<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For Quarter Ended September 30,1999
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, SkyTel 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
----- -----
SkyTel Communications, Inc. is a wholly-owned subsidiary of MCI WORLDCOM,
Inc., and there is no market for the registrant's common stock.
The registrant meets the conditions set forth in General Instructions
H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
<PAGE>
SKYTEL COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 3
1999 and December 31, 1998.
Consolidated Statements of Operations - Nine
Months Ended September 30, 1999
and 1998, and Three Months Ended September 30, 4
1999 and 1998.
Consolidated Statements of Cash Flows -- Nine
Months Ended September 30, 1999
and 1998, and Three Months Ended September 30, 5
1999 and 1998.
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition
and Results of Operations 15
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 34
Item 2. Changes in Securities 34
Item 3. Defaults upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security 34
Holders
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURE 36
---------
2
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SKYTEL COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ ------------
ASSETS:
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 10,792,406 $ 17,000,752
Accounts receivable, net of allowances for losses 59,710,293 49,553,165
Assets held for sale 2,050,233 2,050,233
Other current assets 4,074,156 5,395,254
------------- -------------
TOTAL CURRENT ASSETS 76,627,088 73,999,404
------------- -------------
MESSAGING NETWORKS
Property and equipment, net 244,137,549 260,702,952
Certificates of authority and license costs, net 141,257,753 142,741,719
Network construction and development costs, net 16,023,071 21,644,749
------------- -------------
TOTAL MESSAGING NETWORKS 401,418,373 425,089,420
------------- -------------
GOODWILL, net 99,073,835 102,089,718
INVESTMENT IN UNCONSOLIDATED INTERNATIONAL VENTURES 17,077,129 11,797,993
OTHER ASSETS 11,505,682 20,220,290
------------- -------------
$ 605,702,107 $ 633,196,825
============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT:
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,000,000 $ 1,000,900
Accounts payable and accrued liabilities 113,352,293 99,189,149
Notes payable 15,000,000 20,000,000
------------- -------------
TOTAL CURRENT LIABILITIES 129,352,293 120,190,049
------------- -------------
LONG-TERM DEBT, net of current maturities 315,919,000 364,662,400
MINORITY INTEREST 36,287,402 24,399,687
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 1999 and 1998 37,500 37,500
Common Stock, par value $.01 per share;
100,000,000 shares authorized; shares outstanding:
60,424,118 in 1999 and 60,024,227 in 1998 604,241 600,242
Additional paid-in-capital 643,734,876 638,583,669
Accumulated deficit (514,266,803) (509,859,814)
Cumulative translation adjustment (5,966,402) (5,416,908)
------------- -------------
TOTAL STOCKHOLDERS' INVESTMENT 124,143,412 123,944,689
------------- -------------
$ 605,702,107 $ 633,196,825
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
SKYTEL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $422,124,460 $ 380,278,069 $ 141,400,838 $132,643,336
------------ ------------- ------------- ------------
Expenses:
Operating 115,467,505 106,374,499 37,345,390 36,198,221
Selling, general and administrative 209,947,594 188,314,944 85,005,802 63,527,499
Depreciation and amortization 66,514,104 66,191,500 22,200,615 22,386,627
------------ ------------- ------------- ------------
391,929,203 360,880,943 144,551,807 122,112,347
------------ ------------- ------------- ------------
Operating income (loss) 30,195,257 19,397,126 (3,150,969) 10,530,989
Interest income 1,067,035 887,962 338,583 314,068
Interest expense (36,531,341) (42,322,644) (12,402,584) (16,484,568)
Gain (loss) on sale of assets 2,377,365 (226,856) (372,431) 435,262
Other income (expense) 1,574,088 (1,208,957) 805,548 1,318,277
------------ ------------- ------------- ------------
Loss before income taxes and
equity income (1,317,596) (23,473,369) (14,781,853) (3,885,972)
Provision for income taxes 479,767 3,006,235 46,057 984,027
Equity in income of investments 3,718,497 2,162,457 1,790,745 165,332
------------ ------------- ------------- ------------
Net income (loss) before cumulative effect (24,317,147) (4,704,667)
of a change in accounting principle 1,921,134 (13,037,165)
Cumulative effect of a change in accounting
principle 0 (58,128,849) 0 0
------------ ------------- ------------- ------------
Net income (loss) 1,921,134 (82,445,996) (13,037,165) (4,704,667)
Preferred dividend requirement 6,328,125 8,401,731 2,109,375 2,109,375
------------ ------------- ------------- ------------
Net loss to common stockholders ($4,406,991) ($90,847,727) ($15,146,540) ($6,814,042)
============ ============= ============ ============
Net loss per common share:
Basic ($0.07) ($1.59) ($0.25) ($0.11)
============ ============= ============ ============
Diluted ($0.07) ($1.59) ($0.25) ($0.11)
============ ============= ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
SKYTEL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,921,134 ($82,445,996) $(13,037,165) ($4,704,667)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 66,514,104 66,191,500 22,200,615 22,386,627
Provision for losses on accounts receivable and
paging inventory 16,401,307 14,463,587 5,515,662 5,015,157
Amortization of debt issuance costs 1,896,347 1,896,347 632,116 632,116
Write-off of start-up costs 0 58,128,849 0 0
Capitalized interest charge 0 3,566,429 0 3,566,429
Foreign currency transaction loss 38,199 125,003 47,351 49,026
(Gain) loss on sale of assets (2,377,365) 226,856 372,431 (435,262)
Minority interest income (1,612,286) (1,534,082) (852,899) (1,230,443)
Equity in income from investments (3,718,497) (2,162,457) (1,790,745) (165,332)
Change in assets and liabilities:
Increase in accounts receivable (17,689,566) (10,867,483) (669,390) (9,607,680)
Decrease in assets held for sale 0 21,690 0 0
(Increase) decrease in other current assets 1,778,589 (2,713,421) 6,317,292 123,336
Increase in accounts payable and
accrued liabilities 12,360,918 15,453,459 4,377,660 9,521,325
------------ ------------- ------------- ------------
Net Cash Provided By Operating Activities 75,512,884 60,350,281 23,112,928 25,150,632
------------ ------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets 3,532,249 2,220,329 499,000 1,654,923
Capital expenditures, net (49,211,897) (47,155,773) (20,912,041) (19,844,233)
(Increase) decrease in investment in unconsolidated
international ventures 672,207 (522,174) (173,142) 0
(Increase) decrease in other assets 3,203,430 1,800,189 167,320 (171,727)
------------ ------------- ------------- ------------
Net Cash Used In Investing Activities (41,804,011) (43,657,429) (20,418,863) (18,361,037)
------------ ------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (48,506,300) (28,522,119) (10,500,000) (18,503,823)
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 4,917,206 8,194,154 2,724,692 1,677,374
Sale of Mtel Latam PIK preferred stock 10,000,000 0 0 0
------------ ------------- ------------- ------------
Net Cash Used In Financing Activities (39,917,219) (26,656,090) (9,884,683) (18,935,824)
------------ ------------- ------------- ------------
Net decrease in cash and cash equivalents (6,208,346) (9,963,238) (7,190,618) (12,146,229)
Cash and cash equivalents-beginning of period 17,000,752 19,812,116 17,983,024 21,995,107
------------ ------------- ------------- ------------
Cash and cash equivalents-end of period $ 10,792,406 $ 9,848,878 $ 10,792,406 $ 9,848,878
============ ============= ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
SKYTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
SkyTel Communications, Inc. ("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 in the United States (the "Advanced Messaging Network") and
international one-way messaging operations.
On October 1, 1999, MCI WORLDCOM, Inc. ("MCI WorldCom") acquired the
Company through the merger of the Company with and into a wholly-owned
subsidiary of MCI WorldCom (the "Acquisition Subsidiary") pursuant to the
Agreement and Plan of Merger, dated as of May 28, 1999, by and among the
Company, MCI WorldCom and Acquisition Subsidiary (the "Merger"). Upon
consummation of the Merger, Acquisition Subsidiary was renamed SkyTel
Communications, Inc.
As a result of the Merger, each outstanding share of Company common stock ,
par value $.01 per share (the "Common Stock") was converted in to the right to
receive 0.2566 of a share of MCI WorldCom common stock. Holders of the Company's
$2.25 Cumulative Convertible Exchangeable Preferred Stock (the "$2.25 Preferred
Stock") received one share of MCI WorldCom Series C $2.25 Cumulative Convertible
Exchangeable Preferred Stock ("MCI WorldCom $2.25 Preferred Stock") for each
share of $2.25 Preferred Stock held. The newly issued MCI WorldCom $2.25
Preferred Stock is convertible into MCI WorldCom common stock
6
<PAGE>
on a basis that gives effect to the exchange ratio in the Merger and otherwise
has substantially the same terms as the Company's $2.25 Preferred Stock.
As a result of the Merger, all then outstanding and unexercised options and
warrants to purchase shares of Common Stock of the Company were converted into
options and warrants to purchase shares of MCI WorldCom common stock on a basis
that gives effect to the exchange ratio in the Merger and otherwise have the
same terms as the Company's then outstanding options and warrants.
The Company's Common and $2.25 Preferred Stock was delisted from the NASDAQ
Stock Market effective as of the close of business on September 30, 1999. In
addition, on October 7, 1999 the Company filed a Form 15 with the Securities and
Exchange Commission (the "SEC") which terminated the registration of the
Company's Common and $2.25 Preferred Stock under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). As a result, the Company is no longer
obligated to file reports with the SEC pursuant to the Exchange Act.
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.
SkyTel also currently operates its Advanced Messaging Network in the United
States that utilizes spectrum allocated by the FCC for narrowband PCS. The
Advanced Messaging Network is a location independent network that utilizes a
proprietary system architecture designed and developed by SkyTel. Services on
the Advanced Messaging Network currently include advanced text messaging
services with guaranteed delivery, interactive two-way services and fixed
location services.
7
<PAGE>
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 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.
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, 1999 and 1998 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, 1999.
3. EARNINGS (LOSS) PER SHARE
Net loss per share for the three and nine month periods ending September
30, 1999 and 1998 is calculated by dividing the net loss (after deducting
preferred stock dividends) by the weighted average number of shares of common
stock outstanding during those periods, with no effect given to common stock
equivalents because such effect would have been antidilutive. The weighted
average number of shares of common stock outstanding in the third quarter of
1999 and 1998 was 60,289,288
8
<PAGE>
and 59,733,920, respectively, and the weighted average number of shares of
common stock outstanding in the first nine months of 1999 and 1998 was
60,171,887 and 57,255,384, 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 $13.4 million and $5.0 million for the
quarters ended September 30, 1999 and 1998, respectively. The Company also
reported comprehensive income, which included consolidated net income and
foreign currency translation gains and losses, of $1.4 million for the first
nine months of 1999, and a comprehensive loss, which included the consolidated
net loss and foreign currency translation gains and losses, of $82.9 million for
the first nine months of 1998.
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
9
<PAGE>
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 sum of the principal amount of
the Senior Notes and the 6.75% redemption premium on the Senior Notes. During
this period, the Company will receive an amount equal to the 3-month London
Interbank Offered Rate ("LIBOR") plus 1% (currently 7.18%) multiplied by the sum
of the principal amount of the Senior Notes and the 6.75% redemption premium on
the Senior Notes. 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
The preferred dividend requirement in the first nine months of 1998
included dividends of $2.1 million accrued on the Company's 7.5% Cumulative
Convertible Accruing Pay-In-Kind Preferred Stock (the "PIK Preferred Stock"). In
May 1998, the Company made an offer to the holders of 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 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, no dividends were
accrued during the first nine months of 1999 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
10
<PAGE>
reported net income in the first nine months of 1998, such dividends were
deducted from net income for the purpose of determining net income (loss) per
common share.
7. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid by SkyTel was $3.4 million and $2.8 million during the three
months ended September 30, 1999 and 1998, respectively, and was $22.6 million
and $25.1 million during the nine months ended September 30, 1999 and 1998,
respectively. No federal income taxes were paid during these periods.
8. STATEMENT OF POSITION 98-5
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP"), "Reporting on the Costs of Start-Up
Activities." The SOP required 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. 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 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 start-up costs primarily incurred in
conjunction with the development and construction of the Company's Advanced
Messaging Network. The adoption of the SOP was effective as of January 1, 1998
and was recorded
11
<PAGE>
as a cumulative effect of a change in accounting principle. As a result of the
adoption of the SOP, the net loss for the nine months ended September 30, 1998
increased by $53.1 million, 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 $5.0 million.
9. SEGMENT INFORMATION
SkyTel has adopted SFAS No. 131-"Disclosures About Segments of an
Enterprise and Related Information." The Company is organized based on the
services that it offers and geographically for all international units. Under
this organizational structure, the Company operates in three principal areas:
domestic one-way messaging operations, domestic advanced messaging operations
and international one-way messaging operations. In 1999 and 1998, the Company's
"other" category is primarily composed of air-to-ground telecommunications
operations.
For purposes of reporting net income (loss) for the Company's business
segments, certain indirect operating and selling, general and administrative
costs must be allocated among the business segments. Such costs are generally
allocated among the one-way messaging, advanced messaging and international
messaging segments based on various financial and operational factors which
reflect usage of services.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies in Note 1 to the Company's Annual
Report on Form 10-K for the year ended December 31. 1998.
12
<PAGE>
SEGMENT PROFIT AND LOSS AND SEGMENT ASSETS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
One-Way Advanced International
Messaging Messaging Messaging Other Consolidated
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $79,820 $ 55,030 $ 6,036 $ 515 $141,401
Operating cashflow 17,668 4,939 (2,108) (1,449) 19,050
Depreciation and amortization 10,585 10,003 1,588 25 22,201
Interest income -- -- 51 288 339
Interest expense -- 8,826 2,530 1,047 12,403
Equity in income from
investments -- -- 1,791 -- 1,791
Provision for income taxes -- -- 46 -- 46
Net income (loss) 7,057 (13,878) (3,946) (2,270) (13,037)
Capital expenditures 2,053 15,521 623 2,715 20,912
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
One-Way Advanced International
Messaging Messaging Messaging Other Consolidated
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $85,620 $ 39,060 $ 7,359 $ 604 $132,643
Operating cashflow 32,846 2,301 (913) (1,316) 32,918
Depreciation and amortization 11,119 9,497 1,702 69 22,387
Interest income 3 -- 106 205 314
Interest expense (2) 13,608 2,075 804 16,485
Equity in income from
investments -- -- 165 -- 165
Provision for income taxes 842 -- 142 -- 984
Net income (loss) 20,089 (20,794) (3,228) (772) (4,705)
Capital expenditures 5,559 10,548 851 2,886 19,844
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
One-Way Advanced International
Messaging Messaging Messaging Other Consolidated
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $249,780 $151,072 $19,623 $ 1,649 $422,124
Operating cashflow 81,854 20,597 (2,928) (2,814) 96,709
Depreciation and amortization 31,975 29,893 4,566 80 66,514
Interest income -- -- 179 888 1,067
Interest expense 6 27,148 7,028 2,349 36,531
Equity in income from
investments -- -- 3,718 -- 3,718
Provision for income taxes 209 -- 296 (25) 480
Net income (loss) 49,555 (36,523) (9,738) (1,373) 1,921
Total assets 167,515 323,879 64,743 49,565 605,702
Capital expenditures 4,153 37,203 2,034 5,822 49,212
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
One-Way Advanced International
Messaging Messaging Messaging Other Consolidated
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $258,134 $ 94,974 $ 25,158 $ 2,012 $380,278
Operating cashflow 100,219 (5,168) (6,579) (2,883) 85,589
Depreciation and amortization 33,229 27,454 5,371 138 66,192
Interest income 3 -- 356 529 888
Interest expense 8 34,081 6,112 2,122 42,323
Equity in income from
investments -- -- 2,162 -- 2,162
Provision for income taxes 2,593 -- 413 -- 3,006
Cumulative effect of a change
in accounting principle -- (52,791) (5,338) -- (58,129)
Net income (loss) 63,525 (119,526) (20,154) (6,291) (82,446)
Total assets 201,065 321,896 73,328 47,476 643,765
Capital expenditures 11,145 27,511 1,989 6,511 47,156
</TABLE>
GEOGRAPHIC INFORMATION
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS)
1999 1998
---------------------- ----------------------
Long-Lived Long-Lived
Revenues Assets Revenues Assets
Domestic $402,501 $476,593 $355,120 $510,728
International 19,623 52,482 25,158 57,151
----------------------------------------------
Consolidated $422,124 $529,075 $380,278 $567,879
==============================================
Effective July 1, 1998, the results of Mtel Puerto Rico, Inc. ("Mtel Puerto
Rico") were included in the results of operations for the Company's domestic
one-way messaging segment. Prior to July 1, 1998, the results of operations of
Mtel Puerto Rico were included in the Company's international messaging segment.
14
<PAGE>
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 quarters and nine month periods
ended September 30, 1999 and 1998 and certain factors that will affect SkyTel's
financial condition.
The Merger was completed on October 1, 1999. Upon consummation of the
Merger, Acquisition Subsidiary was renamed SkyTel Communications, Inc. The
Company's Common and $2.25 Preferred Stock was delisted from the NASDAQ Stock
Market effective as of the close of business on September 30, 1999. In addition,
on October 7, 1999 the Company filed a Form 15 with the SEC which terminated the
registration of the Company's Common and $2.25 Preferred Stock under the
Exchange Act. As a result, the Company is no longer obligated to file reports
with the SEC pursuant to the Exchange Act.
Certain statements set forth in this Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not
historical facts constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements 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 existing distribution channels, the
successful implementation of new distribution channels and the market acceptance
of new value-added services. This Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the Company's Consolidated Financial Statements and the notes thereto appearing
elsewhere in this Quarterly Report on Form 10-Q.
15
<PAGE>
RESULTS OF OPERATIONS
REVENUES
Revenues on a consolidated basis increased 11% in the first nine months of
1999 as compared to the first nine months of 1998 and increased 7% in the three
months ended September 30, 1999 as compared to the three months ended September
30, 1998, primarily due to a 59% and a 41% increase in revenues from advanced
messaging services in the first nine months and third quarter of 1999,
respectively. Revenues from one-way messaging operations in the United States
decreased 3% in the first nine months of 1999 as compared to the first nine
months of 1998 and decreased 7% in the third quarter of 1999 as compared to the
third quarter of 1998.
During the first quarter of 1999, management adjusted the Company's
methodology for recognizing usage-based revenues and expenses. As a result,
during the first quarter of 1999 the Company recognized $2.4 million of such
revenues and $2.5 million of such expenses.
As of September 30, 1999, the Company had 1,010,200 one-way messaging units
in service in the United States, which included approximately 75,400 prepaid
paging units, as compared to 987,100 one-way messaging units in service as of
September 30, 1998, of which approximately 38,000 were prepaid paging units.
SkyTel also had 534,800 advanced messaging units in service as of September 30,
1999, an increase of 49.2% over the 358,500 advanced messaging units in service
as of September 30, 1998. Approximately 8,300 of the net unit additions placed
in service on the Advanced Messaging Network in the third quarter of 1999
represented conversions of units from one-way to advanced messaging services, as
compared to approximately 9,800 of net unit additions on the Advanced Messaging
Network in the third quarter of 1998.
In the third quarter of 1999, the Company reported 43,900 advanced
messaging net unit additions and 11,200 one-way net unit additions. The Company
believes that net unit additions in the
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third quarter of 1999 continued to be impacted by changing wireless industry
trends resulting, in part, from the promotion of national one-rate wireless
telephone plans. The ability of the Company to achieve improved unit growth and
operating results in 1999 and future periods will be dependent on the
performance of the Company's existing distribution channels, the successful
implementation of new distribution channels and the market acceptance of new
services. In addition, the Company cannot predict the extent to which
competitive advanced messaging services or other competitive telecommunication
services will impact the Company's future operating results.
Average revenue per domestic unit in service was $31.05 in the third
quarter of 1999 as compared to $32.91 in the third quarter of 1998 and $31.78 in
the second quarter of 1999. Average revenue per one-way unit in service was
$28.44 in the third quarter of 1999 as compared to $30.53 in the third quarter
of 1998 and $29.79 in the second quarter of 1999, and average revenue per
advanced messaging unit was $35.79 in the third quarter of 1999 as compared to
$39.80 in the third quarter of 1998 and $35.72 in the second quarter of 1999.
The decline in average monthly revenue per domestic unit in service in the third
quarter of 1999 as compared to the third quarter of 1998 is attributable to
lower usage charges resulting from pricing plans for advanced messaging services
that include increased character allotments, and the implementation of usage
related billing arrangements for certain major customers. The Company cannot
predict the extent to which average monthly revenue per domestic unit in service
will decline in future periods or the extent to which any such decline will be
offset by revenues from value-added features. In addition, the Company recently
introduced new lower priced advanced messaging service offerings, such as "local
only" service, which could also impact average monthly revenue per domestic unit
in service.
During the first nine months of 1999, one-way messaging operations provided
approximately 59% of SkyTel's consolidated revenues as compared to 68% in the
first nine months of
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1998. Advanced messaging operations provided approximately 36% of consolidated
revenues during the first nine months of 1999 as compared to 25% in the first
nine months of 1998. Other SkyTel domestic operations provided less than 1% of
revenues in the first nine months of both 1999 and 1998. During the third
quarter of 1999, one-way messaging operations provided approximately 57% of
SkyTel's consolidated revenues as compared to 65% in the third quarter of 1998.
Advanced messaging operations provided approximately 39% of consolidated
revenues during the third quarter of 1999 as compared to 29% in the third
quarter of 1998. Other SkyTel domestic operations provided less than 1% of
revenues in the third quarter of both 1999 and 1998.
For the first nine months of 1999, SkyTel's consolidated revenues included
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 5% of SkyTel's
consolidated revenues in the nine month period ended September 30, 1999, as
compared to 7% of consolidated revenues during the same period of 1998; and,
during the third quarter of 1999, revenues recorded by the Company's
consolidated international operations provided approximately 4% of SkyTel's
consolidated revenues as compared to 6% of consolidated revenues during the same
period of 1998. Revenues from international operations during the first nine
months of 1999 decreased 22% as compared to the first nine months of 1998, and
decreased 18% during the third quarter of 1999 as compared to the third quarter
of 1998. This decrease resulted, in part, from the transfer of the Company's
Puerto Rican operations from Mtel Latin America, Inc. ("Mtel Latam"), the
holding company for the Company's Latin American operations, to a wholly-owned
domestic operating subsidiary and the inclusion of the operating results of the
Puerto Rican operations as part of the Company's domestic one-way messaging
business segment as of September 30, 1998. In addition, the Company's operating
results in Latin America in the third quarter of 1999 continued to be impacted
by
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increased competition from cellular telephone and other telecommunication
services. The Company cannot predict the extent to which such competitive
services will affect the future operating results of the Company's Latin
American operations.
EXPENSES
Expenses include operating, selling, general and administrative, and
depreciation and amortization.
Operating expenses primarily consist of 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 9% in the first nine months of 1999 as compared to the first nine
months of 1998 and increased 3% in the third quarter of 1999 as compared to the
third quarter of 1998. This increase primarily reflects increased telephone and
system costs associated with the one-way and advanced messaging subscriber base
in the United States and increased transmitter and receiver site rentals
resulting from the continued expansion of coverage of the Company's Advanced
Messaging Network in the United States. As a percentage of consolidated
revenues, operating expenses declined to 27% for the first nine months of 1999
as compared to 28% in the first nine months of 1998, and 26% in the third
quarter of 1999 as compared to 27% in the third quarter of 1998. SkyTel expects
to incur increased operating expenses during the remainder of 1999 and in future
periods, primarily as a result of the continued 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 increased 7% in the first nine months of 1999 as compared to the first
nine months of 1998 and increased 3% in
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the third quarter of 1999 as compared to the third quarter of 1998. Operating
expenses related to advanced messaging operations in the United States increased
13% in the first nine months of 1999 as compared to the first nine months of
1998 and increased 4% in the third quarter of 1999 as compared to the third
quarter of 1998. Operating expenses of the Company's international subsidiaries
decreased 10% in the first nine months of 1999 as compared to the first nine
months of 1998 and increased 2% in the third quarter of 1999 as compared to the
third quarter of 1998; however, operating expenses for the Company's
international subsidiaries increased as a percentage of revenues to 33% in the
first nine months of 1999 as compared to 29% in the first nine months of 1998
and increased as a percentage of revenues to 33% in the third quarter of 1999 as
compared to 27% in the third quarter of 1998.
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 11% in the first nine months of
1999 as compared to the first nine months of 1998 and increased 34% in the third
quarter of 1999 as compared to the third quarter of 1998. A significant portion
of this increase in selling, general and administrative expenses (approximately
$19 million) is attributable to financial advisory, legal, compensation and
other expenses associated with the merger of the Company into a subsidiary of
MCI WorldCom, which was completed on October 1, 1999. Excluding these merger
related expenses, selling, general and administrative expenses on a consolidated
basis increased 1% in the first nine months of 1999 as compared to the first
nine months of 1998 and increased 4% in the third quarter of 1999 as compared to
the third quarter of 1998. As a percentage of consolidated revenues, selling,
general and administrative expenses remained constant at 50% in the first nine
months of 1999 as compared to the first nine months of 1998 and increased to 60%
in the third quarter of 1999 as compared to 48% in the third quarter of 1998.
The
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Company anticipates that selling, general and administrative expenses will
increase during the remainder of 1999 as a result of the continued expansion of
the Company's direct sales force and advertising and marketing expenses that
will be incurred 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 6% in the first nine months of
1999 as compared to the first nine months of 1998 and increased 26% in the third
quarter of 1999 as compared to the third quarter of 1998. Selling, general and
administrative expenses related to advanced messaging operations in the United
States increased 43% in the first nine months and 61% in the third quarter of
1999 as compared to the same periods in 1998. Selling, general and
administrative expenses of the Company's international subsidiaries decreased
34% in the first nine months of 1999 as compared to the first nine months of
1998 and decreased 3% in the third quarter of 1999 as compared to the third
quarter of 1998.
Depreciation and amortization on a consolidated basis increased less than
1% in the first nine months of 1999 as compared to the first nine months of 1998
and decreased 1% in the third quarter of 1999 as compared to the third quarter
of 1998. The adoption of the SOP, which was effective as of January 1, 1998,
resulted in a one-time, non-cash charge of $58.1 million of previously
capitalized start-up costs relating primarily to the development and
construction of the Advanced Messaging Network. See Note 8 of Notes to
Consolidated Financial Statements. As a percentage of revenues, depreciation and
amortization expenses on a consolidated basis decreased to 16% in both the first
nine months and third quarter of 1999 as compared to 17% in both the first nine
months and third quarter of 1998.
OPERATING INCOME (LOSS)
SkyTel reported consolidated operating income of approximately $30.2
million for the first nine months of 1999 as compared to consolidated operating
income of approximately $19.4 million for
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the first nine months of 1998, and a consolidated operating loss of
approximately $3.2 million for the third quarter of 1999 as compared to
consolidated operating income of approximately $10.5 million for the third
quarter of 1998. Without the effect of the selling, general and administrative
expenses attributable to the merger of the Company with MCI WorldCom,
consolidated operating income for the nine months and the quarter ended
September 30, 1999 would have been $48.3 million and $15.0 million,
respectively. For the nine-month period ended September 30, 1999, one- way
messaging operations recorded operating income of $49.9 million as compared to
$67.0 million in the first nine months of 1998 and for the three-month period
ended September 30, 1999, one-way messaging operations recorded operating income
of $7.1 million as compared to $21.7 million in the third quarter of 1998.
Advanced messaging operations during the first nine months of 1999 recorded an
operating loss of $9.3 million as compared to an operating loss of $32.6 million
in the first nine months of 1998, and during the third quarter of 1999 recorded
an operating loss of $5.1 million as compared to an operating loss of $7.2
million in the third quarter of 1998. The Company's international operations
recorded an operating loss of $7.5 million during the first nine months of 1999
as compared to an operating loss of $12.0 million in the first nine months of
1998, and an operating loss of $3.7 million during the third quarter of 1999 as
compared to an operating loss of $2.6 million in the third quarter of 1998.
Future levels of operating income will be dependent on the performance of
the Company's existing distribution channels, the successful implementation of
new distribution channels and the timely availability and market acceptance of
new services on its Advanced Messaging Network. In addition, the Company cannot
predict the extent to which competitive advanced messaging services or other
competitive telecommunication services will impact the Company's future
operating results.
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INTEREST EXPENSE AND INTEREST INCOME
Interest expense decreased 14% in the first nine months of 1999 as compared
to the first nine months of 1998 and decreased 25% in the third quarter of 1999
as compared to the third quarter of 1998. The decrease in interest expense in
the first nine months and third quarter of 1999 resulted from a decrease in the
Company's outstanding bank debt, which was $45.0 million as of September 30,
1999 as compared to $97.5 million as of September 30, 1998.
Interest income totaled $1.1 million in the first nine months of 1999 as
compared to $0.9 million in the first nine months of 1998 and $0.3 million in
the third quarters of, both, 1999 and 1998.
PROVISION FOR INCOME TAXES
SkyTel recorded a provision for state and local income taxes of $0.5
million and $3.0 million in the first nine months of 1999 and 1998,
respectively, and less than $0.1 million and $1.0 million in the third quarter
of 1999 and 1998, respectively. The Company reported net losses for federal
income tax purposes during the nine and three month periods ended September 30,
1999 and 1998, 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, 1999 and 1998 on the Company's $2.25
Preferred Stock. The Company accrued approximately $2.1 million of dividends on
the PIK Preferred Stock in the first nine months of 1998. 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 stock dividends on the PIK
Preferred Stock in the first nine months of 1999. See Note 6 of Notes to
Consolidated Financial Statements. Although
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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 $13.0 million in the quarter
ended September 30, 1999, and consolidated net income of $1.9 million in the
nine months ended September 30, 1999, which included a $3 million one-time gain
on the sale of assets. Combined with the effect of preferred stock dividends,
consolidated net loss per common share (on both a basic and diluted basis) in
the quarter ended September 30, 1999 was $.25 and for the nine month period
ended September 30, 1999 was $.07. Without the effect of the selling, general
and administrative expenses associated with the merger of the Company with MCI
WorldCom, consolidated net income in the three month period ended September 30,
1999 was $5.5 million, which, combined with the effect of preferred stock
dividends, resulted in consolidated net income per common share (on both a basic
and diluted basis) of $.06, and, not including the one-time gain, consolidated
net income in the nine month period ended September 30, 1999 was $17.5 million,
which, combined with the effect of preferred stock dividends, resulted in
consolidated net income per common share (on both a basic and diluted basis) of
$.18. This compares to a consolidated net loss of approximately $4.7 million, or
$.11 per common share in the third quarter of 1998, and a consolidated net loss
of approximately $82.4 million, or $1.59 per common share for the nine month
period ended September 30, 1998. The consolidated net loss for the nine months
ended September 30, 1998 reflected the cumulative effect of the change in
accounting principle related to the adoption of the SOP. See Note 8 of Notes to
Consolidated Financial Statements. For the first nine
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months of 1999, the Company's one-way messaging operations recorded net income
of $49.6 million, which was offset by a net loss of $36.5 million from advanced
messaging operations and a net loss of $9.7 million from international
operations. For the third quarter of 1999, the Company's one-way messaging
operations recorded net income of $7.1 million, which was offset by a net loss
of $13.9 million from advanced messaging operations and a net loss of $3.9
million from international operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Omitted under the reduced disclosure format pursuant to General Instruction
H(2)(c).
LIQUIDITY AND CAPITAL RESOURCES
DOMESTIC
The Company invested a total of $4.2 million in the first nine months of
1999, including $2.1 million in the third quarter of 1999, to fund the expansion
of its one-way messaging system and the procurement of messaging devices to
support its one-way messaging subscriber base. In addition, in the first nine
months of 1999, the Company incurred capital expenditures of $37.2 million,
including $15.5 million in the third quarter of 1999, for advanced messaging
devices and infrastructure equipment related to the continued expansion of the
Advanced Messaging Network. Capital expenditures in the third quarter of 1999
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 1999, the Company repaid $10.5 million of
indebtedness outstanding under its bank credit facility, and had a balance of
$45.0 million of borrowings outstanding as of September 30, 1999, as compared to
a balance of $97.5 million as of September 30, 1998. Letters
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of credit in the amount of $4.4 million had been issued under the credit
facility as of September 30, 1999, and the credit available under the facility
had been reduced by a corresponding amount. The bank credit facility was paid in
full and terminated on October 1, 1999 in conjunction with the merger of the
Company into MCI WorldCom.
In connection with the Merger, MCI WorldCom announced on November 8,
1999 SkyTel will redeem all of its outstanding 13 1/2 percent Senior Notes due
December 15, 2002 (the "SkyTel Notes") and all of its oustanding 6.75 percent
Convertible Subordinated Debentures due May 15, 2002 (the "SkyTel Debentures").
MCI WorldCom has set December 15, 1999 as the redemption date for the SkyTel
Notes and the SkyTel Debentures.
The aggregate outstanding principal amount of the SkyTel Notes and SkyTel
Debentures is approximately $266 million. In connection with the redemptions,
the Company will record a charge of approximately $36 million in the fourth
quarter of 1999. The funds required to pay all amounts required under the
redemptions will be obtained by MCI WorldCom from available liquidity under
their credit facilities and commercial paper program.
INTERNATIONAL
During the first nine months of 1999, Mtel Latam required approximately
$2.4 million to fund capital expenditures and working capital requirements of
its subsidiaries and joint ventures in Latin America. This amount was funded by
a portion of the proceeds received by Mtel Latam from the sale of Cumulative
Accruing Pay-In-Kind Preferred Stock in January 1999.
As of September 30, 1999, Mtel Latam maintained a secured revolving line of
credit with Credit Lyonnais New York Branch (the "Latam Line of Credit"). Under
the Latam Line of Credit, as amended, Mtel Latam could borrow up to $20.0
million to fund capital expenditures and working capital requirements (other
than acquisitions), and had borrowings of $15.0 million outstanding with
borrowing availability of $5.0 million at the end of the third quarter of 1999.
The Latam Line of Credit was paid in full and terminated on October 1, 1999 in
conjunction with the merger of the Company into MCI WorldCom.
YEAR 2000 READINESS
Overview. 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 utilized by certain companies may not
properly recognize the Year 2000, or certain dates prior or
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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 devoted significant efforts to address Y2K
issues. The Company has developed a comprehensive, company-wide plan to
identify, evaluate and remediate Y2K issues (the "Y2K Project Plan") and has
established a Y2K Project Office to coordinate the implementation of the
Company's Y2K Project Plan. The Company has also established a cross-functional
steering committee, which is comprised of management personnel from key
departments in the Company, that is responsible for oversight of Y2K readiness
activities. The Y2K Project Office and steering committee report to the
Company's Senior Vice President-Finance and Chief Financial Officer.
The Company's Y2K Project Plan is focused on those areas which are critical
to maintaining uninterrupted service to the Company's customers and includes
network systems, applications and infrastructure for the provision of one-way
and advanced messaging services and business information systems and
applications. In addition, the Y2K Project Plan includes a review of the Y2K
readiness of the Company's vendors, resellers, suppliers and other third parties
who have material relationships with the Company and its subsidiaries
(collectively, "External Parties"). The major phases of the Company's Y2K
Project Plan with respect to each of these categories include an inventory of
all hardware and software components with possible date implications, an
assessment of the Y2K readiness status of all inventory items, the remediation
of all Y2K issues which have been identified in the assessment phase, and
validation-testing and certification as to Y2K readiness of any items requiring
remediation.
Status. The Company has substantially completed the inventory, assessment,
remediation and validation-testing/certification phases of its Y2K Project Plan
relating to the Company's
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network operations in the United States, which includes hardware and software
components of the one-way and advanced messaging network operation centers, as
well as transmitters, receivers and other equipment comprising the radio
frequency ("RF") infrastructure of the Company's messaging networks which are
located at more than 4,400 sites throughout the United States. The Company has
also worked with the manufacturers of its RF infrastructure equipment to conduct
additional testing procedures to ensure the synchronization of certain
mission-critical infrastructure components with the network operation centers.
The Company has worked with the manufacturers of its one-way and advanced
messaging subscriber devices in order to confirm the Y2K readiness of such
devices. Based upon validation-testing conducted directly by the Company as well
as testing conducted in conjunction with the device manufacturers, the Company
has confirmed that all subscriber devices utilized on its networks are Y2K
compliant in all material respects, with the exception of approximately 100,000
older models of subscriber devices currently in use on the Company's networks.
Certain of these models will require manual reordering of message files on
January 1, 2000 and others will require manual resetting of the calendar
function on March 1, 2000, but the ability of these devices to receive messages
transmitted through the Company's network will not be impacted. The Company has
included information regarding the date issues involving such models of
subscriber devices on the SkyTel Y2K Web site.
The Company's Y2K Project Plan for its business information systems and
applications involves all hardware and software components which relate to major
internal business and administrative functions, such as customer service,
billing, inventory, and credit and collections. In early 1998, the Company
retained a software engineering consulting firm to assist the Company in the
assessment and remediation phases related to the Company's business
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information systems, software and applications. The Company has substantially
completed the inventory, assessment, remediation and
validation-testing/certification phases for the mission-critical hardware and
software comprising its business information systems.
The Company in the ordinary course of business implements new software
applications and system upgrades in both its network operations centers and its
business information systems in connection with the development of new products
and services and the enhancement of existing systems and services. The Company
intends to test and certify the Y2K readiness of any new software or system
upgrades as well as the Y2K compatibility of such software or system upgrades
with the Company's operating systems. The Company's management has adopted
procedures designed to restrict the implementation of new software applications
and system upgrades in its network operations centers and business information
systems in the fourth quarter of 1999, and intends to conduct additional
periodic Y2K testing of its network operations centers and business information
systems during the remainder of 1999.
The Company has completed the inventory and assessment phases of the Y2K
Project Plan with respect to the operations conducted by its subsidiaries in
Latin America. Since the Company licenses its one-way messaging network
operations software to such subsidiaries and the one-way messaging networks in
Latin America generally use equipment, including subscriber devices, and
software of the type utilized by the Company's one-way messaging network in the
United States, the Company has applied the experience obtained in remediating
and testing its domestic one-way network operations center, RF infrastructure
and subscriber devices in the United States to its operations in Latin America.
The Company has substantially completed the remediation and validation-
testing/certification phases for the mission-critical components of the network
operation centers, RF infrastructure and subscriber devices of its Latin
American subsidiaries.
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The Company participated with a third-party vendor in the development of
the business information software which is used by the Company's Latin American
subsidiaries. The Company has substantially completed the inventory, assessment,
remediation and validation-testing/certification phases with respect to the
business systems and applications used by its Latin American operations.
Mtel Latam has minority investments in joint ventures in certain countries
in Latin America which interconnect with the Company's international network.
Although Mtel Latam does not control or designate the management of these joint
ventures, Mtel Latam is assisting the management teams of these joint ventures
in their Y2K readiness efforts and is encouraging such management teams to adopt
a methodology similar to the Y2K Plan adopted by the Company. These joint
ventures also license the Company's one-way messaging network operations and
business information systems software and use equipment similar to that used by
the Company's subsidiaries in Latin America, and processes utilized by Mtel
Latam in completing the Y2K Project Plan for its subsidiaries will be made
available to these joint ventures.
External Parties. The Company is working directly with various mission-
critical External Parties such as its major equipment vendors,
telecommunications service providers, local radio common carriers and resellers
to assess and certify Y2K readiness, and has conducted or intends to conduct
testing procedures with certain of these External Parties in order to confirm
Y2K readiness. In addition, the Company has identified and prioritized other
External Parties that provide equipment and services to the Company for purposes
of assessing their Y2K readiness and has forwarded inquiries to more than 6,000
other External Parties in order to obtain reasonable assurance of their Y2K
readiness. The Company intends to assess all the responses it receives from
External Parties to evaluate Y2K readiness and to forward follow-up
communications when appropriate. The
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Company is also using the Internet as a resource for determining the Y2K
readiness of External Parties.
Contingency Plans. 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 has leveraged this
experience in the development of contingency plans developed as part of the
Company's overall Y2K readiness activities. The Company retained a nationally
recognized contingency planning consulting firm to perform a business risk
assessment and impact analysis and to assist the Company in preparing the
contingency plans for its critical business functions and processes. The
contingency plans include: (i) a business impact analysis designed to identify
and quantify the potential impact on the Company in the event of an interruption
of normal business operations; (ii) an incident management plan to be used by
senior management and support personnel when responding to incidents that might
interrupt or impact the Company's ability to maintain normal business
operations; and (iii) business resumption plans and procedures to address
interruptions or failures of the Company's essential functions and services,
such as network operations and infrastructure, business systems and applications
or those provided by mission-critical External Parties. The Company completed
its initial Y2K contingency plans for its critical business functions and
processes in July 1999, and is implementing these contingency plans in each of
the Company's mission critical functional areas.
Costs. The Company estimates that the total cost of its Y2K readiness
efforts will not exceed $10.0 million. The Company has incurred or committed
approximately $5.7 million in connection with its Y2K readiness efforts through
September 30, 1999. The estimated Y2K costs have not been independently verified
and may vary in the event of unforeseen Y2K remediation costs or costs related
to the implementation of the Company's contingency plans. Certain costs budgeted
for the
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procurement of upgrades or replacements of the Company's network and business
information systems have not been included in this amount since these upgrades
or replacements were being made by the Company independent of Y2K readiness. In
addition, the estimated Y2K costs do not include the Company's internal costs,
such as compensation and benefits of employees delegated Y2K responsibilities,
since such costs are not internally allocated by the Company. The Company
expects to fund its Y2K compliance efforts with cash flows from operations.
The failure by the Company or certain External Parties to achieve Y2K
readiness with respect to any mission-critical aspect of the Company's business
could result in an interruption in, or a failure of, certain normal operations
or business activities of the Company. Such failures could materially and
adversely affect the Company's results of operations, financial condition or
liquidity. For example, the Company's networks are interconnected with, or
dependent upon, systems operated by third parties, including telecommunications
service providers and public utilities, and the ability of the Company's
networks to operate is dependent on these External Parties. Since External
Parties are responsible for addressing their own Y2K readiness, 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 Company's Y2K Project Plan has been designed to
reduce the level of uncertainty regarding the Company's Y2K readiness and the
Y2K readiness of External Parties. The Company believes that its Y2K Project
Plan will substantially reduce the possibility of significant interruptions or
failures of the Company's operations as a result of Y2K issues.
Certain information regarding the Company's Y2K readiness activities
constitutes forward-looking statements under the Private Securities Litigation
Reform Act of 1995. Such
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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 readiness
activities or that the Company will be successful in remeidating all Y2K issues.
Factors that could impact the success of the Company's Y2K Project Plan include
the ability to locate and correct all 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 mission-critical External Parties such as
telecommunications service providers or public utilities.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which was amended in July 1999 when the FASB issued SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." These statements, which apply to all entities,
establish accounting and reporting standards for derivative instruments and for
hedging activities. They require that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 137 delays the effective date of SFAS
No. 133 for one year to become effective for financial statements for fiscal
years beginning after June 15, 2000. SkyTel intends to comply with these
statements and has not yet determined the impact of SFAS No. 133 and SFAS No.
137 on its consolidated financial statements.
33
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not aware of any material legal or regulatory proceedings
involving the Company or its subsidiaries other than license applications,
renewals and regulatory proceedings incident to the Company's business.
Item 2. Changes in Securities
---------------------
Omitted under the reduced disclosure format pursuant to General
Instruction H(2)(b).
Item 3. Defaults upon Senior Securities
-------------------------------
Omitted under the reduced disclosure format pursuant to General
Instruction H(2)(b).
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Omitted under the reduced disclosure format pursuant to General
Instruction H(2)(b).
Item 5. Other Information
-----------------
None.
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:
Exhibit No. Description
2.1 Agreement and Plan of Merger by and among MCI
WorldCom, Empire Merger Inc. and SkyTel dated as
of May 28, 1999 (filed as Annex A to the Proxy
Statement/Prospectus dated August 26, 1999
included in MCI WorldCom's Registration Statement
on Form S-4, Registration No. 333-85919 and
incorporated herein by reference). The registrant
hereby undertakes to furnish supplementally a copy
of any omitted schedule to this Agreement to the
SEC upon request.
3.1 Amendment to Bylaws of SkyTel Communications,
34
<PAGE>
Inc. dated July 23, 1999 (incorporated by reference
at Exhibit 3.1 to the Company's Form 10-Q filed on
August 13, 1999).
4.1 Amendment No. 2, dated as of August 5, 1999, to the
Rights Agreement, dated as of July 26, 1989,
between SkyTel Communications, Inc. and NCNB Texas
National Bank, as amended. (Incorporated by
reference at Exhibit 4.2 to the Company's Amendment
No. 2 to Form 8-A filed on August 6, 1999).
4.2 Form of Indenture and Exchange Debenture relating
to the 4.5% Convertible Subordinated Debentures due
2003. (Incorporated by reference at Exhibit 4.2 to
the Company's Form 8-A filed on August 5, 1999).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
None.
35
<PAGE>
SIGNATURE
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 15, 1999 By /s/ Scott D. Sullivan
----------------------
Scott D. Sullivan
Secretary and Chief Financial Officer
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,792,406
<SECURITIES> 0
<RECEIVABLES> 85,558,785
<ALLOWANCES> 25,848,492
<INVENTORY> 0
<CURRENT-ASSETS> 76,627,088
<PP&E> 491,645,101
<DEPRECIATION> 247,507,552
<TOTAL-ASSETS> 605,702,107
<CURRENT-LIABILITIES> 129,352,293
<BONDS> 315,919,000
37,500
0
<COMMON> 604,241
<OTHER-SE> 123,501,671
<TOTAL-LIABILITY-AND-EQUITY> 605,702,107
<SALES> 422,124,460
<TOTAL-REVENUES> 422,124,460
<CGS> 0
<TOTAL-COSTS> 391,929,203
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,531,341
<INCOME-PRETAX> 2,400,901
<INCOME-TAX> 479,767
<INCOME-CONTINUING> 1,921,134
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,921,134
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
