<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998
Commission File No. 0-17316
SKYTEL COMMUNICATIONS, INC.
---------------------------
(Exact name of Registrant as specified in its charter)
Delaware 64-0518209
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 South Lamar Street, Mtel Centre, Jackson, Mississippi 39201
------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(601) 944-1300
--------------
(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.
59,940,663 shares of Common Stock,
par value $.01 per share, as of
October 30, 1998
<PAGE>
SKYTEL COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1998 and December 31,
1997.
Consolidated Statements of Operations - Nine Months Ended September
30, 1998 and 1997, and Three Months Ended September 30, 1998 and 1997.
Consolidated Statements of Cash Flows -- Nine Months Ended September
30, 1998 and 1997, and Three Months Ended September 30, 1998 and 1997.
Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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2
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SKYTEL COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 9,848,878 $ 19,812,116
Accounts receivable, net of allowances for losses 58,092,839 53,790,128
Assets held for sale 2,050,233 2,173,375
Other current assets 5,893,118 3,179,697
---------------- ----------------
TOTAL CURRENT ASSETS 75,885,068 78,955,316
---------------- ----------------
MESSAGING NETWORKS
Property and equipment, net 263,654,520 281,243,829
Certificates of authority and license cost, net 143,742,899 150,102,050
Network construction and development costs, net 23,504,191 84,406,804
---------------- ----------------
TOTAL MESSAGING NETWORKS 430,901,610 515,752,683
---------------- ----------------
GOODWILL, net 103,089,913 106,164,387
INVESTMENT IN UNCONSOLIDATED INTERNATIONAL VENTURES 16,617,199 16,786,882
OTHER ASSETS 17,270,769 24,085,628
---------------- ----------------
$ 643,764,559 $ 741,744,896
================ ================
LIABILITIES AND STOCKHOLDERS' INVESTMENT:
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,021,433 $ 1,021,526
Accounts payable and accrued liabilities 107,570,006 90,090,298
Notes payable 20,000,000 22,000,000
---------------- ----------------
TOTAL CURRENT LIABILITIES 128,591,439 113,111,824
---------------- ----------------
LONG-TERM LIABILITIES 0 7,187,943
LONG-TERM DEBT, net of current liabilities 369,709,534 398,231,558
MINORITY INTEREST 22,965,895 26,879,386
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT
Preferred Stock, par value $.01 per share; 25,000,000 shares
authorized; 3,750,000 shares of $2.25 Cumulative Convertible
Exchangeable Preferred Stock outstanding in 1998 and 1997;
7.5% Cumulative Convertible Accruing PIK Preferred Stock,
shares outstanding: none in 1998 and 52,500 in 1997 37,500 38,025
Common Stock, par value $.01 per share;
100,000,000 shares authorized; shares issued:
59,848,563 in 1998 and 55,032,602 in 1997 598,486 550,326
Additional paid-in-capital 636,872,768 619,464,704
Accumulated deficit (509,559,640) (418,711,968)
Cumulative translation adjustment (5,451,423) (5,006,902)
---------------- ----------------
TOTAL STOCKHOLDERS' INVESTMENT 122,497,691 196,334,185
---------------- ----------------
$ 643,764,559 $ 741,744,896
================ ================
</TABLE>
See notes to consolidated financial statements.
3
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SKYTEL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 380,278,069 $ 294,766,190 $132,643,336 $ 105,236,446
Expenses:
Operating 106,374,499 91,663,383 36,198,221 31,051,703
Selling, general and administrative 188,314,944 167,996,402 63,527,499 59,844,787
Depreciation and amortization 66,191,500 64,247,948 22,386,627 22,434,766
-------------- ------------- ------------- -------------
360,880,943 323,907,733 122,112,347 113,331,256
-------------- ------------- ------------- -------------
Operating income (loss) 19,397,126 (29,141,543) 10,530,989 (8,094,810)
Interest income 887,962 3,190,814 314,068 781,804
Interest expense (42,322,644) (41,628,675) (16,484,568) (13,268,811)
Gain (loss) on sale of assets (226,856) 6,843,521 435,262 (993,964)
Other income (expense) (1,208,957) (1,804,308) 1,318,277 417,082
-------------- ------------- ------------- -------------
Income (loss) before income taxes
and equity income (losses) (23,473,369) (62,540,191) (3,885,972) (21,158,699)
Provision for income taxes 3,006,235 3,621,755 984,027 1,202,886
Equity in income (losses) of investments 2,162,457 (593,469) 165,332 184,388
-------------- ------------- ------------- -------------
Net income (loss) before cumulative effect
of a change in accounting principle ( 24,317,147) ( 66,755,415) ( 4,704,667) ( 22,177,197)
Cumulative effect of a change in accounting
principle (58,128,849) 0 0 0
-------------- ------------- ------------- -------------
Net income (loss) ( 82,445,996) ( 66,755,415) ( 4,704,667) ( 22,177,197)
Preferred dividend requirement 8,401,731 9,845,666 2,109,375 3,303,736
-------------- ------------- ------------- -------------
Net income (loss) available to common
stockholders ($90,847,727) ($76,601,081) ($6,814,042) ($25,480,933)
============== ============= ============= =============
Net income (loss) per common share:
Basic ( 1.59) ( 1.41) ( 0.11) ( 0.47)
============== ============= ============= =============
Diluted ( 1.59) ( 1.41) ( 0.11) ( 0.47)
============== ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
4
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SKYTEL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
1998 1997 1998 1997
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($82,445,996) ($66,755,415) ($4,704,667) ($22,177,197)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 66,191,500 64,247,948 22,386,627 22,434,766
Provision for losses on accounts receivable and
paging inventory 14,463,587 17,231,001 5,015,157 6,105,343
Amortization of debt issuance costs 1,896,347 1,818,747 632,116 626,429
Write-off of start-up costs (Note 9) 58,128,849 0 0 0
Capitalized interest charge 3,566,429 0 3,566,429 0
Foreign currency transaction (gain) loss 125,003 (396,244) 49,026 (211,004)
(Gain) loss on sale of assets 226,856 (6,843,521) (435,262) 993,964
Minority interest income (loss) (1,534,082) 2,151,788 (1,230,443) (191,634)
Equity in (income) losses from investments (2,162,457) 593,469 (165,332) (184,388)
Change in assets and liabilities:
(Increase) decrease in accounts receivable (10,867,483) 3,934,381 (9,607,680) (4,135,565)
Decrease in assets held for sale 21,690 3,152,801 0 2,846,728
(Increase) decrease in other current assets (2,713,421) 8,834,273 123,336 (6,376,711)
Increase (decrease) in accounts payable and
accrued liabilities 15,453,205 18,907,571 9,521,325 22,925,472
-------------- -------------- ------------- --------------
Net Cash Provided By Operating Activities 60,350,281 46,876,799 25,150,632 22,656,203
-------------- -------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets 2,220,329 36,104,852 1,654,923 2,551,225
Capital expenditures, net (47,155,773) (61,259,957) (19,844,233) (20,184,969)
Increase in investment in unconsolidated
International ventures (522,174) (3,108,795) 0 (2,092,575)
Acquisition of Argentinean paging company 0 (16,000,000) 0 0
(Increase) decrease in other assets 1,800,189 (5,155,148) (171,727) (6,965,767)
-------------- -------------- ------------- --------------
Net Cash Used In Investing Activities (43,657,429) (49,419,048) (18,361,037) (26,692,086)
-------------- -------------- ------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (28,522,119) (5,829,656) (18,503,823) (314,851)
Payment of dividends on preferred stock (6,328,125) (6,328,125) (2,109,375) (2,109,375)
Sale of stock and exercise of options 8,194,154 1,320,250 1,677,374 853,467
-------------- -------------- ------------- --------------
Net Cash Provided By (Used In) Financing Activities (26,656,090) (10,837,531) (18,935,824) (1,570,759)
-------------- -------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents (9,963,238) (13,379,780) (12,146,229) (5,606,642)
Cash and cash equivalents-beginning of period 19,812,116 25,744,724 21,995,107 17,971,586
-------------- -------------- ------------- --------------
Cash and cash equivalents-end of period $ 9,848,878 $ 12,364,944 $ 9,848,878 $ 12,364,944
============== ============== ============= ==============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SKYTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
SkyTel Communications, Inc., formerly Mobile Telecommunication
Technologies Corp., ("SkyTel" or the "Company") is a leading provider of
nationwide messaging services in the United States. SkyTel's principal
operations include one-way messaging services in the United States, advanced
messaging services on the narrowband personal communication services ("PCS")
network (the "Advanced Messaging Network") in the United States and
international one-way messaging operations. The Company's wholly-owned
subsidiary, SkyTel Corp., operates a one-way nationwide messaging system whereby
subscribers can be reached in thousands of towns and cities in the United States
by means of two dedicated 931 MHz frequencies licensed by the Federal
Communications Commission ("FCC"), a ground-based transmitter system, leased
satellite facilities and proprietary network software.
In September 1995, the Company launched commercial operation of the
Advanced Messaging Network, a nationwide network that utilizes spectrum
allocated by the FCC for narrowband PCS. This network enables subscribers to
send and receive messages without the need to know the location of the sender or
receiver at the time of transmission, and utilizes a proprietary system
architecture designed and developed by SkyTel. The Company's 100%-owned
subsidiary, Destineer Corp., holds the FCC license utilized by this network.
SkyTel, through its subsidiaries and joint ventures, operates one-way
wireless messaging systems in various countries outside the United States,
primarily in Latin America. In addition, SkyTel provides its subscribers with
access to an international messaging network that utilizes
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SkyTel's proprietary technology and interconnects the systems operated by its
international subsidiaries and joint ventures with systems in the United States,
Canada, Singapore and other countries.
For the third quarter of 1998, one-way messaging operations reported
revenues of $85.6 million, operating income of $21.7 million and net income of
$20.1 million. Advanced messaging operations reported revenues of $39.1 million,
an operating loss of $7.2 million and a net loss of $20.8 million for the third
quarter of 1998. SkyTel's international operations reported revenues of $7.4
million, an operating loss of $2.6 million and a net loss of $3.2 million for
the quarter ended September 30, 1998. For purposes of reporting operating income
(loss) for the Company's business segments, certain indirect operating and
selling, general and administrative expenses are allocated among the business
segments based on various financial and operational factors which reflect usage
of services.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SkyTel and
its majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
The Company's consolidated financial statements for the three and nine
month periods ending September 30, 1998 and 1997 have not been audited by
independent public accountants. However, in the opinion of management, these
financial statements include all adjustments necessary for a fair presentation.
The results for these periods are not necessarily indicative of the results for
the year ending December 31, 1998.
7
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3. EARNINGS (LOSS) PER SHARE
Net loss per share for the three and nine month periods ending September
30, 1998 and 1997 is calculated by dividing the net loss (after deducting
preferred stock dividends) by the weighted average number of shares of common
stock outstanding during the period, with no effect given to common stock
equivalents because such effect would be antidilutive. The weighted average
number of shares of common stock outstanding in the third quarter of 1998 and
the first nine months of 1998 was 59,733,920 and 57,255,384 respectively. The
weighted average number of shares of common stock outstanding in the third
quarter of 1997 and the first nine months of 1997 was 54,618,857 and 54,513,455,
respectively. Basic and diluted per share amounts were the same for each of the
periods presented.
4. COMPREHENSIVE INCOME (LOSS)
In January 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes
standards for reporting comprehensive income and its components. Comprehensive
income is defined as all changes in the equity of a business enterprise from
transactions and other events and circumstances, except those resulting from
investments by owners and distributions to owners. The Company reported a
comprehensive loss, which included the consolidated net loss and foreign
currency translation gains and losses, of $5.0 million and $23.5 million for the
quarters ended September 30, 1998 and 1997, respectively, and $29.8 million and
$70.1 million for the first nine months of 1998 and 1997, respectively.
8
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5. INTEREST RATE SWAP AGREEMENTS
In April 1998, the Company entered into certain interest rate swap
agreements with respect to the $265 million outstanding principal amount of its
13.5% Senior Notes due 2002 (the "Senior Notes"). These agreements involve the
exchange of interest obligations on fixed and floating interest rate debt
without the exchange of the underlying principal amounts. The agreements have
varying maturities but in no instance exceed the maturity date of the Senior
Notes. The interest rate swap agreements establish an effective interest rate of
10.75% on the Senior Notes through December 15, 2000. During the period from
December 15, 2000 to December 15, 2002, the Company will be required to make
payments to the swap counterparty in an amount equal to 12.07% multiplied by the
principal amount of the Senior Notes plus a redemption premium of 6.75%. During
this period, the Company will receive an amount equal to the 3-month London
Interbank Offered Rate ("LIBOR") plus 1% (currently 6.22%) multiplied by the
principal amount of the Senior Notes plus a redemption premium of 6.75%. The
Company is continuing to record an amount equal to 13.5% of the principal amount
of the Senior Notes as interest expense in its consolidated statements of
operations.
6. PIK PREFERRED STOCK CONVERSION
In May 1998, the Company made an offer to the holders of its 7.5%
Cumulative Convertible Accruing Pay-In-Kind Preferred Stock (the "PIK Preferred
Stock") in order to encourage the voluntary conversion of the PIK Preferred
Stock into Common Stock of the Company. The Company agreed to reduce the
conversion price of the PIK Preferred Stock by 0.81% for any holder
9
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who converted shares of PIK Preferred Stock into Common Stock of the Company on
or before May 15, 1998. The holders of the PIK Preferred Stock converted all the
outstanding shares of PIK Preferred Stock, together with all shares of PIK
Preferred Stock accrued as dividends as of the date of conversion, into an
aggregate of 3.4 million shares of Common Stock of the Company. As a result of
the conversion, the Company will no longer be required to accrue approximately
$4.5 million of annual stock dividends on the PIK Preferred Stock. Although
dividends on the PIK Preferred Stock were not treated as an expense on the
Company's consolidated statements of operations and, therefore, did not affect
reported net income, such dividends were deducted from net income for the
purpose of determining net income (loss) per common share.
7. STOCKHOLDER LITIGATION
On February 20, 1997, certain litigation was filed in the United States
District Court for the District of Columbia against the Company, its wholly-
owned subsidiary SkyTel Corp., and seven current and former officers and
directors. The complaint alleged certain violations of the Securities Exchange
Act of 1934, as amended, during the period January 19, 1995 through February 22,
1996. The plaintiffs sought unspecified damages and to have the case certified
as a class action. In December 1997, the United States District Court for the
District of Columbia granted a motion dismissing SkyTel Corp. as a defendant in
the litigation, and in January 1998 transferred the case to the United States
District Court for the Southern District of Mississippi. On May 4, 1998, the
Company entered into an agreement in principle to settle this litigation without
any admission of liability on the part of the Company or any of the individual
defendants. Under the terms of the agreement in principle, SkyTel agreed to make
a cash payment of approximately $1.9 million into a settlement fund. In
addition, SkyTel's directors' and officers' liability insurer separately agreed
to
10
<PAGE>
make a cash contribution to a settlement fund. In the second quarter of 1998,
the Company recorded a charge to other expenses in its consolidated statements
of operations in the amount of $2.8 million related to the costs of this
litigation and the proposed settlement. On August 1, 1998, the plaintiffs, the
Company and the individual defendants executed a stipulation of settlement, and
the settlement received final approval from the United States District Court for
the Southern District of Mississippi on November 6, 1998.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid by SkyTel was $25.1 million and $30.2 million during the
nine months ended September 30, 1998 and 1997, respectively, and was $2.8
million and $3.4 million during the three months ended September 30, 1998 and
1997, respectively. No federal income taxes were paid during these periods.
9. STATEMENT OF POSITION 98-5
In April 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position 98-5 ("SOP"), "Reporting on the Costs of Start-Up
Activities." The SOP, which is effective for fiscal years beginning after
December 15, 1998, requires all companies to expense, on or before March 31,
1999, all start-up costs previously capitalized, and thereafter to expense all
costs of start-up activities as incurred. Early adoption of the SOP was
encouraged by the AcSEC. Prior to the issuance of the SOP, all companies had the
option of capitalizing or expensing costs associated with start-up activities in
accordance with generally accepted accounting principles. The SOP broadly
defines start-up activities as one-time activities related to the opening of a
new facility, the introduction of a new product or service, the commencement of
business in a new
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territory, the establishment of business with a new class of customer, the
initiation of a new process in an existing facility or the commencement of a new
operation. The Company elected to adopt the SOP in the quarter ended September
30, 1998 and recorded a one-time, non-cash write-off of $58.1 million,
representing primarily start-up costs incurred in conjunction with the
development and construction of the Company's advanced messaging network. The
adoption of the SOP is effective as of January 1, 1998 and is recorded as a
cumulative effect of a change in accounting principle. The basic and diluted net
loss before cumulative effect of a change in accounting principle per common
share for the nine month period ended September 30, 1998 is $0.57. As a result
of the adoption of the SOP effective as of January 1, 1998, the first quarter
net loss increased by $55.6 million, or $1.01 per common share, which represents
the cumulative effect of a change in accounting principle of $58.1 million net
of a decrease in depreciation and amortization expense of $2.5 million. The
second quarter net loss decreased by $2.5 million, or $0.04 per common share, as
a result of decreased depreciation and amortization expense.
10. TRANSFER OF MTEL PUERTO RICO, INC.
On July 1, 1998, Mtel Latin America, Inc. ("Mtel Latam") transferred 100%
of the outstanding shares of its wholly-owned subsidiary, Mtel Puerto Rico, Inc.
("Mtel Puerto Rico"), to a wholly-owned subsidiary of SkyTel. As a result of
this transaction, SkyTel's ownership interest in Mtel Latam was reduced from 80%
to 76%, and the ownership interest in Mtel Latam held by Newbridge Latin
America, L.P. was increased from 20% to 24%. Effective in the third quarter of
1998, the results of operations of Mtel Puerto Rico were included in the results
of operations for the Company's domestic one-way messaging segment and were not
material to this segment. Prior to July 1, 1998, the results of operations of
Mtel Puerto Rico were included in the results of operations of the Company's
international segment. The unaudited summary of operations for Mtel Puerto Rico
for the three and nine months ended September 30, 1997 and 1998 are set forth
below:
12
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MTEL PUERTO RICO, INC.
Summary of Operations
(All amounts in thousands of dollars)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS: NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----------------------- -----------------------
<S> <C> <C> <C> <C>
Revenues $ 2,903 $ 703 $ 1,013 $ 384
Expenses:
Operating 1,433 538 435 266
Selling, general and administrative 3,035 2,191 904 1,011
Depreciation and amortization 363 327 113 123
------- ------- -------- -------
4,831 3,056 1,452 1,400
Operating income (loss) (1,928) (2,353) (439) (1,016)
Interest income (expense) 39 100 3 (14)
------- ------- -------- -------
Income (loss) before taxes (1,889) (2,253) (436) (1,030)
Provision for taxes - - - -
------- ------- -------- -------
Net income (loss) before cumulative effect
of a change in accounting principle (1,889) (2,253) (436) (1,030)
Cumulative effect of a change in accounting
principle (391) - - -
------- ------- -------- -------
Net income (loss) $(2,280) $(2,253) $ (436) $(1,030)
======= ======= ======== =======
</TABLE>
13
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the consolidated financial condition
and results of operations of SkyTel for the three and nine month periods ended
September 30, 1998 and 1997 and certain factors that will affect SkyTel's
financial condition.
On July 1, 1998, Mtel Latin America, Inc. ("Mtel Latam") transferred 100% of
the outstanding shares of its wholly-owned subsidiary, Mtel Puerto Rico, Inc.
("Mtel Puerto Rico"), to a wholly-owned subsidiary of SkyTel. As a result of
this transaction, SkyTel's ownership interest in Mtel Latam was reduced from 80%
to 76%, and the ownership interest in Mtel Latam held by Newbridge Latin
America, L.P. was increased from 20% to 24%. Effective in the third quarter of
1998, the results of operations of Mtel Puerto Rico were included in the results
of operations for the Company's domestic one-were messaging segment and were not
material to this segment. Prior to July 1, 1998, the results of operations of
Mtel Puerto Rico were included in the results of operations of the Company's
international segment. See Note 10 of Notes to Consolidated Financial
Statements.
Certain statements set forth in this Management's Discussions and
Analysis of Financial Condition and Results of Operations which are not
historical facts including, without limitation, statements regarding revenues,
expenses,income and loss, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995 and 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 results to differ materially are competitive pressures, the performance
of the Company's distribution channels, and the timely availability and market
acceptance of new products and value-added services. This Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be
14
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read in conjunction with the Company's Consolidated Financial Statements and the
notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
REVENUES
Revenues on a consolidated basis increased 29% in the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1997 and
increased 26% in the third quarter of 1998 as compared to the third quarter of
1997. This increase was primarily due to a 461% increase in revenues from
advanced messaging services in the first nine months of 1998 as compared to the
same period in 1997 and a 294% increase in advanced messaging revenues in the
third quarter of 1998 as compared to the third quarter of 1997 resulting, in
large part, from sales of SkyWord(R) Plus units, an advanced text messaging
service with guaranteed delivery which was introduced by the Company in April
1997. Revenues from one-way messaging operations in the United States increased
approximately 3% in the first nine months of 1998 as compared to the first nine
months of 1997 but were flat in the third quarter of 1998 as compared to the
third quarter of 1997.
As of September 30, 1998, the Company had 987,100 one-way messaging units
in service in the United States which included approximately 38,000 prepaid
paging units, as compared to 938,300 one-way messaging units in service as of
September 30, 1997. SkyTel also had 358,500 advanced messaging units in service
as of September 30, 1998, an increase of 259% over the 100,000 advanced
messaging units in service as of September 30, 1997 and an increase of 21% over
the number of advanced messaging units in service as of September 30,
1998. Approximately 15% of net unit
15
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additions placed in service on the Advanced Messaging Network in the third
quarter of 1998 represented conversions of units from one-way to advanced
messaging services, as compared to approximately 17% of net unit additions on
the Advanced Messaging Network in the second quarter of 1998.
Average revenue per domestic unit in service was $32.91 in the third
quarter of 1998 as compared to $31.76 in the third quarter of 1997 and $32.61 in
the second quarter of 1998. Average revenue per one-way unit in service was
$30.53 in the third quarter of 1998 as compared to $30.71 in the third quarter
of 1997 and $30.18 in the second quarter of 1998. Average revenue per advanced
messaging unit was $39.80 in the third quarter of 1998 as compared to $44.96 in
the third quarter of 1997 and $41.28 in the second quarter of 1998. The decline
in average revenue per advanced messaging unit in the third quarter of 1998 was
primarily attributable to the implementation of usage related billing
arrangements for certain major customers which were introduced during the
quarter. The Company cannot predict future trends in average revenue per unit
since this will continue to be impacted by customer usage patterns, usage
related billing arrangements and the Company's strategy to encourage customer
owned units which will result in the elimination of rental revenues.
16
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The Company intends to continue to emphasize the distribution of its
family of advanced messaging services, including SkyWord(R) Plus, two-way
interactive messaging and fixed location services. The Company also intends to
continue to feature its one-way services through the promotion of products and
services which more efficiently utilize the capacity of the FLEX(R) enabled one-
way messaging network, such as the Beepwear(TM) pager watch and prepaid paging
services, and the establishment of distribution channels which can effectively
market these products and services. The ability of the Company to continue to
achieve improved operating results will be dependent on the performance of its
direct and reseller distribution channels, the success of new distribution
channels and the timely availability and market acceptance of new products and
value-added services which the Company has introduced in 1998 on the Advanced
Messaging Network. In addition, the Company cannot predict the extent to which
future operating results will be impacted by the introduction of services
competitive with those available on the Advanced Messaging Network.
During the first nine months of 1998, one-way messaging operations
provided approximately 68% of SkyTel's revenues as compared to 85% in the first
nine months of 1997. Advanced messaging operations provided approximately 25%
of consolidated revenues during the first nine months of 1998 as compared to 6%
in the first nine months of 1997. Other SkyTel operations provided less than 1%
of revenues in the first nine months of 1998 as compared to 2% in the first nine
months of 1997.
For the third quarter of 1998, SkyTel's consolidated revenues include
revenues recorded by the Company's international operations in Argentina,
Colombia, Costa Rica, Uruguay and Venezuela. Revenues recorded by the Company's
consolidated international operations provided approximately 6% of SkyTel's
consolidated revenues in the first nine months of 1998 as compared to 7% of
17
<PAGE>
consolidated revenues during the same period of 1997. The Company continues to
experience competition in Latin America from cellular telephone and other
telecommunication services, and plans to introduce new product offerings in
certain countries in an effort to accelerate development of the messaging market
in Latin America. The Company cannot predict the extent to which such
competitive services will affect the future operating results of the Company's
Latin American operations or the extent to which any new product offerings
introduced by the Company will be successful. See "Liquidity and Captial
Resources - International."
EXPENSES
Expenses include operating, selling, general and administrative, and
depreciation and amortization.
Operating expenses primarily consist of salaries, telephone costs and
transmitter and receiver site rentals associated with the Company's one-way and
advanced messaging operations in the United States and one-way international
messaging operations, as well as expenses associated with the maintenance of the
Company's operating equipment and facilities. These expenses on a consolidated
basis increased 16% in the first nine months of 1998 as compared to the first
nine months of 1997 and increased 17% in the third quarter of 1998 as compared
to the third quarter of 1997. This increase primarily reflects increased
telephone and system costs associated with the increasing one-way and advanced
messaging subscriber base in the United States, monthly rental expenses incurred
in connection with operating lease agreements entered into with Motorola Inc. in
the third and fourth quarters of 1997 pursuant to which the Company leased a
total of 50,000 SkyWord(R) Plus units valued at approximately $9.3 million,
increased transmitter and receiver site rentals resulting from the continued
expansion of coverage of the Company's Advanced Messaging Network in the United
States
18
<PAGE>
and increased messaging unit refurbishment costs. As a percentage of
consolidated revenues, operating expenses decreased to 28% in the first nine
months of 1998 as compared to 31% in the first nine months of 1997 and decreased
to 27% in the third quarter of 1998 compared to 30% in the third quarter of
1997. SkyTel expects to continue to incur increased operating expenses during
the remainder of 1998 and in future periods, primarily as a result of the
continued projected increase in the number of units in service on its one-way
and advanced messaging networks in the United States and the continued expansion
of coverage of the Advanced Messaging Network.
Operating expenses related to the one-way messaging system in the United
States were flat in the first nine months of 1998 as compared to the first nine
months of 1997. As a percentage of revenues, operating expenses related to the
one-way messaging system were 22% in the first nine months of 1998 and 1997, and
21% in the third quarter of 1998 and 1997. Operating expenses related to
advanced messaging operations in the United States increased 56% in the first
nine months of 1998 as compared to the first nine months of 1997 and increased
55% in the third quarter of 1998 as compared to the third quarter of 1997, but
decreased as a percentage of revenues to 45% in the first nine months of 1998 as
compared to 162% in the first nine months of 1997 and decreased to 41% in the
third quarter of 1998 as compared to 104% in the third quarter of 1997.
Operating expenses of the Company's international subsidiaries increased 1% in
the first nine months of 1998 as compared to the first nine months of 1997 and
decreased 21% in the third quarter of 1998 as compared to the third quarter of
1997. Operating expenses for the Company's international subsidiaries also
decreased as a percentage of revenues to 29% in the first nine months of 1998 as
compared to 32% in the first nine months of 1997 and decreased to 27% in the
third quarter of 1998 as compared to 30% in the third quarter of 1997.
19
<PAGE>
Selling, general and administrative expenses include marketing and
advertising costs, personnel costs associated with the direct sales and
marketing staff, costs associated with customer support operations and corporate
overhead costs, primarily salaries and administrative expenses. On a
consolidated basis, these expenses increased 12% in the first nine months of
1998 as compared to the first nine months of 1997 and increased 6% in the third
quarter of 1998 as compared to the third quarter of 1997. This increase
primarily reflects increased selling expenses related to the expansion of the
Company's direct sales force, advertising and marketing expenses incurred in
connection with the promotion of products and services on the Advanced Messaging
Network, increased device maintenance costs for advanced messaging devices, and
general and administrative expenses related to the expansion of the Company's
customer support operations, such as billing services and customer messaging. As
a percentage of consolidated revenues, selling, general and administrative
expenses decreased to 50% in the first nine months of 1998 as compared to 57% in
the first nine months of 1997 and decreased to 48% in the third quarter of 1998
as compared to 57% in the third quarter of 1997. Selling, general and
administrative expenses on a consolidated basis are expected to increase during
the remainder of 1998 and in future periods as a result of the Company's plans
to continue to expand its direct sales force in the United States and to incur
additional marketing expenses in connection with the promotion of products and
services on the Advanced Messaging Network.
Selling, general and administrative expenses related to the one-way
messaging system in the United States increased 3% in the first nine months of
1998 as compared to the first nine months of 1997 and increased 1% in the third
quarter of 1998 as compared to the third quarter of 1997. As a percentage of
revenues, selling, general and administrative expenses were 39% in both the
first nine months of 1998 and the first nine months of 1997, and were 40% in the
third quarter of 1998 and the third quarter of 1997. Selling, general and
administrative expenses related to advanced messaging
20
<PAGE>
operations in the United States increased 46% in the first nine months of 1998
as compared to the first nine months of 1997 and increased 46% in the third
quarter of 1998 as compared to the third quarter of 1997, but decreased as a
percentage of revenues to 60% in the first nine months of 1998 as compared to
233% in the first nine months of 1997 and decreased to 53% in the third quarter
of 1998 as compared to 144% in the third quarter of 1997. Selling, general and
administrative expenses of the Company's international subsidiaries remained
flat in the first nine months of 1998 as compared to the first nine months of
1997 and decreased 31% in the third quarter of 1998 as compared to the third
quarter of 1997, but decreased as a percentage of revenues to 98% in the first
nine months of 1998 as compared to 111% in the first nine months of 1997 and
decreased to 85% in the third quarter of 1998 as compared to 107% in the third
quarter of 1997.
Depreciation and amortization increased 3% in the first nine months of
1998 as compared to the first nine months of 1997 and remained flat in the third
quarter of 1998 as compared to the third quarter of 1997. In the third quarter
of 1998, the Company adopted the SOP which resulted in a one time, non-cash
write-off of $58.1 million of capitalized start-up costs relating primarily to
the development and construction of the Advanced Messaging Network. As a result
of the adoption of the SOP, the Company will no longer record depreciation and
amortization expense related to such start-up costs. In addition, depreciation
and amortization expense during the nine month period ended September 30, 1998
has been reduced by approximately $7.5 million as a result of the adoption of
the SOP.
OPERATING INCOME (LOSS)
SkyTel reported consolidated operating income of approximately $19.4
million for the first nine months of 1998 as compared to a consolidated
operating loss of approximately $29.1 million
21
<PAGE>
for the first nine months of 1997, and consolidated operating income of $10.5
million for the third quarter of 1998 as compared to a consolidated operating
loss of $8.1 million for the third quarter of 1997. For the three-month period
ended September 30, 1998, one-way messaging operations recorded operating income
of $21.7 million, which was offset by an operating loss of $7.2 million from
advanced messaging operations and an operating loss of $2.6 million from
international operations.
The Company expects to continue to report operating income on a
consolidated basis in the fourth quarter of 1998 and future periods as a result
of its one-way messaging business in the United States and declining operating
losses from advanced messaging operations. However, future levels of operating
income will be dependent on the performance of the Company's direct and reseller
distribution channels, the success of new distribution channels and the timely
availability and market acceptance of new products and value-added services on
its Advanced Messaging Network. In addition, the Company cannot predict the
extent to which future operating results will be impacted by the introduction of
services competitive with those available on the Advanced Messaging Network.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense increased 2% in the first nine months of 1998 as
compared to the first nine months of 1997 and increased 24% in the third quarter
of 1998 as compared to the third quarter of 1997. The increase in interest
expense in the third quarter of 1998 reflects a non-cash charge of approximately
$3.6 million which represents previously capitalized interest attributable to
the development of the Advanced Messaging Network. This amount was not material
to prior periods.
See Note 5 of Notes to Consolidated Financial Statements regarding the
completion of a series of interest rate swaps in April 1998 with respect to the
Company's Senior Notes. The interest
22
<PAGE>
rate swaps do not impact the amount of interest expense recorded by the Company
for financial reporting purposes with respect to the Senior Notes.
Interest income totaled $0.9 million in the first nine months of 1998 as
compared to $3.2 million in the first nine months of 1997 and totaled $0.3
million in the third quarter of 1998 as compared to $0.8 million in the third
quarter of 1997. Interest income in the second quarter and first half of 1997
included interest accrued on securities restricted for debt service related to
the Company's Senior Notes, the final balance of which was used to pay the
interest payment on the Senior Notes due on December 15, 1997.
PROVISION FOR INCOME TAXES
SkyTel recorded a provision for state and local income taxes of $3.0
million and $3.6 million in the first nine months of 1998 and 1997,
respectively, and $1.0 million and $1.2 million in the third quarter of 1998 and
1997, respectively. The Company reported net losses for federal income tax
purposes during the three and nine month periods ended September 30, 1998 and
1997 and, accordingly, no provision for federal income taxes has been made for
such periods.
PREFERRED STOCK DIVIDENDS
The Company accrued and paid dividends of approximately $2.1 million in
each of the quarters ended September 30, 1998 and 1997 on the Company's $2.25
Cumulative Convertible Exchangeable Preferred Stock (the "$2.25 Preferred
Stock"). As a result of the conversion of all of the outstanding shares of PIK
Preferred Stock into Common Stock in May 1998, no amounts were accrued for
dividends on the PIK Preferred Stock in the third quarter of 1998, as compared
to $1.2 million of accrued dividends in the third quarter of 1997. See Note 6 of
Notes to Consolidated Financial Statements for information relating to the
conversion of the PIK Preferred Stock.
23
<PAGE>
Although dividends on the $2.25 Preferred Stock and the PIK Preferred Stock were
not treated as an expense on the Company's consolidated statements of operations
and, therefore, did not affect reported net income, such dividends were deducted
from net income for the purpose of determining net income (loss) per common
share.
NET INCOME (LOSS)
SkyTel recorded a consolidated net loss of approximately $82.4 million in
the nine month period ended September 30, 1998 which, combined with the effect
of preferred stock dividends, resulted in a consolidated net loss per common
share of $1.59 for such period. The consolidated net loss reported for 1998
includes a one time, non-cash write-off of $58.1 million resulting from the
adoption of the SOP and a non-cash charge of $3.6 million of previously
capitalized interest. See Note 9 of Notes to Consolidated Financial Statements.
This compares to a consolidated net loss of approximately $66.8 million, or
$1.41 per common share, in the first nine months of 1997. The consolidated net
loss in the first nine months of 1997 was offset by a gain of approximately $7.4
million from the sale of the Company's 19% equity interest in a joint venture
that conducts paging operations in Brazil. The Company recorded a consolidated
net loss of $4.7 million, or $0.11 per common share, in the third quarter of
1998 as compared to a consolidated net loss of $22.2 million, or $0.47 per
common share, in the third quarter of 1997. For the third quarter of 1998, the
Company's one-way messaging operations recorded net income of $20.1 million,
which was offset by a net loss of $20.8 million from advanced messaging
operations and a net loss of $3.2 million from international
24
<PAGE>
operations. The Company expects to generate net income on a consolidated basis
(before preferred stock dividends) in the fourth quarter of 1998, although the
Company expects to incur a net loss on a consolidated basis for the year ended
December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
DOMESTIC
The Company invested a total of $11.1 million in the first nine months of
1998, including $5.6 million in the third quarter of 1998, to fund the expansion
of its one-way messaging system and the procurement of messaging units to
support its one-way messaging subscriber base. In addition, in the first nine
months of 1998, the Company incurred capital expenditures of $27.5 million,
including $10.5 million in the third quarter of 1998, for advanced messaging
units and infrastructure equipment related to the continued expansion of the
Advanced Messaging Network. Capital expenditures in the third quarter of 1998
were funded with cash generated from one-way messaging operations and cash on-
hand at the beginning of the quarter.
During the third quarter of 1998, the Company repaid $18.5 million of
indebtedness outstanding under its bank credit facility, and had a balance of
$97.5 million of borrowings outstanding as of September 30, 1998. Letters of
credit in the amount of $5.2 million had been issued under the credit facility
as of September 30, 1998, and the credit available under the facility has been
reduced by a corresponding amount. As of September 30, 1998, the Company had
borrowing availability under the bank credit facility of approximately $97.3
million. The Company may be required to incur additional borrowings under the
bank credit facility during the remainder of 1998 and in 1999 to fund capital
expenditures and working capital requirements, including the payment of interest
on the Senior Notes, to the extent that cash flows from operations do not
satisfy these requirements.
25
<PAGE>
In April 1998, the Company entered into certain interest rate swap
agreements with respect to the $265 million outstanding principal amount of the
Senior Notes. These agreements involve the exchange of interest obligations on
fixed and floating interest rate debt without the exchange of the underlying
principal amounts. The agreements have varying maturities but in no instance
exceed the maturity date of the Senior Notes. The interest rate swap agreements
establish an effective interest rate of 10.75% on the Senior Notes through
December 15, 2000. During the period from December 15, 2000 to December 15,
2002, the Company will be required to make payments to the swap counterparty in
an amount equal to 12.07% multiplied by the principal amount of the Senior Notes
plus a redemption premium of 6.75%. During this period, the Company will receive
an amount equal to the 3-month London Interbank Offered Rate ("LIBOR") plus 1%
(currently 6.22%) multiplied by the principal amount of the Senior Notes plus a
redemption premium of 6.75%. The Company is continuing to record an amount equal
to 13.5% of the principal amount of Senior Notes as interest expense in its
consolidated statements of operations.
INTERNATIONAL
During the first nine months of 1998, Mtel Latam required approximately
$2.5 million to fund capital expenditures and working capital requirements of
its subsidiaries and joint ventures in Latin America. On December 31, 1997, Mtel
Latam established a $20.0 million line of credit (the "Latam Line of Credit") to
fund capital expenditures and working capital requirements (other than
acquisitions). Borrowings under the Latam Line of Credit are evidenced by a
demand note and mature on December 31, 1998 or earlier at the discretion of the
issuing banks. As of September 30, 1998, Mtel
26
<PAGE>
Latam had borrowings of $20.0 million outstanding under the Latam Line of
Credit. Mtel Latam is currently in discussions with its banks regarding an
extension of the December 31, 1998 maturity date of the Latam Line of Credit. If
the maturity date is not extended, Mtel Latam will be required to seek other
sources of funds to repay the Latam Line of Credit. There can be no assurance
that Mtel Latam will be able to secure additional financing on terms acceptable
to Mtel Latam. In addition, Mtel Latam will be required to engage in additional
debt or equity financings in order to fund projected capital expenditures and
working capital requirements in 1999. If Mtel Latam is unable to secure such
additional financing, Mtel Latam will be required to reduce its funding to
certain countries which could adversely affect Mtel Latam's results of
operations and prospects in Latin America.
YEAR 2000 READINESS
The Year 2000 ("Y2K") issue exists because many computer systems and
applications, including those embedded in equipment and facilities, use two-
digit rather than four-digit date fields to designate an applicable year. As a
result, the systems and applications may not properly recognize the Year 2000,
or certain dates prior or subsequent thereto, or process data which includes a
reference to the Year 2000, potentially causing data miscalculations or
inaccuracies or operational malfunctions or failures.
Since late 1997, the Company has been developing a company-wide plan to
identify, evaluate and address Y2K issues. The Company's Y2K project includes an
analysis of network systems and applications and supporting infrastructure for
the provision of one-way and advanced messaging services, business and financial
computer systems and applications, and internal computing systems of both its
domestic and Latin American operations. In addition, the project includes a
review of the Y2K compliance efforts of the Company's vendors, resellers and
other third parties
27
<PAGE>
who have material relationships with the Company and its subsidiaries
(collectively, "External Parties"). The Company is in the process of compiling
an inventory and assessing its network, business and information systems to
determine the extent to which such systems may be impacted by the Year 2000, and
is developing a comprehensive plan to address all aspects of the Y2K problem
which are identified. The Company has retained an independent consulting firm to
assist the Company in this phase of the Y2K project and expects this phase to be
completed on or about December 31, 1998.
Following completion of the inventory and assessment phase of the
Company's Y2K project, the Company will proceed with its efforts to remediate,
test and confirm the Y2K compliance of its network, business and information
systems. The pace of these efforts will vary, although remediation and testing
of certain mission-critical aspects of the Company's network and business
systems have already begun. The Company has retained a software engineering
consulting firm to assist the Company in its remediation efforts with respect to
its internal business systems. The Company expects to complete its Y2K
remediation and testing efforts for all network, business and information
systems by mid-1999.
The Company is also in the process of identifying and prioritizing its
External Parties for purposes of assessing their Y2K efforts, although detailed
evaluations of certain mission-critical External Parties have been initiated.
The Company intends to complete the identification and prioritization of
External Parties on or before December 31, 1998 and intends to communicate and,
to the extent appropriate, participate in testing procedures with such External
Parties in order to assess their Y2K readiness prior to mid-1999.
28
<PAGE>
The Company also intends to continue to communicate with such External Parties
through the remainder of 1999 for purposes of additional follow-up reviews.
The Company is evaluating the potential for business disruption and
intends to develop contingency and business continuity plans applicable to Y2K-
related occurrences as part of its Y2K project. The Company anticipates that
the development of contingency and business continuity plans will be completed
by mid-1999. Contingency planning to maintain and restore service in the event
of natural disasters or technical problems has been part of the Company's
standard operating procedures, and the Company intends to leverage this
experience in the development of contingency plans to meet its Y2K challenges.
The Company has minority investments in joint ventures in certain
countries in Latin America which it does not control, and is working with the
management in these countries to address Y2K issues. The Company supplies the
network operations software to these joint ventures and has developed business
and financial operating software with a third-party vendor which is used by
certain of these joint ventures. The Company believes that its own Y2K efforts
will be invaluable in assisting these joint ventures in meeting their Y2K
challenges.
The failure by the Company or certain External Parties to correct a
material Y2K problem could result in an interruption in, or a failure of,
certain normal business activities or operations of the Company or its
subsidiaries. Such failures could materially and adversely affect the Company's
results of operations, financial condition and liquidity. Due to the general
uncertainty inherent in the Y2K problem, resulting in part from the uncertainty
of the Y2K readiness of External Parties, the Company is unable to determine at
this time whether any Y2K-related interruptions or failures will occur or the
extent to which any such interruptions or failures might have a material impact
on the Company's results of operations, financial condition or liquidity. The
Y2K project is expected to reduce the Company's level of uncertainty about the
Y2K problem and, in particular, about the Y2K compliance and readiness of
External Parties. The Company believes that, as the Y2K project described
above progresses, the possibility of significant interruptions or failures of
the Company's operations as a result of Y2K issues should be reduced .
29
<PAGE>
The Company's preliminary estimate of the total cost of its Y2K
compliance efforts, based on amounts expended or committed to date, plus
estimated amounts of remediation costs not yet fully assessed, is $5 million to
$10 million, of which approximately $1.2 million has been incurred through
September 30, 1998. The total costs of the Company's Y2K compliance efforts
cannot be predicted with any certainty at this time since the Company has not
completed an assessment of the remediation efforts that will be required
throughout the Company. Certain costs budgeted for the procurement of upgrades
or replacements of the Company's information systems has not been included in
this amount since these upgrades or replacements were being made by the Company
independent of Y2K issues. The Company expects to fund its Y2K compliance
efforts with cash flows from operations.
Certain information regarding the Company's Y2K efforts constitute
forward-looking statements under the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based upon certain assumptions, and
there can be no assurance that the Company's expectations will be achieved, that
there will not be delays or increased costs associated with the Company's Y2K
project or that the Company will be successful in remediating all Y2K problems.
Factors that could impact the Company's Y2K project include the availability of
personnel trained in specified technical areas involved in the Company's
businesses, the ability to locate and correct all
30
<PAGE>
relevant software code in its network and business systems that could be
affected by the Year 2000, and the successful remediation of Y2K issues by
External Parties.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that each
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded on the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
fair value of a derivative instrument be recognized currently in earnings unless
specific hedge accounting criteria are met. SkyTel has not yet quantified the
impact of adopting SFAS No. 133 and has not determined the timing or method of
adoption. However, the adoption of SFAS No. 133 could increase the volatility in
reported net income and other comprehensive income.
31
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On February 20, 1997, a civil complaint was filed in the United States
District Court for the District of Columbia, Kris Lindblom and Jack Fefer v.
Mobile Telecommunication Technologies Corporation, SkyTel Corporation, J. Robert
Fugate, Leonard G. Kriss, M. Bernard Puckett, Thomas G. Barksdale, Calvin C.
LaRoche, Jai Bhagat and John N. Palmer, Civil Action No. 1:97CV00337. The
complaint had two counts, one alleging violations of Section 10(b) of the
Exchange Act against all defendants, and one alleging violations of Section
20(a) of the Exchange Act against the Company and defendants Palmer and Puckett.
The plaintiffs sought unspecified damages and to certify the case as a class
action. In December 1997, the United States District Court for the District of
Columbia granted a motion dismissing SkyTel Corp. as a defendant in the
litigation, and in January 1998 transferred the case to the United States
District Court for the Southern District of Mississippi. On May 4, 1998, the
Company entered into an agreement in principle to settle this litigation without
any admission of liability on the part of the Company or any of the individual
defendants. Under the terms of the agreement in principle, the Company agreed
to make a cash payment of approximately $1.9 million into a settlement fund. In
addition, the Company's directors' and officers' liability insurer separately
agreed to make a cash contribution to a settlement fund. On August 1, 1998, the
plaintiffs, the Company and the individual defendants executed a stipulation of
settlement, and the settlement received final approval from the United States
District Court for the Southern District of Mississippi on November 6, 1998.
Subsequent to the filing of the complaint, the Company, as have other companies
involved in private securities litigation, received from the staff of the
Securities and
32
<PAGE>
Exchange Commission ("SEC") an informal inquiry letter seeking documents
pertaining to consultants and products used in the development and operation of
the Advanced Messaging Network. The Company is cooperating with the SEC staff.
Except as set forth above, the Company is not aware of any material legal
or regulatory proceedings involving the Company other than license applications
and renewals and other regulatory proceedings incident to the Company's
business.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
The Company's Bylaws provide that in order for a stockholder proposal
to be brought before an annual meeting of stockholders, a stockholder
must give written notice to Secretary of the Company not less than 80
days prior to the meeting, provided that if less than 90 days' notice
or prior public disclosure has been given of the date of the meeting,
notice of a stockholder proposal must be received within 10 days of the
notice to stockholders or public disclosure of the date of the meeting.
Proxies solicited by the Company for the 1999 Annual Meeting of
Stockholders will grant discretionary authority to vote on any
stockholder proposal if the Company has not received notice of the
proposal by such date.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
The following Exhibits are filed as part of this Quarterly Report
on Form 10-Q:
33
<PAGE>
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None
34
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
SKYTEL COMMUNICATIONS, INC.
Dated: November 16, 1998 By /s/ John T. Stupka
-----------------------------------
John T. Stupka
President and Chief Executive Officer
Dated: November 16, 1998 By /s/ Robert Kaiser
-----------------------------------
Robert Kaiser
Senior Vice President-Finance and
Chief Financial Officer
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 9,848,878
<SECURITIES> 0
<RECEIVABLES> 82,485,887
<ALLOWANCES> 24,393,048
<INVENTORY> 0
<CURRENT-ASSETS> 75,855,068
<PP&E> 457,212,421
<DEPRECIATION> 193,557,902
<TOTAL-ASSETS> 643,764,559
<CURRENT-LIABILITIES> 128,591,439
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<COMMON> 598,486
<OTHER-SE> 121,861,705
<TOTAL-LIABILITY-AND-EQUITY> 643,764,559
<SALES> 380,278,069
<TOTAL-REVENUES> 380,278,069
<CGS> 0
<TOTAL-COSTS> 360,880,943
<OTHER-EXPENSES> 1,208,957
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<INTEREST-EXPENSE> 42,322,644
<INCOME-PRETAX> (21,310,912)
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<INCOME-CONTINUING> (24,317,147)
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