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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, 1999
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)
14911 QUORUM DRIVE
DALLAS, TEXAS 75240
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (972) 801-8000
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value The Nasdaq SmallCap Market
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 NO X
--- ---
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.
---
As of April 25, 2000, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $175,636,000.
As of April 25, 2000, 104,242,067 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS.
GENERAL
Paging Network, Inc. (PageNet or the Company) is a provider of wireless
communications services throughout the United States and in the U.S. Virgin
Islands, Puerto Rico and Canada. PageNet provides services in all 50 states and
the District of Columbia, including service in the 100 most populated markets in
the United States. PageNet also owns a minority interest in a wireless
communications company in Brazil.
The main services of PageNet are numeric and alphanumeric wireless
messaging services. Numeric pagers (devices) allow a subscriber to receive a
numeric message (such as a telephone number to call back or a pre-arranged code)
and alphanumeric devices allow a subscriber to receive numeric and text
messages. As of December 31, 1999, numeric devices represented approximately 83%
of PageNet's total units in service with subscribers and alphanumeric units
represented approximately 16% of PageNet's total units in service with
subscribers. The total units in service has grown from 4,409,000 at December 31,
1994 to 8,991,000 at December 31, 1999, representing a compounded annual growth
rate of approximately 15.3%. However, total units in service have declined each
quarter since their high of 10,604,000 at June 30, 1998 and are expected to
decline significantly in 2000. In addition, PageNet sells confirmed receipt
paging services, which enable subscribers to receive acknowledgements that their
messages were delivered, services which enable subscribers to respond to
messages with their messaging devices by using pre-scripted replies, and send
and receive (2-way) services, which enable subscribers to initiate messages and
to respond to messages with their messaging devices by using pre-scripted
replies or by creating original replies. These services presently account for
approximately one percent of PageNet's total units in service. PageNet is
currently developing other applications for its wireless network through its
wholly-owned subsidiary, Vast Solutions, Inc. (Vast), as described more fully
below.
MERGER AGREEMENT
On November 8, 1999, PageNet announced that it 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
PageNet's common stock will be exchanged for 0.1247 share of Arch common stock.
Under the terms of the Merger Agreement, PageNet'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.
As part of the Merger, PageNet intends to distribute up to 80.5% of its
interest in Vast, a wholly-owned subsidiary of PageNet, to holders of the Notes
and PageNet's common stock. Holders of the Notes will receive up to a 68.9%
interest in Vast, while holders of PageNet's common stock will receive up to an
11.6% interest. The remaining interest will be held by the combined company
following the Merger.
The Merger Agreement requires 97.5% acceptance by the holders of the Notes
and affirmative votes of a majority of PageNet's and Arch's stockholders to
complete the Merger. Consent of the lenders under PageNet's revolving credit
facility (the Credit Agreement) is also required. The Merger Agreement also
provides for PageNet 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% in amount and 50% in number required under the Bankruptcy
Code for the noteholder class to accept the "pre-packaged" Chapter 11
reorganization plan.
Consummation of the Merger is subject to customary regulatory review,
certain third-party consents, including PageNet's lenders, and the approvals
noted above. The Company has received approval from the Department of Justice
and the Federal Communications Commission to proceed with the Merger, and
anticipates completing the Merger during the third quarter of 2000.
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LIQUIDITY AND GOING CONCERN MATTERS
PageNet's Consolidated Financial Statements as of December 31, 1999, and
for the year then ended, have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in those accompanying financial
statements, PageNet incurred losses of $157 million, $162 million, and $299
million during the years ended December 31, 1997, 1998, and 1999, respectively.
PageNet's deteriorating financial results and liquidity have caused it to be in
default of the covenants of all of its domestic debt agreements. On February 2,
2000, PageNet failed to make the semi-annual interest payments on its 8.875%
senior subordinated notes due 2006 (8.875% Notes) and its 10.125% senior
subordinated notes due 2007 (10.125% Notes). As of March 2, 2000, the
non-payment of interest constituted a default under the indentures of the 8.875%
Notes and the 10.125% Notes. On April 17, 2000, PageNet failed to make the
semi-annual interest payment on its 10% senior subordinated notes due 2008 (10%
Notes), and does not expect to make additional cash interest payments on any of
its Notes. As a result of these defaults, the holders of the Notes could demand
at any time that PageNet immediately pay $1.2 billion of outstanding Notes in
full. Should this happen, PageNet would immediately file for protection under
Chapter 11 of the United States Bankruptcy Code (Chapter 11).
PageNet is also in default of several of the financial and other covenants
of the Credit Agreement. As a result of these defaults, the lenders under the
Credit Agreement could demand at any time that PageNet immediately pay the $745
million outstanding under the Credit Agreement in full. Should this happen,
PageNet would immediately file for protection under Chapter 11.
PageNet is prohibited from additional borrowings and has classified all of
its outstanding indebtedness under the Credit Agreement and the Notes as a
current liability as of December 31, 1999. As of May 1, 2000, PageNet has
approximately $55 million in cash. PageNet believes that this cash, plus the
cash expected to be generated from operations, is sufficient to meet its
obligations, except for the cash interest payments due under the Notes, into the
third quarter of 2000. However, if PageNet's financial results continue to
deteriorate, it may not have sufficient cash to meet such obligations through
the third quarter of 2000. As discussed below, PageNet is considering
alternatives to ensure that it has sufficient liquidity through the completion
of the Merger. However, there can be no assurance that PageNet's efforts to
ensure that it has adequate liquidity will be timely or successful or that the
Merger will be completed. As a result, PageNet may have to reduce the level of
its operations and/or file for protection under Chapter 11 to complete the
Merger and/or restructure its obligations. PageNet is negotiating a
debtor-in-possesion loan facility with its lenders to be made available in the
event it commences a Chapter 11 case. Filing for bankruptcy would have a
material impact on PageNet's results of operations and financial position. In
addition, if the Merger is not completed, PageNet will likely incur significant
charges for asset impairments and restructuring its obligations. The
accompanying financial statements do not include any adjustments relating to the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that might be necessary should
PageNet file for protection under Chapter 11 and/or be unable to continue as a
going concern.
PageNet's deteriorating financial results and lack of additional liquidity
indicate that PageNet may not be able to continue as a going concern for a
reasonable period of time. PageNet's ability to continue as a going concern is
dependent upon several factors, including, but not limited to, the continued
non-demand for immediate payment of outstanding indebtedness by the holders of
the Notes and the lenders under the Credit Agreement and PageNet's ability to
(i) generate sufficient cash flows to meet its obligations, other than the cash
interest payments due under the Notes, on a timely basis, (ii) obtain additional
or restructured financing, including potential debtor-in-possession borrowings
if PageNet is required to file for protection under Chapter 11, (iii) continue
to obtain uninterrupted supplies and services from its vendors, and (iv) reduce
capital expenditures and operating expenses. PageNet is proceeding with these
initiatives as well as its plan to complete the Merger as described above.
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STRATEGY AND RESTRUCTURING
In February 1998, PageNet announced its intention to refocus its strategy
from rapid expansion and subscriber growth towards profitable growth. The major
components of this realignment have included:
o restructuring and consolidation of its operations by eliminating
redundant administrative and support functions located in offices
throughout the country into centralized processing centers;
o completing the build-out of its new advanced messaging network, and
launching new, advanced messaging services for its customers;
o developing other applications for its network to provide "wireless
solutions" to customers;
o focusing PageNet's sales and marketing efforts on more profitable
services, such as alphanumeric and nationwide paging; and
o increasing prices of some services.
Restructuring of Operations
In February 1998, PageNet's Board of Directors approved a restructuring of
PageNet's domestic operations (the Restructuring). PageNet's Restructuring plan
called for the elimination of redundant administrative operations by
consolidating key support functions located in offices throughout the country
into centralized processing facilities. In addition, the Restructuring plan
called for the conversion to new billing and customer service software
platforms. The Restructuring plan specified local and regional office closures,
the disposition of certain furniture, fixtures, and equipment and the
termination of approximately 1,950 employees by job function and location. While
progress in establishing these centralized processing centers was made,
PageNet's efforts to convert its offices to its new billing and customer service
software platforms fell behind the original schedule of being completed during
the second quarter of 1999. Billing software and system implementation problems
surfaced during the first office conversions, and, as a result, PageNet had to
postpone the conversion of many of its other offices. Additional implementation
problems surfaced during 1999 and caused further delays. In November 1999, and
in conjunction with the announcement of PageNet's planned merger with Arch,
PageNet decided to suspend the Restructuring after January 2000 pending the
decision as to which operating platforms will be used by the combined company.
PageNet has converted to its new billing and customer service software
platforms all of its customer units placed in service by its resellers and
approximately 50% of its direct customer units. However, due to the suspension
of the Restructuring, combined with the impact of the contemplated merger on its
operations, PageNet is unable to determine the amount of future savings
resulting from the consolidation initiative.
Completion of Advanced Messaging Network
On February 1, 2000, PageNet launched its 2-way wireless messaging
services over its advanced messaging network. PageNet anticipates that it will
invest approximately $15 million in the network during 2000. This investment is
intended to complete the buildout of sites started in the fourth quarter of 1999
and expand capacity in certain cities throughout the nation during the first
half of 2000, and will substantially complete PageNet's investment in its
advanced messaging network.
Deployment of Advanced Messaging Services and "Wireless Solutions"
PageNet has been engaged in several efforts to develop additional uses for
its wireless networks. In June 1999, PageNet consolidated its initiative to
develop advanced services, including wireless data and wireless solutions, into
Vast.
Through Vast, PageNet is commencing operations that can provide
comprehensive end-to-end wireless data solutions that connect corporate mobile
users with Internet or corporate data networks using wireless devices. Vast's
initial focus is on large businesses with mobile workforces. Vast can host,
deploy, operate and support its wireless solution for customers, allowing them
to completely outsource their wireless data operations and provide their
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mobile users with continuous connectivity to enterprise applications. Vast is an
active member of the Wireless Application Platform (WAP) Forum and intends to
support new technologies and applications based on emerging standards that
support wireless communications.
Vast is a development stage company and, since its inception, has been
engaged primarily in product research and development and developing markets for
its products and services. In 1999, Vast had only $1 million of total revenues
and incurred an operating loss of approximately $36 million as a result of these
startup activities.
Realignment of Sales and Marketing Structure
PageNet has reviewed its customers and prospects in each market in order
to design a sales and marketing structure that is more closely aligned with its
customers' needs and with PageNet's overall goal of migrating its customers to
higher revenue products. This new sales structure, which was implemented in
April 1999, enables PageNet to sell a diversified portfolio of products to a
sophisticated group of customers. This structure includes account segmentation
and focused selling skills, career paths for all sales personnel, sales targets,
training curriculums for each selling group, and competitive compensation plans.
Price Increases
In an effort to improve the profitability of some of its services,
PageNet implemented price increases in late 1998 and 1999 to some of its
customers. As a result of these price increases, increased competition in the
marketplace for wireless communications services, and other factors, PageNet's
units in service have decreased each quarter from the third quarter of 1998
through the fourth quarter of 1999, and this trend is expected to continue
through 2000. PageNet experienced its first year-to-year increase in average
revenue per unit in 1998, although average revenue per unit has since declined
during the second, third, and fourth quarters of 1999. PageNet continues to
review its pricing structure for all of its services.
SALES AND DISTRIBUTION
PageNet's services are sold to its customers through both direct and
indirect distribution channels. The direct channel consists of selling services
to customers through local employee sales representatives who call on prospects
and customers or take orders at storefront locations, as well as sales completed
through PageNet's internet store. The indirect channel consists of selling
services to customers primarily through resellers. PageNet does not depend upon
any single subscriber or reseller for a significant portion of its revenues.
As of December 31, 1999, direct sales accounted for approximately 48% of
PageNet's overall units in service, and the indirect sales channel accounted for
approximately 52%. In the direct channel, PageNet charges a monthly service fee
and either leases or sells its messaging devices to its customers. In the
indirect channel, PageNet provides services to resellers under marketing
agreements at wholesale service rates. PageNet sells or leases messaging devices
to resellers, who sell PageNet's services to end users. Resellers are typically
responsible for all costs associated with servicing their customers. However, in
some cases, resellers may contract with PageNet to provide billing and other
customer service functions.
MARKETING
PageNet promotes its products and services through a variety of programs,
including television, print, newspaper, yellow pages advertising, and co-op
programs with manufacturers and other third parties. Traditionally, PageNet has
focused its marketing efforts primarily on business users, who represent the
majority of its subscribers.
MESSAGING DEVICES AND TRANSMISSION EQUIPMENT
PageNet currently purchases messaging devices primarily from Motorola,
Inc., transmitters from Glenayre Technologies, Inc. and Motorola, and wireless
messaging terminals from Glenayre. Motorola has announced its intention to
discontinue manufacturing transmitters and other paging infrastructure during
2000, although it will continue to maintain and service existing infrastructure
into the future. PageNet believes that it will be able to continue to purchase
messaging devices from Motorola and other sources and be able to purchase
paging infrastructure from sources other than Motorola.
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PageNet's technical functions include testing of new messaging devices and
transmission equipment, designing wireless transmission systems and installing
and maintaining transmitters to support PageNet's transmission system. Because
of the compatibility among different transmitters, computers, and other
messaging equipment, PageNet can design its systems without being dependent upon
any single supplier.
As of December 31, 1999, PageNet owned messaging devices having a net book
value of approximately $166 million.
INTERNATIONAL OPERATIONS
PageNet provides services in Canada similar to those offered in the United
States through its wholly-owned subsidiary, Paging Network of Canada Inc.
PageNet has sales operations in Montreal, Ottawa, Quebec City, Toronto and
Vancouver. PageNet services a geographic area containing more than 75% of the
population of Canada.
PageNet holds a minority interest in a wireless messaging company in
Brazil. PageNet, through its subsidiaries, also owns frequency licenses in the
United Kingdom, Argentina, and Chile. PageNet is currently considering options
to return these licenses to the regulatory bodies in each of these countries.
PageNet recorded a provision of $18 million during the first quarter of 1999 for
the impairment of the assets of its 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, PageNet 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, PageNet 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 PageNet'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
PageNet's Spanish subsidiaries. All operations in the Spanish subsidiaries were
ceased in the third quarter of 1999. No additional charges are required.
PageNet is not considering opportunities for international expansion at this
time.
COMPETITION
PageNet has numerous competitors in all of the locations in which it
operates. Competition in most geographic markets is based primarily on price,
type and quality of service offered and geographic coverage. In addition to
other wireless messaging companies, PageNet experiences significant competition
from companies which provide personal communications services (PCS) and cellular
telephones and, more recently, also offer basic and advanced messaging services
and internet access. Many of these competitors possess financial, technical and
other resources greater than those of PageNet. PageNet's competitors currently
include wireless messaging carriers such as Vodafone Airtouch, Inc., Arch, Bell
Atlantic Corporation, BellSouth Wireless Data, L.P., MCI WorldCom, Inc., Skytel
Communications, Inc., Metrocall, Inc., Nextel Communications, Inc., RSR, Sprint
PCS Group, and WebLink Wireless, Inc., formerly known as PageMart Wireless.
Future technological advances in wireless communications could create new
services or products which could be competitive with the services provided by
PageNet. PageNet continuously evaluates new technologies and applications in
wireless services. However, PageNet cannot guarantee that it will not be
adversely affected by technological changes in wireless communications.
REGULATION
Federal Regulation -- Overview
PageNet's wireless messaging operations are subject to regulation by the
Federal Communications Commission under federal communications laws and
regulations. The Federal Communications Commission has granted PageNet licenses
to use the radio frequencies necessary to conduct its business. Licenses issued
by the Federal Communications Commission to PageNet set forth the technical
parameters, such as output signal level and tower height, under which PageNet is
authorized to use those frequencies. Each Federal Communications Commission
license held by PageNet has construction and operational requirements that must
be satisfied within set time frames. The Federal Communications Commission has
the authority to auction most new licenses over which wireless mobile services
are traditionally offered but does not have the authority to use auctions for
license renewals or license modifications.
The Federal Communications Commission licenses granted to PageNet have
varying terms of up to 10 years, at the end of which time renewal applications
must be approved by the Federal Communications Commission. In the past, Federal
Communications Commission renewal applications have been routinely granted, in
most cases upon a demonstration of compliance with Federal Communications
Commission regulations and adequate service to the public. The Federal
Communications Commission has granted each renewal license PageNet has filed,
other than
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those which are pending. Although PageNet 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 PageNet's licenses will be renewed by the
Federal Communications Commission. Furthermore, although revocation and
involuntary modification of licenses are extraordinary regulatory measures, the
Federal Communications Commission has the authority to restrict the operation of
licensed facilities or revoke or modify licenses. PageNet is seeking an
extension of time in which to meet construction benchmarks for licenses acquired
at auction. Failure to obtain such extensions could result in PageNet having
such licenses revoked or modified involuntarily. No license of PageNet has ever
been revoked or modified involuntarily.
The Federal Communications Commission's review and revision of rules
affecting companies such as PageNet is ongoing. The regulatory requirements to
which PageNet is subject may change significantly over time. For example, the
Federal Communications Commission has adopted rules which allow companies to
operate on particular channels throughout a broader geographic area. These
geographic area licenses have been awarded through an auction. Incumbent
messaging carriers that are already licensed by the Federal Communications
Commission in these broad geographic areas are entitled to continue to operate
without interference from the auction winners, if any. In many instances PageNet
still needs to obtain the prior approval of the Federal Communications
Commission before it can implement any significant changes to its messaging
networks. Once the Federal Communications Commission's market area licensing
rules are implemented, however, many of these licensing obligations will be
eliminated.
In addition to eliminating obligations, the Federal Communications
Commission has sought comment on rules for certain frequencies licensed to
PageNet for use throughout much of the nation. If the Federal Communications
Commission were to impose additional, more stringent coverage requirements on
licensees with these frequencies, including PageNet, PageNet might have to
accelerate the buildout of its systems.
Federal communications laws and regulations require licensees, such as
PageNet, to obtain prior approval from the Federal Communications Commission for
the transfer of control of any construction permit or station license. Prior
approval is required by the Federal Communications Commission of acquisitions of
other messaging companies by PageNet and transfers by PageNet of a controlling
interest in any of its licenses or construction permits. The Federal
Communications Commission has approved each acquisition and transfer of control
for which PageNet has sought approval, including those contemplated in
connection with the Merger. PageNet also regularly applies for Federal
Communications Commission 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 PageNet will be approved or acted upon in a timely manner
by the Federal Communications Commission, or that the Federal Communications
Commission will grant the extension requested, PageNet knows of no reason to
believe any such requests, applications, or extension will not be approved or
granted. PageNet makes no representations, however, about the continued
availability of additional frequencies used to provide its services.
Foreign Ownership Restrictions
Foreign ownership of entities that directly or indirectly hold certain
licenses from the Federal Communications Commission, including some of those
held by PageNet, is limited. Because PageNet holds licenses from the Federal
Communications Commission only through its subsidiaries, up to 25% of PageNet'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. However, if more than 25% of PageNet's common stock is owned or
voted by aliens or their representatives, a foreign corporation, or a foreign
government or its representatives, the Federal Communications Commission has the
right to revoke or refuse to grant licenses if it finds that such revocation or
refusal serves the public interest. The Federal Communications Commission has
indicated that, pursuant to the World Trade Organization Telecommunications
Agreement, it would waive the 25% limitation in appropriate circumstances. Based
upon information obtained by PageNet, it 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. PageNet subsidiaries that are radio common carrier licensees are
subject to more stringent requirements and may have only up to 20% of their
stock owned or voted by aliens or their representatives, a foreign government or
their representatives or a foreign corporation. This ownership restriction is
not subject to waiver.
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Limitations on Allocation of Numbers
Increased demand for telephone numbers, particularly in metropolitan
areas, is causing depletion of numbers in some of the more popular area codes.
Recent plans to address this increased demand have included elements that could
impact PageNet's operations, including the take-back of numbers already assigned
for use and service-specific plans whereby only some services, such as paging
and cellular, would be assigned numbers using a new area code, or plans which
require the pooling of blocks of numbers for use by multiple carriers. PageNet
can provide no assurance as to whether such plans will be adopted by a federal
or state commission, or whether such plans will require PageNet to incur
further, substantial expenses in order to continue to obtain telephone numbers
for its subscribers.
Interconnection
Recent amendments to federal communications laws are intended to promote
competition in phone services through the removal of legal or other barriers to
entry. Specifically, all telecommunications carriers have the duty to
interconnect with the facilities and equipment of other telecommunications
carriers. The Federal Communications Commission, and the 9th Circuit Court of
Appeals, among others, have interpreted this duty as requiring certain local
telephone companies to compensate mobile wireless companies for calls originated
by customers of the local telephone companies which terminate on a mobile
wireless company's network. The Federal Communications Commission has also found
to be unlawful charges to messaging companies that have been assessed in the
past on a monthly basis by certain local telephone companies for the use of
interconnection facilities, including telephone numbers. PageNet has refused to
pay certain of those charges determined to be unlawful. These findings by the
Federal Communications Commission have been challenged at the Federal
Communications Commission and in the courts. Although PageNet strongly believes
that such charges are unlawful and that it has no obligation to pay such
charges, PageNet cannot predict with certainty the ultimate outcome of these
proceedings. Compensation amounts may be determined in subsequent proceedings
either at the federal or state level, or may be determined based on negotiations
between the local telephone companies and the messaging companies. Any
agreements reached between the local telephone companies and the messaging
companies may be required to be submitted to a state regulatory commission for
approval. PageNet has negotiated interconnection agreements with some major
local telephone companies and is in negotiations with other local telephone
companies but can provide no assurances that it will obtain interconnection
agreements with all local telephone companies. If these issues are ultimately
decided in favor of the local telephone companies, PageNet, to a lesser extent
because of the agreements it has reached, may be required to pay past due
contested charges and may also be assessed interest and late charges for amounts
withheld. PageNet does not believe the ultimate resolution of this matter will
have a material adverse impact on its results of operations, financial position,
or liquidity.
Additional Regulatory Obligations and Benefits
The Federal Communications Commission has determined that companies such
as PageNet are required to contribute to "Universal Service" or other funds to
assure the continued availability of local phone service to high cost areas, as
well as to contribute funds to cover other designated costs or societal goals.
Further, providers of payphones must be compensated for all calls placed from
pay telephones to toll-free numbers. This latter requirement increases PageNet's
costs of providing toll-free number service, and there are no assurances that
PageNet will be able to continue to pass on these, or other increased costs
imposed by federal or state telecommunication regulators, to its subscribers.
Beneficially, the laws now limit the circumstances under which state and local
governments may deny a request by most wireless companies to place transmission
facilities in residential communities and business districts, and give the
Federal Communications Commission the authority to preempt the states in some
circumstances.
The laws require some telecommunications companies, including PageNet, 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 been established but not acknowledged by all
governmental bodies to date. Therefore, PageNet cannot determine at this time
what compliance measures will be required or the costs thereof. In addition, the
Federal Communications Commission has instituted proceedings addressing the
manner in
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which telecommunications carriers are permitted to jointly market certain types
of services, and the manner in which telecommunications carriers render bills
for these services. Depending on the outcome of these proceedings, PageNet and
other telecommunications carriers could incur higher administration and other
costs in order to comply.
State Regulation
In addition to potential regulation by the Federal Communications
Commission, some states have the authority to regulate messaging services,
except where such regulation affects or relates to the rates charged to
customers and/or the ability of companies like PageNet to enter a market. Such
regulations have been preempted by the federal communications laws. States may
petition the Federal Communications Commission for authority to continue to
regulate commercial mobile radio service rates if certain conditions are met.
State filings seeking rate authority have all been denied by the Federal
Communications Commission, although new petitions seeking such authority may be
filed in the future. Furthermore, some states and localities continue to exert
jurisdiction over (1) approval of acquisitions of assets and transfers of
licenses of mobile wireless systems and (2) resolution of consumer complaints.
PageNet believes that, to date, all required filings for their respective
messaging operations have been made. All state approvals of acquisitions or
transfers made by PageNet have been approved, and PageNet 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 laws do not preempt state regulatory authority over other aspects of
PageNet's operations, and some state may choose to exercise such authority. Some
state and local governments have imposed additional taxes or fees upon some of
the activities in which PageNet is engaged. In addition, the construction and
operation of radio transmitters may be subject to zoning, land use, public
health and safety, consumer protection and other state and local taxes, levies
and ordinances. As noted above, the Federal Communications Commission may
delegate to the states authority over telephone number allocation and
assignment.
TRADEMARKS
PageNet markets its services under various names and marks, including
PageNet(R), PageMail(R), PageMate(R), PageNet Nationwide(R), SurePage(R),
FaxNow(R), and MessageNow(R), all of which are federally registered service
marks. PageNet's federal mark registrations must be renewed at various times
between 2000 and 2005. PageNet has filed applications with the United States
patent and trademark office to register additional names and marks.
CORPORATE ORGANIZATION
Historically, PageNet's subsidiaries operated as independent business
units making their own staffing, administrative, operational and marketing
decisions within guidelines established by the executive officers of PageNet.
Effective December 31, 1998, PageNet merged a substantial number of its
operating subsidiaries into PageNet, Inc., a first tier subsidiary of PageNet.
PageNet has eight wholly-owned domestic subsidiaries. As of December 31, 1999,
PageNet conducted its international operations through eleven wholly- and
partially-owned subsidiaries. In March 2000, PageNet sold its interest in its
Spanish subsidiary.
SEASONALITY
PageNet's results of operations are not significantly affected by seasonal
factors.
EMPLOYEES
PageNet had approximately 4,300 employees as of December 31, 1999. Of
these employees, approximately 1,800 were engaged in administrative, customer
service, and technical capacities at PageNet's headquarters and its centralized
processing facilities. Approximately 2,500, including approximately 1,250 sales
personnel, were employed in PageNet's domestic and international offices. In
addition to its 4,300 employees, PageNet had approximately 1,300 temporary
workers in various customer service and administrative roles as of December 31,
1999. As a result of PageNet's Restructuring efforts, the Company eliminated
approximately 300 permanent and 850 temporary positions during 1999. None of
PageNet's employees is represented by a labor union. During 1999, PageNet
experienced high employee turnover primarily due to its Restructuring
initiative. PageNet is
9
<PAGE> 10
currently continuing to experience a high employee turnover rate due to its
deteriorating financial results and its pending merger with Arch.
ITEM 2. PROPERTIES.
As of December 31, 1999, PageNet leased office space in 112 cities in 35
states in the United States and the District of Columbia, and in six cities in
four provinces in Canada. These leases expire, subject to renewal options, on
various dates through December 31, 2007. PageNet also leases office space for
its corporate headquarters in Dallas, Texas under a lease term that expires in
June 2003. As of December 31, 1999, PageNet was paying annualized rent of
approximately $28 million. This amount includes amounts paid under leases that
were closed as part of PageNet's Restructuring initiative, but excludes any
potential income from subleasing these facilities. PageNet has suspended further
Restructuring efforts during 2000 pending a determination as to the
infrastructure to be used by the combined company following the Merger.
PageNet also leases sites for its transmitters on commercial broadcast
towers, buildings, and other structures. As of December 31, 1999, PageNet leased
transmitter sites for between 10,000 and 12,000 transmitters. A few local
municipalities have suspended the designation of new transmitter locations
and/or the addition of new towers. Should these suspensions, or others, continue
for an extended period of time, they could affect PageNet's and other wireless
carriers' ability to offer coverage in those areas.
ITEM 3. LEGAL PROCEEDINGS.
PageNet 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 PageNet's business, financial position, or
results of operations.
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 1999.
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<PAGE> 11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREOWNER
MATTERS.
On February 25, 2000, Nasdaq moved the trading of PageNet's common stock,
$0.01 par value, from the Nasdaq National Market System (NMS) to the Nasdaq
SmallCap Market. The determination was made following a hearing before the
Nasdaq Listing Qualifications Panel on January 29, 2000. On April 20, 2000,
PageNet was notified by Nasdaq that it would be delisted from the Nasdaq
SmallCap Market on May 1, 2000 unless its Form 10-K was filed with the
Securities and Exchange Commission by April 27, 2000. PageNet has requested an
oral hearing before the Nasdaq Listing Qualifications Panel and delisting has
been stayed pending such hearing. The hearing is scheduled for June 1, 2000.
PageNet's shares are traded under the symbol PAGEE. The following table sets
forth the high and low trading prices per share of PageNet common stock for the
quarterly periods indicated, which correspond to PageNet's quarterly fiscal
periods for financial reporting purposes.
<TABLE>
<CAPTION>
PRICE RANGE
-------------------------------
HIGH LOW
---------- -----------
<S> <C> <C>
1998
----
First Quarter $ 16.3750 $ 9.5000
Second Quarter $ 16.6250 $ 12.5000
Third Quarter $ 14.6250 $ 4.8125
Fourth Quarter $ 7.3750 $ 3.5625
1999
----
First Quarter $ 7.0000 $ 3.8750
Second Quarter $ 4.9375 $ 3.0000
Third Quarter $ 6.8750 $ 0.7188
Fourth Quarter $ 1.7188 $ 0.5938
</TABLE>
As of April 25, 2000, there were approximately 923 shareholders of record.
From January 1, 1998 through the date hereof, PageNet has declared no cash
dividends on its common stock. PageNet does not anticipate paying cash dividends
or making other cash distributions to shareholders in the foreseeable future.
Under the terms of PageNet's debt agreements, it is currently restricted from
paying cash dividends.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA.
The following table sets forth selected historical consolidated financial
and operating data of PageNet as of and for the years ended December 31, 1995,
1996, 1997, 1998, and 1999. The selected financial and operating data as of
December 31, 1995, 1996, 1997, 1998, and 1999 and for each of the five years in
the period ended December 31, 1999, has been derived from PageNet's audited
consolidated financial statements and notes. The following consolidated
financial information should be read in conjunction with "PageNet Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
PageNet's consolidated financial statements and notes.
The provision for asset impairment for the year ended December 31, 1999
represents a charge for the impairment of the assets of PageNet's majority-owned
Spanish subsidiaries. The provision for asset impairment for the year ended
December 31, 1996 represents a provision to write off subscriber devices leased
by PageNet to customers under an agreement with a national marketing affiliate.
The provision for asset impairment for the year ended December 31, 1997
represents a provision to write down certain subscriber devices to their net
realizable value. The restructuring charges for the years ended December 31,
1998 and 1999 represent a charge in 1998 and adjustment of such charge in 1999,
for the abandonment of facilities and property and related severance costs
associated with the reorganization of PageNet's domestic operations. The
extraordinary item for the year ended December 31, 1997, represents the loss on
the early retirement of all $200 million of PageNet's outstanding 11.75%
11
<PAGE> 12
senior subordinated notes in May 1997. The cumulative effect of a change in
accounting principle for the year ended December 31, 1999 represents the
write-off of all remaining unamortized start-up costs as of January 1, 1999,
upon the adoption of AICPA Statement of Position 98-5 "Reporting on the Costs of
Start-Up Activities." Effective April 1, 1999, PageNet changed the depreciable
lives for its subscriber devices and a portion of its network equipment. As a
result of these changes, depreciation expense increased by approximately $78
million during the year ended December 31, 1999. Further discussion of these
items is included in "PageNet Management's Discussion and Analysis of Financial
Condition and Results of Operations" and PageNet's consolidated financial
statements and notes.
Earnings before interest, income taxes, depreciation, and amortization
(EBITDA) is commonly used by analysts and investors as a principal measure of
financial performance in the wireless messaging industry. EBITDA is also one of
the primary financial measures used to calculate whether PageNet and its
subsidiaries are in compliance with financial covenants under their debt
agreements. These covenants, among other things, limit the ability of PageNet
and its subsidiaries to: incur additional indebtedness, advance funds to some of
PageNet's affiliates, pay dividends, grant liens on its assets, merge, sell or
acquire assets, repurchase or redeem capital stock, incur capital expenditures
and prepay certain indebtedness. EBITDA is also one of the financial measures
used by analysts to value PageNet. Therefore, PageNet's management believes that
the presentation of EBITDA provides relevant information to investors. Adjusted
EBITDA, as determined by PageNet, does not reflect other non-operating (income)
expense, provision for asset impairment, restructuring charge, extraordinary
items, and cumulative effect of a change in accounting principle; consequently
Adjusted EBITDA may not necessarily be comparable to similarly titled data of
other wireless messaging companies. EBITDA and Adjusted EBITDA should not be
construed as alternatives to operating income or cash flows from operating
activities as determined in accordance with GAAP or as a measure of liquidity.
Amounts reflected as EBITDA or Adjusted EBITDA are not necessarily available for
discretionary use as a result of restrictions imposed by the terms of existing
indebtedness and limitations imposed by applicable law upon the payment of
dividends or distributions, among other things. See "PageNet Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Adjusted EBITDA margin is calculated by dividing PageNet Adjusted EBITDA
by total revenues less cost of products sold. EBITDA margin is a measure
commonly used in the wireless messaging industry to evaluate a company's EBITDA
relative to total revenues less cost of products sold as an indicator of the
efficiency of a company's operating structure.
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<PAGE> 13
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Services, rent and maintenance revenues $ 532,079 $ 685,960 $ 818,461 $ 945,524 $ 897,348
Product sales 113,943 136,527 142,515 100,503 92,375
----------- ----------- ----------- ----------- -----------
Total revenues 646,022 822,487 960,976 1,046,027 989,723
Cost of products sold (93,414) (116,647) (121,487) (77,672) (57,901)
----------- ----------- ----------- ----------- -----------
552,608 705,840 839,489 968,355 931,822
Services, rent and maintenance expenses 109,484 146,896 173,058 210,480 267,043
Selling expenses 67,561 82,790 102,995 104,350 97,413
General and administrative expenses 174,432 219,317 253,886 320,586 361,386
Depreciation and amortization expense 148,997 213,440 289,442 281,259 327,101
Provision for asset impairment -- 22,500 12,600 -- 17,798
Restructuring charge -- -- -- 74,000 (23,531)
----------- ----------- ----------- ----------- -----------
Total operating expenses 500,474 684,943 831,981 990,675 1,047,210
----------- ----------- ----------- ----------- -----------
Operating income (loss) 52,134 20,897 7,508 (22,320) (115,388)
Interest expense (102,846) (128,014) (151,380) (143,762) (150,921)
Interest income 6,511 3,679 3,689 2,070 3,902
Other non-operating income (expense) -- (882) (1,220) 2,003 851
----------- ----------- ----------- ----------- -----------
Loss before extraordinary item and
cumulative effect of a change in
accounting principle (44,201) (104,320) (141,403) (162,009) (261,556)
Extraordinary loss -- -- (15,544) --
Cumulative effect of a change in
accounting principle -- -- -- -- (37,446)
----------- ----------- ----------- ----------- -----------
Net loss $ (44,201) $ (104,320) $ (156,947) $ (162,009) $ (299,002)
=========== =========== =========== =========== ===========
Per common share data (basic and diluted):
Loss before extraordinary item and
cumulative effect of a change in
accounting principle $ (0.43) $ (1.02) $ (1.38) $ (1.57) $ (2.52)
Extraordinary loss -- -- (0.15) -- 0
Cumulative effect of a change in
accounting principle -- -- -- -- (0.36)
----------- ----------- ----------- ----------- -----------
Net loss per share $ (0.43) $ (1.02) $ (1.53) $ (1.57) $ (2.88)
=========== =========== =========== =========== ===========
</TABLE>
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<PAGE> 14
OTHER OPERATING DATA:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT UNIT DATA)
YEAR ENDED DECEMBER 31, 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
EBITDA $ 201,131 $ 233,455 $ 280,186 $ 260,942 $ 175,118
Adjusted EBITDA 201,131 256,837 309,550 332,939 205,980
Adjusted EBITDA margin 36.4% 36.4% 36.9% 34.4% 22.1%
Capital expenditures $ 312,289 $ 437,388 $ 328,365 $ 268,183 $ 234,926
Cash flows provided by
operating activities 160,629 110,382 150,503 248,101 77,866
Cash flows used in investing
activities (589,387) (601,122) (459,929) (285,586) (237,319)
Cash flows provided by
financing activities 624,489 296,335 308,573 37,638 188,520
Units in service at end
of period 6,738,000 8,588,000 10,344,000 10,110,000 8,991,000
</TABLE>
The following table reconciles PageNet's net loss to EBITDA and Adjusted EBITDA:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss $ (44,201) $ (104,320) $ (156,947) $ (162,009) $ (299,002)
Interest expense 102,846 128,014 151,380 143,762 150,921
Interest income (6,511) (3,679) (3,689) (2,070) (3,902)
Depreciation and amortization expense 148,997 213,440 289,442 281,259 327,101
------------ ------------ ------------ ------------ ------------
EBITDA 201,131 233,455 280,186 260,942 175,118
Other non-operating (income) expense -- 882 1,220 (2,003) (851)
Provision for asset impairment -- 22,500 12,600 -- 17,798
Restructuring charge -- -- -- 74,000 (23,531)
Extraordinary loss -- -- 15,544 -- --
Cumulative effective of a change in
accounting principle -- -- -- -- 37,446
------------ ------------ ------------ ------------ ------------
Adjusted EBITDA $ 201,131 $ 256,837 $ 309,550 $ 332,939 $ 205,980
============ ============ ============ ============ ============
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets $ 259,096 $ 95,550 $ 105,214 $ 108,961 $ 130,930
Total assets 1,228,338 1,439,613 1,597,233 1,581,244 1,422,560
Long-term obligations,
less current maturities 1,150,000 1,459,188 1,779,491 1,815,137 58,127
Total shareowners' deficit (80,784) (182,175) (337,931) (490,419) (789,839)
</TABLE>
14
<PAGE> 15
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, performance and market
acceptance of new products and services, impact of Year 2000 issues on the
operations of Paging Network, Inc. (PageNet), pending distribution of equity
interests in Vast (the Vast distribution), PageNet's financial condition and
ability to continue as a going concern 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, the introduction of products and services by
competitors of PageNet, the performance of PageNet's vendors and independent
contractors, third-party Year 2000 remediation plans, the introduction of
competing technologies, the performance of PageNet's advanced messaging network,
acceptance of PageNet's products and services in the marketplace, higher than
normal employee turnover, impact of the suspension of PageNet's Restructuring,
the financial condition of PageNet and the uncertainty of additional financing.
Certain statements in this filing relating to the consummation of a merger
of PageNet with Arch Communications Group, Inc. (Arch), including statements
regarding the rates at which PageNet's common stock and senior subordinated
notes will be exchanged or converted into shares of the common stock of Arch,
the percentage distribution of PageNet's interest in a wholly-owned subsidiary
to holders of PageNet'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 PageNet and Arch, the filing of an involuntary
bankruptcy proceeding by creditors of PageNet or a voluntary bankruptcy
proceeding by PageNet, the emergence of a competing offer to acquire either
PageNet or Arch, the material breach of the merger agreement by PageNet or Arch,
or the failure to satisfy any of the other conditions to the closing of the
merger.
INTRODUCTION
PageNet is a provider of wireless communications services throughout the
United States and in the U.S. Virgin Islands, Puerto Rico, and Canada. PageNet
provides services in all 50 states and the District of Columbia, including
service in the 100 most populated markets in the United States. PageNet also
owns a minority interest in a wireless communications company in Brazil. During
1999 and early 2000, several significant events have occurred:
o On November 8, 1999, PageNet announced a merger with Arch. Under the
merger, PageNet will become a wholly-owned subsidiary of Arch. Also as
part of the merger, PageNet's advanced wireless data and wireless
solutions business will be spun-off from PageNet. See discussion under
"Merger Agreement."
o PageNet's deteriorating financial results and defaults under its debt
agreements have resulted in significant liquidity constraints. The
report of PageNet's independent auditors expresses substantial doubt
about its ability to continue as a going concern. See discussion under
"Liquidity and Capital Resources."
o In February and April 2000, PageNet failed to make the semi-annual
interest payments due under its $1.2 billion of senior subordinated
public notes. PageNet is also not in compliance with several financial
covenants of its domestic revolving credit facility (the Credit
Agreement). See discussion under "Liquidity and Capital Resources."
o As a result of billing software and system implementation problems
encountered throughout 1999 and the proposed merger with Arch, PageNet
initially postponed and subsequently suspended the conversions of
certain local offices to its new billing and customer service
platforms. As a result of these suspensions, PageNet reversed $24
million of the restructuring charge recorded in 1998 during the fourth
quarter of 1999. See discussion under "Restructuring."
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<PAGE> 16
o Units in service with subscribers decreased from approximately 10.1
million units at December 31, 1998, to approximately 9.0 million units
at December 31, 1999. Units in services further declined significantly
in the first quarter of 2000 and are expected to continue to decline
throughout 2000.
o In June 1999, PageNet consolidated its initiative to develop advanced
services including wireless data and wireless solutions into its
wholly-owned subsidiary, Vast. Vast is a development stage company
and, since its inception, has been engaged primarily in product
research and development and developing markets for its products and
services. In 1999, Vast had only $1 million of total revenues and
incurred an operating loss of approximately $36 million as a result of
these startup activities.
o PageNet's Spanish subsidiaries ceased operations during the third
quarter of 1999. PageNet had recorded a provision of $18 million
during the first quarter of 1999 for the impairment of the assets of
the Spanish subsidiaries.
o PageNet incurred a net loss of $299 million for the year ended
December 31, 1999. The net loss for 1999 includes an increase in
depreciation expense of $78 million resulting from changes in the
depreciable lives of subscriber devices and certain network equipment
and a charge of $37 million for the cumulative effect of adopting a
new accounting standard. See "Results of Operations".
MERGER AGREEMENT
On November 8, 1999, PageNet announced that it had signed a definitive
agreement (the Merger Agreement) to merge (the Merger) with Arch. Under the
terms of the Merger Agreement, each share of PageNet's common stock will be
exchanged for 0.1247 share of Arch common stock. Under the terms of the Merger
Agreement, PageNet'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.
As part of the Merger, PageNet intends to distribute up to 80.5% of its
interest in Vast, a wholly-owned subsidiary of PageNet, to holders of the Notes
and PageNet's common stock. Holders of the Notes will receive up to a 68.9%
interest in Vast, while holders of PageNet's common stock will receive up to an
11.6% interest. The remaining interest will be held by the combined company
following the Merger.
The Merger Agreement requires 97.5% acceptance by the holders of the Notes
and affirmative votes of a majority of PageNet's and Arch's stockholders to
complete the Merger. Consent of the lenders under PageNet's Credit Agreement is
also required. The Merger Agreement also provides for PageNet 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% in amount and
50% in number required under the Bankruptcy Code for the noteholder class to
accept the "pre-packaged" Chapter 11 reorganization plan.
Consummation of the Merger is subject to customary regulatory review,
certain third-party consents, including PageNet's lenders, and the approvals
noted above. The Company has received approval from the Department of Justice
and the Federal Communications Commission to proceed with the Merger, and
anticipates completing the Merger during the third quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
General
PageNet's deteriorating financial results and liquidity have caused PageNet
to be in default of the covenants of all of its domestic debt agreements. On
February 2, 2000, PageNet failed to make the semi-annual interest payment on its
8.875% senior subordinated notes due 2006 (8.875% Notes), and its 10.125% senior
subordinated notes due 2007 (10.125% Notes). As of March 2, 2000, the
non-payment of interest constituted a default under the indentures
16
<PAGE> 17
of the 8.875% Notes and the 10.125% Notes. As of April 17, 2000, PageNet failed
to make the semi-annual interest payment on its 10% senior subordinated notes
due 2008 (10% Notes), and does not expect to make additional cash interest
payments on any of its Notes. As a result of this default, PageNet's bondholders
could demand at any time that PageNet immediately pay $1.2 billion of its bonds
in full. Should this happen, PageNet would immediately file for protection under
Chapter 11 of the United States Bankruptcy Code (Chapter 11).
PageNet is also in default of several of the financial and other covenants
of its Credit Agreement. As a result of these defaults, the lenders under the
Credit Agreement could demand at any time that PageNet immediately pay the $745
million outstanding under the Credit Agreement in full. Should this happen,
PageNet would immediately file for protection under Chapter 11.
PageNet is prohibited from additional borrowings and has classified all of
its outstanding indebtedness under the Credit Agreement and the Notes as a
current liability as of December 31, 1999. As of May 1, 2000, PageNet had
approximately $55 million in cash. PageNet believes that this cash, plus the
cash expected to be generated from operations, is sufficient to meet its
obligations, except for the cash interest payments due under the Notes, into the
third quarter of 2000. However, if PageNet's financial results continue to
deteriorate, PageNet may not have enough cash to meet such obligations through
the third quarter of 2000. PageNet is considering alternatives to ensure that it
has sufficient liquidity through the completion of the Merger. However, there
can be no assurance that PageNet's efforts to obtain additional liquidity will
be timely or successful or that the Merger will be completed. As a result,
PageNet may have to reduce the level of its operations and/or file for
protection under Chapter 11 to complete the Merger and/or restructure its
obligations. PageNet is negotiating a debtor-in-possession loan facility with
its lenders to be made available in the event it commences a Chapter 11 case.
Filing for bankruptcy would have a material impact on PageNet's results of
operations and financial position.
PageNet's deteriorating financial condition and lack of additional
liquidity indicate that PageNet may not be able to continue as a going concern
for a reasonable period of time. PageNet's ability to continue as a going
concern is dependent upon several factors, including, but not limited to, the
continued non-demand for immediate payment of outstanding indebtedness by the
holders of the Notes and the lenders under the Credit Agreement and PageNet's
ability to (i) generate sufficient cash flows to meet its obligations, other
than the cash interest payments due under the Notes, on a timely basis, (ii)
obtain additional or restructured financing, including potential
debtor-in-possession borrowings if PageNet is required to file for protection
under Chapter 11, (iii) continue to obtain uninterrupted supplies and services
from its vendors, and (iv) reduce capital expenditures and operating expenses.
PageNet is proceeding with these initiatives as well as also proceeding with its
plan to complete the Merger described above.
Vast Solutions
Since the inception of Vast, PageNet has funded substantially all of its
operations, which are in the development stage. However, as a result of the
above described defaults, PageNet is prohibited from providing any additional
funding to Vast. Of PageNet's cash on hand at May 1, 2000, approximately $7
million was held by Vast. Vast believes such cash is sufficient to meet its
obligations into the third quarter of 2000. However, without additional
financing, Vast may not have sufficient liquidity to meet its obligations
through the third quarter of 2000. Vast is currently involved in discussions
with third parties regarding potential private equity investments, which, if
consummated, would be expected to close simultaneously with the Merger and
related Vast distribution. However, there can be no assurance that such efforts
will prove successful or that Vast will have adequate liquidity to meet its
obligations through the date of the Vast distribution. Furthermore, the
financial position and debt defaults of PageNet make it difficult for Vast to
obtain separate debt or equity financing prior to the completion of the Merger
and Vast distribution. As a result, Vast may be required to reduce or cease its
current level of development stage operations. Such events would have a material
impact on PageNet.
Cash Provided by Operating Activities
Net cash provided by operating activities was $78 million for the year
ended December 31, 1999, compared to $248 million for the year ended December
31, 1998, and $151 million for the year ended December 31, 1997. The decrease of
$170 million from 1998 to 1999 resulted primarily from the increase in net loss
before non-cash
17
<PAGE> 18
charges. The increase of $97 million from 1997 to 1998 resulted primarily from a
decrease in net loss before non-cash charges, an increase in accounts payable,
and a decrease in inventories. The increase in accounts payable in 1998 was due
to the high level of accounts payable at December 31, 1998, resulting from
additional expenses incurred late in the fourth quarter of 1998 related to the
Restructuring. The decrease in inventories during 1998 was the result of
programs PageNet began instituting in 1997 to utilize subscriber devices more
effectively and to more closely control subscriber device purchases.
Cash Provided by Financing Activities
Net cash provided by financing activities was $309 million, $38 million,
and $189 million, respectively, for the years ended December 31, 1997, 1998, and
1999. The primary source of financing for each period was net borrowings under
PageNet's domestic revolving Credit Agreement, which increased by $519 million,
$30 million, and $187 million, respectively, for the years ended December 31,
1997, 1998, and 1999. During the year ended December 31, 1997, PageNet redeemed
all its outstanding 11.75% senior subordinated notes utilizing funds borrowed
under the Credit Agreement. As a result, PageNet recorded an extraordinary loss
on the early retirement of debt of approximately $16 million during the year
ended December 31, 1997. Net cash provided by financing activities has been used
for capital expenditures, working capital, and other general corporate purposes,
which included expansion of its existing business and acquisition of new paging
frequencies.
Cash Used in Investing Activities
PageNet's operations and expansion into new markets and product lines have
required substantial capital investment. Furthermore, PageNet has been building
an advanced messaging network, which will enable it to offer new enhanced
messaging services and has converted certain back office functions from
decentralized field offices into centralized processing facilities. PageNet
substantially completed building its advanced messaging network in early 2000.
PageNet continued to convert certain back office functions from its
decentralized field offices into the centralized processing facilities through
January 2000, at which time PageNet suspended further conversions. Cash used in
investing activities was $460 million, $286 million, and $237 million,
respectively, for the years ended December 31, 1997, 1998, and 1999. Capital
expenditures, excluding payments for spectrum licenses, were $328 million, $268
million, and $235 million, respectively, for the years ended December 31, 1997,
1998, and 1999, and consisted primarily of expenditures for PageNet's
traditional paging operations, PageNet's advanced messaging operations, and its
Restructuring initiative. Payments for spectrum licenses were $93 million, $13
million, and $4 million, respectively, for the years ended December 31, 1997,
1998, and 1999, and consisted primarily of expenditures for the acquisition of
exclusive rights to certain specialized mobile radio (SMR) frequency licenses
from incumbent operators.
Capital expenditures related to PageNet's traditional paging operations,
excluding capital expenditures related to the Restructuring, were $224 million,
$136 million, and $84 million, respectively, for the years ended December 31,
1997, 1998, and 1999. The decreases in traditional paging capital expenditures
have been primarily due to a reduction in PageNet's network-related expenditures
pertaining to geographic coverage and capacity expansion. Also, during 1997,
PageNet began instituting programs to utilize subscriber devices more
effectively and to more closely control subscriber device capital expenditures.
In addition to the programs to utilize subscriber devices more effectively, the
decrease in traditional paging capital expenditures in 1997 was also due to
increased efficiencies in infrastructure deployment.
Capital expenditures related to advanced messaging operations were $104
million, $75 million, and $113 million, respectively, for the years ended
December 31, 1997, 1998, and 1999. PageNet launched its two-way messaging
services on its advanced messaging network on February 1, 2000. PageNet expects
to spend an additional $15 million in capital expenditures to complete the
buildout of sites started in the fourth quarter of 1999 and expand capacity in
certain cities throughout the nation during the first half of 2000. This will
substantially complete PageNet's investment in its advanced messaging network.
Capital expenditures related to establishing PageNet's centralized
processing facilities, including new system implementations, were $57 million
and $38 million, respectively, for the years ended December 31, 1998 and 1999.
In January 2000, PageNet suspended further capital expenditures for its
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<PAGE> 19
centralized processing facilities, pending the decision as to which operating
platforms will be used by the combined company.
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. With the substantial completion of the
buildout of its advanced messaging network and the suspension of the
Restructuring initiatives beyond January 2000, PageNet expects its capital
expenditures in 2000 to decrease to approximately $100 million. PageNet expects
to fund these capital expenditures through cash on hand, additional cash
generated from operations prior to its contemplated merger with Arch, and
potential debtor-in-possession borrowings if PageNet is required to file for
protection under Chapter 11.
In 1994, PageNet acquired three nationwide narrowband personal
communications services (PCS) frequencies in a Federal Communications Commission
(FCC) auction for $197 million. During April 1996, PageNet concluded its
participation in an FCC auction of SMR frequency licenses, and ultimately
acquired rights to two to four blocks of two-way spectrum in markets across the
United States. During the remainder of 1996 and through 1999, PageNet purchased
the exclusive rights to certain of these SMR frequencies from incumbent
operators. The total cost of PageNet's investment in its nationwide SMR
frequencies was $221 million. PageNet has employed the nationwide PCS and SMR
frequencies for its advanced messaging network.
Credit Agreements
Under the terms of the Credit Agreement, PageNet was able to borrow,
provided it meets certain financial and other covenants, the lesser of $1.0
billion or an amount based primarily upon PageNet's domestic earnings before
interest, income taxes, depreciation, and amortization (EBITDA) for the most
recent fiscal quarter. However, as discussed above, PageNet is currently
prohibited from making additional borrowings under the Credit Agreement, and
does not anticipate being able to make additional borrowing under the Credit
Agreement in the future. As of December 31, 1999, there were $745 million of
outstanding borrowings under the Credit Agreement. PageNet's maximum borrowings
under the Credit Agreement are permanently reduced beginning on June 30, 2001,
by the following amounts: 2001 -- $150 million; 2002 -- $200 million; 2003 --
$250 million; and 2004 -- $400 million. The Credit Agreement expires on December
31, 2004.
Under the Credit Agreement, PageNet may designate all or a portion of
outstanding borrowings to be either a Base Rate Loan or a loan based on the
London Interbank Offered Rate (LIBOR). As of December 31, 1999, PageNet had
designated all $745 million of borrowings as LIBOR loans, which bear interest at
a rate equal to LIBOR plus a spread of 2.00%. The interest rates for the $745
million of LIBOR loans as of December 31, 1999 ranged from 7.94% to 8.17%. As a
result of the defaults described in Note 2 to the Consolidated Financial
Statements, PageNet's lenders have the right to collect default interest up to
12.00% for PageNet's outstanding balances under its Credit Agreement. PageNet is
currently negotiating with its lenders and expects to receive relief from this
default pricing as part of its efforts associated with the Merger. The Credit
Agreement prohibits PageNet from paying cash dividends or other cash
distributions to shareowners. The Credit Agreement also prohibits PageNet from
paying more than a total of $2 million in connection with the purchase of common
stock owned by employees whose employment is terminated. The Credit Agreement
contains other covenants that, among other things, limit the ability of PageNet
and its subsidiaries to incur indebtedness, engage in transactions with
affiliates, dispose of assets, and engage in mergers, consolidations, and other
acquisitions without the prior written consent of its lenders. Amounts owing
under the Credit Agreement are secured by a security interest in substantially
all of PageNet's assets, the assets of PageNet's subsidiaries, and the capital
stock of the subsidiaries of PageNet (other than the international subsidiaries
and Vast).
The two credit agreements of PageNet's Canadian subsidiaries provide for
total borrowings of approximately $75 million. The lenders are Toronto Dominion
Bank, Canadian Imperial Bank of Commerce, and National Bank of Canada. Amounts
available under the two credit agreements begin reducing in the first quarter of
2002 and reduce to zero on December 31, 2004. Borrowings of up to approximately
$40 million require security in the form of cash or government securities.
Borrowings of up to approximately $35 million require a first security in the
assets of the Canadian subsidiaries. Furthermore, PageNet is required to provide
an additional $2 million of cash collateral by September 30, 2000. However, as a
result of the above described defaults, PageNet is precluded from providing any
additional funding on behalf of its Canadian subsidiaries. The ability of
PageNet's Canadian subsidiaries to continue as a going concern is dependent on
meeting the terms of their credit agreements, either by providing the additional
cash collateral or by establishing alternative arrangements satisfactory to the
lenders. PageNet and its Canadian subsidiaries have taken and plan to take
certain actions that management believes will mitigate any
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<PAGE> 20
adverse conditions and events resulting from the likely failure of PageNet to
provide the required cash collateral. However, there is no certainty that these
actions or other strategies will be sufficient to allow PageNet's Canadian
subsidiaries to meet the terms of their credit agreements.
As of December 31, 1999, approximately $56 million of borrowings were
outstanding under the Canadian credit facilities. Additional borrowings are
available to PageNet's Canadian subsidiaries under these facilities, so long as
the borrowings are either collateralized or the financial covenants in the
credit agreements are met. The interest rate for borrowings secured by cash or
government securities is the bankers' acceptance rate for bankers' acceptances
reported by Toronto Dominion Bank plus .5%. The interest rate for borrowings
secured by the assets of the Canadian subsidiaries is the bankers' acceptance
rate for bankers' acceptances reported by Toronto Dominion Bank plus 1%, 2%, 3%,
or 4%, depending on the current debt ratio of the Canadian subsidiaries. The
current bankers' acceptance rate for bankers' acceptances reported by Toronto
Dominion Bank is 5.4% and the current spread required for borrowings secured by
the assets of the Canadian subsidiaries is 4%.
RESTRUCTURING
In February 1998, PageNet's Board of Directors approved the restructuring
of the Company's domestic operations (the Restructuring). PageNet's
Restructuring plan called for the elimination of redundant administrative
operations by consolidating key support functions located in offices throughout
the country into centralized processing facilities. In addition the
Restructuring plan called for the conversion to new billing and customer service
software platforms. The Restructuring plan specified local and regional office
closures, the disposition of certain furniture, fixtures, and equipment and the
termination of approximately 1,950 employees by job function and location.
Having adopted a formal plan of restructuring, PageNet recorded a restructuring
charge of $74 million during the quarter ended March 31, 1998. While progress in
establishing the centralized processing facilities was made, PageNet's efforts
to convert its offices to its new billing and customer service software
platforms fell behind the original schedule of being completed during the second
quarter of 1999. Billing software and system implementation problems surfaced
during the first office conversions, and as a result, PageNet had to postpone
the conversion of many of its other offices. These postponements resulted in
delays in office closures which deferred the payments of amounts accrued for
lease obligations and terminations and severance and related benefits.
Additional implementation problems surfaced during 1999 and caused further
delays. In November 1999, and in conjunction with the announcement of PageNet's
planned merger with Arch, PageNet decided to suspend further conversions after
January 2000 pending the decisions as to which operating platforms will be used
by the combined company. As a result of the decision to suspend the
Restructuring indefinitely, PageNet recorded a reversal of the unused portion of
the original restructuring charge of $24 million during the quarter ended
December 31, 1999.
PageNet has converted to its new billing and customer service software
platforms all of its customer units placed in service by its resellers and
approximately 50% of its direct customer units. As a result, PageNet will
realize a portion of the anticipated cost savings resulting from its
Restructuring initiative and will eliminate some of the duplicative costs that
have adversely affected its results of operations. However, due to the
suspension of future conversions, combined with the impact of the contemplated
merger on its operations, PageNet is unable to determine the amount of future
cost savings resulting from the centralized processing facilities initiative.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
PageNet's consolidated financial statements and notes. EBITDA is a commonly used
measure of financial performance in the wireless messaging industry and is one
of the financial measures used to calculate whether PageNet is in compliance
with the financial covenants under its debt agreements. EBITDA is defined as
earnings before interest, income taxes, depreciation, and amortization. Adjusted
EBITDA is defined as earnings before interest, income taxes, depreciation,
amortization, other non-operating income (expense), provision for asset
impairment, restructuring charge, extraordinary items, and cumulative effect of
a change in accounting principle. Adjusted EBITDA should not be considered an
alternative to operating income or cash flows from operating activities as
determined in accordance with GAAP. One of PageNet's financial objectives is to
increase its Adjusted EBITDA, since Adjusted EBITDA is a significant source of
funds for servicing indebtedness and for investment in continued growth,
including purchase of paging units and paging system equipment and the
construction and expansion of paging systems. Adjusted EBITDA, as determined by
PageNet, may not be comparable to similarly titled data of other wireless
messaging companies. Amounts described as Adjusted EBITDA are not necessarily
available for discretionary use as a result of restrictions imposed by the
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<PAGE> 21
terms of existing or future indebtedness, including the repayment of such
indebtedness or the payment of associated interest, limitations imposed by law
upon the payment of dividends or distributions or capital expenditure
requirements.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
Services, Rent and Maintenance Revenues
Revenues from services, rent and maintenance, which PageNet considers its
primary business, decreased 5.1% to $897 million for the year ended December 31,
1999, compared to $946 million for the year ended December 31, 1998. The average
revenue per unit for PageNet's traditional paging domestic operations increased
to $7.80 for the year ended December 31, 1999, compared to $7.71 for the year
ended December 31, 1998. However, the increases in average revenue per unit,
which resulted from the shift of PageNet's subscriber base toward higher revenue
products and services during early 1999, were offset by the 11.1% reduction in
the number of units in service during the year ended December 31, 1999.
The number of units in service with subscribers at December 31, 1999 was
approximately 8,991,000, compared to 10,110,000 and 10,344,000 units in service
with subscribers at December 31, 1998 and December 31, 1997. This reduction was
mainly due to the impact of price increases to some of its customers,
intensifying price competition in the market for wireless communications
services, disruptions in customer service caused by conversions to new
centralized processing facilities systems and infrastructure, and the degree to
which cellular, PCS, and other mobile telephone services, are being subscribed
to in lieu of one-way messaging services such as those offered by PageNet.
Approximately two-thirds of the loss in units in service was a result of
continued weakness in PageNet's reseller channel. Many of the factors that
reduced PageNet's units in service in the fourth quarter of 1999 have continued
to exist in 2000. As a result, PageNet estimates it has lost approximately
570,000 net subscribers in the first quarter of 2000.
Product Sales
Product sales decreased 8.1% to $92 million for the year ended December 31,
1999, compared to $101 million for the year ended December 31, 1998. The
decreases in product sales and cost of products sold from 1998 to 1999 resulted
primarily from increased price competition and competition from cellular, PCS,
and other mobile telephone services, both of which resulted in a substantial
decrease in sales through PageNet's reseller channel. In addition, the decrease
in cost of products sold from 1998 to 1999 also resulted from the decrease in
the depreciable lives of PageNet'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
Services, rent and maintenance expenses increased 26.9% to $267 million for
year ended December 31, 1999, compared to $210 million for the year ended
December 31, 1998. The increase in services, rent and maintenance expenses for
the year ended December 31, 1999 was primarily due to:
o increased contracted dispatch costs of approximately $17 million,
primarily related to advanced messaging units placed in service during
1998 and 1999;
o increased transmitter site rent expense of approximately $17 million,
mainly related to the adoption of the provisions of AICPA Statement of
Position 98-5 "Reporting on the Costs of Start-up Activities" (SOP
98-5), effective January 1, 1999, which required start-up costs to be
expensed as incurred, and an increase in transmitter sites in
connection with the buildout of PageNet's advanced messaging network;
o increased telephone expenses of approximately $8 million, primarily
associated with the operation of the advanced messaging network;
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<PAGE> 22
o increased salaries and payroll costs of technical personnel of
approximately $7 million, primarily related to the buildout of the
advanced messaging network;
o increased pager parts, repairs and scrap expense of approximately $4
million.
Selling Expenses
Selling expenses decreased 6.6% to $97 million for the year ended December
31, 1999, compared to $104 million for the year ended December 31, 1998. The
decrease in selling expenses for the year ended December 31, 1999 was primarily
due to a decrease in salaries and payroll costs of sales personnel of
approximately $7 million, mainly due to reduced costs incurred associated with
PageNet's telemarketing and reseller sales program. Marketing research,
development costs, and advertising expenses associated with PageNet's
traditional paging and advanced messaging operations are expected to be scaled
back in future periods.
General and Administrative Expenses
General and administrative expenses increased 12.7% to $361 million for the
year ended December 31, 1999, compared to $321 million for the year ended
December 31, 1998. The increase in general and administrative expenses was
primarily due to:
o increased contract labor and outside consulting expense of
approximately $39 million, primarily related to increased levels of
contract labor and outside consulting utilized during the transition
to the centralized processing facilities in 1999 and costs for
temporary workforce personnel associated with PageNet's higher than
normal employee turnover during 1999;
o increased provision of bad debt expense of approximately $8 million,
related to an increased amount of uncollectible receivables
written-off from customer accounts during 1999 due to a deterioration
of the aging of the accounts receivable customer base.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 16.3% to $327 million for
the year ended December 31, 1999, compared to $281 million for the year ended
December 31, 1998. The increase in depreciation and amortization expense
resulted primarily from PageNet's change in the depreciable lives of its
subscriber devices and certain of its network equipment, effective April 1,
1999. PageNet 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 PageNet's review of the
historical usage periods of its subscriber devices and its network equipment and
PageNet's expectations regarding future usage periods for subscriber devices
considering current and projected technological advances. PageNet determined
that the appropriate useful life of its subscriber devices is two years as a
result of technological advances, customer desire for new pager technology, and
the company's decreasing ability to redeploy older pager models. PageNet
determined that the appropriate useful life of its network equipment is ten
years since this equipment is operational for a longer time period given current
technology. As a result of these changes, depreciation expense increased by
approximately $78 million during the year ended December 31, 1999. PageNet also
commenced depreciation and amortization on the assets related to its centralized
processing facilities during the third quarter of 1999. This increased
depreciation and amortization expense during 1999 by approximately $4 million.
PageNet has commenced 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 $24 million.
Provision for Asset Impairment
PageNet recorded a provision of $18 million during the year ended December
31, 1999, for the impairment of the assets of PageNet's majority-owned Spanish
subsidiaries. See Note 5 to PageNet's consolidated financial statements for the
year ended December 31, 1999.
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Restructuring Charge
PageNet recorded a partial reversal of its restructuring charge in the
amount of $24 million during the year ended December 31, 1999. See Note 4 to
PageNet's consolidated financial statements for the year ended December 31,
1999.
Interest Expense
Interest expense, net of amounts capitalized, was $151 million for the year
ended December 31, 1999, compared to $144 million for the year ended December
31, 1998. The increase in interest expense from 1998 to 1999 was primarily due
to the higher average level of indebtedness outstanding during 1999. The average
level of indebtedness outstanding during 1999 was $1.9 billion, compared to $1.8
billion outstanding during 1998.
Change in Accounting Principle
PageNet adopted the provisions of SOP 98-5 effective January 1, 1999 and
recorded a charge of $37 million as the cumulative effect of a change in
accounting principle to write-off all remaining unamortized start-up costs as of
January 1, 1999. See Note 6 to PageNet's consolidated financial statements for
the year ended December 31, 1999.
Adjusted EBITDA
As a result of the factors outlined above, Adjusted EBITDA decreased 38.1%
to $206 million for the year ended December 31, 1999, compared to $333 million
for the same period in 1998. Adjusted EBITDA and Adjusted EBITDA as a percentage
of total revenues less cost of products sold for 1999 were negatively impacted
by PageNet's declining revenues (negative $56 million and negative 6.0%,
respectively), the costs associated with its advanced messaging operations
(negative $57 million and negative 6.2%, respectively), the development and
implementation of its centralized processing facilities (negative $16 million
and negative 1.7%, respectively), and the adoption of SOP 98-5 (negative $21
million and negative 2.3%, respectively).
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
Services, Rent and Maintenance Revenues
Revenues from services, rent and maintenance increased 15.5% to $946
million for the year ended December 31, 1998, compared to $818 million for the
year ended December 31, 1997. The increase in revenues from services, rent and
maintenance was primarily due to an increase in average revenue per unit
resulting from the shift of PageNet's subscriber base toward higher revenue
products and services.
The average revenue per unit for PageNet's traditional paging domestic
operations increased to $7.71 for the year ended December 31, 1998, compared to
$7.20 for the corresponding period of 1997. The number of units in service with
subscribers at December 31, 1998, was 10,110,000, a decrease of approximately
234,000 units in service compared to 10,344,000 units in service with
subscribers at December 31, 1997.
Product Sales
Product sales decreased 29.5% to $101 million for the year ended December
31, 1998 compared to $143 million for the year ended December 31, 1997. The
decrease in product sales and corresponding decrease in cost of products sold
from 1997 to 1998 resulted primarily from PageNet's price increases and other
factors, including increased competition from cellular, PCS, and other mobile
phones, which resulted in a substantial decrease in sales through the reseller
channel.
Services, Rent and Maintenance Expenses
Services, rent and maintenance expenses increased 21.6% to $210 million for
the year ended December 31, 1998, compared to $173 million for the year ended
December 31, 1997. The increase in services, rent, and maintenance expenses was
partially a result of:
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o increased telephone expenses of approximately $6 million, mainly
associated with the enactment of regulations requiring that the
providers of pay phones be compensated for all calls placed from pay
phones to toll-free numbers. This requirement increased PageNet's cost
of providing toll-free number service commencing in the fourth quarter
of 1997;
o increased contracted dispatch costs of approximately $8 million,
mainly related to advanced messaging units placed in service during
1998;
o increased transmitter site rent expense of approximately $5 million
associated with an increase in the number of transmitter sites;
o increased pager parts and repairs expense of approximately $12
million, primarily the result of management's decision to increase its
pager redeployment efforts.
Selling Expenses
Selling expenses were $104 million for the year ended December 31, 1998,
compared to $103 million for the year ended December 31, 1997. The decrease in
selling expenses as a percentage of total revenues from 1997 to 1998 resulted
primarily from a decrease in advertising expenses of approximately $3 million,
mainly related to a decline in marketing research, development costs, and
advertising expenses associated with the suspension of the promotion of
PageNet's VoiceNow service.
General and Administrative Expenses
General and administrative expenses increased 26.3% to $321 million for the
year ended December 31, 1998, compared to $254 million for the year ended
December 31, 1997. The increase in general and administrative expenses from 1997
to 1998 was primarily related to:
o increased contract labor expense of approximately $43 million, mainly
associated with increased levels of contract labor utilized during the
transition to the centralized processing facilities;
o approximately $6 million attributable to expenses associated with
establishing PageNet's centralized processing facilities and redundant
operating costs associated with operating both the new centralized
processing facilities infrastructure and the traditional decentralized
infrastructure.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased 2.8% to $281 million for
the year ended December 31, 1998, compared to $289 million for the year ended
December 31, 1997. The decrease in depreciation and amortization expense from
1997 to 1998 resulted primarily from certain property and equipment becoming
fully depreciated, certain non-current assets becoming fully amortized, and the
decline in capital expenditures of approximately $31 million.
Restructuring Charge
PageNet recorded a restructuring charge of $74 million during the year
ended December 31, 1998, as a result of a restructuring approved by PageNet's
Board of Directors in February 1998. See Note 4 of PageNet's consolidated
financial statements.
Interest Expense
Interest expense, net of amounts capitalized, was $144 million for the year
ended December 31, 1998, compared to $151 million for the year ended December
31, 1997. The decrease in interest expense from 1997 to 1998 was primarily
attributable to an increase in interest capitalized of approximately $6 million,
a decrease in interest rates on outstanding borrowings under PageNet's credit
agreement, and the redemption of PageNet's 11.75% subordinated notes on May 14,
1997 with lower interest rate funds borrowed under the credit agreement.
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Adjusted EBITDA
Adjusted EBITDA increased 7.6% to $333 million for the year ended December
31, 1998, compared to $310 million for the year ended December 31, 1997.
Adjusted EBITDA and Adjusted EBITDA as a percentage of total revenues less cost
of products sold for 1998 were negatively impacted by PageNet's advanced
messaging operations (negative $25 million and negative 2.6%, respectively), the
formation of its centralized processing facilities (negative $13 million and
negative 1.3%, respectively), and its international operations (negative $6
million and negative 0.6%, respectively).
INFLATION
Inflation has not had a material effect on PageNet's operations to date.
Paging systems equipment and operating costs have generally not increased in
price and PageNet's pager costs have declined substantially in recent years.
This reduction in costs has generally been reflected in lower pager prices
charged to subscribers who purchase their units. PageNet's general and
administrative operating expenses, such as salaries, employee benefits and
occupancy costs are subject to normal inflationary pressures.
YEAR 2000 COMPLIANCE
PageNet implemented a task force, and developed a comprehensive plan to
address Year 2000 issues. PageNet completed all of the phases for its critical
business processes and, to date, has not experienced any material Year
2000-related errors. PageNet spent approximately $4 million correcting Year 2000
problems. PageNet believes that all mission critical vendors have successfully
readied their systems for the Year 2000 and, to date, has not experienced any
Year 2000-related errors in its systems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The risk inherent in PageNet's market risk sensitive instruments is the
potential loss arising from adverse changes in interest rates and foreign
currency exchange rates. PageNet's earnings are affected by changes in interest
rates due to the impact those changes have on the Company's variable-rate debt
obligations, which represented approximately 40% and 34% of its total long-term
obligations as of December 31, 1999 and 1998, respectively. If interest rates
average one percentage point more in 2000 than they did during 1999, PageNet's
interest expense would increase by approximately $7 million. In comparison, at
December 31, 1998, PageNet estimated that if interest rates averaged one
percentage point more in 1999 than they did in 1998, PageNet's interest expense
would have increased by approximately $6 million. The impact of an increase in
interest rates was determined based on the impact of the hypothetical change in
interest rates on PageNet's variable-rate long-term obligations as of December
31, 1999 and 1998. Market risk for fixed-rate long-term obligations is estimated
as the potential increase in fair value resulting from a hypothetical one
percentage point decrease in interest rates and amounted to approximately $11
million and $68 million as of December 31, 1999 and 1998, respectively, based on
discounted cash flow analyses. The preceding sensitivity analyses do not,
however, consider the effects that such changes in interest rates may have on
overall economic activity, nor does it consider additional actions the Company
may take to mitigate its exposure to such changes. Actual results may differ
from the above analyses.
PageNet's earnings are also affected by foreign exchange rate fluctuations
between the U.S. dollar and the Canadian dollar. In addition, PageNet is subject
to market risk related to its net investments in its Canadian subsidiaries.
However, the impact of such market risk exposures as a result of foreign
exchange rate fluctuations has not been, and is not expected to be, material
based on the relative insignificance of PageNet's Canadian subsidiaries to
PageNet's financial position or results of operations. As of December 31, 1999,
PageNet was not engaged in other activities that would cause exposure to the
risk of material earnings or cash flow loss due to changes in interest rates,
foreign currency exchange rates, or market commodity prices.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors 27
Consolidated Statements of Operations for the years ended December 31, 1999, 1998, and 1997 28
Consolidated Balance Sheets as of December 31, 1999 and 1998 29
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997 30
Consolidated Statements of Shareowners' Deficit for the years ended December 31, 1999, 1998, and 1997 31
Notes to Consolidated Financial Statements 32
</TABLE>
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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. (the Company) as of December 31, 1999 and 1998, and the related
consolidated statements of operations, cash flows and shareowners' deficit for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company is in default on $1.9 billion of debt as a result of the non-payment of
interest on the Company's public notes and the violation of various financial
covenants in the Company's revolving credit agreement. The Company is also
precluded from any additional borrowings under the terms of its debt agreements,
and may be required to reduce the level of its operations and/or commence a
proceeding under Chapter 11 of the Bankruptcy Code to restructure its
obligations. These events and circumstances raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The accompanying financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of these
uncertainties.
ERNST & YOUNG LLP
Dallas, Texas
May 3, 2000
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CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Services, rent and maintenance revenues $ 818,461 $ 945,524 $ 897,348
Product sales 142,515 100,503 92,375
----------- ----------- -----------
Total revenues 960,976 1,046,027 989,723
Cost of products sold (121,487) (77,672) (57,901)
----------- ----------- -----------
839,489 968,355 931,822
Operating expenses:
Services, rent and maintenance 173,058 210,480 267,043
Selling 102,995 104,350 97,413
General and administrative 253,886 320,586 361,386
Depreciation and amortization 289,442 281,259 327,101
Provision for asset impairment 12,600 -- 17,798
Restructuring charge -- 74,000 (23,531)
----------- ----------- -----------
Total operating expenses 831,981 990,675 1,047,210
----------- ----------- -----------
Operating income (loss) 7,508 (22,320) (115,388)
Other income (expense):
Interest expense (151,380) (143,762) (150,921)
Interest income 3,689 2,070 3,902
Other non-operating income (expense) (1,220) 2,003 851
----------- ----------- -----------
Total other expense (148,911) (139,689) (146,168)
----------- ----------- -----------
Loss before extraordinary item and cumulative
effect of a change in accounting principle (141,403) (162,009) (261,556)
Extraordinary loss (15,544) -- --
Cumulative effect of a change in accounting
principle -- -- (37,446)
----------- ----------- -----------
Net loss $ (156,947) $ (162,009) $ (299,002)
=========== =========== ===========
Net loss per share (basic and diluted):
Loss before extraordinary item and cumulative
effect of a change in accounting principle $ (1.38) $ (1.57) $ (2.52)
Extraordinary loss (0.15) -- --
Cumulative effect of a change in accounting
principle -- -- (0.36)
----------- ----------- -----------
Net loss per share $ (1.53) $ (1.57) $ (2.88)
=========== =========== ===========
</TABLE>
See accompanying notes
28
<PAGE> 29
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,077 $ 32,144
Accounts receivable (less allowance for doubtful accounts of
$11,119 and $17,399 in 1998 and 1999, respectively) 84,440 84,476
Inventories 6,379 8,687
Prepaid expenses and other assets 15,065 5,623
----------- -----------
Total current assets 108,961 130,930
Property, equipment, and leasehold improvements, at cost 1,452,870 1,451,761
Less accumulated depreciation (547,599) (684,648)
----------- -----------
Net property, equipment, and leasehold improvements 905,271 767,113
Other non-current assets, at cost 629,372 609,014
Less accumulated amortization (62,360) (84,497)
----------- -----------
Net other non-current assets 567,012 524,517
----------- -----------
$ 1,581,244 $ 1,422,560
=========== ===========
LIABILITIES AND SHAREOWNERS' DEFICIT
Current liabilities:
Long-term debt in default $ -- $ 1,945,000
Accounts payable 96,478 80,889
Accrued expenses 49,692 50,146
Accrued interest 43,209 42,532
Accrued restructuring costs, current portion 8,256 --
Customer deposits 22,735 15,927
Deferred revenue 15,874 19,778
----------- -----------
Total current liabilities 236,244 2,154,272
----------- -----------
Long-term obligations, non-current portion 1,815,137 58,127
Accrued restructuring costs, non-current portion 18,765 --
Minority interest 1,517 --
Commitments and contingencies -- --
Shareowners' deficit:
Common Stock - $.01 par, authorized 250,000,000 shares; issued and
outstanding 103,640,554 shares at December 31, 1998 and
103,960,240 shares at December 31, 1999 1,036 1,040
Paid-in capital 132,950 134,161
Accumulated other comprehensive income 2,378 745
Accumulated deficit (626,783) (925,785)
----------- -----------
Total shareowners' deficit (490,419) (789,839)
----------- -----------
$ 1,581,244 $ 1,422,560
=========== ===========
</TABLE>
See accompanying notes
29
<PAGE> 30
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net loss $ (156,947) $ (162,009) $ (299,002)
Adjustments to reconcile net loss
to cash provided by operating activities:
Provision for asset impairment 12,600 -- 17,798
Cumulative effect of a change
in accounting principle -- -- 37,446
Restructuring charge -- 74,000 (23,531)
Extraordinary loss 15,544 -- --
Depreciation 258,798 252,234 307,536
Amortization 30,644 29,025 19,565
Provision for doubtful accounts 18,343 20,516 28,189
Amortization of debt issuance costs 8,418 4,430 4,574
Other non-operating (income) expense 1,220 (2,003) (851)
Changes in operating assets and liabilities:
Accounts receivable (21,542) (35,081) (29,438)
Inventories (1,302) 18,349 (2,506)
Prepaid expenses and other assets (6,016) 9,133 9,270
Accounts payable (18,397) 22,768 14,963
Accrued expenses and accrued interest 4,286 16,203 247
Accrued restructuring costs -- (1,979) (3,490)
Customer deposits and deferred revenue 4,854 2,515 (2,904)
----------- ----------- -----------
Net cash provided by operating activities 150,503 248,101 77,866
----------- ----------- -----------
Investing activities:
Capital expenditures (328,365) (268,183) (234,926)
Payments for spectrum licenses (92,856) (13,065) (3,768)
Restricted cash invested in money market instruments (6,422) -- (1,024)
Business acquisitions and joint venture investments (7,253) (7,322) --
Deposits for purchase of subscriber devices (13,493) -- --
Other, net (11,540) 2,984 2,399
----------- ----------- -----------
Net cash used in investing activities (459,929) (285,586) (237,319)
----------- ----------- -----------
Financing activities:
Borrowings of long-term obligations 558,317 305,587 325,280
Repayments of long-term obligations (39,000) (275,555) (137,966)
Proceeds from exercise of stock options 87 7,606 1,206
Redemption of $200 million senior subordinated notes (211,750) -- --
Other, net 919 -- --
----------- ----------- -----------
Net cash provided by financing activities 308,573 37,638 188,520
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (853) 153 29,067
Cash and cash equivalents at beginning of year 3,777 2,924 3,077
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2,924 $ 3,077 $ 32,144
=========== =========== ===========
</TABLE>
See accompanying notes
30
<PAGE> 31
CONSOLIDATED STATEMENTS OF SHAREOWNERS' DEFICIT
YEAR ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON PAID-IN COMPREHENSIVE ACCUMULATED SHAREOWNERS'
STOCK CAPITAL INCOME DEFICIT DEFICIT
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 1,026 $ 124,522 $ 104 $ (307,827) $ (182,175)
Net Loss -- -- -- (156,947) (156,947)
Foreign currency translation adjustments -- -- 804 -- 804
------------
Total comprehensive loss (156,143)
Issuance of 38,838 shares of
Common Stock pursuant to stock
option and compensation plans 1 386 -- -- 387
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 1,027 124,908 908 (464,774) (337,931)
Net Loss -- -- -- (162,009) (162,009)
Foreign currency translation adjustments -- -- 1,470 -- 1,470
------------
Total comprehensive loss (160,539)
Issuance of 980,639 shares of
Common Stock pursuant to stock
option and compensation plans 9 8,042 -- -- 8,051
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 1,036 132,950 2,378 (626,783) (490,419)
Net Loss -- -- -- (299,002) (299,002)
Foreign currency translation adjustments -- -- (1,633) -- (1,633)
------------
Total comprehensive loss (300,635)
Issuance of 319,686 shares of
Common Stock pursuant to stock
option and compensation plans 4 1,211 -- -- 1,215
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 $ 1,040 $ 134,161 $ 745 $ (925,785) $ (789,839)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND MERGER AGREEMENT
Paging Network, Inc. (the Company) is a provider of wireless communications
services throughout the United States and the U.S. Virgin Islands, Puerto Rico,
and Canada. The Company provides service in all 50 states and the District of
Columbia, including service in the 100 most populated markets in the United
States. The Company also owns a minority interest in a wireless communications
company in Brazil.
On November 8, 1999, the Company announced that it 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.
As part of the Merger, the Company intends to distribute up to 80.5% of its
interest in Vast Solutions, Inc. (Vast), a wholly-owned subsidiary of the
Company, to holders of the Notes and the Company's common stock. Holders of the
Notes will receive up to a 68.9% interest in Vast, while holders of the
Company's common stock will receive up to an 11.6% interest. The remaining
interest will be held by the combined company following the Merger.
The Merger Agreement requires 97.5% acceptance by the holders of the Notes
and affirmative votes of a majority of the Company's and Arch's stockholders to
complete the Merger. Consent of the lenders under the Company's 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% in amount and 50% in number required under the Bankruptcy
Code for the noteholder class to accept the "pre-packaged" Chapter 11
reorganization plan. If the Merger Agreement is terminated after one party
pursues an alternative offer, a plan of reorganization of the Company other than
the one contemplated in the Merger Agreement is filed by the Company and/or
confirmed by a bankruptcy court, or under other specified circumstances, either
the Company or Arch may be required to pay a termination fee of $40 million.
Consummation of the Merger is subject to customary regulatory review,
certain third-party consents, including the Company's lenders, and the approvals
noted above. The Company has received approval from the Department of Justice
and the Federal Communications Commission to proceed with the Merger, and
anticipates completing the Merger during the third quarter of 2000.
2. LIQUIDITY AND GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements, the Company incurred losses of $157 million, $162 million,
and $299 million during the years ended December 31, 1997, 1998, and 1999,
respectively. The Company's deteriorating financial results and liquidity have
caused it to be in default of the covenants of all of its domestic debt
agreements. On February 2, 2000, the Company failed to make the semi-annual
interests payments on its 8.875% senior subordinated notes due 2006 (8.875%
Notes) and its 10.125% senior subordinated notes due 2007 (10.125% Notes). As of
March 2, 2000, the non-payment of interest constituted a default under the
indentures of the 8.875% Notes and the 10.125% Notes. On April 17, 2000, the
Company failed to make the semi-annual interest payment on its 10% senior
subordinated notes due 2008 (10% Notes). As a result of these defaults, the
holders of the Notes could demand at any time that the Company immediately pay
$1.2 billion of outstanding Notes in full. Should this happen, the Company would
be forced to immediately file for protection under Chapter 11 of the United
States Bankruptcy Code (Chapter 11).
32
<PAGE> 33
The Company is also in default of several of the financial and other
covenants of the Credit Agreement. As a result of these defaults, the lenders
under the Credit Agreement could demand at any time that the Company immediately
pay the $745 million outstanding under the Credit Agreement in full. Should this
happen, the Company would immediately file for protection under Chapter 11.
The Company is prohibited from additional borrowings and has classified all
of its outstanding indebtedness under the Credit Agreement and the Notes as a
current liability as of December 31, 1999. As of May 1, 2000, the Company has
approximately $55 million in cash. The Company believes that this cash, plus the
cash expected to be generated from operations, is sufficient to meet its
obligations, except for the cash interest payments due under the Notes, into the
third quarter of 2000. However, if the Company's financial results continue to
deteriorate, it may not have sufficient cash to meet such obligations through
the third quarter of 2000. As discussed below, the Company is considering
alternatives to ensure that it has sufficient liquidity through the completion
of the Merger. However, there can be no assurance that the Company's efforts to
ensure that it has adequate liquidity will be timely or successful or that the
Merger will be completed. As a result, the Company may have to reduce the level
of its operations and/or file for protection under Chapter 11 to complete the
Merger and/or restructure its obligations. PageNet is negotiating a
debtor-in-possession loan facility with its lenders to be made available in the
event it commences a Chapter 11 case. Filing for bankruptcy would have a
material impact on the Company's results of operations and financial position.
In addition, if the Merger is not completed, the Company will likely incur
significant charges for asset impairments and restructuring its obligations. The
accompanying financial statements do not include any adjustments relating to the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that might be necessary should the
Company file for protection under Chapter 11 and/or be unable to continue as a
going concern.
The Company's deteriorating financial results and lack of additional
liquidity indicate that the Company may not be able to continue as a going
concern for a reasonable period of time. The Company's ability to continue as a
going concern is dependent upon several factors, including, but not limited to,
the continued non-demand for immediate payment of outstanding indebtedness by
the holders of the Notes and the lenders under the Credit Agreement and the
Company's ability to (i) generate sufficient cash flows to meet its obligations,
other than the semi-annual interest payments due under the Notes, on a timely
basis, (ii) obtain additional or restructured financing, including potential
debtor-in-possession borrowings if the Company is required to file for
protection under Chapter 11, (iii) continue to obtain uninterrupted supplies and
services from its vendors, and (iv) reduce capital expenditures and operating
expenses. The Company is proceeding with these initiatives as well as also
proceeding with its plan to complete the Merger described above.
3. SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The consolidated financial statements include the accounts
of all of its wholly and majority-owned subsidiaries. All intercompany
transactions have been eliminated. Certain amounts from prior years have been
reclassified to conform with the current year presentation.
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 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.
33
<PAGE> 34
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:
Machinery and equipment 3 to 10 years(1)
Subscriber devices 2 years(1)(2)
Furniture and fixtures 7 years
Leasehold improvements 5 years(3)
Building and building improvements 20 years
(1) Effective April 1, 1999, the Company changed the depreciable lives of its
subscriber devices from 3 years to 2 years and the depreciable life of
certain of its network equipment from 7 years to 10 years (see Note 5).
(2) Effective January 1, 1997, the Company changed the depreciable life of its
subscriber devices from 4 years to 3 years, with estimated residual value
ranging up to $20 (see Note 5).
(3) Or term of lease if shorter.
The Company reserves for subscriber devices, which it estimates to be
non-recoverable.
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:
Licenses and frequencies 40 years
Goodwill 20 years
Other intangible assets 18 months to 3 years
Other non-current assets 10 years to 12 years
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 has historically equaled the market price of the underlying stock on the
date of grant, no compensation expense has been recognized.
Advertising costs - The Company expenses the costs of advertising as
incurred. Advertising expense for the years ended December 31, 1997, 1998, and
1999, was $22 million, $19 million, and $17 million, respectively.
Comprehensive income (loss) - Other comprehensive income as of December 31,
1997, 1998, and 1999, consists solely of foreign currency translation
adjustments.
34
<PAGE> 35
Capitalization of internally developed software - The Company adopted the
provisions of Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed For or Obtained for Internal Use" (SOP 98-1), effective
January 1, 1999. SOP 98-1 requires the capitalization of certain costs of
developing or acquiring computer software for internal use. The adoption of SOP
98-1 did not have a material impact on the Company's results of operations or
financial position as the Company's previous policy for accounting for the costs
of developing or acquiring computer software for internal use was generally
consistent with the provisions of SOP 98-1.
4. RESTRUCTURING CHARGE
In February 1998, the Company's Board of Directors approved the
restructuring of the Company's domestic operations (the Restructuring). The
Company's Restructuring plan called for the elimination of redundant
administrative operations through the consolidation of key support functions
located in local and regional offices throughout the country into central
processing facilities. The Restructuring plan specified local and regional
office closures, the disposition of certain furniture, fixtures and equipment
and the termination of approximately 1,950 employees by job function and
location. Having adopted a formal plan of restructuring, the Company recorded a
$74 million charge, 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, 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.
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 were expected to occur over the
remaining lease terms, the majority of which were to expire prior to 2003.
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 office 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 $3 million for the year ended December 31, 1998.
35
<PAGE> 36
The Company's restructuring activity from initial charge through December
31, 1998, was as follows (in thousands):
<TABLE>
<CAPTION>
Initial Adjustments Utilization of Reserve Remaining
Charge To Charge Cash Non-Cash Reserve
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Fixed assets impairments $ 38,900 $ 2,600 $ -- $ 41,500 $ --
Lease obligation costs 18,900 (1,300) 683 -- 16,917
Severance costs 12,700 (1,300) 1,296 -- 10,104
Other 3,500 -- -- 3,500 --
--------- --------- --------- --------- ---------
Total $ 74,000 $ -- $ 1,979 $ 45,000 $ 27,021
========= ========= ========= ========= =========
</TABLE>
While progress in establishing the centralized processing facilities was
made during 1998 and early 1999, the Company's efforts to convert its offices to
its new billing and customer service software platforms fell behind the
Company's original schedule of being completed during the second quarter of
1999. Billing software and system implementation problems surfaced during the
first office conversions, and as a result, the Company had to postpone the
conversion of many of its other offices. These postponements resulted in delays
in office closures which deferred the payments of amounts accrued for lease
obligations and terminations and severance and related benefits. Additional
implementation problems surfaced during 1999 and caused further delays.
In November 1999 and in conjunction with the announcement of the Merger, as
discussed in Note 1, the Company decided to suspend further conversions after
January 2000 pending the decisions as to which operating platforms will be used
by the combined company. As a result of the decision to suspend the
Restructuring indefinitely, the Company recorded a reversal of the unused
portion of the original restructuring charge of $24 million, or $0.23 per share
(basic and diluted), during the quarter ended December 31, 1999.
The Company's restructuring activity from January 1, 1999 through December
31, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
Beginning Utilization of Reserve Reversal Remaining
Reserve Cash Non-cash of Charge Reserve
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Lease obligation costs ....... $ 16,917 $ 755 $ -- $ (16,162) $ --
Severance costs .............. 10,104 2,735 -- (7,369) --
--------- --------- --------- --------- ---------
Total ............. $ 27,021 $ 3,490 $ -- $ (23,531) $ --
========= ========= ========= ========= =========
</TABLE>
As a result of the Restructuring, the Company eliminated approximately 325
positions and involuntarily terminated approximately 1,150 employees during 1998
and 1999.
5. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
The cost of property, equipment, and leasehold improvements consisted of
the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1998 1999
---------- ----------
<S> <C> <C>
Machinery and equipment $ 871,870 $ 956,122
Subscriber devices 497,238 407,188
Furniture and fixtures 59,996 61,801
Leasehold improvements 20,609 23,489
Land, buildings, and building improvements 3,157 3,161
---------- ----------
Total cost $1,452,870 $1,451,761
========== ==========
</TABLE>
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. The Company anticipates that subscriber devices will continue to be
available for purchase from Motorola and other sources, consistent with normal
manufacturing and delivery lead times.
36
<PAGE> 37
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. During third quarter of
1999, all operations of the Company's majority-owned Spanish subsidiaries were
ceased. The Company's interest in its Spanish subsidiaries was sold in the first
quarter of 2000 for minimal proceeds. As a result of the Company's decision to
sell or otherwise dispose of its Spanish subsidiaries, the Company recorded a
provision of $18 million during the year ended December 31, 1999, for the
impairment of the assets of the Company's majority-owned subsidiaries, the
effect of which was to write-off the Company's net investment in its Spanish
subsidiaries. The amount of the provision was based on the Company's estimate of
the value of its net investment in the Spanish subsidiaries, which did not
materially differ from the proceeds received upon the sale of the subsidiaries
in the first quarter of 2000. 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, and no additional charges are expected to be required.
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. PageNet has determined that the
appropriate useful life of its subscriber devices is two years as a result of
technological advances, customer desire for new pager technology, and the
company's decreasing ability to redeploy older pager models. As a result of
these changes, the net loss increased by $78 million, or $0.75 per share (basic
and diluted), during the year ended December 31, 1999.
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 $17 million and net loss per share by $0.16 (basic and diluted).
During the year ended December 31, 1997, the Company recorded a provision
of $13 million to write down certain subscriber devices to their net realizable
value.
6. OTHER NON-CURRENT ASSETS
The cost of other non-current assets consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1998 1999
---------- ----------
<S> <C> <C>
Licenses and frequencies $ 473,211 $ 477,659
Goodwill 50,495 37,922
Restricted cash invested in money
market instruments, at fair value (Note 7) 33,461 34,485
Other intangible assets 13,920 7,647
Other non-current assets 58,285 51,301
---------- ----------
Total cost $ 629,372 $ 609,014
========== ==========
</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 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.
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 the
writing off of 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 net loss of $21 million, or $0.20 per share
(basic and diluted), for the year ended December 31, 1999.
37
<PAGE> 38
7. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1998 1999
------------------------ ------------------------
(carrying (estimated (carrying (estimated
value) fair value) value) fair value)
<S> <C> <C> <C> <C>
Borrowings under Credit Agreement $ 565,000 $ -- $ 745,000 $ --
10% Senior Subordinated Notes due October 15, 2008 500,000 477,473 500,000 145,000
10.125% Senior Subordinated Notes due August 1, 2007 400,000 382,964 400,000 116,000
8.875% Senior Subordinated Notes due February 1, 2006 300,000 292,484 300,000 87,000
Other 50,137 -- 58,127 --
---------- ----------
1,815,137 2,003,127
Obligations in default and classified as current (Note 2) -- 1,945,000
---------- ----------
$1,815,137 $ 58,127
========== ==========
</TABLE>
As of December 31, 1999, PageNet had $ 745 million of borrowings
outstanding under its Credit Agreement. The Company's maximum borrowings under
the Credit Agreement are permanently reduced beginning on June 30, 2001, by the
following amounts: 2001 - $150 million; 2002 - $200 million; 2003 - $250
million; and 2004 - $400 million. The Company's Credit Agreement expires on
December 31, 2004. As discussed in Note 2, the Company is in default of the
covenants of its domestic debt agreements and is precluded from any additional
borrowings under the Credit Agreement.
Under the Credit Agreement, the Company may designate all or a portion of
outstanding borrowings to be either a Base Rate Loan or a loan based on the
London Interbank Offered Rate (LIBOR). As of December 31, 1999, the Company had
designated all $745 million of borrowings as LIBOR loans, which bear interest at
a rate equal to LIBOR plus a spread of 2.00%. The interest rates for the $745
million of LIBOR loans as of December 31, 1999 ranged from 7.94% to 8.17%. As a
result of the defaults described in Note 2, the Company's lenders have the right
to collect default interest up to 12.00% for the Company's outstanding balances
under its Credit Agreement.
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 million in connection with the
purchase of Common Stock owned by employees whose employment with the Company is
terminated. 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 without the prior
written consent of its lenders. 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 (other than the international subsidiaries and Vast).
The two credit agreements of the Company's Canadian subsidiaries provide
for total borrowings of approximately $75 million. As of December 31, 1999,
approximately $56 million of borrowings were outstanding under the credit
facilities. Such borrowings were collateralized by $34 million of restricted
cash included in other non-current assets. Additional borrowings are available
under these facilities, provided such borrowings are either collaterized or
certain financial conditions are met. Maximum borrowings that may be outstanding
under the credit facilities are permanently reduced beginning on March 31, 2002,
by the following amounts: 2002 - $1 million; 2003 - $6 million; and 2004 - $68
million. Both credit agreements expire on December 31, 2004.
The 8.875% Notes, the 10.125% Notes, and the 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,
38
<PAGE> 39
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. The fair values of the 8.875% Notes, the
10.125% Notes, and the 10% Notes were based on quoted market prices and
discounted cash flow analyses. The fair values of the amounts outstanding under
the Credit Agreement and other indebtedness cannot be reasonably estimated due
to the debt defaults and covenant violations of the Company.
On May 14, 1997, PageNet redeemed all $200 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
$16 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 $12
million and the write-off of unamortized issuance costs of $4 million.
39
<PAGE> 40
8. INCOME TAXES
For the years ended December 31, 1997, 1998, and 1999, the Company had no
provision or benefit for income taxes because of the Company's inability to
benefit its net operating losses. The valuation allowance for deferred tax
assets increased by $56 million, $58 million, and $109 million during the years
ended December 31, 1997, 1998, and 1999, respectively. Significant components of
the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) DECEMBER 31, 1998 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 197,983 $ 294,580
Deferred revenue 5,982 7,411
Provision for asset impairment -- 6,941
Bad debt reserve 3,768 6,670
Other tax credit carryforwards 679 664
Other 28,482 18,405
--------- ---------
Total deferred tax assets 236,894 334,671
Valuation allowance (201,496) (310,909)
--------- ---------
Net deferred tax assets 35,398 23,762
Deferred tax liabilities:
Depreciation (23,450) (3,977)
Amortization (11,948) (19,785)
--------- ---------
Total deferred tax liabilities (35,398) (23,762)
--------- ---------
$ -- $ --
========= =========
</TABLE>
As of December 31, 1999, the Company has net operating loss carryforwards
of approximately $755 million that expire in years 2001 through 2019. Of such
amounts, $5 million expire in 2001 and $3 million expire in 2002. The Merger is
expected to result in the elimination of substantially all of the tax benefit of
the net operating loss carryforwards and certain other tax attributes of the
Company. Loss before income taxes attributable to the Company's foreign
operations was $14 million, $12 million, and $11 million for the years ended
December 31, 1997, 1998, and 1999.
9. 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. As of December 31, 1999, options for 228,487 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 Compensation and
Management Development Committee of the Board of Directors (the Committee).
Approximately 3 million shares remained available for grant under the 1991 Plan
as of December 31, 1999. A total of 4,034,671 shares were vested and exercisable
under the 1991 Plan as of December 31, 1999. Options granted under the 1991 Plan
are non-transferable except by the laws of descent and distribution and are
exercisable upon vesting, which occurs in installments, as the Board of
Directors or the Committee may determine at the time it grants such options.
40
<PAGE> 41
On May 21, 1998, the Company's shareowners approved an amendment to its
1991 Plan to broaden the group of employees eligible to receive stock options
under such plan to include all employees of the Company and its subsidiaries. On
May 22, 1998, PageNet granted approximately 2 million options under the 1991
Plan to approximately 2,700 employees at an exercise price of $13.94 per share,
which represented the market price of the Company's Common Stock at the date of
grant. Since that time, grants of stock options to eligible new employees have
been made the first day of the next quarter after the quarter in which they were
hired.
The Amended and Restated 1992 Directors Compensation Plan (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 300,000 shares remain available for grant under the
Directors' Plan as of December 31, 1999. A total of 225,000 shares were vested
and exercisable as of December 31, 1999. Options granted under the Directors'
Plan are non-transferable except by the laws of descent and distribution and are
exercisable upon vesting, which occurs 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. The Merger Agreement provides that
all the Company's stock options will be converted into options for shares of
Arch at a formula which would reduce the number of options outstanding by
8,944,792 and increase the exercise price range by $6.18 to $120.24.
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, PageNet canceled approximately 3 million
of options with exercise prices ranging from $13.69 to $26.50 and granted
approximately 1 million of options to the same optionees with an exercise price
of $8.25 per share.
Information concerning options as of December 31, 1997, 1998, and 1999 is
as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Outstanding at January 1 5,968,605 5,687,335 8,579,568
Granted 3,435,873 5,066,000 4,214,987
Canceled (3,705,609) (1,241,982) (2,505,716)
Exercised (11,534) (931,785) (69,724)
----------- ----------- -----------
Outstanding at December 31 5,687,335 8,579,568 10,219,115
=========== =========== ===========
Exercisable at December 31 2,450,795 3,253,511 4,588,158
=========== =========== ===========
Option price range-options outstanding $2.67-$25.50 $2.67-$25.50 $0.88-$17.13
Option price range-options exercised $2.73-$ 9.25 $2.67-$14.38 $2.67-$ 5.13
</TABLE>
41
<PAGE> 42
Weighted-average exercise prices are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Outstanding at January 1 $ 15.90 $ 9.47 $ 10.98
Granted 9.54 12.59 4.54
Canceled 19.89 12.79 10.17
Exercised 7.49 8.16 3.12
Outstanding at December 31 9.47 10.98 8.56
Exercisable at December 31 9.12 9.85 9.31
</TABLE>
Certain information is being presented based on a range of exercise prices
as of December 31, 1999, as follows:
<TABLE>
<CAPTION>
$0.88-$6.00 $6.03-$8.13 $8.25-$12.63 $12.94-$17.13
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Number of shares outstanding 2,567,374 2,308,960 2,338,101 3,004,680
Weighted-average exercise price $ 3.40 $ 6.43 $ 9.83 $ 13.62
Weighted-average remaining
contractual life 8.55 8.01 7.23 8.01
Number of shares exercisable 792,465 800,140 1,632,993 1,362,560
Weighted-average exercise
price of shares exercisable $ 3.63 $ 6.89 $ 9.63 $ 13.66
</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 1997,
1998, and 1999 was $5.98, $7.21, and $1.22, 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 ranging from
5.46% to 6.89% for 1997, ranging from 4.09% to 5.72% for 1998, and ranging from
4.54% to 6.13% for 1999; a dividend yield of 0%; volatility factors of the
expected market price of the Company's Common Stock ranging from 54.4% to 57.6%
for 1997, ranging from 56.8% to 60.0% for 1998, and 75.0% for 1999; and a
weighted average expected life of each option ranging from 5.5 years to 6.7
years for 1997 and 1998, and ranging from 2.0 years to 6.0 years for 1999.
For purposes of the pro forma disclosures, the estimated fair market 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>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss As reported $ (156,947) $ (162,009) $ (299,002)
Pro forma $ (172,884) $ (179,834) $ (301,586)
Net loss per common share As reported $ (1.53) $ (1.57) $ (2.88)
(basic and diluted) Pro forma $ (1.68) $ (1.74) $ (2.90)
</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.
42
<PAGE> 43
10. 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 1997, 1998, and
1999 was approximately $70 million, $81 million, and $101 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 as of December 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: (IN THOUSANDS)
<S> <C>
2000 $ 27,997
2001 19,788
2002 14,855
2003 10,229
2004 7,080
Later years 8,163
----------
Total minimum payments required $ 88,112
==========
</TABLE>
11. 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 PageNet's business, financial position, or
results of operations.
12. 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, 1997, 1998, and 1999, was 103
million, 103 million, and 104 million, respectively. The average number of
options to purchase shares of the Company's Common Stock during the years ended
December 31, 1997, 1998, and 1999, were 6 million, 8 million, and 10 million,
respectively, at exercise prices ranging from $0.88 per share to $25.50 per
share. These stock options were not included in the computation of diluted
earnings per share because the effect of assuming their exercise would have been
antidilutive.
The Company has 275 million authorized shares, of which 250 million are
Common Stock and 25 million are preferred stock. As of December 31, 1999,
approximately 15 million shares of Common Stock were reserved for the issuance
of shares under the Company's stock option and other plans. As of December 31,
1999, 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 million shares of the Company's Common Stock. Under the
employee stock purchase plan, an employee may elect to purchase shares of the
Company's Common Stock at the end of a predetermined 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 period, whichever is lower. The Company implemented two-year
employee stock purchase plans on January 1, 1997 and 1998, and a one-year plan
on January 1, 1999. The Company discontinued the employee stock purchase plan
effective December 31, 1999.
13. 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, 1999, 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, 1997, 1998, and 1999 were approximately $144 million, $136
million, and $147 million, respectively, net of $16 million, $22 million, and
$24 million, respectively, of interest capitalized during the years ended
December 31, 1997, 1998 and
43
<PAGE> 44
1999. During the year ended December 31, 1998, PageNet utilized $13 million of
deposits made in 1998 for the purchase of subscriber devices. There were no
significant federal or state income taxes paid or refunded for the years ended
December 31, 1997, 1998, and 1999.
14. 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 equal 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 $2 million in 1997, $3 million in 1998, and $2 million in 1999.
15. STOCK PURCHASE RIGHTS
In September 1994, the Board of Directors of the Company adopted a Stock
Purchase Rights Plan and declared a distribution of one common share purchase
right for each outstanding share of the Company's Common Stock. As of September
28, 1994, certificates representing shares of the Company's Common Stock also
represent ownership of one common share purchase right. In January 1999, the
Board of Directors of the Company amended the Rights Plan to eliminate certain
provisions held to be unenforceable under Delaware law.
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. The Company's Board of Directors can waive the application of the
stock purchase rights under certain circumstances. In connection with the
approval of the Merger Agreement, the Company's Board of Directors waived such
application as it would have related to the Merger.
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
Board of Directors 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. Thereafter, they may be redeemed by the Board of 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.
16. SEGMENT INFORMATION
The Company has determined that it has two reportable segments, traditional
paging operations and advanced messaging operations. The Company's basis for the
segments relates to the types of products and services each segment provides.
The traditional paging segment consists of 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
2-way wireless messaging services, VoiceNow service, and the operations of Vast,
which includes wireless integration products, consumer content, and wireless
software development and sales.
44
<PAGE> 45
The following table presents certain information related to the Company's
business segments as of December 31, 1997, 1998, and 1999 or for the years ended
December 31, 1997, 1998, and 1999.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Total Revenues:
Traditional Paging(1) $ 960,290 $ 1,041,603 $ 973,658
Advanced Messaging 686 4,424 16,065
----------- ----------- -----------
$ 960,976 $ 1,046,027 $ 989,723
=========== =========== ===========
Depreciation and amortization:
Traditional Paging(1) $ 276,590 $ 266,319 $ 310,347
Advanced Messaging 12,852 14,940 16,754
----------- ----------- -----------
$ 289,442 $ 281,259 $ 327,101
=========== =========== ===========
Operating income(loss):
Traditional Paging(1) $ 31,399(2) $ 17,406(3) $ (41,190)(4)
Advanced Messaging (23,891) (39,726) (74,198)
----------- ----------- -----------
$ 7,508 $ (22,320) $ (115,388)
=========== =========== ===========
Adjusted EBITDA(5):
Traditional Paging(1) $ 320,589 $ 357,725 $ 263,424
Advanced Messaging (11,039) (24,786) (57,444)
----------- ----------- -----------
$ 309,550 $ 332,939 $ 205,980
=========== =========== ===========
Capital expenditures:
Traditional Paging(1) $ 224,459 $ 193,234 $ 121,779
Advanced Messaging 103,906 74,949 113,147
----------- ----------- -----------
$ 328,365 $ 268,183 $ 234,926
=========== =========== ===========
Net interest expense(6):
Traditional Paging(1) $ 90,458 $ 74,729 $ 65,107
Advanced Messaging 57,233 66,963 81,912
----------- ----------- -----------
$ 147,691 $ 141,692 $ 147,019
=========== =========== ===========
Total assets:
Traditional Paging(1) $ 1,047,246 $ 945,621 $ 746,515
Advanced Messaging 549,987 635,623 676,045
----------- ----------- -----------
$ 1,597,233 $ 1,581,244 $ 1,422,560
=========== =========== ===========
</TABLE>
(1) The international operations of the Company currently consist entirely of
traditional paging services and accordingly are included in PageNet's
traditional paging business segment.
(2) Operating income for the traditional paging business segment for 1997
includes a $13 million provision to write down certain subscriber devices
to their net realizable value. See Note 5.
(3) Operating income for the traditional paging business segment for 1998
includes a restructuring charge of $74 million. See Note 4.
(4) Operating loss for the traditional paging business segment for 1999
includes a partial reversal of the restructuring charge of $24 million and
a provision for asset impairment of $18 million. See Notes 4 and 5,
respectively.
(5) Adjusted EBITDA, as determined by the Company, does not reflect other
non-operating (income) expense, provision for asset impairment,
restructuring charge, extraordinary items, and cumulative effect of a
change in accounting principle.
(6) Net interest expense is interest expense less interest income.
Adjusted EBITDA is not 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.
45
<PAGE> 46
17. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly financial information for the two years ended December 31, 1999
is summarized below.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1998
Services, rent, and
maintenance revenues $ 229,861 $ 235,172 $ 239,689 $ 240,802
Product sales 25,889 29,329 25,382 19,903
------------ ------------ ------------ ------------
Total revenues 255,750 264,501 265,071 260,705
Cost of products sold (21,103) (23,161) (18,276) (15,132)
------------ ------------ ------------ ------------
234,647 241,340 246,795 245,573
Operating income (loss) (56,605)(1) 19,803 17,998 (3,516)
Net loss (92,372)(1) (15,619) (16,428) (37,590)
Net loss per share (basic and diluted) (0.90)(1) (0.15) (0.16) (0.36)
1999
Services, rent, and
maintenance revenues $ 241,868 $ 231,635 $ 223,063 $ 200,782
Product sales 21,692 22,930 24,347 23,406
------------ ------------ ------------ ------------
Total revenues 263,560 254,565 247,410 224,188
Cost of products sold (16,177) (10,462) (16,374) (14,888)
------------ ------------ ------------ ------------
247,383 244,103 231,036 209,300
Operating income (loss) (16,505)(2) (58,248) (13,499) (27,136)(3)
Loss before cumulative effect of
a change in accounting principle (51,758)(2) (95,311) (49,488) (64,999)(3)
Cumulative effect of a change
in accounting principle (37,446) -- -- --
Net loss (89,204)(2) (95,311) (49,488) (64,999)(3)
Loss before cumulative effect of
a change in accounting principle (0.50)(2) (0.92) (0.48) (0.64)(3)
Cumulative effect of a change
in accounting principle (0.36) -- -- --
Net loss per share (0.86)(2) (0.92) (0.48) (0.64)(3)
</TABLE>
(1) Operating loss for the first quarter of 1998 includes a restructuring
charge of $74 million. See Note 4.
(2) Operating loss for the first quarter of 1999 includes a provision for asset
impairment of $18 million. See Notes 5 and 6.
(3) Operating loss for the fourth quarter of 1999 includes a partial reversal
of the restructuring charge of $24 million. See Note 4.
46
<PAGE> 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
47
<PAGE> 48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and position of PageNet's
directors and executive officers as of April 15, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ---- ---------
<S> <C> <C>
Richard C. Alberding ........... 69 Director (1)(2)
Lynn A. Bace ................... 47 Executive Vice President and Chief Administrative Officer
Andreas K. Bremer .............. 43 Vice President of Finance and Treasurer
Hermann Buerger ................ 56 Director (1)(4)(5)
Julian B. Castelli ............. 32 Senior Vice President and Chief Financial Officer and
Acting Chief Financial Officer of Vast
Jeffrey M. Cunningham .......... 47 Director (3)
J. Barry Duncan ................ 42 Vice President and Controller
Gary J. Fernandes .............. 56 Director (3)(4)(5)
John P. Frazee, Jr ............. 55 Chairman of the Board of Directors and Chief Executive
Officer of PageNet and Vast (4)
Jason G. Gillespie ............. 39 Senior Vice President and Chief Technology Officer
Mark A. Knickrehm .............. 37 President and Chief Operating Officer of Vast
John S.Llewellyn, Jr ........... 65 Director (2)(3)(5)
Robert J. Miller ............... 55 Director (2)(3)
Edward W. Mullinix, Jr ......... 46 President and Chief Operating Officer
Timothy J. Paine ............... 45 Senior Vice President -- Customer Service
Douglas R. Ritter .............. 42 Senior Vice President -- Sales
G. Robert Thompson ............. 38 Senior Vice President -- Operations Staff
Ruth Williams .................. 43 Senior Vice President, General Counsel and Assistant Secretary
</TABLE>
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Board Affairs Committee of the Board of Directors.
(3) Member of the Compensation and Management Development Committee of the
Board of Directors.
(4) Member of the Executive Committee of the Board of Directors.
(5) Member of the Finance Committee of the Board of Directors.
RICHARD C. ALBERDING has been a director of PageNet since 1994. From 1958
through 1991, Mr. Alberding held various management positions with
Hewlett-Packard Co., including Executive Vice President. Mr. Alberding also
serves as a director of Digital Microwave Corporation, Kennametal, Inc., Sybase,
Inc., Walker Interactive Systems, Inc., JLK Direct, Inc., and PCTel, Inc.
LYNN A. BACE has served as Executive Vice President and Chief
Administrative Officer of PageNet since June 1999. She served as Executive Vice
President -- Sales and Marketing from December 1998 through June 1999, and as
Senior Vice President -- Marketing from August 1998 to December 1998. Prior to
that, Ms. Bace was employed in several executive positions with Kraft Foods,
Inc. from September 1993 to April 1997, most recently as Executive Vice
President and General Manager for a division of Kraft.
ANDREAS K. BREMER has served as Vice President of Finance and Treasurer of
PageNet since February 2000, and as Vice President and Treasurer since joining
PageNet in August 1999. Prior to that time, Mr. Bremer served in various
executive positions with Commerzbank AG from 1986 to 1999, most recently as
Senior Vice President and General Manager of various branches in the United
States and Germany.
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<PAGE> 49
HERMANN BUERGER has been a director of PageNet since 1998. Mr. Buerger has
held the position of Executive Vice President and General Manager of North
American Operations for Commerzbank AG since 1989. Mr. Buerger also serves as a
director of Security Capital Group, Inc. and United Dominion Industries.
JULIAN B. CASTELLI has served as Senior Vice President and Chief Financial
Officer since June 1999. He also serves as Acting Chief Financial Officer of
Vast, a position he has held since December 1999. Mr. Castelli served as Vice
President and Treasurer for PageNet from July 1998 to June 1999. Prior to
joining PageNet, Mr. Castelli was employed by McKinsey & Company, an
international consulting firm, from August 1995 to July 1998, serving as
Engagement Manager from June 1997. Mr. Castelli served in the Corporate Finance
Department of Goldman, Sachs & Co. as an analyst from 1990 to 1993.
JEFFREY M. CUNNINGHAM has been a director of PageNet since 1998. Mr.
Cunningham currently serves as chairman of ILIFE Holdings. Mr. Cunningham served
as the President of Planet Direct, an internet media company and majority owned
subsidiary of CMGI, Inc., from December 1998 to March 2000. Previously, Mr.
Cunningham served as President and Chief Executive Officer of Knowledge
Universe, an internet media company, from July 1998 through December 1998. From
June 1993 through July 1998, Mr. Cunningham was the Group Publisher for Forbes,
Inc. Mr. Cunningham also serves as a director of Countrywide Credit, Inc., Data
General Corp. and Schindler Holdings.
J. BARRY DUNCAN has served as Vice President and Controller for PageNet
since October 1998 and as Corporate Controller from May 1995 to October 1996.
Mr. Duncan served as Vice President of Finance for the Southwest Region of
Unisource Worldwide, Inc. from October 1996 to October 1998, and as Corporate
Controller for Dal-Tile International from February 1994 to May 1995.
GARY J. FERNANDES has been a director of PageNet since 1999. Mr. Fernandes
has been Chairman of the Board of Directors and Chief Executive Officer of
GroceryWorks.com, a Dallas-based Internet home fulfillment service specializing
in groceries, since January 2000. Previously, Mr. Fernandes served as managing
partner of Convergent Partners LLC, a private equity capital investment firm,
from January 1999 to January 2000. Mr. Fernandes previously held the position of
Vice Chairman as well as other senior management positions with Electronic Data
Systems Corporation from 1969 through 1998. Mr. Fernandes also serves as a
director of 7-Eleven Inc. and John Wiley & Sons, Inc.
JOHN P. FRAZEE, JR. has been a director of PageNet since 1995 and has
served as Chairman of the Board of Directors and Chief Executive Officer of
PageNet since June 1999 and of Vast since December 1999. From August 1997
through June 1999, Mr. Frazee served as Chairman of the Board, President and
Chief Executive Officer of PageNet. Mr. Frazee was a private investor from
August 1993 to August 1997. Mr. Frazee also serves as a director of Security
Capital Group, Inc., Dean Foods Company, Cabot Microelectronics Corporation, and
Homestead Village Incorporated.
JASON G. GILLESPIE has served as Senior Vice President and Chief Technology
Officer of PageNet since February 2000. From October 1999 through February 2000
Mr. Gillespie served as Senior Vice President of Network Services, and from June
1999 to October 1999 he served as Vice President of Network Services of PageNet.
From December 1997 to June 1999 Mr. Gillespie was Vice President of Field
Operations of PageNet. Mr. Gillespie was a Vice President and General Manager of
PageNet prior to December 1997 and has been employed by PageNet for eight years.
MARK A. KNICKREHM has served as President and Chief Operating Officer of
Vast since December 1999 and has been responsible for the wireless solutions
operations of PageNet since June 1999. He served as Executive Vice President and
Chief Financial Officer for PageNet from February 1998 through June 1999. Mr.
Knickrehm was employed by McKinsey & Company, an international consulting firm,
from 1989 to February 1998, where he served as a Partner beginning in 1995.
JOHN S. LLEWELLYN, JR. has been a director of PageNet since 1997. From 1982
to his retirement in 1997, Mr. Llewellyn held various management positions with
Ocean Spray Cranberries, Inc., including Chief Executive Officer. Mr. Llewellyn
also serves as a director of Dean Foods Company.
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<PAGE> 50
ROBERT J. MILLER has been a director of PageNet since 1999. From 1989 to
January 1999, Mr. Miller served as the Governor of Nevada. Upon his retirement
as Governor, Mr. Miller became a senior partner in the law firm of Jones Vargas
with offices in Las Vegas and Reno, Nevada. Mr. Miller also serves as a director
of America West Airlines, International Game Technology, Newmont Mining
Corporation, Zenith Insurance Corp., National Center for Missing & Exploited
Children and the American Cancer Society Foundation; as a member of the Advisory
Board for the Secretary of Energy, Americans for Technology Leadership and
Com-Net Ericsson.
EDWARD W. MULLINIX, JR. has served as President and Chief Operating Officer
of PageNet since June 1999. He served as Executive Vice President -- Operations
for PageNet from February 1998 through June 1999, and as Senior Vice President
- -- Strategic Planning from November 1997 to February 1998. From September 1995
to October 1997, Mr. Mullinix served as Senior Vice President of Finance and
Administration and Chief Financial Officer of The Haskell Company. He was Vice
President -- Finance for LCI, Ltd. From August 1994 to April 1995.
TIMOTHY J. PAINE has served as Senior Vice President -- Customer Service
for PageNet since March 1998. Prior to joining PageNet, 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 -- Sales for PageNet
since January 1999. Mr. Ritter served as Senior Vice President -- Corporate
Development for PageNet from February 1998 to January 1999 and as Vice President
- -- Corporate Development for PageNet from December 1997 to February 1998. Mr.
Ritter served as Vice President -- Business Planning for PageNet from January
1996 to December 1997 and as Vice President -- New Business Development for
PageNet from July 1993 to January 1996.
G. ROBERT THOMPSON has served as Senior Vice President -- Staff Operations
since June 1999. He also served as Senior Vice President -- Process Improvement
for PageNet from November 1998 to June 1999. Mr. Thompson served as Vice
President -- Finance for PageNet from February 1995 to November 1998 and was
Corporate Controller for PageNet from 1990 to 1995.
RUTH WILLIAMS has served as Senior Vice President, General Counsel and
Assistant Secretary for PageNet since May 1997. Prior to joining PageNet, 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 1996, most recently as Staff Vice President and Associate General
Counsel.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's directors,
certain of its officers, and any persons holding more than ten percent of the
Common Stock are required to report their ownership of the Common Stock and any
changes in that ownership to the Securities and Exchange Commission (the
"Commission"). Specific due dates for these reports have been established and
the Company is required to report in this filing any failure to file by such
dates during 1999. During 1999, to the knowledge of the Company, all of these
filing requirements were satisfied. In making these statements, the Company has
relied upon written representation of its directors, officers, and its ten
percent holders as well as copies of those reports filed with the Commission
that have been furnished to the Company.
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<PAGE> 51
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation paid by the Company for services rendered in all
capacities for the years ended December 31, 1999, 1998 and 1997 of its chief
executive officer and those persons who were, at December 31, 1999, the other
four most highly compensated executive officers of the Company. Positions
indicated are as of December 31, 1999.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------------- --------------------------------------------
SECURITIES
RESTRICTED UNDERLYING ALL
STOCK OPTIONS OTHER
YEAR SALARY BONUS OTHER AWARDS($) (SHARES) COMPENSATION(1)
---- -------- -------- ---------- ---------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
John P. Frazee, Jr ................. 1999 $640,385 $ -- $ 95,958(2) $ -- 311,500 $ 2,229
Chairman and Chief Executive 1998 671,875 430,000 90,706(3) -- 100,000 2,333
Officer of PageNet and Vast 1997 279,571(4) 150,000 50,938(5) 100,000(6) 600,000 20,000(7)
Mark A. Knickrehm(8) ............... 1999 $299,038 -- 4,172(9) -- 165,000 3,875
President & Chief Operating 1998 266,036 230,000(10) 43,573(11) -- 300,000 --
Officer of Vast 1997 -- -- -- -- -- --
Edward W. Mullinix, Jr.(12) ........ 1999 292,949 -- 4,928(13) -- 165,000 4,825
President and Chief 1998 247,916 120,000 41,589(14) -- 50,000 3,750
Operating Officer 1997 45,337 60,000 7,837(15) -- 250,000 --
Lynn A. Bace(16) ................... 1999 216,218 -- 2,742(17) -- 115,000 --
Executive Vice President and 1998 93,750 51,000 -- -- 250,000 --
Chief Administrative Officer 1997 -- -- -- -- -- --
William G. Scott(18) ............... 1999 213,462 -- 2,043(19) -- 25,000 5,000
Senior Vice President and 1998 224,583 72,000 -- -- 20,000 5,000
Chief Technology Officer of Vast 1997 215,000 80,000 -- 55,313(20) 113,464 4,750
</TABLE>
- ----------------
(1) Represents matching contributions to the Company's 401(k) Plan, except
where noted.
(2) Includes housing allowance of $61,069.
(3) Includes housing allowance of $66,158.
(4) Annual compensation for 1997 represents compensation for the period from
August 4, 1997, when Mr. Frazee became Chairman, President & Chief
Executive Officer of the Company, through December 31, 1997.
(5) Includes payment of $23,214 to defray Mr. Frazee's expenses associated with
relocation to the Dallas, Texas area.
(6) Represents the fair market value on the date of grant of 11,510 shares of
the Company's common stock awarded to Mr. Frazee on August 4, 1997.
(7) Represents compensation for services rendered as a non-employee director of
the Company.
(8) Annual compensation for 1998 represents compensation for the period from
February 4, 1998, when Mr. Knickrehm became employed with the Company as
its Executive Vice President and Chief Financial Officer, through December
31, 1998. On June 2, 1999, Mr. Knickrehm was promoted to President and
Chief Operating Officer of Vast.
(9) Includes $4,928 of long-term disability insurance premiums paid by the
Company.
(10) Includes a $100,000 employment bonus and $130,000 paid as an annual bonus
for performance in 1998.
(11) Includes payments of $43,573 made to defray Mr. Knickrehm's expenses
associated with relocation to the Dallas, Texas area.
(12) Mr. Mullinix joined the Company on November 3, 1997 as Senior Vice
President of Strategic Planning and was promoted to Executive Vice
President -- Operations of the Company on February 4, 1998. On June 2,
1999, Mr. Mullinix was promoted to President and Chief Operating Officer of
the Company.
(13) Includes $4,928 of long-term disability insurance premiums paid by the
Company.
(14) Includes payment of $41,589 made to defray Mr. Mullinix's expenses
associated with relocation to the Dallas, Texas area.
(15) Includes payments of $7,837 made to defray Mr. Mullinix's expenses
associated with relocation to the Dallas, Texas area.
(16) Ms. Bace joined the Company on August 19, 1998 as Senior Vice President of
Marketing and was promoted to Executive Vice President and Chief
Administrative Officer of the Company on June 2, 1999.
(17) Includes $2,742 of long-term disability insurance premiums paid by the
Company.
(18) Mr. Scott served as Senior Vice President and Chief Technology Officer for
the Company from June 1999 through December 1999. Upon Mr. Scott's change
to his current position with Vast, he was no longer an Executive Officer of
the Company; therefore, Mr. Scott is not listed as an executive of the
Company in Item 10.
(19) Includes $2,043 of long-term disability insurance premiums paid by the
Company.
(20) Represents the fair market value on the date of grant of 5,000 shares of
the Company's common stock awarded to Mr. Scott on February 2, 1997,
vesting at the rate of 20% per year beginning on February 2, 1998 through
2002, contingent upon meeting performance goals.
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<PAGE> 52
OPTION GRANTS IN 1999
The following table sets forth information on grants of options to purchase
common stock of the Company during the year ended December 31, 1999, to its
chief executive officer and those persons who were, at December 31, 1999, the
other most highly compensated executive officers of the Company.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO PRESENT VALUE
OPTIONS EMPLOYEES ON DATE
NAME GRANTED (1) IN 1999 EXERCISE PRICE EXPIRATION DATE OF GRANT(2)
---- ----------- ------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
John P. Frazee, Jr ...... 311,500 7.54% $ 6.1250 01/20/09 $1,907,938
Mark A. Knickrehm ....... 65,000 6.1250 01/20/09 398,125
100,000 3.3438 06/10/09 334,380
------- ---- ------- -------
Subtotal ...... 165,000 3.99% 732,505
------- -------
Edward W. Mullinix, Jr .. 65,000 6.1250 01/20/09 398,125
100,000 3.3438 06/10/09 334,380
------- ---- ------- -------
Subtotal ...... 165,000 3.99% 732,505
Lynn A. Bace ............ 65,000 6.1250 01/20/09 398,125
50,000 3.3438 06/10/09 167,190
------- ---- ------- -------
Subtotal ...... 115,000 2.78% 565,315
------- -------
William G. Scott ........ 25,000 * 6.1250 01/20/09 153,125
</TABLE>
- ----------------
* Less than 1%
- ----------------
(1) All options are exercisable only so long as employment continues or within
limited periods following termination of employment. All options have a
term of 10 years. All options vest in five equal annual installments
beginning on the date of the grant, except that all of such options would
vest at the closing of the Merger by virtue of a change in control of the
ownership of the Company.
(2) The determination of the present value of the Company common stock on the
date of the grant is based on the Black-Scholes pricing model. Estimated
values under the Black-Scholes model are based on standard assumptions as
to variables in the model such as stock price volatility, projected future
dividend yield and interest rates. In addition, the estimated value is
discounted for potential forfeiture due to vesting schedules. The discount
rate is consistent with the Company's employment turnover experience over
time. The estimated Black-Scholes values above are based on a range of
values for the key variable. The range reflects different values in effect
on the grant date of the option: volatility -- ranged from .559 to .583;
dividend yield -- 0%; turnover -- 8% per year; risk-free interest rate --
yield to maturity of 10-year treasury note at grant date (rates ranged from
5.41% to 5.56%). The actual value, if any, that an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised. There is no assurance that the value realized
by an executive will be at or near the value estimated using a
Black-Scholes model. Currently, all such stock options have no value
because the trading price of the Company shares is below the option
exercise prices.
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<PAGE> 53
AGGREGATE OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES
The following table sets forth information related to the unexercised
options to purchase the Company common stock that were granted during the year
ended December 31, 1999, and prior years under the Company's 1991 stock option
plan to the named officers and held by them at December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD IN-THE-MONEY OPTIONS HELD
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
SHARES --------------------------- ----------------------------
ACQUIRED ON
NAME EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John P. Frazee, Jr .......... 0 0 820,600 235,900 0 0
Mark A. Knickrehm ........... 0 0 226,000 239,000 0 0
Edward W. Mullinix, Jr ..... 0 0 226,000 239,000 0 0
Lynn A. Bace ................ 0 0 136,000 229,000 0 0
William G. Scott ............ 0 0 105,464 53,000 0 0
</TABLE>
- ----------
(1) Based on the difference between the exercise price of each option and
$0.8130, the last reported sales price of the Company's common stock on the
Nasdaq Market on December 31, 1999, the last trading date in the Company's
1999 fiscal year.
CONTRACTS RELATED TO EMPLOYMENT
The Company and Mr. Frazee entered into an employment agreement on August
4, 1997. This agreement provides that Mr. Frazee is to be employed until July
31, 1998. The agreement is automatically extended for one-year periods unless
either the Company or Mr. Frazee notifies the other party of termination not
less than 90 days prior to the beginning of any one-year renewal period. Mr.
Frazee's current base salary is $675,000 and current target bonus is $675,000 if
the Company achieves the objectives established by the board of directors. The
employment agreement also provides that at least 40% of the bonus is to be paid
in shares of the Company common stock. The board of directors gave Mr. Frazee
his 1997 and 1998 bonuses in cash, with the understanding that he would use 40%
or more of the bonus to purchase the Company common stock in the public market.
In 1997, Mr. Frazee purchased shares in excess of this requirement. Upon signing
the employment agreement, Mr. Frazee was granted options to purchase 600,000
shares of common stock, all of which have vested. Mr. Frazee also was awarded
11,510 shares of the Company common stock under the Company's 1997 restricted
stock plan. In addition, the Company provides Mr. Frazee with transportation to
and from his residence in Florida.
CHANGE OF CONTROL SEVERANCE PLAN
On January 20, 1999, the Board of Directors approved a severance plan which
would provide benefits to substantially all the Company's employees in the event
of a "change of control" of the Company. "Change of control" is defined as any
merger, sale or other transaction which results in 35% or more of the Company
common stock being held by an outsider, or any change in the composition of a
majority of the board of directors. This definition is consistent with the
change of control provisions that trigger accelerated vesting under the
Company's 1991 Employee Stock Option Plan. The severance plan provides for
severance amounts ranging from 50% to 300% of an employee's annual salary and
annual target bonus compensation and payment of a pro-rated portion of the
employee's annual target bonus compensation. In addition, the severance plan
provides that the employee will continue to receive substantially similar
medical insurance, disability income protection, life insurance protection and
death benefits, and perquisites for at least one year following the date of the
employee's termination of employment at no additional cost to the employee above
the cost paid by the employee for such benefits immediately prior to the change
of control. An employee is entitled to receive benefits under the severance plan
if the Company or its successor in interest terminates the employee without
cause or the employee resigns for good reason during the 12-month period
immediately following a change in control. Good reasons for an employee's
resignation under the severance plan include a reduction in the employee's
compensation, a significant change in the employee's duties, responsibilities,
title or authorities, relocation of the employee's office to a location more
than 50 miles from the location of the employee's office prior to the change in
control, and PageNet's failure to obtain the agreement from a successor to
execute the severance plan. The amount an employee will receive depends upon the
employee's position at the Company. Payments under the plan are made in one lump
sum. In contemplation of the Merger, the Company's Board of Directors approved
an increase in the severance percentages applicable to John P. Frazee, Jr., Mark
A. Knickrehm, Edward W. Mullinix, Jr., Lynn A. Bace and up to one other officer
from 200% to 300% of their annual salary and annual target bonus compensation,
in the fourth quarter of 1999. PageNet has since decided that Julian Castelli is
the other officer who would receive severance payments at the 300% level.
COMPENSATION OF DIRECTORS
Directors that are also full-time officers of the Company do not receive
any additional compensation for serving on the board or its committees.
Directors who are not full-time officers receive an annual retainer of $20,000,
plus $1,500 for each meeting they attend in person, $1,000 for each
teleconference meeting in which they participate, and reimbursement for
traveling costs and other out-of-pocket expenses incurred. Directors who serve
53
<PAGE> 54
on one or more committees receive $5,000 per year for their service. Directors
who serve as a chairman of one or more of these committees receive an additional
$5,000 per year.
In addition, pursuant to the Company's 1992 Director Compensation Plan,
each non-employee director is granted an option to purchase 45,000 shares of the
Company common stock. The exercise price is fair market value on the date of
grant. The options vest in five equal annual installments so long as the person
remains a director of the Company. In addition to these initial grants,
subsequent grants to purchase an additional 45,000 shares are made to each
director on the date that the options granted to such director under the 1992
Director Compensation Plan become fully exercisable. The exercise price for
these options is also the fair market value on the date of the grant. These
option vest in five equal annual installments so long as the person remains a
director of the Company.
The 1992 Director Compensation Plan also allows a director to waive his or
her right to the cash retainer and meeting fees and in lieu thereof:
o receive the number of shares of the Company common stock equal to the
dollar amount of the annual retainer, meeting and other fees due for
such year;
o defer receipt of all compensation until a designated future date, and
invest such compensation in an interest-bearing account; or
o defer receipt of all compensation until a designated future date, and
invest such compensation in a phantom stock account whose value will
increase and decrease with the value of the Company's stock.
A director who elects to defer receipt of his or her cash retainer and
meeting fees and invest such compensation in a phantom stock plan will be
credited with share units, of which one share unit is equivalent to a share of
Company common stock. The number of share units deposited in a director's
deferred compensation account is equal to the amount of compensation deferred
divided by the then current trading price of Company common stock. Although no
actual shares of Company common stock are transferred into the director's
deferred compensation account, the value of the director's share units equal the
trading price of the Company's common stock from time to time. Directors elect
the form, method and timing of the distribution of the deferred compensation.
Directors may elect to receive distributions of the amounts credited with share
units in the form of cash, shares of Company common stock, or in any combination
of cash and shares of Company common stock.
In 1998, each director waived his rights to cash payments and elected to
receive deferred shares of Company common stock. Messrs. Alberding, Buerger,
Fernandes, and Llewellyn elected to defer their compensation to phantom stock
units in 1999. Messrs. Cunningham and Miller elected to receive their 1999
compensation in cash. All directors have elected to receive their 2000
compensation in cash.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during 1999 consisted of Messrs.
Llewellyn (Chairman), Cunningham, Fernandes, and Miller, none of whom is a
former or current officer or employee of the Company or any of its subsidiaries.
There were no interlocks or relationships requiring disclosure under applicable
SEC rules.
COMPENSATION COMMITTEE REPORT
The members of the Compensation Committee for 1999, Messrs. Llewellyn,
Cunningham, Fernandes, and Miller, present their report on executive
compensation.
54
<PAGE> 55
Compensation Philosophy and Objectives. The guiding principle considered in
the development and administration of annual and long-term compensation plans is
to align the interests of executive management with those of the Company's four
constituencies: its shareowners, its customers, its employees, and the
communities it serves. The key elements that underscore this principle are the
following:
1. Establishing compensation plans which deliver cash compensation that
is commensurate with the Company's performance relative to operating,
financial and strategic objectives, all of which are regularly
reviewed and approved by the Compensation Committee and the Board of
Directors;
2. Providing significant equity-based incentives for executives to ensure
that they are motivated over the long term to respond to the Company's
business challenges and opportunities as owners as well as employees;
3. Establishing criteria for determination of annual cash compensation
awards which appropriately balance financial performance, customer
service levels, community service, and leadership and management
development; and
4. Establishing total cash compensation targets above market averages to
ensure the Company's ability to attract and retain world-class
executive talent.
Bonuses may be granted to certain executives of the Company solely within
the discretion of the Compensation Committee and the Board of Directors. The
Company's bonus plan rewards executives for both overall Company performance and
the executive's individual performance in serving the Company's four
constituencies.
The Company's long-term incentive program consists of stock options granted
pursuant to the 1991 Stock Option Plan. The stock option grants historically
have been made at the fair market value of the Common Stock on the date of grant
and become exercisable over a period of years. Through grants under the 1991
Stock Option Plan, executives receive significant equity opportunity that
provides an incentive to build long-term shareowner value.
1999. For 1999, the executive compensation program consisted of base
salary, a bonus plan based on the factors described above and stock options that
generally become exercisable over a period of time from the date of grant.
The compensation program was highly dependent upon bonus payouts. Based on
the Company's performance and results of operations during 1999 the Company did
not make bonus payouts to the executive officers.
Mr. Frazee was hired as Chairman, President and Chief Executive Officer
effective August 4, 1997. Mr. Frazee's compensation package, including his stock
options and bonus opportunity, was negotiated with him at the time of his hiring
on the basis of his previous compensation and competitive factors at the time.
Consistent with the Company's policy as to other executives, no bonus was paid
for 1999. Stock options were granted to him along with other executives.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of the
Internal Revenue Code, enacted in 1993, generally disallows a tax deduction to
public companies for compensation over $1 million paid to the corporation's
chief executive officer and four other most highly compensated executive
officers. Qualifying performance-based compensation would not be subject to the
deduction limit if certain requirements were met. The Company believes that
options granted under its stock option plans are exempt from the limitations and
that other compensation expected to be paid during 2000 will be below the
compensation limitations.
Option Vesting Upon Sale of the Company. As described in footnote 1 to the
table entitled "Option Grants in 1999" on page 52, under certain circumstances
all options, including those granted to the five most highly compensated
executive officers of the Company, become immediately vested and exercisable in
full in the event of certain mergers or acquisitions or a sale of all or
substantially all of the Company's assets or capital stock.
55
<PAGE> 56
Summary. The Company's philosophy is that total compensation programs for
its Chief Executive Officer and other executives should be established by the
same process used for its other salaried employees, except that: (1) executives
should have a greater portion of their compensation at risk than other
employees, (2) a large portion of executive compensation should be tied directly
to the performance of the business, and (3) executives should share in the same
risks and rewards as do shareowners of the Company.
We, the members of the Compensation Committee of the Board, believe that
the Company's compensation practices have been successful in retaining and
motivating qualified executives. We will continue to monitor the effectiveness
and appropriateness of each of the components to reflect changes in the business
environment.
JOHN S. LLEWELLYN, JR., Chairman
JEFFREY M. CUNNINGHAM
GARY J. FERNANDES
ROBERT J. MILLER
56
<PAGE> 57
CORPORATE PERFORMANCE GRAPH
Set forth below is a line graph comparing (i) the yearly percentage change
in the cumulative total shareowner return on the Company's Common Stock, with
(ii) the cumulative total return of the Nasdaq Stock Market (U.S. Companies)
Index and the Nasdaq Telecommunications Stock Index for the period beginning
December 31, 1994 and ended December 31, 1999. The comparison assumes $100 was
invested on December 31, 1994 in the Company's Common Stock and in each of the
indices and assumes reinvestment of dividends.
[CORPORATE PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
12/30/94 12/29/95 12/31/96 12/30/97 12/31/98 12/31/99
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Company Index $100.0 $143.4 $ 89.7 $ 63.2 $ 27.6 $ 4.8
-------- -------- -------- -------- -------- --------
Market Index (Nasdaq) $100.0 $139.9 $171.7 $208.8 $291.6 $541.2
-------- -------- -------- -------- -------- --------
Peer Index (Nasdaq Telecomm) $100.0 $134.2 $139.0 $197.4 $322.6 $663.9
-------- -------- -------- -------- -------- --------
</TABLE>
57
<PAGE> 58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
THE COMPANY'S PRINCIPAL STOCKHOLDERS
The following table sets forth information on the beneficial ownership of
the Company's common stock as of April 25, 2000 by:
o each person who is known by the Company to beneficially own more than
5% of its outstanding shares of common stock;
o each current director of the Company;
o the Company's chief executive officer and the other named executive
officers of the Company; and
o all of the Company 's current executive officers and directors as a
group.
<TABLE>
<CAPTION>
NUMBER OF SHARES AND
NATURE OF BENEFICIAL PERCENT OF
NAME OWNERSHIP(1) COMMON STOCK(2)
- ---- ------------ ---------------
<S> <C> <C>
Wellington Management Company, LLP .......... 9,711,400(3) 9.3%
75 State Street, Boston, MA 02109
Richard C. Alberding ........................ 47,307(4) *
Lynn A. Bace ................................ 151,000(5) *
Hermann Buerger ............................. 50,810(6) *
Jeffrey M. Cunningham ....................... 27,000(7) *
Gary J. Fernandes ........................... 18,000(8) *
John P. Frazee, Jr. ......................... 952,760(9) *
Mark A. Knickrehm ........................... 246,000(10) *
John S. Llewellyn, Jr. ...................... 27,437(11) *
Robert J. Miller ............................ 18,000(12) *
Edward W. Mullinix, Jr. ..................... 247,000(13) *
William G. Scott ............................ 113,368(14) *
All executive officers and directors as a
group (18 persons) ........................ 2,295,777(15) 2.2%
</TABLE>
- ----------
* Less than 1%
(1) Unless otherwise indicated, each person has sole voting and investment
power over the shares listed. These numbers include options vested and
exercisable as of April 25, 2000 or within 60 days after such date.
(2) The total number of shares of the Company common stock outstanding as of
April 25, 2000 is 104,242,067.
(3) Information has been obtained from the Form 13G filed by Wellington
Management Company, LLP on February 10, 2000. Wellington, in its capacity
as investment advisor, may be deemed to beneficially own the shares of
PageNet common stock which are held of record by clients of Wellington.
Wellington has shared voting power and shared investment discretion with
Wellington Trust Company, NA for 6,427,100 shares and 9,711,400 shares,
respectively.
(4) Includes 45,000 shares subject to options that are vested and exercisable
within 60 days.
(5) Includes 146,000 shares subject to options that are vested and exercisable
within 60 days.
(6) Includes 27,000 shares subject to options that are vested and exercisable
within 60 days.
(7) Includes 27,000 shares subject to options that are vested and exercisable
within 60 days.
(8) Includes 18,000 shares subject to options that are vested and exercisable
within 60 days.
(9) Includes 829,600 shares subject to options that are vested and exercisable
within 60 days.
(10) Includes 246,000 shares subject to options that are vested and exercisable
within 60 days.
(11) Includes 27,000 shares subject to options that are vested and exercisable
within 60 days.
(12) Includes 18,000 shares subject to options that are vested and exercisable
within 60 days.
(13) Includes 246,000 shares subject to options that are vested and exercisable
within 60 days.
(14) Includes 105,464 shares subject to options that are vested and exercisable
within 60 days.
(15) Includes 2,134,553 shares subject to options that are vested and
exercisable within 60 days.
58
<PAGE> 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
59
<PAGE> 60
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 November 17, 1999, the Company filed a Current Report on Form 8-K dated
November 7, 1999, disclosing that it had entered into a merger agreement
where the Company will be merged with Arch Communications Group, Inc., and
disclosing that the Company had amended its Rights Agreement making it
inapplicable to the merger.
On December 17, 1999, the Company filed a Current Report on Form 8-K dated
December 16, 1999, disclosing that it had received notification from the
Nasdaq Stock Market that its common stock would be delisted from the Nasdaq
National Market, effective December 22, 1999, due to the Company's failure
to maintain compliance with Nasdaq's alternative listing Maintenance
Standards.
60
<PAGE> 61
PAGING NETWORK, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
[ITEM 14(a)]
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors 27
Consolidated Balance Sheets as of December 31, 1999 and 1998 29
For each of the three years in the period ended December 31, 1999:
Consolidated Statements of Operations 28
Consolidated Statements of Cash Flows 30
Consolidated Statements of Shareowners' Deficit 31
Notes to Consolidated Financial Statements 32
Consolidated financial statement schedule for each of the
three years in the period ended December 31, 1999:
II - Valuation and qualifying accounts 62
Report of Independent Auditors 63
</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.
61
<PAGE> 62
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997, 1998, AND 1999
(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:
1997 $ 4,994 $18,343 $16,667 $ 6,670
1998 6,670 20,516 16,067 11,119
1999 11,119 28,189 21,909 17,399
Reserve for unrecoverable subscriber devices:
1997 $ 2,420 $ 4,184 $ 4,064 $ 2,540
1998 2,540 5,193 3,411 4,322
1999 4,322 5,592 7,107 2,807
</TABLE>
62
<PAGE> 63
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, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999, and have issued our report thereon dated May 3, 2000.
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. The
financial statement schedule does not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of the uncertainty regarding the Company's ability to continue as a going
concern.
ERNST & YOUNG LLP
Dallas, Texas
May 3, 2000
63
<PAGE> 64
PAGING NETWORK, INC.
INDEX TO EXHIBITS
[ITEM 14(a)]
<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 (8)
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 (8)
4.3 Form of Indenture (2)
4.4 Shareholder Rights Agreement (3)
4.5 First Amendment to the Shareholder Rights Agreement (8)
4.6 Second Amendment to the Shareholder Rights Agreement (10)
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 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 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 (4)
10.9 1997 Restricted Stock Plan, as approved by shareowners on May 22, 1997
(5)
10.10 Employment Agreement dated as of August 4, 1997 among the Registrant and
John P. Frazee, Jr. (6)
</TABLE>
64
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.11 1992 Director Compensation Plan, as amended and restated on April 22,
1998 (7)
10.12 Amended and Restated 1991 Stock Option Plan, as approved by shareowners
on May 21, 1998 (7)
10.13 Forms of Stock Option Agreement executed by recipients of options
granted under the 1991 Stock Option Plan (8)
10.14 Employee Stock Purchase Plan, as amended on December 16, 1998 (8)
10.15 Severance Pay Plan dated as of January 20, 1999 (8)
10.16 Amendment to Severance Pay Plan dated as of December 9,
1999 (13)
10.17 Form of Stock Option Agreement executed by recipients of options granted
under the 1992 Director Compensation Plan (8)
10.18 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 (9)
10.19 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 (9)
10.20 Agreement and Plan of Merger, dated as of November 7, 1999, by and among
the Registrant, Arch Communications Group, Inc., and St. Louis
Acquisition Corp. (11)
10.21 Amendment to Agreement and Plan of Merger, dated as of January 7, 2000,
by and among the Registrant, Arch Communications Group, Inc., and St.
Louis Acquisition Corp. (12)
12.1 Ratio of Earnings to Fixed Charges for the years ended December 31,
1995, 1996, 1997, 1998, and 1999 (13)
21.1 List of the Registrant's Subsidiaries (13)
23.1 Consent of Independent Auditors (13)
27.1 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, 1996.
65
<PAGE> 66
-----------------------------------------------------------
(5) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997.
(6) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997.
(7) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998.
(8) Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
(9) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999.
(10) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999.
(11) Previously filed as an exhibit to the Registrant's
Report on Form 8-K on November 17, 1999.
(12) Previously filed as an exhibit to the Registrant's
Report on Form 8-K on January 20, 2000.
(13) Filed herewith.
66
<PAGE> 67
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: May 3, 2000 By: /s/ John P. Frazee, Jr.
----------------------------------------
John P. Frazee, Jr.
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Date: May 3, 2000 By: /s/ Julian B. Castelli
----------------------------------------
Julian B. Castelli
Senior Vice President and
Chief Financial Officer (Principal
Financial Officer and Principal
Accounting Officer)
<PAGE> 68
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: May 3, 2000 By: /s/ John P. Frazee, Jr.
-----------------------------------------
John P. Frazee, Jr.,
Chairman of the Board of Directors,
Chief Executive Officer, and Director
Date: May 3, 2000 By: /s/ Richard C. Alberding
-----------------------------------------
Richard C. Alberding, Director
Date: May 3, 2000 By: /s/ Hermann Buerger
-----------------------------------------
Hermann Buerger, Director
Date: May 3, 2000 By: /s/ Jeffrey M. Cunningham
-----------------------------------------
Jeffrey M. Cunningham, Director
Date: May 3, 2000 By: /s/ Gary J. Fernandes
-----------------------------------------
Gary J. Fernandes, Director
Date: May 3, 2000 By: /s/ John S. Llewellyn, Jr.
-----------------------------------------
John S. Llewellyn, Jr., Director
Date: May 3, 2000 By: /s/ Robert J. Miller
-----------------------------------------
Robert J. Miller, Director
<PAGE> 69
INDEX TO EXHIBITS
<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 (8)
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 (8)
4.3 Form of Indenture (2)
4.4 Shareholder Rights Agreement (3)
4.5 First Amendment to the Shareholder Rights Agreement (8)
4.6 Second Amendment to the Shareholder Rights Agreement (10)
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 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 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 (4)
10.9 1997 Restricted Stock Plan, as approved by shareowners on May 22, 1997
(5)
10.10 Employment Agreement dated as of August 4, 1997 among the Registrant and
John P. Frazee, Jr. (6)
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.11 1992 Director Compensation Plan, as amended and restated on April 22,
1998 (7)
10.12 Amended and Restated 1991 Stock Option Plan, as approved by shareowners
on May 21, 1998 (7)
10.13 Forms of Stock Option Agreement executed by recipients of options
granted under the 1991 Stock Option Plan (8)
10.14 Employee Stock Purchase Plan, as amended on December 16, 1998 (8)
10.15 Severance Pay Plan dated as of January 20, 1999 (8)
10.16 Amendment to Severance Pay Plan dated as of December 9, 1999 (13)
10.17 Form of Stock Option Agreement executed by recipients of options granted
under the 1992 Director Compensation Plan (8)
10.18 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 (9)
10.19 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 (9)
10.20 Agreement and Plan of Merger, dated as of November 7, 1999, by and among
the Registrant, Arch Communications Group, Inc., and St. Louis
Acquisition Corp. (11)
10.21 Amendment to Agreement and Plan of Merger, dated as of January 7, 2000,
by and among the Registrant, Arch Communications Group, Inc., and St.
Louis Acquisition Corp. (12)
12.1 Ratio of Earnings to Fixed Charges for the years ended December 31,
1995, 1996, 1997, 1998, and 1999 (13)
21.1 List of the Registrant's Subsidiaries (13)
23.1 Consent of Independent Auditors (13)
27.1 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, 1996.
<PAGE> 71
-----------------------------------------------------------
(5) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997.
(6) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1997.
(7) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998.
(8) Previously filed as an exhibit to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
(9) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1999.
(10) Previously filed as an exhibit to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999.
(11) Previously filed as an exhibit to the Registrant's
Report on Form 8-K on November 17, 1999.
(12) Previously filed as an exhibit to the Registrant's
Report on Form 8-K on January 20, 2000.
(13) Filed herewith.
<PAGE> 1
EXHIBIT 10.16
AMENDMENT OF THE PAGING NETWORK, INC.
SEVERANCE PAY PLAN
WHEREAS, Paging Network, Inc. (the "Company") maintains the Paging
Network, Inc. Severance Pay Plan (the "Plan"); and
WHEREAS, amendment of the Plan is now desirable;
NOW, THEREFORE, IT IS RESOLVED that, pursuant to the amending power
reserved to the Board of Directors of the Company (the "Board") pursuant to
subsection 7.1(b), the Plan be, and it hereby is, amended in the following
particulars:
1. Effective as of the date of the adoption of this amendment by the Board, by
modifying Section 4.5 to read in its entirety as follows:
4.5 Severance Benefits. If a Participant becomes entitled to severance
benefits in accordance with the provisions of subsection 4.1 the
Participant shall continue to receive medical insurance, disability
income protection, life insurance protection and death benefits, and
perquisites for a period of not less than the 12 consecutive months
immediately following the date of termination of employment, with
substantially similar coverage and at no additional cost to the
Participant than as such benefits were provided to such Participant
immediately prior to the Change in Control. Any Participant described
in the first sentence of this subsection 4.5 shall be further entitled
to a lump sum payment in cash no later than ten business days after
the date of termination equal to:
(a) If the Participant holds the position of Chairman and Chief
Executive Officer, President and Chief Operating Officer,
Executive Vice President and Chief Administrative Officer or
Senior Vice President and Chief Financial Officer of the
Company, or President and Chief Operating Officer of Vast
Solutions, Inc., as of the date of the Change in Control,
then three hundred percent (300%) of the Participant's Base
Severance Amount; or
(b) If the Participant holds the position of Regional Sales Vice
President or higher (but is not designated in subparagraph
(a)), as of the date of the Change in Control, then two
hundred percent (200%) of the Participant's Base Severance
Amount; or
(c) If the Participant holds the position of Director or higher
(but less than Regional Sales Vice President) as of the date
of the Change in Control, one hundred percent (100%) of the
Participant's Base Severance Amount; or
<PAGE> 2
(d) for all other Participants, then fifty percent (50%) of the
Participant's Base Severance Amount, as defined below;"
2. Effective as of the date of the adoption of this amendment by the Board,
by adding the word "or" at the end of subsection 4.4(d) and adding the
following new subsection (e) in Section 4.4:
"(e) with respect solely to employees of Vast Solutions, Inc., a
wholly-owned subsidiary of the Company ("Vast"), Vast is not spun-off as a
separate entity in conjunction with the merger of the Company with Arch
Communications, Inc. ("Arch") and Arch determines to discontinue the
operations of Vast as a whole within 12 months of the completion of such
merger."
-2-
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Earnings:
Loss before extraordinary item
and cumulative effect of a change
in accounting principle $ (44,201) $(104,320) $(141,403) $(162,009) $(261,556)
Fixed charges, less
interest capitalized 118,666 148,055 174,311 170,343 184,273
--------- --------- --------- --------- ---------
Earnings $ 74,465 $ 43,735 $ 32,908 $ 8,334 $ (77,283)
========= ========= ========= ========= =========
Fixed charges:
Interest expense, including
interest capitalized $ 98,533 $ 122,753 $ 158,888 $ 161,269 $ 169,874
Amortization of deferred
financing costs 4,313 5,261 8,418 4,430 4,574
Interest portion of rental
expense 15,820 20,041 22,931 26,581 33,352
--------- --------- --------- --------- ---------
Fixed charges $ 118,666 $ 148,055 $ 190,237 $ 192,280 $ 207,800
========= ========= ========= ========= =========
Ratio of earnings to fixed charges -- -- -- -- --
========= ========= ========= ========= =========
Deficiency of earnings available
to cover fixed charges $ (44,201) $(104,320) $(157,329) $(183,946) $(285,083)
========= ========= ========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
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>
PageNet, Inc. Delaware 100%
Paging Network of America, Inc. Delaware 100%
Paging Network Canadian Holdings, Inc. Delaware 100%
Paging Network of Colorado, Inc. Delaware 100%
Paging Network Finance Corp. Delaware 100%
Paging Network International, Inc. Delaware 100%
Paging Network of Michigan, Inc. Delaware 100%
Paging Network of Northern California, Inc. Delaware 100%
Paging Network of San Francisco, Inc. Delaware 100%
Vast Solutions, 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%
Madison Telecommunications, Inc. Canada 100%
Compania Europea De Radiobusqueda, S.A. (1) Spain 79.7%
</TABLE>
(1) This subsidiary was sold by the Registrant in March 2000.
<PAGE> 1
EXHIBIT 23.1
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 May 3, 2000, 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, 1999.
ERNST & YOUNG LLP
Dallas, Texas
May 3, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 32,144
<SECURITIES> 0
<RECEIVABLES> 101,875
<ALLOWANCES> 17,399
<INVENTORY> 8,687
<CURRENT-ASSETS> 130,930
<PP&E> 1,451,761
<DEPRECIATION> 684,648
<TOTAL-ASSETS> 1,422,560
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0
0
<COMMON> 1,040
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<TOTAL-REVENUES> 989,723
<CGS> 57,901
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<OTHER-EXPENSES> 146,168
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<INTEREST-EXPENSE> 150,921
<INCOME-PRETAX> (261,556)
<INCOME-TAX> 0
<INCOME-CONTINUING> (261,556)
<DISCONTINUED> 0
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<CHANGES> (37,446)
<NET-INCOME> (299,002)
<EPS-BASIC> (2.88)
<EPS-DILUTED> (2.88)
</TABLE>
