<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
--------- ---------
COMMISSION FILE NO. 0-19494
PAGING NETWORK, INC.
(Exact name of the Registrant as specified in charter)
DELAWARE 04-2740516
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14911 QUORUM DRIVE
DALLAS, TEXAS 75240
(Address of principal executive offices, including zip code)
(972) 801-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date.
Title Shares Outstanding as of October 31, 1999
----------------------------- -----------------------------------------
Common Stock, $ .01 par value 103,960,240
The Company's Common Stock is publicly traded on the Nasdaq Stock Market and the
Chicago Stock Exchange under the symbol "PAGE".
================================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of
December 31, 1998 and September 30, 1999 (Unaudited)............................. 3
Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1998 and 1999 (Unaudited)...... 4
Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1999 (Unaudited)................ 5
Notes to Consolidated Financial Statements............................................ 6
</TABLE>
2
<PAGE> 3
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 3,077 $ 102,961
Accounts receivable, less allowance
for doubtful accounts .............................................. 84,440 77,253
Inventories ............................................................. 6,379 10,278
Prepaid expenses and other assets ....................................... 15,065 12,983
----------- -----------
Total current assets ............................................... 108,961 203,475
Property, equipment, and leasehold improvements, at cost ..................... 1,452,870 1,511,209
Less accumulated depreciation ........................................... (547,599) (727,712)
----------- -----------
Net property, equipment, and leasehold improvements ................ 905,271 783,497
Other non-current assets, at cost ............................................ 629,372 612,231
Less accumulated amortization ........................................... (62,360) (78,318)
----------- -----------
Net other non-current assets ....................................... 567,012 533,913
----------- -----------
$ 1,581,244 $ 1,520,885
=========== ===========
LIABILITIES AND SHAREOWNERS' DEFICIT
Current liabilities:
Accounts payable ........................................................ $ 96,478 $ 109,962
Accrued expenses ........................................................ 49,692 33,800
Accrued interest ........................................................ 43,209 38,585
Accrued restructuring costs, current portion ............................ 8,256 12,521
Customer deposits ....................................................... 22,735 17,785
Deferred revenue ........................................................ 15,874 20,553
----------- -----------
Total current liabilities .......................................... 236,244 233,206
----------- -----------
Long-term obligations ........................................................ 1,815,137 1,999,320
Accrued restructuring costs, non-current portion ............................. 18,765 12,783
Minority interest ............................................................ 1,517 --
Commitments and contingencies ................................................ -- --
Shareowners' deficit:
Common Stock - $.01 par, authorized 250,000,000 shares;
103,640,554 and 103,960,240 shares issued and outstanding
as of December 31, 1998 and September 30, 1999, respectively ............ 1,036 1,040
Paid-in capital ............................................................. 132,950 134,161
Accumulated other comprehensive income ...................................... 2,378 1,161
Accumulated deficit ......................................................... (626,783) (860,786)
----------- -----------
Total shareowners' deficit ......................................... (490,419) (724,424)
----------- -----------
$ 1,581,244 $ 1,520,885
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Services, rent and maintenance revenues ...... $ 239,689 $ 223,063 $ 704,722 $ 696,566
Product sales ................................ 25,382 24,347 80,600 68,969
--------- --------- --------- ---------
Total revenues .......................... 265,071 247,410 785,322 765,535
Cost of products sold ........................ (18,276) (16,374) (62,540) (43,013)
--------- --------- --------- ---------
246,795 231,036 722,782 722,522
Operating expenses:
Services, rent and maintenance .......... 52,643 63,033 158,011 193,705
Selling ................................. 27,284 24,231 72,320 70,223
General and administrative .............. 79,811 84,648 224,035 260,877
Depreciation and amortization ........... 69,059 72,623 213,220 268,171
Provision for asset impairment .......... -- -- -- 17,798
Restructuring charge .................... -- -- 74,000 --
--------- --------- --------- ---------
Total operating expenses ........... 228,797 244,535 741,586 810,774
--------- --------- --------- ---------
Operating income (loss) ...................... 17,998 (13,499) (18,804) (88,252)
Other income (expense):
Interest expense ........................ (35,822) (37,296) (109,353) (111,097)
Interest income ......................... 534 681 1,564 1,986
Minority interest ....................... 862 626 2,174 806
--------- --------- --------- ---------
Total other income (expense) ....... (34,426) (35,989) (105,615) (108,305)
--------- --------- --------- ---------
Loss before cumulative effect of a change in
accounting principle ..................... (16,428) (49,488) (124,419) (196,557)
Cumulative effect of a change in accounting
principle ................................ -- -- -- (37,446)
--------- --------- --------- ---------
Net loss ..................................... $ (16,428) $ (49,488) $(124,419) $(234,003)
========= ========= ========= =========
Net loss per share (basic and diluted):
Loss before cumulative effect of a change in
accounting principle ........................ $ (0.16) $ (0.48) $ (1.20) $ (1.89)
Cumulative effect of a change in
accounting principle ........................ -- -- -- (0.36)
--------- --------- --------- ---------
Net loss per share ............................. $ (0.16) $ (0.48) $ (1.20) $ (2.25)
========= ========= ========= =========
</TABLE>
See accompanying notes
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss .................................................................................... $(124,419) $(234,003)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Provision for asset impairment .................................................. -- 17,798
Cumulative effect of a change in accounting principle ........................... -- 37,446
Restructuring charge ........................................................... 74,000 --
Depreciation..................................................................... 193,242 254,884
Amortization .................................................................... 19,978 13,287
Provision for doubtful accounts ................................................. 13,780 20,896
Amortization of debt issuance costs ............................................. 3,316 3,411
Minority interest ............................................................... (2,174) (806)
Other............................................................................ 4,160 --
Changes in operating assets and liabilities:
Accounts receivable ............................................................. (11,990) (14,841)
Inventories...................................................................... 2,512 (4,066)
Prepaid expenses and other assets ............................................... 2,430 1,939
Accounts payable ................................................................ 11,752 15,132
Accrued expenses and accrued interest ........................................... 3,248 (20,147)
Accrued restructuring costs ..................................................... (2,101) (1,717)
Customer deposits and deferred revenue .......................................... 3,010 (197)
--------- ---------
Net cash provided by operating activities ........................................................ 190,744 89,016
--------- ---------
Investing activities:
Capital expenditures .......................................................................... (171,295) (162,830)
Payments for spectrum licenses ................................................................ (6,044) (3,835)
Business acquisitions and joint venture investments ........................................... (6,528) --
Other, net .................................................................................... 10,873 (9,047)
--------- ---------
Net cash used in investing activities............................................................. (172,994) (175,712)
--------- ---------
Financing activities:
Borrowings of long-term obligations ........................................................... 216,710 321,353
Repayments of long-term obligations ........................................................... (230,907) (135,979)
Proceeds from exercise of stock options ....................................................... 7,607 1,206
--------- ---------
Net cash provided by (used in) financing activities .............................................. (6,590) 186,580
--------- ---------
Net increase in cash and cash equivalents ........................................................ 11,160 99,884
Cash and cash equivalents at beginning of period ................................................. 2,924 3,077
--------- ---------
Cash and cash equivalents at end of period ....................................................... $ 14,084 $ 102,961
========= =========
</TABLE>
See accompanying notes
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(Unaudited)
1. MERGER AGREEMENT AND LIQUIDITY
On November 8, 1999, Paging Network, Inc. (the Company)
announced that the Company had signed a definitive agreement (the
Merger Agreement) to merge (the Merger) with Arch Communications Group,
Inc. (Arch). Under the terms of the Merger Agreement, each share of the
Company's common stock will be exchanged for 0.1247 share of Arch
common stock. Under the terms of the Merger Agreement, the Company's
8.875% senior subordinated notes due 2006, its 10% senior subordinated
notes due 2008, and its 10.125% senior subordinated notes due 2007
(collectively, the Notes), along with all accrued interest thereon,
will be exchanged in a registered exchange offer under which the
holders of each $1,000 of outstanding principal of Notes will receive,
upon consummation of the Merger, approximately 64 shares of common
stock of Arch. The Merger Agreement also requires that certain senior
notes and preferred stock of Arch be converted into Arch common stock
as part of a recapitalization of the combined company.
As part of the Merger, the Company intends to distribute 80.5%
of its interest in Silverlake Communications, Inc., a wholly-owned
subsidiary of the Company doing business as Vast Solutions (Vast
Solutions), to holders of the Notes and the Company's common stock.
Holders of the Notes will receive an effective 68.9% interest in Vast
Solutions, while holders of the Company's common stock will receive an
effective 11.6% interest. The remaining 19.5% interest will be held by
the combined company following the Merger.
The Merger Agreement and related recapitalization of the
combined company require a 97.5% acceptance by the holders of the Notes
and Arch's senior discount noteholders, in addition to the affirmative
votes of a majority of the Company's stockholders, Arch's stockholders,
and Arch's Series C preferred stockholders, to complete the Merger.
Consent of the lenders under the Company's $1 billion revolving credit
facility (the Credit Agreement) is also required. The Merger Agreement
also provides for the Company to file a "pre-packaged" Chapter 11
reorganization plan if the level of acceptances from the holders of the
Notes is below 97.5%, but greater than 66.7%, the level required for
consummation of a "pre-packaged" Chapter 11 reorganization plan.
Consummation of the Merger is subject to completion of the
recapitalization described, customary regulatory review, certain
third-party consents, and the approvals noted above. The Company
anticipates the Merger to be completed during the first half of 2000.
The Company is currently in compliance with the financial
covenants set forth in all of its U.S. and Canadian debt agreements.
The Company is pursuing various efforts to improve the Company's
domestic earnings before interest, income taxes, depreciation, and
amortization (EBITDA) for the fourth quarter of 1999. However, if these
efforts prove unsuccessful, the Company will cease to remain in
compliance with the interest coverage covenant set forth in the
Company's Credit Agreement following the close of the fourth quarter of
1999. In that event, the Company would seek to obtain a waiver for such
non-compliance under the Credit Agreement. If the Company is unable to
obtain a waiver for such non-compliance, the lenders will have various
rights, including the right to accelerate the outstanding indebtedness.
Such acceleration would also result in the Company being in default
under the cross-default provisions of the Notes.
The Company is currently precluded from further borrowings by
the terms of its Notes. As of November 5, 1999, the Company had
approximately $50 million in cash, which, combined with cash expected
to be generated from operations, the Company believes is sufficient to
meet its obligations into the first quarter of 2000. If the Company
does not achieve an improvement in its domestic EBITDA, the Company may
not have sufficient cash or borrowing capacity to meet its obligations
through the first quarter of 2000. The Company is currently exploring
certain strategic and financing alternatives to ensure continued
liquidity through the consummation of the Merger. However, there can be
no assurance that the Company's efforts to obtain additional liquidity
will prove timely or successful or that the Merger will be completed,
and the Company may be required to reduce the level of its operations
and/or file for protection under Chapter 11 of the U.S. Bankruptcy Code
to restructure its obligations, including those under the Notes. Such a
filing would likely have a material impact on the Company's results of
operations and financial position. Furthermore, if the Merger is not
ultimately consummated, the Company may incur significant charges,
including charges for asset impairments and restructuring the Company's
operations.
6
<PAGE> 7
2. THE COMPANY
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,
Canada, and Spain, including service in all of the largest 100 markets
(in population) in the United States, and owns a minority interest in a
wireless messaging company in Brazil. The consolidated financial
statements include the accounts of all of its wholly and majority-owned
subsidiaries. All intercompany transactions have been eliminated.
3. UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim consolidated financial information contained
herein is unaudited but, in the opinion of management, includes all
adjustments, which are of a normal recurring nature, except for the
cumulative effect of a change in accounting principle discussed in Note
4, the provision for asset impairment discussed in Note 5, and the
restructuring charge discussed in Note 6, necessary for a fair
presentation of the financial position, results of operations, and cash
flows for the periods presented. These financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, these financial statements
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. The balance sheet as of December 31, 1998, has been derived
from the audited financial statements as of that date. Results of
operations for the periods presented herein are not necessarily
indicative of results of operations for the entire year. These
financial statements and related notes should be read in conjunction
with the financial statements and notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
4. ACCOUNTING CHANGES
The Company adopted the provisions of Statement of Position
98-5 "Reporting on the Costs of Start-Up Activities" (SOP 98-5),
effective January 1, 1999. SOP 98-5 requires the expensing of all
start-up costs as incurred as well as writing off the remaining
unamortized balance of capitalized start-up costs at the date of
adoption of SOP 98-5. The impact of the Company's adoption of SOP 98-5
was a charge of $37 million representing the cumulative effect of a
change in accounting principle to write-off all unamortized start-up
costs as of January 1, 1999, and an increase in services, rent and
maintenance expenses of $5 million and $16 million, respectively, for
the three and nine months ended September 30, 1999, and a decrease in
depreciation and amortization expense of $1 million and $4 million,
respectively, for the three and nine months ended September 30, 1999.
Effective April 1, 1999, the Company changed the depreciable
lives for its subscriber devices and certain network equipment. The
Company changed the depreciable lives of its subscriber devices from
three years to two years and the depreciable life of certain of its
network equipment from seven years to ten years. The changes resulted
from a review by the Company of the historical usage periods of its
subscriber devices and its network equipment and the Company's
expectations regarding future usage periods for subscriber devices
considering current and projected technological advances. As a result
of these changes, depreciation expense increased by approximately $8
million and $77 million, respectively, during the three and nine months
ended September 30, 1999.
In March 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued Statement
of Position 98-1, "Accounting for the Costs of Computer Software
Developed For of Obtained for Internal Use" (SOP 98-1). SOP 98-1
requires the capitalization of certain costs of developing or acquiring
computer software for internal use. The Company adopted the provisions
of SOP 98-1, effective January 1, 1999. The adoption of SOP 98-1 did
not have a significant impact on the Company's results of operations or
financial position, as the Company's policy for accounting for the
costs of developing or acquiring computer software for internal use
prior to the adoption of SOP 98-1 was generally consistent with the
provisions of SOP 98-1.
7
<PAGE> 8
5. PROVISION FOR ASSET IMPAIRMENT
The Company recorded a provision of $18 million during the
quarter ended March 31, 1999, for the impairment of the assets of the
Company's majority-owned Spanish subsidiaries in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amount. During the
first quarter of 1999, the Company made the decision to narrow its
focus to its North American operations and, as a result, made the
decision to sell or otherwise dispose of its operations in Spain. As a
result of this decision, the Company analyzed the estimated future cash
flows expected to be generated from its Spanish operations and
determined that they would not be sufficient to recover the net book
value of the assets of the subsidiaries and, accordingly, recorded a
provision to write down the assets of the Spanish subsidiaries based on
the estimated value of the Company's investment in its Spanish
subsidiaries as of March 31, 1999. No cash costs have been incurred or
are expected as a result of the provision for the impairment of the
assets of the Company's Spanish subsidiaries.
6. RESTRUCTURING CHARGE
In February 1998, the Company's Board of Directors approved a
restructuring of the Company's domestic operations (the Restructuring).
As part of the Restructuring, the Company is in the process of
reorganizing its operations to expand its sales organization, eliminate
local and redundant administrative operations, and consolidate certain
key support functions. Subject to the potential merger described in
Note 1, the Company expects to eliminate a total of approximately 1,600
positions, including positions already eliminated and 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 (the Centers of Excellence). As a
result of the Restructuring, the Company recorded a charge of $74
million, or $0.72 per share (basic and diluted), during the quarter
ended March 31, 1998. The components of the charge included (in
thousands):
<TABLE>
<S> <C>
Write-down of property and equipment $ 38,900
Lease obligations and terminations 18,900
Severance and related benefits 12,700
Other 3,500
--------
Total restructuring charge $ 74,000
========
</TABLE>
The writedown of property and equipment related to a non-cash
charge to reduce the carrying amount of certain machinery and
equipment, furniture and fixtures, and leasehold improvements that the
Company would not continue to utilize following the Restructuring to
their estimated net realizable value as of the date such assets were
projected to be disposed of or abandoned by the Company, allowing for
the recognition of normal depreciation expense on such assets through
their projected disposal date. The net realizable value of these assets
was determined based on management estimates, which considered such
factors as the nature and age of the assets to be disposed of, the
timing of the assets' disposal, and the method and potential costs of
the disposal. Such estimates are subject to change.
The provision for lease obligations and terminations related
primarily to future lease commitments on local and regional office
facilities that would be closed as part of the Restructuring. The
charge represented future lease obligations, net of projected sublease
income, on such leases past the dates the offices would be closed by
the Company, or, for certain leases, the cost of terminating the leases
prior to their scheduled expiration. Projected sublease income was
based on management estimates, which are subject to change. Cash
payments on the leases and lease terminations will occur over the
remaining lease terms, the majority of which expire prior to 2003.
8
<PAGE> 9
Through the elimination of certain local and regional
administrative operations and the consolidation of certain support
functions, the Company expects to eliminate a total of approximately
1,600 net positions, including positions already eliminated, the
majority of which are non-sales related positions in local and regional
offices. As a result of eliminating these positions, the Company
expects to involuntarily terminate an estimated 1,950 employees. The
majority of the remaining severance and benefits costs to be paid by
the Company will be paid during 2000. The number of positions
eliminated and employees involuntarily terminated may be significantly
impacted if the Merger discussed in Note 1 is consummated.
During the fourth quarter of 1998, the Company identified
additional furniture, fixtures, and equipment that would not be
utilized following the Restructuring, resulting in an additional
non-cash charge of $3 million. This charge was offset by reductions in
the provisions for lease obligations and terminations and severance
costs as a result of refinements to the Company's schedule for local
and regional offices closures. Also as a result of the refinements to
the office closing schedule, the Company adjusted, effective October 1,
1998, the depreciable lives of certain of the assets written down in
the first quarter of 1998, resulting in a decrease in depreciation
expense of approximately $5 million for the third quarter of 1999 and
$15 million for the nine months ended September 30, 1999.
The Company's restructuring activity from January 1, 1999
through September 30, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Beginning Utilization of Reserve Remaining
Reserve Cash Non-Cash Reserve
------- ------- -------- -------
<S> <C> <C> <C> <C>
Lease obligation costs ..... $16,917 $ 527 $ -- $16,390
Severance costs ............ 10,104 1,190 -- 8,914
------- ------- -------- -------
Total ............. $27,021 $ 1,717 $ -- $25,304
======= ======= ======== =======
</TABLE>
7. LONG-TERM OBLIGATIONS
As of September 30, 1999, the Company had $745 million of
borrowings outstanding under its Credit Agreement.
8. INCOME TAX PROVISION
No provision or benefit for income taxes has been made for the
three and nine months ended September 30, 1998 and 1999, as the
deferred benefit from operating losses was offset by an increase in the
valuation allowance.
9
<PAGE> 10
9. COMMON STOCK AND NET LOSS PER SHARE
Net loss per share amounts are computed based on the weighted
average number of common shares outstanding. The number of shares used
to compute per share amounts for both the three months ended September
30, 1998 and 1999 were 104 million. The number of shares used to
compute per share amounts for the nine months ended September 30, 1998
and 1999 were 103 million and 104 million, respectively. The average
number of options to purchase shares of the Company's Common Stock
during the three and nine months ended September 30, 1998 were 8
million and 7 million, respectively, at exercise prices ranging from
$2.67 per share to $25.50 per share. The average number of options to
purchase shares of the Company's Common Stock during the three and nine
months ended September 30, 1999 were 10 million, at exercise prices
ranging from $2.73 per share to $17.13 per share. These stock options
were not included in the computation of diluted earnings per share
because the effect of assuming their exercise would have been
antidilutive.
The Company has 275 million authorized shares, of which 250
million are Common Stock and 25 million are preferred stock. As of
September 30, 1999, there were no preferred shares issued or
outstanding.
10. COMPREHENSIVE LOSS
Comprehensive loss for the three and nine months ended
September 30, 1998 and 1999, is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss...................................... $ (16,428) $ (49,488) $(124,419) $(234,003)
Foreign currency translation adjustments ..... 526 (210) 1,636 (1,217)
--------- --------- --------- ---------
Total comprehensive loss..................... $ (15,902) $ (49,698) $(122,783) $(235,220)
========= ========= ========= =========
</TABLE>
11. STATEMENT OF CASH FLOWS INFORMATION
Cash and cash equivalents include highly liquid debt
instruments with an original maturity of three months or less. As of
September 30, 1999, cash equivalents also include investments in money
market instruments, which are carried at fair market value. Cash
payments made for interest during the nine months ended September 30,
1998 and 1999, were approximately $108 million and $112 million,
respectively, net of interest capitalized during the nine months ended
September 30, 1998 and 1999 of $14 million and $17 million,
respectively. There were no significant federal or state income taxes
paid or refunded for the nine months ended September 30, 1998 and 1999.
12. SEGMENT INFORMATION
The Company has determined that it has two reportable
segments, core operations and advanced messaging operations. The
Company's basis for the segments relates to the types of products and
services each segment provides. The core operating segment includes the
traditional display and alphanumeric services, which are basic one-way
services, and 1 1/2-way paging services. The advanced messaging
operating segment consists of the Company's new two-way wireless
messaging services, VoiceNow service and Iridium WorldPage, and the
operations of Vast Solutions, which include wireless integration
products, consumer content, and wireless software development and
sales.
10
<PAGE> 11
The following table presents certain information related to
the Company's business segments for the three and nine months ended
September 30, 1998 and 1999.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- -------------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Revenues (1):
Core (2) ............... $ 246,134 $ 227,238 $ 721,960 $ 712,469
Advanced Messaging .... 661 3,798 822 10,053
--------- --------- --------- ---------
$ 246,795 $ 231,036 $ 722,782 $ 722,522
========= ========= ========= =========
Operating income (loss):
Core (2) ............... $ 28,353 $ (379) $ 1,778(3) $ (54,625)(4)
Advanced Messaging ..... (10,355) (13,120) (20,582) (33,627)
--------- --------- --------- ---------
$ 17,998 $ (13,499) $ (18,804) $ (88,252)
========= ========= ========= =========
Adjusted EBITDA (5):
Core (2) ............... $ 92,759 $ 71,694 $ 276,855 $ 229,551
Advanced Messaging ..... (5,702) (12,570) (8,439) (31,834)
--------- --------- --------- ---------
$ 87,057 $ 59,124 $ 268,416 $ 197,717
========= ========= ========= =========
Free Cash Flow (6):
Core (2) ............... $ 30,432 $ 29,009 $ 107,255 $ 91,176
Advanced Messaging ..... (62,232) (63,374) (117,923) (165,400)
--------- --------- --------- ---------
$ (31,800) $ (34,365) $ (10,668) $ (74,224)
========= ========= ========= =========
</TABLE>
(1) Net Revenues are revenues from services, rent, and maintenance
plus product sales less the cost of products sold.
(2) The international operations of the Company currently consist
entirely of core services and accordingly are included in the
Company's core business segment.
(3) Operating loss for the core business segment for the first nine
months of 1998 includes a restructuring charge of $74 million.
See Note 6.
(4) Operating loss for the core business segment for the first nine
months of 1999 includes a provision for asset impairment of $18
million. See Note 5.
(5) Adjusted EBITDA is earnings before interest, income taxes,
depreciation, amortization, minority interest, restructuring
charge, provision for asset impairment, and cumulative effect of
a change in accounting principle.
(6) Free Cash Flow is Adjusted EBITDA less capital expenditures
(excluding payments for spectrum licenses) and debt service.
The Company's method for allocating costs to business segments is not
consistent with the contemplated asset transfer in connection with the intended
distribution of Vast Solutions in connection with the Merger. See Note 1.
Adjusted EBITDA and Free Cash Flow are not measures defined in
generally accepted accounting principles and should not be considered in
isolation or as substitutes for measures of performance in accordance with
generally accepted accounting principles.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this filing which are not historical facts,
including but not limited to future capital expenditures, future borrowings,
performance and market acceptance of new products and services, impact of Year
2000 issues on the Company's operations, anticipated costs and expenses related
to, and the timetable for, the remediation of Year 2000 issues, expected annual
recurring performance improvements and cost savings as a result of 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 pricing pressures,
growth rates, the introduction of products and services by competitors of the
Company, the performance of the Company's vendors and independent contractors,
third-party Year 2000 remediation plans, the introduction of competing
technologies, the transition of the Company's regional office operations into
centralized facilities (the Centers of Excellence) infrastructure, the
construction, testing and placement of the Company's advanced messaging network
into operation, and acceptance of the Company's products and services in the
marketplace.
Certain statements in this filing relating to the consummation of a
merger (the Merger) of Paging Network, Inc. (the Company) with Arch
Communications Group, Inc. (Arch), including statements regarding the rates at
which the Company's common stock and senior subordinated notes will be exchanged
or converted into shares of the common stock of Arch, the percentage
distribution of the Company's interest in a wholly-owned subsidiary to holders
of the Company's common stock and senior subordinated notes, and other
statements regarding the manner and timing of the Merger, are forward-looking in
nature and are subject to risks and uncertainties that could cause the actual
results to differ materially from those set forth in such forward-looking
statements. Among the factors that could cause actual future results to differ
materially are the failure to receive the necessary approvals of stockholders,
bondholders and lenders of the Company and Arch, the failure to receive the
necessary antitrust and other regulatory approvals, the filing of an involuntary
bankruptcy proceeding by creditors of the Company, the emergence of a competing
offer to acquire either the Company or Arch, the material breach of the Merger
agreement by the Company or Arch, or the failure to satisfy any of the other
conditions to the closing of the Merger.
INTRODUCTION
Throughout this section the Company makes reference to earnings before
interest, income taxes, depreciation, amortization, minority interest,
restructuring charge, provision for asset impairment, and cumulative effect of a
change in accounting principle (Adjusted EBITDA). EBITDA (earnings before
interest, income taxes, depreciation, and amortization) 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 and Adjusted EBITDA are not measures
defined in generally accepted accounting principles and should not be considered
in isolation or as substitutes for measures of performance in accordance with
generally accepted accounting principles.
MERGER AGREEMENT AND LIQUIDITY
On November 8, 1999, the Company announced that the Company had signed
a definitive agreement (the Merger Agreement) to merge (the Merger) with Arch.
Under the terms of the Merger Agreement, each share of the Company's common
stock will be exchanged for 0.1247 share of Arch common stock. Under the terms
of the Merger Agreement, the Company's 8.875% senior subordinated notes due
2006, its 10% senior subordinated notes due 2008, and its 10.125% senior
subordinated notes due 2007 (collectively, the Notes), along with all accrued
interest thereon, will be exchanged in a registered exchange offer under which
the holders of each $1,000 of outstanding principal of Notes will receive, upon
consummation of the Merger, approximately 64 shares of common stock of Arch. The
Merger Agreement also requires that certain senior notes and preferred stock of
Arch be converted into Arch common stock as part of a recapitalization of the
combined company.
As part of the Merger, the Company intends to distribute 80.5% of its
interest in Silverlake Communications, Inc., a wholly-owned subsidiary of the
Company doing business as Vast Solutions (Vast Solutions), to holders of the
Notes and the Company's common stock. Holders of the Notes will receive an
effective 68.9% interest in Vast Solutions, while holders of the Company's
common stock will receive an effective 11.6% interest. The remaining 19.5%
interest will be held by the combined company following the Merger.
The Merger Agreement and related recapitalization of the combined
company require a 97.5% acceptance by the holders of the Notes and Arch's senior
discount noteholders, in addition to the affirmative votes of a majority of the
Company's stockholders, Arch's stockholders, and Arch's Series C preferred
stockholders, to complete the Merger. Consent of the lenders under the Company's
$1 billion revolving credit facility (the Credit Agreement) is also required.
The Merger Agreement also provides for the Company to file a "pre-packaged"
Chapter 11 reorganization plan if the level of acceptances from the holders of
the Notes is below 97.5%, but greater than 66.7%, the level required for
consummation of a "pre-packaged" Chapter 11 reorganization plan.
Consummation of the Merger is subject to completion of the
recapitalization described, customary regulatory review, certain third-party
consents, and the approvals noted above. The Company anticipates the Merger to
be completed during the first half of 2000.
The Company is currently in compliance with the financial covenants set
forth in all of its U.S. and Canadian debt agreements. The Company is pursuing
various efforts to improve the Company's domestic EBITDA for the fourth quarter
of 1999. However, if these efforts prove unsuccessful, the Company will cease to
remain in compliance with the interest coverage covenant set forth in the
Company's Credit Agreement following the close of the fourth quarter of 1999. In
that event, the Company would seek to obtain a waiver for such non-compliance
under the Credit Agreement. If the Company is unable to obtain a waiver for such
non-compliance, the lenders will have various rights, including the right to
accelerate the outstanding indebtedness. Such acceleration would also result in
the Company being in default under the cross-default provisions of the Notes.
The Company is currently precluded from further borrowings by the terms
of its Notes. As of November 5, 1999, the Company had approximately $50 million
in cash, which, combined with cash expected to be generated from operations, the
Company believes is sufficient to meet its obligations into the first quarter of
2000. If the Company does not achieve an improvement in its domestic EBITDA, the
Company may not have sufficient cash or borrowing capacity to meet its
obligations through the first quarter of 2000. The Company is currently
exploring certain strategic and financing alternatives to ensure continued
liquidity through the consummation of the Merger. However, there can be no
assurance that the Company's efforts to obtain additional liquidity will prove
timely or successful or that the Merger will be completed, and the Company may
be required to reduce the level of its operations and/or file for protection
under Chapter 11 of the U.S. Bankruptcy Code to restructure its obligations,
including those under the Notes. Such a filing would likely have a material
impact on the Company's results of operations and financial position.
Furthermore, if the Merger is not ultimately consummated, the Company may incur
significant charges, including charges for asset impairments and restructuring
the Company's operations.
12
<PAGE> 13
STRATEGIC INITIATIVES
The Company is aggressively implementing its previously announced
Restructuring, which includes eliminating redundant administrative operations by
consolidating certain key support functions. While progress has been made, the
Company's efforts to convert all of its offices to its new billing and customer
service software platforms have fallen behind schedule. The Company's original
plans called for the conversions to be substantially complete during early 1999.
The Company now believes the conversions will not be substantially complete
until early 2000. The Company also has made progress in the build-out of its
advanced wireless network, which, when completed in late December 1999 or early
January 2000, will permit enhanced delivery of a broad portfolio of wireless
information products and services. In April 1999, the Company completed a
realignment of its sales and marketing organizations to more clearly align those
groups with customers' needs and the Company's overall strategic direction.
In June 1999, the Company formed Vast Solutions to accelerate the
development and commercialization of business opportunities in three related
areas: the Company's Internet-based wireless information content; its business
solutions capabilities; and its wireless content gateway. Separating Vast
Solutions from the Company's other subsidiaries on an organizational basis is
expected to enhance the Company's ability to focus on discrete opportunities
and, potentially, different business models.
RESULTS OF OPERATIONS
Revenues from services, rent and maintenance plus product sales less
the cost of products sold (Net Revenues) for the three-month period ended
September 30, 1999, were $231 million, a decrease of 6.4% from $247 million for
the corresponding period of 1998. Net Revenues for both the nine months ended
September 30, 1998 and 1999, were $723 million. Revenues from services, rent and
maintenance, which the Company considers its primary business, decreased 6.9% to
$223 million for the three months ended September 30, 1999, compared to $240
million for the three months ended September 30, 1998. Services, rent and
maintenance revenues for the nine months ended September 30, 1999 decreased 1.2%
to $697 million, compared to $705 million for the nine months ended September
30, 1998. Increases in average revenue per unit resulting from pricing
initiatives and the changing mix of the Company's subscriber base toward higher
revenue products and services were offset by the decrease in revenues
13
<PAGE> 14
associated with the net decrease in units in service during both the three and
nine months ended September 30, 1999 as described below.
The number of units in service with subscribers at September 30, 1999
was 9,314,000, compared to 10,110,000 and 10,484,000 units in service with
subscribers at December 31, 1998 and September 30, 1998, respectively. The
Company experienced a net reduction of approximately 462,000 domestic units in
service in the third quarter of 1999, mainly due to the Company's continued
rationalization of its customer base and intensifying price competition in the
market for paging services. Approximately two-thirds of the loss in units in
service was a result of continued weakness in the Company's reseller channel and
most of the loss were of subscribers to lower cost numerical services. The
cancellation of units from a national account relationship and the bankruptcy of
a major reseller accounted for a loss of approximately 120,000 units. In
addition, another 122,000 units were reduced based upon the reconciliation of
certain of the Company's reseller account records as they were converted to the
Centers of Excellence platform.
The average revenue per unit (ARPU) for the Company's core domestic
operations increased to $7.78 and $7.96, respectively, for the three and nine
months ended September 30, 1999, compared to $7.59 and $7.52, respectively, for
the corresponding periods of 1998. ARPU for the three months ended September 30,
1999 declined to $7.78 from $7.84 per unit for the second quarter of 1999. The
decrease in the third quarter of 1999 resulted from the Company's efforts to
maintain market share in the face of heightened price competition.
Product sales decreased 4.1% to $24 million for the three months ended
September 30, 1999, compared to $25 million for the same period in 1998. Product
sales decreased 14.4% to $69 million for the nine months ended September 30,
1999, compared to $81 million for the corresponding period of 1998. The
decreases in product sales and corresponding decreases in cost of products sold
from 1998 to 1999 resulted primarily from the Company's efforts to reduce the
number of customers using unprofitable services through certain pricing
initiatives, which resulted in a substantial decrease in sales through the
Company's reseller channel. In addition, the decreases in cost of products sold
from 1998 to 1999 also resulted from the decrease in the depreciable lives of
the Company's subscriber devices from three years to two years, effective April
1, 1999. This change had the effect of increasing depreciation expense and
thereby reducing the net book values of sold subscriber devices.
Services, rent and maintenance expenses increased 19.7% to $63 million
for the three months ended September 30, 1999, compared to $53 million for the
three months ended September 30, 1998. Services, rent and maintenance expenses
increased 22.6% to $194 million for the nine months ended September 30, 1999,
compared to $158 million for the nine months ended September 30, 1998. The
increases in services, rent and maintenance expenses were primarily attributable
to the adoption of Statement of Position 98-5, Reporting on the Costs of
Start-up Activities (SOP 98-5), effective January 1, 1999, which required the
expensing of certain costs previously capitalized, increased contracted dispatch
costs related to advanced messaging units placed in service during 1998 and the
first nine months of 1999, increased pager parts and repairs expense, and
expenses associated with an increase in transmitter sites. The increase for the
nine months ended September 30, 1999 was partially offset by the decline in the
Company's reserve for non-recoverable subscriber devices resulting from the
change in the depreciable lives of its subscriber devices from three years to
two years.
Selling expenses decreased 11.2% to $24 million for the third quarter
of 1999, compared to $27 million for the same period in 1998. Selling expenses
decreased 2.9% to $70 million for the first nine months of 1999, compared to $72
million for the corresponding period of 1998. The decrease in selling expenses
for the three months ended September 30, 1999 resulted primarily from a decrease
of approximately $4 million in the Company's advertising expenditures, including
advertising costs for its core operations and its advanced messaging operations.
The decrease in selling expenses for the nine months ended September 30, 1999
was primarily due to a one-time adjustment to sales commissions made during the
second quarter of 1999 to better reflect the period in which the commission is
earned. As a result of this change, selling expenses decreased by $2 million
during the nine months ended September 30, 1999. The decrease in selling
expenses for the first nine months of 1999 also resulted from a lower amount of
sales commissions paid in conjunction with the net decrease in units in service
as compared to the same period of 1998. Marketing research, development costs,
and advertising expenses associated with the Company's core and advanced
messaging operations are expected to grow in future periods due to expanded
promotion of its core and advanced messaging operations, including such costs
related to its SurePage and Two-Way services.
General and administrative expenses increased 6.1% to $85 million for
the third quarter of 1999, compared to $80 million for the third quarter of
1998. General and administrative expenses increased 16.4% to $261 million for
14
<PAGE> 15
the first nine months of 1999, compared to $224 million for the first nine
months of 1998. The increases in general and administrative expenses were
primarily related to expenses associated with establishing the Company's Centers
of Excellence, redundant operating costs associated with operating both its new
Centers of Excellence infrastructure and its traditional decentralized
infrastructure, and increased levels of contract labor utilized during the
transition to the Centers of Excellence infrastructure. Such costs are expected
to decrease in 2000 as the Company completes the transition to its Centers of
Excellence.
Depreciation and amortization expense increased 5.2% to $73 million for
the three months ended September 30, 1999, compared to $69 million for the three
months ended September 30, 1998. Depreciation and amortization expense increased
25.8% to $268 million for the nine months ended September 30, 1999, compared to
$213 million for the nine months ended September 30, 1998. The increases in
depreciation and amortization expense resulted primarily from the Company's
change in the depreciable lives of its subscriber devices and certain of its
network equipment, effective April 1, 1999. The Company changed the depreciable
lives of its subscriber devices from three years to two years and the
depreciable life of certain of its network equipment from seven years to ten
years. The changes resulted from a review by the Company of the historical usage
periods of its subscriber devices and its network equipment and the Company's
expectations regarding future usage periods for subscriber devices considering
current and projected technological advances. As a result of these changes,
depreciation expense increased by approximately $8 million and $77 million,
respectively, during the three and nine months ended September 30, 1999 and is
expected to increase by approximately $3 million during the fourth quarter of
1999. Depreciation and amortization expense was reduced during the three and
nine months ended September 30, 1999 by certain property and equipment becoming
fully depreciated, certain non-current assets becoming fully amortized, and the
write-off of start-up costs upon the adoption of SOP 98-5. The Company commenced
depreciation and amortization on the assets related to its Centers of Excellence
during the third quarter of 1999. This is expected to increase depreciation and
amortization expense during the fourth quarter of 1999 by approximately $2
million. The Company expects to commence depreciation and amortization on the
assets related to its advanced messaging operations during the first quarter of
2000, which is expected to increase depreciation and amortization expense during
2000 by approximately $25 million.
The Company recorded a provision of $18 million during the quarter
ended March 31, 1999, for the impairment of the assets of the Company's
majority-owned Spanish subsidiaries. See further discussion in Note 5 to the
Consolidated Financial Statements.
The Company recorded a restructuring charge of $74 million during the
quarter ended March 31, 1998, as a result of a Restructuring approved by the
Company's Board of Directors in February 1998. See further discussion in Note 6
to the Consolidated Financial Statements.
As a result of the above factors, Adjusted EBITDA decreased 32.1% to
$59 million for the third quarter of 1999, compared to $87 million for the
corresponding period of 1998. Adjusted EBITDA decreased 26.3% to $198 million
for the first nine months of 1999, compared to $268 million for the same period
in 1998. Adjusted EBITDA and Adjusted EBITDA as a percentage of Net Revenues
were negatively impacted by the Company's advanced messaging operations, the
development and implementation of its Centers of Excellence, its international
operations, and the adoption of SOP 98-5. Adjusted EBITDA and Adjusted EBITDA as
a percentage of Net Revenues for the three and nine months ended September 30,
1999 were positively impacted by approximately $0.5 million and approximately $3
million, respectively, as a result of the change in the depreciable lives of
subscriber devices as previously discussed.
Interest expense, net of amounts capitalized, was relatively flat for
the three and nine months ended September 30, 1999, compared to the same periods
in 1998. Interest expense, net of amounts capitalized, was $37 million for the
third quarter of 1999, compared to $36 million for the third quarter of 1998.
Interest expense, net of amounts capitalized, was $111 million for the nine
months ended September 30, 1999, compared to $109 million for the nine months
ended September 30, 1998. Interest expense is expected to increase in early 2000
as the amount of interest capitalized is anticipated to decrease upon the
completion of the build-out of the Company's advanced wireless network.
The Company adopted the provisions of SOP 98-5 effective January 1,
1999 and recorded a charge of $37 million as a cumulative effect of a change in
accounting principle to write-off all unamortized start-up costs as of January
1, 1999.
15
<PAGE> 16
CAPITAL RESOURCES
The Company's operations and expansion into new markets and product
lines have required substantial capital investment for the development and
installation of wireless communications systems and for the procurement of
subscriber devices and related equipment. Furthermore, the Company is currently
in the process of building an advanced messaging network over which it can
deploy new enhanced messaging services and customized wireless information and
completing the formation of its Centers of Excellence. Capital expenditures
(excluding payments for spectrum licenses) were $163 million for the nine months
ended September 30, 1999, compared to $171 million for the corresponding period
of 1998. The decrease in capital expenditures in 1999 was primarily due to
declining capital expenditures related to the Company's advanced messaging
network and its Centers of Excellence. Capital expenditures related to the
Company's build-out of its advanced messaging network were $54 million for the
nine months ended September 30, 1999, compared to $55 million for the
corresponding period of 1998. Capital expenditures related to establishing the
Company's Centers of Excellence, including new system implementations, were $25
million for the nine months ended September 30, 1999, compared to $30 million
for the same period of 1998.
The amount of capital expenditures may fluctuate from quarter to
quarter and on an annual basis due to several factors, including the variability
of units in service with subscribers. Based on current expectations, the Company
anticipates the total amount of capital expenditures to be approximately $50
million in the fourth quarter of 1999. As of September 30, 1999, the Company has
substantially completed capital expenditures related to the establishment of its
Centers of Excellence. The Company expects to substantially complete capital
expenditures made in connection with the Company's expansion of its advanced
messaging network during the fourth quarter of 1999. With the substantial
completion of these capital expenditures in 1999, the Company expects aggregate
capital expenditures in 2000 to decrease as compared to 1999. However, the
Company is currently unable to estimate its capital expenditures for 2000 due
to uncertainty surrounding the Merger and liquidity matters discussed in Note 1
to the Consolidated Financial Statements.
For the first nine months of 1999, capital expenditures were funded by
net cash provided by operating activities of $89 million, as well as incremental
borrowings. Net cash provided by operating activities decreased $102 million for
the nine months ended September 30, 1999, as compared to the same period of
1998. The decrease resulted primarily from an increase in net loss before
non-cash charges and a decrease in accrued liabilities due to timing of
payments.
The two credit agreements of the Company's Canadian subsidiaries, as
amended on August 5, 1999, provide for total borrowings of approximately $75
million. As of September 30, 1999, approximately $52 million of borrowings were
outstanding under the Canadian credit facilities. Additional borrowings are
available under these facilities, provided such borrowings are either
collateralized or certain financial covenants are met.
The deficiency in Free Cash Flow, defined as Adjusted EBITDA less
capital expenditures (excluding payments for spectrum licenses) and debt
service, for the Company's consolidated operations for the three and nine months
ended September 30, 1999, was $34 million and $74 million, respectively. The
deficiency in Free Cash Flow for the Company's consolidated operations for the
three and nine months ended September 30, 1998 was $32 million and $11 million,
respectively. 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. The decline in Free Cash Flow for the three and nine
months ended September 30, 1999 was primarily the result of a decrease in
Adjusted EBITDA, as previously noted.
YEAR 2000 READINESS DISCLOSURE
Year 2000 issues affect virtually all companies and organizations
throughout the world. Many existing computer programs were designed and
developed to use and store only two digits to identify a calendar year, without
considering the capability of properly recognizing the upcoming change in the
century. If not corrected by January 1, 2000, the Company could potentially
experience system failures or interruptions, such as a temporary inability to
deliver paging transmissions, system generation of erroneous data, or other
disruptions of normal business operations.
The Company implemented a task force and developed a comprehensive plan
to address Year 2000 issues, and continues to utilize both internal and external
resources to evaluate and test its systems. The Company has developed
16
<PAGE> 17
an approach to address Year 2000 issues that includes phases for inventory of
business processes and systems, assessment of Year 2000 risk, remediation,
testing, implementation and evaluation. The Company has completed these phases
for all critical business processes. The Company has completed the process of
evaluating the project documentation that represents the Year 2000 readiness of
its application systems and embedded systems, such as its paging terminals and
paging network and is archiving the documentation in its corporate Y2K
Repository. Furthermore, in connection with the Restructuring, the Company is
currently in the process of replacing all of its core systems for its new
Centers of Excellence. The Company has completed Year 2000 readiness assessment
and testing on these systems.
The Company anticipates its total cost associated with correcting Year
2000 problems, including the expenses necessary to remediate the Company's
existing systems and costs related to the collection of third-party Year 2000
readiness information, to be approximately $4 million, substantially all of
which has been incurred as of November 10, 1999. In addition, in connection with
the Restructuring, the Company is currently in the process of replacing all of
its core systems for its new Centers of Excellence at an estimated cost of
approximately $80 million to $100 million.
The Company continues to work with Motorola, Inc., Glenayre
Technologies, Inc., and other primary vendors that currently supply the Company
with subscriber devices, wireless messaging terminals, and network facilities,
to assess their Year 2000 readiness. Assessment has been completed for the
Company's mission critical primary vendors. The Company's primary vendors are
making the preparations necessary for their products and services to be ready
for the Year 2000. However, there can be no assurance that third parties, on
which the Company's business relies, will successfully remediate their systems
on a timely basis. The Company also relies on the provision of electrical power
and telecommunications transmission services in the operation of its business.
The Company has queried its primary electrical and telecommunications suppliers
regarding Year 2000 compliance. Each supplier queried believes that it will be
Year 2000 ready by the end of 1999. The Company has no means of confirming these
statements, nor any ability to ensure Year 2000 compliance by these suppliers.
The Company believes that although it may experience power and/or transmission
outages related to Year 2000 noncompliance, these outages will be limited in
both scope and duration and will not have a material adverse effect on the
Company's ability to operate nor on its results of operations. In addition, the
possibility of power and/or transmission outages is being addressed in the
contingency planning process described below.
The Company is working with a globally recognized consulting firm to
develop contingency plans to mitigate the impact of its potential system
failures related to Year 2000 issues. The contingency plans will address the
risk of potential failures related to internal software applications, embedded
systems, infrastructure, and third-party systems (including electrical power and
telecommunications transmission services). The contingency plans have been
completed for mission critical systems and selected failure scenarios will
continue to be practiced during the fourth quarter of 1999 to validate the
thoroughness of these plans.
The Company believes it has met all project deliverables according to
schedule based on management's review and verification of the project
documentation. However, in particular due to the potential impact of third-party
modification plans, actual results could differ materially from those
anticipated. The Company's business, financial position, or results of
operations could be materially adversely affected by the failure of its computer
systems and applications, or those operated by third parties, to properly
operate or manage dates beyond 1999. In addition, disruptions in the economy
generally resulting from Year 2000 issues could materially adversely affect the
Company. The amount of any potential liability or lost revenue cannot be
estimated at this time.
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<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
There have been no material changes from the information provided in
Item 7A of the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in various lawsuits arising in the normal
course of business. In management's opinion, the ultimate outcome of these
lawsuits will not have a material adverse effect on the Company's business,
financial position, or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The exhibits listed on the accompanying index to exhibits are
filed as part of this quarterly report.
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PAGING NETWORK, INC.
Date: November 12, 1999 By: /s/ John P. Frazee, Jr.
-----------------------------------------
John P. Frazee, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 By: /s/ Julian B. Castelli
-----------------------------------------
Julian B. Castelli
Senior Vice President and Chief
Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
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<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant, as
amended (1)
3.3 By-laws of the Registrant, as amended (11)
4.1 Articles Sixth, Seventh, Eighth, Twelfth, and Thirteenth of the
Restated Certificate of Incorporation of the Registrant, as
amended (1)
4.2 Articles II, III, and VII and Section I of Article VIII of the
Registrant's By-laws, as amended (11)
4.3 Form of Indenture (2)
4.4 Shareholder Rights Agreement (3)
4.5 First Amendment to the Shareholder Rights Agreement (11)
4.6 Second Amendment to the Shareholder Rights Agreement (13)
10.1 1982 Incentive Stock Option Plan, as amended and restated (1)
10.2 Form of Stock Option Agreement executed by recipients of options
granted under the 1982 Incentive Stock Option Plan (1)
10.3 Form of Management Agreement executed by recipients of options
granted under the 1982 Incentive Stock Option Plan (1)
10.4 Form of Vesting Agreement executed by recipients of options
granted under the 1982 Incentive Stock Option Plan (1)
10.5 Form of Indemnification Agreement executed by recipients of
options granted under the 1991 Stock Option Plan (1)
10.6 Form of First Amendment to Vesting Agreement executed by
recipients of options granted under the 1982 Incentive Stock
Option Plan (1)
10.7 Form of First Amendment to Management Agreement executed by
recipients of options granted under the 1982 Incentive Stock
Option Plan (1)
10.8 Amended and Restated Credit Agreement dated as of May 2, 1995
among the Registrant, NationsBank of Texas, N.A., Toronto
Dominion (Texas), Inc., The First National Bank of Boston, and
certain other lenders (4)
10.9 Amendment No. 1 dated as of December 12, 1995 to the Amended and
Restated Credit Agreement dated as of May 2, 1995 among the
Registrant, NationsBank of Texas, N.A., Toronto Dominion (Texas),
Inc., The First National Bank of Boston, and certain other
lenders (5)
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<S> <C>
10.10 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)
10.11 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)
10.12 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)
10.13 1997 Restricted Stock Plan, as approved by shareowners on May 22,
1997 (7)
10.14 Employment Agreement dated as of August 4, 1997 among the
Registrant and John P. Frazee, Jr. (8)
10.15 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)
10.16 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)
10.17 1992 Director Compensation Plan, as amended and restated on April
22, 1998 (10)
10.18 Amended and Restated 1991 Stock Option Plan, as approved by
shareowners on May 21, 1998 (10)
10.19 Letter dated May 26, 1998 regarding Second Amendments effective
March 31, 1998 to the Loan Agreements dated as of June 5, 1996:
(1) among Paging Network of Canada Inc., The Toronto-Dominion
Bank, and such other financial institutions as become banks (2)
among Madison Telecommunications Holdings, Inc., The
Toronto-Dominion Bank, and such other financial institutions as
become banks (10)
10.20 Forms of Stock Option Agreement executed by recipients of options
granted under the 1991 Stock Option Plan (11)
10.21 Employee Stock Purchase Plan, as amended on December 16, 1998
(11)
10.22 Severance Pay Plan dated as of January 20, 1999 (11)
10.23 Form of Stock Option Agreement executed by recipients of options
granted under the 1992 Director Compensation Plan (11)
10.24 Amended and Restated Loan Agreement dated August 5, 1999 among
Paging Network of Canada Inc., The Toronto-Dominion Bank,
Canadian Imperial Bank of Commerce, National Bank of Canada, and
such other financial institutions as become banks (12)
10.25 Amended and Restated Loan Agreement dated August 5, 1999 among
Madison Telecommunications Holdings, Inc., The Toronto-Dominion
Bank, Canadian Imperial Bank of Commerce, National Bank of
Canada, and such other financial institutions as become banks
(12)
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
<S> <C>
12 Ratio of Earnings to Fixed Charges for the three and nine months
ended September 30, 1998 and 1999 (13)
27 Financial Data Schedule (13)
</TABLE>
- ---------------
(1) Previously filed as an exhibit to Registration Statement
No. 33-42253 on Form S-1 and incorporated herein by
reference.
(2) Previously filed as an exhibit to Registration Statement
No. 33-46803 on Form S-1 and incorporated herein by
reference.
(3) Previously filed as an exhibit to the Registrant's Report
on Form 8-K on September 15, 1994.
(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 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) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997.
(10) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998.
(11) Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998.
(12) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999.
(13) Filed herewith.
22
<PAGE> 1
EXHIBIT 4.6
AMENDMENT NUMBER 2 TO RIGHTS AGREEMENT
This AMENDMENT TO RIGHTS AGREEMENT is made as of November 7, 1999, by and
between Paging Network, Inc. ("Company") and The First National Bank of Boston,
as Rights Agent ("Rights Agent").
WHEREAS, the Company has adopted that certain Rights Agreement ("Rights
Agreement"), dated as of September 8, 1994, as amended by Amendment Number 1,
dated March 16, 1999, each by and between the Company and the Rights Agent (all
capitalized terms used and not defined herein shall be as defined in the Rights
Agreement, as amended hereby);
WHEREAS, the Senior Vice President and General Counsel of the Company has
executed and delivered to the Rights Agent a certificate that states that the
proposed amendments to the Rights Agreement set forth herein are in compliance
with the terms of Section 28 of the Rights Agreement;
WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of November
7, 1999 ("Merger Agreement"), by and among the Company, Arch Communications
Group, Inc. and St. Louis Acquisition Corp. ("Merger Sub"), Merger Sub will
merge with and into the Company;
WHEREAS, the Company and the Rights Agent wish to enter into this Amendment
Number 2 to Rights Agreement in furtherance thereof.
NOW, THEREFORE, for good and valid consideration, the receipt and
sufficiency of which are acknowledged, the parties hereby amend the Rights
Agreement as follows:
Article 1. The definition of "Acquiring Person" set forth in Section 1(a) of the
Rights Agreement is amended to insert the following text immediately after the
period concluding the definition:
"Notwithstanding the foregoing or anything to the contrary in this Rights
Agreement, "Acquiring Person" shall not include Arch Communications Group,
Inc., a Delaware corporation ("Arch"), St. Louis Acquisition Corp., a
Delaware corporation ("Merger Sub"), any Affiliate of Arch or Merger Sub,
any Associate of Arch or Merger Sub, any Beneficial Owner of Arch or Merger
Sub, or any committee of the holders of Ranger Notes (as defined in the
Agreement and Plan of Merger among the Company, Arch and Merger Sub dated
as of November 7, 1999 (the "Merger Agreement")) formed for the purpose of
negotiating the Ranger Exchange Offer (as defined in the Merger
Agreement)."
Article 2. The definition of "Adverse Person" set forth in Section 1(b) of the
Rights Agreement is amended to insert the following text immediately after the
period concluding the definition:
<PAGE> 2
"Notwithstanding the foregoing or anything to the contrary in this Rights
Agreement, "Adverse Person" shall not include Arch or Merger Sub, any
Affiliate of Arch or Merger Sub, any Associate of Arch or Merger Sub, any
Beneficial Owner of Arch or Merger Sub, or any committee of the holders of
Ranger Notes (as defined in the Merger Agreement) formed for the purpose of
negotiating the Ranger Exchange Offer (as defined in the Merger
Agreement)."
Article 3. The definition of "Triggering Event" set forth in Section 1(r) of the
Rights Agreement is amended to insert the following text immediately after the
period concluding the definition:
"Notwithstanding the foregoing or anything to the contrary in this Rights
Agreement, a Triggering Event shall not include, and shall not occur by
virtue of: (i) the negotiation, execution, preparation, or delivery of that
certain merger agreement, by and among the Company, Arch or Merger Sub
("Merger Agreement"); (ii) the negotiation, execution, preparation, or
delivery of any or all of the agreements, undertakings, documents,
instruments, certificates, registrations, notices, or statements referred
to in, or contemplated by, the Merger Agreement ("Transaction Agreements");
(iii) the consummation of any transaction permitted under the Merger
Agreement or the Transaction Agreements; (iv) the acquisition or purchase
of Common Shares by Arch or Merger Sub, any Affiliate of Arch or Merger
Sub, any Associate of Arch or Merger Sub, or any Beneficial Owner of Arch
or Merger Sub, or (v) the formation of any committee of the holders of
Ranger Notes (as defined in the Merger Agreement) for the purpose of
negotiating the Ranger Exchange Offer (as defined in the Merger
Agreement)."
Article 4. The definition of "Distribution Date" set forth in Section 3 of the
Rights Agreement is amended to insert the following text immediately after the
period concluding the definition:
"Notwithstanding the foregoing or anything to the contrary in this Rights
Agreement, the Company and the Rights Agent hereby acknowledge and agree
that a Distribution Date shall not include, and shall not occur by virtue
of: (i) the negotiation, execution, preparation, or delivery of the Merger
Agreement or the Transaction Agreements; (ii) the consummation of any
transaction permitted under the Merger Agreement or the Transaction
Agreements; or (iii) the formation of any committee of the holders of
Ranger Notes (as defined in the Merger Agreement) for the purpose of
negotiating the Ranger Exchange Offer (as defined in the Merger
Agreement)."
Article 5. Section 7(a) of the Rights Agreement is amended by deleting the
current Section 7(a) and substituting in lieu thereof the following:
"Subject to subsection (e), the registered holder of any Rights Certificate
may exercise the Rights evidenced thereby (except as otherwise provided
herein) in whole or in part at any
2
<PAGE> 3
time after the Distribution Date upon surrender of the Rights Certificate,
with the form of election to purchase on the reverse side thereof duly
executed, to the Rights Agent at the office of the Rights Agent designated
for such purpose, together with payment of the Purchase Price for each
Common Share (or such other number of Common Shares or other securities) as
to which the Rights are exercised, at or prior to the earliest of (i) the
close of business on September 27, 2004 (the "Final Expiration Date"), (ii)
the time at which the Rights are redeemed as provided in Section 24 hereof
(the "Redemption Date"), (iii) the time at which such Rights are exchanged
as provided in Section 25 hereof, or (iv) immediately prior to the Merger
(as defined in the Merger Agreement) (such earliest time being herein
referred to as the "Expiration Date")."
* * * * *
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment to Rights Agreement as of the date first written above.
PAGING NETWORK, INC.
By: /s/ JOHN P. FRAZEE, JR.
-----------------------------------
Name: John P. Frazee, Jr.
Title: Chairman of the Board and
Chief Executive Officer
THE FIRST NATIONAL BANK OF BOSTON,
as Rights Agent
By:
-----------------------------------
Name: Carol Mulvey-Eori
Title: Managing Director
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment to Rights Agreement as of the date first written above.
PAGING NETWORK, INC.
By:
-----------------------------------
Name: John P. Frazee, Jr.
Title: Chairman of the Board and
Chief Executive Officer
BANKBOSTON, N.A.
as Rights Agent
By: /s/ Carol Mulvey-Eori
-----------------------------------
Name: Carol Mulvey-Eori
Title: Managing Director
<PAGE> 1
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Earnings:
Loss before cumulative effect of a change in
accounting principle ............................. $ (16,428) $ (49,488) $(124,419) $(196,557)
Fixed charges, less interest capitalized ............ 42,297 45,737 128,718 135,893
--------- --------- --------- ---------
Earnings ...................................... $ 25,869 $ (3,751) $ 4,299 $ (60,664)
========= ========= ========= =========
Fixed charges:
Interest expense, including interest capitalized .... $ 39,943 $ 42,248 $ 120,535 $ 124,867
Amortization of deferred financing costs ............ 1,101 1,151 3,316 3,411
Interest portion of rental expense .................. 6,475 8,441 19,365 24,796
--------- --------- --------- ---------
Fixed charges ................................. $ 47,519 $ 51,840 $ 143,216 $ 153,074
========= ========= ========= =========
Ratio of earnings to fixed charges ......................... -- -- -- --
========= ========= ========= =========
Deficiency of earnings available to cover
fixed charges ....................................... $ (21,650) $ (55,591) $(138,917) $(213,738)
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 102,961
<SECURITIES> 0
<RECEIVABLES> 91,808
<ALLOWANCES> 14,555
<INVENTORY> 10,278
<CURRENT-ASSETS> 203,475
<PP&E> 1,511,209
<DEPRECIATION> (727,712)
<TOTAL-ASSETS> 1,520,885
<CURRENT-LIABILITIES> 233,265
<BONDS> 1,999,320
0
0
<COMMON> 1,040
<OTHER-SE> (725,464)
<TOTAL-LIABILITY-AND-EQUITY> 1,520,885
<SALES> 24,347
<TOTAL-REVENUES> 247,410
<CGS> 16,374
<TOTAL-COSTS> 244,535
<OTHER-EXPENSES> 35,989
<LOSS-PROVISION> 8,266
<INTEREST-EXPENSE> 37,296
<INCOME-PRETAX> (49,488)
<INCOME-TAX> 0
<INCOME-CONTINUING> (49,488)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,488)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
