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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-12786
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AMERICAN PAGING, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 36-3109408
- -------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
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1300 GODWARD STREET NE, SUITE 3100, MINNEAPOLIS, MINNESOTA 55413-1767
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: (612) 623-3100
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange
Title of each class on which registered
- -------------------------------- --------------------------------
Common Shares, $1 par value American Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes __X__ No ______
Indicate 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 February 28, 1997, the aggregate market value of registrant's Common
Shares held by nonaffiliates was approximately $16.0 million (based upon the
closing price of the Common Shares on February 28, 1997, of $4.625, as reported
by the American Stock Exchange).
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 28, 1997, is 7,588,551 Common Shares, $1 par value,
and 12,500,000 Series A Common Shares, $1 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrant's 1996 Annual Report to
Shareholders and of the registrant's Notice of Annual Meeting of Shareholders
and Proxy Statement for its Annual Meeting of Shareholders to be held May 5,
1997, described in the cross reference sheet and table of contents attached
hereto are incorporated by reference into Parts II and III of this report.
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<PAGE>
CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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<TABLE>
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PAGE NUMBER
OR REFERENCE(1)
---------------
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Item 1. Business........................................................................................... 3
Item 2. Properties......................................................................................... 13
Item 3. Legal Proceedings.................................................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders................................................ 13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 13(2)
Item 6. Selected Financial Data............................................................................ 14(3)
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 14(4)
Item 8. Financial Statements and Supplementary Data........................................................ 14(5)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............... 14
Item 10. Directors and Executive Officers of the Registrant................................................. 14(6)
Item 11. Executive Compensation............................................................................. 14(7)
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 15(8)
Item 13. Certain Relationships and Related Transactions..................................................... 15(9)
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K..................................... 15
</TABLE>
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(1) Parenthetical references are to information incorporated by reference from
the registrant's Exhibit 13, which includes portions of its Annual Report to
Shareholders for the year ended December 31, 1996 ("Annual Report") and from
the registrant's Notice of Annual Meeting of Shareholders and Proxy
Statement for its Annual Meeting of Shareholders to be held on May 5, 1997
("Proxy Statement").
(2) Annual Report section entitled "American Paging Stock and Dividend
Information."
(3) Annual Report section entitled "Selected Consolidated Financial Data."
(4) Annual Report section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(5) Annual Report sections entitled "Consolidated Statements of Operations,"
"Consolidated Statements of Cash Flows," "Consolidated Balance Sheets,"
"Consolidated Statements of Changes in Common Shareholders' Equity," "Notes
to Consolidated Financial Statements," "Report of Independent Public
Accountants" and "Consolidated Quarterly Income Information (Unaudited)."
(6) Proxy Statement section entitled "Election of Directors" and "Executive
Officers."
(7) Proxy Statement section entitled "Executive Compensation and Other
Information," except for the information specified in Item 402(a)(8) of
Regulation S-K under the Securities Exchange Act of 1934, as amended.
(8) Proxy Statement section entitled "Security Ownership of Certain Beneficial
Owners and Management."
(9) Proxy Statement section entitled "Certain Relationships and Related
Transactions."
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mnopq
AMERICAN PAGING, INC.
1300 GODWARD STREET NE - SUITE 3100 - MINNEAPOLIS, MN 55413
TELEPHONE (612) 623-3100
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PART I
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ITEM 1. BUSINESS
American Paging, Inc. [AMEX symbol "APP" or the "Company"] provides one-way
and two-way wireless communications messaging services in 21 states and the
District of Columbia through 51 sales and service offices, with operations
concentrated in Florida and in the Mid-Atlantic and Midwest regions. The Company
served 777,400 customers at December 31, 1996 through 1,048 transmitters
covering a total population of approximately 76 million in 122 of 492 total
Basic Trading Areas ("BTA") in the United States as designated by Rand McNally &
Company and adopted by the Federal Communications Commission ("FCC"). As of
December 31, 1996, the Company was the eleventh largest Radio Common Carrier
("RCC") paging company in the United States based upon customer units
outstanding.
The Company was formed in 1980 under Delaware law as a wholly owned
subsidiary of Telephone and Data Systems, Inc. [AMEX symbol "TDS"]. TDS owned
16,500,000 shares of Common Stock of the Company at December 31, 1996,
representing 82.3 percent of the combined total of the Company's outstanding
Common and Series A Common Shares and 98.2 percent of their combined voting
power.
Unless the context indicates otherwise: (i) references to "APP," the
"Company" or "American Paging" refer to American Paging, Inc. and its
subsidiaries; (ii) references to "TDS" refer to Telephone and Data Systems, Inc.
and its subsidiaries.
WIRELESS MESSAGING INDUSTRY
Paging is a wireless communications messaging technology which uses an
assigned radio frequency, licensed by the FCC, to contact a paging customer
within a geographic service area. Pagers are small, lightweight, easy-to-use,
battery-operated devices which receive messages by the broadcast of a radio
signal. To contact a customer, a message is initiated by placing a telephone
call to the customer's pager number or through computer software which enables a
computer to transmit a text message via the modem line. The message is received
by a computerized paging switch which generates a signal sent to
microprocessor-controlled radio transmitters within the service area. These
radio transmitters are connected to the paging terminal either through land-line
or satellite links. The transmitters broadcast a digital or analog signal that
is received by the pager and delivered as alphanumeric text, numerical display,
tone or voice message.
The paging industry started in 1949 when the FCC allocated certain radio
frequencies for exclusive use in providing one-way and two-way types of mobile
communications services. The industry grew slowly during its first thirty years
as the quality and reliability of equipment was developed and the market began
to perceive the benefits of wireless communications. Until the 1980s, the
industry was highly fragmented with a large number of small, local operators.
During that decade, acquisitions of many firms
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by regional telephone companies and others greatly consolidated the industry.
Several large industry acquisitions have occurred in the 1990s which has
resulted in further consolidation of the paging industry.
Although an exact paging industry growth rate is difficult to determine,
industry sources estimate the number of pagers in service during the five year
period ended December 31, 1996, increased at a compound annual growth rate of
approximately 29 percent. Industry sources also estimate the 12 largest RCC
paging companies, including American Paging, served approximately 65.8 percent
of the estimated 42.3 million pagers in service in the United States at December
31, 1996.
Manufacturers of pagers and transmission equipment have produced innovative
technological advances which are expected to continue to broaden the potential
market size for paging services and support the industry's rapid growth rate.
Micro circuitry, liquid crystal display technology and digital signal processing
have all expanded the capability and capacity of paging services while reducing
equipment and air-time costs and equipment size. Narrowband Personal
Communication Services ("PCS") technology is expected to greatly expand the
messaging capacity of the paging infrastructure and provide advanced two-way
messaging and data services. Future service offerings are expected to include
acknowledgment paging, which allows customers to confirm a message to the
originator, as well as digitized voice paging, two-way data conveyance to highly
mobile devices such as lap-top computers and Personal Digital Assistants
("PDA"), and other data transfer applications.
COMPANY STRATEGY
The Company's business strategy is to promote above industry average growth
in customers, service revenue and operating cash flow (earnings before interest,
taxes, depreciation and amortization) by providing the highest quality service
through one of the industry's most technologically advanced digital transmission
systems with a focus on strong customer service and competitive pricing. The
Company's business strategy is based on the following elements:
QUALITY CUSTOMER SERVICE. Beginning in April 1996, the Company began
providing full customer service to its entire customer base 24-hours-per-day,
seven-days-per-week, through its centralized Customer Telecare Center ("CTC")
located in Oklahoma City, Oklahoma. Customer service representatives at the CTC
have the capability to fulfill sales orders, add additional services and answer
technical and billing questions. While the Company encountered difficulties in
converting to the CTC, corrective actions implemented since then have gradually
improved customer satisfaction levels. Starting in 1997, customer service
representatives at the CTC will be organized based on geographic regions in
order to further improve customer service.
TECHNOLOGICAL LEADERSHIP. The Company invests in state-of-the-art
communication network technology which provides high transmission quality, data
speed and system capacity, while also providing strong system management tools
which allow the Company to more efficiently and effectively operate the systems.
The Company utilizes FLEX-Registered Trademark- protocol technology for all new
transmitters installed on its network which increases system capacity and will
allow a more cost effective migration to narrowband PCS technology and other
future wireless messaging services. The Company also utilizes satellite-based
digital technology which reduces maintenance and eliminates expensive
terrestrial radio links, site costs and repeater equipment. The Company's
satellite-controlled systems cover portions of Arizona, Minnesota, Wisconsin,
Illinois, Oklahoma, Florida, Texas and Washington, DC. The Company is converting
all other wide-area systems to this satellite-based digital technology.
In order to reduce the cost of providing service in 1997 and into the
future, the Company has developed a plan to migrate the existing customer base
from its current 19 frequencies and 43 networks to no more than three
frequencies supported by six nationwide networks. During this migration, the
Company expects to dismantle and sell some of the older, less efficient systems.
In addition, the Company intends to relocate some existing transmitters to more
heavily populated areas in order to expand coverage, improve quality and gain
new customers.
SPECTRUM DEVELOPMENT. The Company owns five regional narrowband PCS
licenses which provide coverage equivalent to that of a nationwide license. Each
of the five licenses consists of a 50 kHz
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outbound channel on frequency 930.625 MHz paired with a 12.5 kHz return channel
on frequency 901.80625 MHz. The licenses will eventually enable the Company to
introduce two-way wireless messaging communications services including
acknowledgment paging, data and telemetry services, wireless e-mail and
digitized voice messaging throughout the United States. However, commercial
unavailability of the ReFLEX25-Registered Trademark- protocol and related
infrastructure and subscriber device equipment necessary to offer these services
has resulted in the Company suspending development of its PCS licenses.
The Company also owns an exclusive nationwide Private Carrier Paging ("PCP")
channel on frequency 929.3375 MHz. The Company believes this license will enable
it to offer competitive regional and nationwide wireless messaging services. The
Company's Minnesota, Oklahoma, Texas and Washington, DC systems currently
utilize this frequency.
The narrowband PCS licenses and the PCP license will provide the Company
with significant spectrum capacity upon which to offer future wireless messaging
services. Significant funds will be required when the Company proceeds with
development of its narrowband PCS licenses and PCP license. There can be no
assurance that the Company will be successful in developing these licenses due
to such factors as the inability to obtain sufficient financing at a reasonable
cost, availability of the supporting infrastructure and related subscriber
device equipment, competition, regulatory developments or other factors.
ALLIANCES AND AFFILIATES. The Company is a joint venture partner with Nexus
Telecommunication Systems Ltd. of Israel ("Nexus") in American Messaging
Services, LLC ("AMS"). AMS was formed to develop multiple applications and
distribution channels worldwide for a patented communications network that
provides two-way paging, location and telemetry services. In June 1996, AMS
constructed a beta-test system in Chicago to perform radio frequency and
infrastructure tests. The system is still being tested, while also serving as a
demonstration system for prospective customers of a Nexus-based technology. The
Company has notified Nexus that it will stop funding AMS as of June 30, 1997. As
a result, the Company's interest in AMS may be diluted.
The Company also has an agreement with Liazon, Inc. of Toronto for the
coordinated development and use of narrowband PCS and conventional PCP paging
frequencies in North America. Under the terms of the agreement, each company
will pursue its own PCS build out plans, but will have the added potential to
market North American coverage of advanced wireless messaging services. In a
related action, both the FCC and Industry Canada have provided conditional
authority for both companies to construct and operate transmitters in previously
restricted areas.
The Company continues to explore synergies with TDS and affiliated
companies, United States Cellular Corporation, a TDS subsidiary which operates
cellular telephone companies, and Aerial Communications, Inc., a TDS subsidiary
which is developing broadband PCS services. Opportunities being pursued with
these affiliated companies include bundling of complementary products and joint
marketing efforts.
COMPANY RESTRUCTURING
During the third quarter of 1995, the Company began restructuring three key
operating areas: sales and marketing, administration, and customer service. The
impact on operations from these restructuring efforts was more severe than
originally anticipated, and results from operations were negatively impacted in
1995 and 1996. The changes implemented in 1996 caused disruptions in many
aspects of the business, and also resulted in additional restructuring costs
being recorded during 1996. These disruptions led to several senior management
changes including the appointment of a new President and Chief Executive Officer
and a new Vice President - Sales, Marketing and Field Operations in the second
half of 1996. Additionally, the Company recently added a new Vice President -
Development and Engineering and a new Vice President - Finance and Chief
Financial Officer.
The first goal of the restructuring effort was to increase sales
productivity through improved direct sales efforts and improved customer mix.
Towards this end, the Company increased the number of direct sales
representatives with the goal of increasing growth in units in service, revenue
and average
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monthly service revenue per unit ("ARPU"). During 1996, the Company increased
the number of employees involved in the sales function to approximately 60% of
total employees, but improvements in units in service, service revenue and ARPU
growth were not achieved due to dislocations from restructuring related
activities within the sales and customer support areas. The Company's strategy
is to organize the department on a market segment basis so that the sales and
marketing employees will be better able to address current customer demands, and
also be more responsive to changes within those market segments.
The second and third goals of the restructuring effort were to reduce
administrative expense and improve customer service. An integral part of
achieving these two goals was the consolidation of 17 geographically-dispersed
customer service and administrative units into a centralized Customer Telecare
Center located in Oklahoma City, Oklahoma. The CTC, opened in April 1996, now
handles all back office activities including customer service, order
fulfillment, customer billing and collections, and is available 24 hours-a-day,
seven days-per-week. The process of implementing the CTC, as well as changing
the way the Company sells, services and supports its customers, was very
disruptive to operations during 1996. As a result, restructuring-related
expenses recorded during 1996 include a write-down of inventory identified as
obsolete upon centralization of inventory management at the CTC, as well as
costs for duplicate staffing, employee severance, and consulting and legal fees.
In addition, during the consolidation of customer information databases at the
CTC, it became apparent that the Company's customer management and billing
system did not provide the flexibility necessary to support the Company's future
customer growth and retention. The creation and successful operation of the CTC
is critical to achieving the Company's objectives of growth in units, service
revenue and ARPU.
PAGING OPERATIONS
American Paging provides local, statewide, regional and nationwide advanced,
one-way digital wireless messaging communications services to customers in 21
states and the District of Columbia through its 51 sales and service offices.
The Company offers local and regional paging coverage throughout Florida, the
Midwest (including all or parts of Minnesota, Wisconsin, Missouri, Illinois,
Indiana and Kentucky), the Mid-Atlantic (including all or parts of Maryland,
Pennsylvania, Virginia and Washington, D.C.) and in portions of Oklahoma, Texas,
Arizona and Utah. One-way paging services are also offered in portions of Ohio,
Iowa and Southern California, through various transmitter-sharing agreements
with nonaffiliated service providers. Nationwide one-way and two-way paging
services are offered through the Company's alliances with nonaffiliated service
providers.
Generally, a paging system consists of a control center, transmitters and
dedicated links (wire, fiber optic, radio, or satellite) between the control
center and the transmitters and the pagers themselves. The control center is
interconnected with the public switched telephone network ("PSTN") and receives
messages from landline telephones. Messages received at the control center are
matched to each pager's unique telephone number, or "cap code," translated into
digital signals and forwarded over dedicated links to transmitters that
broadcast the message over a specified frequency. If the pager to which the
message is directed is in the transmitter coverage area, it will recognize its
"cap code" and indicate to its wearer that it has received a page.
A paging operator is generally assigned a block of numbers by the local
telephone company in its service area. These numbers are assigned to individual
pagers. When the number assigned to the pager is called from the PSTN, messages
can be transmitted automatically by terminal equipment in the control center
without the intervention of a live operator.
The Company currently provides four types of pagers in all of its markets:
alphanumeric text display, numeric display, tone and voice. Alphanumeric text
display service allows customers to receive, store and display full text
messages, consisting of both numbers and letters up to 240 characters long,
which are sent from either a data entry device, message dispatch operator or via
computer modem through messaging software. A numeric display pager permits a
caller to transmit to the customer a numeric message that may consist of a
telephone number, an account number or coded numeric information. It has the
memory capability to store several such numeric messages which can be recalled
by the
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customer when desired. A tone pager notifies the customer that a message has
been received by emitting an audible beep, displaying a flashing light or
vibrating. In the case of voice service, the notification is followed by a brief
voice message.
The following table presents the number and percentage of the various types
of pagers in service:
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<CAPTION>
1996 1995 1994
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NUMBER OF NUMBER OF NUMBER OF
PAGER TYPE PAGERS PERCENT PAGERS PERCENT PAGERS PERCENT
- ----------------------------------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Numeric............................ 663,000 85.3 684,500 87.2 574,900 88.1
Alphanumeric....................... 108,600 14.0 88,500 11.3 59,300 9.1
Voice.............................. 3,300 0.4 6,200 0.8 9,400 1.4
Tone............................... 2,500 0.3 5,300 0.7 9,200 1.4
--------- ------- --------- ------- --------- -------
Total.............................. 777,400 100.0 784,500 100.0 652,800 100.0
--------- ------- --------- ------- --------- -------
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<CAPTION>
1993 1992
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NUMBER OF NUMBER OF
PAGER TYPE PAGERS PERCENT PAGERS PERCENT
- ----------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Numeric............................ 396,300 86.0 264,500 82.1
Alphanumeric....................... 37,400 8.1 24,200 7.5
Voice.............................. 12,400 2.7 13,600 4.2
Tone............................... 14,800 3.2 19,900 6.2
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Total.............................. 460,900 100.0 322,200 100.0
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</TABLE>
Over the past five years, the Company has migrated its customer base toward
higher-margin units such as numeric display and alphanumeric pagers. From
year-end 1992 to year-end 1996, the Company's digital display units and
alphanumeric units in service as a percentage of total pagers in service
increased to 85.3% and 14.0%, respectively, from 82.1% and 7.5%, respectively.
In addition, the Company actively markets value-added services such as
information services, loss protection, maintenance, voice mail, text dispatching
and personalized caller greeting. The Company is expanding its offering of
information services which are tailored to specific industries such as real
estate, medical services and governmental agencies. For example, the Company's
"Realty Pager" allows customers with alphanumeric units to receive current local
mortgage and home equity loan rates as well as the latest real estate industry
and economic news. The Company also offers information services which allow
customers to receive such information as the latest customized news headlines,
stock quotes or sports scores.
Loss protection allows a customer who leases a pager to limit the cost of
replacement upon loss, destruction or theft of the pager. Maintenance contracts
are offered to customers who own their pagers. Voice mail allows a caller to
leave a recorded message that is stored in the Company's computerized message
retrieval center. When a voice message is left, the Company's customer can be
automatically alerted through the customer's pager, who can then retrieve the
stored message by calling the Company's digital voice retrieval system.
Alphanumeric message dispatching allows a customer to receive a transcribed
message on his or her pager. Personalized greetings allow a customer to record a
message that greets callers who reach the customer's voice mail or pager number.
MARKETING AND CUSTOMER SERVICE
The Company directs its marketing efforts at value-oriented customers who
appreciate the Company's high degree of technical reliability and high level of
customer service. The Company's marketing strategy is designed to increase
market share and operating cash flow by achieving rapid growth at modest cost
per net customer unit added. Continuing quality improvements, including new
services and products, help stimulate this growth while controlling costs.
The Company generates its revenue from (i) service usage billed on a
flat-rate or measured service basis, (ii) pager rentals, (iii) pager warranties,
maintenance and repair, (iv) loss protection, (v) voice mail usage on a
flat-rate or measured-service basis, (vi) activation fees, (vii) the sale of
pager accessories, and (viii) service usage of value-added services such as
information services, text dispatching, second telephone numbers or group calls.
Service to end users is provided directly by the Company in most cases.
The Company markets its services directly through its direct sales force,
company-owned retail stores, and indirectly through third-party resellers and
agents. As of December 31, 1996, customers acquired through the direct channel
made up approximately 62.0 percent of the Company's total pagers in service. The
direct sales staff is responsible for the development of large and medium
business acounts and for the promotion of nationwide paging services.
Company-owned retail stores focus on serving consumer and small business
accounts as do indirect agents. The Company sells pagers to
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agents at a small mark-up or at cost. Agents then sell the pagers to customers
who purchase the services directly from the Company. The Company provides sales
support to its agents, including promotional material and end-user information.
The portion of the Company's subscriber base placed in service through agents
accounted for approximately 4.3 percent of the Company's pagers in service at
December 31, 1996.
The Company provides services under marketing agreements with third-party
marketing organizations, or resellers. The Company offers paging air time in
bulk quantities at wholesale rates to resellers who then "re-sell" the air time
to end users at a mark-up. Resellers incur the cost to acquire customers as well
as service, bill and collect revenues from the customer. They also assume the
cost of the paging unit for those who rent rather than purchase. The portion of
the Company's subscriber base placed in service through resellers accounted for
approximately 33.7 percent of the Company's pagers in service at December 31,
1996.
In 1997, the Company intends to take a market segment approach, applying
different strategies and resources related to the customer needs within each
channel and market segment. The Company operates in two distinct markets,
commercial and consumer, and is creating sales and marketing plans for segments
within these markets.
The following table reflects the Company's change in units in service:
DISTRIBUTION CHANNELS OF PAGERS IN SERVICE
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- -------------------
NUMBER OF NUMBER OF NUMBER OF
DISTRIBUTION CHANNEL PAGERS PERCENT PAGERS PERCENT PAGERS PERCENT
- ----------------------------------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Direct............................. 482,200 62.0 489,200 62.3 429,700 65.8
Reseller........................... 261,700 33.7 254,500 32.5 190,300 29.2
Retail............................. 33,500 4.3 40,800 5.2 32,800 5.0
--------- ------- --------- ------- --------- -------
Total.............................. 777,400 100.0 784,500 100.0 652,800 100.0
--------- ------- --------- ------- --------- -------
--------- ------- --------- ------- --------- -------
<CAPTION>
1993 1992
------------------- -------------------
NUMBER OF NUMBER OF
DISTRIBUTION CHANNEL PAGERS PERCENT PAGERS PERCENT
- ----------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Direct............................. 351,500 76.3 283,000 87.8
Reseller........................... 88,100 19.1 34,400 10.7
Retail............................. 21,300 4.6 4,800 1.5
--------- ------- --------- -------
Total.............................. 460,900 100.0 322,200 100.0
--------- ------- --------- -------
--------- ------- --------- -------
</TABLE>
To obtain new customers and retain existing customers, the Company employs a
strategy of general advertising through Yellow Pages, local retail traffic
promotions and target marketing campaigns. Customer incentives include new
service trials, discounts on equipment and reduced prices on enhancement
services such as voice mail and 800 numbers.
The Company provides paging services to subscribers where the pager is
either owned by the Company and leased to the subscriber, or owned by the
subscriber directly. Pager lease rates and purchase prices vary widely by market
region, service type and the volume of pagers purchased or leased by a
subscriber. As of December 31, 1996, the Company owned a total of 504,300 pagers
having a total cost to the Company of approximately $29.8 million (net of
accumulated depreciation). Of these pagers, 386,300 were leased to customers of
the Company and the balance were held in inventory by the Company for
anticipated growth and replacement. In addition to its pagers, the Company owned
transmitters, telemessaging equipment and other tangible assets having a net
book value of approximately $21.5 million as of December 31, 1996.
OWNERSHIP OF PAGERS IN SERVICE
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- -------------------
NUMBER OF NUMBER OF NUMBER OF
OWNERSHIP PAGERS PERCENT PAGERS PERCENT PAGERS PERCENT
- ----------------------------------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Company............................ 386,300 49.7 383,100 48.8 324,800 49.7
Customer........................... 391,100 50.3 401,400 51.2 328,000 50.3
--------- ------- --------- ------- --------- -------
Total.............................. 777,400 100.0 784,500 100.0 652,800 100.0
--------- ------- --------- ------- --------- -------
--------- ------- --------- ------- --------- -------
<CAPTION>
1993 1992
------------------- -------------------
NUMBER OF NUMBER OF
OWNERSHIP PAGERS PERCENT PAGERS PERCENT
- ----------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Company............................ 261,500 56.8 211,600 65.7
Customer........................... 199,400 43.2 110,600 34.3
--------- ------- --------- -------
Total.............................. 460,900 100.0 322,200 100.0
--------- ------- --------- -------
--------- ------- --------- -------
</TABLE>
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Customers discontinue service each month for various reasons, including
economic downturns, unmet expectations, relocation to a non-service area,
transitory need, securing services other than those provided by the Company, or
switching to a competing service provider. The Company discontinues service to
customers who fail to pay. The Company's monthly disconnect or "churn" rate
increased during 1996 due to disruptions in service caused by the restructuring.
The average churn rate was 3.1 percent per month during the twelve months ended
December 31, 1996 as compared to 2.5 percent for 1995. While the conversion to
the CTC created difficulties in customer service, corrective actions taken
during 1996 led to a significant reduction in customer churn to 2.7 percent for
the month of December from a high of 4.6 percent for the month of August.
SOURCES OF EQUIPMENT
The Company does not manufacture any of the equipment or pagers used in its
paging operations. The equipment the Company uses is available for purchase from
multiple sources, and the Company anticipates equipment and pagers will continue
to be available to the Company in the foreseeable future, consistent with normal
manufacturing and delivery lead times. Because of the high degree of
compatibility among different models of transmitters, computers and other paging
equipment manufactured by suppliers, the Company is able to design its systems
without being dependent upon any single manufacturing source. The Company
continuously evaluates new developments in wireless messaging technology in
connection with the design and enhancement of its systems and selects the newest
and most reliable technology to offer its customers.
COMPETITION
The Company faces significant competition in all of its markets. Competition
for subscribers to the Company's paging services in most geographic markets it
serves is based primarily on price, quality of services offered and the
geographic area covered. The Company believes it provides high quality service
in all its geographic markets. A number of the Company's competitors, which
include local, regional and national paging companies and certain regional
telephone companies, possess greater financial, technical and other resources
than the Company. Moreover, certain competitors in the paging business offer
wider coverage in certain geographic areas than does American Paging and certain
competitors follow a low-price discounting strategy to expand market share. If
any of such companies were to devote additional resources to the paging business
or increase competitive pressure in the Company's markets, the Company's results
of operations could be adversely affected.
A number of wireless communication technologies, including cellular
telephone service, broadband PCS, enhanced Specialized Mobile Radio ("SMR") and
others, are competitive forms of technology used in, or projected to be used
for, wireless two-way communications. These technologies are currently in use or
are under development. Although these technologies are higher priced than
traditional paging services, technological improvements could result in
increased capacity and efficiency for wireless two-way communication and,
accordingly, could result in increased competition for the Company.
Cellular telephone technology provides an alternative communications system
for customers who are frequently away from fixed-wire or land-line
communications systems (i.e., ordinary telephones). Compared to cellular
telephone service, paging service is generally less expensive, offers longer
battery life, provides better in-building penetration, extends over wider
coverage areas and has easier transportability. Management believes that paging
will remain one of the lowest-cost forms of wireless messaging due to the
low-cost infrastructure associated with paging systems, as well as advances in
technology that will provide for reduced paging costs.
Broadband PCS technology is currently available in selected markets and
development continues in many other markets throughout the United States.
Broadband PCS technology is similar in design to cellular technology and will
offer increased capacity for wireless two-way communication as well as
short-text messaging. Accordingly, this technology is expected to result in
increased competition for the Company.
The Company believes the services offered by narrowband PCS technology will
be complementary to the services and functionality of cellular and broadband
PCS. Future technological developments in
9
<PAGE>
the wireless telecommunications industry and the enhancement of current
technologies will likely create new products and services that are competitive
with the paging services currently offered by the Company. There can be no
assurance that the Company would not be adversely affected by such technology
changes.
GOVERNMENT REGULATION
REGULATORY ENVIRONMENT. The Company's paging operations are subject to
regulation by the FCC and by state regulatory agencies. The FCC exercises broad
authority to regulate market entry and rates and shares responsibilities with
state regulatory authorities over a broad range of other matters.
The construction, operation and transfer of the Company's systems in the
United States are regulated to varying degrees by the FCC pursuant to the
Communications Act of 1934 (the "Communications Act"). In addition, the
Telecommunications Act of 1996 (the "1996 Act"), which amended the
Communications Act, mandates significant changes in existing telecommunications
rules and policies to promote competition, ensure the availability of
telecommunications services to all parts of the nation and to streamline
regulation of the telecommunications industry to remove regulatory burdens, as
competition develops and makes regulation unnecessary. The FCC has promulgated
regulations governing construction and operation of wireless systems, licensing
(including renewal of licenses) and technical standards for the provision of
wireless services under the Communications Act, and is implementing the
legislative objectives of the 1996 Act, as discussed below.
LICENSING. The FCC is responsible for awarding licenses for radio
frequencies used by the Company and its subsidiaries to provide its one-way and
two-way message and other service offerings. It also establishes and enforces
the licensing, technical and operating rules which govern operations on those
frequencies, the terms and conditions under which the wireless systems of the
Company and its subsidiaries are interconnected with and obtain services and
facilities from other service providers such as local exchange carriers and
others with respect to interstate services and adjudicates any consumer or other
complaints filed under the Communications Act with respect to service providers
subject to its jurisdiction.
The FCC licenses granted to the Company are issued for up to ten years at
the end of which time renewal applications must be filed with the FCC. Most of
the Company's current licenses expire between 1998 and 2001. FCC renewals are
generally granted so long as the Company is in compliance with FCC regulations.
Although the Company is unaware of any circumstances which would prevent the
approval of any pending or future renewal applications, no assurance can be
given that the Company's licenses will be renewed by the FCC in the future.
Moreover, although revocation and involuntary modification of licenses are
extraordinary regulatory measures, the FCC has the authority to restrict the
operation of licensed facilities or revoke or modify licenses. No license
granted to the Company has ever been involuntarily revoked or modified.
The Communications Act requires licensees, such as the Company, to obtain
prior approval from the FCC for the assignment or transfer of control of any
construction permit or station license, or any rights thereunder. The
Communications Act also requires prior approval by the FCC of acquisitions of
other paging companies by the Company. The FCC has approved all transfers of
control for which the Company has sought approval. The Company also routinely
applies for FCC authority to use frequencies, modify the technical parameters of
existing licenses, expand its service territory and provide new services.
Although there can be no assurance that any future requests for approval or
applications filed by the Company will be approved or acted upon in a timely
manner by the FCC, or that the FCC will grant the relief requested, the Company
has no reason to believe that any such requests, applications or relief will not
be approved or granted.
Pursuant to 1993 amendments to the Communications Act, a paging service is
classified as a Commercial Mobile Radio Service ("CMRS"), to the extent that it
is a service offered to the public, for a fee, which is interconnected to the
public switched telephone network. These 1993 amendments prohibit state and
local authorities from limiting CMRS market entry and regulating CMRS rates.
10
<PAGE>
RECENT EVENTS. The FCC adopted certain significant decisions during 1996.
In one decision, the FCC amended its rules to allow paging and narrowband PCS
carriers to offer fixed wireless service on a co-primary basis with mobile
services. In another decision, the FCC required that all licensees register and
obtain FCC registration numbers for all of their antenna towers which require
prior FAA clearance. The FCC also amended its environmental protection rules to
adopt new guidelines and procedures for evaluating the environmental effects of
RF emissions.
In addition, the FCC initiated proceedings proposing to adopt market area
licensing to replace site-by-site licensing of paging base stations, to permit
geographic partitioning and spectrum disaggregation in the event market area
licensing is adopted, and to make changes affecting the licensing of local and
response channels in narrowband PCS services. The FCC has also announced its
intention to hold spectrum auctions for paging and narrowband PCS spectrum in
1997 if its market area licensing and narrowband PCS rule revisions are adopted.
The FCC also established a phased program which requires per-call
compensation to be paid to pay-phone service providers by subscribers to 800
numbers, among others. The Company and numerous other paging providers who offer
800 number calling features as a means of accessing their networks will be
required to compensate pay phone service providers under these new requirements.
During 1996 the FCC implemented significant changes in existing regulation
of the telecommunications industry under the 1996 Act. Some of these specific
changes, potentially affecting CMRS providers, including paging and narrowband
PCS providers, are summarized below.
The 1996 Act provides that implementing its legislative objectives will be
the task of the FCC, the state public utilities commissions and a federal-state
joint board. Much of this implementation is proceeding in numerous, concurrent
proceedings with aggressive deadlines. The Company cannot predict the full
extent, nature and interrelationships among state and federal implementation and
other responses to the 1996 Act.
The primary purpose and effect of the new law is to open all
telecommunications markets to competition. The 1996 Act makes most direct or
indirect state and local barriers to competition unlawful. It directs the FCC to
preempt all inconsistent state and local laws and regulations, after notice and
comment proceedings. It also enables electric and other utilities to engage in
telecommunications service through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service provision
and necessary for universal services, public safety and welfare, continued
service quality and consumer rights. While a state may not impose requirements
that effectively function as barriers to entry, it retains limited authority to
regulate certain competitive practices in rural telephone company service areas.
Since enactment, the FCC has adopted orders implementing the local
competition provisions of the 1996 Act. The FCC found that certain wireless
providers are entitled to reciprocal compensation, may not be charged for
LEC-originated traffic or for code opening/per-number fees, and may obtain LEC
interconnection subject to the terms of the 1996 Act. Appeals have been taken to
the United States Court of Appeals for the Eighth Circuit from these FCC orders
by numerous parties alleging that the FCC has exceeded its statutory mandate,
among other matters. The Eighth Circuit Court of Appeals granted a stay of
certain rules adopted in the FCC orders pending its decision on the merits of
these appeals.
The 1996 Act establishes principles and a process for implementing a
modified "universal service" policy. This policy seeks nationwide, affordable
service and access to advanced telecommunications and information services. It
calls for reasonably comparable urban and rural rates and services. The 1996 Act
also requires universal service to schools, libraries and rural health
facilities at discounted rates. The FCC has proceedings pending to address
recommendations made by the joint board with respect to the implementation of
the universal service provisions of the 1996 Act, including, among other issues,
the size of the universal service fund and the assessment mechanism to determine
how much individual wireless carriers will be required to contribute.
11
<PAGE>
STATE AND LOCAL REGULATION. The scope of state regulatory authority, while
excluding market entry and rate regulation, covers such matters as the terms and
conditions of interconnection between local exchange carriers and wireless
carriers with respect to intrastate services, customer billing information and
practices, billing disputes, other consumer protection matters, facilities setup
issues and transfers of control, among other matters. In these areas,
particularly the terms and conditions of interconnection between local exchange
carriers and wireless providers, the FCC and state regulatory authorities share
regulatory responsibilities with respect to interstate and intrastate issues,
respectively.
The FCC has pending numerous petitions for pre-emption of state and local
regulations which allege such regulations prohibit or impair the provision of
interstate or intrastate telecommunications services. It has also requested
public comment on a petition requesting pre-emption of moratoria imposed by
state and local governments on siting of telecommunications facilities, the
imposition of state taxes on the gross receipts of CMRS providers and other
proposed state taxes based on the asset value of CMRS licenses awarded by the
FCC.
The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary.
The Company and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and, through its membership in state
associations of wireless providers, before state regulatory authorities.
Proceedings with respect to the foregoing policy issues before the FCC and state
regulatory authorities could have a significant impact on the competitive market
structure among wireless providers and the relationships between wireless
providers and other carriers. The Company is unable to predict the scope, pace
or financial impact of policy changes which could be adopted in these
proceedings.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY LANGUAGE
This Form 10-K contains "forward-looking" statements, as defined in the
Private Securities Litigation Reform Act of 1995, that are based on current
expectations, estimates and projections. Statements that are not historical
facts, including statements about the Company's beliefs and expectations are
forward-looking statements. These statements contain potential risks and
uncertainties and, therefore, actual results may differ materially. American
Paging undertakes no obligation to update publicly any forward-looking
statements whether as a result of new information, future events or otherwise.
Important factors that may affect these projections or expectations include,
but are not limited to: changes in the overall economy; changes in competition
in the Company's markets; new wireless messaging technology advances; possible
future litigation; availability of future financing; start-up of narrowband PCS
operations; and unanticipated changes in growth in paging customers, penetration
rates, churn rates and the mix of products and services offered in the Company's
markets. Readers should evaluate any statements in light of these important
factors.
SEASONALITY
Generally, the Company's operating results are not significantly affected by
seasonal factors. However, certain markets reflect slower new pager customer
growth during winter months, while certain other markets reflect more rapid new
customer growth during the same period.
TRADEMARKS
The Company markets its services under the name American
Paging-Registered Trademark- which is a federally registered trademark. The
Company also routinely files for federal registration of other service marks
which may be used in connection with its various services.
EMPLOYEES
The Company and its subsidiaries had 837 full-time employees as of December
31, 1996. Of these, 553 were based at various sales offices around the country
managed by the Company with 76 based at
12
<PAGE>
its corporate office in Minneapolis, Minnesota and 208 located at its Customer
Telecare Center in Oklahoma City, Oklahoma. None of the Company's employees are
covered by a collective bargaining agreement. The Company considers its
relationship with its employees to be satisfactory.
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
At December 31, 1996, the Company leased approximately 193,000 square feet
of office space in 55 locations within 14 states and the District of Columbia,
including approximately 19,000 square feet of office space for its headquarters
in Minneapolis, Minnesota. In early 1996, the Company also leased approximately
35,000 square feet of office space for its Customer Telecare Center in Oklahoma
City, Oklahoma, which opened in April 1996. The Company has canceled or sublet
approximately 23,000 square feet of space in three offices in 1996 and expects
to sublet or cancel an additional 50,000 square feet of space in nine offices in
1997. These office leases are used in connection with the Company's paging
operations and provide for monthly rentals at market rates and expire, subject
to renewal options, on various dates through September 2006. In most cases, the
Company expects that in the normal course of business, leases will be renewed or
replaced by other leases. Management believes that the Company will be able to
obtain additional space as needed at reasonable cost. The Company considers the
properties owned or leased by it and its subsidiaries to be suitable and
adequate for their respective business operations.
The Company also leases sites for its transmitters on commercial broadcast
towers, buildings and other fixed structures at various rentals for various
terms. As of December 31, 1996, the Company leased transmitter sites for 1,048
transmitters. Monthly rentals for these transmitter and related control link
sites average approximately $325 and are for various terms.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in routine legal and regulatory
proceedings incidental to its business. The Company is not involved in any
currently pending lawsuits or proceedings that it believes will have,
individually or in the aggregate, a material adverse effect on the Company.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of securities holders during the fourth
quarter of fiscal year 1996.
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference from Exhibit 13, Annual Report section
entitled "American Paging Stock and Dividend Information."
13
<PAGE>
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from Exhibit 13, Annual Report section
entitled "Selected Consolidated Financial Data."
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated herein by reference from Exhibit 13, Annual Report section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference from Exhibit 13, Annual Report sections
entitled "Consolidated Statements of Operations," "Consolidated Statements of
Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Changes
in Common Shareholders' Equity," "Notes to Consolidated Financial Statements,"
"Report of Independent Public Accountants," and "Consolidated Quarterly Income
Information (Unaudited)."
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from Proxy Statement sections entitled
"Election of Directors" and "Executive Officers."
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from Proxy Statement section entitled
"Executive Compensation and Other Information" except for the information
specified in Item 402(a)(8) of Regulation S-K under the Securities Exchange Act
of 1934, as amended.
- --------------------------------------------------------------------------------
14
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from Proxy Statement section entitled
"Security Ownership of Certain Beneficial Owners and Management."
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
Incorporated herein by reference from Proxy Statement section entitled
"Certain Relationships and Related Transactions."
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
<TABLE>
<S> <C>
(a)(1) Financial Statements
Consolidated Statements of Operations..................... Annual Report*
Consolidated Balance Sheets............................... Annual Report*
Consolidated Statements of Cash Flows..................... Annual Report*
Consolidated Statements of Changes in Common Shareholders'
Equity................................................... Annual Report*
Notes to Consolidated Financial Statements................ Annual Report*
Report of Independent Public Accountants.................. Annual Report*
Consolidated Quarterly Income Information (Unaudited)..... Annual Report*
</TABLE>
- ---------
* Incorporated herein by reference from Exhibit 13.
(2) Schedules
<TABLE>
<CAPTION>
LOCATION
-----------
<S> <C>
Report of Independent Public Accountants on Financial Statement Schedule......................................... page 17
II. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31, 1996 ........ page 18
</TABLE>
All other schedules have been omitted because they are not applicable or not
required or because the required information is shown in the financial
statements or notes thereto.
15
<PAGE>
(3) Exhibits
The exhibits set forth in the accompanying Index to Exhibits are filed as a
part of this Report. The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14(c) of this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
10.9 American Paging, Inc. 1994 Long-Term Incentive Plan is hereby incorporated by reference to Annex A to the Company's
Notice of Annual Meeting and Proxy Statement dated April 15, 1996
10.10 1996 Bonus Program for the Senior Management Staff of the Company
10.11 1996 Special Bonus Opportunity
10.12 American Paging, Inc. Secure and Future Earnings Plan is hereby incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (Registration 33-72707)
10.13 Summary of Compensation Arrangement for Terrence T. Sullivan
10.14 Summary of Severance Arrangements for John R. Schaaf
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended December 31, 1996.
No reports on Form 8-K were filed during the quarter ended December 31, 1996.
16
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of
AMERICAN PAGING, INC.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in American Paging, Inc. and
Subsidiaries Annual Report to Shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated January 29, 1997. Our audits
were made for the purpose of forming an opinion on those financial statements
taken as a whole. The financial statement schedule listed in Item 14(a)(2) is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This financial statement schedule
has been subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 29, 1997
17
<PAGE>
AMERICAN PAGING, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN B COLUMN C-1 COLUMN C-2 COLUMN E
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
COLUMN A BEGINNING OF COSTS AND OTHER COLUMN D END OF
CLASSIFICATION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------------------------------------------- ------------ ----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Deducted from federal deferred tax asset:
For unrealized net operating losses $ (5,664) $ 0 $ 0 $ 16,551 $ (22,215)
Deducted from state deferred tax asset:
For unrealized net operating losses (3,709) 0 0 759 (4,468)
Deducted from accounts receivable:
For doubtful accounts (1,283) 4,898 0 4,298 (1,883)
FOR THE YEAR ENDED DECEMBER 31, 1995
Deducted from federal deferred tax asset:
For unrealized net operating losses $ (114) $ 0 $ 0 $ 5,550 $ (5,664)
Deducted from state deferred tax asset:
For unrealized net operating losses (3,701) 103 476 587 (3,709)
Deducted from accounts receivable:
For doubtful accounts (704) 4,146 0 3,567 (1,283)
FOR THE YEAR ENDED DECEMBER 31, 1994
Deducted from federal deferred tax asset:
For unrealized net operating losses $ 0 $ 0 $ 0 $ 114 $ (114)
Deducted from state deferred tax asset:
For unrealized net operating losses (3,763) 62 0 0 (3,701)
Deducted from accounts receivable:
For doubtful accounts (603) 2,548 0 2,447 (704)
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE>
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.
AMERICAN PAGING, INC.
By: /s/ TERRENCE T. SULLIVAN
-----------------------------------------
Terrence T. Sullivan
PRESIDENT (CHIEF EXECUTIVE OFFICER)
By: /s/ DENNIS M. BESTE
-----------------------------------------
Dennis M. Beste
VICE PRESIDENT--FINANCE AND TREASURER
(CHIEF FINANCIAL OFFICER)
By: /s/ MICHELLE M. HAUPT
-----------------------------------------
Michelle M. Haupt
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
Dated: March 20, 1997
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 and on the dates indicated.
SIGNATURE TITLE DATE
- ---------------------------------- -------------------------- ---------------
/s/ JAMES BARR III DIRECTOR March 20, 1997
- ----------------------------------
James Barr III
/s/ LEROY T. CARLSON, JR. DIRECTOR March 20, 1997
- ----------------------------------
LeRoy T. Carlson, Jr.
/s/ DEBORA M. DE HOYOS DIRECTOR March 20, 1997
- ----------------------------------
Debora M. de Hoyos
/s/ JEAN B. KEFFELER DIRECTOR March 20, 1997
- ----------------------------------
Jean B. Keffeler
/s/ EDWIN L. RUSSELL DIRECTOR March 20, 1997
- ----------------------------------
Edwin L. Russell
/s/ TERRENCE T. SULLIVAN DIRECTOR March 20, 1997
- ----------------------------------
Terrence T. Sullivan
/s/ MURRAY L. SWANSON DIRECTOR March 20, 1997
- ----------------------------------
Murray L. Swanson
<PAGE>
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ---------- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1994
3.2 Restated Bylaws, as amended, is hereby incorporated by reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994
4.1 Restated Certificate of Incorporation, as amended, is hereby incorporated by reference to Exhibit 4.1 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1994
4.2 Restated Bylaws, as amended, is hereby incorporated by reference to Exhibit 4.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994
9.1(a) Voting Trust Agreement, dated as of June 30, 1989, with respect to Common Shares of TDS, is hereby incorporated by
reference to Exhibit 9.1(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994
9.1(b) Amendment dated as of May 9, 1991, to the Voting Trust Agreement dated as of June 30, 1989, is hereby incorporated by
reference to Exhibit 9.1(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994
9.1(c) Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, is hereby
incorporated by reference to Exhibit 9.1(c) to the Company's Annual Report on Form 10-K for the year ended December
31, 1994
10.1 Form of Exchange Agreement, between the Company and TDS, is hereby incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (Registration No. 33-72707)
10.2(a) Form of Revolving Credit Agreement, between the Company and TDS, is hereby incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1 (Registration No. 33-72707)
10.2(b) Form of Amendment to Revolving Credit Agreement between the Company and TDS, dated March 5, 1997 and effective
January 1, 1997
10.5 Form of Intercompany Agreement, between the Company and TDS, is hereby incorporated by reference to Exhibit 10.5 to
the Company's Registration Statement on Form S-1 (Registration No. 33-72707)
10.6 Form of Registration Rights Agreement, between the Company and TDS, as amended, is hereby incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (Registration No. 33-72707)
10.8 Form of Employee Benefit Plans Agreement, between the Company and TDS, is hereby incorporated by reference to Exhibit
10.8 to the Company's Registration Statement on Form S-1 (Registration No. 33-72707)
10.9 American Paging, Inc. 1994 Long-Term Incentive Plan is hereby incorporated by reference to Annex A to the Company's
Notice of Annual Meeting and Proxy Statement dated April 15, 1996
10.10 1996 Bonus Program for the Senior Management Staff of the Company
10.11 1996 Special Bonus Opportunity
10.12 American Paging, Inc. Secure and Future Earnings Plan is hereby incorporated by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (Registration No. 33-72707)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ---------- ---------------------------------------------------------------------------------------------------------------------
10.13 Summary of Compensation Arrangement for Terrence T. Sullivan
<S> <C>
10.14 Summary of Severance Arrangements for John R. Schaaf
13 Incorporated portions of 1996 Annual Report to Shareholders
21 List of subsidiaries of the Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 10.2(b)
March 5, 1997
American Paging, Inc.
Suite #3100
1300 Godward Street NE
Minneapolis, MN 55413
Re: Revolving Credit Agreement dated January 1, 1994, as amended (the
"Revolving Credit Agreement"), between American Paging, Inc. ("API") and
Telephone and Data Systems, Inc. ("TDS")
Ladies and Gentlemen:
This letter will constitute TDS's agreement to amend the Revolving Credit
Agreement, effective January 1, 1997, by changing all references to
"$150,000,000" in the Revolving Credit Agreement to "$180,000,000." All other
terms and conditions of the Revolving Credit Agreement shall remain in full
force and effect.
TDS also hereby waives all defaults or events of defaults by the Company
under the Revolving Credit Agreement resulting from the violation of the
covenant in Section 7(b)(2) of the Revolving Credit Agreement or the insolvency
of the Company from the respective dates from any such default or event of
default through January 1, 1999.
Please acknowledge your agreement to this amendment by executing a copy of
this letter and return it to the undersigned.
Very truly yours,
TELEPHONE AND DATA SYSTEMS, INC.
By: /S/ MURRAY L. SWANSON
-----------------------------------
Murray L. Swanson
Executive Vice President - Finance
Accepted and agreed to as of the date set forth above.
AMERICAN PAGING, INC.
By: /S/ DENNIS M. BESTE
------------------------------------
Dennis M. Beste
Vice President - Finance, Chief
Financial Officer and Treasurer
<PAGE>
EXHIBIT 10.10
1996 BONUS PROGRAM FOR
THE SENIOR MANAGEMENT STAFF OF AMERICAN PAGING
(revised 3/15/96)
I. PURPOSE
- To provide suitable incentive for the senior corporate staff of
American Paging (API) to extend their best efforts to achieve
superior results in relation to key performance targets.
- To suitably reward API's senior corporate staff in relation to their
success in meeting and exceeding these performance targets.
- To help API attract and retain talented management personnel in
positions of critical importance to the success of API.
II. BASIC PREMISES
- The 1996 performance categories: Operating Cash Flow (EBITDA),
Service Revenue and Individual Objectives were selected because they
are the prime indicators of API's growth and progress.
III. PARTICIPANTS
) President and CEO
) V. P. Sales and Marketing
) V. P. Finance
) V. P. Operations
) V. P. Human Resources
) V. P. Engineering
) V. P. Business Development
) Executive Director Sales and Marketing
) Regional Directors of Sales
) Regional Directors of Engineering
) Director of Operations Center
) Director of Staffing and People Development
) Controller
<PAGE>
API 1996 Bonus Program (revised 3/15/96)
API Senior Management Staff
IV. TARGET OF BONUS AND WEIGHING OF PERFORMANCE CATEGORIES
- The target bonus for each of the eligible individuals in Section III
other than the President/CEO is 25% of base salary. The target for
the President/CEO is 30% of base salary. Greater or less than 100%
of the bonus target may be achieved if there is positive or negative
variance from the plan. This is detailed in Section V below.
NOTE: Regional Directors' bonus for Operating Cash Flow (EBITDA) and
Service Revenue is calculated for their specific region rather than
the entire company.
PERFORMANCE CATEGORY WEIGHING
-------------------- --------
Operating Cash Flow (EBITDA) 45%
Service Revenue 40%
Individual Objectives 15%
---
100%
V. PERFORMANCE CATEGORY RESULTS AS THEY AFFECT THE SIZE OF THE BONUS
The following performance category's actual results will determine the
portion of the total bonus pool to be paid:
1. OPERATING CASH FLOW (EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION AND AMORTIZATION): Measured against 1996 API
Operating Statement. (See scale below):
Operating Cash Flow
Actual Performance Percent of Salary *See Note 1
------------------ -----------------
At Least $30 Million 23%
At Least $29 Million 20%
At Least $28 Million 17%
At Least $27 Million 15%
At Least $26 Million 13%
At Least $25 Million 12%
At Least $24 Million (Budget $23.7 Million) 11% (Target bonus)
At Least $23 Million 10%
At Least $22 Million 9%
At Least $21 Million 7%
At Least $20 Million 5%
At Least $19 Million 3%
At Least $18 Million 1%
Less Than $18 Million 0%
2
<PAGE>
API 1996 Bonus Program (revised 3/15/96)
API Senior Management Staff
2. SERVICE REVENUE: Measured against 1996 API Operating Statement. (See
scale below):
Actual Performance Percent of Salary *See Note 1
------------------ -----------------
At Least $115 Million 21%
At Least $114 Million 18%
At Least $113 Million 16%
At Least $112 Million 14%
At Least $111 Million 12%
At Least $110 Million 11%
At Least $109 Million (Budget $108.9 Million) 10% (Target bonus)
At Least $108 Million 9%
At Least $107 Million 8%
At Least $106 Million 6%
At Least $105 Million 4%
At Least $104 Million 2%
Less Than $104 Million 0%
3. INDIVIDUAL OBJECTIVES: To accomplish the transformation and restructuring
of the Company and to position the Company for a successful future, API
wishes to reinforce the accomplishment of activities taken in support of
these objectives. Specifically, in the following key areas:
- Reduced operating costs
- Improved technical systems
- Expanded business growth
- Redesigned information systems
- Development and retention of employees
- Productivity of employees
- Customer service and customer retention
- Positive corporate structure
- Teamwork, cooperation and communication among regions
Each plan participant will submit two to three specific objectives to the
President and CEO of API prior to March 1, 1996 by which that participant
will be measured during the calendar year 1996. These objectives, which
must be approved by the President/CEO of API, will be in the area of the
business over which the participant has some substantial control or
influence, and is important to API. The President/CEO of API will submit
his specific objectives to the President/CEO of TDS under the same
conditions as above.
3
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API 1996 Bonus Program (revised 3/15/96)
API Senior Management Staff
Upon approval of the written objectives, each participant will be
required to submit a written progress report on their own individual
objectives to the President/CEO by the following dates to coincide
with semi-annual performance reviews: June 30, 1996; January 15,
1997. Final reviews and determination of awards under this category
will occur no later than February 15, 1997. The following scale will
be used to measure and reward accomplishment of objectives:
Assessed Specific Objective Percent of
Performance for the Year Salary *See Note 1
------------------------ ------
OUTSTANDING - Overall performance greatly 6%
exceeded that which was planned or could
be expected. It represented a truly stellar
level of accomplishment.
COMMENDABLE - Overall performance for the 5%
year significantly exceeded that which was
planned or could reasonably be expected.
It represented an excellent level of
accomplishment.
TARGET - Overall performance for the year fully 4%
met that which was planned or could reason-
ably be expected. It represented a good
level of accomplishment.
SATISFACTORY - Overall performance for the 2%
year was somewhat below that which was
planned or could reasonably be expected.
It represented an adequate level of
accomplishment.
LESS THAN SATISFACTORY - Overall performance 0%
was well below what was planned or could be
expected. It represented less than an adequate
level of accomplishment.
* Note 1: For each "Percent of Salary" in category V.1. through V.3. above the
President/CEO calculation is 1.2 times the actual percent listed.
4
<PAGE>
API 1996 Bonus Program (revised 3/15/96)
API Senior Management Staff
VI. CAP ON BONUS
- API senior managers are encouraged to excel in all areas of the 1996
bonus program; however, the total bonus for the year shall not exceed
a combined total of 50% of any individual participant's base salary
for 1996.
VII. EXCLUSIONS
- Revenue, expenses and income results for 1996 shall exclude
extraordinary items such as acquisitions or divestitures of companies
and new business starts, including narrowband PCS development. The
effect of acquisitions will be excluded for a period of four calendar
quarters after the closing date of each acquisition.
VIII. ADMINISTRATION
- The Vice President - Finance, API and the Vice President - Human
Resources, API will verify the measurement methods to be used for
each of the performance categories identified in the Bonus Plan and
will inform the President/CEO of API of any areas in which such
measurements are not reliable or achievable.
- The Vice President - Finance and the Vice President - Human
Resources, API will, as soon as possible after the end of the year,
provide the President of API, the Executive Vice President - Finance,
TDS and the Vice President - Human Resources, TDS with the 1996
results of all performance measures discussed in the Bonus Plan.
- As soon as the former have signed off on the accuracy of the results
achieved and have resolved any questions or problems they may have
with the results, the final proposed settlement of the Bonus Plan
will be submitted to the President & CEO of API and the Chairman of
the Board of Directors of API for their final approval.
- Should judgmental questions or disputes arise with regard to the
calculations used to determine each participant's bonus amount, the
final decision on the Bonus Plan payment amount will be made by the
Chairman of the Board of Directors of API.
- Every effort made to pay all bonuses under the 1996 API Senior
Management Bonus Program by March 15, 1997 or earlier if possible.
5
<PAGE>
API 1996 Bonus Program (revised 3/15/96)
API Senior Management Staff
- This Bonus Program applies only to the year 1996 and will be reviewed
late in 1996 by the President/CEO of API and Chairman of the Board of
Directors of API to determine whether it should be continued,
revised, or discontinued.
- Participants must be employed in a senior management position the
entire calendar year to be eligible to receive a bonus under the
Bonus Program, unless in the joint opinion of the President/CEO of
API and Chairman of the Board of Directors of API, the particular
circumstances that were involved justify a partial bonus being
awarded.
6
<PAGE>
EXHIBIT 10.11
AMERICAN PAGING, INC.
1996 SPECIAL BONUS OPPORTUNITY
On September 27, 1997 Ted Carlson agreed in principle to a Special Bonus
Opportunity for Terrence T. Sullivan and certain of his senior managers for
the successful accomplishment of key objectives the last four months of 1996
to position the company for success in 1997. A plan was submitted by API to
TDS which contained ten critical success projects which needed to be complete
by the start of 1997. The specific projects were:
1. Implementation of standardized pricing
2. Development of a channel distribution plan
3. Implementation of a goal-aligned field compensation plan
4. Implementation of a performance managed sales organization
5. Implementation of a company-wide inventory system
6. Establishment of a customer retention group within the Customer Telecare
Center
7. Source and select a new customer billing and information management system
8. Development of a spectrum plan
9. Issuing of location and department level budgets by January 1st
10. Redesign billing system and general ledger system to support
performance management reporting
This plan received final approval in November 1996 and contained the
following provisions for bonus:
- The successful accomplishment of each of the ten projects would earn
the following executives 3% of 1996 year-end salary as long as a
minimum of five projects were successfully completed:
- Terrence Sullivan, President/CEO
- Malcolm Humphrey, VP Information Technology/CIO
- Larry Piumbroeck, VP Development and Engineering
- In addition to the above, a designated project manager for each
successfully completed project may be named and awarded a bonus of 3%
of year-end 1996 salary.
- A TDS senior manager was appointed to be the evaluator of each
project's completion to certify to Ted Carlson that the project was
eligible for bonus
On January 26, 1997 API submitted documents to TDS representing the
supporting material for eight projects completed under this plan. In
accordance with the plan's design, the eight projects were reviewed by
various senior managers of TDS and on February 28, 1997 all eight of the
submitted projects were certified for approval and bonus payment. As a result
of this approval, API paid the following bonus amounts to officers on March
14, 1997:
Terrence Sullivan 24% of salary ($46,800)
Malcolm Humphrey 24% of salary ($28,800)
Larry Piumbroeck 24% of salary ($22,620)
George Orr 6% of salary ($6,300)
James Kelly 12% of pro-rated salary ($3,200)
<PAGE>
Exhibit 10.13
Summary of Compensation Arrangement for Terrence T. Sullivan for Assuming the
Presidency of American Paging, Inc. (API)
- -- Salary will be $195,000 effective September 1, 1996.
- -- Target bonus opportunity for the last four months of 1996 will be 15% of
new base salary of $195,000. Performance will be measured against
targets/performance measures for API as approved by LeRoy T. Carlson, Jr.
- -- The target bonus percentage for 1997 will be 40%.
- -- Entitled to use of company car and membership to luncheon club.
- -- Mr. Sullivan will be awarded an additional 16,000 automatic stock options
for the remaining years of the current API Program starting in 1997 (for
a total of 20,000 stock option shares per year), and an additional
performance based stock option award of 16,000 stock option shares at
target performance for the remaining years of the current Stock Option
Program starting in 1997 (for a total of 20,000 stock option shares per
year at target performance).
Mr. Sullivan will also receive an additional 6,000 automatic stock options
for functioning as API's CEO for the last four months of 1996, and an
additional performance based stock option award for 1996 which at target
performance would generate 6,000 stock option shares.
- -- The automatic portion of the above awards will vest upon change-in-control
as defined in the TDS Long-Term Incentive Program. Also, the performance
based stock option awards for the year in which a change-in-control took
place will immediately vest at the target performance amount for the year.
- -- Mr. Sullivan will be paid a severance allowance of one year and six months
of base salary if a change-in-control takes place, and Mr. Sullivan's
position was eliminated or "constructively" terminated. This term is
defined as being asked to accept and not agreeing to accept:
-- A reduction in base salary.
-- A reduction in target bonus opportunity.
-- A material reduction in benefits package.
<PAGE>
-- A material reduction in job responsibilities.
-- An assignment which requires relocation.
- -- Mr. Sullivan will have a 670 target stock option opportunity for Company
performance over the final four months of 1996. How many stock option
shares earned under this stock option opportunity will depend on how well
API performs in meeting the target/performance measures to be approved by
Ted Carlson.
- -- This new Stock Option Program will have to be approved by API's two
outside directors who are members of API's Stock Option Committee.
- -- Should change-in-control take place, payment of bonuses to eligible
participants of API annual bonus program(s) for that year will be made on
a pro rate basis based on API's performance for the portion of the year
prior to the date change-in-control took place.
<PAGE>
EXHIBIT 10.14
SUMMARY OF SEVERANCE ARRANGEMENTS FOR JOHN R. SCHAAF
1. Mr. Schaaf's resignation date is September 10.
2. Mr. Schaaf will receive the equivalent of 15 months of full pay ($18,167
per month or $218,000 per year) starting on September 16, 1996.
3. If Mr. Schaaf accepts another full-time position during this salary
continuation period, the remainder of APP's 15-month salary obligation
will be paid to Mr. Schaaf in a lump sum and he will no longer be on
APP's payroll.
4. If Mr. Schaaf has not accepted another full-time position after the
above-mentioned 15 months, he will receive up to an additional three
months pay at $18,167 per month (the three-month period between December
16, 1997 and March 15, 1998). This (up to) 18-month salary continuation
program is a major exception to APP's standard practice of providing one
year of severance to senior executives who leave APP's employ under
certain circumstances. It was made because of Mr. Schaaf's major
contributions to APP over 15 years and, in particular, his important
accomplishments during the five years he served as the President and
CEO of APP.
5. These payments are also in recognition of such consulting services as
Mr. Schaaf may render during such 18 months. For the period starting
September 16, 1996 and ending March 15, 1998, or when Mr. Schaaf accepts
a new position, whichever comes first, he will be a consultant to APP, as
discussed below in point 14.
6. Mr. Schaaf will receive a bonus payment of 5% of his current annual base
salary ($10,900) in recognition of his performance on the individual
objectives section of the 1995 APP Senior Management Bonus Program.
7. Mr. Schaaf will receive a prorated bonus payment of 3.75% of his current
base salary ($8,175) in recognition of his performance on the individual
objectives section of the 1996 APP Senior Management Bonus Program.
8. Given Mr. Schaaf's status as a consultant as of September 16, 1996:
- He will have six months from the time he goes off the payroll to
exercise his vested APP stock option shares. He will vest in no
further stock option shares after September 16, 1996.
- He will receive one more contribution (for the year 1996) to his
pension plan account and his SERP account. These payments will be
placed into his accounts in December 1996.
- He will not accrue any additional vacation. However, all currently
accrued vacation will be paid to him at the earliest appropriate date.
9. Mr. Schaaf will continue to be covered under APP's medical, dental and
life insurance plans through March 15, 1998, or until he accepts another
full-time position, whichever comes first. If he has not accepted
another full-time position as of March 15, 1998, he will be eligible for
COBRA benefits under the same terms and conditions as APP extends to any
other terminating employee.
10. During Mr. Schaaf's 15-month salary continuation period, he will have the
use of his current company car. He will also have the use of this car
during the possible additional three-month salary continuation period
(December 16, 1997 through March 15, 1998) or until he accepts a
full-time position during this three-month period, whichever comes first.
Effective September 16, 1998, all expenses associated with this automobile
will be Mr. Schaaf's. At the conclusion of his salary continuation
period, as discussed immediately above, he will have the opportunity to
purchase said company vehicle at the then "blue book" price.
During the consulting period, Mr. Schaaf will also have use of the pager
and cellular telephone now in his possession. The only expenses that APP
will be responsible for in connection with this equipment are those
related to his consulting work for APP and TDS. At the end of the
consulting period, this equipment will either be purchased by Mr. Schaaf
at the then market price or returned to APP.
11. Mr. Schaaf may also continue to participate in the 401(k) and Employee
Stock Purchase Plans while he is a consultant for APP on the same basis he
previously participated in these programs.
12. APP's responsibility for his country club dues, fees and associated
expenses were terminated.
13. APP will pay the cost of outplacement assistance for Mr. Schaaf up to the
sum of $54,000 (one-fourth of his annual salary).
14. Mr. Schaaf agreed to be available to provide consulting services to APP
and/or TDS up to four full days per month through March 15, 1998 or until
he secures another full-time position, whichever comes first. Should APP
and/or TDS require Mr. Schaaf's consulting services for more than four
full days in any month, he will be paid for them at the rate of $100 per
hour.
15. APP will continue to indemnify and defend Mr. Schaaf from any lawsuits
brought by third parties to which he currently is or to which he becomes
a party as a result of the discharge of his responsibilities as the
President of APP. The specifics of this indemnification and legal
support will be exactly the same as those which have been provided to
Mr. Schaaf by APP in his capacity as its President and CEO.
16. In return for the above severance arrangements, and as a condition of
their remaining in place, Mr. Schaaf agreed not to compete with APP for
the two-year period ending on September 15, 1998.
17. Also as a condition of these above agreements remaining in place, Mr.
Schaaf agreed not disclose any confidential or proprietary information
relating to APP, TDS or any APP or TDS affiliate.
18. During the period of time Mr. Schaaf acts as a consultant for APP, APP
will reimburse him for such reasonable travel expenses as he may incur
while he is discharging his responsibilities as an APP consultant.
-2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
American Paging, Inc. (AMEX symbol "APP" or the "Company") served 777,400
customers at December 31, 1996 through its digital radio transmission systems,
covering a geographic area with a total population of approximately 76 million.
The Company currently provides local, regional and nationwide advanced wireless
messaging communications services in 21 states and the District of Columbia
through 51 sales and service centers. The Company offers local and regional
paging coverage throughout Florida, the Midwest (including all or parts of
Minnesota, Wisconsin, Missouri, Illinois, Indiana and Kentucky), the
Mid-Atlantic (including all or parts of Maryland, Pennsylvania, Virginia and
Washington, D.C.) and in portions of Oklahoma, Texas, Arizona and Utah. The
Company also provides paging service coverage in portions of Iowa, Ohio and
Southern California through transmitter-sharing agreements with non-affiliated
service providers. Nationwide one-way and two-way paging services are offered
through the Company's alliances with non-affiliated service providers.
Overview and Restructuring
American Paging's results of operations for 1996 reflect nearly flat service
revenue growth and a slight decrease in the number of units in service. In
addition, declining average monthly service revenue per unit ("ARPU"), primarily
due to competitive pressures, coupled with rapid increases in operating costs
have resulted in sharply higher operating and net losses. Restructuring efforts,
started in the third quarter of 1995 and continuing throughout 1996, caused
disruptions throughout the Company which, in turn, have slowed revenue growth
and led to significant increases in operating costs.
During the third quarter of 1995, the Company launched a comprehensive
restructuring initiative related to its sales and customer service
organizations. The restructuring effort was aimed at improving three main areas
of the Company's operations: increasing sales productivity and service revenue
growth, reducing administrative support expenses and improving customer service.
The increase in sales productivity was to be achieved through improved direct
sales efforts and an increase in the number of direct sales representatives.
Reductions in administrative expenses and improvements in customer service were
to come from consolidation of the Company's 17 geographically-dispersed customer
service and administrative functions into the Company's newly established
centralized Customer Telecare Center ("CTC") located in Oklahoma City.
The disruption caused by the restructuring activities was more severe on the
Company's results of operations than initially anticipated. Among the problems
the Company faced during the restructuring initiative were an increased level of
turnover in sales employees, a loss of qualified administrative support for the
field, a complete change in the customer support and retention processes, as
well as various system integration difficulties encountered during the
conversion to the CTC.
The process of transferring back office operations from the field offices to the
CTC also resulted in dysfunctions throughout the organization. For example, in
the management of inventory, all field offices were directed to ship their
broken or damaged inventory to the CTC to be repaired through a centralized
repair system. However, the volume of pagers received created a severe backlog
resulting in a shortage of user devices in the field. In addition, it was
discovered that many of the pagers received at the CTC were obsolete based on
the Company's needs.
In order to address these disruptions, several changes were made to the senior
management team. During the third quarter of 1996, the Company appointed a new
President and Chief Executive Officer, hired a new Vice President- Sales,
Marketing and Field Operations, and consolidated its engineering and business
development operations under one vice president. Early in 1997, the Company also
hired a new Vice President-Finance and Chief Financial Officer. The new senior
management team has begun implementing a plan for 1997 centered on building a
high-quality, focused sales and marketing organization driven by a new
goal-aligned compensation plan, creating new distribution channel and pricing
strategies, consolidating current transmission systems to reduce the cost of
service and continually improving customer care practices.
The following table presents the breakdown of restructuring charges for the
years ended December 31, 1996 and 1995 and the impact on net loss before income
taxes:
For the Year Ended December 31,
1996 1995
------------------------
(Dollars in thousands)
Net loss before income taxes $(45,185) $(15,385)
------------------------
General and administrative
restructuring charges:
Employee severance costs
and duplicate staffing 2,511 752
Consulting and legal costs 1,535 430
Lease buy out costs -- 951
------------------------
4,046 2,133
Depreciation restructuring charges:
Obsolete inventory 2,760 --
Customer management
and billing system 2,214 --
Leasehold improvements and other 310 779
------------------------
5,284 779
Total restructuring related charges 9,330 2,912
------------------------
Net loss before income taxes
excluding restructuring charges $(35,855) $(12,473)
========================
During 1996, the Company recorded $4.0 million of general and administrative
expenses related to the restructuring effort, primarily for duplicate staffing,
employee severance costs, and consulting and legal fees. The problems related to
inventory management at the CTC noted above resulted in a write-down of obsolete
inventory in the third quarter of 1996 of $2.8 million. The Company also
recorded additional depreciation charges of $2.5 million primarily for the
write-off of the customer management and billing system. During the
consolidation of customer information databases at the CTC, it became apparent
that the Company's customer management and billing system did not provide the
16
<PAGE>
flexibility necessary to support future customer growth and retention. The
Company is currently assessing potential customer management and billing
systems.
Restructuring activities during the second half of 1995 resulted in the Company
recording pre-tax charges of $2.9 million during 1995. The Company recorded $2.1
million related to employee severance payments, lease buy out costs and
consulting fees. In addition, approximately $800,000 in additional depreciation
expense was recorded for the reduction in the useful lives of fixed assets which
were no longer required after the restructuring.
Over the past two years, the Company has experienced operating losses as a
result of increased costs associated with the operation of its upgraded radio
paging systems, sales and marketing expenses related to programs which failed to
produce planned increases in service revenue, higher general and administrative
expense (including restructuring charges), and increased depreciation expense
related to obsolete inventory and restructuring-related retirements. Higher
operating costs as well as increased interest expense have contributed to
increased net losses. Higher interest expense is associated with the Company's
increased borrowings to purchase its narrowband Personal Communications Services
("PCS") licenses, capital expenditures, and acquisitions. The Company's
operating loss in 1996 was $36.6 million compared to $9.0 million and $169,000
in 1995 and 1994, respectively. The Company's net loss in 1996 was $45.5 million
compared to $15.7 million and $1.3 million in 1995 and 1994, respectively.
Results of Operations
SERVICE REVENUE increased 0.9% ($800,000) in 1996 and 20.0% ($15.5 million) in
1995. The minimal growth in 1996 was due to an increase in the average number of
units in service partially offset by a decrease in the Company's ARPU. Even
though ending units in service for 1996 were below 1995, average units in
service for 1996 increased due to steady increases in units in service through
the first half of 1996 with gradual declines occurring in the second half of the
year. The increase in 1995 was primarily driven by the growth in customers
served, including customers obtained through acquisitions. The Company's
customer units in service decreased 0.9% (7,100 units) in 1996 and increased
20.2% (131,700 units including approximately 28,400 acquired units) in 1995. The
Company's unit growth was slowed in the second half of 1995 and negative for
1996 as a result of workforce disruptions related to restructuring efforts.
In addition to the decrease in units in service during 1996, the Company's
service revenue was also slowed by competitive pricing declines and a shift in
the distribution channel mix, both of which have had an adverse impact on the
Company's ARPU. In 1996 ARPU was $9.88 compared to $10.57 and $11.92 in 1995 and
1994, respectively. The 1996 decline of 6.5% was the result of competitive
pricing pressures which accounted for a 5.1% change and a shift in distribution
channel mix which accounted for a 1.4% change.
The Company obtains its customers through the direct distribution channel as
well as through the indirect reseller and agent distribution channels. Service
revenue received through the Company's direct distribution channel is obtained
from customers who either purchase the pager or lease the pager from the
Company. Service revenue received from customer-owned and maintained ("COAM")
pagers is lower than for leased pagers because the COAM customer does not pay
monthly lease fees. Reseller units produce lower service revenue and operating
cash flow on a per unit basis than units added through the direct and retail
distribution channels. As part of the restructuring effort, the Company
increased the number of direct sales representatives with the goal of increasing
growth in units in service, revenue and ARPU. However, disruptions within the
direct sales force from restructuring activities and the resultant increased
sales employee turnover led to a decrease in the percentage of customer units
served through the direct channel at December 31, 1996 to 62.0% from 62.3% and
65.8% at December 31, 1995 and 1994, respectively.
The Company's revenue is derived primarily from fixed periodic (usually monthly)
fees charged to customers for radio paging services and rental of pagers. As
long as a subscriber remains on service, future operating results benefit from
the recurring payments of the fixed periodic fees without incurring additional
selling expenses or additional fixed costs by the Company. The Company's selling
activities are directed toward adding new customers and marketing new or
additional services to existing customers. Each month, a percentage of the
Company's customer base discontinues service for a variety of reasons, including
failure to pay, transitory need, economic downturns, switching to a competing
service provider, unmet expectations, relocation to a non-service area or
securing alternative services. Due to disruptions within the customer service
functions that were consolidated as part of the restructuring, the Company's
average monthly disconnect or "churn" rate for the year increased to 3.1% during
1996 from 2.5% and 2.6% for 1995 and 1994, respectively. However, the many
process improvements implemented at the CTC during the fourth quarter of 1996
led to significant reductions in customer churn from a high of 4.6% for the
month of August to 2.7% for the month of December.
SERVICE OPERATING EXPENSES increased 28.3% ($28.9 million) in 1996 and 31.3%
($24.3 million) in 1995 principally due to increased costs to serve the customer
base, restructuring charges, higher selling costs, and increased depreciation
and amortization expense. The increase in service operating expenses includes
restructuring charges totaling $9.3 million and $2.9 million recorded in 1996
and 1995, respectively. As a result of these increased costs, the Company's
average
17
<PAGE>
monthly cash operating expense per unit (cost of services plus general and
administrative expense) increased to $7.36 in 1996 from $6.98 and $7.27 in 1995
and 1994, respectively.
Cost of service increased 25.1% ($6.0 million) in 1996 and 24.4% ($4.7
million) in 1995. During 1996, the Company's third-party reseller expense
increased mainly due to an increase in nationwide units in service, along
with additional demand for alphanumeric dispatch services and telephone
expense increased due to a need for greater trunking capacity at the CTC. The
increase in 1995 was due to increased costs of providing service to the
customer base as well as increasing system capacity and geographic coverage.
The Company's transmitters in service increased to 1,048 at year-end 1996
from 1,018 at year-end 1995 and from 943 at year-end 1994. During 1996 and
1995, transmitters were added primarily for the continued expansion and
upgrade of existing systems coupled with the deconstruction of smaller,
outdated systems. The Company's new systems and upgraded transmitters are
capable of digital broadcast using the high-speed FLEX-TM- signaling
protocol, significantly increasing system capacity over the Company's
conventional signaling protocol. Beginning in 1997, the Company intends to
reduce its cost of providing service by reducing the number of frequencies it
maintains and deconstructing older networks it operates.
Sales and marketing expense increased 70.7% ($11.3 million) in 1996 and 20.7%
($2.7 million) in 1995. The increase in 1996 was due to a significant
increase in the number of employees in the sales and marketing function as
well as increased recruiting and relocation costs associated with high
employee turnover. The number of sales employees as a percentage of total
employees increased to 62% at year-end 1996 compared to 45% at year-end 1995.
With the numerous changes and dislocations surrounding the restructuring
effort, employee turnover for 1996 increased significantly, primarily within
the sales staff. As part of the restructuring plan, the Company committed
additional resources to sales and sales support with the intent to increase
unit sales, service revenue and productivity. The Company experienced slight
net unit decline in 1996 and slower revenue growth in the second half of 1995
as a result of continued work force disruptions caused by the refocusing of
the sales force on direct sales and reengineering of the customer service
organization. Selling cost per gross unit added, excluding acquisitions,
increased to $94 in 1996 compared to $50 in 1995 and $41 in 1994.
General and administrative expense increased 6.6% ($2.5 million) in 1996 and
33.5% ($9.4 million) in 1995. During 1996, the Company recorded restructuring
expenses of approximately $4.0 million related to duplicate staffing, employee
severance costs and consulting and legal fees. During the third quarter of 1996,
the Company also recorded additional expense of $1.3 million for information
systems consulting services in support of the conversion to the CTC. Bad debt
expense increased $900,000 in 1996 as a result of temporarily suspending credit
and collection activities while these activities were consolidated from the
field offices to the CTC. However, partially offsetting these charges were
reductions in general and administrative expense primarily due to administrative
staff reductions also related to restructuring initiatives. During 1995 the
Company recorded restructuring charges of $2.1 million related to subleasing
office space, employee severance and outplacement fees, and consulting services.
Operating cash flow was $(2.8) million, or (3.0)% of service revenue in 1996
compared to $15.7 million, or 16.9% of service revenue in 1995 and $17.0
million, or 21.9% of service revenue in 1994. Excluding the $4.0 million of
restructuring charges recorded during 1996, operating cash flow would have been
$1.2 million, or 1.3% of service revenue. Excluding the $2.1 million of
restructuring charges recorded during 1995, operating cash flow would have been
$17.8 million, or 19.2% of service revenue.
Depreciation and amortization expense increased 36.8% ($9.1 million) in 1996 and
43.7% ($7.5 million) in 1995. The increase in 1996 was primarily due to
increased depreciation totaling $5.3 million for obsolete inventory, write-off
of the customer management and billing system, and a reduction in the useful
lives of assets retired as a result of the Company's restructuring. The
remaining increase in depreciation and amortization expense in 1996 reflects the
Company's increased investment in system infrastructure and pager devices.
Increased depreciation and amortization expense in 1995 was due to the reduction
in the useful lives of pagers and transmitters, and charges of $800,000 to
write-off certain assets retired as a result of the Company's restructuring.
Excluding the investment in narrowband PCS licenses (which is not yet being
amortized), gross fixed assets grew 7.0% to $145.2 million at year-end 1996 from
$135.7 million at year-end 1995, primarily due to increases in pagers,
transmitters and terminals.
EQUIPMENT SALES INCOME increased $450,000 in 1996 and decreased $13,000 in 1995.
The Company generally plans to break even or make a small profit on equipment
sales. For marketing purposes, it may, at times in selected locations, discount
paging equipment below cost due to competitive pressures or sales promotions.
OPERATING LOSS was $36.6 million in 1996 compared to $9.0 million in 1995 and
$169,000 in 1994. Operating margin on service revenue decreased to (39.0)% from
(9.7)% in 1995, and was nearly break-even in 1994. As noted previously, the
decrease in operating results reflects slower service revenue growth coupled
with higher costs to serve the customer base, increased sales and marketing
costs, and additional restructuring charges.
The Company's new senior management team is working toward improving unit and
service revenue growth during 1997 through a more focused and goal-aligned sales
and
18
<PAGE>
marketing organization. This plan also includes improving customer churn and
service revenue through additional training and increased tenure of CTC customer
service representatives. Another major goal in 1997 is to significantly reduce
the cost of serving the customer base. The Company currently utilizes 19
frequencies which are supported by 43 network systems across the country. The
Company intends to reduce the cost of service by migrating its customer base to
no more than three frequencies in any one market which will be supported by a
total of six network systems nationwide. Along with dismantling older, less
efficient systems, there are plans to relocate some existing transmitters to
more heavily populated areas in order to expand coverage, improve quality and
gain new customers. The Company intends for these efforts to marginally improve
service operating loss and net loss in 1997.
INVESTMENT AND OTHER INCOME/(EXPENSE) was $(900,000) in 1996 and $(855,000) in
1995, reflecting primarily investment losses of $1.2 million for each of the
years ended December 31, 1996 and 1995, associated with the Company's joint
venture with Nexus Telecommunication Systems, Ltd. ("Nexus"), accounted for
using the equity method. The joint venture, American Messaging Services, LLC,
was formed to develop multiple applications and distribution channels worldwide
for a patented communications network that provides two-way paging, location and
telemetry services.
INTEREST EXPENSE-AFFILIATES increased $2.1 million to $7.6 million in 1996
compared to 1995 primarily as the result of increased long-term indebtedness
due to the purchase of narrowband PCS licenses, acquisitions and construction
expenditures. At year-end 1996, the Company had $140 million outstanding
under its Revolving Credit Agreement with its parent, Telephone and Data
Systems, Inc. (AMEX symbol "TDS"). The Company pays interest to TDS at a rate
of 1 1/2% over the prime rate (for a rate of 9.75% at December 31, 1996) on
its outstanding debt. Beginning October 1, 1995 and continuing through
September 30, 1996, the Company capitalized interest costs related to
borrowing for the acquisition and development of its narrowband PCS licenses.
The Company stopped capitalizing interest as of October 1, 1996 due to a
suspension in the Company's development of its narrowband PCS licenses.
Please see the Capital Resources and Liquidity section for more information
related to the Company's plans with respect to the buildout of its narrowband
PCS licenses. Capitalized interest totaled $4.2 million for 1996 and $1.4
million for 1995. Interest expense-affiliates was increased $4.4 million to
$5.5 million in 1995 compared to 1994 primarily as the result of increased
long-term indebtedness due to the purchase of narrowband PCS licenses,
acquisitions and construction expenditures.
INCOME TAX EXPENSE was $340,000 in 1996 and $325,000 in 1995, primarily for
state income taxes in states where the Company's subsidiaries are generating
taxable income after utilization of state net operating losses. The Company s
effective income tax rate was (0.8)% in 1996 and (2.1)% in 1995. American Paging
is included in a consolidated federal income tax return with other members of
the TDS consolidated group. The Company and TDS are parties to a Tax Allocation
Agreement pursuant to which American Paging is able to carry forward its losses
and credits and use them to offset any current or future income tax liabilities
to TDS. The amount of the federal operating loss carry forward available to
offset future taxable income aggregated $58.3 million at December 31, 1996, and
expires between 2010 and 2012. The amount of the state net operating loss carry
forward available to offset future taxable income aggregated $61.5 million at
December 31, 1996, and expires between 1997 and 2012.
NET LOSS increased to $45.5 million in 1996 primarily due to significant
increases in operating expenses as well as increased interest expense due to
additional borrowings under the Revolving Credit Agreement with TDS. Net loss
increased to $15.7 million in 1995 from $1.3 million in 1994, also reflecting a
significant increase in operating loss and increased interest expense and costs
associated with the Company's investment in the Nexus joint venture. LOSS PER
COMMON SHARE was $2.27 in 1996 and $0.78 in 1995, reflecting the change in net
loss.
Inflation
Management believes that inflation affects the Company's business to no greater
extent than it does the general economy.
Capital Resources and Liquidity
Construction and development of the Company's radio paging infrastructure and
Customer Telecare Center, the purchase of narrowband PCS licenses, costs
associated with restructuring the Company's operations, and growth in the number
of customers served, both internally and through acquisitions, have caused
financing requirements to exceed internally generated cash flow during the last
three years. Accordingly, the Company has obtained substantial external funds in
the form of borrowings under a Revolving Credit Agreement with TDS and
anticipates that it will require additional funds over the next few years. The
additional funds will be used to finance continuing operations as needed, as
well as for expanding and upgrading its infrastructure to provide increased
coverage and improved quality service to customers.
CASH FLOWS FROM OPERATING ACTIVITIES required cash of $10.8 million in 1996 and
provided cash of $13.8 million and $20.7 million for the years ended December
31, 1995 and 1994, respectively. Cash flows required by operating activities in
1996 compared to 1995 reflect a $24.6 million decrease, primarily due to $29.8
million additional net loss coupled with a decrease in items requiring cash such
as accrued interest, accounts payable and unearned revenue of $4.1 million.
These decreases were partially offset by $9.3 million for depreciation and
amortization and other items not requiring cash. Cash flows provided by
operating activities in 1995 compared to 1994 reflect a $6.9 million
19
<PAGE>
increase, primarily due to $14.4 million additional net loss coupled with a
decrease in items requiring cash such as accounts payable, employee benefit
obligations and unearned revenue of $6.9 million. These decreases were
partially offset by $14.4 million for items not requiring cash, such as
depreciation and amortization and balance sheet accruals for interest, taxes
and restructuring.
CASH FLOWS FROM FINANCING ACTIVITIES provided $45.6 million, $67.8 million
and $28.3 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company increased its borrowings under the Revolving Credit
Agreement with TDS by $45.4 million, $66.4 million and $28.1 million during
the years ended December 31, 1996, 1995 and 1994, respectively. In 1994, the
Company repaid $44.4 million of notes payable-affiliates from the net
proceeds of its February 1994 initial public offering.
CASH FLOWS FROM INVESTING ACTIVITIES required cash totaling $38.5 million, $79.6
million and $48.6 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The majority of the cash outflow in each of these years related to
additions to property, plant and equipment of $32.5 million, $26.5 million and
$29.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Net cash outflow of $4.3 million for the year ended December 31,
1996 primarily related to interest capitalized on borrowings for the purchase of
five regional narrowband PCS licenses. Net cash outflow of $45.4 million and
$11.2 million for the years ended December 31, 1995 and 1994, respectively,
related to the Company's acquisition and development of its narrowband PCS
licenses. Acquisitions required cash totaling $5.5 million and $9.5 million
during 1995 and 1994, respectively. Cash required for other investments related
primarily to the Company's joint venture with Nexus. Capital expenditures for
radio paging property and equipment and the purchase of pagers for lease are
anticipated to total approximately $35 million in 1997.
In April 1995, the Company completed its acquisition of five regional
narrowband PCS licenses, providing coverage equivalent to that of a
nationwide license, from the Federal Communications Commission ("FCC"). The
Company does not expect to spend a significant amount during 1997 on the
development of its narrowband PCS licenses. The Company is suspending
development of its narrowband PCS licenses until such time as the supporting
infrastructure and related subscriber device equipment is commercially
available. In addition, significant funds will be required when the Company
resumes development of its narrowband PCS infrastructure and markets the
services that these licenses will allow the Company to provide. There can be
no assurance that the Company will be successful in developing these
licenses due to such factors as the inability to obtain sufficient financing
at a reasonable cost, the availability of supporting infrastructure and
related subscriber device equipment, competition, regulatory developments or
other factors.
At December 31, 1996, the Company had $560,000 in cash. The Company had unused
borrowing capacity at December 31, 1996 of $10 million under its Revolving
Credit Agreement with TDS.
Pursuant to the Revolving Credit Agreement, amended effective January 1, 1997,
the Company may borrow up to an aggregate of $180 million from TDS. At December
31, 1996, long-term debt under this agreement of $140 million was used for the
acquisition and development of five regional narrowband PCS licenses ($61.0
million), investment in infrastructure, systems and pagers ($49.2 million),
acquisitions ($15.7 million) and continuing operations ($14.1 million). The
Revolving Credit Agreement allows the Company to borrow funds at an interest
rate equal to 1 1/2% above the prime rate, which is payable quarterly. No
principal is payable until January 1, 1999, subject to acceleration under
certain circumstances, at which time the entire principal balance then
outstanding is scheduled to become due and payable. The Company determined that
it was in violation of a covenant under the Revolving Credit Agreement with TDS
relating to maintaining a certain ratio of equity to liabilities. The Company
obtained a waiver of the covenant from TDS through January 1, 1999. In absence
of such waiver, the entire amount outstanding under the Revolving Credit
Agreement would have become immediately due and payable at the discretion of
TDS.
In connection with the Company's efforts to increase its customer base and
market share, invest in new communications technologies and fulfill its
obligations under the Revolving Credit Agreement with TDS, the Company may
require additional funding, the nature, amount and source of which cannot now be
determined, but which may include increases under or changes in the structure of
the Revolving Credit Agreement with TDS or public or private offerings of debt
or equity securities. If sufficient funding is not made available to the Company
on terms and prices acceptable to the Company, the Company would have to reduce
its construction and development programs, which could have a material adverse
impact on the Company's financial condition and results of operations.
Private Securities Litigation Reform Act of 1995 Safe Harbor Cautionary Language
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Annual Report contain "forward-looking"
statements, as defined in the Private Securities Litigation Reform Act of 1995,
that are based on current expectations, estimates and projections. Statements
that are not historical facts, including statements about the Company's beliefs
and expectations are forward-looking statements. These statements contain
potential risks and uncertainties and, therefore, actual results may differ
materially. American Paging undertakes no obligation to update publicly any
forward-looking statements whether as a result of new information, future events
or otherwise.
Important factors that may affect these projections or expectations include, but
are not limited to: changes in the overall economy; changes in competition in
the Company's markets; new wireless messaging technology advances; possible
future litigation; availability of future financing; start-up of narrowband PCS
operations; and unanticipated changes in growth in paging customers, penetration
rates, churn rates and the mix of products and services offered in the Company's
markets. Readers should evaluate any statements in light of these important
factors.
20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1996 1995 1994
-----------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
Service Revenue $ 93,841 $ 93,034 $ 77,520
-----------------------------------------
Service Operating Expenses
Cost of services 30,092 24,062 19,347
Sales and marketing 27,295 15,988 13,249
General and administrative 39,766 37,308 27,947
Depreciation and amortization 33,777 24,692 17,178
-----------------------------------------
130,930 102,050 77,721
-----------------------------------------
Service Operating Loss (37,089) (9,016) (201)
-----------------------------------------
Equipment Sales
Revenue 10,346 14,116 14,545
Cost of equipment sold 9,883 14,097 14,513
-----------------------------------------
Equipment Sales Income 463 19 32
-----------------------------------------
Operating Loss (36,626) (8,997) (169)
-----------------------------------------
Investment and Other Income/(Expense)
Investment loss in joint venture (1,201) (1,151) (1,055)
Interest income 259 175 121
Other, net 33 121 153
-----------------------------------------
(909) (855) (781)
-----------------------------------------
Loss Before Interest and Income Taxes (37,535) (9,852) (950)
Interest expense - affiliates 7,650 5,533 1,165
-----------------------------------------
Loss Before Income Taxes (45,185) (15,385) (2,115)
Income tax expense/(benefit) 342 325 (783)
-----------------------------------------
Net Loss $(45,527) $ (15,710) $ (1,332)
=========================================
Weighted Average Common and
Series A Common shares (000s) (SEE NOTE 1) 20,048 20,017 19,621
Net Loss per Common and Series A Common share $ (2.27) $ (0.78) $ (0.07)
=========================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
21
<PAGE>
CONSOLIDATED BALANCE SHEETS
Assets
December 31,
1996 1995
---------------------------
(Dollars in thousands)
Current Assets
Cash and cash equivalents $ 557 $ 4,280
Temporary investments 150 --
Accounts receivable:
Customers, net of reserves of
$1,883 and $1,283, respectively 12,639 11,883
Affiliates--income taxes -- 258
Other 234 15
Inventory 8,548 3,408
Net deferred tax asset 2,482 2,028
Prepaid expenses and other 1,231 1,508
---------------------------
25,841 23,380
---------------------------
Investments
Investment in joint venture 193 97
Marketable securities 286 --
---------------------------
479 97
---------------------------
Property, Plant and Equipment
In service 113,000 102,385
Less accumulated depreciation 61,528 42,933
---------------------------
51,472 59,452
---------------------------
Intangible Assets
PCS licenses 59,601 55,538
Other intangibles, net of accumulated
amortization of $17,543 and $13,733,
respectively 15,981 20,682
---------------------------
75,582 76,220
---------------------------
Total Assets $ 153,374 $ 159,149
===========================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
22
<PAGE>
Liabilities and Common Shareholders' Equity
December 31,
1996 1995
---------------------------
(Dollars in thousands)
Current Liabilities
Due to affiliates
Accounts payable $ 1,486 $ 1,540
Accrued interest 1,169 2,391
Accounts payable 3,401 9,192
Unearned revenue and deposits 10,527 10,829
Accrued taxes 357 353
Accrued compensation 1,266 1,033
Other current liabilities 2,841 1,991
---------------------------
21,047 27,329
---------------------------
Revolving Credit Agreement - TDS 139,960 94,523
---------------------------
Net Deferred Tax Liability 2,169 1,721
---------------------------
Common Shareholders' Equity
Common shares, par value $1 per share;
authorized 50,000,000 shares; issued
and outstanding 7,559,633 shares in
1996 and 7,536,931 shares in 1995 7,560 7,537
Series A Common shares, par value $1 per share;
authorized 50,000,000 shares; issued and
outstanding 12,500,000 shares 12,500 12,500
Additional paid-in capital 72,589 72,463
Retained deficit (102,451) (56,924)
---------------------------
(9,802) 35,576
---------------------------
Total Liabilities and Common Shareholders' Equity $153,374 $159,149
===========================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
23
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1996 1995 1994
-----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $(45,527) $(15,710) $ (1,332)
Add (deduct) adjustments to reconcile net loss to
net cash (required) provided by operating activities:
Depreciation and amortization 33,777 24,692 17,178
Deferred income taxes, net (6) 263 (129)
Investment loss 1,201 1,151 1,055
Other noncash expense 4,473 4,030 2,912
Change in accounts receivable (975) (998) (1,118)
Change in accounts payable (2,269) 167 4,811
Change in unearned revenue (302) 788 946
Change in accrued taxes 262 (281) (2,518)
Change in accrued interest (1,222) 1,887 (319)
Change in employee benefit obligations -- (2,096) --
Change in other assets and liabilities (186) (104) (800)
-----------------------------------------
(10,774) 13,789 20,686
-----------------------------------------
Cash Flows from Financing Activities
Change in Revolving Credit Agreement - TDS 45,437 67,548 28,113
Change in notes payable - affiliates -- -- (44,436)
Common shares issued 149 268 44,581
-----------------------------------------
45,586 67,816 28,258
-----------------------------------------
Cash Flows from Investing Activities
Additions to property, plant and equipment (32,517) (26,527) (28,966)
Acquisitions, excluding cash acquired -- (5,539) (9,548)
Investment in PCS licenses (4,285) (45,412) (11,203)
Other investments (1,297) (2,131) (1,751)
Change in temporary investments and marketable securities (436) -- 2,858
-----------------------------------------
(38,535) (79,609) (48,610)
-----------------------------------------
Net (Decrease) Increase in Cash
and Cash Equivalents (3,723) 1,996 334
Cash and Cash Equivalents
Beginning of period 4,280 2,284 1,950
-----------------------------------------
End of period $ 557 $ 4,280 $ 2,284
=========================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Year Ended December 31,
1996 1995 1994
-----------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Common shares
Balance at beginning of period $ 7,537 $ 7,500 $ --
Add
Employee stock ownership plans 23 37 --
Recapitalization -- -- 1,500
Initial public offering -- -- 3,500
Conversion of Series A Common shares -- -- 2,500
-----------------------------------------
Balance at end of period $ 7,560 $ 7,537 $ 7,500
=========================================
Series A Common shares
Balance at beginning of period $ 12,500 $ 12,500 $ --
Add (deduct)
Recapitalization -- -- 15,000
Conversion into Common shares -- -- (2,500)
-----------------------------------------
Balance at end of period $ 12,500 $ 12,500 $ 12,500
=========================================
Additional Paid-in Capital
Balance at beginning of period $ 72,463 $ 72,232 $ 47,651
Add (deduct)
Employee stock ownership plans 126 231 --
Recapitalization -- -- (16,500)
Initial public offering -- -- 42,070
Common stock expense -- -- (989)
-----------------------------------------
Balance at end of period $ 72,589 $ 72,463 $ 72,232
=========================================
Retained Deficit
Balance at beginning of period $ (56,924) $ (41,214) $ (39,882)
Add Net loss (45,527) (15,710) (1,332)
-----------------------------------------
Balance at end of period $(102,451) $ (56,924) $ (41,214)
=========================================
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS.
25
</TABLE>
<PAGE>
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
American Paging, Inc. (the "Company") is an 82.3%-owned subsidiary of Telephone
and Data Systems, Inc. ("TDS").
The Company provides local, regional and nationwide advanced wireless
messaging communications services in 21 states and the District of Columbia.
The Company offers local and regional paging coverage throughout the Midwest,
the Mid-Atlantic, and in the states of Florida, Oklahoma, Texas, Arizona and
Utah. Nationwide paging is offered through the Company's alliances with
non-affiliated service providers. As of December 31, 1996, the Company had
777,400 pagers in service through 51 sales and service offices.
PRINCIPLES OF CONSOLIDATION
The accounting policies of the Company conform to generally accepted accounting
principles. The consolidated financial statements include the accounts of
American Paging, Inc. and its subsidiaries. All material intercompany accounts
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
SERVICE REVENUE AND EQUIPMENT SALES
Service revenue includes all regular monthly charges to customers for subscriber
device rental and dispatch services. Rental and dispatch revenues are recognized
in the month in which service is provided. Equipment sales revenue includes all
charges for pagers sold to customers.
UNEARNED REVENUE AND DEPOSITS
Unearned revenue and deposits primarily represent monthly charges to customers
for subscriber device rental and dispatch services billed in advance. Such
revenue is recognized in the following months when service is provided and
deposits are applied against the customer's final bill.
NET LOSS PER SHARE
Net loss per Common and Series A Common share is computed by dividing Net loss
by the weighted average number of Common and Series A Common shares outstanding
during the periods, adjusted to give retroactive effect to the recapitalization
in conjunction with the Company's 1994 initial public offering.
Assuming that the Company's initial public offering had taken place and all
proceeds therefrom had been used to retire Notes payable-affiliates as of
January 1, 1994, pro forma Net loss would have decreased by $286,000 (net of
income taxes) due to the elimination of Interest expense-affiliates and pro
forma Net loss per Common and Series A Common share would have been $0.05 for
the year ended December 31, 1994.
CASH AND CASH EQUIVALENTS, TEMPORARY INVESTMENTS AND MARKETABLE SECURITIES
Cash and cash equivalents include cash and those short term, highly-liquid
investments with original maturities of three months or less. Those
investments with original maturities of more than three months and less than
12 months are classified as temporary investments and are stated at cost,
which approximates market. Those investments with original maturities of more
than 12 months are classified as marketable securities and are stated at
amortized cost.
INVENTORY
Inventory consists of subscriber devices on hand. Subscriber device cost is
determined by the average cost method.
INVESTMENT IN JOINT VENTURE
The equity method of accounting is used to record the Company's 50% interest in
American Messaging Services, LLC ("AMS"), which is the Company's joint venture
with Nexus Telecommunication Systems, Ltd. of Israel ("Nexus"). AMS, a
development stage entity, was formed to develop multiple applications and
distribution channels worldwide for a patented communications network that
provides two-way paging, location and telemetry services. The Company's share of
the net losses of the joint venture is stated as Investment loss in joint
venture in the Consolidated Statement of Operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at original cost. Depreciation is
provided based on the straight-line method over the estimated useful lives of
the assets, which range from two to five years. Based on a study of useful
lives, the Company shortened the estimated useful lives of its subscriber
devices from five to four years and transmitters from seven to five years,
beginning in July 1994. This change in accounting estimate increased
depreciation expense approximately $3.5 million, or $0.18 per share, for 1995
and $1.5 million, or $0.08 per share, for 1994.
Property, plant and equipment is composed of the following:
December 31,
1996 1995
---------------------------
(Dollars in thousands)
Subscriber devices $ 39,714 $ 47,577
Terminals and transmitters 44,251 41,842
Computer equipment 16,595 4,467
Furniture and fixtures 10,314 6,696
Other 2,126 1,803
---------------------------
Subtotal 113,000 102,385
Less accumulated depreciation 61,528 42,933
---------------------------
Total $ 51,472 $ 59,452
===========================
See Note 5 - Commitments for a discussion of property leased by the Company.
26
<PAGE>
INTANGIBLE ASSETS
The Company has capitalized certain start-up costs in connection with the
development and acquisition of paging systems. Costs of developing new paging
systems are deferred pending the outcome of license applications which grant
authority to provide paging services in a particular area. Upon acceptance of
the application the Company amortizes these deferred start-up costs over a
period of ten years commencing with the date of commercial operation. If the
application is not granted, all costs incurred are charged to expense in the
current period. In the case of trades for or acquisitions of operating paging
systems, certain costs are included in other intangible assets. Covenants not to
compete are amortized over the term of the agreements. Goodwill is amortized
over a period of 25 years. Customer lists are amortized over a period of five
years.
Other intangible assets are composed of the following:
December 31,
1996 1995
---------------------------
(Dollars in thousands)
Customer lists $ 15,411 $ 15,411
Deferred start-up costs 7,048 7,939
Goodwill 6,599 6,599
Covenants not to compete 2,409 2,409
Other 2,057 2,057
---------------------------
Subtotal 33,524 34,415
Less accumulated amortization 17,543 13,733
---------------------------
Total $ 15,981 $ 20,682
===========================
In November 1994, the Company was the successful bidder for five regional
narrowband Personal Communications Services ("PCS") licenses, providing coverage
equivalent to that of a nationwide license, at auction by the Federal
Communications Commission ("FCC"). The FCC granted the licenses in May 1995. The
Company's cost of the licenses aggregated $53.6 million.
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 34,
American Paging capitalized interest on the borrowings for the purchase of these
licenses while it undertook development activities. Interest capitalized for the
year ended December 31, 1995 was $1.4 million. Interest capitalized for the nine
months ended September 30, 1996 was $4.2 million. Effective October 1, 1996, the
Company stopped capitalizing interest as the Company suspended the development
of its narrowband PCS licenses pending commercial availability of the supporting
infrastructure and related subscriber device equipment.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," in January 1996. SFAS No.
121 requires that long-lived assets and certain identifiable intangibles to be
held and used by any entity be reviewed for impairment whenever events indicate
that the carrying amount of an asset may not be recoverable. The effect of
adopting the standard on results of operations and financial position was
immaterial.
OTHER CURRENT LIABILITIES
Other current liabilities consists of accrued restructuring expenses of $1.3
million and $1.0 million at December 31, 1996 and 1995, respectively. The
remaining other current liabilities consist of accrued expenses as of December
31, 1996 and 1995.
RESTRUCTURING
American Paging began restructuring its sales and operating areas during the
third quarter of 1995 which continued throughout 1996. During 1995, the Company
recorded restructuring-related expense totaling $2.9 million, primarily for
employee severance payments, lease costs and consulting fees of $2.1 million
included in general and administrative expense. In addition, approximately
$800,000 in depreciation expense was recorded during 1995 for the reduction in
the useful lives of fixed assets which were no longer required upon completion
of the restructuring.
During 1996, the Company recorded restructuring-related expense totaling $9.3
million, primarily for additional depreciation related to obsolete inventory of
$2.8 million and the write-off of the customer management and billing system of
$2.2 million. Also recorded were accruals for other restructuring costs included
in general and administrative expense of $4.0 million.
SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company acquired three paging companies in 1995 and one in 1994. In
conjunction with these acquisitions, the following assets were acquired and
liabilities assumed:
Year Ended December 31,
1995 1994
---------------------------
(Dollars in thousands)
Goodwill $ 2,193 $ 3,850
Customer lists 2,022 4,400
Licenses 775 500
Covenants not to compete 500 500
Property, plant and equipment 216 350
Accounts receivable 181 --
Inventory 103 150
Advance billings and
customer deposits (123) (40)
Unearned revenue (330) (150)
Other assets and liabilities,
excluding cash acquired 2 (12)
---------------------------
Decrease in cash due
to acquisitions $ 5,539 $ 9,548
===========================
The following table summarizes interest and income taxes paid.
Year Ended December 31,
1996 1995 1994
--------------------------------------
(Dollars in thousands)
Interest paid
to affiliates $13,039 $3,645 $1,483
Income taxes paid $ 96 $ 205 $1,333
--------------------------------------
27
<PAGE>
The Company used federal income taxes refundable of $1.1 million to reduce its
debt to TDS during 1995.
Other noncash expenses included in the statements of cash flows consist
primarily of lost pager expense of $2.9 million, $2.4 million and $2.1 million
for the years ended December 31, 1996, 1995 and 1994, respectively,
restructuring expense of $1.5 million and $1.7 million for the years ended
December 31, 1996 and 1995, respectively, and deferred compensation for stock
appreciation rights of $306,000 for the year ended December 31, 1994.
Other investments consist primarily of the Company's investment in the AMS joint
venture of $1.2 million, $1.1 million and $1.1 million for the years ended
December 31, 1996, 1995 and 1994, respectively.
2. INCOME TAXES
The Company is included in a consolidated federal income tax return with other
members of the TDS consolidated group.
TDS and American Paging entered into a Tax Allocation Agreement (the
"Agreement") effective January 1, 1994. The Agreement provides that American
Paging and its subsidiaries be included in a consolidated federal income tax
return and in state income or franchise tax returns in certain situations with
the TDS affiliated group. American Paging and its subsidiaries calculate their
losses and credits as if they comprised a separate affiliated group. Under the
Agreement, American Paging is able to carry forward its losses and credits and
use them to offset any future income tax liabilities to TDS. The amount of
federal net operating loss carry forward available to offset future taxable
income aggregated $58.3 million at December 31, 1996 and expires between 2010
and 2012. The amount of state net operating loss carry forward available to
offset future taxable income aggregated $61.5 million at December 31, 1996 and
expires between 1997 and 2012.
Income tax expense/(benefit) is summarized as follows:
Year Ended December 31,
1996 1995 1994
--------------------------------
(Dollars in thousands)
Federal income taxes:
Current $ -- $ (39) $ (666)
Deferred -- 60 35
State income taxes:
Current 348 101 12
Deferred (6) 203 (164)
--------------------------------
Income tax expense/(benefit) $ 342 $ 325 $ (783)
================================
The components of the Company's noncurrent deferred tax assets and liabilities
are summarized as follows:
December 31,
1996 1995
---------------------------
(Dollars in thousands)
Deferred tax asset:
Net operating loss
carryforwards $ 24,797 $ 10,290
Deferred charges 3,295 391
AMT credit carryforward 313 313
Other 417 63
--------------------------
28,822 11,057
Less: valuation allowance (26,683) (9,373)
--------------------------
Total deferred tax asset 2,139 1,684
--------------------------
Deferred tax liability:
Property, plant and equipment (831) 2,817
Licenses 5,139 588
--------------------------
Total deferred tax liability 4,308 3,405
--------------------------
Net deferred tax liability $ 2,169 $ 1,721
==========================
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance primarily for the federal and state net
operating loss carryforwards that may expire before they are utilized. The
valuation allowance increased by $17.3 million and $5.6 million in 1996 and
1995, respectively. The Company had current deferred tax assets totaling $2.5
million at December 31, 1996, representing primarily the effects of unearned
revenue. At December 31, 1996, the Company had $313,000 of federal alternative
minimum tax ("AMT") credit carryforwards available to offset regular income tax
payable in future years.
The statutory federal income tax rate is reconciled to the Company's effective
income tax rate from net loss before the cumulative effect of a change in
accounting principle below:
Year Ended December 31,
1996 1995 1994
-------------------------------------------
Statutory federal
income tax rate 35.0% 35.0% 35.0%
State income taxes,
net of federal benefit (0.8) (2.0) 4.7
Federal deferred
tax asset adjustment (36.6) (36.0) (5.4)
Other, net 1.6 0.9 2.7
-------------------------------------------
Effective tax rate (0.8)% (2.1)% 37.0%
===========================================
3. REVOLVING CREDIT AGREEMENT
The Company has unsecured notes payable to TDS and Telecommunications
Technologies Fund, Inc., a wholly owned subsidiary of TDS, pursuant to a
Revolving Credit Agreement.
The Company entered into the Revolving Credit Agreement with TDS effective
January 1, 1994, at which date all of the outstanding obligations of the Company
to TDS were incorporated thereunder. Pursuant to the Revolving Credit
28
<PAGE>
Agreement, as amended effective January 1, 1997, the Company may borrow up to
an aggregate of $180 million from TDS, at an interest rate equal to 1 1/2%
above the prime rate announced from time to time by the LaSalle National Bank
of Chicago (for a rate of 9.75% at December 31, 1996) on the unpaid principal
amount. Interest is payable on demand on any overdue principal or overdue
installment of interest at a rate equal to 3 1/2% above such prime rate.
Interest on the balance due under the Revolving Credit Agreement is payable
quarterly and no principal is payable until the earlier of January 1, 1999,
or six months after such time as TDS's ownership of the Company falls below
70%, subject to acceleration under certain circumstances, at which time the
entire principal balance due under the Revolving Credit Agreement then
outstanding is scheduled to become due and payable.
During 1996, the Company determined that it was in violation of a covenant
under the Revolving Credit Agreement with TDS relating to maintaining a
certain ratio of equity to liabilities. The Company obtained a waiver of the
covenant from TDS through January 1, 1999. In absence of such waiver, the
entire amount outstanding under the Revolving Credit Agreement would have
become immediately due and payable at the discretion of TDS.
4. RELATED PARTY TRANSACTIONS
The Company is billed for all services it receives from TDS and its affiliates,
consisting primarily of information processing and general management services.
Such billings are based on expenses specifically identified to the Company and
on allocations of common expenses. Such allocations are based on the
relationship of the Company's assets, employees, investment in plant and
expenses to the total assets, employees, investment in plant and expenses of
TDS. Management believes the method used to allocate common expenses is
reasonable.
TDS and certain of its affiliates provided the Company with centralized
management, accounting, engineering, billing and data processing services
aggregating $5.9 million, $5.8 million and $4.6 million in 1996, 1995 and
1994, respectively. In addition, the Company purchased materials and
equipment at cost through TDS's associated service companies aggregating
$244,000, $296,000 and $400,000 in 1996, 1995 and 1994, respectively.
The Company has a Cash Management Agreement with TDS under which the Company may
from time to time deposit its excess cash with TDS for investment under TDS's
Cash Management program. Deposits made under the agreement are generally
available to the Company on demand and bear interest each month equal to the
daily weighted average rate earned on all securities held on behalf of the
participants in the program. For financial reporting purposes, the Company
reports its proportionate amount of cash, temporary investments and marketable
securities invested in the program.
5. COMMITMENTS
The Company expects to spend approximately $35 million during 1997 for
enhancements to existing systems, construction of new systems and purchases of
subscriber devices for lease. The Company has not budgeted any amounts for the
buildout of its narrowband PCS license for 1997.
The Company and its subsidiaries lease office and transmitter sites at various
locations in the United States under operating leases. Future minimum rental
payments required under operating leases that have noncancellable lease terms in
excess of one year, as of December 31, 1996, are as follows:
Minimum Future
Rental Payments
---------------
(Dollars in thousands)
1997 $ 2,631
1998 2,403
1999 1,836
2000 1,150
2001 749
Thereafter 1,700
Rent expense totaled $6.7 million, $5.7 million and $4.6 million in 1996, 1995
and 1994, respectively.
6. COMMON STOCK
EMPLOYEE BENEFIT PLANS
The following table summarizes Common shares issued for the year ended December
31, 1996 for the employee benefit plans described below:
Year Ended December 31,
1996 1995
-------------------------
Common shares:
Tax deferred savings plan 18,970 31,453
Employee stock purchase plan 3,732 5,478
Employee stock option plan -- --
-------------------------
22,702 36,931
=========================
No shares were issued under these plans for the year ended December 31, 1994.
EMPLOYEE STOCK APPRECIATION RIGHTS PLAN
In 1988, American Paging began a Stock Appreciation Rights ("SAR") program
for its senior management pursuant to the Long-Term Incentive Plan (the
"Plan"). The Plan utilized phantom stock of the Company and lasted until
December 31, 1994. Each SAR allowed the grantee to receive an amount, in TDS
Common shares or cash, equivalent to the difference between the estimated
market value of the SAR on the grant and exercise dates. The Company recorded
compensation expense over the seven year vesting period with total
compensation under the Plan of $2.1 million being paid in cash in 1995.
TAX-DEFERRED SAVINGS PLAN
The Company has reserved 150,000 Common shares for issuance under the TDS
Tax-Deferred Savings Plan, a qualified profit-sharing plan pursuant to Sections
401(a) and 401(k) of the Internal Revenue Code. Participating
29
<PAGE>
employees have the option of investing their contributions in American Paging
Common shares, TDS Common shares, United States Cellular Corporation (an
80.6%-owned subsidiary of TDS) Common shares, Aerial Communications, Inc. (an
82.8%-owned subsidiary of TDS) Common shares or five non-affiliated funds.
During 1996 and 1995, the Company issued 18,970 and 31,453 Common shares
under this plan, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company reserved 110,000 Common shares for sale to employees of American
Paging and its subsidiaries in connection with the 1994 Employee Stock Purchase
Plan ("1994 ESPP"). During 1996 and 1995, the Company issued 3,732 and 5,478
Common shares, respectively, to employees under the 1994 ESPP. The termination
date of this plan was December 31, 1996. During 1996, the 1997 Employee Stock
Purchase Plan ("1997 ESPP") was approved which became effective January 1, 1997.
The Company reserved 100,000 Common shares for sale to employees of American
Paging and its subsidiaries under the 1997 ESPP.
EMPLOYEE STOCK OPTION PLAN
The Company has reserved 700,000 Common shares for sale to officers and
employees through stock options in connection with the 1994 Long-Term
Incentive Plan (the "1994 Plan"), as amended and restated as of April 1,
1996. As of December 31, 1996, no shares had been issued under the 1994 Plan.
The options are exercisable over a specified period not in excess of ten
years. The options expire from 2000 to 2006, or the date of the employee's
termination of employment, if earlier.
The Company accounts for stock options and employee stock purchase plans
under Accounting Principles Board Opinion No. 25. No compensation costs have
been recognized for these plans. Had compensation cost for all plans been
determined consistent with SFAS No. 123 "Accounting for Stock-Based
Compensation," the Company's Net loss and Net loss per share would have been
the following pro forma amounts:
Year Ended December 31,
1996 1995
---------------------------
(Dollars in thousands
except per share amounts)
Net loss As reported $ (45,527) $ (15,710)
Pro forma (45,639) (15,746)
Loss per Common share As reported $ (2.27) $ (0.78)
Pro forma (2.28) (0.79)
---------------------------
Because the method of accounting prescribed by SFAS No. 123 has not been applied
to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
A summary of the status of the Company's stock option plan as of December 31,
1996 and 1995, and changes during the years then ended is presented in the
following table:
Weighted Weighted
Number of Average Average
Shares Option Prices Fair Values
----------------------------------------
STOCK OPTIONS:
Outstanding-January 1, 1995 282,500 $14.00
(no shares exercisable)
Granted 85,500 $ 7.58 $4.02
Cancelled (88,500) $14.00
Outstanding-December 31, 1995 279,500 $12.04
(42,000 shares exercisable)
Granted 33,000 $ 6.73 $3.43
Cancelled (93,875) $11.43
Outstanding-December 31, 1996 218,625 $11.49
(88,400 shares exercisable)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1995, respectively: risk-free
interest rates of 5.6% and 7.6%; expected dividend yield of 0.0% for both
years; expected lives of 7.4 years and 5.5 years; and expected volatility of
38.6% and 38.6%.
In accordance with provisions of the 1994 ESPP, shares issued in 1996 and 1995
under the 1994 ESPP were issued at 100% of the fair market value as this was
below the offering price as of the grant date on October 1, 1994. As a result,
there is no compensation cost to be recognized under SFAS No. 123 for these
shares.
INITIAL PUBLIC OFFERING
In 1994, the Company sold 3.5 million Common shares in an underwritten public
offering at an initial public offering price of $14.00 per share. The Company
realized $45.6 million in connection with the sale, after the payment of the
underwriters' discount. The proceeds of the sale were used to repay indebtedness
to TDS. Prior to the public offering, TDS exchanged all of the outstanding
common stock of the Company for 1.5 million Common shares and 15.0 million
Series A Common shares.
SERIES A COMMON SHARES
The holders of Common shares are entitled to one vote per share. The holders of
Series A Common shares are entitled to fifteen votes per share. Series A Common
shares are convertible on a share-for-share basis into Common shares. During
1994, TDS converted 2.5 million Series A Common shares into Common shares. As of
December 31, 1996, all of the Company's Series A Common shares were held by TDS.
7. ACQUISITIONS
Assuming that the acquisitions accounted for as purchases during 1995 had taken
place on January 1, 1995, unaudited pro forma results of operations would have
been as follows:
Year Ended December 31,
1996 1995
---------------------------
(Dollars in thousands
except per share amounts)
Service revenue $ 93,841 $ 95,570
Net loss (45,527) (16,432)
Loss per Common share $ (2.27) $ (0.82)
---------------------------
30
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended or at December 31,
1996 1995 1994 1993 1992
--------------------------------------------------------------
(Dollars in thousands, except per share and per unit amounts)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Service revenue $ 93,841 $ 93,034 $ 77,520 $ 64,384 $ 48,582
Equipment sales revenue 10,346 14,116 14,545 10,979 6,134
Operating loss (36,626) (8,997) (169) (721) (5,447)
Net loss before cumulative effect of a
change in accounting principle (45,527) (15,710) (1,332) (3,058) (4,725)
Cumulative effect of a change in accounting principle -- -- -- (178) --
Net loss $ (45,527) $ (15,710) $ (1,332) $ (3,236) $ (4,725)
Weighted average Common and
Series A Common shares (000s) (1) 20,048 20,017 19,621 16,500 16,500
Loss per Common and Series A Common share:
Before cumulative effect of a
change in accounting principle $ (2.27) $ (0.78) $ (0.07) $ (0.19) $ (0.29)
Cumulative effect of a change
in accounting principle -- -- -- (0.01) --
Net loss $ (2.27) $ (0.78) $ (0.07) $ (0.20) $ (0.29)
Effective tax rate (0.8)% (2.1)% 37.0% 31.8% 30.7%
OTHER DATA
Operating cash flow (Earnings before interest, taxes,
depreciation and amortization) (2) $ (2,849) $ 15,695 $ 17,009 $ 12,671 $ 4,965
Operating cash flow margin (2) (3.0)% 16.9% 21.9% 19.7% 10.2%
BALANCE SHEET DATA
Working capital (3) $ 4,794 $ (3,949) $ 42,008) $ 41,811) $ (29,032)
Property, plant and equipment, net 51,472 59,452 53,661 43,083 34,632
Intangible assets, net 75,582 76,220 71,258 9,862 7,007
Total assets 153,374 159,149 147,056 75,225 58,519
Revolving Credit Agreement - TDS 139,960 94,523 28,113 -- --
Common shareholders' equity $ (9,802) $ 35,576 $ 51,018 $ 7,769 $ 11,004
OTHER COMPANY STATISTICS
Customer units in service 774,400 784,500 652,800 460,900 322,200
Average monthly service revenue per unit ("ARPU") $ 9.88 $ 10.57 $ 11.92 $ 13.65 $ 14.93
Average monthly operating cost per unit $ 7.36 $ 6.98 $ 7.27 $ 8.61 $ 10.06
Subscriber devices in service per employee 893 1,007 853 685 539
Average monthly service revenue per employee $ 8,980 $ 12,457 $ 10,171 $ 9,388 $ 7,801
Transmitters in service 1,048 1,018 943 685 532
Capital expenditures $ 28,940 $ 35,107 $ 27,403 $ 24,813 $ 15,501
Average monthly disconnect rate ("churn") 3.1% 2.5% 2.6% 2.9% 2.9%
Current ratio 1.2 0.9 0.3 0.3 0.4
Return on equity (227.1)% (78.5)% (6.8)% (19.6)% (28.6)%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) WEIGHTED AVERAGE COMMON AND SERIES A COMMON SHARES OUTSTANDING GIVE
RETROACTIVE EFFECT TO THE RECAPITALIZATION IN CONJUNCTION WITH THE COMPANY'S
1994 INITIAL PUBLIC OFFERING, AS IF THIS TRANSACTION HAD OCCURRED AT JANUARY 1,
1992.
(2) ALTHOUGH OPERATING CASH FLOW AND OPERATING CASH FLOW MARGIN ARE COMMONLY
USED AS MEASURES OF PERFORMANCE IN THE PAGING INDUSTRY AND BY FINANCIAL ANALYSTS
AND OTHERS WHO FOLLOW THE INDUSTRY, THEY SHOULD NOT BE CONSIDERED IN ISOLATION
OR USED AS PERFORMANCE AND LIQUIDITY MEASURES PURSUANT TO GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.
(3) WORKING CAPITAL INCLUDES DUE TO FCC - PCS LICENSES OF $42.9 MILLION AT
DECEMBER 31, 1994. WORKING CAPITAL INCLUDES NOTES PAYABLE - AFFILIATES OF $44.4
MILLION AND $31.7 MILLION AT DECEMBER 31, 1993 AND 1992, RESPECTIVELY.
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF AMERICAN PAGING, INC.:
We have audited the accompanying consolidated balance sheets of American Paging,
Inc. (a Delaware corporation) and its subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, changes in common
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Paging, Inc. and its
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 29, 1997
<TABLE>
<CAPTION>
CONSOLIDATED QUARTERLY INCOME INFORMATION (UNAUDITED)
Quarter Ended
March 31 June 30 Sept. 30 Dec. 31
----------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1996
Service revenue $ 23,708 $ 23,493 $ 23,766 $ 22,784
Restructuring charges 778 1,465 7,087 --
Operating loss (4,086) (6,567) (16,694) (9,279)
Net loss $ (5,344) $ (8,340) $ (18,636) $ (13,207)
Weighted average Common and Series A Common shares (000s) 20,041 20,047 20,050 20,053
Loss per Common and Series A Common share $ (0.27) $ (0.42) $ (0.93) $ (0.66)
1995
Service revenue $ 22,237 $ 22,866 $ 24,109 $ 23,822
Restructuring charges -- -- 2,196 716
Operating loss (2,029) (2,010) (2,339) (2,619)
Net loss $ (2,748) $ (4,027) $ (4,871) $ (4,064)
Weighted average Common and Series A Common shares (000s) 20,000 20,019 20,023 20,030
Loss per Common and Series A Common share $ (0.14) $ (0.20) $ (0.24) $ (0.20)
</TABLE>
32
<PAGE>
SHAREHOLDER INFORMATION
AMERICAN PAGING STOCK AND DIVIDEND INFORMATION
The Company's Common shares are listed on the American Stock Exchange under the
symbol "APP" and in the newspapers as "AmPaging." As of February 28, 1997, the
Company's Common shares were held by 98 record owners. All of the Series A
Common shares were held by TDS. No public trading market exists for the Series A
Common shares, but the Series A Common shares are convertible on a
share-for-share basis into Common shares.
The high and low sales prices of the Common shares as reported by the American
Stock Exchange were as follows:
Common Shares
Calendar Period High Low
---------------------------
1996
First Quarter $ 7.375 $ 6.250
Second Quarter 10.000 6.500
Third Quarter 7.563 5.500
Fourth Quarter 6.125 4.625
1995
First Quarter $ 8.750 $ 7.125
Second Quarter 8.250 6.125
Third Quarter 8.375 6.625
Fourth Quarter 8.250 6.375
The Company has never paid any cash dividends and currently intends to retain
any future earnings for use in the Company's business. In addition, the
Revolving Credit Agreement with TDS prohibits the payment of dividends on the
Company's Common shares and Series A Common shares, except to the extent of
one-half of the cumulative consolidated net income, if any, of the Company for
the period after December 31, 1993.
INVESTOR RELATIONS
Our Annual Report, Form 10-K, Quarterly Reports, Prospectuses, and News Releases
are available to our investors, security analysts and other members of the
investment community. These reports are provided, without charge, upon request
to our Corporate Office. Our Corporate Office can also help with questions
regarding lost, stolen or destroyed certificates, consolidation of accounts,
transferring of shares and name or address changes. All inquiries should be
directed to:
Michelle M. Haupt
Investor Relations
AMERICAN PAGING, INC.
1300 Godward Street Northeast Suite 3100
Minneapolis, Minnesota 55413
612/623-3100
612/623-4413 (fax)
e-mail: [email protected]
[email protected]
ANNUAL MEETING
The Annual Meeting of shareholders of American Paging, Inc. will be held on May
5, 1997, at 11:00 a.m., local time, in Minneapolis, Minnesota.
<PAGE>
EXHIBIT 21
AMERICAN PAGING, INC.
SUBSIDIARY AND AFFILIATED COMPANIES
DECEMBER 31, 1996
COMPANY JURISDICTION
- ------- ------------
Advanced Wireless Messaging, Inc. . . . . . . . . . . . . Delaware
American Messaging Services, LLC. . . . . . . . . . . . . Minnesota
American Paging, Inc. (of Arizona). . . . . . . . . . . . Arizona
American Paging, Inc. (of the District of Columbia) . . . District of Columbia
American Paging, Inc. (of Florida). . . . . . . . . . . . Florida
American Paging, Inc. (of Illinois) . . . . . . . . . . . Illinois
American Paging, Inc. (of Indiana). . . . . . . . . . . . Indiana
American Paging, Inc. (of Kentucky) . . . . . . . . . . . Kentucky
American Paging, Inc. (of Maryland) . . . . . . . . . . . Maryland
American Paging, Inc. (of Minnesota). . . . . . . . . . . Minnesota
American Paging of Missouri, Inc. . . . . . . . . . . . . Missouri
American Paging, Inc. (of Oklahoma) . . . . . . . . . . . Oklahoma
A.P. of Pennsylvania, Inc.. . . . . . . . . . . . . . . . Pennsylvania
American Paging, Inc. (of Texas). . . . . . . . . . . . . Texas
American Paging, Inc. (of Utah) . . . . . . . . . . . . . Utah
American Paging, Inc. (of Virginia) . . . . . . . . . . . Virginia
American Paging, Inc. (of Wisconsin). . . . . . . . . . . Wisconsin
APIXUS, Inc. . . . . . . . . . . . . . . . . . . . . . . Minnesota
APPNOC, Inc. . . . . . . . . . . . . . . . . . . . . . . Delaware
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of American Paging, Inc., of our report dated
January 29, 1997, on the consolidated financial statements of American Paging,
Inc. and Subsidiaries (the "Company") included in the Company's 1996 Annual
Report to Shareholders, to the inclusion in this Form 10-K of our report dated
January 29, 1997, on the financial statement schedule of the Company, and to the
incorporation of such reports into the Company's previously filed S-8
registration statements, nos. 33-85860, 33-89208, 33-89976 and 333-16811.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN PAGING, INC. AS OF DECEMBER 31,
1996, AND FOR THE TWELVE MONTHS THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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0
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