-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LTpSTpR5CYJCwAKEzIh8PogILdOjMhUf0yAhs+ZVGGFwCzVpY8xPqlvNvPo6CjaF jL1d1EX6F3B+aLYu8cVmcQ== 0000950134-98-004395.txt : 19980518 0000950134-98-004395.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950134-98-004395 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAGING NETWORK INC CENTRAL INDEX KEY: 0000878324 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 042740516 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19494 FILM NUMBER: 98622044 BUSINESS ADDRESS: STREET 1: 4965 PRESTON PARK BLVD STE 600 CITY: PLANO STATE: TX ZIP: 75093 BUSINESS PHONE: 2149854100 MAIL ADDRESS: STREET 1: 4965 PRESTON PARK BLVD STREET 2: SUITE 600 CITY: PLANO STATE: TX ZIP: 75093 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1998 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____. COMMISSION FILE NO. 0-19494 PAGING NETWORK, INC. (Exact name of the Registrant as specified in charter) DELAWARE 04-2740516 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 4965 PRESTON PARK BOULEVARD, SUITE 800 PLANO, TEXAS 75093 (Address of principal executive offices, including zip code) (972) 985-4100 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock, as of the latest practicable date. Title Shares Outstanding as of April 30, 1998 --------------------------------- --------------------------------------- Common Stock, $ .01 par value 103,356,295
The Company's Common Stock is publicly traded on the Nasdaq Stock Market under the symbol "PAGE". ================================================================================ 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Index to Financial Statements
PAGE ---- Paging Network, Inc. Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997 (Unaudited).............................................................3 Paging Network, Inc. Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and 1997 (Unaudited)...............................................4 Paging Network, Inc. Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (Unaudited)...............................................5 Paging Network, Inc. Notes to Consolidated Financial Statements ..................................................6
2 3 PAGING NETWORK, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share information) (Unaudited)
MARCH 31, DECEMBER 31, 1998 1997 ----------- ------------ ASSETS Current assets: Cash and cash equivalents ..................................................... $ 5,374 $ 2,924 Accounts receivable, less allowance for doubtful accounts ...................................................... 61,948 63,288 Inventories ................................................................... 26,055 24,114 Prepaid expenses and other assets ............................................. 16,340 14,888 ----------- ----------- Total current assets ....................................................... 109,717 105,214 Property, equipment, and leasehold improvements, at cost .......................... 1,292,147 1,387,560 Less accumulated depreciation ................................................. (441,994) (469,526) ----------- ----------- Net property, equipment, and leasehold improvements ........................ 850,153 918,034 Other non-current assets, at cost ................................................. 668,752 659,661 Less accumulated amortization ................................................. (94,206) (85,676) ----------- ----------- Net other non-current assets ............................................... 574,546 573,985 ----------- ----------- $ 1,534,416 $ 1,597,233 =========== =========== LIABILITIES AND SHAREOWNERS' DEFICIT Current liabilities: Accounts payable .............................................................. $ 34,600 $ 42,640 Accrued interest .............................................................. 35,761 40,085 Accrued expenses .............................................................. 34,801 36,854 Accrued restructuring costs, current portion .................................. 15,351 -- Customer deposits ............................................................. 24,056 24,460 Deferred revenue .............................................................. 15,035 11,634 ----------- ----------- Total current liabilities .................................................. 159,604 155,673 ----------- ----------- Long-term obligations ............................................................. 1,781,431 1,779,491 Accrued restructuring costs, non-current portion .................................. 15,707 -- Minority interest ................................................................. 3,049 -- Commitments and contingencies ..................................................... -- -- Shareowners' deficit: Common Stock - $.01 par, authorized 250,000,000 shares; 103,314,944 and 102,659,915 shares issued and outstanding in 1998 and 1997, respectively.... 1,033 1,027 Paid-in capital ............................................................... 130,015 124,908 Accumulated deficit ........................................................... (557,146) (464,774) Other comprehensive income .................................................... 723 908 ----------- ----------- Total shareowners' deficit ................................................. (425,375) (337,931) ----------- ----------- $ 1,534,416 $ 1,597,233 =========== ===========
See accompanying notes 3 4 PAGING NETWORK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share information) (Unaudited)
THREE MONTHS ENDED MARCH 31, ------------------------ 1998 1997 --------- --------- Services, rent and maintenance revenues ............. $ 229,861 $ 188,880 Product sales ....................................... 25,889 36,368 --------- --------- Total revenues .................................. 255,750 225,248 Cost of products sold ............................... (21,103) (31,357) --------- --------- 234,647 193,891 Operating expenses: Services, rent and maintenance .................. 51,823 40,942 Selling ......................................... 21,490 28,271 General and administrative ...................... 70,071 60,398 Depreciation and amortization ................... 73,868 64,468 Restructuring charge ............................ 74,000 -- --------- --------- Total operating expenses ................... 291,252 194,079 --------- --------- Operating loss ...................................... (56,605) (188) Other income (expense): Interest expense ................................ (36,778) (37,826) Interest income ................................. 512 992 Minority interest ............................... 499 25 Equity in loss of an unconsolidated subsidiary .. -- (317) --------- --------- Total other income (expense) ............... (35,767) (37,126) --------- --------- Net loss ............................................ $ (92,372) $ (37,314) ========= ========= Net loss per share (basic and diluted) .............. $ (0.90) $ (0.36) ========= =========
See accompanying notes 4 5 PAGING NETWORK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
THREE MONTHS ENDED MARCH 31, ------------------------ 1998 1997 --------- --------- Operating activities: Net loss ................................................... $ (92,372) $ (37,314) Adjustments to reconcile net loss to net cash provided by operating activities: Restructuring charge ................................ 74,000 -- Depreciation ........................................ 66,454 59,059 Amortization ........................................ 7,414 5,409 Provision for doubtful accounts ..................... 4,724 4,163 Amortization of debt issuance costs ................. 1,112 2,471 Minority interest ................................... (499) (25) Equity in loss of an unconsolidated subsidiary ...... -- 317 Changes in operating assets and liabilities: Accounts receivable ................................. (3,377) (7,367) Inventories ......................................... (1,327) (5,118) Prepaid expenses and other assets ................... (1,322) (6,974) Accounts payable .................................... (10,252) 8,495 Accrued expenses and accrued interest ............... (6,710) 7,559 Accrued restructuring costs ......................... (929) -- Customer deposits and deferred revenue .............. 2,997 3,305 --------- --------- Net cash provided by operating activities ...................... 39,913 33,980 --------- --------- Investing activities: Capital expenditures ....................................... (43,249) (102,990) Payments for spectrum licenses ............................. (3,979) (47,835) Business acquisitions and joint venture investments ........ (3,500) (1,769) Restricted cash invested in money market instruments ....... -- (2,022) Other, net ................................................. 10,852 (251) --------- --------- Net cash used in investing activities .......................... (39,876) (154,867) --------- --------- Financing activities: Borrowings of long-term obligations ........................ 79,201 120,228 Repayments of long-term obligations ........................ (81,346) -- Proceeds from exercise of Common Stock options ............. 4,558 -- Other ...................................................... -- 182 --------- --------- Net cash provided by financing activities ...................... 2,413 120,410 --------- --------- Net increase (decrease) in cash and cash equivalents ........... 2,450 (477) Cash and cash equivalents at beginning of period ............... 2,924 3,777 --------- --------- Cash and cash equivalents at end of period ..................... $ 5,374 $ 3,300 ========= =========
See accompanying notes 5 6 PAGING NETWORK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (Unaudited) 1. THE COMPANY Paging Network, Inc. (the Company) is a provider of wireless messaging and information delivery services. The Company provides service in all 50 states, the District of Columbia, the U.S. Virgin Islands, Puerto Rico, and Canada, including local service in all of the largest 100 markets (in population) in the United States, and owns interests in wireless messaging companies in Spain and Brazil. The consolidated financial statements include the accounts of all of its wholly and majority-owned subsidiaries. Effective January 1, 1998, the Company began consolidating the results of its Spanish subsidiary, which had previously been accounted for under the equity method of accounting. All intercompany transactions have been eliminated. 2. UNAUDITED INTERIM FINANCIAL STATEMENTS The interim consolidated financial information contained herein is unaudited but, in the opinion of management, except for the restructuring charge discussed in Note 3, includes all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. These financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The balance sheet as of December 31, 1997, has been derived from the audited financial statements as of that date. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year. These financial statements and related notes should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Certain 1997 amounts have been reclassified to conform with the 1998 presentation. 3. RESTRUCTURING CHARGE On February 8, 1998, the Company's Board of Directors approved a restructuring of the Company's domestic operations (the Restructuring). As part of the Restructuring, the Company is reorganizing its operations to expand its sales organization, eliminate local and redundant administrative operations, and consolidate certain key support functions. The Company expects to eliminate approximately 1,600 positions, net of positions added, through the consolidation of redundant administrative operations and certain key support functions today located in offices throughout the country into central facilities (the Centers of Excellence). As a result of the Restructuring, the Company recorded a charge of $74.0 million, or $0.72 per share (basic and diluted), during the quarter ended March 31, 1998. The components of the charge include (in thousands): Write-down of property and equipment $38,900 Lease obligations and terminations 18,900 Severance and related benefits 12,700 Other 3,500 ------- Total restructuring charge $74,000 =======
6 7 The write-down of property and equipment relates to a non-cash charge to reduce the carrying amount of certain machinery and equipment, furniture and fixtures, and leasehold improvements that the Company will not continue to utilize following the Restructuring to their estimated net realizable value as of the date such assets are projected to be disposed of or abandoned by the Company, allowing for the recognition of normal depreciation expense on such assets through their projected disposal date. The net realizable value of these assets was determined based on management's estimates, which considered such factors as the nature and age of the assets to be disposed of, the timing of the assets' disposal, and the method and potential costs of the disposal. Such estimates are subject to change. The provision for lease obligations and terminations relates primarily to future lease commitments on local and regional office facilities that will be closed as part of the Restructuring. The charge represents future lease obligations, net of projected sublease income, on such leases past the dates the offices will be closed by the Company, or, for certain leases, the cost of terminating the leases prior to their scheduled expiration. Projected sublease income was based on management estimates which are subject to change. Cash payments on the leases and lease terminations will occur over the remaining lease terms, the majority of which expire prior to 2003. During the first quarter of 1998, cash payments totaling approximately $0.6 million were made for lease termination costs and charged against accrued restructuring costs. Through the elimination of certain local and regional administrative operations and the consolidation of certain support functions, the Company will eliminate approximately 1,600 net positions. As a result of eliminating these positions, the Company will involuntarily terminate an estimated 2,150 personnel. The majority of the positions to be eliminated are in the local and regional offices which will be closed as a result of the Restructuring. All of the severance and benefits costs to be paid by the Company will be paid during the remainder of 1998 and in 1999. The Company's restructuring activity as of March 31, 1998 is as follows (in thousands):
Reserve initially Utilization of Reserve Remaining established Cash Non-Cash Reserve ----------- ----------- ---------- --------- Fixed assets impairments $38,900 $ -- $38,900 $ -- Lease obligation costs 18,900 542 -- 18,358 Severance costs 12,700 -- -- 12,700 Other 3,500 387 3,113 -- ------- ------- ------- ------- Total $74,000 $ 929 $42,013 $31,058 ======= ======= ======= =======
4. PROPERTY AND EQUIPMENT AND OTHER ASSETS Included in inventories, property and equipment, and other non-current assets at March 31, 1998, is approximately $30 million of assets which are directly attributable to the Company's VoiceNow(R) service and thus cannot be utilized for other wireless communication services. While the Company currently believes such assets are recoverable, the ultimate recoverability of such assets is dependent upon the economic viability of the VoiceNow service. The Company will reassess the recoverability of the assets directly attributable to the VoiceNow service following the reintroduction of the VoiceNow service under a revised strategy in the second quarter of 1998. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" (SOP 98-5), effective for years beginning after December 15, 1998. SOP 98-5 requires the expensing of all start-up costs as incurred as well as writing off the remaining balance of capitalized start-up costs at the date of adoption of SOP 98-5 as the cumulative effect of a change in accounting principle. Start-up activities are defined as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer, or initiating a significant new process in an existing facility. The Company will be required to adopt the provision of SOP 98-5 effective January 1, 1999. The impact of the adoption of SOP 98-5 has not been determined at this time. 7 8 5. LONG-TERM OBLIGATIONS As of March 31, 1998, the Company had $535.0 million of borrowings outstanding under its domestic $1.0 billion revolving credit agreement (the Credit Agreement). 6. INCOME TAX PROVISION No provision or benefit for income taxes has been made for the three months ended March 31, 1998 and 1997, as the deferred benefit from operating losses was offset by the increase in the valuation allowance. 7. COMMON STOCK AND NET LOSS PER SHARE Net loss per share amounts are computed based on the weighted average number of common shares outstanding. The number of shares used to compute per share amounts for the three months ended March 31, 1998 and 1997 were 102.9 million and 102.6 million, respectively. The average number of options to purchase shares of the Company's Common Stock during the three months ended March 31, 1998 and 1997 was 6.4 million and 6.5 million, respectively, at exercise prices ranging from $2.67 per share to $14.38 per share. These stock options were not included in the computation of diluted earnings per share because the effect of assuming their exercise would have been antidilutive. The Company has 275.0 million authorized shares, of which 250.0 million are Common Stock and 25.0 million are preferred stock. As of March 31, 1998, there were no preferred shares issued or outstanding. 8. COMPREHENSIVE LOSS As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), which establishes new rules for the reporting and display of comprehensive loss and its components. SFAS 130 requires certain items, including foreign currency translation adjustments, which prior to adoption were reported separately in shareowners' deficit, to be included in other comprehensive loss. The adoption of SFAS 130 had no impact on the Company's net loss or shareowners' deficit. Comprehensive loss for the three months ended March 31, 1998 and 1997, is as follows (in thousands):
THREE MONTHS ENDED MARCH 31, ---------------------------- 1998 1997 -------- -------- Net loss $(92,372) $(37,314) Foreign currency translation adjustments (185) 170 -------- -------- Comprehensive loss $(92,557) $(37,144) ======== ========
9. STATEMENT OF CASH FLOWS INFORMATION Cash and cash equivalents include highly liquid debt instruments with an original maturity of three months or less. As of March 31, 1998, cash equivalents also include investments in money market instruments, which are carried at fair market value. Cash payments made for interest during the three months ended March 31, 1998 and 1997, were approximately $40.0 million and $32.3 million, respectively, net of interest capitalized of $4.6 million and $3.0 million, respectively. There were no significant federal or state income taxes paid or refunded for the three months ended March 31, 1998 and 1997. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements contained in this filing which are not historical facts, including but not limited to future capital expenditures, future borrowings, international investments expectations, introduction of new services, expected annual recurring performance improvements and cost savings as a result of the Restructuring, and sales productivity increases and incremental annual increases in revenues expected to result from the Restructuring together with associated price increases, are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Among the factors that could cause actual future results to differ materially are competitive pressures, growth rates, new market opportunities, supplier constraints, market conditions, timing and techniques used in marketing by third parties, new technologies, and acceptance of the Company's services in the marketplace. RESULTS OF OPERATIONS Throughout this section the Company makes reference to earnings before interest, income taxes, depreciation, amortization, minority interest, equity in loss of an unconsolidated subsidiary, and restructuring charge (EBITDA). EBITDA is a key performance measure used in the wireless messaging industry and is one of the financial measures by which the Company's covenants are calculated under the agreements governing its debt obligations. EBITDA is not a measure defined in generally accepted accounting principles and should not be considered in isolation or as a substitute for measures of performance in accordance with generally accepted accounting principles. The following table presents certain items in the Consolidated Statements of Operations as a percentage of revenues from services, rent and maintenance plus product sales less the cost of products sold (Net Revenues) for the three months ended March 31, 1998 and 1997, respectively.
THREE MONTHS ENDED MARCH 31, -------------------- 1998 1997 ------ ------ Net Revenues....................................... 100.0% 100.0% Operating expenses: Services, rent and maintenance............... 22.1(1) 21.1(1) Selling...................................... 9.1(1) 14.6(1) General and administrative................... 29.9 31.1 Depreciation and amortization................ 31.5(1) 33.3(1) Restructuring charge......................... 31.5 -- ----- ----- Operating loss..................................... (24.1) (0.1) Net loss........................................... (39.4) (19.2) EBITDA............................................. 38.9 33.2 EBITDA for domestic operations..................... 40.0 34.4 EBITDA for core domestic paging operations (2)..... 40.4 37.8
(1) Excluding direct costs attributable to the Company's voice messaging (VoiceNow) service , which was introduced during the first quarter of 1997, services, rent and maintenance expenses, selling expenses, and depreciation and amortization expense as a percentage of Net Revenues were 21.9%, 9.0%, and 29.8%, respectively, for the three months ended March 31, 1998, and were 20.6%, 11.7%, and 33.3%, respectively, for the three months ended March 31, 1997. (2) Represents EBITDA for the Company's domestic operations, excluding its domestic advanced messaging services (primarily VoiceNow service). 9 10 Net Revenues for the three-month period ended March 31, 1998, were $234.6 million, an increase of 21.0% over $193.9 million for the comparable period ended March 31, 1997. Revenues from services, rent and maintenance, which the Company considers its primary business, increased 21.7% to $229.9 million for the three months ended March 31, 1998, compared to $188.9 million for the three months ended March 31, 1997. These increases were primarily due to continued growth in the number of units in service with subscribers of the Company. The number of units in service with subscribers at March 31, 1998 was 10,478,683 compared to 9,132,495 units in service with subscribers at March 31, 1997, an increase of 14.7%. The Company's local and national third-party resellers represented 48.6% and 68.6%, respectively, of the Company's net unit additions for the three months ended March 31, 1998 and 1997. The Company is reviewing its pricing structure along all lines of its businesses, has instituted certain price increases for existing customers, anticipates certain additional increases, and has set appropriate minimum pricing levels for new business; however, the impact of such actions cannot be determined at this time. Product sales, less cost of products sold, were relatively flat for the three months ended March 31, 1998, compared to the same period in 1997. Product sales, less cost of products sold, were $4.8 million (2.0% of Net Revenues) for the first quarter of 1998 compared to $5.0 million (2.6% of Net Revenues) for the first quarter of 1997. Services, rent and maintenance expenses increased 26.6% to $51.8 million (22.1% of Net Revenues) for the three months ended March 31, 1998, compared to $40.9 million (21.1% of Net Revenues) for the three months ended March 31, 1997. The increase in services, rent and maintenance expenses and the increase as a percentage of Net Revenues for the three months ended March 31, 1998 were primarily attributable to an increase in telephone expenses associated with the regulation recently enacted which requires that providers of payphones be compensated for all calls placed from payphones to toll free numbers. This requirement increased the Company's cost of providing toll free number service commencing in the fourth quarter of 1997. In addition, the increase in services, rent and maintenance expenses for the three months ended March 31, 1998 was the result of the continued growth in the number of units in service with subscribers of the Company, expenses associated with an increase in transmitter sites, and expansion of the nationwide transmission networks. Selling expenses decreased 24.0% to $21.5 million (9.1% of Net Revenues) for the three months ended March 31, 1998, from $28.3 million (14.6% of Net Revenues) for the three months ended March 31, 1997. The decrease in selling expenses and the decrease as a percentage of Net Revenues resulted primarily from the decrease in certain marketing research, development costs, and advertising expenses associated with the Company's VoiceNow service, along with a lower amount of sales commissions paid in conjunction with the decline in net additions in units in service with subscribers of the Company for the first three months of 1998, compared to the corresponding period of 1997. The marketing research, development costs, and advertising expenses associated with the Company's VoiceNow service were $0.3 million and $5.5 million (0.1% and 2.9% of Net Revenues), respectively, for the three months ended March 31, 1998 and 1997. General and administrative expenses increased 16.0% to $70.1 million (29.9% of Net Revenues) for the first quarter of 1998, compared to $60.4 million (31.1% of Net Revenues) for the corresponding period of 1997. The increase in general and administrative expenses for the first quarter of 1998 occurred to support the growth in the number of units in service with subscribers of the Company. The decrease in general and administrative expenses as a percentage of Net Revenues for the three months ended March 31, 1998 was primarily due to the general and administrative expenses being absorbed by a larger subscriber base. Depreciation and amortization expense increased 14.6% to $73.9 million (31.5% of Net Revenues) for the three months ended March 31, 1998, compared to $64.5 million (33.3% of Net Revenues) for the three months ended March 31, 1997. The increase in depreciation and amortization expense was primarily attributable to the increase in the number of subscriber devices owned by the Company and leased to subscribers, the expansion of the nationwide transmission networks, and the increase in computer and wireless messaging equipment used by the Company in its operations. The Company recorded a restructuring charge of $74.0 million during the three months ended March 31, 1998, as a result of a reorganization of the Company's sales, administrative, and certain key support functions. See further discussion in Note 3 to the Consolidated Financial Statements. 10 11 As a result of the above factors, EBITDA increased 42.0% to $91.3 million (38.9% of Net Revenues) for the first quarter of 1998, compared to $64.3 million (33.2% of Net Revenues) for the corresponding period in 1997. EBITDA and EBITDA as a percentage of Net Revenues were negatively impacted by the Company's international operations and its VoiceNow service. Effective January 1, 1998, the Company began consolidating the results of its Spanish subsidiary. The Company's international operations and VoiceNow service resulted in a decrease to EBITDA of $1.1 million and $0.9 million, respectively, in the first quarter of 1998 and $2.1 million and $6.4 million, respectively, in the first quarter of 1997. EBITDA for the Company's domestic operations increased 39.1% to $92.3 million (40.0% of Net Revenues) for the first quarter of 1998, compared to $66.4 million (34.4% of Net Revenues) for the first quarter of 1997. Excluding the Company's VoiceNow operations, EBITDA for the Company's core domestic paging operations increased 28.1% to $93.2 million (40.4% of Net Revenues) for the first quarter of 1998, compared to $72.8 million (37.8% of Net Revenues) for the first quarter of 1997. Interest expense, net of amounts capitalized, was relatively flat for the three months ended March 31, 1998, compared to the same period of 1997. Interest expense, net of amounts capitalized, was $36.8 million for the first quarter of 1998, compared to $37.8 million for the first quarter of 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's operations and expansion into new markets and product lines have required substantial capital investment for the development and installation of wireless communications systems and for the procurement of various types and brands of pagers (the subscriber devices) and related equipment. Capital expenditures (excluding payments for licenses) were $43.2 million for the three months ended March 31, 1998, compared to $103.0 million for the same period in 1997. The Company's capital expenditures related to the buildout of the advanced two-way wireless network to be utilized as a platform for new enhanced messaging services decreased from $21.0 million for the three months ended March 31, 1997 to $9.6 million for the three months ended March 31, 1998. The Company's core domestic capital expenditures decreased from $81.1 million for the three months ended March 31, 1997 to $28.9 million for the corresponding period in 1998. The decrease in core domestic capital expenditures in 1998 was primarily due to a reduction in the Company's network-related expenditures pertaining to geographic coverage and capacity expansion. The Company has instituted programs to utilize subscriber devices more effectively and to more closely control subscriber device capital expenditures, including efficiencies established in the logistics management of the subscriber device ordering process. For the first three months of 1998, capital expenditures were funded by net cash provided by operating activities of $39.9 million. The amount of capital expenditures may fluctuate from quarter to quarter and on an annual basis due to several factors; however, the Company anticipates the total amount of capital expenditures in 1998 (including capital expenditures made in connection with the Company's expansion of its two-way advanced network and to establish the Centers of Excellence in connection with the Company's Restructuring) to be relatively consistent with the amount incurred in 1997. During April 1996, the Company concluded its participation in a Federal Communications Commission auction of specialized mobile radio (SMR) frequency licenses, and ultimately acquired rights to two to four blocks of two-way spectrum in markets across the United States for a purchase price of $45.6 million. The Company is in the process of purchasing exclusive rights to certain of these SMR frequencies from incumbent operators. The total cost of the investment will be approximately $235 million (including the $45.6 million auction purchase price), of which $109 million, $93 million, and $4 million, respectively, was paid in 1996, 1997, and the first quarter of 1998. The Company intends to utilize its narrowband personal communications services (PCS) and SMR frequencies for additional capacity as needed for its existing operations, such as digital and alphanumeric services, and to build an advanced two-way network over which it can deploy new enhanced messaging services and customized wireless information. The Company expended $47 million in 1996 and $104 million in 1997 to construct the advanced two-way network. The Company expects to spend an additional $75 million to $100 million in total in 1998 and 1999 (including approximately $10 million incurred in the first three months of 1998) to achieve nationwide coverage with its advanced two-way network. Additional capital expenditures for the advanced two-way network will be determined based on the market introduction and success of new products. 11 12 Under the Credit Agreement, the Company is able to borrow, provided it meets certain financial covenants, the lesser of $1.0 billion or an amount based upon a calculation which is reduced by total outstanding domestic indebtedness for borrowed monies (as defined) and outstanding letters of credit. The amount of total indebtedness allowed is equal to 6.5 times last quarter's annualized domestic EBITDA. As of March 31, 1998, the Company had $535.0 million of borrowings outstanding under the Credit Agreement and, under the terms of the Credit Agreement, an additional $465.0 million was available for borrowings as of that date. Such amount may fluctuate from quarter to quarter during 1998 based on the domestic EBITDA for the respective quarter of 1998. As of April 30, 1998, the Company had $552.0 million of borrowings outstanding under its Credit Agreement. Maximum borrowings which may be outstanding under the Credit Agreement are permanently reduced beginning on June 30, 2001 and the Credit Agreement expires on December 31, 2004. The two credit agreements of the Company's Canadian subsidiaries provide for total borrowings of approximately $75 million. As of March 31, 1998, approximately $42 million of borrowings were outstanding under the credit facilities. Additional borrowings are available under these facilities, provided such borrowings are either collateralized or certain financial covenants are met. Maximum borrowings which may be outstanding under the credit facilities begin reducing on March 31, 2001, and both credit agreements expire on December 31, 2004. Free cash flow, defined as EBITDA after capital expenditures (excluding the costs of acquiring SMR frequency licenses) and debt service, for the Company's core domestic operations was $47.5 million for the three months ended March 31, 1998. Free cash flow is not a measure defined in generally accepted accounting principles and should not be considered in isolation or as a substitute for a measure of performance in accordance with generally accepted accounting principles. The deficiency in free cash flow for the Company's core domestic operations for the three months ended March 31, 1997 was $33.6 million. Free cash flow for the Company's consolidated operations was $11.7 million for the three months ended March 31, 1998, compared to a deficiency of $75.5 million for the same period in 1997. The improvements in free cash flow in 1998 were primarily the result of a decrease in capital expenditures and an increase in EBITDA in the Company's core domestic paging operations, as previously noted. The costs of acquiring SMR frequency licenses totaled $4.0 million and $47.2 million, respectively, for the three months ended March 31, 1998 and 1997. The amount of capital expenditures and SMR frequency purchases may fluctuate from quarter to quarter and on an annual basis due to several factors. RESTRUCTURING On February 8, 1998 the Company's Board of Directors approved the Restructuring. As part of the Restructuring, the Company is reorganizing its operations to expand its sales organization, eliminate local and redundant administrative operations, and consolidate certain key support functions. The Company expects to eliminate approximately 1,600 positions, net of positions added, through the consolidation of redundant administrative operations and key support functions today located in offices throughout the country into the Centers of Excellence. The Company will also expand its sales organization. The Company expects to realize annual recurring performance improvements and cost savings of $45 million to $55 million when the Restructuring is completed in mid 1999. Additionally, the Company presently estimates that the Restructuring will result in sales productivity increases that, together with associated price increases, will total approximately $75 million in incremental annual revenues upon its completion. As a result of the Restructuring, the Company recorded a charge of $74.0 million during the quarter ended March 31, 1998 as discussed in Note 3 to the Consolidated Financial Statements. 12 13 VOICENOW The Company is in the process of reviewing its strategy for marketing its VoiceNow service, which was introduced in Dallas/Fort Worth, Atlanta, and Sacramento during 1997. The VoiceNow service has not met the Company's original expectations in those markets. The Company introduced the VoiceNow service in the Chicago market under a revised strategy in the second quarter of 1998. The Company believes that, based on the foreseeable growth in its existing services and the potential for future services, substantially all of the spectrum and advanced two-way network constructed for its VoiceNow service can be utilized for non-VoiceNow services, including existing services and new advanced information offerings and messaging services. Included in inventories, property and equipment, and other non-current assets at March 31, 1998, is approximately $30 million of assets which are directly attributable to the Company's VoiceNow service and thus cannot be utilized for other wireless communications services. While the Company currently believes such assets are recoverable, the ultimate recoverability of such assets is dependent upon the economic viability of the VoiceNow service. The Company will reassess the recoverability of the assets directly attributable to the VoiceNow service following the introduction of the VoiceNow service in the Chicago market in the second quarter of 1998. YEAR 2000 The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (Year 2000) approaches. The Year 2000 problem is pervasive and complex and virtually every computer operation in the country will be affected in some way by the rollover of the two-digit year value to 00. The Company has identified the status of all computer applications and systems with reference to Year 2000 compliance. Most applications are already compliant, and those that are not have been earmarked for retirement, replacement, or modification to ensure uninterrupted service to the Company's subscribers. In addition, a task force of Company personnel is working closely with Motorola Inc., Glenayre Technologies Inc., and certain other vendors that currently supply the Company with subscriber devices, wireless messaging terminals, and network facilities to ensure that all of their products and services are Year 2000 compliant as well. The Company is committed to having its systems Year 2000 compliant well in advance of January 1, 2000, and is utilizing both internal and external resources to identify, correct or reprogram, and test its systems. At the present time, the expense associated with the Year 2000 compliance program has not been fully assessed. It is anticipated that all reprogramming efforts will be completed in sufficient time to allow for proper testing of the systems. To date, confirmations have been received from the Company's primary processing vendors that plans are being developed to address processing of transactions in the Year 2000. The Company believes its planning efforts are adequate to address the Year 2000 compliance. However, the Company's business, financial position, or results of operations could be materially adversely affected by the failure of its computer systems and applications, or those operated by other parties, to properly operate or manage dates beyond 1999. RECENT ACCOUNTING PRONOUNCEMENT In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). The Company will initially adopt SFAS 131 in its 1998 annual financial statements. SFAS 131 supersedes Statement of Financial Accounting Standards No. 14, "Financial Reporting for Segments of a Business Enterprise," and requires that a public company report annual and interim financial and descriptive information about its reportable operating segments pursuant to criteria that differ from current accounting practice. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Because this statement addresses how supplemental financial information is disclosed in annual and interim reports, the adoption of SFAS 131 will have no impact on the Company's financial statements, but may require the disclosure of segment information. 13 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is involved in various lawsuits arising in the normal course of business. In management's opinion, the ultimate outcome of these lawsuits will not have a material adverse effect on the Company's business or consolidated financial statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The exhibits listed on the accompanying index to exhibits are filed as part of this quarterly report. (b) Reports on Form 8-K. On January 8, 1998, the Company filed a Current Report on Form 8-K relating to the retirement of George M. Perrin from the Company's Board of Directors, effective January 31, 1998. On February 13, 1998, the Company filed a Current Report on Form 8-K relating to the announcement of the Restructuring. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PAGING NETWORK, INC. Date: May 8, 1998 By: /s/ John P. Frazee, Jr. ---------------------------------------------- John P. Frazee, Jr. Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) Date: May 8, 1998 By: /s/ Mark A. Knickrehm ---------------------------------------------- Mark A. Knickrehm Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 15 16 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------ 4.1 Articles Sixth, Seventh, Eighth, Twelfth, and Thirteenth of the Restated Certificate of Incorporation of the Registrant, as amended (1) 4.2 Articles II, III, and VII and Section I of Article VIII of the Registrant's By-laws, as amended (1) 4.3 Form of Indenture (2) 4.4 Article V, Sections I, VI, and VII of the Registrant's By-Laws, as amended (4) 10.1 1982 Incentive Stock Option Plan, as amended and restated (1) 10.2 Form of Stock Option Agreement executed by recipients of options granted under the 1982 Incentive Stock Option Plan (1) 10.3 Form of Management Agreement executed by recipients of options granted under the 1982 Incentive Stock Option Plan (1) 10.4 Form of Vesting Agreement executed by recipients of options granted under the 1982 Incentive Stock Option Plan (1) 10.5 1991 Stock Option Plan (1) 10.6 Form of Stock Option Agreement executed by recipients of options granted under the 1991 Stock Option Plan (1) 10.7 Form of Indemnification Agreement executed by recipients of options granted under the 1991 Stock Option Plan (1) 10.8 Form of First Amendment to Vesting Agreement executed by recipients of options granted under the 1982 Incentive Stock Option Plan (1) 10.9 Form of First Amendment to Management Agreement executed by recipients of options granted under the 1982 Incentive Stock Option Plan (1) 10.10 1992 Stock Option Plan for Directors (3) 10.11 Amended and Restated Credit Agreement dated as of May 2, 1995 among the Registrant, NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc., The First National Bank of Boston, and certain other lenders (4) 10.12 Amendment No. 1 dated as of December 12, 1995 to the Amended and Restated Credit Agreement dated as of May 2, 1995 among the Registrant, NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc., The First National Bank of Boston, and certain other lenders (5)
17
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------ 10.13 Second Amended and Restated Credit Agreement dated as of June 5, 1996, among the Registrant, NationsBank of Texas, N.A., Toronto Dominion (Texas), Inc., The First National Bank of Boston, Chase Securities Inc., and certain other lenders (6) 10.14 Loan Agreement dated as of June 5, 1996 among Paging Network of Canada Inc., The Toronto-Dominion Bank, and such other financial institutions as become banks (6) 10.15 Loan Agreement dated as of June 5, 1996 among Madison Telecommunications Holdings, Inc., The Toronto-Dominion Bank, and such other financial institutions as become banks (6) 10.16 1991 Stock Option Plan, as amended and approved by shareowners on May 22, 1997 (7) 10.17 1992 Stock Option Plan for Directors, as amended and restated and approved by shareowners on May 22, 1997 (7) 10.18 1997 Restricted Stock Plan and approved by shareowners on May 22, 1997 (7) 10.19 Employment Agreement dated as of August 4, 1997 among the Registrant and John P. Frazee, Jr. (8) 10.20 1992 Stock Option Plan for Directors, as amended and restated on December 10, 1997 (9) 10.21 First Amendment dated April 18, 1997 to the Loan Agreement dated as of June 5, 1996 among Paging Network of Canada Inc., The Toronto-Dominion Bank, and such other financial institutions as become banks (9) 10.22 First Amendment dated April 18, 1997 to the Loan Agreement dated as of June 5, 1996 among Madison Telecommunications Holdings, Inc., The Toronto-Dominion Bank, and such other financial institutions as become banks (9) 10.23 1992 Director Compensation Plan, as amended and restated on April 22, 1998 (10) 12 Ratio of Earnings to Fixed Charges for the three months ended March 31, 1998 and 1997 (10) 27 Financial Data Schedule (10)
----------------------------------------------------------------- (1) Previously filed as an exhibit to Registration Statement No. 33-42253 on Form S-1 and incorporated herein by reference. (2) Previously filed as an exhibit to Registration Statement No. 33-46803 on Form S-1 and incorporated herein by reference. (3) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (4) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995. 18 (5) Previously filed as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (6) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996. (7) Previously filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. (8) Previously filed as an exhibit to the Registrants' Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997. (9) Previously filed as an exhibit to the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (10) Filed herewith. EX-10.23 2 AMENDED & RESTATED 1992 DIRECTOR COMPENSATION PLAN 1 EXHIBIT 10.23 PAGING NETWORK, INC. 1992 DIRECTOR COMPENSATION PLAN (AS AMENDED AND RESTATED APRIL 22, 1998) 1. PURPOSE. The purpose of this Plan is to advance the interests of PAGING NETWORK INC. (the "Company") by providing an opportunity for non-employee directors of the Company to purchase Common Stock of the Company through the exercise of options granted under the Plan and, on an elective basis, to (i) receive grants of options on shares or shares in lieu of directors fees, and (ii) defer receipt of director fees until a date, and in a manner, determined by each director. 2. EFFECTIVE DATE. This 1992 Stock Option Plan for Directors (the "Plan") became effective on May 21, 1992 (the "Effective Date"), the date it was adopted by the Board of Directors of the Company (the "Board") and approved by the stockholders of the Company. The Plan was amended and restated by the Board on January 9, 1997, subject to stockholder approval, which was given on May 22, 1997, and was further amended by the Board on December 10, 1997 and April 22, 1998. 3. STOCK SUBJECT TO THE PLAN. Awards of Common Stock and options to purchase shares of the $.01 par value common stock of the Company ("Common Stock") may be granted under the Plan. At no time shall the number of shares of Common Stock then outstanding which are attributable to the grant of shares under the Plan or the exercise of options granted under the Plan plus the number of shares then issuable upon exercise of outstanding options granted under the Plan exceed 750,000 shares, subject, however, to the adjustment provisions of Paragraph 9 of the Plan. Any shares subject to an option which for any reason expires or is terminated unexercised as to such shares may again be the subject of an option under the Plan. The shares delivered under the Plan may, in whole or in part, be either authorized but unissued shares or issued shares reacquired by the Company. 4. OPTIONS. (a) Nonelective Grants. (i) Initial Election. On the day of a person's initial election as a director, each eligible director who is not an employee of the Company shall receive an option to purchase 45,000 shares of Common Stock. (ii) Subsequent Grants. On the day immediately following the date on which an eligible director's most recently granted option under this Plan (other than as an Elective Grant, defined in subsection (b) below) has become exercisable in full, such director shall receive a further option to purchase 45,000 shares of Common Stock. 2 (b) Elective Grants. (i) Grant & Conditions Thereto. Subject to the following qualifications, any eligible director shall receive a grant under the Plan of either (x) that whole number of shares of Common Stock having a fair market value equal to or most nearly approaching the amount of the director's annual retainer and meeting fees, as the case may be, as and when otherwise payable in cash or (y) an option, granted on the second Monday of January beginning in January, 1997, to purchase that whole number of shares of Common Stock resulting in an option having a value, determined under the method and assumptions for valuing options most recently employed for purposes of the Company's annual proxy statement to stockholders, equal to or most nearly approaching the amount of the director's annual retainer fee for the year and the meetings fees payable to the director assuming his attendance at each of the Board meetings, and meetings of committees of the Board of which he is a member, for the coming year. Grants of shares or options pursuant to this Section 4(b) are here referred to as "Elective Grants." (ii) Election Procedures. To receive an Elective Grant with respect to any calendar year's retainer and meetings fees, a director must elect in writing to receive shares or options in lieu of the Company's payment in cash of the directors' annual retainer and meeting fees for such year. Any such election shall be made by written notice to the Company to forego any cash payment of the retainer and meeting fees taken into consideration in determining the number of shares subject to such Grant, such notice to be given prior to the beginning of that calendar year (or on or prior to May 22, 1997, in the case of Elective Grants to otherwise be made in respect of 1997). Such election shall not affect his or her right to cash compensation in accordance with the Company's director compensation policies as in effect from time to time for any number of Board or committee meetings attended in a calendar year in excess of the number taken into account in determining the number of shares subject to an Elective Grant in option form made to the director in January of that year. Such election shall specify whether the director wishes to receive an Elective Grant of shares, or of options, as provided above. Combinations of shares and options for the same calendar year are not permitted. Each such election shall be irrevocable as to a calendar year once that year begins, except that in the event the stockholders should fail to approve this amended and restated Plan, all such elections shall be immediately revoked and the director promptly paid in cash any fees theretofore withheld pursuant to such election. Any such election may be of continuing effect, i.e., to carry over from year to year, until revoked as to a year or years subsequent to the year in which revoked. (c) Effect of Lack of Shares. In the event that on any date on which shares or options are to be granted hereunder, there is not a sufficient number of shares available to implement fully the grants then to be made, then each such director entitled to a grant at such time shall receive a pro rata portion of the grant contemplated 2 3 by the preceding provisions. In addition, if the grants which are to be made but cannot be fully implemented are Elective Grants, then the director's agreement to forego fees shall be deemed automatically revoked to the same extent. 5. ADMINISTRATION. The Plan shall be administered by the Stock Option/Compensation Committee of the Board (the "Committee"). The members of the Committee shall be elected by the Board, which shall have the discretion to remove any member of the Committee for any reason. Subject to the provisions of the Plan, the Committee shall have full power to construe and interpret the Plan and to establish, amend and rescind rules and regulations for its administration. Any decisions made with respect thereto shall be final and binding on the Company, any director receiving grants hereunder and all other persons. 6. DURATION OF THE PLAN. This Plan shall terminate on January 20, 2002 unless terminated earlier pursuant to Paragraph 10, and no options or shares may be granted thereafter; 7. ELIGIBILITY. Any person who is a director of the Company and who is not an employee of the Company and who has not been an employee of the Company during the 24 months preceding the date of grant is eligible to have an option granted to him or her and to elect to receive Elective Grants. 8. TERMS AND CONDITIONS OF OPTIONS. Options granted under the Plan shall be evidenced by stock option agreements in such form and containing such terms and conditions as the Committee shall determine; provided, however, that such agreements shall evidence among their terms and conditions the following: (a) Price. The purchase price per share of Common Stock payable upon the exercise of each option granted hereunder shall be 100% of the fair market value of the stock on the day the option is granted or, in the event there is no fair market value available on the day the option is granted, on the date next following the day the option is granted for which a fair market value is available. (b) Number of Shares. Each option agreement shall specify the number of shares to which it pertains. (c) Exercise of Options. In general, each option grant shall be exercisable for the full amount or for any part thereof and at such intervals or in such installments as the Committee may determine at the time it grants such option; provided, however, that no option shall be exercisable with respect to any shares later than ten years after the date of the grant of such option. However, Elective Grants of options shall become exercisable as to one-twelfth, two-twelfths, and so on, of the number of shares covered by each such Grant (or the nearest lower number of whole shares, if less) on the last day of the first through twelfth calendar months to end subsequent to the date such Grant was made (including the January in which such grant was made). Notwithstanding the foregoing, no option grant pursuant to this amended and restated Plan, Elective Grant 3 4 or otherwise, may be exercised until the shareholders of the Company shall have approved this amended and restated Plan. (d) Notice of Exercise and Payment. An option shall be exercisable only by delivery of a written notice to the Company's Treasurer or any other officer of the Company designated by the Committee to accept such notices on its behalf, specifying the number of shares for which it is exercised. If shares to be purchased are not at that time effectively registered under the Securities Act of 1933, as amended, the optionee shall include with such notice a letter, in form and substance satisfactory to the Company, confirming that the shares are being purchased for the optionee's own account for investment and not with a view to distribution and acknowledging the consequences for resale of absence of registration. Payment shall be made in full at the time the option is exercised. Payment shall be made by (i) check, (ii) if permitted by the Committee and stated in the option agreement, by delivery and assignment to the Company of shares of Common Stock having a value equal to the option price, (iii) if permitted by the Committee, by delivery of a written notice stating that a market sell order has been placed with a broker with respect to shares of Common Stock issuable upon exercise of the option and that the broker has been directed to pay a sufficient portion of the net proceeds of the sale to the Company in satisfaction of the aggregate exercise price of the option or the portion thereof so exercised, or (iv) by a combination of (i) and (ii). The value of the Common Stock for such purpose shall be its fair market value as of the date the option is exercised, as determined in accordance with procedures to be established by the Committee. (e) Withholding Taxes; Delivery of Shares. The Company's obligation to deliver shares of Common Stock under the Plan or upon exercise of an option, in whole or in part, shall be subject to the optionee's satisfaction of all applicable federal, state and local tax withholding obligations. (f) Non-Transferability. No option shall be transferable by the optionee otherwise than by will or the laws of descent and distribution, and each option shall be exercisable during the optionee's lifetime only by the optionee (or the optionee's guardian or legal representative). (g) Termination of Options. Each option agreement shall contain provisions for the termination of the options granted thereunder if the optionee ceases for any reason to be a director of the Company no more favorable to the optionee than the following: (i) if the optionee ceases to be a director of the Company for any reason other than disability or death, he may at any time within a period of three months after he ceased to be a director exercise each of his options to the extent that the option was exercisable by him on the date on which he ceased to be a director; 4 5 (ii) if the optionee ceases to be a director of the Company because of disability within the meaning of Section 22(e)(3) of the Code, he may at any time within a period of one year after such termination exercise his option to the extent that the option was exercisable by him on the date he ceased to be a director; and (iii) if the optionee dies at a time when he might have exercised the option, then his estate, personal representative or beneficiary to whom it has been transferred pursuant to Paragraph 8(f) hereof may, at any time within a period of one year after the optionee's death, or the termination of the option pursuant to this Plan, whichever is earlier, exercise it to the extent the optionee might have exercised it at the time of his death. (h) Rights as Stockholder. An optionee shall have no rights as a stockholder with respect to any shares covered by his option until the date the option has been exercised and the full purchase price for such shares has been received by the Company. 9. STOCK DIVIDENDS; STOCK SPLITS; STOCK COMBINATIONS; RECAPITALIZATIONS. Appropriate adjustment shall be made in the maximum number of shares of Common Stock subject to the Plan and in the number, kind, and option price of shares covered by outstanding options granted hereunder to give effect to any stock dividends, stock splits, stock combinations, recapitalizations and other similar changes in the capital structure of the Company after the effective date of the Plan. 10. MERGER; SALE OF ASSETS; DISSOLUTION. Notwithstanding anything to the contrary contained in this Plan, in the event of a "Change of Control," as defined herein, every option outstanding hereunder will become immediately exercisable in full. In the event of a change in the Common Stock resulting from a merger or similar reorganization, the number and kind of shares which thereafter may be optioned and sold under the Plan and the number and kind of shares then subject to options granted hereunder and the price per share thereof will be appropriately adjusted, in such manner as the Committee may deem equitable, to prevent substantial dilution or enlargement of the rights available or granted hereunder. A "Change of Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (a) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of PageNet representing 25% or more of the combined voting power of PageNet's then outstanding securities (not including in such securities beneficially owned by such Person any securities acquired directly from PageNet), other than any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (c) below; or 5 6 (b) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who on the date hereof constitute the Board, and any new director whose appointment or election by the Board or nomination for election by PageNet's shareowners was approved or recommended by at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended (other than a new director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of PageNet); or (c) there is consummated a merger or consolidation of PageNet or any direct or indirect subsidiary of PageNet with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of PageNet outstanding immediately prior to such merger or consolidation continuing to represent, in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of PageNet, at least 65% of the combined voting power of the securities of PageNet or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation (either by remaining outstanding or by being converted into voting securities of the surviving entity or parent thereof), or (ii) a merger or consolidation effected to implement a recapitalization of PageNet, or similar transaction, in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of PageNet representing 25% or more of the combined voting power of PageNet's then outstanding securities (not including in the securities Beneficially Owned by such Person any securities acquired directly from PageNet); or (d) the shareowners of PageNet approve a plan of complete liquidation or dissolution of PageNet or there is consummated an agreement for the sale or disposition by PageNet of all or substantially all of PageNet's assets, other than a sale or disposition by PageNet of all or substantially all of the PageNet's assets to an entity, at least 65% of the combined voting power of the outstanding securities of which are owned by shareowners of PageNet in substantially the same proportions as their ownership of PageNet immediately prior to such sale. Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the Common Stock of PageNet immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of PageNet immediately following such transaction or series of transactions. For purposes of this Section 10, (a) "Person" shall mean any person or entity other than (1) any employee plan established by PageNet, (2) PageNet or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (3) an underwriter temporarily holding securities pursuant to an offering of such securities, or (4) a corporation owned, directly or indirectly, by shareowners of PageNet in 6 7 substantially the same proportions as their ownership of PageNet and (b) "Beneficial Owner" shall have the meaning set forth in Rule 12d-3 under the Exchange Act. 11. TERMINATION OR AMENDMENT OF PLAN. (a) The Board may at any time terminate the Plan, or make such changes in or additions to the Plan as it deems advisable without further action on the part of the stockholders of the Company, provided: (i) that no such termination or amendment shall adversely affect or impair any then outstanding option or any shares at the time subject to options without the consent of the optionee holding such option; (ii) no amendment shall adversely affect any director's or beneficiary's rights to any director compensation deferred under this Plan, without his consent, with respect to amounts credited prior to such amendment; and (iii) that any such amendment which requires stockholder approval in order to comply with applicable provisions of the Code, rules promulgated pursuant to Section 16 of the Securities Exchange Act of 1934, applicable state law, or NASD or exchange listing requirements shall be subject to approval by the stockholders of the Company within one year from the effective date of such amendment and shall be null and void if such approval is not obtained. (b) Upon termination of the Plan, the remaining balance of the directors' Deferred Compensation Accounts (as defined in Section 13 below) shall be paid to the directors (or to their respective beneficiaries, as the case may be), in lump sums as soon as practicable but no more than thirty (30) days following the termination of the Plan. 12. DEFERRED ELECTIONS. Upon a director's election to the Board (or on or prior to May 22, 1998, in the case of Deferral Elections to be made in respect of 1998), and on or prior to the first day of each fiscal year of the Company thereafter until a director ceases to be a director of the Company, each director shall execute and file an annual election document (the "Deferral Election") with the Treasurer of the Company, specifying whether or not such director's annual retainer and meeting compensation for the year for which the election is to be effective is to be deferred and if so, the investment option to which the deferral shall be credited and the form, method and timing of distribution of the deferrals. The Deferral Election shall control the distribution of all amounts deferred pursuant to the Deferral Election and shall be irrevocable as to such amounts. A Deferral Election must be made for each year a director remains a director of the Company. Directors electing to defer annual retainer and meeting compensation for any year may not make an election under Section 4(b) of the Plan for such year, and any prior election made under Section 4(b) shall have no effect on such deferred amounts. If a director fails to execute and file a Deferral Election for any year, the director's annual retainer and meeting compensation for that year would be paid to him as earned, without deferral, pursuant to his election under Section 4(b) of the Plan. 7 8 (a) Deferrals shall be no less than one hundred percent (100%) of all compensation payable to a director in the year he elects to defer. In addition, each director shall elect in his Deferral Election the percent of the deferral that shall be credited among the deferral options (the "Deferred Options") described below: (i) credits ("Investment Fund Credits") equivalent to amounts invested in such investment fund that is selected by the Committee for this purpose, or in any other or additional fund or funds as the Committee shall determine (each an "Investment Fund," and together the "Investment Funds"); and (ii) share units ("Share Units"), a unit equivalent to a share of Common Stock of the Company (the "Common Stock"). Directors may elect to transfer their deferred compensation from one Deferral Option to a different Deferral Option, including transferring Investment Fund Credits from one Investment Fund to a different Investment Fund; provided, however, that in no event may any such election become effective sooner than six (6) months following the effective date of any prior transfer election. A transfer election pursuant to this Subsection 12(a) shall be made in the form of a document prescribed by the Committee to be executed by the director and filed with the Treasurer of the Company. Notwithstanding the foregoing, the Committee may, from time to time, discontinue any of the Investment Funds described in clause (i) above. In such event, each director shall execute an election in the form of a document prescribed by the Committee and filed with the Treasurer of the Company, to transfer the amounts deferred in the discontinued Investment Fund to such other Deferral Options as the Committee shall make available at such time. In the event that the director shall fail to timely elect a new Deferral Option, such amounts shall be transferred to a Deferral Option that the Committee deems appropriate. (b) Directors shall elect on the Deferral Election the form, method and timing of distribution of amounts deferred hereunder. Distributions under this Section 12 shall begin as soon as practicable following the date specified in each director's Deferral Election, but may not begin earlier than thirty (30) days after the date on which a director ceases to be a director for any reason; provided, however, that in no event may distribution commence later than thirty (30) days after the date on which a director attains age seventy (70). Such payment shall be made, pursuant to the director's election in the Deferral Election, (i) in the form of a lump-sum payment or (ii) in substantially equal annual installments over a period not to exceed fifteen (15) years. If a director elects installment payments, the unpaid balance thereof shall continue to accrue interest, earnings and dividend equivalents, computed in accordance with the provisions of Section 13 below, and shall be prorated and paid over the installment period. Notwithstanding the foregoing, in the event a director ceases to be a director of the Company for any reason other than retirement or his death, the total amount credited to his Deferred Compensation Account as of such 8 9 date shall be payable to the director in a lump sum as soon as practicable following such date. A director may change his prior distribution election at any time, and from time to time; provided, however, that any such distribution election shall not become effective until the first (1st) anniversary of the date such distribution election is made; and provided, further, that no distribution election with respect to the distribution of amounts attributable to any deferral will be effective if the director is, or is scheduled to be, receiving distributions with respect to such deferral within one (1) year following the date such subsequent distribution election is made. In the event an election does not become effective, the prior valid election of such director shall govern the form, method and timing of distribution. A director shall elect on the Deferral Election, with respect to Share Units, to receive amounts so credited in cash, in shares of Common Stock, or in any combination thereof. The amount to be paid in cash with respect to distributions of Share Units shall be equal to the product of (a) the number of Share Units in respect of which payment is to be made, and (b) the price of a share of Common Stock on The Nasdaq Stock Market during such period immediately preceding the date of distribution, as the Company shall determine. (c) If a director fails to make a valid timely election with respect to method of payment, the director shall receive the total amount credited to his Deferred Compensation Account in ten (10) substantially equal annual installments. If a director fails to make a valid timely election with respect to timing of payment, distribution shall commence thirty (30) days after the date on which the director attains age seventy (70). If a director fails to make a valid timely election with respect to whether payment shall be in cash or in shares of the Common Stock, those amounts credited as Share Units shall be distributed in shares of Common Stock, and all other amounts credited shall be distributed in cash. (d) In the event a director dies prior to the distribution of any or all of such director's Deferred Compensation Account, all amounts credited to such account shall be paid to the beneficiary designated in writing at any time or from time to time by the director with the approval of the Company or, failing such a designation, to the spouse, children (per stirpes), parents or estate (in that order) of the director (all such entities being herein included within the term "beneficiary"). Such distribution shall be made in the form and at such time as was applicable to the director; provided, however, that the director's beneficiary may elect to receive the balance of the director's Deferred Compensation Account in an immediate lump-sum distribution, and in the form of cash or in shares of Common Stock, or in a combination thereof. 9 10 13. DEFERRED ELECTION CREDITS. During such period as amounts are standing to the credit of a director hereunder, with respect to each such director, the Company shall credit to a book reserve account (the "Deferred Compensation Account") established for this purpose the amount deferred by such director under Section 12 above. (a) Amounts credited to a director's Deferred Compensation Account with respect to each Investment Fund shall be credited with interest and earnings (including gains and losses) equivalent to the amounts that would have accrued during such period had the amount so credited been actually invested in such Investment Fund. Interest and earnings on such amounts shall be computed from the date such deferrals are credited to the Deferred Compensation Account through the date of distribution to a director or his designated beneficiary, in accordance with Subsection 12(d) above. (b) If amounts are deferred as Share Units, then the number of such Share Units shall be determined on the basis of the price of the Common Stock on The Nasdaq Stock Market during such period immediately preceding and/or immediately following the date the Share Units are credited, as the Company shall determine. (c) As of each payment date for dividends, if any, on Common Stock with respect to which Share Units are standing to the credit of a director until the director's entire Deferred Compensation Account has been distributed, such Deferred Compensation Account shall be credited with dividend equivalents equal to the sum of all cash dividends, if any, that such director would have received on such date, had the director been the owner of a number of shares of Common Stock equal to the number of Share Units in the director's Deferred Compensation Account on the record date for such dividend. The amount so credited shall be converted into additional Share Units with the number of Share Units being determined on the basis of the price of Common Stock on The Nasdaq Stock Market during such period immediately preceding and/or immediately following the payment date for the dividend, as the Company shall determine. 14. DEFERRED ELECTION -- MISCELLANEOUS. (a) Title to, and beneficial ownership of, any assets, whether in cash or otherwise, that the Company may designate to pay the deferred compensation hereunder shall at all times prior to payment remain an asset of the Company, and neither a director nor his designated beneficiary shall have any property interest whatsoever in any specific assets of the Company. (b) If the director so requests and if the director provides satisfactory evidence of financial hardship, the Company may, in its sole and absolute discretion, permit a distribution of all or a portion of the director's Deferred Compensation Account prior to the date on which payments would have commenced under Section 12 hereof. 10 11 (c) If the Company shall be adjudicated or determined to be insolvent by a court of competent jurisdiction, either in bankruptcy or otherwise, the amount credited to each director's Deferred Compensation Account on the date of such proceeding shall constitute a debt of the Company to each such director in any such proceeding. (d) Except as otherwise required by applicable law, no rights under the Plan as to deferred compensation, contingent or otherwise, shall be assignable or subject to any encumbrance, pledge or charge of any nature, except that, under such rules and regulation as the Company may establish, a director may designate a beneficiary to receive, in the event of death, any amount that would otherwise have been payable to such director or that may become payable on account of, or following, his death except that, if any amount shall become payable to the executor or administrator of such director's estate, then such executor or administrator may transfer the right to the payment of any such amount to the person, persons or entity (including a trust) entitled thereto under the will of such director or, in case of intestacy, under the laws relating to intestacy. Directors shall not have any interest in any funds or specific assets of the Company, except as expressly provided herein. (e) Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind or fiduciary relationship between the Company and a director, his designated beneficiary, or any other person. To the extent that any person acquires a right to receive payments from the Company under this Plan, such rights shall be no greater than the right of any unsecured general creditor of the Company. 15. INTERPRETATION. The Company intends that transactions under this Plan will be exempt under amended Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934, as amended, unless otherwise determined by the Company. 11 EX-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 PAGING NETWORK, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------- 1998 1997 -------- -------- Earnings: Net loss ................................... $(92,372) $(37,314) Fixed charges, less capitalized interest ... 43,302 43,460 -------- -------- Earnings ................................ $(49,070) $ 6,146 ======== ======== Fixed charges: Interest expense, including interest capitalized ........................... $ 40,245 $ 38,355 Amortization of deferred financing costs ... 1,112 2,471 Interest portion of rental expense ......... 6,524 5,634 -------- -------- Fixed charges ........................... $ 47,881 $ 46,460 ======== ======== Ratio of earnings to fixed charges ......... $ -- $ -- ======== ======== Deficiency of earnings available to cover fixed charges .......................... $(96,951) $(40,314) ======== ========
EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 5,374 0 69,917 7,969 26,055 109,717 1,292,147 (441,994) 1,534,416 159,604 1,781,431 0 0 1,033 (426,408) 1,534,416 4,786 255,750 21,103 291,252 35,767 4,724 36,778 (92,372) 0 (92,372) 0 0 0 (92,372) (0.90) (0.90)
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