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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
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<C> <S>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-21924
METROCALL, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 54-1215634
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6677 RICHMOND HIGHWAY, ALEXANDRIA, VIRGINIA 22306
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, including area code: (703) 660-6677
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 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 issuer's classes
of common stock as of the latest practicable date:
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<CAPTION>
CLASS OUTSTANDING AT AUGUST 1, 1997
---------------------------------------- ----------------------------------------
<S> <C>
Common Stock, $.01 par value 29,146,436
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METROCALL, INC. AND SUBSIDIARIES
The Registrant hereby amends Item 1 of its Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1997, to correct an arithmetical error
in the Condensed Consolidated Statement of Cash Flows. For convenience, the
Quarterly Report is restated in full.
INDEX TO FORM 10-Q
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PAGE
NUMBER
------
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, December 31, 1996 and June 30,
1997................................................................. 3
Condensed Consolidated Statements of Operations for the three months
ended June 30, 1996 and 1997......................................... 4
Condensed Consolidated Statements of Operations for the six months
ended June 30, 1996 and 1997......................................... 5
Condensed Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 1997........................................... 6
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and 1997......................................... 7
Notes to Condensed Consolidated Financial Statements................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 24
Item 2. Changes in Securities.................................................. 24
Item 3. Defaults Upon Senior Securities........................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.................... 25
Item 5. Other Information...................................................... 25
Item 6. Exhibits and Reports on Form 8-K....................................... 25
SIGNATURES............................................................................ 29
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
METROCALL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 10,917 $ 20,749
Accounts receivable, less allowance for doubtful accounts of $2,961 as of
December 31, 1996 and $3,031 as of June 30, 1997.......................... 18,223 24,041
Prepaid expenses and other current assets................................... 5,681 7,396
-------- --------
Total current assets................................................. 34,821 52,186
-------- --------
PROPERTY AND EQUIPMENT:
Land, buildings and leasehold improvements.................................. 12,694 15,799
Furniture, office equipment and vehicles.................................... 29,742 36,279
Paging and plant equipment.................................................. 188,236 195,369
Less -- Accumulated depreciation and amortization........................... (77,260) (95,616)
-------- --------
153,412 151,831
-------- --------
INTANGIBLE ASSETS, net of accumulated amortization of approximately $20,926 as
of December 31, 1996 and $38,258 as of June 30, 1997........................ 452,639 440,356
OTHER ASSETS.................................................................. 3,023 2,355
-------- --------
TOTAL ASSETS.................................................................. $643,895 $ 646,728
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt........................................ $ 700 $ 965
Accounts payable............................................................ 17,194 20,246
Accrued expenses and other current liabilities.............................. 18,940 18,693
Deferred revenues and subscriber deposits................................... 5,254 6,457
-------- --------
Total current liabilities............................................ 42,088 46,361
-------- --------
CAPITAL LEASE OBLIGATIONS, net of current portion............................. 3,244 4,717
CREDIT FACILITY AND OTHER LONG-TERM DEBT, less current maturities............. 171,314 191,037
SENIOR SUBORDINATED NOTES, due 2005 and 2007.................................. 152,534 152,534
DEFERRED INCOME TAX LIABILITY................................................. 76,687 75,249
MINORITY INTEREST IN PARTNERSHIP.............................................. 499 511
-------- --------
Total liabilities.................................................... 446,366 470,409
-------- --------
SERIES A CONVERTIBLE PREFERRED STOCK, 14% cumulative; par value $.01 per
share; 810,000 shares authorized; 159,600 shares issued and outstanding as
of December 31, 1996 and June 30, 1997, and a liquidation preference of
$40,598 and $43,440 at December 31, 1996 and June 30, 1997, respectively.... 31,231 34,401
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; authorized 1,000,000 shares; none
issued and outstanding.................................................... -- --
Common stock, par value $.01 per share; authorized 60,000,000 shares;
24,521,135 and 25,074,001 shares issued and outstanding as of December 31,
1996 and June 30, 1997, respectively...................................... 245 251
Additional paid-in capital.................................................. 262,827 265,662
Accumulated deficit......................................................... (96,774) (123,995)
-------- --------
Total stockholders' equity........................................... 166,298 141,918
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $643,895 $ 646,728
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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METROCALL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------
1996 1997
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REVENUES:
Service, rent and maintenance revenues............................. $ 25,079 $ 60,021
Product sales...................................................... 6,969 10,276
---------- ----------
Total revenues............................................. 32,048 70,297
Net book value of products sold.................................... (5,910) (7,525)
---------- ----------
26,138 62,772
---------- ----------
OPERATING EXPENSES:
Service, rent and maintenance expenses............................. 8,305 18,189
Selling and marketing.............................................. 5,399 13,001
General and administrative......................................... 6,920 14,693
Depreciation and amortization...................................... 13,607 22,831
---------- ----------
34,231 68,714
---------- ----------
Loss from operations....................................... (8,093) (5,942)
INTEREST EXPENSE..................................................... (4,191) (7,867)
INTEREST AND OTHER INCOME............................................ 1,157 143
---------- ----------
LOSS BEFORE INCOME TAX BENEFIT....................................... (11,127) (13,666)
INCOME TAX BENEFIT................................................... 172 1,362
---------- ----------
Net loss................................................... (10,955) (12,304)
PREFERRED DIVIDENDS.................................................. -- (1,609)
---------- ----------
Loss attributable to common stockholders................... $ (10,955) $ (13,913)
========= =========
Loss per share attributable to common stockholders................... $ (0.75) $ (0.55)
========= =========
Weighted-average common shares outstanding........................... 14,626,255 25,074,059
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
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METROCALL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1996 1997
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REVENUES:
Service, rent and maintenance revenues............................. $ 48,829 $ 118,537
Product sales...................................................... 13,158 18,513
---------- ----------
Total revenues............................................. 61,987 137,050
Net book value of products sold.................................... (10,560) (13,682)
---------- ----------
51,427 123,368
---------- ----------
OPERATING EXPENSES:
Service, rent and maintenance expenses............................. 16,498 35,440
Selling and marketing.............................................. 9,992 24,913
General and administrative......................................... 12,702 29,836
Depreciation and amortization...................................... 25,098 43,549
---------- ----------
64,290 133,738
---------- ----------
Loss from operations....................................... (12,863) (10,370)
INTEREST EXPENSE..................................................... (8,401) (15,907)
INTEREST AND OTHER INCOME............................................ 2,511 60
---------- ----------
LOSS BEFORE INCOME TAX BENEFIT....................................... (18,753) (26,217)
INCOME TAX BENEFIT................................................... 107 2,165
---------- ----------
Net loss................................................... (18,646) (24,052)
---------- ----------
PREFERRED DIVIDENDS.................................................. -- (3,169)
---------- ----------
Loss attributable to common stockholders................... $ (18,646) $ (27,221)
========= =========
Loss per share attributable to common stockholders......... $ (1.27) $ (1.09)
========= =========
Weighted-average common shares outstanding........................... 14,626,255 24,977,724
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
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METROCALL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
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<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL
SHARES PAR PAID-IN ACCUMULATED
OUTSTANDING VALUE CAPITAL DEFICIT TOTAL
----------- ----- --------- ---------- --------
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BALANCE, December 31, 1996................. 24,521,135 $ 245 $ 262,827 $ (96,774) $166,298
Issuance of shares in employee stock
purchase plan............................ 34,770 1 143 -- 144
Adjustment to consideration for 1996
acquisition.............................. 21,921 -- (209) -- (209)
Issuance of common stock in the acquisition
of Radio and Communications Consultants,
Inc. and Advanced Cellular Telephone,
Inc...................................... 494,279 5 2,899 -- 2,904
Issuance of shares under option
agreement................................ 1,896 -- 2 -- 2
Preferred dividends........................ -- -- -- (3,169) (3,169)
Net loss................................... -- -- -- (24,052) (24,052)
----------- ----- --------- ---------- --------
BALANCE, June 30, 1997..................... 25,074,001 $ 251 $ 265,662 $ (123,995) $141,918
========= ==== ======== ========= ========
</TABLE>
See notes to condensed consolidated financial statements.
6
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METROCALL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1996 1997
-------- --------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................. $(18,646) $(24,052)
Adjustments to reconcile net loss to net cash provided by operating
activities-- Depreciation and amortization......................... 25,098 43,549
Amortization of debt financing costs............................... 176 498
Decrease in deferred income taxes.................................. (343) (2,692)
Write-off of deferred acquisition costs............................ 388 --
Equity in loss of A+ Network, Inc. ................................ 153 --
Cash provided by (used in) changes in assets and liabilities, net of
effect of acquisitions and dispositions:
Accounts receivable................................................ (1,002) (6,566)
Prepaid expenses and other current assets.......................... (113) (1,016)
Accounts payable................................................... 8,068 3,196
Deferred revenues and subscriber deposits.......................... 809 1,679
Other current liabilities.......................................... (665) (298)
-------- --------
Net cash provided by operating activities..................... 13,923 14,298
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired...................... -- (798)
Proceeds from sale of telemassaging operations........................ -- 10,300
Purchases of property and equipment, net.............................. (39,065) (32,501)
Additions to intangibles.............................................. (35,265) (678)
Equity investment in A+ Network, Inc. ................................ (13,671) --
Other................................................................. 3 (297)
-------- --------
Net cash used in investing activities......................... (87,998) (23,974)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.......................................... -- 20,000
Principal payments on long-term debt.................................. (122) (650)
Net proceeds from issuance of common stock............................ -- 146
Increase in minority interest in partnership.......................... -- 12
-------- --------
Net cash (used in) provided by financing activities........... (122) 19,508
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................... (74,197) 9,832
CASH AND CASH EQUIVALENTS, beginning of period.......................... 123,574 10,917
-------- --------
CASH AND CASH EQUIVALENTS, end of period................................ $ 49,377 $ 20,749
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest............................................ $ 7,956 $ 13,024
Cash payments for income taxes........................................ $ 236 $ 527
</TABLE>
See notes to condensed consolidated financial statements.
7
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METROCALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND RISK FACTORS
Metrocall, Inc. ("Metrocall" or the "Company"), provides local, regional
and nationwide paging and other wireless messaging services. The Company's
selling efforts are concentrated in 32 markets in five operating regions: (i)
the Northeast (Massachusetts through Delaware), (ii) the Mid-Atlantic (Maryland,
Virginia and the Washington, D. C. metropolitan area), (iii) the Southeast
(including Virginia, the Carolinas, Georgia, Florida, Alabama, Louisiana,
Mississippi and Tennessee), (iv) the Southwest (primarily Texas) and (v) the
West (primarily California, Nevada and Arizona). Through its Nationwide Network,
the Company provides coverage to over 1,000 cities representing the top 100
Standard Metropolitan Statistical Areas.
Risks and Other Important Factors
The Company sustained net losses of $2.4 million, $20.1 million, $49.1
million, and $24.1 million for each of the years ended December 31, 1994, 1995,
1996 and the six months ended June 30, 1997, respectively. The Company's loss
from operations for the six months ended June 30, 1997 was $10.4 million. In
addition, at June 30, 1997, the Company had an accumulated deficit of
approximately $124.0 million. The Company's losses from operations and its net
losses are expected to continue for additional periods in the future. There can
be no assurance that the Company's operations will become profitable.
The Company's operations require the availability of substantial funds to
finance the maintenance and growth of its existing paging operations and
customer base, development and construction of future wireless communications
networks, expansion into new markets, and the acquisition of other wireless
communications companies. At June 30, 1997, the Company had incurred
approximately $349.3 million in long-term debt and capital leases. Amounts
available under the Company's credit facility are subject to certain financial
covenants and other restrictions such that as of June 30, 1997, approximately
$76.8 million of additional borrowings were available to the Company under its
credit facility. On July 1, 1997, the Company incurred additional borrowings of
$26.0 million in the Page America transaction discussed in Note 9. The Company's
ability to borrow additional amounts in the future is dependent on its ability
to comply with the provisions of its credit facility.
The Company is also subject to certain additional risks and uncertainties
including, but not limited to, changes in technology, business integration,
competition, regulatory, legal and subscriber turnover.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC") and include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of interim period results. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes, however,
that its disclosures are adequate to make the information presented not
misleading. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1996 Annual Report on Form 10-K, as amended. The
results of operations for the three and six-month periods ended June 30, 1997,
are not necessarily indicative of the results to be expected for the full year.
8
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METROCALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue under service, rental and maintenance
agreements with customers as the related services are performed. Sales of
equipment are recognized upon delivery.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid investments
purchased with original maturities of three months or less.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives.
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and leasehold improvements................................ 10-31
Furniture and office equipment...................................... 5-10
Vehicles............................................................ 3-5
Subscriber paging equipment......................................... 3-5
Transmission and plant equipment.................................... 5-12
</TABLE>
The net book value of lost pagers is charged to depreciation expense. New
pagers are depreciated using the half-year convention upon acquisition.
Betterments to acquired pagers are charged to depreciation expense.
Long-Lived Assets
Long-lived assets and identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount should be addressed. Impairment is measured by
comparing the book value to the estimated undiscounted future cash flows
expected to result from use of the assets and their eventual disposition. At
June 30, 1997, the market value of the Company's common stock was $4.50 per
share and the net book value was $5.66 per share. However, the Company has
determined that there has been no permanent impairment in the carrying value of
long-lived assets reflected in the accompanying balance sheet.
Effective July 1, 1996, the Company changed the estimated useful lives of
certain intangibles acquired in 1994, including goodwill and regulatory licenses
issued by the Federal Communications Commission ("FCC") recorded in the
acquisitions of FirstPAGE USA, Inc. and MetroPaging, Inc. from 40 years to 15
years for goodwill and from 40 years to 25 years for FCC licenses. The impact of
these changes was to increase amortization expense for the three and six-month
periods ended June 30, 1997 by approximately $650,000 and $1.3 million,
respectively.
9
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METROCALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Reclassifications
Certain amounts in the prior period's consolidated financial statements
have been reclassified to conform with the current period's presentation.
4. LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Loss per share attributable to common stockholders for the three and
six-month periods ended June 30, 1996 and 1997, is based upon the
weighted-average number of common equivalent shares outstanding during the
period. The effect of outstanding options and warrants on loss per share
attributable to common stockholders for the three and six-month periods ended
June 30, 1996 and 1997, is not included because such options and warrants would
be antidilutive.
New Accounting Pronouncement
On March 3, 1997, the Financial Accounting Standards Board released
Statement No. 128, "Earnings Per Share." Statement 128 requires dual
presentation of basic and diluted earnings per share on the face of the income
statement for all periods presented. Basic earnings per share excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share pursuant to Accounting Principles Bulletin
No. 15. Statement 128 is effective for reporting periods ending after December
15, 1997, and when adopted, it will require restatement of prior periods'
earnings per share.
Since the effect of outstanding options and warrants is antidilutive, they
have been excluded from the Company's computation of net loss per share.
Accordingly, management does not believe that Statement 128 will have an impact
upon historical net loss per share as reported.
5. ACQUISITION
On February 5, 1997, the Company acquired 100% of the outstanding common
stock of Radio and Communications Consultants, Inc. and Advanced Cellular
Telephone, Inc. (collectively, "RCC") by means of a merger of Metrocall of
Shreveport, Inc., a wholly owned subsidiary of Metrocall formed to effect the
merger with RCC. The merger was financed through the issuance of 494,279 shares
of the Company's common stock, approximately $800,000 in cash and assumed
liabilities of approximately $200,000. The Company also recorded a deferred tax
liability of approximately $1.3 million in connection with this transaction. The
RCC acquisition has been accounted for as a purchase for financial accounting
purposes.
6. STOCK AND STOCK RIGHTS
Capital Stock
The authorized capital stock of Metrocall consists of 60,000,000 shares of
common stock, par value $.01 per share and 1,000,000 shares of preferred stock,
par value $0.01 per share, of which 810,000 shares have been designated as
Series A Convertible Preferred Stock and 9,000 shares have been designated
Series B Convertible Preferred Stock ("Series B Preferred Stock").
10
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METROCALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK AND STOCK RIGHTS -- (CONTINUED)
Series A Preferred
On November 15, 1996, the Company issued 159,600 shares of Series A
Convertible Preferred Stock ("Series A Preferred"), together with warrants,
discussed below, for $250 per share or $39.9 million. Each share of Series A
Preferred has a stated value of $250 per share and has a liquidation preference
over shares of the Company's common stock equal to the stated value. The Series
A Preferred carries a dividend of 14% of the stated value per year, payable
semiannually on May 15 and November 15 in cash or in additional shares of Series
A Preferred, at the Company's option. Preferred dividends accrued for the three
and six-month periods ended June 30, 1997 were approximately $1.4 million and
$2.8 million, respectively. The payment of dividends due May 15, 1997 was made
in 11,172 additional Series A Preferred shares.
In connection with the Series A Preferred, the Company issued warrants to
purchase the Company's common stock. Each warrant represents the right of the
holder to purchase 18.266 shares of common stock or an aggregate of 2,915,254
shares. The exercise price is $7.40 per share. The warrants expire November 15,
2001. The total value allocated to the warrants for financial reporting
purposes, $7.9 million or $2.70 per share, is being accreted over the term of
the Series A Preferred as preferred dividends or approximately $164,000 and
$328,000 for the three and six-month periods ended June 30, 1997, respectively.
Series B Preferred Stock
In connection with the Page America transaction (see Note 9), the Board of
Directors authorized the designation of 9,000 shares of preferred stock as
Series B Preferred Stock. The Company issued 1,500 shares of Series B Preferred
Stock pursuant to the Amended Page America Agreement. Each share of Series B
Preferred Stock has a stated value of $10,000 per share and a liquidation
preference, which is junior to the Series A Preferred Stock but senior to the
shares of Metrocall common stock, equal to its stated value. The Series B
Preferred Stock carries a dividend of 14% of the stated value per year, payable
semiannually in cash or in additional shares of Series B Preferred Stock, at the
Company's option.
Stock Option Plans
At December 31, 1996, 1,747,002 options were issued and outstanding with a
weighted-average exercise price of approximately $8.18 per share, expiring on
various dates ranging from 2003 through 2006. On February 5, 1997, the
Compensation Committee of the Board of Directors approved a change in the
exercise price for substantially all outstanding options for current employees,
officers and directors. The new exercise price was $6.00 per share, the fair
market value on the date of the change.
During the six months ended June, 30, 1997, the Board of Directors approved
grants of options to purchase 626,500 shares of Metrocall common stock to
current officers, employees and directors with exercise prices ranging from
$4.50 to $6.00 per share with a weighted-average exercise price of $5.97 per
share. All options were granted with exercise prices equal to or greater than
the fair market value on the date of grant.
Employee Stock Purchase Plan
On May 1, 1996, the stockholders of the Company approved the Metrocall,
Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan"), which offers
eligible employees the opportunity to purchase an aggregate of 300,000 shares of
Metrocall common stock through payroll deductions. Each eligible employee may
elect to purchase shares of Metrocall common stock at the lesser of 85% of the
fair market value of Metrocall common stock on either the first or last trading
day for each payroll deduction period. On January 1, 1997, the Company issued
34,770 shares of Company common stock under the Stock Purchase Plan with a
purchase price of approximately $4.14 per share. For the payroll deduction
period ended June 30, 1997, the
11
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METROCALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK AND STOCK RIGHTS -- (CONTINUED)
Company issued 74,977 shares of common stock effective July 1, 1997 with a
purchase price of approximately $3.80 per share.
7. COMMITMENTS AND CONTINGENCIES
Legal and Regulatory Matters
The Company is subject to certain legal and regulatory matters in the
normal course of business. In the opinion of management, the outcome of such
assertions will not have a material adverse effect on the financial position or
results of operations of the Company.
In April 1996, the Company entered into an agreement to purchase certain of
the assets of Source One Wireless, Inc. ("Source One") and placed $1 million
cash in escrow. On June 26, 1996, the Company advised Source One that Source One
had failed to meet certain conditions to complete the transaction and terminated
the agreement. On September 20, 1996, Source One filed an action in the Circuit
Court of Cook County, Illinois, claiming that the Company had breached the
agreement and seeking specific performance of the purchase agreement or
unspecified damages in excess of $80 million. The Company intends to vigorously
defend the claims in this action and believes it has meritorious defenses to
this action. The Company has denied the claim and asserted affirmative defenses
and counterclaims based on misrepresentations and breaches of contract by Source
One. The matter is now in discovery, which is scheduled to be completed by the
end of October 1997; trial is not expected before January 1998.
8. SALE OF TELEMESSAGING ASSETS
On May 9, 1997, the Company completed the sale of the assets of the
telemessaging business acquired in the merger with A+ Network in November 1996
pursuant to the terms of an Asset Purchase Agreement (the "Purchase Agreement")
between Metrocall and Procommunications, Inc. dated April 30, 1997. Pursuant to
the terms of the Purchase Agreement, the Company received proceeds totaling
$11.0 million in cash, net of a cash escrow of $700,000. For the six month
period ended June 30, 1997, the telemessaging business generated net revenues of
approximately $3.7 million and operating income of approximately $0.1 million.
No gain or loss was recognized upon the sale for financial reporting purposes as
net assets sold approximate the net proceeds received.
9. SUBSEQUENT EVENTS
Page America Group, Inc.
On July 1, 1997, the Company completed its acquisition of substantially all
the assets of Page America Group, Inc. and subsidiaries ("Page America"). The
total purchase price of approximately $63.2 million included consideration of
$25 million in cash, 1,500 shares of Series B Preferred Stock (see Note 6)
having a value upon liquidation of $15,000,000, 3,997,458 shares of Metrocall
common stock, assumed liabilities of approximately $3.1 million plus transaction
fees and expenses. The cash portion of the purchase price was funded through
borrowings of $26 million under the Company's credit facility. The Page America
acquisition will be accounted for as a purchase for financial reporting
purposes.
ProNet Inc.
On August 11, 1997, the Company and ProNet Inc. ("ProNet") announced the
signing of a definitive merger agreement dated August 8, 1997, whereby ProNet
would be merged with and into the Company. Under the terms of the merger
agreement, the Company will issue .90 shares of Metrocall common stock for each
share of ProNet common stock, subject to adjustment based on certain defined
operating performance criteria and debt and pager inventory targets. In
connection with the merger, the Company will assume
12
<PAGE> 13
METROCALL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENTS -- (CONTINUED)
ProNet's 11 7/8% senior subordinated notes due 2005 totaling $100 million and
expects to refinance indebtedness outstanding under ProNet's credit facility
with the Company's own credit facility. The Company anticipates the merger will
be accounted for as a purchase for financial reporting purposes. The merger is
subject to approval by regulatory agencies including the Federal Communications
Commission, Federal Trade Commission and each company's stockholders.
Credit Facility
The Company has requested that its lenders amend the loan agreement
governing its bank credit facility by increasing available borrowings under the
facility by $25.0 million from $350 million to $375 million. In addition to
increasing available borrowings, the requested amendment includes approval of
the ProNet transaction discussed above and changes to certain financial
covenants including total leverage and interest coverage beginning January 1,
1998. The lenders have approved this amendment subject to completion of loan
documentation.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
financial statements and the notes thereto which appear elsewhere in this
quarterly report and its annual report on Form 10-K, as amended, for the year
ended December 31, 1996.
All statements contained herein that are not historical facts, including
but not limited to, statements regarding anticipated future capital
requirements, the Company's future development plans, the Company's ability to
obtain additional debt, equity or other financing, and the Company's ability to
generate cash from operations and further savings from existing operations, are
based on current expectations. These statements are forward looking in nature
and involve a number of risks and uncertainties. Actual results may differ
materially. Among the factors that could cause actual results to differ
materially are the following: the availability of sufficient capital to finance
the Company's business plan on terms satisfactory to the Company; competitive
factors, such as the introduction of new technologies and competitors into the
paging and wireless communications industry; pricing pressures which could
affect demand for the Company's services; changes in labor, equipment and
capital costs; future acquisitions and strategic partnerships; general business
and economic conditions; and the other risk factors described from time to time
in the Company's reports filed with the Securities and Exchange Commission. The
Company wishes to caution readers not to place undue reliance on any such
forward looking statements, which statements are made pursuant to the Private
Securities Litigation Reform Act of 1995 and, as such, speak only as of the date
made.
OVERVIEW
Metrocall is currently the fifth largest paging company in the United
States based on number of subscribers, with approximately 2.5 million pagers in
service after giving effect to the Page America transaction (see "Recent and
Pending Acquisitions -- Page America Group, Inc."). For the quarter ended June
30, 1997, the Company added 104,442 subscribers to its base of pagers in service
exclusively through internal growth. On February 5, 1997, the Company completed
the acquisition of Radio and Communications Consultants, Inc. and Advanced
Cellular Telephone, Inc. (collectively, "RCC"), affiliated paging companies
operating in the Shreveport, Louisiana market. The results of operations for the
three and six months ended June 30, 1997 reflect the results of operations of
companies acquired throughout 1996 including Parkway Paging, Inc. ("Parkway")
Satellite Paging and Message Network (collectively, "Satellite") and A+ Network,
Inc. ("A+ Network")(collectively, the "1996 Acquisitions"), as well as RCC from
the date of acquisition. Additionally, the results of operations for the three
and six months ended June 30, 1997 also reflect the operations of the Company's
telemessaging business until its sale on May 1, 1997. Net revenues and operating
income derived from the telemessaging operations and included in the results of
operations for the six-month period ended June 30, 1997 were approximately $3.7
million and $0.1 million, respectively. Since June 30, 1996, the Company has
added more than 1.4 million pagers through acquisitions and internal growth
including approximately 200,000 added from the Page America transaction
completed on July 1, 1997.
The definitions below relate to management's discussion of the Company's
results of operations that follows.
- Service, rent and maintenance revenues: include primarily monthly,
quarterly, semi-annually and annually billed recurring revenue, not
generally dependent on usage, charged to subscribers for paging and
related services such as voice mail and pager repair and replacement.
Service, rent and maintenance revenues also include revenues derived from
telemessaging, cellular and long distance services.
- Net revenues: include service, rent and maintenance revenues and sales
of customer owned and maintained ("COAM") pagers less net book value of
products sold.
- Service, rent and maintenance expenses: include costs related to the
management, operation and maintenance of the Company's network systems
and customer support centers.
14
<PAGE> 15
- Selling and marketing expenses: include salaries, commissions and
administrative costs for the Company's sales force and related marketing
and advertising expenses.
- General and administrative expenses: include executive management,
accounting, office telephone, repairs and maintenance, management
information systems and employee benefits.
The Company derives the majority of its revenues from fixed, periodic
(usually monthly) fees, generally not dependent on usage, charged to subscribers
for paging services. While a subscriber continues to use the Company's service,
operating results benefit from this recurring revenue stream with minimal
requirements for incremental selling expenses or other fixed costs. The
Company's total revenues have increased by approximately 119.3% to $70.3 million
for the quarter ended June 30, 1997 from $32.0 million for the quarter ended
June 30, 1996. Overall, subscribers have increased by approximately 110.2% to
more than 2.3 million at June 30, 1997 from 1.1 million at June 30, 1996.
The Company's average monthly paging service, rent and maintenance revenues
per unit ("ARPU") for the three-month periods ended June 30, 1996 ("1996") and
June 30, 1997 ("1997") was $7.89 and $8.44, respectively. The increase in ARPU
from 1996 to 1997 is primarily related to the merger with A+ Network in November
1996, the changing distribution mix, and enhanced paging services. ARPU for the
A+ Network markets averaged slightly more than $10.00 per month during the
fourth quarter of 1996 causing an increase in the weighted-average ARPU for the
combined company after the merger. In order to capitalize on the anticipated
growth of the paging and wireless messaging industries, the Company has expanded
its channels of distribution to include Company-owned and operated retail
stores, strategic partnerships and alliances, franchises and internet sales
among others; with each focusing on the sale rather than lease of pagers. These
channels tend to have higher ARPU's than typical third-party resellers who
purchase service in quantity at wholesale rates. Furthermore, the Company has
been successful in marketing enhanced services, such as nationwide paging
services and voice mail, to its subscriber base, as well as branded customer
service and billing services for the Company's strategic partners and
franchisees.
The Company's growth and expansion into new markets, whether internal or
through acquisitions, require significant capital investment for the
installation of paging equipment and technical infrastructure. The Company also
purchases pagers for that portion of its subscriber base that leases equipment
from the Company. During the quarter ended June 30, 1997 the Company's capital
expenditures totaled approximately $18.0 million including approximately $12.0
million for pagers, representing an increase in pagers on hand, primarily in
anticipation of the completion of the Page America transaction, and net
increases and maintenance to the rental pager base.
As a result of the completion of the Company's nationwide network and an
emphasis on distribution channels through which pagers are sold rather than
leased, capital expenditures are expected to be reduced for the year ending
December 31, 1997. The combination of growing revenues and EBITDA along with
reduced levels of capital expenditures should result in improving leverage
ratios and access to capital in future periods.
The Company's long-term strategy is to continue to expand its business by
providing paging and other wireless communications services to an increasingly
broad base of subscribers throughout the United States, while increasing total
revenues and EBITDA and de-emphasizing that portion of the business which has
historically leased pagers. The Company believes that increases in revenues from
the sale of pagers and service revenue from providing paging service to such
pagers will more than make up for the losses of rental revenues derived from
leasing pagers, which has increasingly involved high volume, lower margin
transactions. The Company is seeking to increase its base of subscribers by
expanding its operations in existing, contiguous and other markets, through
acquisitions, start-up operations and internal growth. The Company has also
entered into a merger agreement with ProNet Inc. (See "Recent and Pending
Acquisitions -- ProNet Inc.")
15
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
net revenues represented by certain items in the Company's Condensed
Consolidated Statements of Operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED JUNE
JUNE 30, 30,
----------------------- -----------------------
1996 1997 1996 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Service, rent and maintenance........... 95.9% 95.6% 94.9% 96.1%
Product sales........................... 26.7 16.4 25.6 15.0
--------- --------- --------- ---------
Total revenues..................... 122.6 112.0 120.5 111.1
Net book value of products sold......... (22.6) (12.0) (20.5) (11.1)
--------- --------- --------- ---------
100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Service, rent and maintenance
expenses............................. 31.8 29.0 32.1 28.7
Selling and marketing................... 20.7 20.7 19.4 20.2
General and administrative.............. 26.5 23.4 24.7 24.2
Depreciation and amortization........... 52.1 36.4 48.8 35.3
--------- --------- --------- ---------
Total operating expenses........... 131.1 109.5 125.0 108.4
--------- --------- --------- ---------
Loss from operations............... (31.1) (9.5) (25.0) (8.4)
Interest and other income................. 4.4 0.2 4.9 --
Interest expense.......................... (16.0) (12.5) (16.3) (12.9)
--------- --------- --------- ---------
Loss before income tax benefit............ (42.7) (21.8) (36.4) (21.3)
Income tax benefit........................ 0.8 2.2 0.2 1.8
--------- --------- --------- ---------
Net loss........................... (41.9) (19.6) (36.2) (19.5)
Preferred dividends....................... -- (2.6) -- (2.6)
--------- --------- --------- ---------
Loss attributable to common
stockholders.................... (41.9)% (22.2)% (36.2)% (22.1)%
========= ========= ========= =========
Units in service (end of period).......... 1,109,647 2,332,006 1,109,647 2,332,006
EBITDA (in thousands)(1).................. $ 5,514 $ 16,889 $ 12,235 $ 33,179
Ratio of EBITDA to net revenues(1)........ 21.1% 26.9% 23.8% 26.9%
ARPU(2)................................... $ 7.89 $ 8.44 $ 7.93 $ 8.36
Average monthly operating cost per
unit(3)................................. $ 6.49 $ 6.59 $ 6.36 $ 6.50
</TABLE>
- ---------------
(1) EBITDA (earnings before interest, taxes, depreciation and amortization),
while not a measure under generally accepted accounting principles ("GAAP"),
is a standard measure of financial performance in the paging industry;
EBITDA should not be considered in isolation or as an alternative to net
income (loss), income (loss) from operations, cash flows from operating
activities or any other measure of performance under GAAP. EBITDA is,
however, an approximation of the primary financial measure by which the
Company's covenants are calculated under its indenture relating to its
senior subordinated notes and its credit facility. See "-- Liquidity and
Capital Resources" for a discussion of significant capital requirements and
commitments.
(2) ARPU (average monthly paging revenue per unit) is calculated by dividing (a)
paging service, rent and maintenance revenues for the period by (b) the
average number of units in service for the period. The calculation of ARPU
excludes revenues derived from non-paging services such as telemessaging,
long distance and cellular telephone.
(3) Average monthly operating expense per unit is calculated by dividing (a)
total recurring paging operating expenses before depreciation and
amortization for the period by (b) the average number of units in service
for the period. The calculation of average monthly operating expense per
unit excludes costs associated with the telemessaging operations.
16
<PAGE> 17
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH 1996
Total revenues increased approximately $38.2 million, or approximately
119%, from $32.0 million for the three months ended June 30, 1996 (the "1996
quarter") to $70.3 million for the three months ended June 30, 1997 (the "1997
quarter"). Net revenues increased approximately $36.6 million, or 140%, from
$26.1 million in the 1996 quarter to $62.8 million in the 1997 quarter. The
increase is attributable to greater service revenues due primarily to the growth
of pagers in service from 1,109,647 at June 30, 1996, to 2,332,006 at June 30,
1997. Acquisitions completed in 1996 added approximately 900,000 subscribers to
the Company's subscriber base. Operations of acquired companies are included in
the results of operations from their respective acquisition dates. ARPU for
paging services increased from $7.89 per unit in the 1996 quarter to $8.44 per
unit in the 1997 quarter due primarily to the merger with A+ Network in November
1996, the changing distribution mix, and enhanced paging services. Pro forma
ARPU for the quarter ended December 31, 1996, assuming the A+ Network
acquisition was completed as of October 1, 1996, was estimated to be $8.21 per
unit. Factors affecting ARPU in future periods include distribution mix of new
subscribers, competition and new technologies, among others. There can be no
assurance that ARPU will not decline in future periods.
Product sales increased $3.3 million from $7.0 million in the 1996 quarter
to $10.3 million in the 1997 quarter and decreased as a percentage of net
revenues from 26.7% in the 1996 quarter to 16.4% in the 1997 quarter. Net book
value of products sold increased approximately $1.6 million from $5.9 million in
the 1996 quarter to $7.5 million in the 1997 quarter principally due to the
increase in product sales, partially offset by increased depreciation expense.
The gross margin on products sold increased from 15.2% in the 1996 quarter to
26.8% in the 1997 quarter.
Overall, the Company experienced an increase in average monthly operating
costs per unit in service (operating costs per unit before depreciation and
amortization) from the 1996 quarter to the 1997 quarter. Average monthly
operating cost per unit increased from $6.49 per unit for the 1996 quarter to
$6.59 per unit (excluding operating costs associated with non-paging operations,
primarily telemessaging) for the 1997 quarter. Each operating expense is
discussed separately below.
Service, rent and maintenance expenses increased approximately $9.9 million
from $8.3 million in the 1996 quarter to $18.2 million in the 1997 quarter and
decreased as a percentage of net revenues from 31.8% in the 1996 quarter to
29.0% in the 1997 quarter. The overall increase in service, rent and maintenance
expense is attributable to the acquisitions of Parkway Paging ($0.8 million),
Satellite ($0.8 million) and A+ Network ($5.9 million) completed in 1996.
Additional increases are attributable to increased third-party carrier costs
($0.4 million), increased site rental costs ($1.1 million) and increased
personnel costs ($0.9 million). Service, rent and maintenance expense per unit
was $2.61 in the 1996 and 1997 quarters, respectively.
Selling and marketing expenses increased approximately $7.6 million from
$5.4 million in the 1996 quarter to $13.0 million in the 1997 quarter and was
unchanged as a percentage of net revenues at 20.7%. The increase in selling and
marketing expenses is primarily associated with the companies acquired in 1996,
which added 20 new sales offices and approximately 80 retail locations. Selling
and marketing expenses attributed to the acquired companies are Parkway Paging
($0.5 million), Satellite ($0.3 million), and A+ Network ($5.5 million).
Additional increases are associated with the increased sales staff and related
costs ($1.0 million) and increased advertising and promotion costs ($0.3
million). Monthly selling and marketing expense per unit has increased from
$1.70 per unit in the 1996 quarter to $1.89 per unit in the 1997 quarter, due
primarily to increasing the Company's sales force as a result of acquisitions in
new geographic areas for the Company. Selling and marketing expenses may
increase as a percentage of net revenues as the Company continues to increase
its presence in existing markets and expand geographic coverage.
General and administrative expenses increased $7.8 million from $6.9
million in the 1996 quarter compared to $14.7 million in the 1997 quarter, and
decreased as a percentage of net revenues from 26.5% in the 1996 quarter to
23.4% in the 1997 quarter. General and administrative expenses attributed to the
acquired companies are Parkway Paging ($0.2 million), Satellite ($0.4 million),
and A+ Network ($4.4 million). General and administrative expenses also
increased due to increased expenses for collection activities ($1.0 million),
additional operational personnel ($1.0 million), and taxes, licenses and fees
($0.5 million). Monthly general and administrative expense per unit has
decreased from $2.18 per unit in the 1996 quarter to
17
<PAGE> 18
$2.09 per unit in the 1997 quarter. On a per unit basis, general and
administrative expenses are expected to decline as additional synergies are
gained from the Company's 1996 and 1997 acquisitions.
Depreciation and amortization increased approximately $9.2 million from
$13.6 million in the 1996 quarter to $22.8 million in the 1997 quarter, and
decreased as a percentage of net revenues from 52.1% to 36.4% in the 1996
quarter and the 1997 quarter, respectively. The increase in total depreciation
expense resulted primarily from depreciation on increased subscriber paging
equipment and on other plant and operating equipment since June 30, 1996.
Amortization increased substantially during 1997 due to the amortization of
goodwill and other intangibles recorded in the 1996 and 1997 acquisitions.
Effective July 1, 1996, the Company changed the estimated useful lives of
certain intangibles acquired in 1994, including goodwill and regulatory licenses
issued by the FCC from 40 years to 15 years for goodwill and from 40 years to 25
years for FCC licenses. The impact of these changes was to increase amortization
expense for the 1997 quarter by approximately $650,000.
Interest expense increased approximately $3.7 million, from $4.2 million in
the 1996 quarter to $7.9 million in the 1997 quarter. Interest expense increased
due to higher average level of debt during 1997 primarily associated with the
financing of the 1996 Acquisitions.
In November 1996, the Company issued 159,600 shares of Series A Convertible
Preferred Stock ("Series A Preferred") with a stated value of $250 per share for
total proceeds of $39.9 million. The Series A Preferred bears dividends at 14%
of the stated value per year. Dividends on the Series A Preferred may be paid in
either cash or additional shares of Series A Preferred, at the Company's option.
Preferred dividends recorded during the 1997 quarter were approximately $1.6
million.
Loss attributable to common stockholders increased $3.0 million from $10.9
million in the 1996 quarter to $13.9 million in the 1997 quarter primarily due
to increased interest expense ($3.7 million) and preferred dividends ($1.6
million), partially offset by a decrease in the loss from operations of $2.1
million.
EBITDA increased approximately $11.4 million to $16.9 million in the 1997
quarter from $5.5 million in the 1996 quarter. As a percentage of net revenues,
EBITDA increased from 21.1% in 1996 to 26.9% in 1997.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH 1996
Total revenues increased approximately $75.1 million from $62.0 million for
the six months ended June 30, 1996 ("1996") to $137.1 million for the six months
ended June 30, 1997 ("1997"). Service, rent and maintenance revenues increased
approximately $69.7 million in 1997 from $48.8 million in 1996 to $118.5 million
in 1997. The increase in revenues is attributed to greater service revenues due
to the growth of pagers from 1,109,647 at June 30, 1996 to 2,332,006 at June 30,
1997. Monthly ARPU for paging services increased from $7.93 per unit in 1996 to
$8.36 per unit in 1997 due to the merger with A+ Network in November, 1996, the
changing distribution mix, and enhanced paging services. Factors affecting ARPU
in future periods include distribution mix of new subscribers, competition and
new technologies, among others. There can be no assurance that ARPU will not
decline in future periods.
Product sales increased $5.4 million from $13.1 million in 1996 to $18.5
million in 1997, and decreased as a percentage of total revenues from 25.6% in
1996 to 15.0% in 1997. Net book value of products sold increased approximately
$3.1 million from $10.6 million in 1996 to $13.7 million in 1997 principally due
to the increase in product sales, partially offset by increased depreciation
expense. The gross margin on products sold increased from 19.7% in 1996 to 26.1%
in 1997.
Overall, the Company experienced an increase in average monthly operating
costs per unit in service (operating costs per unit before depreciation and
amortization) from 1996 to 1997. Average monthly operating costs per unit
increased from $6.36 per unit in 1996 to $6.50 per unit in 1997. Each operating
expense is discussed separately below.
Service, rent and maintenance expenses increased approximately $18.9
million from $16.5 million in 1996 to $35.4 million in 1997 and decreased as a
percentage of net revenues from 32.1% to 28.7% in 1997. The overall increase in
service, rent and maintenance expense is attributable to the acquisitions of
Parkway Paging
18
<PAGE> 19
($1.4 million), Satellite ($1.5 million), and A+ Network ($11.0 million)
completed during the second half of 1996. Additional increases are attributable
to increased third party carrier costs ($0.5 million), increased site rental
costs ($1.7 million), and increased personnel costs ($2.2 million). Service,
rent and maintenance expense per unit has decreased from $2.68 per unit in 1996
to $2.54 per unit in 1997.
Selling and marketing expenses increased approximately $14.9 million, from
$ 10.0 million in 1996 to $24.9 million in 1997 and increased as a percentage of
net revenues from 19.4% in 1996 to 20.2% in 1997. The increase in selling and
marketing expenses is primarily associated with the companies acquired in 1996,
which added 20 new sales offices and approximately 80 retail locations. Selling
and marketing expenses attributed to the acquired companies are Parkway Paging
($0.9 million), Satellite ($0.6 million), and A+ Network ($10.6 million).
Additional increases are associated with the increased sales staff and related
costs ($2.0 million), and increased advertising and promotional costs ($0.5
million). Monthly selling and marketing expense per unit has increased from
$1.62 per unit in 1996 to $1.84 per unit in 1997, due primarily to increasing
the Company's sales force as a result of acquisitions in new geographic areas
for the Company. Selling and marketing expenses may increase as a percentage of
net revenues as the Company continues to increase its presence in existing
markets and expand geographic coverage.
General and administrative expenses increased $17.1 million from $12.7
million in 1996 to $29.8 million in 1997 and decreased as a percentage of net
revenues from 24.7% in 1996 to 24.2% in 1997. General and administrative
expenses attributed to the acquired companies are Parkway Paging ($0.4 million),
Satellite ($0.9 million), and A+ Network ($11.2 million). General and
administrative expenses also increased primarily due to increased expenses for
collection activities ($1.6 million), additional operational personnel ($1.3
million), and taxes and licenses ($0.8 million). Monthly general and
administrative expense per unit has increased from $2.06 per unit in 1996 to
$2.12 per unit in 1997. On a per unit basis, general and administrative expenses
are expected to decline as additional synergies are gained from the Company's
1996 and 1997 acquisitions.
Depreciation and amortization increased approximately $18.4 million from
$25.1 million in 1996 to $43.5 million in 1997 and decreased as a percentage of
net revenues from 48.8% in 1996 to 35.3% in 1997. The increase in total
depreciation expense resulted primarily from depreciation on increased
subscriber paging equipment and on other plant and operating equipment.
Amortization increased substantially during 1997 due to the amortization of
goodwill and other intangibles recorded in the 1996 and 1997 acquisitions.
Effective July 1, 1996, the Company changed the estimated useful lives of
certain intangibles acquired in 1994, including goodwill and regulatory licenses
issued by the FCC from 40 years to 15 years for goodwill and from 40 years to 25
years for FCC licenses. The impact of these changes was to increase amortization
expense for 1997 by approximately $1.3 million.
Interest expense increased approximately $7.5 million, from $8.4 million in
1996 to $15.9 million in 1997. Interest expense increased due to higher average
level of debt during 1997 primarily associated with the financing of the 1996
acquisitions.
In November, 1996, the Company issued 159,600 shares of Series A
Convertible Preferred Stock ("Series A Preferred") with a stated value of $250
per share for total proceeds of $39.9 million. The Series A Preferred bears
dividends at 14% of the stated value per year. Dividends on the Series A
Preferred may be paid in either cash or additional shares of Series A Preferred,
at the Company's option. Preferred dividends recorded during the six months
ended June 30, 1997 were approximately $3.2 million.
Loss attributable to common stockholders increased $8.6 million from $18.6
million in 1996 to $27.2 million in 1997 primarily due to increased interest
expense ($7.5 million) and preferred dividends ($3.2 million) partially offset
by a decrease in loss from operations of $2.5 million.
EBITDA increased approximately $21.0 million to $33.2 million in 1997 from
$12.2 million in 1996. As a percentage of net revenues, EBITDA increased from
23.8% in 1996 to 26.9% in 1997.
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require the availability of substantial funds to
finance the growth of its existing operations and customer base, development and
construction of future wireless communications networks, expansion into new
markets, and the acquisition of other wireless communications companies. Further
cash requirements include debt service, working capital and general corporate
requirements.
The Company has financed its internal growth in 1997 through its operating
cash flow, available cash on hand and, to a limited extent, borrowings under the
Company's credit facility. Net cash provided by operating activities increased
from $13.9 million to $14.3 million for the six months ended June 30, 1996 and
1997, respectively.
At June 30, 1997, the Company had a working capital surplus of
approximately $5.8 million largely due to cash received from the sale of the
Company's telemessaging operations. In prior periods, the Company has
experienced working capital deficits and such deficits may reoccur in future
periods. Pursuant to the Page America acquisition, the Company will assume
certain current liabilities of Page America which may result in a working
capital deficit. The Company attempts, whenever possible, to finance its growth
through operating cash flow and available cash balances rather than incurring
additional indebtedness. As a result, purchases of noncurrent assets, including
pagers and other network and transmission equipment, may be financed with
current liabilities (e.g. accounts payable), causing a deficit in working
capital. The Company currently has sufficient borrowing capacity available under
its credit facility, discussed below, to fund estimated working capital
requirements at June 30, 1997 including working capital needs associated with
the Page America transaction.
Cash flows used in investing activities were primarily to fund purchases of
property and equipment. Capital expenditures were approximately $39.1 million
and $32.5 million for the six months ended June 30, 1996 and 1997, respectively.
Capital expenditures for the 1997 six months included approximately $12.0
million for pagers, representing increases in pagers on hand, primarily in
anticipation of the completion of the Page America transaction, and net
increases and maintenance to the rental subscriber base. The balance of capital
expenditures included $2.7 million for information systems and computer related
equipment, $2.4 million for network construction and development and $0.9
million for general purchases including leasehold improvements and office
equipment. Additionally, the Company received proceeds of approximately $10.3
million from the sale of the assets of its telemessaging operations acquired in
the A+ Network merger in November 1996.
Cash flows provided by financing activities for the six months ended June
30, 1997, included borrowings under the Company's credit facility of $20.0
million primarily to fund working capital requirements and capital expenditures.
Total capital expenditures for the year ending December 31, 1997 are estimated
to be approximately $60 million primarily for the acquisition of pagers, paging
and transmission equipment and information systems enhancement. This estimate
does not include the cash consideration of $26.0 million paid in the Page
America acquisition on July 1, 1997, or the related transaction costs, but does
include estimated capital expenditures related to the Page America assets after
the acquisition. The Company expects that its capital expenditures for the year
ending December 31, 1997, will be financed through a combination of operating
cash flow and borrowings. Projected capital expenditures are subject to change
based on the Company's internal growth, general business and economic conditions
and competitive pressures. Future cash requirements include debt service costs,
primarily interest.
There are no significant principal payments required under the Company's
debt agreements during the year ending 1997. Additionally, dividends on the
Company's Series A Preferred accrue at a rate of 14% of the stated value ($39.9
million) per year. Dividends on the Series A Preferred may be paid in either
cash or additional shares of Series A Preferred, at the Company's option.
However, under certain circumstances, as defined in the certificate of
designation, the dividend rate may increase to 16% per year. Further, Metrocall
is required to redeem all outstanding shares of Series A Preferred (including
dividend shares) in November 2008 unless the holders have previously converted
such shares to common stock. Accrued but unpaid dividends at June 30, 1997, were
approximately $0.7 million. On May 7, 1997, the Board of Directors
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<PAGE> 21
authorized the payment of accrued dividends on the Series A Preferred in 11,172
additional shares of Series A Preferred and such additional shares were issued
effective May 15, 1997.
SENIOR SECURED CREDIT FACILITY
During 1996, the Company amended and restated the loan agreement governing
the Company's existing credit facility. Subject to certain conditions set forth
in the new agreement, the Company may borrow up to $350 million under two loan
facilities. The first facility ("Facility A") is a $225 million reducing
revolving credit facility and the second ("Facility B") is a $125 million
reducing credit facility (together Facility A and Facility B are referred to as
the "Credit Facility"). The Credit Facility has a term of eight years and is
secured by substantially all the assets of the Company. Required quarterly
principal repayments begin on March 31, 2000 and continue through December 31,
2004. At June 30, 1997, a total of approximately $189.9 million was outstanding
under the Credit Facility. Pursuant to the terms of the loan agreement, at June
30, 1997, total additional borrowings available to the Company under the credit
facility were approximately $76.8 million. On July 1, 1997, the Company
increased the borrowings outstanding under its credit facility by $26.0 million
to fund the cash portion of the Page America acquisition including transaction
fees and expenses.
The Credit Facility contains various covenants that, among other
restrictions, require the Company to maintain certain financial ratios,
including total debt to annualized operating cash flow (not to exceed 6.0 to 1.0
from January 1, 1997 to December 31, 1997, and declining thereafter), senior
debt to annualized operating cash flow, annualized operating cash flow to pro
forma debt service, total sources of cash to total uses to cash, and operating
cash flow to interest expense (in each case, as such terms are defined in the
agreement relating to the Credit Facility). The Credit Facility also required
the Company to raise additional equity (approximately $10,000,000) if its ratio
of cash flow to interest expense is less than 2.0 to 1.0 for the quarter ending
June 30, 1997. For the quarter ended June 30, 1997, the ratio of cash flow to
interest expense was 2.3 to 1.0. The covenants also limit additional
indebtedness and future mergers and acquisitions (other than the pending
transaction with Page America discussed below) without the approval of the
lenders, and restrict the payment of cash dividends and other stockholder
distributions by the Company during the term of the Credit Facility. The Credit
Facility also prohibits certain changes in ownership control of the Company as
defined, during the term of the Credit Facility.
The Company has requested its lenders to amend the loan agreement governing
its credit facility to add a third facility ("Facility C"). Facility C is a $25
million reducing revolving facility which increases total available borrowings
under the facility from $350 million to $375 million. In addition to increasing
the available borrowings, the requested amendment includes approval of the
ProNet transaction, discussed below, and changes to certain financial covenants
including total leverage and interest coverage beginning January 1, 1998. The
lenders have approved this amendment subject to completion of loan
documentation.
Management believes that funds generated by the Company's operations,
together with those available under its Credit Facility, will be sufficient to
meet cash requirements for the pending acquisition of Page America, to finance
estimated capital expenditure requirements, and to fund the Company's existing
operations for the foreseeable future. While the Company has no current
outstanding commitments, other than the agreement to acquire the assets of Page
America, discussed below, the Company will continue to evaluate strategic
acquisition targets in the future. Potential future acquisitions would be
evaluated on significant strategic opportunities such as geographic coverage and
regulatory licenses and other factors including overall valuation, consideration
and availability of financing. Such potential acquisitions may result in
substantial capital requirements for which additional financing may be required.
No assurance can be given that such additional financing would be available on
terms satisfactory to the Company.
RECENT AND PENDING ACQUISITIONS
Page America Group, Inc.
On April 22, 1996, the Company signed a definitive acquisition agreement
(the "Page America Agreement") with Page America Group, Inc. of Hackensack, New
Jersey ("Page America"). The Page America Agreement was subsequently amended and
restated on January 30, 1997 and further amended
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<PAGE> 22
on March 28, 1997 (the "Amended Page America Agreement"). The Page America
acquisition was completed on July 1, 1997. Pursuant to the Amended Page America
Agreement, as subsequently modified (i) Metrocall acquired substantially all of
the assets and assumed substantially all of Page America's accounts payable and
certain obligations under various office and equipment leases and (ii) Page
America received (a) approximately $25 million in cash, (b)1,500 shares of
Series B Convertible Preferred Stock with a liquidation value of $15 million and
(c) 3,997,458 shares of the Company's common stock. The Company financed the
cash portion of the purchase price, including transaction fees and expenses,
with borrowings of $26 million under its Credit Facility. The Page America
transaction will be accounted for as a purchase for financial reporting
purposes.
PRONET INC.
On August 11, 1997, the Company and ProNet Inc. ("ProNet") announced the
signing of a definitive merger agreement, whereby ProNet will be merged with and
into the Company. Under the terms of the merger agreement, the Company will
issue .90 shares of Metrocall common stock for each share of ProNet common
stock, subject to adjustment based on certain defined operating performance
criteria and debt and pager inventory targets. In connection with the merger,
the Company will assume ProNet's 11 7/8% senior subordinated notes due 2005
totaling $100 million and expects to refinance indebtedness outstanding under
ProNet's credit facility with the Company's own credit facility. The Company
anticipates the merger will be accounted for as a purchase for financial
reporting purposes. The merger is subject to approval by regulatory agencies
including the Federal Communications Commission, Federal Trade Commission and
each company's stockholders.
ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS AND FINANCIAL CONDITION
The ability of the Company to meet its debt service and other obligations
will be dependent upon the future performance of the Company and its cash flows
from operations, which will be subject to financial, business and other factors,
certain of which are beyond its control, such as prevailing economic conditions.
Management believes that funds generated from the Company's operations and funds
available under its Credit Facility will be sufficient to meet projected capital
expenditures and debt service requirements and to fund the Company's operations
for the foreseeable future. Although management has no further obligation to do
so (other than Page America discussed above), it plans to continue to expand its
geographic service areas through internal growth and will continue to evaluate
potential strategic acquisition targets in the future which may result in
substantial capital requirements for which additional financing may be required.
No assurance can be given that such additional financing would be available on
terms satisfactory to the Company. Additionally, the following important
factors, among others, could cause the Company's operating results and financial
condition to differ materially from those indicated or suggested by forward
looking statements made in this quarterly report.
Substantial Indebtedness
At June 30, 1997, the Company had outstanding approximately $349.3 million
in long-term debt consisting of bank loans, senior subordinated notes, mortgage
indebtedness and capital leases, and incurred additional indebtedness of $26
million in connection with the Page America acquisition on July 1, 1997.
Further, the Company expects to assume ProNet's 11 7/8% senior subordinated
notes totaling $100 million and to refinance bank indebtedness outstanding under
the ProNet credit facility with borrowings under its own credit facility.
Additionally, the Company expects to incur additional indebtedness (in the form
of draws under the Company's senior secured credit facility) to meet working
capital needs and other purposes. This substantial indebtedness, along with the
net losses and working capital deficits sustained by the Company in recent
periods, will have consequences for the Company, including the following: (i)
the ability of the Company to obtain additional financing for working capital,
capital expenditures, debt service requirements or other purposes may be
impaired; (ii) a substantial portion of the Company's cash flow from operations
will be required to be dedicated to the payment of the Company's interest
expense; (iii) indebtedness under the Credit Facility bears interest at floating
rates, which will cause the Company to be vulnerable to increases in
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interest rates; (iv) the Company may be more highly leveraged than companies
with which it competes, which may place it at a competitive disadvantage; and
(v) the Company may be more vulnerable in the event of a downturn in its
business or in general economic conditions. In addition, the ability of the
Company to access borrowings under its credit facility and to meet its debt
service and other obligations (including compliance with financial covenants)
will be dependent upon the future performance of the Company and its cash flows
from operations, which will be subject to financial, business and other factors,
certain of which are beyond its control, such as prevailing economic conditions.
No assurance can be given that, in the event the Company were to require
additional financing, such additional financing would be available on terms
permitted by agreements relating to existing indebtedness or otherwise
satisfactory to Metrocall.
Possible Impact of Competition and Technological Change
The Company faces competition from other paging companies in all markets in
which it operates. The wireless communications industry is a highly competitive
industry, with price being one of the primary means of differentiation among
providers of numeric messaging services which account for the substantial
majority of the Company's revenues. Companies in the industry also compete on
the basis of coverage area, enhanced services, transmission quality, system
reliability and customer service. Certain of Metrocall's competitors possess
greater financial, technical, marketing and other resources that Metrocall. In
addition, other entities offering wireless two-way communications technology,
including cellular telephone, specialized mobile radio services and personal
communications services, compete with the paging services provided by Metrocall.
There can be no assurance that additional competitors will not enter markets
served by Metrocall or that Metrocall will be able to compete successfully. In
this regard, certain long distance carriers have begun to or have announced
their intention to market paging services jointly with other telecommunications
services.
The wireless communications industry is characterized by rapid
technological change. Future technological advances in the wireless
communications industry could create new services or products competitive with
the paging and wireless messaging services provided or to be developed by
Metrocall. Recent and proposed regulatory changes by the Federal Communications
Commission ("FCC") are aimed at encouraging such services and products.
In particular, in 1994 the FCC began auctioning licenses for new personal
communications services ("PCS"). The FCC's rules also provide for the private
use of PCS spectrum on an unlicensed basis. PCS will involve a network of small,
low-powered transceivers placed throughout a neighborhood, business complex,
community or metropolitan area to provide customers with mobile voice and data
communications. There are two types of PCS, narrowband and broadband. Narrowband
PCS is expected to provide enhanced or advanced paging and messaging
capabilities, such as "acknowledgment paging" or "talk-back" paging. Several PCS
systems are currently operational. Additionally, other existing or prospective
radio services have potential to compete with Metrocall. For example, the FCC
has authorized non-geostationary mobile satellite service systems in several
frequency bands, and has initiated proceedings to consider making additional
licenses in some of those bands available. Licensees of those satellite services
(some of whom have already launched satellites) are permitted to offer signaling
and other mobile services that could compete with terrestrial paging companies.
A recent FCC decision will allow land mobile licensees in the 220-222 MHz band
to offer commercial paging services. The FCC has also initiated a rule making
proceeding proposing to allow Multiple Address Systems, a fixed microwave
service in various 900 MHz frequency bands, to offer mobile services. Any of
these services may compete directly or indirectly with Metrocall.
Moreover, changes in technology could lower the cost of competitive
services and products to a level where Metrocall's services and products would
become less competitive or to where Metrocall would be required to reduce the
prices of its services and products. There can be no assurance that Metrocall
will be able to develop or introduce new services and products to remain
competitive or that Metrocall will not be adversely affected in the event of
such technological developments.
Technological changes also may affect the value of the pagers owned by
Metrocall and leased to its subscribers. If Metrocall's subscribers requested
more technologically advanced pagers, Metrocall could incur additional capital
expenditures if it were required to replace pagers to its subscribers.
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History of Net Losses
Metrocall has sustained net losses of $2.4 million, $20.1 million and $49.1
million for the years ended December 31, 1994, 1995 and 1996 and $24.1 million
for the six months ended June 30, 1997. No assurance can be given that losses
can be reversed in the future. In addition, at June 30, 1997, Metrocall's
accumulated deficit was approximately $124.0 million. Metrocall's business
requires substantial funds for capital expenditures and acquisitions that result
in significant depreciation and amortization charges. Additionally, substantial
levels of borrowing, which will result in significant interest expense, are
expected to be outstanding in the foreseeable future. Accordingly, net losses
are expected to continue to be incurred in the future. There can be no assurance
that Metrocall will be able to operate profitably at any time in the future.
Litigation
In April 1996, the Company entered into an agreement to purchase certain of
the assets of Source One Wireless, Inc. ("Source One") and placed $1 million
cash in escrow. On June 26, 1996, the Company advised Source One that Source One
had failed to meet certain conditions to complete the transaction and terminated
the agreement. On September 20, 1996, Source One filed an action in the Circuit
Court of Cook County, Illinois claiming that the Company had breached the
agreement and seeking specific performance of the purchase agreement of
unspecified damages in excess of $80 million. The Company intends to vigorously
defend the claims in this action and believes it has meritorious defenses to
this action. The Company has denied the claim and asserted affirmative defenses
and counterclaims based on misrepresentations and breaches of contract by Source
One. The matter is now in discovery, which is scheduled to be completed by the
end of October 1997; trial is not expected before January 1998.
Subscriber Turnover
The results of operations of paging service providers, such as Metrocall,
can be significantly affected by subscriber cancellations and by subscribers who
switch their service to other carriers. Metrocall's average monthly subscriber
turnover rate for the six months ended June 30, 1997 was approximately 2.0%. In
order to realize net growth in subscribers, disconnected subscribers must be
replaced and new subscribers must be added. The sales and marketing costs
associated with attracting new subscribers are substantial relative to the costs
of providing service to existing customers. Because Metrocall's business is
characterized by high fixed costs, disconnections directly and adversely affect
Metrocall's results of operations. An increase in its subscriber cancellation
rate may adversely affect Metrocall's results of operations.
Potential for Change in Regulatory Environment
Metrocall's paging operations are subject to regulation by the FCC and, to
a lesser extent, by various state regulatory agencies. There can be no assurance
that those agencies will not adopt regulations or take actions that would have a
material adverse effect on the business of Metrocall. Changes in regulation of
Metrocall's paging business or the allocation of radio spectrum for services
that compete with Metrocall's business could adversely affect Metrocall's
results of operations. For example, the FCC has adopted rules to issue paging
licenses on a wide-area basis by competitive bidding; those rules are currently
subject to pending appeals and petitions for agency reconsideration. Although,
Metrocall believes that the proposed rule changes may simplify Metrocall's
regulatory compliance burdens, particularly regarding adding or relocating
transmitter sites, those rule changes may also increase Metrocall's costs of
obtaining paging licenses.
Intangible Assets
Intangible assets, net of accumulated amortization, have increased
significantly since June 30, 1996 primarily as a result of the Company's 1996
acquisitions of Parkway, Satellite and A+ Network. At June 30, 1997, the
Company's total assets of approximately $646.7 million included net intangible
assets of approximately $440.4 million. Intangible assets include state
certificates and FCC licenses, customer lists, debt financing cost, goodwill and
certain other intangibles. The Company will record, for financial reporting
purposes, additional intangible assets in connection with its acquisition of the
assets of Page America. Long-
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lived assets and identifiable intangibles to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount should be addressed. Impairment is measured by comparing the
book value to the estimated undiscounted future cash flows expected to result
from use of the assets and their eventual disposition The Company's estimates of
anticipated gross revenues, the remaining estimated lives of tangible and
intangible assets, or both could be reduced significantly in the future due to
changes in technology, regulation, available financing and competitive pressures
in any of the Company's individual markets. As a result, the carrying amount of
long-lived assets and intangible assets including goodwill could be reduced
materially in the future.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to certain legal and regulatory matters in the
normal course of business. In the opinion of management, the outcome of such
assertions will not have a material adverse effect on the financial position or
the results of operations of the Company.
In April 1996, the Company entered into an agreement to purchase certain of
the assets of Source One Wireless, Inc. ("Source One") and placed $1 million
cash in escrow. On June 26, 1996, the Company advised Source One that Source One
had failed to meet certain conditions to completion of the transaction and
terminated the agreement. On September 20, 1996, Source One filed an action in
the Circuit Court of Cook County, Illinois claiming that the Company had
breached the agreement and seeking specific performance of the purchase
agreement or unspecified damages in excess of $80 million. The Company intends
to vigorously defend the claims in this action and believes it has meritorious
defenses to this action. The Company has denied the claim and asserted
affirmative defenses and counterclaims based on misrepresentations and breaches
of contract by Source One. The matter is now in discovery, which is scheduled to
be completed by the end of October 1997; trial is not expected before January
1998.
ITEM 2. CHANGES IN SECURITIES
Unregistered Securities. On February 7, 1997, the Company issued 494,279
shares of its Common Stock and paid approximately $800,000 in cash to complete
the acquisition of Radio & Communication Consultants, Inc. and Advanced Cellular
Telephone, Inc. (collectively, "RCC"). The Shares of Common Stock were issued to
Leroy Faith, Sr., Eddie Ray Faith, Donald Dewayne Faith, and Leroy Faith, Jr.,
the stockholders of RCC (the "Selling Stockholders"). Because the securities
were issued in a transaction involving a public offering, the sale was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"). On April 4, 1997, the Company filed a
Registration Statement under the Securities Act on Form S-3 to register for
resale the 494,279 shares of Common Stock held by the Selling Stockholders.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 7, 1997, the
following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
WITHHELD/ BROKER
PROPOSAL FOR AGAINST ABSTAIN NONVOTES
- --------------------------------------------------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C>
Election of three directors:
1. William L. Collins III.......................... 18,570,991 1,732,174 -- N/A
2. Francis A. Martin............................... 18,277,088 2,026,077 -- N/A
3. Suzanne S. Brock................................ 18,606,855 1,696,310 -- N/A
4. Norman H. Minkow................................ -- -- -- N/A
Ratification of Arthur Andersen LLP as independent
public accountants................................. 19,765,914 49,175 488,076 N/A
Approval of an amendment to Amended and Restated
Certificate of Incorporation increasing number of
authorized shares of common stock from 33.5 million
to 60.0 million.................................... 19,610,215 659,558 33,392 N/A
Approval of the conversion rights of holders of
Series B Junior Convertible Preferred Stock........ 11,628,691 1,417,460 72,795 7,183,949
Approval of amendments to the Metrocall 1996 Stock
Option Plan........................................ 15,093,932 5,170,055 39,178 N/A
</TABLE>
ITEM 5. OTHER INFORMATION
Telemessaging Operations
On May 9, 1997, the Company completed the sale of the assets of the
telemessaging operations acquired in the merger with A+ Network in November 1996
pursuant to the terms of an Asset Purchase Agreement (the "Purchase Agreement")
between Metrocall and Procommunications, Inc. dated April 30, 1997. Pursuant to
the terms of the Purchase Agreement, the Company received proceeds totaling
$11.0 million in cash, net of a cash escrow of $700,000. For the six months
ended June 30, 1997, the telemessaging business generated net revenues of
approximately $3.7 million and operating income of approximately $0.1 million.
PageAmerica Group, Inc.
On July 1, 1997, the Company completed its acquisition of substantially all
the assets of Page America Group, Inc. and subsidiaries ("Page America"). The
total purchase of approximately $63.2 million included consideration of $25
million in cash, 1,500 shares of Series B Preferred Stock having a value upon
liquidation of $15,000,000, 3,997,458 shares of Metrocall common stock, assumed
liabilities of approximately $3.1 million plus transaction fees and expenses.
The cash portion of the purchase price was funded through borrowings of $26
million under the Company's credit facility. The PageAmerica acquisition will be
accounted for as a purchase for financial reporting purposes.
ProNet Inc.
On August 11, 1997, the Company and ProNet Inc. ("ProNet") announced the
signing of a definitive merger agreement, whereby ProNet will be merged with and
into the Company. Under the terms of the merger agreement, the Company will
issue .90 shares of Metrocall common stock for each share of ProNet common
stock, subject to adjustment based on certain defined operating performance
criteria and debt and pager inventory targets. In connection with the merger,
the Company will assume ProNet's 11 7/8% senior subordinated notes due 2005
totaling $100 million and expects to refinance indebtedness outstanding under
ProNet's credit facility with the Company's own credit facility. The Company
anticipates the merger will be accounted for as a purchase for financial
reporting purposes. The merger is subject to approval by regulatory
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agencies including the Federal Communications Commission, Federal Trade
Commission and each company's stockholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation S-K.
<TABLE>
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EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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<S> <C>
2.1 Amended and Restated Asset Purchase Agreement by and among Page America Group, Inc.,
Page America of New York, Inc., Page America of Illinois, Inc., Page America
Communications of Indiana, Inc., Page America of Pennsylvania, Inc. (collectively
"Page America") and Metrocall, Inc. ("Metrocall") dated as of January 30, 1997.(a)
2.2 Amendment to Asset Purchase Agreement by and among Page America and Metrocall dated
as of March 28, 1997.(a)
3.1 Amended and Restated Certificate of Incorporation of Metrocall (the "Certificate"),
as amended.(b)
3.2 Certificate of Amendment to the Certificate dated May 8, 1997.(b)
3.3 Fifth Amended and Restated Bylaws of Metrocall.(p)
4.1 Indenture, including form of 10 3/8% Senior Subordinated Notes due 2007.(c)
4.2 Indenture for A+ Network, Inc. 11 7/8% Senior Subordinated Notes due 2005 ("A+
Notes") dated October 24, 1995.(m)
4.3 First Supplemental Indenture dated November 14, 1996, for A+ Notes.(p)
4.4 Second Supplemental Indenture dated November 14, 1996, for A+ Notes.(p)
10.1 Agreement and Plan of Merger dated as of May 16, 1996, between Metrocall, Inc. and
A+ Network, Inc.(d)
10.2 Amendment to Agreement and Plan of Merger dated as of May 16, 1996, between
Metrocall, Inc., and A+ Network, Inc.(e)
10.3 Shareholders' Option and Sale Agreement dated as of May 16, 1996, between Metrocall,
Inc. and certain shareholders of A+ Network, Inc. listed therein.(d)
10.4 Metrocall Stockholders Voting Agreement dated as of May 16, 1996, between A+
Network, Inc. and certain stockholders of Metrocall, Inc., listed therein.(d)
10.5 Agreement dated May 16, 1996, among Metrocall, Inc. and Ray D. Russenberger and
Elliott H. Singer regarding voting for director.(d)
10.6 Employment Agreement between Metrocall, Inc. and Vincent D. Kelly.(e)
10.7 Employment Agreement between Metrocall, Inc. and William L. Collins, III.(e)
10.8 Employment Agreement between Metrocall, Inc. and Steven D. Jacoby.(e)
10.9 Agreement and Plan of Merger entered into effective the 26th date of April, 1996
between A+ Network, Inc. ("ACOM"), a Louisiana corporation to be formed as a
wholly-owned subsidiary of ACOM, Radio and Communications Consultants, Inc.,
Advanced Cellular Telephone, Inc., Leroy Faith Sr. and Eddie Ray Faith, DeWayne
Faith and Leroy Faith Jr.(e)
10.10 Non-disclosure/No Conflict Agreement dated May 16, 1996 between Metrocall, Inc. and
Ray D. Russenberger.(d)
10.11 Non-disclosure/No Conflict Agreement dated May 16, 1996 between Metrocall, Inc. and
Elliott H. Singer.(d)
10.12 Employment Agreement dated May 16, 1996, between Metrocall, Inc. and Charles A.
Emling.(d)
10.13 Change of Control Agreement between Metrocall, Inc. and Vincent D. Kelly.(e)
10.14 Change of Control Agreement between Metrocall, Inc. and William L. Collins, III.(e)
10.15 Change of Control Agreement between Metrocall, Inc. and Steven D. Jacoby.(e)
10.16 Agreement of Merger by and among Metrocall, Inc., PPI Acquisition Corp., Parkway
Paging, Inc. certain shareholders of Parkway Paging, Inc., and George W. Bush, dated
February 26, 1996.(f)
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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<S> <C>
10.17 Assets Purchase by and among O.R. Estman, Inc., d/b/a Satellite Paging, Dana Paging,
Inc., d/b/a Message Network, Bertram M. Wachtel, Edward R. Davalos, Kevan D.
Bloomgren and Metrocall, Inc., dated February 28, 1996. (A portion of this Exhibit
has been omitted pursuant to a request for confidential treatment. The omitted
material has been filed separately with the Commission.)(f)
10.18 Amendment to Asset Purchase Agreement dated as of August 30, 1996, by and among O.R.
Estman, Inc., d/b/a Satellite Paging, Dana Paging, Inc., d/b/a Message Network,
Bertram M. Wachtel, Edward R. Davalos and Kevan D. Bloomgren, and Metrocall, Inc.(g)
10.19 Amended and Restated 1993 Stock Option Plan of Metrocall.(h)
10.20 Directors' Stock Option Plan, as amended.(i)
10.21 Metrocall 1996 Stock Option Plan, as amended.(i)
10.23 Metrocall Employee Stock Purchase Plan.(o)
10.24 Deed of Lease between Douglas and Joyce Jemal, as landlord, and Metrocall, as tenant
dated April 14, 1994.(j)
10.25 Lease Agreement dated December 20, 1983, between a predecessor of Metrocall and
Beacon Communications Associates, Ltd.(k)
10.26 Tax Indemnification Agreement by and among Metrocall, Harry L. Brock, Jr.,
Christopher A. Kidd, Vincent D. Kelly and Suzanne S. Brock.(e)
10.27 Metrocall Savings and Retirement Plan, as amended and restated, dated April 1,
1995.(d)
10.28 Amended and Restated Loan Agreement among Metrocall, Inc., the Toronto-Dominion Bank
and the First National Bank of Boston, with the Toronto-Dominion Bank as
"Documentation Agent," the First National Bank of Boston as "Syndication Agent," the
Toronto Dominion Bank and the First National Bank of Boston as "Managing Agents,"
and Toronto-Dominion (Texas), Inc. as "Administrative Agent".(l)
10.30 Variable Common Rights Agreement between Metrocall, Inc. and First Union National
Bank of Virginia, Rights Agent, dated as of November 15, 1996, including Form of
Certificate representing Variable Common Rights.(q)
10.31 Unit Purchase Agreement dated as of November 15, 1996, among Metrocall, Inc. and
Certain Purchasers.(n)
10.32 Warrant Agreement dated as of November 15, 1996, between Metrocall, Inc. and the
First National Bank of Boston, Warrant Agent.(n)
11.1 Statement re computation of per share earnings.
21.1 Subsidiaries of Metrocall, Inc.
27.1 Financial Data Schedule.
</TABLE>
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(a) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-21231), initially filed with the Commission
on February 5, 1997.
(b) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q
filed with the Commission on May 15, 1997.
(c) Incorporated by reference to Metrocall's Registration Statement on Form
S-1, as amended (File No. 33-96042), filed with the Commission on September
27, 1995.
(d) Incorporated by reference to Metrocall, Inc. Tender Offer Statement on
Schedule 14D-1, filed with the Commission on May 22, 1996.
(e) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-06919), filed with the Commission on June 27,
1996.
(f) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996, filed with the Commission on May 15,
1996.
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(g) Incorporated by reference to Metrocall's Periodic Report on Form 8-K filed
with the Commission on September 13, 1996, as amended October 1, 1996.
(h) Incorporated by reference to Metrocall's Annual Report on Form 10-K/A, as
amended, for the year ended December 31, 1993, filed with the Commission on
July 21, 1994.
(i) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders to be held on May 7, 1997.
(j) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994, filed with the Commission on November
14, 1994.
(k) Incorporated by reference to Metrocall's Registration Statement on Form
S-1, as amended (File No. 33-63886), filed with the Commission on July 12,
1993.
(l) Incorporated by reference to Metrocall's Registration Statement on Form
S-3, as amended (File No. 333-13123), filed with the Commission on October
1, 1996.
(m) Incorporated by reference to the Registration Statement on Form S-1 of A+
Communications, Inc. as amended (File No. 33-95208), filed with the
Commission on September 18, 1995.
(n) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(o) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders to be held on May 1, 1996.
(p) Incorporated by reference to Metrocall's Annual Report on Form 10-K for the
year ended December 31, 1996, filed with the Commission on March 31, 1997.
(q) Incorporated by reference to Metrocall's Annual Report on Form 10-K/A for
the year ended December 31, 1996, filed with the Commission on May 9, 1997.
(b) Reports on Form 8-K
None.
29
<PAGE> 30
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.
Date: August 22, 1997 METROCALL, INC.
/s/ VINCENT D. KELLY
--------------------------------------
Vincent D. Kelly
Chief Financial Officer,
Treasurer and Executive Vice President
31
<PAGE> 31
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
2.1 Amended and Restated Asset Purchase Agreement by and among Page America Group, Inc.,
Page America of New York, Inc., Page America of Illinois, Inc., Page America
Communications of Indiana, Inc., Page America of Pennsylvania, Inc. (collectively
"Page America") and Metrocall, Inc. ("Metrocall") dated as of January 30, 1997.(a)
2.2 Amendment to Asset Purchase Agreement by and among page America and Metrocall dated
as of March 28, 1997.(a)
3.1 Amended and Restated Certificate of Incorporation of Metrocall (the "Certificate"),
as amended.(b)
3.2 Certificate of Amendment to the Certificate dated May 8, 1997.(b)
3.3 Fifth Amended and Restated Bylaws of Metrocall.(p)
4.1 Indenture, including form of 10 3/8% Senior Subordinated Notes due 2007.(c)
4.2 Indenture for A+ Network, Inc. 11 7/8% Senior Subordinated Notes due 2005 ("A+
Notes") dated October 24, 1995.(m)
4.3 First Supplemental Indenture dated November 14, 1996, for A+ Notes.(p)
4.4 Second Supplemental Indenture dated November 14, 1996, for A+ Notes.(p)
10.1 Agreement and Plan of Merger dated as of May 16, 1996, between Metrocall, Inc. and
A+ Network, Inc.(d)
10.2 Amendment to Agreement and Plan of Merger dated as of May 16, 1996, between
Metrocall, Inc., and A+ Network, Inc.(e)
10.3 Shareholders' Option and Sale Agreement dated as of May 16, 1996, between Metrocall,
Inc. and certain shareholders of A+ Network, Inc. listed therein.(d)
10.4 Metrocall Stockholders Voting Agreement dated as of May 16, 1996, between A+
Network, Inc. and certain stockholders of Metrocall, Inc., listed therein.(d)
10.5 Agreement dated May 16, 1996, among Metrocall, Inc. and Ray D. Russenberger and
Elliott H. Singer regarding voting for director.(d)
10.6 Employment Agreement between Metrocall, Inc. and Vincent D. Kelly.(e)
10.7 Employment Agreement between Metrocall, Inc. and William L. Collins, III.(e)
10.8 Employment Agreement between Metrocall, Inc. and Steven D. Jacoby.(e)
10.9 Agreement and Plan of Merger entered into effective the 26th date of April, 1996
between A+ Network, Inc. ("ACOM"), a Louisiana corporation to be formed as a
wholly-owned subsidiary of ACOM, Radio and Communications Consultants, Inc.,
Advanced Cellular Telephone, Inc., Leroy Faith Sr. and Eddie Ray Faith, DeWayne
Faith and Leroy Faith Jr.(e)
10.10 Non-disclosure/No Conflict Agreement dated May 16, 1996 between Metrocall, Inc. and
Ray D. Russenberger.(d)
10.11 Non-disclosure/No Conflict Agreement dated May 16, 1996 between Metrocall, Inc. and
Elliott H. Singer.(d)
10.12 Employment Agreement dated May 16, 1996, between Metrocall, Inc. and Charles A.
Emling.(d)
10.13 Change of Control Agreement between Metrocall, Inc. and Vincent D. Kelly.(e)
10.14 Change of Control Agreement between Metrocall, Inc. and William L. Collins, III.(e)
10.15 Change of Control Agreement between Metrocall, Inc. and Steven D. Jacoby.(e)
10.16 Agreement of Merger by and among Metrocall, Inc., PPI Acquisition Corp., Parkway
Paging, Inc. certain shareholders of Parkway Paging, Inc., and George W. Bush, dated
February 26, 1996.(f)
</TABLE>
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<S> <C>
10.17 Assets Purchase by and among O.R. Estman, Inc., d/b/a Satellite Paging, Dana Paging,
Inc., d/b/a Message Network, Bertram M. Wachtel, Edward R. Davalos, Kevan D.
Bloomgren and Metrocall, Inc., dated February 28, 1996. (A portion of this Exhibit
has been omitted pursuant to a request for confidential treatment. The omitted
material has been filed separately with the Commission.)(f)
10.18 Amendment to Asset Purchase Agreement dated as of August 30, 1996, by and among O.R.
Estman, Inc., d/b/a Satellite Paging, Dana Paging, Inc., d/b/a Message Network,
Bertram M. Wachtel, Edward R. Davalos and Kevan D. Bloomgren, and Metrocall, Inc.(g)
10.19 Amended and Restated 1993 Stock Option Plan of Metrocall.(h)
10.20 Directors' Stock Option Plan, as amended.(i)
10.21 Metrocall 1996 Stock Option Plan, as amended.(i)
10.23 Metrocall Employee Stock Purchase Plan.(o)
10.24 Deed of Lease between Douglas and Joyce Jemal, as landlord, and Metrocall, as tenant
dated April 14, 1994.(j)
10.25 Lease Agreement dated December 20, 1983, between a predecessor of Metrocall and
Beacon Communications Associates, Ltd.(k)
10.26 Tax Indemnification Agreement by and among Metrocall, Harry L. Brock, Jr.,
Christopher A. Kidd, Vincent D. Kelly and Suzanne S. Brock.(e)
10.27 Metrocall Savings and Retirement Plan, as amended and restated, dated April 1,
1995.(d)
10.28 Amended and Restated Loan Agreement among Metrocall, Inc., the Toronto-Dominion Bank
and the First National Bank of Boston, with the Toronto-Dominion Bank as
"Documentation Agent," the First National Bank of Boston as "Syndication Agent," the
Toronto Dominion Bank and the First National Bank of Boston as "Managing Agents,"
and Toronto-Dominion (Texas), Inc. as "Administrative Agent".(l)
10.30 Variable Common Rights Agreement between Metrocall, Inc. and First Union National
Bank of Virginia, Rights Agent, dated as of November 15, 1996, including Form of
Certificate representing Variable Common Rights.(q)
10.31 Unit Purchase Agreement dated as of November 15, 1996, among Metrocall, Inc. and
Certain Purchasers.(n)
10.32 Warrant Agreement dated as of November 15, 1996, between Metrocall, Inc. and the
First National Bank of Boston, Warrant Agent.(n)
11.1 Statement re computation of per share earnings.
21.1 Subsidiaries of Metrocall, Inc.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(a) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-21231), initially filed with the Commission
on February 5, 1997.
(b) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q
filed with the Commission on May 15, 1997.
(c) Incorporated by reference to Metrocall's Registration Statement on Form
S-1, as amended (File No. 33-96042), filed with the Commission on September
27, 1995.
(d) Incorporated by reference to Metrocall, Inc. Tender Offer Statement on
Schedule 14D-1, filed with the Commission on May 22, 1996.
(e) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-06919), filed with the Commission on June 27,
1996.
<PAGE> 33
(f) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996, filed with the Commission on May 15,
1996.
(g) Incorporated by reference to Metrocall's Periodic Report on Form 8-K filed
with the Commission on September 13, 1996, as amended October 1, 1996.
(h) Incorporated by reference to Metrocall's Annual Report on Form 10-K/A, as
amended, for the year ended December 31, 1993, filed with the Commission on
July 21, 1994.
(i) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders to be held on May 7, 1997.
(j) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994, filed with the Commission on November
14, 1994.
(k) Incorporated by reference to Metrocall's Registration Statement on Form
S-1, as amended (File No. 33-63886), filed with the Commission on July 12,
1993.
(l) Incorporated by reference to Metrocall's Registration Statement on Form
S-3, as amended (File No. 333-13123), filed with the Commission on October
1, 1996.
(m) Incorporated by reference to the Registration Statement on Form S-1 of A+
Communications, Inc. as amended (File No. 33-95208), filed with the
Commission on September 18, 1995.
(n) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(o) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders to be held on May 1, 1996.
(p) Incorporated by reference to Metrocall's Annual Report on Form 10-K for the
year ended December 31, 1996, filed with the Commission on March 31, 1997.
(q) Incorporated by reference to Metrocall's Annual Report on Form 10-K/A for
the year ended December 31, 1996, filed with the Commission on May 9, 1997.
<PAGE> 1
EXHIBIT 11
METROCALL, INC.
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss...................................... $ (10,955) $ (12,305) $ (18,646) $ (24,052)
Preferred dividends......................... -- (1,609) -- (3,169)
---------- ---------- ---------- ----------
Net loss attributable to common
stockholders................................ $ (10,955) $ (13,914) $ (18,646) $ (27,221)
========= ========= ========= =========
Weighted-average shares outstanding:
Shares outstanding, beginning of period..... 14,626,255 24,521,135 14,626,255 24,521,135
Shares issued in acquisitions............... -- 516,633 -- 421,054
Shares issued for exercise of stock
options.................................. -- 1,521 -- 765
Shares issued in employee stock purchase
plan..................................... -- 34,770 -- 34,770
---------- ---------- ---------- ----------
Weighted-average shares outstanding......... 14,626,255 25,074,059 14,626,255 24,977,724
========= ========= ========= =========
Loss per share attributable to common
stockholders................................ $ (0.75) $ (0.55) $ (1.27) $ (1.09)
========= ========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 21.1
METROCALL, INC.
SUBSIDIARIES OF METROCALL, INC.
Metrocall USA, Inc.
Metrocall of Virginia, Inc.
Metrocall of Shreveport, Inc.
Florida Network USA, Inc.
Page East, Inc.
A+ Network Acquisitions, Inc.
A+ Beepers, Inc.
A+ Network of Jacksonville, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 20,749
<SECURITIES> 0
<RECEIVABLES> 27,072
<ALLOWANCES> 3,031
<INVENTORY> 0
<CURRENT-ASSETS> 52,186
<PP&E> 247,447
<DEPRECIATION> 95,616
<TOTAL-ASSETS> 646,728
<CURRENT-LIABILITIES> 46,361
<BONDS> 152,534
34,401
0
<COMMON> 251
<OTHER-SE> 141,667
<TOTAL-LIABILITY-AND-EQUITY> 646,728
<SALES> 10,276
<TOTAL-REVENUES> 70,297
<CGS> 7,525
<TOTAL-COSTS> 68,714
<OTHER-EXPENSES> 1,466
<LOSS-PROVISION> 2,758
<INTEREST-EXPENSE> 7,867
<INCOME-PRETAX> (13,666)
<INCOME-TAX> (1,362)
<INCOME-CONTINUING> (12,304)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,913)
<EPS-PRIMARY> (0.55)
<EPS-DILUTED> (0.55)
</TABLE>
