998, page 12,
under the caption "Contracts Relating to Employment."
41
<PAGE> 42
----------------------
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
The financial statements listed in the accompanying index to
financial statements and financial statement schedules are filed as
part of this report.
2. Financial Statements Schedules.
The schedule listed in the accompanying index to financial statements
and financial statement schedules is filed as part of this report.
3. Exhibits.
The exhibits listed in the accompanying index to exhibits are filed as
part of this annual report.
(b) Reports on Form 8-K.
On January 8, 1998, the Company filed a Current Report on Form 8-K
relating to the retirement of George M. Perrin from the Company's
Board of Directors, effective January 31, 1998.
On February 13, 1998, the Company filed a Current Report on Form 8-K
relating to the announcement of Restructuring.
42
<PAGE> 43
PAGING NETWORK, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[ITEM 14 (a)]
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors 25
Consolidated Balance Sheets as of
December 31, 1997 and 1996 27
For each of the three years in the
period ended December 31, 1997:
Consolidated Statements of Operations 26
Consolidated Statements of Cash Flows 28
Consolidated Statements of Shareowners' Deficit 29
Notes to Consolidated Financial Statements 30
Consolidated financial statement schedule for each of the
three years in the period ended December 31, 1997:
II - Valuation and qualifying accounts 44
Report of Independent Auditors 45
</TABLE>
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements, including the notes thereto.
43
<PAGE> 44
PAGING NETWORK, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1995, 1996, AND 1997
--------------------------------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING COSTS AND AND OTHER BALANCE AT
OF PERIOD EXPENSES ADJUSTMENTS END OF PERIOD
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
1995 $ 3,806 $ 12,209 $ 11,311 $ 4,704
1996 4,704 14,033 13,743 4,994
1997 4,994 18,343 16,667 6,670
Allowance for inventory obsolescense:
1995 $ 1,716 $ 403 $ 774 $ 1,345
1996 1,345 756 (319) 2,420
1997 2,420 9,868 4,064 8,224
</TABLE>
44
<PAGE> 45
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareowners
Paging Network, Inc.
We have audited the consolidated financial statements of Paging Network, Inc. as
of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, and have issued our report thereon dated February 9,
1998. Our audits also included Schedule II - Valuation and Qualifying Accounts.
This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
February 9, 1998
45
<PAGE> 46
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: March 20, 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: March 20, 1998 By: /s/ Mark A. Knickrehm
-------------------------------------
Mark A. Knickrehm
Executive Vice President and
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
49
<PAGE> 47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
PAGING NETWORK, INC.
Date: March 20, 1998 By: /s/ John P. Frazee, Jr.
-------------------------------------
John P. Frazee, Jr.
Chairman of the Board of Directors,
President, Chief Executive Officer,
and Director
Date: March 20, 1998 By: /s/ Richard C. Alberding
-------------------------------------
Richard C. Alberding, Director
Date: March 20, 1998 By: /s/ Bryan C. Cressey
-------------------------------------
Bryan C. Cressey, Director
Date: March 20, 1998 By: /s/ John S. Llewellyn, Jr.
-------------------------------------
John S. Llewellyn, Jr., Director
Date: March 20, 1998 By: /s/ Lee M. Mitchell
-------------------------------------
Lee M. Mitchell, Director
Date: March 20, 1998 By: /s/ Carl D. Thoma
-------------------------------------
Carl D. Thoma, Director
Date: March 20, 1998 By: /s/ Roy A. Wilkens
-------------------------------------
Roy A. Wilkens, Director
50
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant, as
amended (1)
3.3 By-laws of the Registrant, as amended (1)
4.1 Articles Sixth, Seventh, Eighth, Twelfth and Thirteenth of the
Restated Certificate of Incorporation of the Registrant, as
amended (1)
4.2 Articles II, III, and VII and Section 1 of Article VIII of the
Registrant's Bylaws, as amended (1)
4.3 Form of Indenture (2)
4.4 Article V, Sections I, VI, and VII of the Registrant's
By-laws, as amended (4)
9 None
10.1 1982 Incentive Stock Option Plan, as amended and restated (1)
10.2 Form of Stock Option Agreement executed by recipients of
options granted under the 1982 Incentive Stock Option Plan (1)
10.3 Form of Management Agreement executed by recipients of options
granted under the 1982 Incentive Stock Option Plan (1)
10.4 Form of Vesting Agreement executed by recipients of options
granted under the 1982 Incentive Stock Option Plan (1)
10.5 1991 Stock Option Plan (1)
10.6 Form of Stock Option Agreement executed by recipients of
options granted under the 1991 Stock Option Plan (1)
10.7 Form of Indemnification Agreement executed by recipients of
options granted under the 1991 Stock Option Plan (1)
10.8 Form of First Amendment to Vesting Agreement executed by
recipients of options granted under the 1982 Incentive Stock
Option Plan (1)
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)
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.12 Amendment No. 1 dated as of December 12, 1995 to the Amended
and Restated Credit Agreement dated as of May 2, 1995 among
the Registrant, NationsBank of Texas, N.A., Toronto Dominion
(Texas), Inc., The First National Bank of Boston, and certain
other lenders (5)
10.13 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)
10.14 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)
10.15 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)
10.16 1991 Stock Option Plan, as amended and approved by shareowners
on May 22, 1997 (7)
10.17 1992 Stock Option Plan for Directors, as amended and restated
and approved by shareowners on May 22, 1997 (7)
10.18 1997 Restricted Stock Option Plan and approved by shareowners
on May 22, 1997 (7)
10.19 Employment Agreement dated as of August 4, 1997 among the
Registrant and John P. Frazee, Jr. (8)
10.20 1992 Stock Option Plan for Directors, as amended and restated
on December 10, 1997 (9)
10.21 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 (9)
10.22 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 (9)
12 Ratio of Earnings to Fixed Charges for the years ended
December 31, 1993, 1994, 1995, 1996, and 1997 (9)
22 List of the Registrant's Subsidiaries (9)
23 Consent of Independent Auditors (9)
27 Financial Data Schedule (9)
-------------------------------------------------------------
(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.
</TABLE>
<PAGE> 50
DESCRIPTION
-----------
<TABLE>
<C> <S>
(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) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997.
(9) Filed herewith.
</TABLE>
<PAGE> 1
EXHIBIT 10.20
PAGING NETWORK, INC.
1992 STOCK OPTION PLAN FOR DIRECTORS
(As Amended and Restated December 10, 1997)
1. Purpose. The purpose of this Plan is to advance the interests
of PAGING NETWORK, INC. (the "Company") by providing an opportunity for
non-employee directors of the Company to purchase Common Stock of the Company
through the exercise of options granted under the Plan and, on an elective
basis, to receive grants of options on shares or shares in lieu of directors
fees.
2. Effective Date. This 1992 Stock Option Plan for Directors (the
"Plan") became effective on May 21, 1992 (the "Effective Date"), the date it
was adopted by the Board of Directors of, the Company (the "Board") and
approved by the stockholders of the Company. The Plan was amended and restated
by the Board on January 9, 1997, subject to stockholder approval, which was
given on May 22, 1997.
3. Stock Subject to the Plan. Awards of Common Stock and options
to purchase shares of the $.01 par value common stock of the Company ("Common
Stock") may be granted under the Plan. At no time shall the number of shares of
Common Stock then outstanding which are attributable to the grant of shares
under the Plan or the exercise of options granted under the Plan plus the
number of shares then issuable upon exercise of outstanding options granted
under the Plan exceed 750,000 shares, subject, however, to the adjustment
provisions of Paragraph 9 of the Plan. Any shares subject to an option which
for any reason expires or is terminated unexercised as to such shares may again
be the subject of an option under the Plan. The shares delivered under the Plan
may, in whole or in part, be either authorized but unissued shares or issued
shares reacquired by the Company.
4. Options.
(a) Nonelective Grants.
(i) Initial Election. On the day of a person's
initial election as a director, each eligible director who is not an employee
of the Company shall receive an option to purchase 45,000 shares of Common
Stock.
(ii) Subsequent Grants. On the day immediately
following the date on which an eligible director's most recently granted option
under this Plan (other than as an Elective Grant, defined in subsection (b)
below) has become exercisable in full, such director shall receive a further
option to purchase 45,000 shares of Common Stock.
<PAGE> 2
-2-
(b) Elective Grants.
(i) Grant & Conditions Thereto. Subject to the
following qualifications, any eligible director shall receive a grant under the
Plan of either (x) that whole number of shares of Common Stock having a fair
market value equal to or most nearly approaching the amount of the director's
annual retainer and meeting fees, as the case may be, as and when otherwise
payable in cash or (y) an option, granted on the second Monday of January
beginning in January, 1997, to purchase that whole number of shares of Common
Stock resulting in an option having a value, determined under the method and
assumptions for valuing options most recently employed for purposes of the
Company's annual proxy statement to stockholders, equal to or most nearly
approaching the amount of the director's annual retainer fee for the year and
the meetings fees payable to the director assuming his attendance at each of
the Board meetings, and meetings of committees of the Board of which he is a
member, for the coming year. Grants of shares or options pursuant to this
Section 4(b) are here referred to as "Elective Grants."
(ii) Election Procedures. To receive an Elective
Grant with respect to any calendar year's retainer and meetings fees, a
director must elect in writing to receive shares or options in lieu of the
Company's payment in cash of the directors' annual retainer and meeting fees
for such year. Any such election shall be made by written notice to the Company
to forego any cash payment of the retainer and meeting fees taken into
consideration in determining the number of shares subject to such Grant, such
notice to be given prior to the beginning of that calendar year (or on or prior
to May 22, 1997, in the case of Elective Grants to otherwise be made in respect
of 1997). Such election shall not affect his or her right to cash compensation
in accordance with the Company's director compensation policies as in effect
from time to time for any number of Board or committee meetings attended in a
calendar year in excess of the number taken into account in determining the
number of shares subject to an Elective Grant in option form made to the
director in January of that year. Such election shall specify whether the
director wishes to receive an Elective Grant of shares, or of options, as
provided above. Combinations of shares and options for the same calendar year
are not permitted. Each such election shall be irrevocable as to a calendar
year once that year begins, except that in the event the stockholders should
fail to approve this amended and restated Plan, all such elections, shall be
immediately revoked and the director promptly paid in cash any fees theretofore
withheld pursuant to such election. Any such election may be of continuing
effect, i.e., to carry over from year to year, until revoked as to a year or
years subsequent to the year in which revoked.
(c) Effect of Lack of Shares. In the event that on any
date on which shares or options are to be granted hereunder, there is not a
sufficient number of shares
<PAGE> 3
-3-
available to implement fully the grants then to be made, then each such
director entitled to a grant at such time shall receive a pro rata portion of
the grant contemplated by the preceding provisions. In addition, if the grants
which are to be made but cannot be fully implemented are Elective Grants, then
the director's agreement to forego fees shall be deemed automatically revoked
to the same extent.
5. Administration. The Plan shall be administered by the
Committee. The members of the Committee shall be elected by the Board, which
shall have the discretion to remove any member of the Committee for any reason.
Subject to the provisions of the Plan, the Committee shall have full power to
construe and interpret the Plan and to establish, amend and rescind rules and
regulations for its administration. Any decisions made with respect thereto
shall be final and binding on the Company, any director receiving grants
hereunder and all other persons.
6. Duration of the Plan. This Plan shall terminate on January 20,
2002 unless terminated earlier pursuant to Paragraph 10, and no options or
shares may be granted thereafter.
7. Eligibility. Any person who is a director of the Company and
who is not an employee of the Company and who has not been an employee of the
Company during the 24 months preceding the date of grant is eligible to have an
option granted to him or her and to elect to receive Elective Grants.
8. Terms and Conditions of Options. Options granted under the
Plan shall be evidenced by stock option agreements in such form and containing
such terms and conditions as the Committee shall determine; provided, however,
that such agreements shall evidence among their terms and conditions the
following:
(a) Price. The purchase price per share of Common Stock
payable upon the exercise of each option granted hereunder shall be 100% of the
fair market value of the stock on the day the option is granted or, in the
event there is no fair market value available on the day the option is granted,
on the date next following the day the option is granted for which a fair
market value is available.
(b) Number of Shares. Each option agreement shall specify
the number of shares to which it pertains.
(c) Exercise of Options. In general, each option grant
shall be exercisable for the full amount or for any part thereof and at such
intervals or in such installments as the Committee may determine at the time it
grants such option; provided, however, that no option shall be exercisable with
respect to any shares later than ten years after the date of the grant of such
option. However, Elective Grants of options shall become exercisable as to
one-twelfth, two-twelfths, and so on, of the number of shares covered by each
such Grant (or the nearest lower number of whole shares, if less) on the
<PAGE> 4
-4-
last day of the first through twelfth calendar months to end subsequent to the
date such Grant was made (including the January in which such grant was made).
Notwithstanding the foregoing, no option grant pursuant to this amended and
restated Plan, Elective Grant or otherwise, may be exercised until the
shareholders of the Company shall have approved this amended and restated Plan.
(d) Notice of Exercise and Payment. An option shall be
exercisable only by delivery of a written notice to the Company's Treasurer or
any other officer of the Company designated by the Committee to accept such
notices on its behalf, specifying the number of shares for which it is
exercised. If shares to be purchased are not at that time effectively
registered under the Securities Act of 1933, as amended, the optionee shall
include with such notice a letter, in form and substance satisfactory to the
Company, confirming that the shares are being purchased for the optionee's own
account for investment and not with a view to distribution and acknowledging
the consequences for resale of absence of registration. Payment shall be made
in full at the time the option is exercised. Payment shall be made either by
(i) check, (ii) if permitted by the Committee and stated in the option
agreement, by delivery and assignment to the Company of shares of Common Stock
having a value equal to the option price, or (iii) by a combination of (i) and
(ii). The value of the Common Stock for such purpose shall be its fair market
value as of the date the option is exercised, as determined in accordance with
procedures to be established by the Committee.
(e) Withholding Taxes, Delivery of Shares. The Company's
obligation to deliver shares of Common Stock under the Plan or upon exercise of
an option, in whole or in part, shall be subject to the optionee's satisfaction
of all applicable federal, state and local tax withholding obligations.
(f) Non-Transferability. No option shall be transferable
by the optionee otherwise than by will or the laws of descent and distribution,
and each option shall be exercisable during the optionee's lifetime only by
the optionee (or the optionee's guardian or legal representative).
(g) Termination of Options. Each option agreement shall
contain provisions for the termination of the options granted thereunder if the
optionee ceases for any reason to be a director of the Company no more
favorable to the optionee than the following:
(i) if the optionee ceases to be a director of
the Company for any reason other than disability or death, he may at any time
within a period of three months after he ceased to be a director exercise each
of his options to the extent that the option was exercisable by him on the date
on which he ceased to be a director;
(ii) if the optionee ceases to be a director of
the Company because of disability within the meaning of Section 22(e)(3) of the
Code, he
<PAGE> 5
-5-
may at any time within a period of one year after such termination exercise his
option to the extent that the option was exercisable by him on the date he
ceased to be a director; and
(iii) if the optionee dies at a time when he might
have exercised the option, then his estate, personal representative or
beneficiary to whom it has been transferred pursuant to Paragraph 8(f) hereof
may, at any time within a period of one year after the optionee's death, or the
termination of the option pursuant to this Plan, whichever is earlier, exercise
it to the extent the optionee might have exercised it at the time of his death.
(h) Rights as Stockholder. An optionee shall have no
rights as a stockholder with respect to any shares covered by his option until
the date the option has been exercised and the full purchase price for such
shares has been received by the Company.
9. Stock Dividends; Stock Splits; Stock Combinations;
Recapitalizations. Appropriate adjustment shall be made in the maximum number
of shares of Common Stock subject to the Plan and in the number, kind, and
option price of shares covered by outstanding options granted hereunder to give
effect to any stock dividends, stock splits, stock combinations,
recapitalizations and other similar changes in the capital structure of the
Company after the effective date of the Plan.
10. Merger; Sale of Assets; Dissolution. Except as otherwise
determined by the Committee, if the Company is merged or consolidated into a
new surviving company and the holders of the Company's voting securities (on a
fully-diluted basis) immediately prior to the merger or consolidation own less
than a majority of the ordinary voting power to elect directors of the new
surviving company (on a fully-diluted basis), or if there is a sale of all or
substantially all of the Company's assets or capital stock in any transaction
or series of related transactions, then (i) ten business days before any such
occurrence, every option outstanding hereunder shall become immediately
exercisable in full, to the extent not then exercised, and (ii) upon such
occurrence, every option outstanding hereunder will terminate, to the extent
not then exercised. In the event of a change of the Common Stock resulting from
a merger or similar reorganization other than as described in the preceding
sentence, the number and kind of shares which thereafter may be optioned and
sold under the Plan and the number and kind of shares then subject to options
granted hereunder and the price per share thereof shall be appropriately
adjusted, in such manner as the Committee may deem equitable, to prevent
substantial dilution or enlargement of the rights available or granted
hereunder.
11. Termination or Amendment of Plan. The Board may at any time
terminate the Plan, or make such changes in or additions to the Plan as it
deems advisable without further action on the part of the stockholders of the
Company, provided:
<PAGE> 6
-6-
(a) that no such termination or amendment shall adversely
affect or impair any then outstanding option or any shares at the time subject
to options without the consent of the optionee holding such option; and
(b) that any such amendment which requires stockholder
approval in order to comply with applicable provisions of the Code, rules
promulgated pursuant to Section 16 of the Securities Exchange Act of 1934,
applicable state law, or NASD or exchange listing requirements shall be subject
to approval by the stockholders of the Company within one year from the
effective date of such amendment and shall be null and void if such approval is
not obtained.
<PAGE> 1
EXHIBIT 10.21
FIRST AMENDMENT TO THE LOAN AGREEMENT
DATED as of the 18th day of April, 1997.
AMONG:
PAGING NETWORK OF CANADA INC.
(the "Borrower")
- and -
THE TORONTO-DOMINION BANK, as administrative
agent
(the "Administrative Agent")
- and -
THE TORONTO-DOMINION BANK and such other
financial institutions as become "Banks"
under the Loan Agreement
(collectively, the "Banks")
WHEREAS the Borrower, the Administrative Agent and the Banks entered
into a loan agreement dated as of the 5th day of June, 1996 (the "Loan
Agreement") pursuant to which the Banks agreed to establish credit facilities in
favour of the Borrower;
AND WHEREAS the Borrower, the Administrative Agent and the Banks have
agreed that the Loan Agreement shall be amended, all as more particularly set
forth herein;
NOW THEREFORE, the parties agree as follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINED TERMS. Unless there is something in the subject matter or
context inconsistent therewith, all defined terms in the Loan Agreement shall
have the same meaning in this Agreement and all conventions of interpretation
established in the Loan Agreement shall have the same effect in this Agreement.
<PAGE> 2
-2-
1.2 GOVERNING LAW. This Agreement shall be governed by and interpreted in
accordance with the Applicable Laws of the Province of Ontario and the
Applicable Laws of Canada applicable therein.
ARTICLE 2
AMENDMENTS
2.1 AMENDMENT TO ARTICLE 1. Section 1 of the Loan Agreement is amended by:
(a) the addition, in the appropriate alphabetical order, of the following
definitions:
"DEPOSIT AGREEMENT GUARANTY" shall mean that certain Guaranty in favour
of the Administrative Agent for the benefit of the Banks, given by PNCHI
on April 18, 1997.
"MADTEL HOLDINGS OBLIGATIONS" shall mean the indebtedness, liabilities
and obligations of MadTel Holdings to the Administrative Agent and the
Banks under, or in connection with, the MadTel Holdings Agreement.
"PNCHI" shall mean Paging Network Canadian Holdings, Inc., a Delaware
corporation.
"PNII" shall mean Paging Network International, Inc., a Delaware
corporation.
"PNNV" shall mean Paging Network International Inc., N.V., a
Netherlands Corporation.
"UNCOLLATERALIZED PORTION OF THE COMMITMENT" shall mean, as of any date,
that portion of the Available Commitment in excess of the Minimum
Permitted Collateral Amount.
(b) the deletion of the definitions of "AVAILABLE COMMITMENT", "COMMITMENT",
"DEPOSIT AGREEMENT", "MATURITY DATE", "MINIMUM PERMITTED COLLATERAL
AMOUNT", "PERMITTED COLLATERAL", "RESTRICTED PAYMENT", "TOTAL DEBT",
"TOTAL SUBSCRIBERS" and "UNITS IN SERVICE" and by the substitution
therefor, in the appropriate alphabetical order, of the following:
"AVAILABLE COMMITMENT" shall mean, as of any date, the greater of:
<PAGE> 3
-3-
(a) the Equivalent Canadian Dollar Amount of the aggregate amount of
Permitted Collateral held on such date by the Administrative Agent
pursuant to the Deposit Agreement; and
(b) $41,250,000, but only to the extent that (i) the Minimum Permitted
Collateral Amount is held on such date by the Administrative Agent
pursuant to the Deposit Agreement, and (ii) as of the end of the most
recently completed fiscal quarter for which financial statements have
been delivered pursuant to Sections 6.1 or 6.2, as applicable, hereof,
either (A) for the two (2) most recently completed fiscal quarters, the
Leverage Ratio is less than 7.0 to 1, or (B)(i) the aggregate number of
Units in Service is greater than or equal to 50,000, and (ii) Gross
Revenue for the Borrower Group on a combined basis is greater than or
equal to $1,600,000; or
(c) $52,000,000, but only to the extent that (i) the Minimum Permitted
Collateral Amount is held on such date by the Administrative Agent
pursuant to the Deposit Agreement, and (ii) as of the end of the most
recently completed fiscal quarter for which financial statements have
been delivered pursuant to Sections 6.1 or 6.2, as applicable, hereof,
either (A) for the two (2) most recently completed fiscal quarters, the
Leverage Ratio is less than 6.0 to 1, or (B)(i) the aggregate number of
Units in Service is greater than or equal to 120,000, and (ii) Gross
Revenue for the Borrower Group on a combined basis is greater than or
equal to $3,750,000; or
(d) $60,000,000, but only to the extent that (i) the Minimum Permitted
Collateral Amount is held on such date by the Administrative Agent
pursuant to the Deposit Agreement, and (ii) as of the end of the most
recently completed fiscal quarter for which financial statements have
been delivered pursuant to Sections 6.1 or 6.2, as applicable, hereof,
either (A) for the two (2) most recently completed fiscal quarters, the
Leverage Ratio is less than 5.0 to 1, or (B)(i) the aggregate number of
Units in Service is greater than or equal to 180,000, and (ii) Gross
Revenue for the Borrower Group on a combined basis is greater than or
equal to $5,000,000; or
(e) $75,000,000, but only to the extent that (i) the Minimum Permitted
Collateral Amount is held on such date by the Administrative Agent
pursuant to the Deposit Agreement, and (ii) as of the end of the most
recently completed fiscal quarter for which financial statements have
been delivered pursuant to Sections 6.1 or 6.2, as applicable, hereof,
either (A) for the two (2) most recently completed fiscal quarters, the
<PAGE> 4
-4-
Leverage Ratio is less than 5.0 to 1, or (B)(i) the aggregate number
of Units in Service is greater than or equal to 250,000, and (ii)
Gross Revenue for the Borrower Group on a combined basis is greater
than or equal to $7,000,000;
provided, however, that the Available Commitment shall not at anytime
exceed the Commitment on such date; and provided, further, however,
that from and after the date of any event which, with respect to the
Licenses, results in a violation of the Canadian ownership and control
rules promulgated under the Radio Communication Act (Canada), the
Telecommunications Act (Canada) and any replacement act or any
regulations made under any such act, the Available Commitment shall be
as set forth in clause (a) of this definition.
"COMMITMENT" shall mean the several obligations of the Banks to make
Accommodations to the Borrower pro rata, in accordance with their
respective Commitment Ratios, in an aggregate amount up to $75,000,000
pursuant to the terms hereof, as such obligations may be reduced from time
to time pursuant to the terms hereof.
"DEPOSIT AGREEMENT" shall mean that certain Deposit Agreement dated as of
April 18, 1997 between PNCHI and the Administrative Agent for the benefit
of the Banks.
"MATURITY DATE" shall mean December 31, 2004, or as the case may be, such
earlier date as payment of the Obligations shall be due (whether by
acceleration, reduction of the Commitment to zero or otherwise).
"MINIMUM PERMITTED COLLATERAL AMOUNT" shall mean, as of any date:
(a) prior to April 1, 2001, $32,500,000 (or the Equivalent U.S. Dollar
Amount); provided, however, that if the Available Commitment is in
excess of $60,000,000 solely as a result of the application of clause
(e)(ii)(B) of the definition of Available Commitment, then prior to
making any Accommodations to the Borrower in respect of the Available
Commitment in excess of $60,000,000, the Minimum Permitted Collateral
Amount must increase by $.556 (or the Equivalent U.S. Dollar Amount)
for each additional Dollar of Accommodations made to the Borrower; and
(b) on or after April 1, 2001, the lesser of (i) $32,500,000 (or the
Equivalent U.S. Dollar Amount), and (ii) the product of (A) 54.2%
times (B) the Commitment as of such date; provided, however, that if
<PAGE> 5
-5-
the Available Commitment is in excess of $60,000,000 solely as a
result of the application of clause (e)(ii)(B) of the definition
of Available Commitment, then prior to making any Accommodations
to the Borrower in respect of the Available Commitment in excess
of $60,000,000, the Minimum Permitted Collateral Amount must
increase by $.556 (or the Equivalent U.S. Dollar Amount) for each
additional Dollar of Accommodations made to the Borrower.
"PERMITTED COLLATERAL" shall mean (a) U.S. Dollars, (b) marketable,
direct obligations of the United States of America maturing within
ninety (90) days of the date of purchase, or (c) other collateral
acceptable to the Banks at any time and from time to time held by or
on deposit with the Administrative Agent pursuant to the Deposit
Agreement as collateral for the Deposit Agreement Guaranty.
"RESTRICTED PAYMENT" shall mean (a) any direct or indirect
distribution, dividend or other payment to any Person (other than to
the Borrower or any wholly-owned Subsidiary of the Borrower) on account
of any general or limited partnership interest in, or shares of Capital
Stock or other securities of, the Borrower or any of its Subsidiaries
(other than dividends payable solely in the Capital Stock of such
Person and stock splits), including, without limitation, any direct or
indirect distribution, dividend or other payment to any Person (other
than to the Borrower or any wholly-owned Subsidiary of the Borrower) on
account of any warrants or other rights or options to acquire shares of
Capital Stock of the Borrower or any of its Subsidiaries; (b) any
payment of principal of, or interest on, or payment into a sinking fund
for the retirement of, or any defeasance of subordinated debt; (c) any
payment of principal of, or interest on, Indebtedness referred to in
Section 7.1(g) or 7.1(h) hereof; and (d) any management, consulting or
similar fees, or any interest thereon, payable by the Borrower or any
of its Subsidiaries to any partner, shareholder or Affiliate of any
such Person.
"TOTAL DEBT" shall mean, as of any date with respect of any Person and
its Subsidiaries on a consolidated basis, the difference between (a)
the aggregate amount of Indebtedness for Money Borrowed, determined in
accordance with GAAP, minus (b) the aggregate of: (i) the aggregate
principal amount of Collateralized Advances and Face Amount of
Collateralized Bankers' Acceptances outstanding on such date, and (ii)
the aggregate amount of Indebtedness permitted to be incurred in
accordance with Sections 7.1(g) and 7.1(h) hereof outstanding on such
date.
<PAGE> 6
-6-
"TOTAL SUBSCRIBERS" shall mean, as of any date, the aggregate number
of subscribers for the Units in Service of the Borrower Group on a
combined basis.
"UNITS IN SERVICE" shall mean, as of any date, for the Borrower Group
on a combined basis, the aggregate number of wireless messaging units
that are operating pursuant to valid and binding agreements with
customers, in respect of which the customer is obligated to make
payments at regular intervals in amounts consistent with standard
industry practice, where the customer is delinquent less than sixty
(60) days (unless the amount for such customer which is delinquent
sixty (60) days or more constitutes less than thirty-five (35)
percent of such customer's current monthly billing), except for
governmental or corporate customers delinquent less than ninety (90)
days that (a) have been serviced by such Person for at least six (6)
months and have a consistent prior payment history and in which the
customer has made a payment within the last forty-five (45) days equal
to or greater than the amount of the current monthly billing for such
customer, or (b) have a regular history of paying on their accounts
amounts equal to or greater than the amount of the current monthly
billing for such customer and whose total account receivable is (i)
no older and (ii) no greater in dollar amount, than such account
receivable was on the date ninety (90) days prior.
2.2 AMENDMENTS TO ARTICLE 2. Article 2 of the Loan Agreement is amended by:
(a) the deletion of Section 2.8 and the substitution therefor of the
following:
"Section 2.8 Mandatory Commitment Reductions. Commencing March 31,
2001 and at the end of each fiscal quarter thereafter, the
Uncollateralized Portion of the Commitment as in effect on March 30,
2001, shall be automatically and permanently reduced by the
percentages set forth below:
<PAGE> 7
-7-
<TABLE>
<Caption)
QUARTERLY PERCENTAGE
REDUCTION OF THE
UNCOLLATERALIZED PORTION OF
THE COMMITMENT IN EFFECT
DATES OF COMMITMENT REDUCTION ON MARCH 30, 2001
----------------------------- ---------------------------
<S> <C>
March 31, 2001, June 30, 2001, September 30, 2.500%
2001 and December 31, 2001
March 31, 2002, June 30, 2002, September 30,
2002 and December 31, 2002 7.500%
March 31, 2003, June 30, 2003, September 30,
2003 and December 31, 2003 7.500%
March 31, 2004, June 30, 2004, September 30,
2004 and December 31, 2004 7.500%
</TABLE>
The Borrower shall make repayment of the Accommodations outstanding
under the Commitment, together with accrued interest thereon, on or
before the effective date of each reduction in the Commitment under
this Section 2.8, such that the aggregate principle amount of the
Accommodations outstanding at no time exceeds the Commitment as so
reduced. In addition, any remaining unpaid principal and interest
under the Commitment shall be due and payable in full on the Maturity
Date."
(b) the deletion of the reference to "June 30, 1999" in the nineteenth
line of Section 2.9(b) and the substitution therefor of
"March 31, 2001".
2.3 AMENDMENTS TO ARTICLE 6. Article 6 of the Loan Agrement is amended by:
(a) the deletion of Section 6.1 and the substitution therefor of the
following:
"Section 6.1 Quarterly Financial Statements and Information. Within
forty-five (45) days after the last day of each of the first three (3)
fiscal quarters of the Borrower during any fiscal year:
(a) a copy of the balance sheets of (i) the Borrower on a
consolidated and consolidating (unconsolidated) basis with its
Subsidiaries, and (ii) the Borrower Group on a combined basis, in
each case as at the end of such quarter and as of the end of the
preceding fiscal year; and
(b) the related statements of operations and the related statements
of cash flows of (i) the Borrower on a consolidated basis with
its Subsidiaries, and (ii) the Borrower Group on a combined
basis, in each cash for such
<PAGE> 8
-8-
quarter and for the elapsed portion of the year ended with the
last day of such quarter,
all of which shall set forth in comparative form such figures as at
the end of and for such quarter and appropriate prior period, shall
provide consolidated and consolidating (unconsolidated) figures with
respect to any acquisitions consummated during such quarter, and shall
be certified by the chief financial officer of the Borrower to have
been prepared in accordance with GAAP and to present fairly in all
material respects the financial position of (x) the Borrower on a
consolidated and consolidating (unconsolidated) basis with its
Subsidiaries, and (y) the Borrower Group on a combined basis, in each
case as at the end of such quarter and the results of operations for
such quarter, and for the elapsed portion of the year ended with the
last day of such quarter, subject only to normal year-end and audit
adjustments and the absence of footnotes."
(b) the deletion of Section 6.2 and the substitution therefor of the
following:
"Section 6.2 Annual Financial Statements and Information. Within
ninety (90) days after the end of each fiscal year of the Borrower:
(a) a copy of the audited consolidated and consolidating
(unconsolidated) balance sheets of the Borrower and its
Subsidiaries as of the end of such fiscal year and for the
previous fiscal year and the related audited consolidated and
consolidating (unconsolidated) statements of operations for such
fiscal year and for the previous fiscal year, the related audited
consolidated and consolidating (unconsolidated) statements of
cash flow and stockholders' equity for such fiscal year and for
the previous fiscal year, which shall be accompanied by an
opinion of Ernst & Young or such other independent auditor
acceptable to the Administrative Agent, certified to have been
prepared in accordance with GAAP and to present fairly in all
material respects the financial position of the Borrower on a
consolidated and consolidating (unconsolidated) basis with its
Subsidiaries as at the end of such fiscal year; and
(b) for the Borrower Group on a combined basis, a balance sheet as of
the end of such fiscal year and for the previous fiscal year and
the related statement of operations for such fiscal year and for
the previous fiscal year, the related statements of cash flow and
stockholders' equity for such fiscal year and for the previous
fiscal year, which may be prepared on an unaudited basis, but
must be certified by the chief financial officer of the Borrower
to have been prepared in accordance with GAAP, and to present
fairly in all material respects the financial position of the
Borrower Group
<PAGE> 9
-9-
as at the end of such fiscal year and the results of operations
for such fiscal year, subject only to normal year-end and audit
adjustments and the absence of footnotes."
2.4 AMENDMENTS TO ARTICLE 7. Article 7 of the Loan Agreement is amended by:
(a) the deletion from Section 7.1(e) of the word "and" at the end of
Section 7.1(e); the deletion of the period (".") at the end of Section
7.1(f) and the substitution therefor of a semi-colon (";"); and the
addition of Sections 7.1(g) and 7.1(h), as follows:
(g) Indebtedness of the Borrower to MadTel Holdings so long as (i)
the Indebtedness is not secured by any Lien, (ii) the
corresponding debt instruments are assigned to the Administrative
Agent as security for the MadTel Holdings Obligations, and (iii)
any such Indebtedness is fully postponed to the Obligations. In
this regard, prior to incurring any such Indebtedness, the
Administrative Agent shall receive a specific assignment of
receivables from MadTel Holdings, which will include a
postponement from MadTel Holdings, together with any additional
documentation and opinions required by the Administrative Agent,
all in form and substance satisfactory to the Administrative
Agent, in its sole discretion; and
(h) Indebtedness of the Borrower to PNII, PNNV or PNCHI so long as
(i) the borrower is a wholly-owned Subsidiary of PNII, PNNV or
PNCHI, as the case may be, (ii) the Indebtedness is not secured
by any Lien, (iii) the Administrative Agent receives a limited
recourse guaranty from PNII, PNNV or PNCHI, as the case may be,
(iv) the corresponding debt instruments are assigned to the
Administrative Agent as security for the obligations of PNII,
PNNV or PNCHI, as the case may be, under their respective
guaranties, (v) any such Indebtedness is fully postponed to the
Obligations, and (vi) the Administrative Agent shall have
received any additional documentation and opinions which it deems
appropriate in respect of, inter alia, corporate existence, and
due authorization, execution, delivery and enforceability of the
guaranties referred to in this Section 7.1(h). In this regard,
prior to incurring any such Indebtedness, the Administrative
Agent shall receive a limited recourse guaranty from the
creditors referred to in this Section 7.1(h), which will include
an assignment and postponement from such creditors, together with
any additional documentation and opinions required by the
Administrative Agent, all in form and substance satisfactory to
the Administrative Agent, in its sole discretion.
<PAGE> 10
- 10 -
(b) the deletion of Section 7.7 and the substitution therefor of the
following:
"Section 7.7 Restricted Payments and Purchases. The Borrower shall
not, and shall not permit any of its Subsidiaries to, directly or
indirectly, declare or make any Restricted Payment or Restricted
Purchase, except that so long as no Default hereunder then exists
or would be caused thereby the Borrower may make (a) distributions
to PNII, PNNV or PNCHI so long as the Leverage Ratio is below 4.00
to 1 (both before and after giving effect to such distribution),
and (b) payments of principal of any Indebtedness referred to in
Section 7.1(g) hereof."
(c) the deletion of Section 7.8 and the substitution therefor of the
following:
"Section 7.8 Leverage Ratio. Commencing July 1, 1999, the
Borrower shall not permit the Leverage Ratio to exceed the ratios
set forth below during the periods indicated:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
July 1, 1999 through 6.00:1
December 31, 1999
January 1, 2000 through 5.00:1
June 30, 2000
July 1, 2000 through 4.00:1
December 31, 2000
January 1, 2001 through 3.00:1
June 30, 2001
July 1, 2001 and thereafter 2.50:1"
</TABLE>
(d) the deletion of Section 7.9 and the substitution therefor of the
following:
"Section 7.9 Annualized Operating Cash Flow to Pro Forma Debt
Service. Commencing January 1, 2000, the Borrower shall not
permit the ratio of Annualized Operating Cash Flow to Pro Forma
Debt Service for the Borrower Group on a combined basis to be
less than the ratios set forth below for the periods indicated:
<PAGE> 11
-11-
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
January 1, 2000 through 1.25:1
June 30, 2002
July 1, 2002 and thereafter 1.50:1"
</TABLE>
(e) the deletion of Section 7.10 and the substitution therefor of the
following:
"Section 7.10 Total Debt Per Subscriber. The Borrower shall not at any time
permit the Total Debt for the Borrower Group on a combined basis divided by
Total Subscribers to be greater than or equal to $175.00."
(f) the deletion of Section 7.11 and the substitution therefor of the
following:
"Section 7.11 Capital Expenditures. The Borrower shall not permit the
aggregate Capital Expenditures for the Borrower Group on a combined basis
to exceed the following for the fiscal years indicated:
<TABLE>
<CAPTION>
Period Total Capital Expenditures
------ --------------------------
<S> <C>
At December 31, 1996 $45,000,000.00
At December 31, 1997 $22,000,000.00
At December 31, 1998 $19,000,000.00
and thereafter
</TABLE>
No amount of unused Total Capital Expenditure availability may be carried
forward from 1996 to 1997 or subsequent fiscal years. Commencing in 1997,
to the extent not used in any fiscal year, an amount equal to the lessor of
(a) the unused Total Capital Expenditure availability (exclusive of any
carry forwards from prior periods) for such fiscal year, and (b) 15% of the
Total Capital Expenditure availability shown above (exclusive of any carry
forwards from prior periods) for such fiscal year, may be carried forward,
in whole or in part, to subsequent fiscal years until fully utilized."
(g) the deletion of Section 7.12 and the substitution therefor of the
following:
"Section 7.12 Minimum Revenue Test. Commencing March 31, 1997 and
continuing for each fiscal quarter through the fiscal quarter ending June
30, 1999, the Borrower shall not permit the aggregate Gross Revenue for the
Borrower Group on a combined basis to be less than the following for the
fiscal quarters indicated:
<PAGE> 12
-12-
<TABLE>
<CAPTION>
Quarter Ending Minimum Revenue
-------------- ---------------
<S> <C>
03/31/97 $1,380,000
06/30/97 $1,930,000
09/30/97 $2,550,000
12/31/97 $3,360,000
03/31/98 $4,040,000
06/30/98 $4,620,000
09/30/98 $5,440,000
12/31/98 $6,130,000
03/31/99 $6,860,000
06/30/99 $7,550,000"
</TABLE>
(h) the deletion of Section 7.13 and the substitution therefor of the
following:
"Section 7.13 Minimum Units in Service. Commencing March 31, 1997 and
continuing for each fiscal quarter through the fiscal quarter ending June 30,
1999, the Borrower shall not permit the minimum number of Units in Service to
be less than the following for the fiscal quarters indicated:
<TABLE>
<CAPTION>
Minimum Units
Quarter Ending In Service
-------------- -------------
<S> <C>
03/31/97 45,000
06/30/97 62,000
09/30/97 80,000
12/31/97 100,000
03/31/98 120,000
06/30/98 147,000
09/30/98 173,000
12/31/98 200,000
03/31/99 234,000
06/30/99 274,000"
</TABLE>
ARTICLE 3
CONDITIONS PRECEDENT
Without limiting the application of Article 3 of the Loan Agreement, the
effectiveness of this Agreement is subject to the prior or contemporaneous
fulfilment of each of the following conditions:
<PAGE> 13
-13-
(a) the transfer of the Permitted collateral from PageNet to PNCHI and
the receipt by the Administrative Agent of documentation confirming
such transfer;
(b) the replacement of the PageNet Guaranty with the Deposit Agreement
Guaranty;
(c) the execution and delivery of the Deposit Agreement by PNCHI;
(d) MadTel Holdings shall execute a specific assignment of receivables
(including a postponement) in favour of the Administrative Agent, in
respect of any present and future Indebtedness of the Borrower to
MadTel Holdings contemplated by Section 7.1(g) of the Loan Agreement;
(e) PNCHI shall execute a limited recourse guaranty in favour of the
Administrative Agent, which will include an assignment and
postponement of any present and future Indebtedness of the Borrower
to PNCHI contemplated by Section 7.1(h) of the Loan Agreement;
(f) the delivery of legal opinions of (i) Bingham, Dana & Gould, LLP,
counsel to PNCHI, in respect of, inter alia, the authorization,
execution and delivery of the Deposit Agreement Guaranty, the
Deposit Agreement and the guaranty referred to in Section 3(e) above,
(ii) Powell, Goldstein, Frazer & Murphy in respect of the
enforceability of the Deposit Agreement Guaranty and the Deposit
Agreement, and (iii) McCarthy Tetrault, counsel to the Borrower, in
respect of, inter alia, the authorization, execution, delivery and
enforceability of the specific assignment of receivables referred to
in Section 3(d) above, and the enforceability of the guaranty referred
to in Section 3(e) above, all in form and substance satisfactory to
each Bank and the Administrative Agent; and
(g) the Administrative Agent and each Bank shall have received payment of
all fees due and payable in connection with the execution of this
Agreement.
ARTICLE 4
MISCELLANEOUS
4.1 CONFIRMATION
Except as hereinbefore provided, the parties hereto confirm the terms
and conditions of the Loan Agreement and acknowledge that the Loan Agreement as
amended hereby is in full force and effect.
<PAGE> 14
-14-
4.2 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all such separate counterparts
shall together constitute one and the same original.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date first above written.
BORROWER: PAGING NETWORK OF CANADA INC.
Per: /s/ G. FITZGERALD
----------------------------------
(Authorized Signing Officer)
Per: /s/ A. DYKSTRA
----------------------------------
(Authorized Signing Officer)
ADMINISTRATIVE AGENT: THE TORONTO-DOMINION BANK
Per: /s/ B. CHAMBERS
----------------------------------
(Authorized Signing Officer)
Per:
----------------------------------
(Authorized Signing Officer)
BANK: THE TORONTO-DOMINION BANK
Per: /s/ KEN KLASSEN
----------------------------------
(Authorized Signing Officer)
Per: /s/ JEREMY WALKER
----------------------------------
(Authorized Signing Officer)
<PAGE> 1
EXHIBIT 10.22
FIRST AMENDMENT TO THE LOAN AGREEMENT
DATED as of the 18th day of April, 1997.
A M O N G:
MADISON TELECOMMUNICATIONS
HOLDINGS INC.
(the "Borrower")
-and-
THE TORONTO-DOMINION BANK, as
administrative agent
(the "Administrative Agent")
-and-
THE TORONTO-DOMINION BANK and such
other financial institutions as become "Banks"
under the Loan Agreement
(collectively, the "Banks")
WHEREAS the Borrower, the Administrative Agent and the Banks entered into
a loan agreement dated as of the 5th day of June, 1996 (the "Loan Agreement")
pursuant to which the Banks agreed to establish credit facilities in favour of
the Borrower;
AND WHEREAS the Borrower, the Administrative Agent and the Banks have
agreed that the Loan Agreement shall be amended, all as more particularly set
forth herein;
NOW THEREFORE, the parties agree as follows:
ARTICLE 1
INTERPRETATION
1.1 Defined Terms. Unless there is something in the subject matter or context
inconsistent therewith, all defined terms in the Loan Agreement shall have the
same meaning
<PAGE> 2
-2-
in this Agreement and all conventions of interpretation established in the Loan
Agreement shall have the same effect in this Agreement.
1.2 GOVERNING LAW. This Agreement shall be governed by and interpreted in
accordance with the Applicable Laws of the Province of Ontario and the
Applicable Laws of Canada applicable therein.
ARTICLE 2
AMENDMENTS
2.1 AMENDMENT TO ARTICLE 1. Section 1 of the Loan Agreement is amended by:
(a) the addition, in the appropriate alphabetical order, of the following
definitions:
"DEPOSIT AGREEMENT GUARANTY" shall mean that certain Guaranty in
favour of the Administrative Agent for the benefit of the Banks, given
by PNCHI on April 18, 1997.
"PAGENET CANADA OBLIGATIONS" shall mean the indebtedness, liabilities
and obligations of PageNet Canada to the Administrative Agent and the
Banks under, or in connection with, the PageNet Canada Agreement.
"PNCHI" shall mean Paging Network Canadian Holdings, Inc., a Delaware
corporation.
"UNCOLLATERALIZED PORTION OF THE COMMITMENT" shall mean, as of any
date, that portion of the Available Commitment in excess of the
Minimum Permitted Collateral Amount.
(b) the deletion of the definitions of "AVAILABLE COMMITMENT",
"COMMITMENT", "DEPOSIT AGREEMENT", "LETTER OF CREDIT", "MATURITY
DATE", "MINIMUM PERMITTED COLLATERAL AMOUNT", "PERMITTED COLLATERAL",
"RESTRICTED PAYMENT", "TOTAL DEBT", "TOTAL SUBSCRIBERS" and "UNITS IN
SERVICE", and by the substitution therefor, in the appropriate
alphabetical order, of the following:
"AVAILABLE COMMITMENT" shall mean, as of any date, the greater of:
(a) the Equivalent Canadian Dollar Amount of the aggregate amount of
Permitted Collateral held on such date by the Administrative
Agent pursuant to the Deposit Agreement; and
<PAGE> 3
-3-
(b) $22,500,000, but only to the extent that (i) the Minimum Permitted
Collateral Amount is held on such date by the Administrative Agent
pursuant to the Deposit Agreement, and (ii) as of the end of the most
recently completed fiscal quarter for which financial statements have
been delivered pursuant to Sections 6.1 or 6.2, as applicable, hereof,
either (A) for the two (2) most recently completed fiscal quarters,
the Leverage Ratio is less than 7.0 to 1, or (B) (i) the aggregate
number of Units in Service is greater than or equal to 50,000, and
(ii) Gross Revenue for the Borrower Group on a combined basis is
greater than or equal to $1,600,000; or
(c) $25,500,000, but only to the extent that (i) the Minimum Permitted
Collateral Amount is held on such date by the Administrative Agent
pursuant to the Deposit Agreement, and (ii) as of the end of the most
recently completed fiscal quarter for which financial statements have
been delivered pursuant to Sections 6.1 or 6.2, as applicable, hereof,
either (A) for the two (2) most recently completed fiscal quarters,
the Leverage Ratio is less than 6.0 to 1, or (B) (i) the aggregate
number of Units in Service is greater than or equal to 120,000, and
(ii) Gross Revenue for the Borrower Group on a combined basis is
greater than or equal to $3,750,000; or
(d) $30,000,000, but only to the extent that (i) the Minimum Permitted
Collateral Amount is held on such date by the Administrative Agent
pursuant to the Deposit Agreement, and (ii) as of the end of the most
recently completed fiscal quarter for which financial statements have
been delivered pursuant to Sections 6.1 or 6.2, as applicable, hereof,
either (A) for the two (2) most recently completed fiscal quarters,
the Leverage Ratio is less than 5.0 to 1, or (B) (i) the aggregate
number of Units in Service is greater than or equal to 180,000, and
(ii) Gross Revenue for the Borrower Group on a combined basis is
greater than or equal to $5,000,000;
provided, however, that the Available Commitment shall not at anytime
exceed the Commitment on such date; and provided, further, however, that
from and after the date of any event which, with respect to the Licenses,
results in a violation of the Canadian ownership and control rules
promulgate under the Radiocommunication Act (Canada), the
Telecommunications Act (Canada) and any replacement act or any regulations
made under any such act, the Available Commitment shall be as set forth in
clause (a) of this definition.
"COMMITMENT" shall mean the several obligations of the Banks to make
Accommodations to the Borrower pro rata, in accordance with their
respective
<PAGE> 4
-4-
Commitment Ratios, in an aggregate amount of up to
$30,000,000 pursuant to the terms hereof, as such obligations
may be reduced from time to time pursuant to the terms
hereof.
"DEPOSIT AGREEMENT" shall mean, collectively, that certain
Deposit Agreement dated as of April 18, 1997 between PNCHI
and the Administrative Agent for the benefit of the Banks,
the Deposit Agreement dated June 5, 1996 between Madison
Venture Corporation and the Administrative Agent for the
benefit of the Banks and any other Deposit Agreement entered
into by the Administrative Agent after the Agreement Date.
"LETTER OF CREDIT" shall mean that certain irrevocable letter
of credit in the original principal amount of at least
$3,500,000 issued in favour of the Administrative Agent for
the benefit of the Banks and all renewals thereof and
substitutions therefor, all of which shall be in form and
substance satisfactory to the Administrative Agent.
"MATURITY DATE" shall mean December 31, 2004, or as the case
may be, such earlier date as payment of the Obligations shall
be due (whether by acceleration, reduction of the Commitment
to zero or otherwise).
"MINIMUM PERMITTED COLLATERAL AMOUNT" shall mean, as of any
date, (a) prior to April 1, 2001, $17,500,000 (or the
Equivalent U.S. Dollar Amount) and (b) on or after April 1,
2001, the lesser of (i) $17,500,000 (or the Equivalent U.S.
Dollar Amount), and (ii) the product of (A) 58.333334% times
(B) the Commitment as of such date.
"PERMITTED COLLATERAL" shall mean (a) the Letter of Credit
(or the proceeds thereof in Dollars if such Letter of Credit
is drawn), (b) U.S. Dollars, (c) marketable, direct
obligations of the United States of America maturing within
ninety (90) days of the date of purchase, or (d) other
collateral acceptable to the Banks at any time and from time
to time held by or on deposit with the Administrative Agent
pursuant to the Deposit Agreement as collateral for the
Deposit Agreement Guaranty.
"RESTRICTED PAYMENT" shall mean (a) any direct or indirect
distribution, dividend or other payment to any Person (other
than to the Borrower or any wholly-owned Subsidiary of the
Borrower) on account of any general or limited partnership
interest in, or shares of Capital Stock or other securities
of, the Borrower or any of its Subsidiaries (other than
dividends payable solely in the Capital Stock of such Person
and stock splits), including, without limitation, any direct
or indirect distribution, dividend or other payment to any
Person (other than to the Borrower or any wholly-owned
Subsidiary of the
<PAGE> 5
-5-
Borrower) on account of any warrants or other rights or options
to acquire shares of Capital Stock of the Borrower or any of its
Subsidiaries; (b) any payment of principal of, or interest on, or
payment into a sinking fund for the retirement of, or any
defeasance of subordinated debt; (c) any payment of principal of,
or interest on, Indebtedness referred to in Section 7.1(g)
hereof; and (d) any management, consulting or similar fees, or
any interest thereon, payable by the Borrower or any of its
Subsidiaries to any partner, shareholder or Affiliate of any such
Person.
"TOTAL DEBT" shall mean, as of any date with respect of any
Person and its Subsidiaries on a consolidated basis, the
difference between (a) the aggregate amount of Indebtedness for
Money Borrowed, determined in accordance with GAAP, minus (b) the
aggregate of: (i) the aggregate principal amount of
Collateralized Advances and Face Amount of Collateralized
Bankers' Acceptances outstanding on such date, and (ii) the
aggregate amount of Indebtedness permitted to be incurred in
accordance with Section 7.1(g) hereof outstanding on such date.
"TOTAL SUBSCRIBERS" shall mean, as of any date, the aggregate
number of subscribers for the Units in Service of the Borrower
Group on a combined basis.
"UNITS IN SERVICE" shall mean, as of any date, for the Borrower
Group on a combined basis, the aggregate number of wireless
messaging units that are operating pursuant to valid and binding
agreements with customers, in respect of which the customer is
obligated to make payments at regular intervals in amounts
consistent with standard industry practice, where the customer is
delinquent less than sixty (60) days (unless the amount for such
customer which is delinquent sixty (60) days or more constitutes
less than thirty-five (35) percent of such customer's current
monthly billing), except for governmental or corporate customers
delinquent less than ninety (90) days that (a) have been serviced
by such Person for at least six (6) months and have a consistent
prior payment history and in which the customer has made a
payment within the last forty-five (45) days equal to or greater
than the amount of the current monthly billing for such customer;
or (b) have a regular history of paying on their accounts amounts
equal to or greater than the amount of the current monthly
billing for such customer and whose total account receivable is
(i) no older and (ii) no greater in dollar amount, than such
account receivable was on the date ninety (90) days prior.
<PAGE> 6
-6-
2.2 Amendments to Article 2. Article 2 of the Loan Agreement is amended by:
(a) the deletion of Section 2.8 and the substitution therefor of the
following:
"Section 2.8 Mandatory Commitment Reductions. Commencing March
31, 2001 and at the end of each fiscal quarter thereafter, the
Uncollateralized Portion of the Commitment as in effect on March
30, 2001, shall be automatically and permanently reduced by the
percentages set forth below:
<TABLE>
<CAPTION>
Quarterly Percentage
Reduction of the
Uncollateralized Portion of
the Commitment in Effect
Dates of Commitment Reduction on March 30, 2001
----------------------------- ---------------------------
<S> <C> <C>
March 31, 2001, June 30, 2001, September 30, 2.500%
2001 and December 31, 2001
March 31, 2002, June 30, 2002, September 30, 7.500%
2002 and December 31, 2002
March 31, 2003, June 30, 2003, September 30, 7.500%
2003 and December 31, 2003
March 31, 2004, June 30, 2004, September 30, 7.500%
2004 and December 31, 2004
</TABLE>
The Borrower shall make a repayment of the Accommodations
outstanding under the Commitment, together with accrued interest
thereon, on or before the effective date of each reduction in the
Commitment under this Section 2.8, such that the aggregate
principal amount of the Accommodations outstanding at no time
exceeds the Commitment as so reduced. In addition, any remaining
unpaid principal and interest under the Commitment shall be due
and payable in full on the Maturity Date.
(b) the deletion of the reference to "June 30, 1999" in the
nineteenth line of Section 2.9(b) and the substitution therefor
of "March 31, 2001".
2.3 Amendments to Article 6. Article 6 of the Loan Agreement is amended by:
(a) the deletion of Section 6.1 and the substitution therefor of the
following:
"Section 6.1 Quarterly Financial Statements and Information.
Within forty-five (45) days after the last day of each of the
first three (3) fiscal quarters of the Borrower during any fiscal
year:
<PAGE> 7
- 7 -
(a) a copy of the balance sheets of (i) the Borrower on a
consolidated and consolidating (unconsolidated) basis with its
Subsidiaries, and (ii) the Borrower Group on a combined basis, in
each case as at the end of such quarter and as of the end of the
preceding fiscal year; and
(b) the related statements of operations and the related statements
of cash flows of (i) the Borrower on a consolidated basis with
its Subsidiaries, and (ii) the Borrower Group on a combined
basis, in each case for such quarter and for the elapsed portion
of the year ended with the last day of such quarter,
all of which shall set forth in comparative form such figures as at
the end of and for such quarter and appropriate prior period, shall
provide consolidated and consolidating (unconsolidated) figures with
respect to any acquisitions consummated during such quarter, and shall
be certified by the chief financial officer of the Borrower to have
been prepared in accordance with GAAP and to present fairly in all
material respects the financial position of (x) the Borrower on a
consolidated and consolidating (unconsolidated) basis with its
Subsidiaries, and (y) the Borrower Group on a combined basis, in each
case as at the end of such quarter and the results of operations for
such quarter, and for the elapsed portion of the year ended with the
last day of such quarter, subject only to normal year-end audit
adjustments and the absence of footnotes."
(b) the deletion of Section 6.2 and the substitution therefor of the
following:
"Section 6.2 Annual Financial Statements and Information. Within
ninety (90) days after the end of each fiscal year of the Borrower:
(a) a copy of the audited consolidated and consolidating
(unconsolidated) balance sheets of the Borrower and its
Subsidiaries as of the end of such fiscal year and for the
previous fiscal year and the related audited consolidated and
consolidating (unconsolidated) statements of operations for such
fiscal year and for the previous fiscal year, the related audited
consolidated and consolidating (unconsolidated) statements of
cash flow and stockholders' equity for such fiscal year and for
the previous fiscal year, which shall be accompanied by an
opinion of Ernst & Young or such other independent auditor
acceptable to the Administrative Agent, certified to have been
prepared in accordance with GAAP and to present fairly in all
material respects the financial position of the Borrower on a
consolidated and consolidating (unconsolidated) basis with its
Subsidiaries as at the end of such fiscal year; and
<PAGE> 8
- 8 -
(b) for the Borrower Group on a combined basis, a balance sheet as of
the end of such fiscal year and for the previous fiscal year and
the related statement of operations for such fiscal year and for
the previous fiscal year, the related statements of cash flow and
stockholders' equity for such fiscal year and for the previous
fiscal year, which may be prepared on an unaudited basis, but
must be certified by the chief financial officer of the Borrower
to have been prepared in accordance with GAAP, and to present
fairly in all material respects the financial position of the
Borrower Group as at the end of such fiscal year and the results
of operations for such fiscal year, subject only to normal
year-end and audit adjustments and the absence of footnotes."
2.4 AMENDMENTS TO ARTICLE 7. Article 7 of the Loan Agreement is amended by:
(a) the deletion from Section 7.1(e) of the word "and" at the end of
Section 7.1(e); the deletion of the period (".") at the end of
Section 7.1(f) and the substitution therefor of the word "and";
and the addition of Section 7.1(g), as follows:
"(g) Indebtedness of the Borrower to PageNet Canada so long as
(i) the Indebtedness is not secured by any Lien, (ii) the
corresponding debt instruments are assigned to the
Administrative Agent as security for the PageNet Canada
Obligations, and (iii) any such Indebtedness is fully
postponed to the Obligations. In this regard, prior to
incurring any such Indebtedness, the Administrative Agent
shall receive a specific assignment of receivables from
PageNet Canada, which will include a postponement from
PageNet Canada, together with any additional documentation
and opinions required by the Administrative Agent, all in
form and substance satisfactory to the Administrative
Agent, in its sole discretion."
(b) the deletion of Section 7.7 and the substitution therefor of the
following:
"Section 7.7 Restricted Payments and Purchases. The Borrower
shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, declare or make any Restricted Payment or
Restricted Purchase, except that so long as no Default hereunder
then exists or would be caused thereby the Borrower may make (a)
distributions to Paging Network International, Inc., Paging
Network International Inc., N.V., PNCHI or Madison Venture
Corporation so long as the Leverage Ratio is below 4.00 to 1
(both before and after giving effect to such distribution), and
(b) payments of principal of any Indebtedness referred to in
Section 7.1(g) hereof."
<PAGE> 9
- 9 -
(c) the deletion of Section 7.8 and the substitution therefor of the
following:
"Section 7.8 Leverage Ratio. Commencing July 1, 1999, the
Borrower shall not permit the Leverage Ratio to exceed the ratios
set forth below during the periods indicated:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
July 1, 1999 through 6.00:1
December 31, 1999
January 1, 2000 through 5.00:1
June 30, 2000
July 1, 2000 through 4.00:1
December 31, 2000
January 1, 2001 through 3.00:1
June 30, 2001
July 1, 2001 and thereafter 2.50:1"
</TABLE>
(d) the deletion of Section 7.9 and the substitution therefor of the
following:
"Section 7.9 Annualized Operating Cash Flow to Pro Forma Debt
Service. Commencing January 1, 2000, the Borrower shall not
permit the ratio of Annualized Operating Cash Flow to Pro Forma
Debt Service for the Borrower Group on a combined basis to be
less than the ratios set forth below for the periods indicated:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
January 1, 2000 through 1.25:1
June 30, 2002
July 1, 2002 and thereafter 1.50:1"
</TABLE>
(e) the deletion of Section 7.10 and the substitution therefor of the
following:
"Section 7.10 Total Debt Per Subscriber. The Borrower shall not
at any time permit the Total Debt for the Borrower Group on a
combined basis divided by Total Subscribers to be greater than or
equal to $175.00."
<PAGE> 10
- 10 -
(f) the deletion of Section 7.11 and the substitution therefor of the
following:
"Section 7.11 Capital Expenditures. The Borrower shall not permit
the aggregate Capital Expenditures for the Borrower Group on a
combined basis to exceed the following for the fiscal years
indicated:
<TABLE>
<CAPTION>
Period Total Capital Expenditures
------ --------------------------
<S> <C>
At December 31, 1996 $45,000,000.00
At December 31, 1997 $22,000,000.00
At December 31, 1998 $19,000,000.00
and thereafter
</TABLE>
No amount of unused Total Capital Expenditure availability may be
carried forward from 1996 to 1997 or subsequent fiscal years.
Commencing in 1997, to the extent not used in any fiscal year, an
amount equal to the lesser of (a) the unused Total Capital
Expenditure availability (exclusive of any carry forwards from
prior periods) for such fiscal year, and (b) 15% of the Total
Capital Expenditure availability shown above (exclusive of any
carry forwards from prior periods) for such fiscal year, may be
carried forward, in whole or in part, to subsequent fiscal years
until fully utilized."
(g) the deletion of Section 7.12 and the substitution therefor of the
following:
"Section 7.12 Minimum Revenue Test. Commencing March 31, 1997 and
continuing for each fiscal quarter through the fiscal quarter
ending June 30, 1999, the Borrower shall not permit the aggregate
Gross Revenue for the Borrower Group on a combined basis to be
less than the following for the fiscal quarters indicated:
<TABLE>
<CAPTION>
Quarter Ending Minimum Revenue
-------------- ---------------
<S> <C> <C>
03/31/97 $1,380,000
06/30/97 $1,930,000
09/30/97 $2,550,000
12/31/97 $3,360,000
03/31/98 $4,040,000
06/30/98 $4,620,000
09/30/98 $5,440,000
12/31/98 $6,130,000
03/31/99 $6,860,000
06/30/99 $7,550,000"
</TABLE>
<PAGE> 11
-11-
(g) the deletion of Section 7.13 and the substitution therefor of the
following:
"Section 7.13 Minimum Units in Service. Commencing March 31, 1997
and continuing for each fiscal quarter through the fiscal quarter
ending June 30, 1999, the Borrower shall not permit the minimum
number of Units in Service to be less than the following for the
fiscal quarters indicated:
<TABLE>
<CAPTION>
Minimum Units
Quarter Ending In Service
-------------- -------------
<S> <C> <C>
03/31/97 45,000
06/30/97 62,000
09/30/97 80,000
12/31/97 100,000
03/31/98 120,000
06/30/98 147,000
09/30/98 173,000
12/31/98 200,000
03/31/99 234,000
06/30/99 274,000"
</TABLE>
ARTICLE 3
CONDITIONS PRECEDENT
Without limiting the application of Article 3 of the Loan
Agreement, the effectiveness of this Agreement is subject to the prior or
contemporaneous fulfilment of each of the following conditions:
(a) the transfer of certain Permitted Collateral from PageNet to
PNCHI and the receipt by the Administrative Agent of
documentation confirming such transfer;
(b) the replacement of the PageNet Guaranty with the Deposit
Agreement Guaranty;
(c) the execution and delivery of the Deposit Agreement by PNCHI;
(d) PageNet Canada shall execute a specific assignment of receivables
(including a postponement) in favour of the Administrative Agent,
in respect of any present and future Indebtedness of the Borrower
to PageNet Canada contemplated by Section 7.1(g) of the Loan
Agreement;
<PAGE> 12
-12-
(e) the delivery of legal opinions of (i) Bingham, Dana & Gould, LLP,
counsel to PNCHI, in respect of, inter alia, the authorization,
execution and delivery of the Deposit Agreement Guaranty and the
Deposit Agreement, (ii) Powell, Goldstein, Frazer & Murphy, in respect
of the enforceability of the Deposit Agreement Guaranty and the
Deposit Agreement; and (iii) McCarthy Tetrault, counsel to the
Borrower, in respect of, inter alia, the authorization, execution,
delivery and enforceability of the specific assignment of receivables
referred to in Section 3(d) above, all in form and substance
satisfactory to each Bank and the Administrative Agent; and
(f) the Administrative Agent and each Bank shall have received payment
of all fees due and payable in connection with the execution of this
Agreement.
ARTICLE 4
MISCELLANEOUS
4.1 CONFIRMATION
Except as hereinbefore provided, the parties hereto confirm the terms and
conditions of the Loan Agreement and acknowledge that the Loan Agreement as
amended hereby is in full force and effect.
4.2 COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, but all of such separate counterparts shall
together constitute one and the same original.
<PAGE> 13
- 13 -
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date first above written.
BORROWER: MADISON TELECOMMUNICATIONS
HOLDINGS INC.
Per: /s/ BRUCE AUNGRE
----------------------------
(Authorized Signing Officer)
Per: /s/ S. GRIPPO
----------------------------
(Authorized Signing Officer)
ADMINISTRATIVE AGENT: THE TORONTO-DOMINION BANK
Per: /s/ B. CHAMBERS
----------------------------
(Authorized Signing Officer)
Per:
----------------------------
(Authorized Signing Officer)
BANK: THE TORONTO-DOMINION BANK
Per: /s/ KEN KLASSEN
----------------------------
(Authorized Signing Officer)
Per: /s/ JEREMY WALKER
----------------------------
(Authorized Signing Officer)
<PAGE> 1
EXHIBIT 12
PAGING NETWORK, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Earnings:
Loss before extraordinary item $ (20,011) $ (17,965) $ (44,201) $(104,320) $(141,403)
Fixed charges, less
capitalized interest 40,479 64,007 118,666 148,055 174,311
--------- --------- --------- --------- ---------
Earnings $ 20,468 $ 46,042 $ 74,465 $ 43,735 $ 32,908
========= ========= ========= ========= =========
Fixed charges:
Interest expense, including
interest capitalized $ 30,225 $ 50,694 $ 98,533 $ 122,753 $ 158,888
Amortization of deferred
financing cost 2,583 3,023 4,313 5,261 8,418
Interest portion of rental
expense 7,671 10,290 15,820 20,041 22,931
--------- --------- --------- --------- ---------
Fixed charges $ 40,479 $ 64,007 $ 118,666 $ 148,055 $ 190,237
========= ========= ========= ========= =========
Ratio of earnings to fixed charges -- -- -- -- --
========= ========= ========= ========= =========
Deficiency of earnings available
to cover fixed charges $ (20,011) $ (17,965) $ (44,201) $(104,320) $(157,329)
========= ========= ========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-45465, Form S-8 No. 33-45690, Form S-8 No. 33-63230, Form S-8
No. 33-76650, Form S-3 No. 33-72456, Form S-3 No. 33-87224, Form S-8 No.
333-18587, Form S-8 No. 333-27603, Form S-8 No. 333-27605, and Form S-8 No.
333-42893) of Paging Network, Inc. and in the related Prospectuses of our
reports dated February 9, 1998, with respect to the consolidated financial
statements and financial statement schedule of Paging Network, Inc. included in
this Annual Report on Form 10-K for the year ended December 31, 1997.
ERNST & YOUNG LLP
Dallas, Texas
March 23, 1998
<PAGE> 1
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of Paging Network, Inc., the
Registrant.
<TABLE>
<CAPTION>
Ownership
Name of Subsidiary Jurisdiction of Incorporation Percentage
------------------ ----------------------------- ----------
<S> <C> <C>
Paging Network of America, Inc. Delaware 100%
Paging Network Canadian Holdings, Inc. Delaware 100%
Paging Network of Colorado, Inc. Delaware 100%
Paging Network of Dallas/Fort Worth, Inc. Delaware 100%
Paging Network Equipment Company, Inc. Delaware 100%
Paging Network Finance Corp. Delaware 100%
Paging Network of Hartford/Springfield, Inc. Delaware 100%
Paging Network of Illinois, Inc. Delaware 100%
Paging Network International, Inc. Delaware 100%
Paging Network of Los Angeles, Inc. Delaware 100%
Paging Network of Massachusetts, Inc. Delaware 100%
Paging Network of Michigan, Inc. Delaware 100%
Paging Network of Minnesota, Inc. Delaware 100%
Paging Network of New Jersey, Inc. Delaware 100%
Paging Network of New York, Inc. New York 100%
Paging Network of Northern California, Inc. Delaware 100%
Paging Network of Ohio, Inc. Delaware 100%
Paging Network of Oregon, Inc. Delaware 100%
Paging Network of Philadelphia, Inc. Delaware 100%
Paging Network of San Antonio, Inc. Delaware 100%
Paging Network of San Francisco, Inc. Delaware 100%
Paging Network Satellite Company, Inc. Delaware 100%
Paging Network Services, Inc. Delaware 100%
Paging Network of Tennessee, Inc. Delaware 100%
Paging Network of Utah, Inc. Delaware 100%
Paging Network of Washington, Inc. Virginia 100%
Paging Network - Central Region, Inc. Delaware 100%
Paging Network - Northeastern Region, Inc. Delaware 100%
Paging Network - Northwestern Region, Inc. Delaware 100%
PageNet de Argentina S.A. Argentina 99%
Paging Network do Brasil S.A. Brazil 17.5%
Paging Network of Canada Inc. Canada 100%
PageNet Chile S.A. Chile 100%
Paging Network International N.V. The Netherlands 100%
Paging Network (UK), Limited England 100%
Madison Telecommunications Holdings, Inc. Canada 80%
Sociedad de Radiotelefoni a Movil, S.A. Spain 25%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,924
<SECURITIES> 0
<RECEIVABLES> 69,958
<ALLOWANCES> 6,670
<INVENTORY> 24,114
<CURRENT-ASSETS> 105,214
<PP&E> 1,387,560
<DEPRECIATION> (469,526)
<TOTAL-ASSETS> 1,597,233
<CURRENT-LIABILITIES> 155,673
<BONDS> 1,779,491
0
0
<COMMON> 1,027
<OTHER-SE> (338,958)
<TOTAL-LIABILITY-AND-EQUITY> 1,597,233
<SALES> 21,028
<TOTAL-REVENUES> 960,976
<CGS> 121,487
<TOTAL-COSTS> 831,981
<OTHER-EXPENSES> 148,911
<LOSS-PROVISION> 18,343
<INTEREST-EXPENSE> 151,380
<INCOME-PRETAX> (141,403)
<INCOME-TAX> 0
<INCOME-CONTINUING> (141,403)
<DISCONTINUED> 0
<EXTRAORDINARY> (15,544)
<CHANGES> 0
<NET-INCOME> (156,947)
<EPS-PRIMARY> (1.53)
<EPS-DILUTED> (1.53)
</TABLE>
