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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-21924
METROCALL, INC.
(Exact Name of Registrant as Specified in its Charter)
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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)
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Registrant's Telephone Number, including area code: (703) 660-6677
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
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Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
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Common Stock ($.01 Par Value)
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 by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based on the closing sales price of March 2, 1998, the aggregate market
value of the voting stock held by non-affiliates of the Registrant was
approximately $211,272,229.
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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CLASS MARCH 2, 1998
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Common stock, $.01 par value 40,866,549
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of the Registrant to
be held May 6, 1998, which will be filed with the Commission within 120 days
after the close of the fiscal year, are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Metrocall, Inc. (the "Company" or "Metrocall") is a leading provider of
paging and other wireless messaging services. Through its Nationwide Network,
the Company provides service to over 1,000 U.S. cities including the top 100
Standard Metropolitan Statistical Areas ("SMSAs"). From December 31, 1993 to
December 31, 1997, the Company has increased its subscriber base through a
combination of internal growth and acquisitions from less than 250,000 to more
than 4.0 million, representing a compounded annual growth rate of more than
100%. This growth rate has been accomplished through a combination of internal
growth and a program of mergers and acquisitions. The Company has added
approximately 2.8 million pagers in service through acquisition since 1993.
Acquisitions in 1997 included Page America Group, Inc. ("Page America") and
ProNet Inc. ("ProNet"). On July 1, 1997, the Company added approximately 200,000
subscribers by completing the acquisition of the assets of Page America.
Further, on December 30, 1997 the Company completed the merger of ProNet (the
"ProNet Merger"), adding approximately 1.3 million subscribers.
BUSINESS STRATEGY
The Company's strategy is to expand its subscriber base and increase its
revenues, cost efficiencies and operating cash flow as well as transition toward
free cash flow in future periods. The principal elements of the Company's
business strategy include:
Maximize Internal Growth Potential. The Company has grown internally by
broadening its distribution network and by expanding its target market to
capitalize on the growing appeal of paging products. To better access the mass
markets, the Company has expanded its direct and indirect distribution channels
by adopting a multi-tiered distribution system designed to access different
market segments as well as primarily sell, rather than lease, its paging units.
The Company has formed strategic alliances with long-distance, cellular and PCS
providers and cable television companies, such as Bell Atlantic and Adelphia
Cable, and retail outlets such as Circle K Stores and Autozone, Inc. The Company
believes these initiatives will increase consumer sales and broaden the range of
products and services that it currently offers. Since December 31, 1994, the
Company has added approximately 890,000 new subscribers through internal growth
(including additions to the subscriber base of acquired companies after
acquisition).
Expand Market Presence through Consolidation. The Company also has
expanded its subscriber base and geographic penetration through consolidation.
Since June 1996, Metrocall has acquired Parkway, Paging, Inc. ("Parkway"),
Satellite Paging and Message Network (collectively "Satellite"), A+ Network,
Inc. ("A+ Network"), Page America and ProNet. Together these acquisitions added
an aggregate of approximately 2.4 million subscribers to Metrocall's subscriber
base and significantly expanded Metrocall's geographic coverage. Metrocall
expects the ProNet Merger to further broaden its reach and believes that its
enhanced nationwide coverage will provide it with a competitive advantage in
gaining additional subscribers in the future. The Company may undertake
additional acquisitions if it identifies suitable acquisition candidates based
on criteria such as geographic coverage, regulatory licenses, overall valuation,
type of consideration and the availability of financing.
Optimize Customer Relationships. Metrocall is committed to providing high
quality, price competitive paging services, with wide-area coverage and optimal
building penetration. To maintain a close relationship with its existing
customers and facilitate stronger relationships with subscribers of recently
acquired companies, the Company has decentralized its sales, marketing and
customer service operations. Furthermore, to attract new subscribers and
increase monthly revenues from existing subscribers, Metrocall provides value-
added services tailored to its customers' needs. Billed as enhancements to basic
service, these services tend to result in higher average monthly paging revenue
per unit ("ARPU").
Minimize Technology Risks. The Company has concentrated its capital
spending on the development of its local, regional and nationwide one-way paging
networks, rather than investing in unproven technologies
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such as narrowband personal communication services ("PCS"). Spending in this
disciplined manner is expected to increase the Company's revenue-generating
capabilities by enhancing its ability to offer one-way local, regional and
nationwide paging services and other value added services. The Company
recognizes that narrowband PCS spectrum permits paging operators to offer
advanced products and services, however the cost of both building and operating
narrowband networks is significantly higher than one-way networks. The Company
has chosen to participate in the development of PCS primarily as a reseller. For
example, through its acquisition of A+ Network, the Company acquired a minority
ownership interest in CONXUS (formerly PCS Development Corporation), a
nationwide narrowband PCS license holder, and has signed a memorandum of
understanding with CONXUS to act as a co-developer of technology, co-carrier of
signal and distributor of services. The Company is pursuing similar
relationships with other PCS developers and operators.
Manage Capital Requirements. The Company's principal financial objective
is to reduce financial leverage by reducing capital requirements. The Company
has focused its new strategic initiatives on the sale, rather than lease, of
paging units, which should result in lower capital requirements per additional
subscriber. Furthermore, since the Nationwide Network provides comprehensive
national coverage, Metrocall does not currently need to increase significantly
its investment in infrastructure, and instead the Company expects to concentrate
on increasing the utilization of its fully developed Nationwide Network.
Focusing on the Nationwide Network should enable the Company to serve more
customers per frequency and enter new markets with minimal capital outlay.
Maintain Low Cost Operating Structure and Improve Margins. The Company has
invested to improve operating efficiency, including investing in high quality,
large-capacity infrastructure and billing and subscriber management systems,
which enable increased system utilization and lower per unit operating costs.
The Company's initiatives to centralize administrative and back-office
operations have been implemented in order to reduce technical, general and
administrative expenses per unit by eliminating duplicative functions related to
acquired businesses. The Company believes that its increased use of strategic
partnerships and other indirect distribution channels should further reduce
operating costs, as these channels typically bear a portion of the expenses,
specifically sales and customer service. Similarly, the Company's focus on
maximizing monthly recurring revenues and promoting value added services should
improve operating margins.
PAGING OVERVIEW
Metrocall believes that paging is the most cost-effective and reliable
means of conveying a variety of information rapidly over a wide geographic area
either directly to a person traveling or to various fixed locations. Because it
is a one-way communications tool, paging is an inherently lower cost way to
communicate than two-way communications methods. For example, pagers and air
time required to transmit an average message cost less than equipment and air
time for cellular and PCS telephones. Furthermore, pagers operate for longer
periods due to superior battery life, often exceeding one month on a single AAA
battery. Paging subscribers generally pay a flat monthly service fee, which
covers a certain number of messages sent to the subscriber. In addition, pagers
are unobtrusive, portable and historically have withstood substantial
technological advances in the communications industry. Growth in the number of
cellular telephone customers is increasingly viewed as a complement to wireless
messaging. Many cellular telephone customers use pagers in conjunction with
their telephones to screen incoming calls and to minimize battery use and
cellular usage charges.
Industry sources estimate that there were approximately 52.0 million pagers
in service in the United States at the end of 1997. Industry sources also
indicate that in recent years the number of pagers in service in the United
States has been growing at annual rates in excess of 20% per year and predict
that the number of pagers in service will continue to grow at compound annual
growth rates of approximately 15% through the year 2000. Factors that have been
described as contributing to this growth include (i) declining costs of service,
(ii) increasing consumer awareness of the benefits of mobile communications,
(iii) introduction of new or enhanced paging equipment and services and (iv)
expanding channels of distribution.
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Although the U.S. paging industry has over 500 licensed paging companies,
the Company estimates that the ten largest paging companies, including
Metrocall, currently serve approximately 75% of the total paging subscribers in
the United States. These paging companies are facilities-based, Commercial
Mobile Radio Service ("CMRS") providers, previously classified as either Radio
Common Carrier ("RCC") or Private Carrier Paging ("PCP") operators, servicing
over 100,000 subscribers each in multiple markets and regions.
The Company believes that the future paging and wireless communications
industry will include (i) technological improvements that permit increased
service and applications on a cost-effective basis, (ii) consolidation of
smaller, single-market operators and larger, multi-market paging companies and
(iii) increased numbers of pagers in service, as a result of general expansion
into consumer and retail markets. Recent technological developments include new
paging services such as "confirmation" or "response" paging that send a message
back to the paging system confirming that a paging message has been received,
digitized voice paging, two-way paging and notebook and sub-notebook computer
wireless data applications. Narrowband PCS may offer the ability to provide some
of these services on an expanded basis. While these services have been proven
technologically feasible, their economic viability has not been fully tested
based on the cost of licenses, infrastructure capital requirements and increased
operating costs as well as competitive, similarly priced two-way broadband PCS
and cellular services.
PAGING OPERATIONS
SERVICES AND SUBSCRIBERS
The Company currently provides four basic paging services: (i) digital
display pagers, which permit a subscriber to receive a telephone number or other
numeric coded information and to store several such numeric messages that the
customer can recall when desired; (ii) alphanumeric display pagers, which allow
the subscriber to receive and store text messages; (iii) tone-only pagers, which
notify the subscriber that a call has been received by vibrating or emitting a
beeping sound; and (iv) tone-plus-voice pagers, which emit a beeping sound
followed by a brief voice message. The Company provides digital display,
alphanumeric display and tone-only service in all its markets, and provides
tone-plus-voice service in a limited number of markets. Digital display paging,
which was introduced over 10 years ago, has grown at a faster rate than
tone-only or tone-plus-voice service in recent years. Approximately 89% of the
Company's pagers in service at December 31, 1997 were digital display pagers.
Alphanumeric display service, which was introduced in the mid-1980s, has
grown at increasing rates as users and dispatch centers overcome technical and
operational obstacles to sending messages. For example, alphanumeric paging
access is available via the Company's Internet website, www.metrocall.com, where
any internet user can access the Company's on-line alphanumeric paging software.
Additionally, the Company now markets, under its service mark "Notesender," a
computer program designed for use in transmitting alphanumeric messages from
personal computers to pagers. The Company also provides enhancements and
ancillary services such as: (i) personalized automated answering services, which
allow a subscriber to record a message that greets callers who reach the
subscriber's voice mailbox; (ii) message protection, which allows a subscriber
to retrieve any calls that come in during the period when the subscriber was
beyond the reach of the Company's radio transmitters; (iii) annual loss
protection, which allows subscribers of leased pagers to limit their cost of
replacement upon loss or destruction of the pager; and (iv) maintenance
services, which are offered to subscribers who own their own pagers.
Subscribers who use paging services have traditionally included small
business operators and employees, professionals, medical personnel, sales and
service providers, construction and tradespeople, and real estate brokers and
developers; however, paging's appeal to the mass market is growing, and the
service is increasingly being adopted by individuals for private, nonbusiness
uses such as communicating with family members and friends.
The Company's subscribers either lease or buy their pagers and purchase
either local, regional, multi-regional or nationwide service. Contracts with
large unit volume subscribers are typically for two to three year terms, while
contracts with smaller volume subscribers generally have one year terms with
annual renewals. The Company receives additional revenue for enhanced services
such as voice mail, personalized greetings and
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One Touch(TM) service, which is an advanced messaging service. Volume discounts
on lease payments and service fees are typically offered to large volume
subscribers. In some instances, the Company's subscribers are resellers that
purchase services at substantially discounted rates, but are responsible for
marketing, billing and collection and related costs with respect to their
customers.
SALES AND MARKETING
The Company's sales and marketing strategy incorporates a multi-tiered
distribution system. At December 31, 1997 and including ProNet, the Company,
through more than 225 sales and administrative offices and retail outlets,
employed a sales force of 1,225 sales representatives, including the Company's
direct sales staff, telemarketing professionals and sales representatives who
call on retailers and resellers. The Company's distribution channels are
described briefly below.
DIRECT DISTRIBUTION CHANNELS
- Direct Sales. Direct sales personnel sell primarily to businesses,
placing special emphasis on key accounts which are of strategic
importance to the Company. The businesses targeted by the Company's
direct sales personnel are generally those that have multiple work
locations or have highly mobile employees. Direct sales personnel are
compensated based on a percentage of sales contract value (plus certain
quota incentives), reduced by any cancellations within the first 120 days
of a contract. Sales compensation plans are designed to motivate direct
sales personnel to sell units and discourage leasing units as well as to
increase sales of higher revenue products, such as nationwide service,
alphanumeric service, voice mail, One Touch(TM) and other value-added
services.
- Database Telemarketing. The Company's internal, professionally-trained
staff utilizes computerized lead management and telemarketing techniques
combined with the Company's proprietary lead screening and development
protocol to generate sales. Using acquired lists to focus their efforts,
the internal staff targets groups of consumers and small businesses who
have a propensity to use paging services but are either in a region where
the Company does not have a direct sales effort or have not been reached
by other distribution channels. Telemarketing salespeople are compensated
on a salary plus commission basis.
- Company-Owned Retail Stores. Retail outlets are designed to sell higher
ARPU services to the consumer market segment directly while providing a
point of presence for the Company to enhance its brand recognition. These
retail outlets take a variety of forms, such as mall stores, kiosks, mall
carts, retail merchandising units and strip center locations. Products
sold to consumers at these locations include paging, messaging, cellular,
long distance and PCS services and related accessories. Many of these
locations function as customer service and payment centers in addition to
offices for direct sales representatives. Through the acquisitions of
Parkway, Satellite, A+ Network, Page America and ProNet, the Company
gained more than 142 Company-owned retail stores.
INDIRECT DISTRIBUTION CHANNELS
- Resellers. Resellers buy bulk paging services from the Company for
resale to their own business clients and individual customers. The
Company issues one monthly bill to each reseller who is responsible for
marketing, billing and collection, and equipment maintenance. As a result
of emphasizing this channel, the Company achieves high network
utilization at low incremental cost, but realizes lower ARPU than through
other distribution channels.
- Retail Outlets. Retail outlets, such as office supply, electronics and
general merchandise chains, buy pagers on a wholesale basis from the
Company for resale to consumers. These outlets are selected based on
factors such as the number of stores in a region and the extent of their
advertising. These outlets then sell the pager itself and provide limited
customer service to the consumer. The Company provides sales incentives
and advertising support, and trains sales personnel to enhance a retail
outlet's effectiveness and to ensure that the customer is well educated
regarding the product. The Company believes that as consumer awareness of
the product grows, retailers will become an increasingly important
distribution channel.
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- Independent Dealers, Representatives and Agents. The Company contracts
with independent dealers, representatives and agents, including such
outlets as small cellular phone dealers and independent specialty
electronics stores. The Company typically uses dealers to reach specific
consumer niches (e.g., ethnic or non-English speaking communities) and
small businesses that are more efficiently accessed through this channel
than through other distribution channels. In addition to selling the
Company's pagers, independent dealers assist the subscriber in choosing a
service plan and collect the initial payments. Independent dealers are
paid commissions for their placement of customers with the Company.
- Strategic Partners. The Company has entered into contractual agreements
with several selected national distribution partners who market
Metrocall's paging services to their existing and future customers. The
Company supplies many of these partners with custom branded turnkey
solutions for network services, products, customer services, billing,
collections and fulfillment. The Company's strategy is to provide these
value added services to enhance the business relationship and margin
opportunities for both parties. The Company has entered into alliances
with companies in the long distance, local exchange, cable, retail,
direct response and multi-level marketing businesses and believes that
these programs will help deliver paging services to market segments that
other distribution channels can not reach cost effectively.
- Affiliates. Through the A+ Network merger, the Company acquired a
network of paging carriers or affiliates that resell services on the
152.480 MHz private carrier paging frequency. These affiliates are
independent owners of paging systems in various markets throughout the
nation who sell expanded coverage to their customers. Utilizing the
Company's infrastructure, these independent networks provide wide area
and nationwide paging on a single channel. The Company provides expanded
coverage options for approximately 121,000 subscribers through its
affiliate network at December 31, 1997.
Set forth below is a table showing the Company's subscribers by geographic
region and number of units in service as of December 31, 1995, 1996 and 1997.
NUMBER OF PAGERS IN SERVICE
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DECEMBER 31,
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1995 1996(1) 1997(2)
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Northeast................................................... 116,652 227,022 671,290
Mid-Atlantic................................................ 496,504 558,318 666,150
Southeast................................................... 3,837 762,251 1,183,688
Midwest..................................................... -- -- 232,105
Southwest................................................... -- 180,432 667,084
West........................................................ 327,020 414,328 610,519
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Total.................................................. 944,013 2,142,351 4,030,836
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(1) Includes approximately 900,000 pagers in service acquired in the Parkway,
Satellite and A+ Network acquisitions.
(2) Includes approximately 200,000 and 1.3 million pagers in service acquired in
the acquisition of Page America and the ProNet Merger, respectively.
The following table sets forth as of December 31, 1995, 1996 and 1997 the
respective numbers and percentages of pagers that are (i) serviced and owned by
the Company, (ii) serviced by the Company and owned by subscribers, (iii)
serviced by the Company and owned by subscribers sold through Company-owned
retail stores, (iv) serviced by the Company through resellers and owned by the
resellers or their subscribers, (v) serviced by the Company through strategic
partners and other paging carriers and owned by such strategic partner, carrier
or its subscribers and (vi) serviced by the Company and owned by subscribers who
acquire equipment and service through retailers.
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OWNERSHIP OF PAGERS IN SERVICE
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DECEMBER 31,
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1995 1996(1) 1997(2)
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NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
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Direct Channels:
Company owned and leased to
subscribers.......................... 380,951 40% 690,382 32% 1,184,193 29%
Subscriber owned (COAM)................ 170,019 18 271,837 13 430,582 11
Company-owned retail stores............ -- -- 114,192 5 223,510 6
Indirect Channels:
Resellers.............................. 339,556 36 865,221 41 1,965,354 49
Strategic partners and affiliates...... -- -- 130,142 6 140,625 3
Retail................................. 53,487 6 70,577 3 86,572 2
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Total................................ 944,013 100% 2,142,351 100% 4,030,836 100%
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(1) Includes approximately 900,000 pagers in service acquired in the Parkway,
Satellite and A+ Network acquisitions.
(2) Includes approximately 200,000 and 1.3 million pagers in service acquired in
the acquisition of Page America and the ProNet Merger, respectively.
MANAGEMENT SYSTEMS AND BILLING
To reduce its cost structure, the Company centralizes operating functions
where possible and utilizes common billing and subscriber management systems
throughout its markets. The Company's centralized operating structure focuses
regional management on sales and distribution and transfers technical and back-
office responsibilities to the Company's national operations center in
Alexandria, Virginia. These functions include accounting, management information
systems, inventory and order fulfillment. The Company has integrated its 1996
and 1997 acquisitions (with the exception of ProNet for which integration
efforts will be progressing throughout 1998) into this structure.
The Company also maintains a centralized National Customer Operations
Center. The Company's National Customer Operations Center handles customer
inquiries from existing and potential customers and supports the Company's
distribution initiatives. The National Customer Operations Center is staffed
with approximately 70 employees, is open six days per week (with emergency
service provided seven days a week, 24 hours a day) and offers a toll-free
access number. The National Customer Operations Center is a critical factor in
marketing and servicing the Nationwide Network to all markets in the United
States. The Company attempts to satisfy customers upon initial inquiry to avoid
repeat calls, thereby increasing customer satisfaction and decreasing costs. The
Company employs state-of-the-art call management equipment (such as an automated
call distribution system and interactive voice response capabilities) to provide
quality customer service and tracks both productivity and quality of performance
of its customer service representatives.
NETWORK AND EQUIPMENT
The Company has developed a state-of-the-art paging system deploying
current technology which achieves optimal building penetration, wide-area
coverage and the ability to deliver new and enhanced paging services. This
existing paging transmission equipment has significant capacity to support
future growth.
The Company's paging services are initiated when telephone calls are placed
to the Company's paging terminals. These state-of-the-art terminals, which the
Company maintains, have a modular design that allows significant future
expansion by adding or replacing modules rather than replacing the entire
terminal. The Company's paging terminals direct pages to the Company's primary
satellite, which signals terrestrial network transmitters providing coverage
throughout the service area.
The Company operates a series of regional operating systems or networks
consisting of primary networks serving Arizona, California and Nevada, and the
area from Boston to the Virginia/North Carolina border. The
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Company also has three exclusive licenses issued by the Federal Communications
Commission (the "FCC") for the same channels in each of the largest 100 SMSAs
and began operating the Nationwide Network in November 1993. The Company is also
capable of providing local paging in each market served by the Nationwide
Network by using nationwide transmitters to carry local messages. Services
provided through the Nationwide Network are marketed to subscribers directly
through the Metrocall sales force and indirectly through retailers, resellers
and strategic alliances.
The Company does not manufacture any of the pagers or related transmitting
and computerized paging terminal equipment used in the Company's paging
operations. The Company anticipates that equipment and pagers will continue to
be available to the Company in the foreseeable future, consistent with normal
manufacturing and delivery lead times. Because of the high degree of
compatibility among different models of pagers, transmitters, computers and
other paging equipment, the Company is able to design, supply and operate its
systems. The Company continually evaluates new developments in paging technology
in connection with the design and enhancement of its paging systems and
selection of products to be offered to subscribers.
The Company achieves cost savings by purchasing pagers at volume discounts
from a limited number of companies, including Motorola, Inc. ("Motorola"), from
which the Company currently purchases most of its pagers. The Company purchases
its transmitters and paging terminals from Motorola and Glenayre Electronics,
Incorporated.
COMPETITION
The Company experiences competition from one or more paging operators in
all of the regions in which it operates. Some of the Company's competitors have
greater financial resources than the Company. Since 1988, the Company has
competed with Paging Network, Inc. ("PageNet"), the world's largest provider of
paging services, in all of the Company's major markets. The Company believes
that competition for subscribers is based on price, geographic coverage and
quality of service. Metrocall believes that it compares favorably with its
competitors in these areas.
With the introduction of the Nationwide Network, the Company's principal
competitors for national accounts are MobileMedia Communications, Inc. (using
the trade name MobileComm), SkyTel Corporation ("SkyTel"), a subsidiary of MTEL,
Inc., PageMart, Inc. ("PageMart"), PageNet and Arch Communications. The Company
is also aware of other paging companies that offer, or intend to offer,
nationwide paging services to their subscribers.
In 1994, the FCC began auctioning licenses for new PCS spectrum. There are
two types of PCS, narrowband and broadband. Narrowband PCS provides enhanced or
advanced paging and messaging capabilities, such as "acknowledgment paging" or
"talk-back" paging. Broadband PCS provides new types of communications devices
that includes multi-functional portable phones and imaging devices. PCS
providers compete directly and indirectly with the Company. Many narrowband and
broadband PCS systems are now providing commercial service.
Developments in the wireless telecommunications industry, such as PCS, and
enhancements of current technology have created new products and services which
compete with the paging services currently offered by Metrocall. There can be no
assurance that Metrocall will not be adversely affected by such technological
change.
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REGULATION
Federal. Metrocall's paging operations are subject to regulation by the
FCC under the Communications Act of 1934, as amended (the "Communications Act").
The Communications Act requires that the Company obtain licenses from the FCC to
use radio frequencies to conduct its paging operations within specified
geographic areas. In addition to authorizing the use of the radio frequencies,
FCC licenses awarded to the Company set forth the technical parameters, such as
maximum power and tower height, under which the Company is permitted to use
those frequencies.
The Company has historically provided paging services as both an RCC
operator and a PCP operator. Traditionally, RCC frequencies were assigned on an
exclusive basis to a single licensee in a service area; RCCs were subject to
regulation by the states as well as by the FCC and were required to provide
service to anyone requesting such service. PCP frequencies were assigned on a
shared basis (i.e., multiple parties in the same area could apply for and obtain
a license to use the same frequency); there were restrictions on eligibility of
PCP customers; and the states were preempted from regulating PCP entry, rates,
operation, terms of service, etc.
In 1993, the FCC permitted PCPs to provide service to individuals, rather
than only for business purposes. Additionally, in November 1993, the FCC adopted
new rules to provide "channel exclusivity" to PCP operators operating on certain
929 MHz frequencies, provided the licensee meets certain qualifications. The
Company has obtained nationwide exclusivity on three of its 929 MHz frequencies
(one used for the Nationwide Network; another obtained in the FirstPAGE USA,
Inc. merger in 1994; and the other obtained in the ProNet Merger). Under the
FCC's current rules, no other entity may apply anywhere in the United States to
operate on either of the Company's frequencies. Any PCP licenses other than the
Company's that were previously granted by the FCC may continue operating on
those frequencies, but those other licensees will not be allowed to expand their
paging services beyond their existing coverage areas. Additionally, on other 929
MHz frequencies, the Company has local exclusivity in the Chicago, Illinois
area, and regional exclusivity in the Northeast, Mid-Atlantic, and Southeast
regions of the United States.
PCP channels below 900 MHz are still allocated on a shared basis. The
Company obtained a 152.480 MHz shared frequency network through its merger with
A+ Network. Applications for those frequencies are first processed through a
frequency coordinator, which attempts to minimize overcrowding on a given
frequency. The coordinator then files the applications with the FCC, which
processes them on a first-come, first-served basis. So long as a given PCP
frequency is not congested with multiple licensees, the subscriber would not
perceive any differences between shared PCP services and exclusive paging
services. In most areas of the country where the Company holds shared PCP
licenses, the Company is the only paging operator, or one of only a few
operators, licensed on its particular frequency in that area.
In August 1993, as part of its Omnibus Budget Reconciliation Act (the "1993
Budget Act"), Congress amended the Communications Act to, inter alia, replace
the prior common carrier and private radio definitions with two newly defined
categories of mobile radio services: (1) CMRS (commercial mobile radio service)
and (2) PMRS (private mobile radio service). The CMRS definition essentially
supplants the prior RCC definition. The FCC has determined that PCP and RCC
paging services are classified as CMRS. The FCC has adopted technical,
operational and licensing rules for CMRS, which became effective on January 2,
1995, and which became applicable to "grandfathered" PCP operators (including
the Company) on August 10, 1996.
Pursuant to authority granted by the 1993 Budget Act, the FCC has
"forborne" from enforcing against all CMRS licensees the following common
carrier regulations under Title II of the Communications Act: any interstate
tariff requirements, including regulation of CMRS rates and practices; the
collection of intercarrier contracts; certification concerning interlocking
directorates; and FCC approval relating to market entry and exit. Additionally,
the 1993 Budget Act preempted state authority over CMRS entry and regulation.
Historically, paging licenses have been issued for terms of either 10 years
(for RCCs) or 5 years (for PCPs); all paging licenses issued since August of
1996 will be for 10-year terms. Renewal applications must be approved by the
FCC. The Company's current licenses have expiration dates ranging from 1998 to
2007. In
8
<PAGE> 10
the past, FCC renewal applications have been routinely granted. Although there
can be no assurance that any future applications filed by the Company will be
approved or acted upon in a timely manner by the FCC, based on its experience to
date, the Company knows of no reason to believe such applications would not be
approved or granted. Additionally, a recently adopted FCC policy will allow the
Company to make certain corporate reorganizations without prior FCC approval.
The Communications Act also requires prior FCC approval for acquisitions by
the Company of radio licenses held by other companies, as well as transfers of
controlling interests of any entities that hold radio licenses. The FCC has
recently adopted rules to streamline the processing of applications to exceed
the indirect foreign ownership benchmark in order to simplify foreign investment
in a licensee's parent company. Although there can be no assurance that any such
future applications filed by the Company will be approved or acted upon in a
timely manner by the FCC, based on its experience to date, the Company knows of
no reason to believe such applications would not be approved or granted.
The Communications Act places limitations on foreign ownership of CMRS
licenses. These foreign ownership restrictions limit the percentage of Company
stock that may be owned or voted, directly or indirectly, by aliens or their
representatives, foreign governments or their representatives, or foreign
corporations. The Company's certificate of incorporation permits the redemption
of the Metrocall common stock from stockholders where necessary to protect the
Company's compliance with there requirements.
The FCC has authority to restrict the operation of licensed radio
facilities or to revoke or modify such licenses. The FCC may adopt changes to
its radio licensing rules at any time, and may impose fines for violations of
its rules. Under certain circumstances, the Company's license applications may
be deemed "mutually exclusive" with those of other paging companies, in which
case, the FCC would select between the mutually exclusive applicants. The FCC
previously used lottery procedures to select between mutually exclusive
applications. Pursuant to authority granted by the Budget Act, the FCC will in
the future select between mutually exclusive CMRS paging applications through
competitive bidding procedures (i.e., auctions).
Paging licenses have traditionally been issued on a site-specific basis. On
February 19, 1997, the FCC adopted rules to issue most paging licenses for
large, FCC-defined service areas. Although the rules are subject to a pending
appeal and petitions for reconsideration, if they become "final", the following
changes will occur. Licenses for 929 MHz PCP and 931 MHz RCC frequencies will be
issued for Rand McNally's "MTA" geographic areas; licenses for RCC frequencies
in lower frequency bands will be licensed in "Economic Areas" or "EAs". Shared
PCP frequencies will continue to be allocated on a shared basis and licensed in
accordance with existing, site-specific procedures; however, the FCC is
considering changes to the application and licensing rules for these
frequencies. Mutually exclusive geographic area applications for all RCC
frequencies and exclusive 929 MHz PCP frequencies will be awarded through an
auction process. The FCC has stated that it will dismiss all pending mutually
exclusive applications for these frequencies , as well as all applications filed
after July 31, 1996 regardless of mutual exclusivity . A filing "freeze" is in
effect for the non-nationwide, exclusive paging frequencies pending commencement
of the auctions. The FCC has not yet announced when paging auctions will begin,
or the order in which it will make the various frequencies and geographic areas
available for bidding. Incumbent licensees will be able to trade in their
existing licenses for a single "wide-area" license based upon their current
coverage; incumbents will be entitled to interference protection from the
auction winners and will be able to modify their facilities within that area,
but they will not be permitted to expand their existing coverage.
Because auctions are new to paging, the Company cannot predict their impact
on its paging business. At least initially, competitive bidding may increase the
Company's costs of obtaining licenses. The FCC's wide-area licensing and auction
rules may also serve as entry barriers to new participants in the paging
industry. In any service area where the Company is the successful bidder, or
where it trades in its licenses for "wide-area" licenses, the Company will save
on the application costs associated with modifying and adding facilities within
its service areas, and no other entity will be able to apply for the Company's
frequencies within those areas. Conversely, in geographic areas where the
Company is not the high bidder, its ability to expand its service territories in
those geographic areas will be curtailed. The Company's nationwide frequencies
will not be
9
<PAGE> 11
subject to competitive bidding, although the FCC is considering imposing
additional "build-out" requirements on the Company and other nationwide
licensees.
The FCC could change its rules or policies in a manner that could have a
material adverse effect on the Company's business. Such actions could affect the
scope and manner of the Company's services, or could lead to increased
competition in the paging industry. Other changes may have a positive impact for
the Company. For example, under the Telecommunications Act of 1996 (the "Telecom
Act") and the FCC's interpreting orders, local exchange carriers ("LECs") are
prohibited from charging paging carriers for the "transport and termination" of
LEC-originated local calls. This prohibition could lead to substantial cost
savings for the Company. Moreover, under the Telecom Act and the FCC's rules,
paging services are entitled to compensation from any telecommunications carrier
that terminates a call on a paging network. This could lead to additional
revenues for paging carriers. The FCC rules are subject to pending petitions for
reconsideration and Court appeals. The Company cannot predict the final outcome
of any FCC proceeding or the possible impact of future FCC proceedings.
State. The 1993 Budget Act preempts all state and local rate and entry
regulation of all CMRS operators. The 1993 Budget Act became effective August
10, 1994. Entry regulations typically refer to the process whereby an RCC
operator must apply to the state to obtain a certificate to provide service in
that state. Rate regulation typically refers to the requirement that RCC
operators file a tariff describing the Company's rates, terms and conditions by
which it provides paging services. Apart from rate and entry regulations, some
states may continue to regulate other aspects of the Company's business in the
form of zoning regulations, or "health and safety" measures. The 1993 Budget Act
does not preempt state authority to regulate such matters. Although there can be
no assurances given with respect to future state regulatory approvals, based on
its experience to date, the Company knows of no reason to believe such approvals
would not be granted. The Telecom Act requires that state and local zoning
regulations shall not unreasonably discriminate among providers of "functionally
equivalent" wireless services, and shall not have the effect of prohibiting the
provision of personal wireless services. The Telecom Act provides for expedited
judicial review of state and local zoning decisions. Additionally, state and
local governments may not regulate the placement, construction and modification
of personal wireless service facilities on the basis of the environmental
effects of radio frequency emissions, if the facilities comply with the FCC's
requirements.
Recently, the FCC held that the Budget Act does not prohibit states from
imposing requirements of CMRS carriers to contribute to funding "universal"
telephone service within the states. Approximately 25 states now impose such
"universal service fund" obligations. The FCC's determination that the states
may impose those obligations is currently on appeal; if that determination is
upheld, the Company may incur additional costs in contributing to state
universal service funds.
Litigation. Metrocall has filed complaints with the FCC against a number
of Regional Bell Operating Companies ("RBOCs") and the largest independent
telephone company for violations of the FCC's interconnection and local
transport rules and the Telecom Act. The complaints allege that these local
telephone companies are unlawfully charging Metrocall for local transport of the
telephone companies' local traffic. Metrocall has petitioned the FCC to rule
that these local transport charges are unlawful and to award Metrocall a
reimbursement or credit for any past charges assessed. Also, Metrocall has asked
the FCC to resolve these complaints within the five month statutory deadline for
complaint proceedings established under the Telecom Act.
Legislative Changes. From time to time, federal and state legislators
propose legislation that could affect the Company's business, either
beneficially or adversely and such regulatory and legislative actions may
increase competition and affect the Company's cost of operations. The
recently-enacted Telecom Act will also have an impact on the paging industry;
the Company expects that that impact will be mostly positive. For example, the
Telecom Act imposes a duty on all telecommunications carriers to provide
interconnection to other carriers, and requires LECs to, among other things,
establish reciprocal compensation arrangements for the transport and termination
of calls, provide other telecommunications carriers access to the network
elements on an unbundled basis on reasonable and non-discriminatory rates, terms
and conditions. The Telecom Act also requires the FCC to appoint an impartial
entity to administer telecommunications numbering and to make numbers available
on an equitable basis. Additionally, as previously indicated, the
10
<PAGE> 12
Telecom Act restricts state and local authority with regard to zoning and
environmental regulation of telecommunications operators. Other provisions of
the Telecom Act, however, may provide for increased competition to the Company
(for example, the provisions allowing the FCC to forbear from applying
regulations and provisions of the Communications Act to any class of carriers,
not only to CMRS, and the provisions allowing public utilities to provide
telecommunications services directly) and may impose additional regulatory costs
(for example, provisions requiring contributions to universal service by
providers of both interstate and intrastate telecommunications). The Company
cannot predict the impact of such legislative actions on its operations.
The foregoing description of certain regulatory factors does not purport to
be a complete summary of all present and proposed legislation and regulations
pertaining to the Company's operations.
SEASONALITY
Generally, Metrocall's operating results are not significantly affected by
seasonal factors. However, selected markets experience slower new pager
additions during the winter months.
TRADEMARKS; SERVICE MARKS
"Metrocall" is a registered trademark with the U.S. Patent and Trademark
Office ("Trademark Office") and is owned by the Company. The Company markets its
paging services under the service marks "Datacall," "Metronet" and
"Metromessage." In addition, the Company owns the service marks "In Touch,"
which it has used in connection with its paging services, and "Metrotext," which
it has used in connection with its marketing of computer programs designed for
use in transmitting alphanumeric messages from personal computers to pagers.
Copyright registration has been granted to the Metrotext computer program. The
Trademark Office has also granted service marks for "Metrofax" and "The Power in
Paging." The Company has applications with the Trademark Office for service
marks "One Touch," "EZ Pack Paging" and "Notesender."
EMPLOYEES
As of December 31, 1997, the Company had 2,950 full and part-time
employees, including 799 employees added as a result of the ProNet Merger, none
of whom is represented by a labor union. The Company believes that its
relationship with its employees is good.
PROPERTIES
The Company does not hold title to any significant real property, although
the Company and its affiliates own interests in certain properties. At December
31, 1997, the Company leased commercial office and retail space at more than 225
locations used in conjunction with its paging operations. These office leases
provide for monthly payments ranging from approximately $250 to $54,000 and
expire, subject to renewal options, on various dates through July 2012.
In April 1994, Metrocall entered into a 10-year lease for additional office
space near its existing headquarters building. The lease was amended effective
January 1, 1997, to expand the Company's office space. The lease may be renewed
for two additional five-year periods. The lease, as amended, provides for annual
rents of approximately $814,000 with annual escalation of 3%. In connection with
this lease, Metrocall also has an option to acquire a 51% interest in the
property for approximately $2.9 million exercisable through December 31, 1998.
The Company leases sites for its transmitters on commercial broadcast
towers, buildings and other fixed structures. At December 31, 1997, the Company
leased transmitter sites for monthly rentals ranging from approximately $40 to
$6,400 that expire, subject to renewal options, on various dates through June
2012.
LITIGATION
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
matters will not have a material adverse effect on the financial position or the
results of the operations of the Company.
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<PAGE> 13
Source One Wireless, Inc.
Metrocall entered into an agreement in April 1996 to purchase certain
assets of Source One Wireless, Inc. ("Source One") and placed $1 million cash in
escrow. On June 26, 1996, Metrocall 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 Metrocall had breached
the agreement and seeking specific performance of the purchase agreement or
unspecified damages in excess of $80 million. In March 1998, by agreement of the
parties, the lawsuit was dismissed and the parties agreed in principle to an
equal division of the escrow account plus accrued interest.
Americom Paging Corporation
Contact Communications, Inc. ("Contact"), a wholly-owned subsidiary of
ProNet, entered into an agreement dated May 1995 to acquire substantially all of
the assets of Americom Paging Corporation ("Americom"). On July 2, 1997, two of
the former principal shareholders of Americom brought an action in Texas state
court seeking damages from ProNet (and subsequently Metrocall as successor in
interest to ProNet), Contact and ProNet's former Chief Executive Officer, in
connection with the transaction. The plaintiffs alleged claims under Texas state
common law and the Texas Securities Act and sought compensatory and punitive
damages. Metrocall asserted counterclaims for damages for breach of the purchase
agreement. In March 1998, by mutual agreement, the parties agreed to settle the
action for a settlement payment by Metrocall to the plaintiffs of $2.4 million.
Each party released all claims against the others, and all counterclaims were
dismissed with prejudice. The settlement payment was accrued at December 31,
1997 as part of the purchase accounting in connection with the ProNet Merger.
Interconnect Complaint
Metrocall has filed complaints with the FCC against a number of RBOCs and
the largest independent telephone company for violations of the FCC's
interconnection and local transport rules and the Telecom Act. The complaints
allege that these local telephone companies are unlawfully charging Metrocall
for local transport of the telephone companies' local traffic. Metrocall has
petitioned the FCC to rule that these local transport charges are unlawful and
to award Metrocall a reimbursement for any past charges assessed. Also,
Metrocall has asked the FCC to resolve these complaints within the five month
statutory deadline for complaint proceedings established under the Telecom Act.
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<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a Special Meeting of Stockholders held on December 17, 1997, the
following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
BROKER
PROPOSAL FOR AGAINST ABSTAIN NONVOTES
-------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C>
To approve and adopt an Agreement and Plan of
Merger by and between Metrocall, Inc. and ProNet
Inc. ............................................ 20,712,817 195,852 44,509 1,782,382
To approve and adopt an amendment to the Amended
and Restated Certificate of Incorporation of
Metrocall to increase the number of authorized
shares of common stock from 60,000,000 to
80,000,000....................................... 22,244,349 396,232 37,479 57,500
To approve and adopt an amendment to the Metrocall
1996 Stock Option Plan to increase the number of
shares of common stock that may be issued
thereunder by 2,000,000 shares to 4,000,000
shares........................................... 14,273,633 6,597,323 82,222 1,782,382
To approve and adopt an amendment to the Metrocall
Employee Stock Purchase Plan (the "ESPP") to
increase the number of shares of common stock
that may be issued thereunder by 700,000 shares
to 1,000,000 shares, to extend the term of the
ESPP to December 31, 2007, to increase
administrative flexibility, and to make certain
other changes.................................... 16,274,894 4,474,315 395,074 1,591,277
</TABLE>
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<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Common Stock is quoted and traded on The Nasdaq National Market under
the symbol "MCLL." The following table sets forth for the periods indicated the
high and low closing prices per share of the Common Stock as reported by The
Nasdaq National Market.
<TABLE>
<CAPTION>
CALENDAR YEAR 1996 HIGH LOW
- ------------------ ---- ------
<S> <C> <C>
Quarter ended March 31.................................... $21 1/4 $16 1/2
Quarter ended June 30..................................... 21 3/4 10
Quarter ended September 30................................ 11 6 1/4
Quarter ended December 31................................. 7 1/8 3 13/16
CALENDAR YEAR 1997
- ------------------
Quarter ended March 31.................................... $ 7 1/2 $ 4 1/8
Quarter ended June 30..................................... 5 5/8 3 3/4
Quarter ended September 30................................ 7 9/16 4 13/16
Quarter ended December 31................................. 7 3/8 4 1/8
</TABLE>
On March 2, 1998, the last reported sales price of the Common Stock on The
Nasdaq National Market was $7.00 per share. As of March 2, 1998, the Company had
approximately 678 stockholders of record.
Dividend Policy. The Company has not declared or paid any cash dividends
or distributions on its capital stock since its initial public offering of
Common Stock in 1993. The Company does not anticipate paying any cash dividends
on the Common Stock in the foreseeable future. Future cash dividends, if any,
will be determined by the Board of Directors, and will be based upon the
Company's earnings, capital requirements, financial condition and other factors
deemed relevant by the Board of Directors. In addition, certain covenants in the
Company's credit facility, its indentures and the terms of the Series A
Convertible and Series B Junior Convertible Preferred Stock restrict or prohibit
the payment of cash dividends on the Company's Common Stock.
Unregistered Securities. On November 15, 1996, the Company issued 159,600
shares of Series A Convertible Preferred Stock ("Series A Preferred") and
159,600 warrants representing the right to purchase an aggregate of 2.915
million shares of Common Stock (the "Warrants"). The aggregate purchase price
for the Series A Preferred and the Warrants was $39.9 million. The purchasers of
these securities were John Hancock Mutual Life Insurance Company, SunAmerica,
Inc. and UBS Capital, LLC. Because the securities were sold to qualified
institutional buyers in a transaction not 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").
The Series A Preferred has a stated value of $250 per share, and carries a
14% dividend (subject to increase upon the occurrence of certain events) payable
in cash or additional shares of Series A Preferred at the election of the
Company, a liquidation preference and redemption value of $250 per share,
certain redemption rights and the right to elect directors of Metrocall. In
addition, beginning November 15, 2001, holders of Series A Preferred have the
right to convert their Series A Preferred (including shares issued as dividends)
into shares of Common Stock based upon the market price of Common Stock at the
time of conversion. Series A Preferred may, at the option of holders, be
converted sooner upon certain change of control events of Metrocall, as defined
in the Certificate of Designation for the Series A Preferred. During 1997, the
Company issued 23,126 additional shares of Series A Preferred as dividends to
the holders of Series A Preferred.
Each Warrant represents the right of the holder to purchase 18,266 shares
of Common Stock, or an aggregate of 2.915 million shares. The exercise price per
share is $7.40. The Warrants contain certain provisions for adjustment in the
exercise price in the event Metrocall sells Common Stock or rights to purchase
Common Stock in private transactions for less than 125% of the then current
market price and other
14
<PAGE> 16
customary anti-dilution provisions. The Warrants expire November 15, 2001. The
Company has registered under the Securities Act the resale of shares that may be
obtained upon exercise of the Warrants.
Series B Preferred
On July 1, 1997, the Company issued 1,500 shares of Series B Junior
Convertible Preferred Stock ("Series B Preferred") in connection with the
acquisition of Page America Group, Inc. Each share of Series B Preferred has a
stated value of $10,000 per share and a liquidation preference, which is junior
to the Series A Preferred but senior to the shares of Common Stock, equal to its
stated value. The Series B Preferred carries a dividend of 14% of the stated
value per year, payable semiannually in cash or in additional shares of Series B
Preferred, at the Company's option. The Series B Preferred was registered under
the Securities Act. During 1997, the Company issued to Page America 79
additional shares of Series B Preferred as dividends. These shares have not been
registered.
The holders of Series B Preferred Stock have the right to convert up to 25%
of the number of Series B Preferred initially issued (plus shares of Series B
Preferred issued as dividends on such shares, and as dividends on such
dividends) into shares of Common Stock at the current market value of the Common
Stock, as defined, on September 1, 1997, December 1, 1997, March 1, 1998 and
June 1, 1998. As of December 31, 1997, no shares of Series B Preferred had been
converted. The Company has registered up to 3,500,000 shares of Common Stock
issuable upon the conversion of the Series B Preferred.
15
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company for each
of the five years in the period ended December 31, 1997. The historical
financial data for each of the five years in the period ended December 31, 1997,
have been derived from the audited consolidated financial statements of the
Company. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and notes
thereto presented elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1994(1) 1995 1996(1) 1997(1)
-------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE,
UNIT, AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Service, rent and maintenance revenues........... $ 33,111 $ 49,716 $ 92,160 $ 124,029 $ 249,900
Product sales.................................... 4,549 8,139 18,699 25,928 39,464
-------- -------- -------- --------- ---------
Total revenues.......................... 37,660 57,855 110,859 149,957 289,364
Net book value of products sold.................. (4,130) (6,962) (15,527) (21,633) (29,948)
-------- -------- -------- --------- ---------
33,530 50,893 95,332 128,324 259,416
Operating expenses:
Service, rent and maintenance.................... 9,559 14,014 27,258 38,347 76,428
Selling, general and administrative(2)........... 17,879 20,727 42,353 57,226 112,519
Depreciation and amortization.................... 6,525 13,829 31,504 58,196 91,699
-------- -------- -------- --------- ---------
(Loss) income from operations.................... (433) 2,323 (5,783) (25,445) (21,230)
Interest and other income (expense)(3)........... 77 161 314 (607) 156
Interest expense................................. (1,331) (3,726) (12,533) (20,424) (36,248)
-------- -------- -------- --------- ---------
Loss before income tax (provision) benefit and
extraordinary item............................. (1,687) (1,242) (18,002) (46,476) (57,322)
Income tax (provision) benefit................... (59) 152 595 1,021 4,861
-------- -------- -------- --------- ---------
Loss before extraordinary item................... (1,746) (1,090) (17,407) (45,455) (52,461)
Extraordinary item(3)............................ (439) (1,309) (2,695) (3,675) --
-------- -------- -------- --------- ---------
Net loss....................................... (2,185) (2,399) (20,102) (49,130) (52,461)
Preferred dividends.............................. -- -- -- (780) (7,750)
-------- -------- -------- --------- ---------
Loss attributable to common stockholders....... $ (2,185) $ (2,399) $(20,102) $ (49,910) (60,211)
======== ======== ======== ========= =========
Loss per share attributable to common
stockholders:
Loss per share before extraordinary item
attributable to common stockholders.......... $ (0.14) $ (1.49) $ (2.84) $ (2.22)
Extraordinary item, net of income tax
benefit...................................... (0.16) (0.23) (0.23) --
-------- -------- --------- ---------
Loss per share attributable to common
stockholders................................. $ (0.30) $ (1.72) $ (3.07) $ (2.22)
======== ======== ========= =========
OPERATING AND OTHER DATA:
Units in service (end of period)(1).............. 247,716 755,546 944,013 2,142,351 4,030,836
EBITDA(4)........................................ $ 10,923 $ 16,152 $ 27,771 $ 32,751 $ 70,469
EBITDA margin(4)(5).............................. 32.6% 31.7% 29.1% 25.5% 27.2%
Net cash provided by operating activities........ $ 10,929 $ 11,796 $ 14,000 $ 15,608 $ 27,166
Net cash used in investing activities............ $(13,598) $(19,227) $(44,528) $(327,904) $(176,429)
Net cash provided by financing activities........ $ 1,983 $ 9,190 $151,329 $ 199,639 $ 163,242
ARPU(6).......................................... $ 12.29 $ 10.53 $ 9.15 $ 8.01 $ 8.25
Average monthly operating expense per unit(7).... $ 8.39 $ 7.36 $ 6.71 $ 6.28 $ 6.47
Units in service per employee (end of period).... 716 1,007 1,047 1,088 1,276
Capital expenditures............................. $ 13,561 $ 19,091 $ 44,058 $ 62,110 $ 69,935
DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- --------- ---------
CONSOLIDATED BALANCE SHEET DATA:
Working (deficit) capital........................ $ (1,603) $ (5,277) $116,009 $ (7,267) $ (24,631)
Cash and cash equivalents........................ 1,014 2,773 123,574 10,917 24,896
Total assets..................................... 33,857 200,580 340,614 646,577 1,087,014
Total long-term debt, net of current portion..... 11,814 101,346 153,803 327,092 598,989
Total stockholders' equity....................... 13,729 68,136 155,238 166,298 179,496
</TABLE>
(Footnotes on following page)
16
<PAGE> 18
NOTES TO SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(1) 1994, 1996 and 1997 include the results of operations of acquired companies
from their respective acquisition dates (see Note 3 to consolidated
financial statements). On May 9, 1997, the Company sold the assets of its
telemessaging operations (acquired through merger on November 15, 1996);
therefore, results of operations for the year ended December 31, 1997
include telemessaging operations through the date of sale only. Consolidated
statements of operations data excludes the operations of ProNet since the
merger between the Company and ProNet was completed on December 30, 1997.
Units in service at December 31, 1997, include approximately 1.3 million
units acquired in the ProNet Merger.
(2) Includes the impact of one-time, non-recurring charges for the forgiveness
of certain stockholder notes receivable of approximately $4.8 million in
1993, and for severance and other compensation costs incurred as part of a
management reorganization charge of approximately $2.0 million in 1995.
(3) In 1993, 1994 and 1995 the Company refinanced balances outstanding under its
then existing credit facilities. As a result of this refinancing the Company
recorded extraordinary items of $439,000, $1.3 million and $2.7 million,
respectively, representing charges to expense unamortized deferred financing
costs and other costs, net of any income tax benefits, related to those
credit facilities. In 1996, the Company recorded an extraordinary item for
costs of approximately $3.7 million paid to purchase the A+ Network 11 7/8%
senior subordinated notes outstanding. Additionally, the Company incurred
breakage fees of approximately $1.7 million associated with the termination
of two interest rate swap agreements in 1995. Costs associated with this
termination have been included in interest and other income (expense) in the
1995 statement of operations.
(4) EBITDA (earnings before interest, taxes, depreciation and amortization, and
certain one-time charges), 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
indentures and its credit facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for discussion of significant capital requirements and
commitments. EBITDA excludes non-recurring charges for the forgiveness of
certain stockholder notes receivable of approximately $4.8 million in 1993,
and approximately $2.0 million incurred as part of a management
reorganization charge in 1995.
(5) EBITDA margin is calculated by dividing (a) EBITDA by (b) the sum of (total
revenues less the net book value of products sold).
(6) ARPU (average monthly paging revenue per unit) is calculated by dividing (a)
service, rent and maintenance revenues for the period by (b) the average
number of units in service for the period. ARPU calculation excludes
revenues derived from non-paging services such as telemessaging, long
distance and cellular telephone.
(7) Average monthly operating expense per unit is calculated by dividing (a)
total recurring operating expenses before depreciation and amortization for
the period by (b) the average number of units in service for the period. For
this calculation, operating expenses exclude non-recurring charges for the
forgiveness of certain stockholder notes receivable of approximately $4.8
million in 1993, and approximately $2.0 million incurred as a part of a
management reorganization charge in 1995.
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ITEM 7. 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 annual
report.
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
(synergies), 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 second largest paging company in the United
States based on number of subscribers, with more than 4.0 million pagers in
service at December 31, 1997. Since December 31, 1994, the Company has added
approximately 3.3 million subscribers through acquisitions and internal growth,
including approximately 1.3 million added from the merger with ProNet Inc.
("ProNet") completed on December 30, 1997. Results of operations reflect the
results of operations of Parkway Paging, Inc. ("Parkway"), Satellite Paging and
Message Network (collectively, "Satellite"), A+ Network, Inc. ("A+ Network") and
Page America Group, Inc. ("Page America") from the date of such acquisitions in
July 1996, August 1996, November 1996 and July 1997, respectively. Results of
operations for the year ended December 31, 1997 exclude the operations of ProNet
since the merger was completed at year end. Further, results of operations
reflect the operations of the Company's telemessaging business until its sale on
May 9, 1997. Net revenues and operating income derived from telemessaging
operations during 1997 were approximately $3.7 million and $100,000,
respectively.
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 services,
operating results benefit from this recurring stream with minimal requirements
for incremental selling expenses or fixed costs.
The Company's average monthly paging revenue per unit ("ARPU") for the
years ended December 31, 1995, 1996 and 1997 was $9.15, $8.01 and $8.25,
respectively. The increase in ARPU during 1997 is related to a number of factors
including the merger with A+ Network in November 1996 (A+ Network's ARPU was
higher than Metrocall's ARPU), general service rate increases, the changing
distribution mix described below and increased sales of enhanced paging services
including alphanumeric services. ARPU is expected to decline in 1998 with the
addition of ProNet (primarily because a greater portion of ProNet's revenues are
derived from resellers). In order to increase penetration and utilization of its
Nationwide Network, the Company emphasizes a number of distribution channels
characterized by lower ARPU, such as resellers, with correspondingly lower
costs. In addition, in order to offset declines in ARPU and to capitalize on
growth of paging and other wireless messaging services, the Company has expanded
its channels of distribution to include Company owned and operated retail
stores, strategic partnerships and alliances, internet sales, among others; with
each distribution channel focusing on the sale rather than lease of pagers. Some
of these channels tend to have higher ARPU's than the Company's strategic
partners and typical resellers, who purchase service
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<PAGE> 20
in quantity at wholesale rates. Furthermore, the Company has been successful in
marketing enhanced services, such as nationwide paging services, voice mail and
other ancillary services for its strategic partners and other alliances.
The Company's growth, whether internal or through acquisitions, requires
significant capital investment for paging equipment and technical
infrastructure. The Company also purchases pagers for that portion of its
subscriber base that leases pagers from the Company. During the year ended
December 31, 1997, the Company's capital expenditures totaled $69.9 million.
These expenditures included approximately $40.3 million for pagers, which in
turn included an increase to pagers on hand and net increases and maintenance to
the pager base. The Company expects capital expenditures for the year ending
December 31, 1998 to be approximately $80.0 million. The Company's focus is now
on integrating ProNet, increasing ARPU's, lowering operating costs, increasing
utilization of its Nationwide Network and emphasizing distribution channels
through which pagers are sold rather than leased in order to reduce future
capital expenditures.
The definitions below relate to the 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.
- 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, rent and employee benefits.
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<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth the percentage of net revenues (total
revenues less the net book value of products sold) represented by certain items
in the Company's Consolidated Statements of Operations and certain other
information for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997(2)
-------- --------- ---------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA(1)(2):
Revenues:
Service, rent and maintenance.................... 96.7% 96.7% 96.3%
Product sales.................................... 19.6 20.2 15.2
Net book value of products sold.................. (16.3) (16.9) (11.5)
------ ----- -----
Net revenues................................ 100.0 100.0 100.0
------ ----- -----
Operating expenses:
Service, rent and maintenance.................... 28.6 29.9 29.5
Selling and marketing............................ 16.4 18.9 19.8
General and administrative....................... 25.9 25.7 23.6
Depreciation and amortization.................... 33.1 45.4 35.3
Management reorganization charge................. 2.1 -- --
------ ----- -----
Loss from operations................................ (6.1) (19.9) (8.2)
Interest and other income (expense)................. 0.3 (0.5) 0.1
Interest expense.................................... (13.1) (15.9) (14.0)
Loss before extraordinary item...................... (18.3) (35.4) (20.2)
Loss attributable to common stockholders............ (21.1)% (38.9)% (23.2)%
OTHER DATA:
Units in service (end of period)(2)................. 944,013 2,142,351 4,030,836
EBITDA (in thousands)(3)............................ $27,771 $ 32,751 $ 70,469
EBITDA margin(3)(4)................................. 29.1% 25.5% 27.2%
ARPU(5)............................................. $ 9.15 $ 8.01 $ 8.25
Average monthly operating cost per unit(6).......... $ 6.71 $ 6.28 $ 6.47
</TABLE>
- ---------------
(1) Consolidated statement of operations data includes the results of operations
of acquired companies from their respective date of acquisition only. On May
9, 1997, the Company sold the assets of its telemessaging operations
(acquired through merger on November 15, 1996); therefore, results of
operations for the year ended December 31, 1997 include telemessaging
operations through the date of sale only.
(2) Consolidated statement of operations data excludes the operations of ProNet
Inc. ("ProNet") since the merger between the Company and ProNet was
completed on December 30, 1997. Units in service at December 31, 1997,
include approximately 1.3 million units acquired in the ProNet Merger.
(3) EBITDA (earnings before interest, taxes, depreciation and amortization and
certain one-time charges), while not a measure under 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 indentures and its credit facility. See "-- Liquidity
and Capital Resources" for discussion of significant capital requirements
and commitments. EBITDA excludes one-time, non-recurring charges for
severance and other compensation costs of approximately $2.0 million
incurred as a part of a management reorganization charge in 1995.
(4) EBITDA margin is calculated by dividing (a) EBITDA by (b) the sum of (total
revenues less the net book value of products sold).
(5) ARPU (average monthly paging revenue per unit) is calculated by dividing (a)
service, rent and maintenance revenues for the period by (b) the average
number of units in service for the period. ARPU calculation excludes
revenues derived from non-paging services such as telemessaging, long
distance and cellular telephone.
(6) Average monthly operating expense per unit is calculated by dividing (a)
total recurring operating expenses before depreciation and amortization for
the period by (b) the average number of units in
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<PAGE> 22
service for the period. For this calculation, operating expenses exclude a
non-recurring charge of approximately $2.0 million incurred as a part of a
management reorganization in 1995.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH DECEMBER 31, 1996
Total revenues increased approximately $139.4 million from $150.0 million
for the year ended December 31, 1996 ("1996") to $289.4 million for the year
ended December 31, 1997 ("1997"). Service, rent and maintenance revenues
increased approximately $125.9 million from $124.0 million in 1996 to $249.9
million in 1997. The increase in revenues is attributed to greater service
revenues due to the growth of pagers from 2,142,351 at December 31, 1996 to
4,030,836 at December 31, 1997 including approximately 1.3 million subscribers
acquired in the ProNet Merger. Monthly ARPU for paging services increased from
$8.01 per unit in 1996 to $8.25 per unit in 1997 due to the merger with A+
Network in November 1996, general service rate increases, the shift in the
Company's sales mix from primarily direct distribution channels, especially the
direct sales force, to indirect channels and Company-owned retail stores, and
the sale of enhanced paging services. Factors affecting ARPU in future periods
include distribution mix of new subscribers, competition and new technologies,
among others.
Product sales increased $13.6 million from $25.9 million in 1996 to $39.5
million in 1997, and decreased as a percentage of total revenues from 17.3% in
1996 to 13.6% in 1997. Net book value of products sold increased approximately
$8.3 million from $21.6 million in 1996 to $29.9 million in 1997 principally due
to the increase in product sales, partially offset by increased depreciation
expense. Pagers are classified as property and depreciated from the date of
acquisition. The gross margin on products sold increased from 16.6% in 1996 to
24.1% in 1997.
Average monthly operating costs per unit in service (operating costs per
unit before depreciation and amortization) increased from $6.28 per unit in 1996
to $6.47 per unit in 1997. Each operating expense is discussed separately below.
Service, rent and maintenance expenses increased approximately $38.1
million from $38.3 million in 1996 to $76.4 million in 1997 and decreased as a
percentage of net revenues from 29.9% in 1996 to 29.5% in 1997. The overall
increase in service, rent and maintenance expense is attributable to the
acquisitions of Parkway ($1.4 million), Satellite ($2.0 million), A+ Network
($27.2 million) and Page America ($3.0 million) completed during 1996 and 1997.
Additional increases are primarily attributable to increased site rental costs
($3.1 million) and increased personnel costs ($1.7 million) partially offset by
reductions in third party carrier costs ($1.9 million). The Company has ceased
paying local exchange carriers in the Company's various service areas for any
facilities used by those local exchange carriers to transport local calls to the
Company's local paging networks pursuant to the Telecommunications Act of 1996
(the "Telecom Act") and the FCC's rules regarding local transport which reduced
third party carriers costs by approximately $8.2 million. The Company has filed
complaints with the FCC against a number of Regional Bell Operating Companies
("RBOCs") and the largest independent telephone company for violations of the
FCC's interconnection and local transport rules and the Telecom Act. Metrocall
has petitioned the FCC to rule that these local transport charges are unlawful
and to award Metrocall a reimbursement or credit for any past charges assessed.
The total value of credits receivable from these local exchange carriers at
December 31, 1997 was approximately $12.1 million. Monthly service, rent and
maintenance expense per unit increased from $2.52 per unit in 1996 to $2.62 per
unit in 1997.
Selling and marketing expenses increased approximately $27.1 million, from
$24.2 million in 1996 to $51.3 million in 1997, and increased as a percentage of
net revenues from 18.9% in 1996 to 19.8% in 1997. The increase in selling and
marketing expenses was primarily associated with the 1996 and 1997 acquisitions,
which added new sales offices and retail locations. Selling and marketing
expenses attributed to the acquired companies are Parkway ($0.9 million),
Satellite ($0.8 million), A+ Network ($23.1 million) and Page America ($1.2
million). Additional increases are associated with the increased sales staff and
related costs ($1.5 million) and increased advertising and promotional costs
($0.1 million). Monthly selling and marketing expense per unit increased from
$1.59 per unit in 1996 to $1.76 per unit in 1997, due primarily to increases in
the Company's sales force as a result of acquisitions in new geographic areas.
Selling and marketing expenses may increase as a percentage of net revenues as
the Company continues to increase its presence in existing
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<PAGE> 23
markets and expand geographic coverage. The Company is reviewing the performance
of acquired retail stores and may close some stores if performance is
inadequate.
General and administrative expenses increased $28.2 million from $33.0
million in 1996 to $61.2 million in 1997 and decreased as a percentage of net
revenues from 25.7% in 1996 to 23.6% in 1997. General and administrative
expenses attributed to the acquired companies are Parkway ($0.4 million),
Satellite ($1.2 million), A+ Network ($18.1 million) and Page America ($1.1
million). General and administrative expenses also increased primarily due to
increased expenses for billing, credit and collection activities ($3.4 million)
and additional operational and administrative personnel ($3.7 million). Monthly
general and administrative expense per unit decreased from $2.17 per unit in
1996 to $2.09 per unit in 1997. On a per unit basis, general and administrative
expenses may decline as additional synergies are gained from the Company's 1996
and 1997 acquisitions.
Depreciation and amortization increased approximately $33.5 million from
$58.2 million in 1996 to $91.7 million in 1997 and decreased as a percentage of
net revenues from 45.4% in 1996 to 35.3% in 1997. The increase in total
depreciation expense resulted primarily from depreciation on increased
subscriber paging equipment and 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 and is
expected to increase further in 1998 primarily due to the ProNet Merger.
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 $2.6 million.
Interest expense increased approximately $15.8 million, from $20.4 million
in 1996 to $36.2 million in 1997. Interest expense increased due to a higher
average level of debt during 1997 primarily associated with the financing of the
1996 and 1997 acquisitions. Interest expense is expected to increase to
approximately $60.0 million in 1998 based on outstanding borrowings at December
31, 1997.
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. Further, on July 1, 1997, the Company issued
1,500 shares of Series B Junior Convertible Preferred Stock ("Series B
Preferred") in connection with the Page America acquisition with a stated value
of $15.0 million. The Series A and Series B Preferred bear dividends at 14% of
the stated value per year. Dividends on the Series A and Series B Preferred may
be paid in either cash or additional shares of the respective series of
preferred stock, at the Company's option. Preferred dividends recorded during
1997 were approximately $7.8 million. All preferred dividends were paid in
additional shares of preferred stock. In November 1996, in connection with the
A+ Network merger, the Company issued indexed Variable Common Rights ("VCRs") to
former A+ Network stockholders. The VCRs expired without value in November 1997.
Loss attributable to common stockholders increased $10.3 million from $49.9
million in 1996 to $60.2 million in 1997 primarily due to increased interest
expense ($15.8 million) and preferred dividends ($7.0 million) partially offset
by a decrease in loss from operations of $4.2 million and an increase in income
tax benefit ($3.8 million).
EBITDA increased approximately $37.7 million to $70.5 million in 1997 from
$32.8 million in 1996. As a percentage of net revenues, EBITDA increased from
25.5% in 1996 to 27.2% in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH DECEMBER 31, 1995
Total revenues increased approximately $39.1 million from $110.9 million in
the year ended December 31, 1995 ("1995") to approximately $150.0 million for
the year ended December 31, 1996 ("1996"). Net revenues increased approximately
$33.0 million, or 34.6% from $95.3 million in 1995 to $128.3 million in 1996.
The increase is attributable to greater service revenues due to the growth of
pagers in service from 944,013 at December 31, 1995 to 2,142,351 at December 31,
1996. The Parkway, Satellite and A+ Network acquisitions, completed in July
1996, August 1996 and November 1996, respectively, added approximately 900,000
pagers to the Company's subscriber base. Operations of the acquired companies
are included in the
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<PAGE> 24
results of operations from their respective acquisition dates. ARPU for paging
services has declined from $9.15 in 1995 to $8.01 in 1996 due primarily to the
increase in the base of customers serviced through indirect channels (which
generally have lower ARPU due to volume discounts) and an overall decline in
monthly rates of approximately 6.6% during 1996. On a pro forma basis, assuming
each of the acquisitions occurred on January 1, 1996, the ARPU for paging
services (excluding long distance, telemessaging and cellular services) is
estimated to have been $8.52 and $8.21 per month for the year and quarter ended
December 31, 1996. 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.
Net book value of products sold increased approximately $6.1 million from
$15.5 million in 1995 to $21.6 million in 1996. The gross margin on products
sold decreased from 17.0% in 1995 to 16.6% in 1996. Net book value of products
sold increased principally due to the increase in product sales, partially
offset by increased depreciation expense.
Overall, the Company has experienced a decrease in total average operating
expenses per unit in service (operating expenses per unit before depreciation
and amortization) from 1995 to 1996. Average monthly operating expenses per unit
decreased from $6.71 for 1995 to $6.28 for 1996. Each component of operating
expenses is discussed separately below. Acquisitions require integration of each
company's administrative, finance, sales and marketing organizations, as well as
the integration of each company's technical network operations. Until the
operations of A+ Network are fully integrated, the Company expects average
operating expenses per unit to increase in 1997 from historical 1996 amounts. On
a pro forma basis, assuming that all acquisitions were completed as of January
1, 1996, the Company's average monthly total operating expense per unit in
service is estimated to have been approximately $7.05 for 1996 and $6.63 for the
quarter ended December 31, 1996. The increase in average monthly total operating
expense per unit is primarily due to higher overall per unit operating costs and
a lower number of subscribers per employee in the A+ Network operations.
Service, rent and maintenance expenses increased approximately $11.0
million from $27.3 million in 1995 to $38.3 million in 1996 and increased as a
percentage of net revenues from 28.6% in 1995 to 29.9% in 1996. The Company
estimates that this overall increase in service, rent and maintenance expenses
is primarily attributable to the acquisitions of Parkway Paging ($1.1 million),
Satellite ($1.2 million), and A+ Network ($2.4 million) and increased carrier
line costs paid to third party service providers ($2.8 million), increased
transmitter site rental costs associated with expanded system coverage ($1.7
million) and increased personnel costs ($1.7 million). On a per unit basis,
monthly service, rent and maintenance expenses decreased from $2.71 in 1995 to
$2.52 in 1996 as a result of combining operations for greater efficiencies. On a
pro forma basis, assuming that all acquisitions were completed as of January 1,
1996, the Company's average monthly service, rent and maintenance expense per
unit in service is estimated to have been approximately $2.55 for 1996 and $2.33
for the quarter ended December 31, 1996.
Selling and marketing expenses increased approximately $8.5 million from
$15.7 million in 1995 to $24.2 million in 1996 and increased as a percentage of
net revenues from 16.4% in 1995 to 18.9% in 1996. The Company estimates this
increase in selling and marketing expenses is primarily associated with the
acquisitions of Parkway Paging ($0.7 million), Satellite ($0.5 million), and A+
Network ($2.6 million) and in part due to increased personnel costs, including
salaries and commissions, ($3.6 million), advertising and promotion ($0.7
million), rents ($0.2 million) and travel expenses ($0.2 million). Monthly
selling and marketing expenses per unit have increased slightly from $1.55 in
1995 to $1.59 in 1996, 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 revenue as the Company
continues to increase markets and expand geographic coverage. On a pro forma
basis, assuming that all acquisitions were completed as of January 1, 1996, the
Company's average monthly selling and marketing expense per unit in service for
the year and quarter ended December 31, 1996 is estimated to have been
approximately $1.77 and $1.68, respectively.
General and administrative expenses increased approximately $8.4 million
from $24.6 million in 1995 to $33.0 million in 1996 and decreased as a
percentage of net revenues from 25.9% in 1995 to 25.7% in 1996. The
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<PAGE> 25
Company estimates that this increase in general and administrative expenses is
primarily attributable to the acquisitions of Parkway Paging ($0.3 million),
Satellite ($0.5 million) and A+ Network ($3.7 million) from their respective
acquisition dates, offset by synergies resulting from the reduction of
duplicative functions, and in part due to increased expenses for collection
activities ($0.6 million), professional services, including legal and accounting
fees, ($1.2 million) and general corporate expenses ($2.1 million), including
personnel, taxes and maintenance. Monthly general and administrative expenses
per unit have decreased from $2.45 in 1995 to $2.17 in 1996. On a pro forma
basis, assuming that all acquisitions were completed as of January 1, 1996, the
Company's average monthly general and administrative expense per unit in service
for the year and quarter ended December 31, 1996 is estimated to have been
approximately $2.73 and $2.62, respectively.
EBITDA increased approximately $5.0 million from $27.8 million in 1995 to
$32.8 million in 1996. As a percentage of net revenues, EBITDA decreased from
29.1% in 1995 to 25.5% in 1996.
Depreciation and amortization increased approximately $26.7 million from
$31.5 million in 1995 to $58.2 million in 1996 and increased as a percentage of
net revenues from 33.1% to 45.4% for 1995 and 1996, respectively. The Company
estimates that the increase in total depreciation expense resulted from
depreciation on additional pagers in service ($12.2 million) and paging
equipment ($2.7 million), other operating equipment ($3.4 million) and
depreciation of assets acquired in the acquisitions of Parkway, Satellite Paging
and Message Network and A+ Network ($2.0 million). Amortization increased
substantially during 1996 due to the amortization of goodwill and other
intangibles recorded in the acquisitions completed in 1996. 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
1996 by approximately $1.3 million.
Interest and other income (expense) decreased approximately $0.9 million
from $0.3 million in 1995 to a loss of $0.6 million in 1996. The decrease is the
result of the recognition of the Company's share of losses of A+ Network (from
June 1996 through November 15, 1996, during which time the Company's investment
was being accounted for under the equity method) of $4.1 million, and the
Company's equity in the Solo America loss ($0.2 million). These losses were
partially offset by a gain recognized on the sale of equipment ($1.2 million)
and increased interest income reflecting higher cash balances in the first half
of 1996.
Interest expense increased approximately $7.9 million from $12.5 million in
1995 to $20.4 million in 1996 primarily due to the Company's 10 3/8% senior
subordinated notes being outstanding all of 1996. Since net proceeds from the
subordinated notes offering were used partially to refinance existing debt, the
impact is to increase interest expense by the marginal increase in the interest
rate of the debt.
During the fourth quarter of 1996, the Company recognized an extraordinary
charge of approximately $3.7 million to expense fees and cash payments incurred
in the tender and consent solicitation for the A+ Network 11 7/8% senior
subordinated notes (the "A+ Notes") outstanding.
The Company's loss attributable to common stockholders increased
approximately $29.8 million from $20.1 million in 1995 to $49.9 million in 1996.
The increase in the loss attributable to common stockholders is primarily
attributable to increased depreciation and amortization expense and increased
interest costs in 1996. The Company's net losses are expected to continue for
additional periods in the future. In addition, the Page America acquisition may
result in increased net losses as a result of additional depreciation and
amortization and interest expense attributable to the Page America transaction
and borrowings to pay the cash portion of the purchase price. In November 1996,
the Company issued $39.9 million of Series A Preferred together with warrants to
acquire approximately 2.9 million shares of the Company's common stock with an
exercise price of $7.40 per share. The Series A Preferred bears dividends at 14%
of the stated value per year. Total dividends accrued but unpaid at December 31,
1996 were approximately $698,000. The total value allocated to the warrants,
$7.9 million or $2.70 per share, will be accreted over the term of the Series A
Preferred as preferred dividends. Since the issuance of the Series A Preferred,
accretion of the allocated value of the warrants was approximately $82,000.
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<PAGE> 26
INFLATION
Inflation is not a material factor affecting the Company's business. Paging
system equipment and operating costs have not increased while pager costs have
declined significantly in recent years. This reduction in costs has been
reflected in lower prices charged to the Company's subscribers. General
operating expenses such as salaries, employee benefits and occupancy costs are,
however, subject to inflationary pressures.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share." SFAS No. 128 requires dual presentation of basic and diluted earnings
per share on the face of the statement of operations 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 shared in the earnings of the Company. Options and warrants to
purchase shares of common stock were not included in the computation of loss per
share as the effect would be antidilutive. As a result, the basic and diluted
earnings per share are identical. Options to purchase 3,470,655 shares of common
stock with exercise prices ranging from $1.035 to $22.125 per share and warrants
to purchase 2,915,250 shares of common stock with an exercise price of $7.40 per
share outstanding at December 31, 1997 were not included in the computation of
diluted loss per share as their effect would be antidilutive. Implementation of
SFAS No. 128 did not have a material effect on the Company's consolidated
results of operations or financial position.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting comprehensive income
and its components. Comprehensive income is defined as all changes in the equity
of a business enterprise during a period from transactions and other events and
circumstances, except those resulting from investments by owners and
distributions to owners. SFAS No. 130 requires that all items of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. Metrocall believes that SFAS No. 130
will not have a material effect on the Company's consolidated results of
operations or financial position.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes new standards
for reporting information about operating segments in annual financial
statements of public business enterprises and requires disclosure of certain
selected information about operating segments in interim financial reports. SFAS
No. 131 is effective for financial statements for periods beginning after
December 15, 1997. Metrocall believes that SFAS No. 131 will not have a material
effect on the Company's consolidated results of operations or financial
position, but has not yet determined the impact on its current segment
reporting.
Year 2000 Compliance
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the year 2000 as "00". This could cause many computer applications to
fail completely or to create erroneous results unless corrective measures are
taken. The Company utilizes software and related computer technologies essential
to its operations that will be affected by the Year 2000 issue. Many of the
Company's computer systems, including the Company's primary billing system, have
been enhanced to meet Year 2000 compliance. The Company is continuing to review
other computer systems, specifically as they relate to recent mergers and
acquisitions, and is developing plans for addressing the remaining Year 2000
compliance issues in 1998. The expense associated with these plans cannot
presently be determined, but could be material.
25
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations require substantial funds to finance the growth of
its existing paging operations and customer base, development and construction
of future wireless communications networks, expansion into new markets and
acquisition of other wireless communications companies. Further cash
requirements also include debt service, working capital and general corporate
requirements.
The Company financed its internal growth in 1996 and 1997 through its
operating cash flow, the use of available cash, borrowings under the Company's
credit facility, and a senior subordinated notes offering, discussed below. Net
cash provided by operating activities increased from $14.0 million for the year
ended December 31, 1995 to $15.6 million for the year ended December 31, 1996.
Net cash provided by operating activities further increased to $27.2 million for
the year ended December 31, 1997.
At December 31, 1997, the Company had a working capital deficit of
approximately $24.6 million and has experienced such working capital deficits in
prior periods. Pursuant to the Page America acquisition and the ProNet Merger,
the Company assumed certain current liabilities of Page America and ProNet. 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 to fund estimated working capital requirements.
Cash flows used in investing activities in 1997 were primarily to fund
purchases of property and equipment and acquisitions including Page America and
ProNet (primarily transaction related fees and severance costs). Capital
expenditures were approximately $62.1 million and $69.9 million for the years
ended December 31, 1996 and 1997, respectively. Capital expenditures for 1997
included approximately $40.3 million for pagers, including increases in pagers
on hand and net increases and maintenance to the subscriber base. The balance of
capital expenditures included $12.1 million for information systems and computer
related equipment, $13.6 million for network construction and development and
$4.0 million for general purchases, including leasehold improvements and office
equipment. Additionally, during 1997 the Company received proceeds of
approximately $11.0 million from the sale of the assets of its telemessaging
operations acquired in connection with the A+ Network merger in November 1996.
Cash flows used in investing activities in 1996 were primarily to fund
purchases of property and equipment and complete the acquisitions of Parkway,
Satellite and A+ Network. The Company experienced much greater capital
expenditure requirements in 1996 compared with 1995 due to the completion of the
Company's Nationwide Network, the expansion and upgrading of the Company's
management information, database and customer service systems and increased
pager placements. In June 1996, the Company completed a cash offer for
approximately 4.4 million shares of the outstanding common stock of A+ Network
for $91.8 million. In July and August 1996, the Company acquired Parkway and
Satellite, respectively. The acquisitions of Parkway and Satellite were financed
primarily with cash payments totaling approximately $45 million and the issuance
of shares of Metrocall common stock.
Cash flows provided by financing activities for 1997 included borrowings
under the Company's credit facility of $164.3 million, primarily to fund working
capital requirements, capital expenditures and to fund the acquisition of Page
America and the ProNet Merger. The Company expects that its capital expenditures
for 1998 (including the effects of the ProNet Merger) will be approximately
$80.0 million. Projected capital expenditures are subject to change based on the
Company's internal growth, general business and economic conditions and
competitive pressures. Future additional cash requirements include debt service
costs, primarily interest. Cash flows from financing activities also included
the proceeds of a senior subordinated notes offering in October 1997, as
discussed in more detail below. The net proceeds of the offering of
approximately $193.0 million were used to repay outstanding indebtedness under
the Company's credit facility.
Cash flows provided by financing activities for 1996 included payments on
long-term debt of approximately $25.5 million. Borrowings under the Company's
credit facility increased by approximately $194.9 mil-
26
<PAGE> 28
lion primarily for the acquisitions of Parkway ($28.0 million), Satellite ($17.0
million) and the purchase of A+ Notes ($122.5 million) and other working capital
requirements. In November 1996, the Company sold Series A Preferred to a group
of investors. Net proceeds were approximately $38.3 million, of which $25.0
million was used to repay debt under the Company's credit facility. In July
1997, the Company issued Series B Preferred with a stated value of $15.0 million
as partial consideration for the Page America Acquisition. Dividends on the
Series A Preferred and Series B Preferred may be paid in either cash or
additional shares of Series A Preferred or Series B Preferred, as the case may
be, at the Company's option. The Company does not currently expect to pay cash
dividends on the Series A Preferred or Series B Preferred. Further, Metrocall is
required to redeem all outstanding shares of Series A Preferred and Series B
Preferred (including dividend shares) in November 2008 and July 2009,
respectively, unless the holders have previously converted such shares to
Metrocall common stock.
Subject to certain conditions, the Company may borrow up to $300.0 million
under its credit facility. At December 31, 1997, approximately $141.2 million
was outstanding, and the Company borrowed an additional $6.0 million in January
1998. As of December 31, 1997, approximately $49.3 million of additional
borrowings were available to the Company under its credit facility.
Management believes that funds generated by the Company's operations,
together with those available under its credit facility, will be sufficient to
finance estimated capital expenditure requirements, and to fund the Company's
existing operations for the foreseeable future.
SENIOR SECURED CREDIT FACILITY
In October 1997, the Company and its bank lenders executed an amended and
restated credit agreement (the "Metrocall Credit Facility"). Under the amended
and restated credit agreement, subject to certain conditions, the Company may
borrow up to $300.0 million under two loan facilities. The first facility is a
$175.0 million reducing revolving credit facility, and the second facility is a
$125.0 million reducing term credit facility. At December 31, 1997, a total of
approximately $141.2 million was outstanding under the Metrocall Credit
Facility. Amounts available under the Company's credit facility are subject to
certain financial covenants and other restrictions such that as of December 31,
1997, approximately $49.3 million of additional borrowings were available to the
Company under its credit facility. The credit facility has a remaining term of
seven years and is secured by substantially all the assets of the Company.
Required quarterly repayments begin on March 31, 2000 and continue through
December 31, 2004.
The Metrocall 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
through December 31, 1998 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 of cash and operating cash flow to interest
expense (in each case, as such terms are defined in the agreement relating to
the amended and restated credit facility). The covenants also limit additional
indebtedness and future mergers and acquisitions 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
Metrocall Credit Facility also prohibits certain changes in ownership control of
the Company, as defined, during the term of the credit facility.
In connection with amendments made during 1997, and the Metrocall Credit
Facility, the Company paid fees to its bank lenders of approximately $1.3
million. These fees have been deferred and will be amortized over the remaining
term of the credit facility as interest expense.
Management believes that funds generated by the Company's operations,
together with those available under its credit facility, will be sufficient to
finance estimated capital expenditure requirements and to fund the Company's
existing operations for the foreseeable future. While there are no current
outstanding commitments, 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
to be given and the availability of financing. Such potential acquisitions may
result in substantial capital requirements for which additional
27
<PAGE> 29
financing may be required. No assurance can be given that such additional
financing would be available on terms satisfactory to the Company.
SENIOR SUBORDINATED NOTES
In October 1997, the Company sold $200.0 million aggregate principal amount
of 9 3/4% senior subordinated notes due 2007 (the "1997 Notes") in a private
placement (the "Notes Offering"). The 1997 Notes bear interest, payable
semi-annually on January 15 and July 15, at a rate of 9.75% per year and mature
on November 1, 2007. The Notes are callable beginning November 1, 2002. The 1997
Notes are unsecured obligations of the Company, subordinated to all present and
future senior indebtedness of the Company. The Company used the net proceeds
from the Notes Offering, approximately $193.0 million, to repay outstanding
indebtedness under its credit facility. Pursuant to an exchange offer that was
completed in March 1998, the 1997 Notes were registered under the Securities
Act.
The 1997 Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain circumstances.
The 1997 Notes may be redeemed, in whole or in part, at any time on or
after November 1, 2002, at the option of the Company. The following redemption
prices, plus any accrued and unpaid interest to, but not including, the
applicable redemption date, are applicable to any optional redemption of the
1997 Notes by the Company during the 12-month period beginning on November 1 of
the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 104.8750%
2003........................................................ 102.4375
2004 and thereafter......................................... 100.0000
</TABLE>
In the event of a change of control of the Company, as defined, each holder
of the 1997 Notes will have the right, at such holder's option, to require the
Company to repurchase that holder's 1997 Notes at a purchase price equal to 101%
of the principal amount thereof, plus any accrued and unpaid interest to the
date of repurchase.
RECENT ACQUISITIONS
Page America Group, Inc.
On July 1, 1997, the Company acquired substantially all of the assets of
Page America Group, Inc. and its subsidiaries ("Page America") and assumed
substantially all of Page America's accounts payable and certain obligations
under various office and equipment leases. Page America received (a)
approximately $25.0 million in cash, (b) 1,500 shares of Series B Junior
Convertible Preferred Stock with a liquidation value of $15.0 million and (c)
3,911,856 shares of the Company's common stock. The Company financed the cash
portion of the purchase price, including transaction fees and expenses, with
borrowings under its credit facility. The Page America acquisition was accounted
for as a purchase for financial reporting purposes.
ProNet Inc.
On December 30, 1997, The Company completed the merger of ProNet with and
into Metrocall (the "ProNet Merger"), pursuant to the terms of the Agreement and
Plan of Merger dated August 8, 1997. Under the terms of the ProNet Merger,
Metrocall issued 0.90 shares of Metrocall common stock for each share of ProNet
common stock, or approximately 12.3 million shares of Metrocall common stock
(including 900,000 shares to be issued in 1998 as settlement of certain ProNet
litigation). In connection with the ProNet Merger, the Company assumed ProNet's
$100.0 million in 11 7/8% senior subordinated notes, due in 2005 and refinanced
indebtedness outstanding, including accrued interest and bank fees, under
ProNet's credit facility with borrowings under the Metrocall Credit Facility.
The ProNet Merger has been accounted for as a purchase for financial reporting
purposes.
28
<PAGE> 30
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. Management plans to continue to expand the Company's
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 annual report.
Substantial Indebtedness
At December 31, 1997, the Company had outstanding approximately $599.9
million in long term debt consisting of bank loans, senior subordinated notes,
mortgage indebtedness and capital leases. The Company increased its borrowings
outstanding under its credit facility by $6.0 million in January 1998 primarily
to fund working capital requirements. Additionally, the Company expects to incur
additional indebtedness (in the form of draws under the Metrocall 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, may 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 flows from operations will be required to be dedicated to the payment of
the Company's interest expense; (iii) indebtedness under the Metrocall Credit
Facility bears interest at floating rates, which causes the Company to be
vulnerable to increases in interest rates; (iv) the Company may be more highly
leveraged than companies with which it competes, which may place it at a
competitive disadvantage although it believes that it currently is less
leveraged than its major competitors; 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 than 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 announced their intention to
market paging services jointly with other telecommunications services.
29
<PAGE> 31
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 FCC are aimed at
encouraging such services and products.
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 change 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 leased to its subscribers.
History of Net Losses
Metrocall has sustained net losses of $20.1 million, $49.1 and $52.5
million for the years ended December 31, 1995, 1996 and 1997. No assurance can
be given that losses can be reversed in the future. In addition, at December 31,
1997, Metrocall's accumulated deficit was approximately $157.0 million and
Metrocall had a deficit in working capital of $24.6 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
Metrocall has filed complaints with the FCC against a number of RBOCs and
the largest independent telephone company for violations of the FCC's
interconnection and local transport rules and the Telecom Act. The complaints
allege that these local telephone companies are unlawfully charging Metrocall
for local transport of the telephone companies' local traffic. Metrocall has
petitioned the FCC to rule that these local transport charges are unlawful and
to award Metrocall a reimbursement or credit for any past charges assessed.
Also, Metrocall has asked the FCC to resolve these complaints within the five
month statutory deadline for complaint proceedings established under the Telecom
Act.
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. 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
30
<PAGE> 32
paging business or the allocation of radio spectrum for services that compete
with Metrocall's business could adversely affect Metrocall's results of
operations.
Intangible Assets
At December 31, 1997, the Company's total assets of $1,087.0 million
included net intangible assets of approximately $787.0 million. Intangible
assets include FCC licenses and certificates, customer lists, debt financing
costs, goodwill and certain other intangibles. 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. 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. Because a majority of the Company's assets are intangible, the
assets of the Company would not be sufficient to repay all of the Company's
indebtedness in the event secured creditors foreclose on the assets pledged to
them.
31
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... F-2
Financial Statements:
Consolidated Balance Sheets, December 31, 1996 and
1997.................................................. F-3
Consolidated Statements of Operations for the three
years ended December 31, 1995, 1996 and 1997.......... F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1995, 1996 and 1997.... F-5
Consolidated Statements of Cash Flows for the three
years ended December 31, 1995, 1996 and 1997.......... F-6
Notes to Consolidated Financial Statements............. F-7
Financial Statement Schedule:
Report of Arthur Andersen LLP, Independent Public
Accountants........................................... F-29
Schedule II Valuation and Qualifying Accounts.......... F-30
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and executive officers of the Company
is incorporated by reference from the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on May 6, 1998, (the "1998 Proxy Statement")
under the caption "Election of Directors -- Information as to Nominees and
Continuing Directors."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
from the 1998 Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the stock ownership of each person known to the
Company to be the beneficial owner of more than 5% of the Common Stock, of each
director and executive officer of Metrocall and all directors and executive
officers as a group is incorporated by reference from the 1998 Proxy Statement
under the caption "Beneficial Ownership of Common Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference from the 1998 Proxy Statement under the caption
"Certain Relationships and Related Transactions."
32
<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are included in Part II Item 8.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... F-2
Financial Statements:
Consolidated Balance Sheets, December 31, 1996 and
1997.................................................. F-3
Consolidated Statements of Operations for the three
years ended December 31, 1995, 1996 and 1997.......... F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1995, 1996 and 1997.... F-5
Consolidated Statements of Cash Flows for the three
years ended December 31, 1995, 1996 and 1997.......... F-6
Notes to Consolidated Financial Statements............. F-7
Financial Statement Schedule:
Report of Arthur Andersen LLP, Independent Public
Accountants........................................... F-29
Schedule II Valuation and Qualifying Accounts.......... F-30
</TABLE>
All other schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the financial statements
or notes thereto.
(b) Reports on Form 8-K
A report dated October 1, 1997, regarding proposed private placement
offering of senior subordinated debt, filed with the Commission on October
8, 1997.
A report dated October 16, 1997, regarding agreement to sell senior
subordinated notes in a private placement, filed with the Commission on
October 23, 1997.
A report dated November 15, 1997, regarding the termination of
variable common rights, filed with the Commission on November 25, 1997.
(c) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of
Metrocall, as amended.(g)
3.3 Sixth Amended and Restated Bylaws of Metrocall.(g)
4.1 Indenture for Metrocall 10 3/8% Senior Subordinated Notes
due 2007 dated September 27, 1995 including form of
Notes.(h)
4.2 Indenture for A+ Network, Inc. 11 7/8% Senior Subordinated
Notes due 2005 ("A+ Notes") dated October 24, 1995.(i)
4.3 First Supplemental Indenture dated November 14, 1996, for A+
Notes.(j)
4.4 Second Supplemental Indenture dated November 15, 1996, for
A+ Notes.(j)
4.5 Indenture for 9 3/4% Senior Subordinated Notes due 2007
dated October 21, 1997, including form of Notes.(k)
4.6 Indenture for ProNet Inc. 11 7/8% Senior Subordinated Notes
due 2005 ("ProNet Notes") dated June 15, 1995.(t)
10.1 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)
</TABLE>
33
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.2 Amendment to Asset Purchase Agreement by and among Page
America and Metrocall dated as of March 28, 1997.(a)
10.3 Form of Certificate of Designation, Number, Powers,
Preferences and Relative, Participating, Optional and Other
Rights of Series A Convertible Preferred Stock of
Metrocall(b)
10.4 Form of Certificate of Designation, Number, Powers,
Preferences and Relative, Participating, Optional and Other
Rights of Series B Junior Convertible Preferred Stock of
Metrocall(c)
10.5 Registration Rights Agreement dated July 1, 1997 by and
between Page America Group, Inc. and Metrocall.(d)
10.6 Registration Rights Agreement dated July 1, 1997 by and
among Page America and Metrocall.(d)
10.7 Indemnity Escrow Agreement dated July 1, 1997 by and among
Page America, Metrocall and First Union National Bank of
Virginia.(d)
10.8 Agreement and Plan of Merger dated as of August 8, 1997,
between Metrocall and ProNet Inc. ("ProNet")(e)
10.9 Stockholders Voting Agreement dated as of August 8, 1997,
among ProNet Inc. and certain stockholders of Metrocall
listed therein.(e)
10.10 Option Agreement dated as of August 8, 1997, between
Metrocall and ProNet(e)
10.11 Amendment to Option Agreement dated as of August 29, 1997,
between Metrocall and ProNet(f)
10.12 Agreement and Plan of Merger dated as of May 16, 1996,
between Metrocall and A+ Network, Inc.(u)
10.13 Amendment to Agreement and Plan of Merger between Metrocall
and A+ Network, Inc.(l)
10.14 Shareholders' Option Sale Agreement dated as of May 16, 1996
between Metrocall and certain shareholders of A+ Network,
Inc. listed therein.(u)
10.15 Metrocall Stockholders Voting Agreement dated as of May 16,
1996 between A+ Network, Inc. and certain stockholders of
Metrocall listed therein.(u)
10.16 Agreement and Plan of Merger entered into effective May 16,
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.(l)
10.17 Agreement of Merger by and among Metrocall, PPI Acquisition
Corp., Parkway Paging, Inc., certain shareholders of Parkway
Paging, Inc., and George W. Bush, dated February 26,
1996.(v)
10.18 Asset Purchase Agreement 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, 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.)(v)
10.19 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, Bertman M. Wachtel,
Edward R. Davalos and Kevan D. Bloomgren, and Metrocall.(w)
10.20 Employment Agreement between Metrocall and William L.
Collins, III.(l)
10.21 Employment Agreement between Metrocall and Steven D.
Jacoby.(l)
10.22 Employment Agreement between Metrocall and Vincent D.
Kelly.(l)
10.23 Change of Control Agreement between Metrocall and William L.
Collins, III.(l)
10.24 Change of Control Agreement between Metrocall and Steven D.
Jacoby.(l)
10.25 Change of Control Agreement between Metrocall and Vincent D.
Kelly.(l)
10.26 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and Jackie R. Kimzey.(m)
10.27 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and David J. Vucina.(m)
10.28 Letter Agreement dated August 8, 1997, between Metrocall and
Jackie R. Kimzey.(m)
10.29 Letter Agreement dated August 8, 1997, between Metrocall and
David J. Vucina.(m)
10.30 Letter Agreement dated August 8, 1997, between Metrocall and
Jan E. Gaulding.(m)
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.31 Letter Agreement dated August 8, 1997, between Metrocall and
Mark A. Solls.(m)
10.32 Letter Agreement dated August 8, 1997, between Metrocall and
Jeffery A. Owens.(m)
10.33 Amendment to Employment Agreement between Metrocall and
William L. Collins, III.(s)
10.34 Amendment to Employment Agreement between Metrocall and
Steven D. Jacoby.(s)
10.35 Amendment to Employment Agreement between Metrocall and
Vincent D. Kelly.(s)
10.36 Directors' Stock Option Plan, as amended.(n)
10.37 Metrocall 1996 Stock Option Plan.(z)
10.38 Metrocall 1996 Stock Option Plan, as amended.(n)
10.39 Metrocall Amended Employee Stock Purchase Plan.(r)
10.40 Variable Common Rights Agreement between Metrocall and First
Union National Bank of Virginia, Rights Agent, dated as of
November 15, 1996, including Form of Certificate
representing Variable Common Rights.(o)
10.41 Unit Purchase Agreement dated as of November 15, 1996, among
Metrocall and Certain Purchasers.(p)
10.42 Warrant Agreement dated as of November 15, 1996, between
Metrocall and the First National Bank of Boston, Warrant
Agent.(p)
10.43 Second Amended and Restated Loan Agreement dated as of
October 21, 1997, among Metrocall, the financial
institutions signatory thereto, and Toronto-Dominion
(Texas), Inc., as Administrative Agent.(q)
10.44 Registration Rights Agreement, dated October 21, 1997
between Metrocall and Morgan Stanley & Co. Incorporated, TD
Securities (USA), Inc., First Union Capital Markets Corp.
and Nationsbank Montgomery Securities, Inc.(g)
10.45 Deed of Lease between Douglas and Joyce Jemal, as landlord,
and Metrocall, as tenant, dated April 14, 1994.(x)
10.46 Lease Agreement dated December 20, 1983 between Beacon
Communications Associates, Ltd. and a predecessor of
Metrocall.(y)
10.47 Agreement dated May 16, 1996 among Metrocall and Ray D.
Russenberger and Elliott H. Singer regarding voting for
director.(u)
10.48 Non-disclosure/No Conflict Agreement dated May 16, 1996
between Metrocall and Ray D. Russenberger.(u)
10.49 Non-disclosure/No Conflict Agreement dated May 16, 1996
between Metrocall and Elliott H. Singer.(u)
10.50 Employment Agreement dated May 16, 1996 between Metrocall
and Charles A. Emling III.(u)
11.1 Statement re computation of per share earnings.
21.1 Subsidiaries of Metrocall, Inc.
23.2 Consent of Arthur Andersen LLP, as independent public
accountants for Metrocall.
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 Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(c) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 1, on Form S-4 (File No. 333-21231) filed with the Commission on April
15, 1997.
(d) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on July 14, 1997.
(e) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on August 12, 1997.
(f) Incorporated by reference to Metrocall's Current Report on Form 8-K, as
amended, filed with the Commission on September 8, 1997.
35
<PAGE> 37
(g) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-44329), filed with the Commission on January
15, 1998.
(h) 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.
(i) 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.
(j) 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.
(k) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 23, 1997.
(l) 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.
(m) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-36079), filed with the Commission on
September 22, 1997.
(n) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders held on May 7, 1997.
(o) 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.
(p) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(q) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 2, on Form S-4 (File No. 333-36079) filed with the Commission on
November 5, 1997.
(r) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 1, on Form S-4 (File No. 333-36079) filed with the Commission on
October 27, 1997.
(s) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, filed with the Commission on November
14, 1997.
(t) Incorporated by reference to ProNet's Current Report on Form 8-K filed with
the Commission on July 5, 1995.
(u) Incorporated by reference to Metrocall's Tender Offer Statement on Schedule
14D-1, filed with the Commission on May 22, 1996.
(v) 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.
(w) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on September 13, 1996, as amended on October 1, 1996.
(x) 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.
(y) 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.
(z) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders held on May 1, 1996.
36
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 31st day of
March, 1998.
METROCALL, INC.
By: /s/ RICHARD M. JOHNSTON
------------------------------------
Richard M. Johnston
Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD M. JOHNSTON Chairman of the Board March 28, 1998
- ---------------------------------------------
Richard M. Johnston
/s/ WILLIAM L. COLLINS, III Vice Chairman of the Board, President, March 31, 1998
- --------------------------------------------- Chief Executive Officer and Director
William L. Collins, III
/s/ VINCENT D. KELLY Chief Financial Officer, Executive March 31, 1998
- --------------------------------------------- Vice President, and Treasurer
Vincent D. Kelly (Principal Financial and Accounting
Officer)
/s/ HARRY L. BROCK, JR. Director March 30, 1998
- ---------------------------------------------
Harry L. Brock, Jr.
/s/ SUZANNE S. BROCK Director March 28, 1998
- ---------------------------------------------
Suzanne S. Brock
/s/ ELLIOTT H. SINGER Director March 24, 1998
- ---------------------------------------------
Elliott H. Singer
/s/ RAY D. RUSSENBERGER Director March 31, 1998
- ---------------------------------------------
Ray D. Russenberger
/s/ FRANCIS A. MARTIN, III Director March 31, 1998
- ---------------------------------------------
Francis A. Martin, III
/s/ RONALD V. APRAHAMIAN Director March 31, 1998
- ---------------------------------------------
Ronald V. Aprahamian
/s/ RYAL R. POPPA Director March 31, 1998
- ---------------------------------------------
Ryal R. Poppa
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MICHAEL GREENE Director March 31, 1998
- ---------------------------------------------
Michael Greene
/s/ ROYCE R. YUDKOFF Director March 31, 1998
- ---------------------------------------------
Royce R. Yudkoff
/s/ JACKIE R. KIMZEY Director March 31, 1998
- ---------------------------------------------
Jackie R. Kimzey
/s/ EDWARD E. JURGERMAN Director March 24, 1998
- ---------------------------------------------
Edward E. Jurgerman
/s/ MAX D. HOPPER Director March 31, 1998
- ---------------------------------------------
Max D. Hopper
</TABLE>
38
<PAGE> 40
METROCALL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... F-2
Consolidated Balance Sheets, December 31, 1996 and 1997..... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1995, 1996 and 1997.................... F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1995, 1996 and 1997........ F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1995, 1996 and 1997.................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metrocall, Inc.:
We have audited the accompanying consolidated balance sheets of Metrocall,
Inc., and subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metrocall, Inc., and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington D.C.
February 9, 1998
(except with respect to the matters
discussed under Source One Wireless,
Inc. and Americom Paging Corporation
in Note 9 as to which the date is
March 26, 1998)
F-2
<PAGE> 42
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
-------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,917 $ 24,896
Accounts receivable, less allowance for doubtful accounts
of $2,961 and $6,843 as of December 31, 1996 and 1997,
respectively........................................... 20,905 30,208
Prepaid expenses and other current assets................. 5,681 18,372
-------- ----------
Total current assets.............................. 37,503 73,476
-------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and leasehold improvements................ 12,694 16,364
Furniture, office equipment and vehicles.................. 29,742 46,588
Paging and plant equipment................................ 188,236 276,993
Less -- Accumulated depreciation and amortization......... (77,260) (115,357)
-------- ----------
153,412 224,588
-------- ----------
INTANGIBLE ASSETS, net of accumulated amortization of
approximately $20,926 and $58,352 as of December 31, 1996
and 1997, respectively.................................... 452,639 787,003
OTHER ASSETS................................................ 3,023 1,947
-------- ----------
TOTAL ASSETS................................................ $646,577 $1,087,014
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 700 $ 952
Accounts payable.......................................... 17,194 35,160
Accrued expenses and other current liabilities............ 18,940 46,141
Deferred revenues and subscriber deposits................. 7,936 15,854
-------- ----------
Total current liabilities......................... 44,770 98,107
CAPITAL LEASE OBLIGATIONS, less current maturities (Note
6)........................................................ 3,244 4,282
CREDIT FACILITY AND OTHER LONG-TERM DEBT, less current
maturities (Note 6)....................................... 171,314 142,173
SENIOR SUBORDINATED NOTES (Note 6).......................... 152,534 452,534
DEFERRED INCOME TAX LIABILITY............................... 76,687 155,930
MINORITY INTEREST IN PARTNERSHIP............................ 499 510
-------- ----------
Total liabilities................................. 449,048 853,536
-------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 9)
SERIES A CONVERTIBLE PREFERRED STOCK, 14% cumulative; par
value $.01 per share; 810,000 shares authorized; 159,600
and 182,726 shares issued and outstanding as of December
31, 1996 and 1997, respectively and a liquidation
preference of $40,598 and $46,481 at December 31, 1996 and
December 31, 1997, respectively (Note 8).................. 31,231 37,918
SERIES B JUNIOR CONVERTIBLE PREFERRED STOCK, 14% cumulative;
par value $.01 per share; 9,000 shares authorized; zero
and 1,579 shares issued and outstanding as of December 31,
1996 and 1997, respectively and a liquidation preference
of $0 and $16,064 at December 31, 1996 and 1997,
respectively (Note 8)..................................... -- 16,064
STOCKHOLDERS' EQUITY (Notes 3 and 8):
Common stock, par value $.01 per share; 80,000,000 shares
authorized; 24,521,135 and 40,548,414 shares issued and
outstanding as of December 31, 1996 and 1997,
respectively........................................... 245 405
Additional paid-in capital................................ 262,827 336,076
Accumulated deficit....................................... (96,774) (156,985)
-------- ----------
166,298 179,496
-------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $646,577 $1,087,014
======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 43
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Service, rent and maintenance.......................... $ 92,160 $ 124,029 $ 249,900
Product sales.......................................... 18,699 25,928 39,464
---------- ---------- ----------
Total revenues................................. 110,859 149,957 289,364
Net book value of products sold........................ (15,527) (21,633) (29,948)
---------- ---------- ----------
95,332 128,324 259,416
OPERATING EXPENSES:
Service, rent and maintenance.......................... 27,258 38,347 76,428
Selling and marketing.................................. 15,656 24,228 51,327
General and administrative............................. 24,647 32,998 61,192
Depreciation and amortization.......................... 31,504 58,196 91,699
Management reorganization charge (Note 5).............. 2,050 -- --
---------- ---------- ----------
101,115 153,769 280,646
---------- ---------- ----------
Loss from operations........................... (5,783) (25,445) (21,230)
INTEREST AND OTHER INCOME (EXPENSE)...................... 314 (607) 156
INTEREST EXPENSE......................................... (12,533) (20,424) (36,248)
---------- ---------- ----------
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM.... (18,002) (46,476) (57,322)
INCOME TAX BENEFIT....................................... 595 1,021 4,861
---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM........................... (17,407) (45,455) (52,461)
EXTRAORDINARY ITEM: Write-off of unamortized debt
financing costs in 1995 and costs of debt refinancing
in 1996, net of tax benefit (Note 6)................... (2,695) (3,675) --
---------- ---------- ----------
Net loss....................................... (20,102) (49,130) (52,461)
PREFERRED DIVIDENDS (Note 8)............................. -- (780) (7,750)
---------- ---------- ----------
Loss attributable to common stockholders............... $ (20,102) $ (49,910) $ (60,211)
========== ========== ==========
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic and diluted loss per share before extraordinary
item attributable to common stockholders............... $ (1.49) $ (2.84) $ (2.22)
Basic and diluted extraordinary item, net of income tax
benefit................................................ (0.23) (0.23) --
---------- ---------- ----------
Basic and diluted loss per share attributable to common
stockholders........................................... $ (1.72) $ (3.07) $ (2.22)
---------- ---------- ----------
Weighted-average common shares outstanding............... 11,668,140 16,252,782 27,086,654
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 44
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994.......................... $106 $ 94,792 $ (26,762) $ 68,136
MetroPaging acquisition purchase price adjustment
(Note 3)....................................... -- (105) -- (105)
Exercise of stock options......................... -- 46 -- 46
Net proceeds from public offering (Note 8)........ 40 106,938 -- 106,978
Compensation on amendment of stock options in
management reorganization (Note 5)............. -- 285 -- 285
Net loss.......................................... -- -- (20,102) (20,102)
---- -------- --------- --------
BALANCE, December 31, 1995.......................... 146 201,956 (46,864) 155,238
Issuance of shares in employee stock purchase plan
(Note 8)....................................... -- 110 -- 110
Shares issued in Satellite acquisition (Note 3)... 18 10,408 -- 10,426
Exercise of stock options (Note 8)................ -- 5 -- 5
Shares issued in merger with A+ Network (Note 3).. 81 42,477 -- 42,558
Warrants issued in connection with Series A
Convertible Preferred Stock (Note 8)........... -- 7,871 -- 7,871
Preferred dividends (Note 8)...................... -- -- (780) (780)
Net loss.......................................... -- -- (49,130) (49,130)
---- -------- --------- --------
BALANCE, December 31, 1996.......................... 245 262,827 (96,774) 166,298
Issuance of shares in employee stock purchase plan
(Note 8)....................................... 1 429 -- 430
Adjustment to shares issued in Satellite
acquisition.................................... 1 (213) -- (212)
Shares issued in acquisition of Radio and
Communications Consultants, Inc. and Advanced
Cellular Telephone, Inc. (Note 3).............. 5 2,899 -- 2,904
Issuance of shares in acquisition of Page America
(Note 3)....................................... 39 18,787 -- 18,826
Exercise of stock options (Note 8)................ -- 2 -- 2
Shares issued in ProNet Merger (Note 3)........... 114 51,345 -- 51,459
Preferred dividends (Note 8)...................... -- -- (7,750) (7,750)
Net loss.......................................... -- -- (52,461) (52,461)
---- -------- --------- --------
BALANCE, December 31, 1997.......................... $405 $336,076 $(156,985) $179,496
==== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 45
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(20,102) $ (49,130) $ (52,461)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 31,504 58,196 91,699
Compensation on amendment of stock options in
management reorganization............................ 285 -- --
Amortization of debt financing costs................... 595 620 1,152
Decrease in deferred income taxes...................... (686) (1,483) (5,400)
Write-off of deferred acquisition costs................ -- 388 --
Minority interest in loss of investments............... -- 207 --
Writedown of equity investment......................... -- 238 240
Loss (gain) on sale of equipment....................... 3 (1,188) --
Extraordinary item..................................... 2,695 3,675 --
Changes in current assets and liabilities, net of effects
from acquisitions:
Accounts receivable.................................... (3,554) (2,626) (1,408)
Prepaid expenses and other current assets.............. (1,070) (1,579) (5,331)
Accounts payable....................................... 2,050 5,841 372
Deferred revenues and subscriber deposits.............. (1,458) 2,126 (2,481)
Other current liabilities.............................. 3,738 323 784
-------- --------- ---------
Net cash provided by operating activities......... 14,000 15,608 27,166
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired.......... -- (260,600) (113,466)
Proceeds from sale of telemessaging operations............ -- -- 11,000
Purchases of property and equipment, net.................. (44,058) (62,110) (69,935)
Additions to intangibles.................................. (1,895) (3,853) (5,070)
Other..................................................... 1,425 (1,341) 1,042
-------- --------- ---------
Net cash used in investing activities............. (44,528) (327,904) (176,429)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ 107,024 115 432
Net proceeds from preferred stock offering (Note 8)....... -- 38,323 --
Proceeds from long-term debt.............................. 163,000 194,904 364,261
Principal payments on long-term debt...................... (113,790) (25,464) (194,222)
Debt tender and consent solicitation costs................ -- (3,675) --
Deferred debt financing costs............................. (4,984) (4,562) (7,240)
Increase (decrease) in minority interest in partnership... 79 (2) 11
-------- --------- ---------
Net cash provided by financing activities......... 151,329 199,639 163,242
-------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 120,801 (112,657) 13,979
CASH AND CASH EQUIVALENTS, beginning of period.............. 2,773 123,574 10,917
-------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $123,574 $ 10,917 $ 24,896
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 46
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND RISK FACTORS
Metrocall, Inc. and subsidiaries (the "Company" or "Metrocall"), is a
provider of local, regional and nationwide paging and other wireless messaging
services in the United States. The Company's selling efforts are concentrated in
five operating regions: (i) the Northeast (Massachusetts through Delaware), (ii)
the Mid-Atlantic (Maryland, Delaware and the Washington, D.C. metropolitan
area), (iii) the Southeast (including Virginia, the Carolinas, Georgia, Florida,
Alabama, Mississippi and Tennessee), (iv) the Southwest (primarily Louisiana and
Texas), (v) the Mid-West (including Illinois, Indiana and Wisconsin) and (vi)
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 $20.1 million, $49.1 million and $52.5
million for the years ended December 31, 1995, 1996 and 1997, respectively. The
Company's loss from operations for the year ended December 31, 1997 was $21.2
million. In addition, at December 31, 1997, the Company has an accumulated
deficit of approximately $157.0 million and a deficit in working capital of
$24.6 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
communication companies. At December 31, 1997, the Company had incurred
approximately $599.9 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 December 31, 1997,
approximately $49.3 million of additional borrowings were available to the
Company under its credit facility. 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 as well as availability of financing in the capital
markets.
Many computer systems in use today were designed and developed using two
digits, rather than four, to specify the year. As a result, such systems will
recognize the year 2000 as "00". This could cause many computer applications to
fail completely or to create erroneous results unless corrective measures are
taken. The Company utilizes software and related computer technologies essential
to its operations that will be affected by the Year 2000 issue. Many of the
Company's computer systems, including the Company's primary billing system, have
been enhanced to meet Year 2000 compliance. The Company is continuing to review
other computer systems, specifically as they relate to recent mergers and
acquisitions, and is developing plans for addressing the remaining Year 2000
compliance issues in 1998. The expense associated with these plans cannot
presently be determined, but could be material.
The Company is also subject to certain additional risks and uncertainties
including changes in technology, business integration, competition and
regulation.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
In addition to Metrocall, the accompanying consolidated financial
statements include the accounts of Metrocall's 61% interest in Beacon Peak
Associates Ltd. ("Beacon Peak"), Metrocall's 20% interest in Beacon
Communications Associates ("Beacon Communications"), and Metrocall of Virginia,
Inc. and
F-7
<PAGE> 47
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Metrocall, USA, Inc., nonoperating wholly owned subsidiaries that hold certain
of the Company's regulatory licenses issued by the Federal Communications
Commission (the "FCC").
Beacon Communications owns the building that is the Company's headquarters.
Since Beacon Communications' debt related to the building is guaranteed by the
Company's lease (expiring 2008) and because the Company has made the only
substantive investment in Beacon Communications, the accounts of Beacon
Communications have been consolidated in the accompanying financial statements.
The Company and Beacon Communications could agree upon alternate arrangements
that could result in an accounting treatment other than consolidation. Beacon
Peak owns land, adjacent to the Beacon Communications building, which is valued
at cost.
The minority interest in Beacon Peak is $499,000 and $510,000 as of
December 31, 1996 and 1997, respectively. Beacon Communications had a
partnership deficit as of December 31, 1996, and accordingly, the minority
interest is not recognized in the accompanying consolidated financial
statements.
All significant intercompany transactions have been eliminated in
consolidation.
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. The Company
leases (as lessor) radio pagers under operating leases. Substantially all the
leases are on a month-to-month basis. Advance billings for services are deferred
and recognized as revenue when earned. 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.
F-8
<PAGE> 48
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
New pagers are depreciated using the half-year convention upon acquisition.
Betterments to acquired pagers are charged to depreciation expense.
Purchases of property and equipment in the accompanying consolidated
statements of cash flows are reflected net of the net book value of products
sold to approximate the net addition to subscriber equipment.
The Company currently purchases a significant amount of its subscriber
paging equipment from one supplier. Although there are other manufacturers of
similar subscriber paging equipment, the inability of this supplier to provide
equipment required by the Company could result in a decrease of pager placements
and decline in sales, which could adversely affect operating results.
Intangible Assets
Intangible assets, net of accumulated amortization, consist of the
following at December 31, 1996 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, AMORTIZATION
------------------- PERIOD IN
1996 1997 YEARS
-------- -------- ------------
<S> <C> <C> <C>
State certificates and FCC licenses.......... $217,914 $312,873 5-40
Goodwill..................................... 180,454 191,550 15-25
Customer lists............................... 40,945 264,489 2-6
Debt financing costs......................... 8,890 14,979 8-12
Other........................................ 4,436 3,112 3-7
-------- --------
$452,639 $787,003
======== ========
</TABLE>
Debt financing costs represent fees and other costs incurred in connection
with the issuance of long-term debt. These costs are amortized to interest
expense over the term of the related debt using the effective interest rate
method.
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. 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 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 year ended December 31, 1996 and 1997, by
approximately $1.3 million and $2.6 million, respectively.
Loss Per Common Share Attributable to Common Stockholders
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." SFAS 128
requires dual presentation of basic and diluted earnings per share on the face
of the statement of operations 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
F-9
<PAGE> 49
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 Company.
Options and warrants to purchase shares of Common Stock were not included in the
computation of loss per share as the effect would be antidilutive. As a result,
the basic and diluted earnings per share amounts are identical (see Note 8).
Reclassifications
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform with the current year's presentation.
3. MERGERS, ACQUISITIONS AND DISPOSITIONS
Presented below is a summary of the Company's mergers and acquisitions
completed in 1996 and 1997. All transactions have been accounted for as
purchases for financial reporting purposes and their results of operations are
included in the statements of operations from their respective acquisition
dates.
Parkway Paging, Inc. ("Parkway")
On July 16, 1996, the Company acquired all the outstanding common stock of
Parkway for cash and the assumption of certain long-term obligations together
totaling approximately $28.0 million. The acquisition was financed through
drawings under the Company's credit facility.
Satellite Paging and Message Network (collectively, "Satellite")
On August 30, 1996, the Company acquired substantially all the assets of
Satellite for approximately $17.0 million in cash, the assumption of certain
liabilities and the issuance of shares of the Company's Common Stock. The
Company issued 1,845,954 shares of Metrocall Common Stock. The cash paid in the
acquisition was financed through drawings under the Company's credit facility.
A+ Network, Inc. ("A+ Network")
On November 15, 1996, the Company completed its merger with A+ Network of
Pensacola, Florida pursuant to an Agreement and Plan of Merger dated May 16,
1996. The total purchase price was approximately $286.4 million, consisting of
approximately 8.1 million shares of the Company's Common Stock, $.01 par value
("Common Stock") valued at approximately $42.6 million ($5.25 per share), 8.1
million indexed Variable Common Rights ("VCRs") valued at zero, approximately
$91.8 million paid in a cash tender offer completed in July 1996, indebtedness
refinanced under the Company's existing credit facility of approximately $122.5
million, and other assumed indebtedness, estimated future liabilities and
transaction fees. Deferred income tax liabilities of approximately $57.4 million
were recorded in the merger.
Prior to November 15, 1996, the Company acquired approximately 40% of the
A+ Network common stock outstanding in a cash tender offer completed in July
1996. For financial reporting purposes, the Company accounted for its investment
in A+ Network under the equity method. As such, the Company recorded its share
of A+ Network's net loss of approximately $4.1 million through November 15,
1996, which has been classified as Other Expense in the accompanying statement
of operations for the year ended December 31, 1996.
In addition, the Company repurchased approximately 40% of all options
outstanding to acquire A+ Network common stock for $13.98 per share or
approximately $4.0 million including related payroll taxes. The remaining A+
Network options, with an exercise price of $6.04 per common share, were assumed
by the Company and exchanged for Metrocall options (see Note 8).
F-10
<PAGE> 50
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MERGERS, ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
Cash payments made in the A+ Network merger were financed through the
Company's credit facility.
Page America Group, Inc. ("Page America")
On July 1, 1997, the Company acquired substantially all the assets of Page
America and subsidiaries. The total purchase price of approximately $63.7
million included consideration of approximately $25.0 million in cash, 1,500
shares of Series B Junior Convertible Preferred Stock (see Note 6) having a
value upon liquidation of $15.0 million, 3,911,856 shares of Common Stock and
assumed liabilities and transaction fees and expenses of approximately $4.9
million. The cash portion of the purchase price including fees and expenses was
funded through borrowings under the Company's credit facility.
ProNet Inc. ("ProNet")
On December 30, 1997, the Company completed the merger of ProNet with and
into Metrocall (the "ProNet Merger"), pursuant to the terms of the Agreement and
Plan of Merger dated August 8, 1997. Under the terms of the ProNet Merger,
Metrocall issued 0.90 shares of Common Stock for each share of ProNet common
stock, or approximately 12.3 million shares of Common Stock (including 900,000
shares to be issued in 1998 as settlement of certain ProNet litigation). In
connection with the ProNet Merger, the Company assumed ProNet's $100.0 million
in 11 7/8% senior subordinated notes, due in 2005 and refinanced indebtedness
outstanding, including accrued interest and bank fees, under ProNet's credit
facility with borrowings under the Metrocall credit facility.
The purchase prices for the Parkway, Satellite, A+ Network, Page America
and ProNet transactions have been allocated as follows (in thousands):
<TABLE>
<CAPTION>
1996 ACQUISITIONS 1997 ACQUISITIONS
-------------------------------- ------------------------
PARKWAY SATELLITE A+ NETWORK PAGE AMERICA PRONET
------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Plant and equipment............. $ 1,606 $ 1,425 $ 55,790 $ 2,610 $ 60,381
Accounts receivable and other
assets........................ 931 1,170 21,040 846 15,310
Noncompete agreements........... 1 -- 2,503 -- --
Customer lists.................. 2,795 2,920 25,646 29,533 205,582
FCC licenses and state
certificates.................. 19,536 20,506 115,913 29,759 71,475
Goodwill........................ 13,618 3,514 122,893 -- 18,403
Liabilities assumed............. (680) (932) (23,192) (28,467) (230,026)
Direct acquisition costs........ (1,468) (628) (8,318) (456) (6,277)
Deferred income tax liability... (8,932) -- (57,424) -- (83,389)
------- ------- -------- -------- ---------
$27,407 $27,975 $254,851 $ 33,825 $ 51,459
======= ======= ======== ======== =========
</TABLE>
The purchase price allocations for 1997 acquisitions may be subject to
adjustment for changes in estimates related to costs to be incurred to close
duplicate facilities and to settle pending legal and other contingencies. The
resolution of these matters is not expected to have a material impact on the
Company's financial condition or its results of future operations.
The unaudited pro forma information presented below reflects the
acquisitions of Parkway, Satellite, A+ Network, Page America and ProNet as if
each had occurred on January 1, 1996. The results are not
F-11
<PAGE> 51
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MERGERS, ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
necessarily indicative of future operating results or of what would have
occurred had the acquisitions actually been consummated on that date (in
thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Revenues................................................ $372,926 $387,051
Loss attributable to common stockholders before
extraordinary item.................................... (156,668) (134,298)
Loss attributable to common stockholders................ (160,343) (134,298)
Loss per share attributable to common stockholders
before extraordinary item............................. (3.78) (3.24)
Loss per share attributable to common stockholders...... (3.87) (3.24)
</TABLE>
Radio and Communications Consultants, Inc.
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 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.
Disposition 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 "Asset Purchase
Agreement") between Metrocall and Procommunications, Inc. dated April 30, 1997.
Pursuant to the terms of the Asset Purchase Agreement, the Company received
proceeds totaling $11.0 million in cash. For the period from January 1, 1997
through the date of disposition, 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 approximated the net proceeds received.
F-12
<PAGE> 52
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
The amounts included in prepaid expenses and other current assets at
December 31, 1996 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------ -------
<S> <C> <C>
Refunds due (local exchange carriers)..................... $1,129 $12,116
Inventory................................................. -- 2,663
Prepaid advertising....................................... 1,490 1,603
Deposits.................................................. -- 1,151
Prepaid insurance......................................... 243 205
Prepaid rents............................................. 118 142
Interest receivable....................................... 18 21
Prepaid taxes............................................. 969 17
Other..................................................... 1,714 454
------ -------
$5,681 $18,372
====== =======
</TABLE>
Pursuant to the Telecommunications Act of 1996 (the "Telecom Act") and
consistent with the FCC's local transport rules, the Company has ceased paying
local exchange carriers ("LECs"), including a number of the Regional Bell
Operating Companies ("RBOCs"), in the Company's various service areas for any
facilities used by those LECs to transport local calls to the Company's local
paging networks. The Company has also notified the LECs that it expects to
receive credit from each LEC, for any such local transport charges assessed
against the Company by that LEC since November 1, 1996, the effective date for
the FCC's rules governing local transport. As of December 31, 1996 and 1997, the
Company had recorded credits receivable from the LECs related to such local
transport charges of approximately $1.1 million and $12.1 million, respectively.
These LEC receivables represent management's estimate, subject to significant
revision, of amounts management believes are fully realizable. These LEC
receivables have been classified as Prepaid Expenses and Other Current Assets in
the accompanying balance sheets as of December 31, 1996 and 1997 (see Note 9).
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The amounts included in other current liabilities at December 31, 1996 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- -------
<S> <C> <C>
Accrued severance, payroll and payroll taxes.............. $ 8,684 $13,729
Accrued acquisition liabilities........................... 1,200 13,579
Accrued interest payable.................................. 4,522 9,461
Accrued state and local taxes............................. 1,616 2,955
Accrued insurance claims.................................. 1,224 1,616
Other..................................................... 1,694 4,801
------- -------
$18,940 $46,141
======= =======
</TABLE>
Management Reorganization
In January 1996, the Company completed a management reorganization. Under
the reorganization, the Company's Chairman of the Board was replaced and the
Company's Chief Executive Officer resigned.
F-13
<PAGE> 53
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES -- (CONTINUED)
Severance and other separation costs for the former Chairman and former Chief
Executive Officer were accrued and recorded as a management reorganization
charge in the accompanying consolidated financial statements as of and for the
year ended December 31, 1995. Additionally, certain nonsales employees were
terminated and related severance costs were included in the management
reorganization charge. Severance costs included approximately $285,000 of
compensation expense recognized upon amending option agreements with certain
former employees and the Company's former Chief Executive Officer to increase
vesting and exercise periods.
6. LONG-TERM LIABILITIES
Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
10 3/8% Senior subordinated notes due in 2007 (the "1995
Notes")............................................... $150,000 $150,000
9 3/4% Senior subordinated notes due in 2007 (the "1997
Notes")............................................... -- 200,000
11 7/8% Senior subordinated notes due in 2005 (the "A+
Notes")............................................... 2,534 2,534
11 7/8% Senior subordinated notes due in 2005 (the
"ProNet Notes")....................................... -- 100,000
Credit agreement, interest at a floating rate, defined
below, with principal payments beginning March 2000... 169,904 141,165
Industrial development revenue note, interest at 70% of
prime rate plus 1/2% (6.3% and 6.5%, respectively),
principal of $6 plus interest, payable monthly to
December 2008, secured by the Company's headquarters
building.............................................. 914 572
Promissory note payable, bearing interest at 7.5%,
principal and interest payable monthly to June 2005,
secured by letter of credit........................... 623 567
-------- --------
323,975 594,838
Less -- Current portion................................. 127 131
-------- --------
Long-term portion....................................... $323,848 $594,707
======== ========
</TABLE>
Senior Subordinated Notes
10 3/8% SENIOR SUBORDINATED NOTES
In October 1995, the Company completed a public offering of $150.0 million
senior subordinated notes (the "1995 Notes"), due 2007, bearing interest at
10.375% per annum, payable semiannually on April 1 and October 1. The 1995 Notes
are general unsecured obligations subordinated in right to the Company's
existing long-term debt and other senior obligations, as defined.
The Company incurred total loan origination fees and other direct financing
costs of approximately $5.0 million, which will be recognized as interest
expense over the term of the 1995 Notes. Debt financing costs are included in
intangible assets in the accompanying consolidated balance sheets as of December
31, 1996 and 1997.
F-14
<PAGE> 54
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM LIABILITIES -- (CONTINUED)
The 1995 Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain circumstances.
The 1995 Notes may be redeemed at the Company's option after October 1,
2000. The following redemption prices are applicable to any optional redemption
of the 1995 Notes by the Company during the 12-month period beginning on October
1 of the years indicated below:
<TABLE>
<CAPTION>
YEARS PERCENTAGE
----- ----------
<S> <C>
2000........................................................ 105.188%
2001........................................................ 103.458%
2002........................................................ 101.729%
2003 and thereafter......................................... 100.000%
</TABLE>
In the event of a change in control of the Company, as defined, each holder
of the 1995 Notes will have the right, at such holder's option, to require the
Company to purchase that holder's 1995 Notes at a purchase price equal to 101%
of the principal amount thereof, plus any accrued and unpaid interest to the
date of purchase.
9 3/4% SENIOR SUBORDINATED NOTES
In October 1997, the Company sold $200.0 million aggregate principal amount
of 9 3/4% senior subordinated notes due 2007 (the "1997 Notes") in a private
placement (the "Notes Offering"). The 1997 Notes bear interest, payable
semi-annually on January 15 and July 15, at a rate of 9.75% per year and mature
on November 1, 2007. The Notes are callable beginning November 1, 2002. The 1997
Notes are unsecured obligations of the Company, subordinated to all present and
future senior indebtedness of the Company. The Company used the net proceeds
from the Notes Offering, approximately $193.0 million, to repay outstanding
indebtedness under its credit facility. Pursuant to an exchange offer that was
completed in March 1998, the 1997 Notes were registered under the Securities
Act.
The 1997 Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain circumstances.
The 1997 Notes may be redeemed, in whole or in part, at any time on or
after November 1, 2002, at the option of the Company. The following redemption
prices, plus any accrued and unpaid interest to, but not including, the
applicable redemption date, are applicable to any optional redemption of the
1997 Notes by the Company during the 12-month period beginning on November 1 of
the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 104.8750%
2003........................................................ 102.4375
2004 and thereafter......................................... 100.0000
</TABLE>
In the event of a change of control of the Company, as defined, each holder
of the 1997 Notes will have the right, at such holder's option, to require the
Company to repurchase that holder's 1997 Notes at a purchase price equal to 101%
of the principal amount thereof, plus any accrued and unpaid interest to the
date of repurchase.
F-15
<PAGE> 55
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM LIABILITIES -- (CONTINUED)
11 7/8% SENIOR SUBORDINATED NOTES (THE "A+ NOTES")
In connection with the merger with A+ Network, the Company offered to
purchase all $125.0 million of A+ Network's 11 7/8% senior subordinated notes
due 2005 for $1,005 per $1,000 principal amount plus accrued and unpaid interest
(the "Offer"). Concurrent with the Offer, the Company solicited consents to
amend the indenture governing the A+ Notes to eliminate substantially all
restrictive covenants and certain related events of default contained therein in
exchange for a payment of $5.00 for each $1,000 principal amount of the A+
Notes. Of the total outstanding, approximately $122.5 million of A+ Notes were
validly tendered and retired. The purchase of the A+ Notes was financed under
the Company's credit facility. Additionally, sufficient consents were received
so that substantially all restrictive covenants and related events of default
were eliminated. The principal balance of the A+ Notes untendered, approximately
$2.5 million, has been assumed by the Company. Interest on the A+ Notes is
payable semi-annually on May 1 and November 1. The Company incurred fees of
approximately $3.7 million in connection with the tender and consent process
which has been recorded as an extraordinary item for the year ended December 31,
1996.
The A+ Notes may be redeemed at the Company's option after November 1,
2000. The following redemption prices are applicable to any optional redemption
of the A+ Notes by the Company during the 12-month period beginning on November
1 of the years indicated below:
<TABLE>
<CAPTION>
YEARS PERCENTAGE
----- ----------
<S> <C>
2000........................................................ 104.5%
2001........................................................ 103.0%
2002........................................................ 101.5%
2003 and thereafter......................................... 100.0%
</TABLE>
11 7/8% SENIOR SUBORDINATED NOTES (THE "PRONET NOTES")
In connection with the merger with ProNet, the Company assumed all $100.0
million of ProNet's 11 7/8% senior subordinated notes due 2005. Interest on the
ProNet Notes is payable semi-annually in June and December each year. The ProNet
Notes are general unsecured obligations subordinated in right to the Company's
existing long-term debt and other senior obligations, as defined.
The ProNet Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain other transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain conditions.
The ProNet Notes may be redeemed at the Company's option on or after June
15, 2000. The following redemption prices are applicable to any optional
redemption of the ProNet Notes by the Company during the 12-month period
beginning on June 15 of the years indicated below:
<TABLE>
<CAPTION>
YEARS PERCENTAGE
----- ----------
<S> <C>
2000........................................................ 105.938%
2001........................................................ 103.958%
2002........................................................ 101.979%
2003 and thereafter......................................... 100.000%
</TABLE>
In the event of a change of control of the Company, as defined, each holder
of the ProNet Notes will have the right to require that the Company repurchase
such holder's ProNet Notes at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase.
F-16
<PAGE> 56
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM LIABILITIES -- (CONTINUED)
Capital Lease Obligations
In April 1994, the Company entered into a lease agreement (the "Lease
Agreement") for additional office space. The Lease Agreement required initial
minimum monthly rents of $37,500. In January 1997, the Company acquired
additional office space under the Lease Agreement at which time monthly minimum
rents increased to approximately $68,000. The Lease Agreement is treated as a
capital lease for financial reporting purposes in the accompanying balance
sheets. The Lease Agreement continues for an initial period of ten years and may
be renewed for two additional five-year periods. In connection with the Lease
Agreement, the Company entered into an Option and Purchase Agreement (the
"Purchase Agreement"), which gives the Company an option to acquire a 51%
interest in the property housing the office space, discussed above. The Company
may exercise the option from January 2, 1995, through December 31, 1998. At the
time the option is exercised, the Company, along with the owners of the
remaining 49% interest in the property, will contribute the property to a
general partnership for which the Company will serve as a general partner and
receive a 51% equity interest. When, if ever, the Company exercises the purchase
option to the Purchase Agreement, the purchase price will be approximately $2.9
million, the estimated fair market value at the date of the Lease Agreement.
On July 1, 1996, the Company entered into a lease agreement for certain
computer equipment. The lease agreement requires quarterly rental payments of
approximately $115,000 for a period of three years. This lease agreement has
been accounted for as a capital lease for financial reporting purposes.
Aggregate maturities of long-term debt and capital lease obligations,
excluding interest, as of December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS TOTAL
--------- ------------- --------
<S> <C> <C> <C>
1998........................................ $ 131 $ 821 $ 952
1999........................................ 136 708 844
2000........................................ 141 574 715
2001........................................ 146 660 806
2002........................................ 152 756 908
Thereafter.................................. 594,132 1,584 595,716
-------- ------ --------
$594,838 $5,103 $599,941
======== ====== ========
</TABLE>
Metrocall Credit Facility
On September 20, 1996, the Company entered into an agreement to amend and
restate the loan agreement governing the Company's existing credit facility. In
October 1997, the credit facility was further amended concurrent with the
issuance of the 1997 Notes discussed above. Subject to certain conditions set
forth in the amended agreement, the Company may borrow up to $300,000,000 under
two loan facilities. The first facility ("Facility A") is a $175,000,000
reducing revolving credit facility and the second ("Facility B") is a
$125,000,000 reducing term credit facility (together Facility A and Facility B
are referred to as the "Metrocall Credit Facility"). The Metrocall Credit
Facility has a remaining term of seven years and is secured by substantially all
the assets of the Company. Required quarterly principal repayments, as defined,
begin on March 31, 2000 and continue through December 31, 2004. At December 31,
1997, a total of $141.2 million was outstanding under the Metrocall Credit
Facility. On January 27, 1998, the Company increased its borrowings outstanding
under the Metrocall Credit Facility by $6.0 million.
The Metrocall 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
F-17
<PAGE> 57
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM LIABILITIES -- (CONTINUED)
exceed 6.0 to 1.0 to December 31, 1998, 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 of cash, and operating cash
flow to interest expense (in each case, as such terms are defined in the
agreement relating to the Metrocall Credit Facility). The covenants also limit
additional indebtedness and future mergers and acquisitions without the approval
of the lenders and restrict the payment of cash dividends and other stockholder
distributions by Metrocall during the term of the agreement. The Metrocall
Credit Facility also prohibits certain changes in ownership control of
Metrocall, as defined. As of December 31, 1997, approximately $49.3 million of
additional borrowings were available to the Company under its credit facility.
Under the Metrocall Credit Facility, the Company may designate all or any
portion of the borrowings outstanding as either a floating base rate advance or
a Eurodollar rate advance with an applicable margin that ranges from 0.0% to
1.375% for base rate advances and 0.875% to 2.500% for Eurodollar rate advances.
The predefined margins will be based upon the level of indebtedness outstanding
relative to annualized cash flow, as defined in the agreement relating to the
Metrocall Credit Facility. Commitment fees of 0.25% to 0.375% per year
(depending on the level of Metrocall's indebtedness outstanding to annualized
cash flow) will be charged on the average unused balance and will be charged to
interest expense as incurred. Pursuant to the terms of the Metrocall Credit
Facility, Metrocall must obtain and maintain interest rate protection on at
least 50% of Metrocall's outstanding debt; all fixed rate debt, including all
senior subordinated notes will count against this requirement.
The Company incurred loan origination fees and direct financing costs in
connection with the Metrocall Credit Facility and amendments thereto, of
approximately $6.0 million which are being amortized and charged to interest
expense over the term of the facility.
The weighted-average balances outstanding under the Company's credit
facilities for the years ended December 31, 1995, 1996 and 1997, were
approximately $108,222,000, $39,902,000 and $170,049,000, respectively. The
highest outstanding borrowings under these facilities for the years ended
December 31, 1995, 1996 and 1997, were approximately $113,320,000, $169,904,000
and $243,904,000, respectively. For the years ended December 31, 1995, 1996 and
1997, interest expense relating to these facilities was approximately
$7,630,000, $3,737,000 and $15,548,000, respectively, at weighted-average
interest rates of 7.0%, 9.4% and 9.2%, respectively. The effective interest
rates as of December 31, 1996 and 1997 were 8.0% and 8.2%, respectively.
Former Credit Facility
In connection with its 1995 Notes offering, discussed above, the Company
repaid all amounts outstanding under a credit facility entered into in 1994 and
terminated certain interest rate swap agreements. Accordingly, upon repayment,
the Company recorded an extraordinary charge to write-off then existing
unamortized debt financing costs of $2.7 million in the year ended December 31,
1995. The Company also incurred breakage fees of approximately $1.7 million
associated with the termination of the interest rate swap agreements which have
been recorded as interest and other income (expense) in the 1995 consolidated
statement of operations.
Promissory Note Payable
The Company assumed indebtedness in the A+ Network merger of approximately
$627,000. The promissory note is payable as consideration for an acquisition
completed by A+ Network in May 1996. The promissory note bears interest at 7.5%
with monthly principal and interest payments of $8,333 through June 2005.
F-18
<PAGE> 58
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the Company's consolidated balance sheet
for cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate fair values due to the short maturity of those
instruments. The fair value of the senior subordinated notes is based on market
quotes as of the dates indicated. The fair value of the industrial development
revenue note and the promissory note payable is based on the Company's
incremental borrowing rate.
The estimated fair values of the Company's other financial instruments are
as follows (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
10 3/8% senior subordinated notes due
2007.................................. $150,000 $127,500 $150,000 $152,250
9 3/4% senior subordinated notes due
2007.................................. -- -- 200,000 199,000
11 7/8% senior subordinated notes due
2005 (A+ Notes)....................... 2,534 2,331 2,534 2,534
11 7/8% senior subordinated notes due
2005 (ProNet Notes)................... -- -- 100,000 107,000
Industrial development revenue note..... 914 780 572 522
Promissory note payable................. 623 565 568 528
</TABLE>
8. STOCK AND STOCK RIGHTS
The authorized capital stock of Metrocall consists of 80,000,000 shares of
Common Stock and 1,000,000 shares of preferred stock, par value $0.01 per share
("Preferred Stock"), of which 810,000 shares have been designated as Series A
Convertible Preferred Stock ("Series A Preferred") and 9,000 shares has been
designated as Series B Junior Convertible Preferred Stock ("Series B
Preferred").
Common Stock
On September 27, 1995, the Company completed a secondary public offering of
4.0 million shares of the Common Stock (the "Secondary Offering"), at $28.25 per
share. After underwriting discounts, commissions and other professional fees,
net proceeds from the Secondary Offering were approximately $107.0 million.
Because the Company holds licenses from the FCC, no more than 20 percent of
the Common Stock may, in the aggregate, be owned directly, or voted by a foreign
government, a foreign corporation, or resident of a foreign country. The
Company's amended and restated certificate of incorporation permits the
redemption of the Common Stock from stockholders, where necessary, to protect
the Company's regulatory licenses. Such stock may be redeemed at fair market
value or if the stock was purchased within one year of such redemption, at the
lesser of fair market value or such holder's purchase price.
Series A Preferred
The Board of Directors has designated 810,000 shares of Preferred Stock as
Series A Preferred. On November 15, 1996, the Company issued 159,600 shares of
Series A Preferred, together with the warrants discussed below, for $250 per
share or $39.9 million. There were 182,726 shares of Series A Preferred
outstanding at December 31, 1997, including 23,126 shares issued as dividends
during 1997. The Company incurred fees of approximately $1.6 million related to
the issuance of the Series A Preferred. Net proceeds from the Series A Preferred
Stock ($38.3 million) were used to reduce outstanding bank indebtedness
F-19
<PAGE> 59
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK AND STOCK RIGHTS -- (CONTINUED)
($25.0 million) and to fund existing working capital requirements ($13.3
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 in cash or in additional shares of
Series A Preferred, at the Company's option. Upon the occurrence of a triggering
event, as defined in the certificate of designation for Series A Preferred, and
so long as the triggering event continues, the dividend rate increases to 16%
per year. Triggering events include, among other things, (i) the Company issues
or incurs indebtedness or equity securities senior with respect to payment of
dividends or distributions on liquidation or redemption to the Series A
Preferred in violation of limitations set forth in the certificate of
designation, and (ii) default on the payment of indebtedness in an amount of
$5,000,000 or more. At December 31, 1996 and 1997, accrued but unpaid dividends
were approximately $698,000 and $799,000, respectively.
Holders of Series A Preferred have the right, beginning five years from the
date of issuance, to convert their Series A Preferred (including shares issued
as dividends) into shares of Common Stock based on the market price of the
Common Stock at the time of conversion. Series A Preferred may, at the holders'
option, be converted sooner upon a change of control of Metrocall, as defined in
the certificate of designation. The Series A Preferred must be redeemed on
November 15, 2008, for an amount equal to the stated value plus accrued and
unpaid dividends.
The Series A Preferred may be redeemed by the Company in whole or in part
(subject to certain minimums) beginning November 15, 1999. Prior to then, the
Series A Preferred may be redeemed by the Company in whole in connection with a
sale of the Company (as described in the Series A Preferred certificate of
designation) unless the holders have exercised their rights to convert to
Metrocall Common Stock in connection with the transaction. The redemption price
prior to November 15, 2001, is equal to the stated value of the shares of Series
A Preferred, plus accrued and unpaid dividends, and a redemption premium, as
defined. After November 15, 2001, the Series A Preferred Stock may be redeemed
for the stated value of $250 per share, without premium.
Holders of Series A Preferred have the right to elect two members to the
Company's Board of Directors. If a triggering event has occurred and is
continuing, the holders of Series A Preferred have the right to elect additional
directors so that directors elected by such holders shall constitute no less
than 40% of the members of the Board of Directors. The Company is required to
obtain the approval of the holders of not less than 75% of the Series A
Preferred before undertaking (i) any changes in Metrocall's certificate of
incorporation and Bylaws that adversely affect the rights of holders of the
Series A Preferred, (ii) a liquidation, winding up or dissolution of the Company
or the purchase of shares of capital stock of Metrocall from holders of over 5%
of the issued and outstanding voting securities, (iii) any payment of dividends
on or redemption of Common Stock; or (iv) issuance of any additional shares of
Series A Preferred (except in payment of dividends) or any shares of capital
stock having preferences on liquidation or dividends ranking equally to the
Series A Preferred. The Company is also required to obtain approval of holders
of not less than a majority of the issued and outstanding Series A Preferred
before undertaking (i) any acquisition involving consideration having a value
equal to or greater than 50% of the market capitalization of the Company or (ii)
any sale of the Company unless Metrocall redeems the Series A Preferred.
Series B Preferred
The Board of Directors designated 9,000 shares of Preferred Stock as Series
B Preferred Stock ("Series B Preferred"). On July 1, 1997, the Company issued
1,500 shares of Series B Preferred in connection with the Page America
transaction (see Note 3). Each share of Series B Preferred has a stated value of
$10,000 per share and a liquidation preference, which is junior to the Series A
Preferred but senior to the shares of Metrocall Common Stock, equal to its
stated value. The Series B Preferred carries a dividend of 14%
F-20
<PAGE> 60
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK AND STOCK RIGHTS -- (CONTINUED)
of the stated value per year, payable semiannually in cash or in additional
shares of Series B Preferred, at the Company's option. During 1997, the Company
issued 79 additional shares of Series B Preferred as dividends. Accrued but
unpaid dividends on the Series B Preferred were approximately $276,000 at
December 31, 1997.
The holders of Series B Preferred have the right to convert up to 25% of
the number of Series B Preferred initially issued (plus shares of Series B
Preferred issued as dividends on such shares, and as dividends on such
dividends) into shares of Common Stock at the current market value of the Common
Stock, as defined on September 1, 1997 ($6.61 per share), December 1, 1997
($5.85 per share), March 1, 1998 ($6.45 per share) and June 1, 1998. As of
December 31, 1997, no shares of Series B Preferred had been converted into
shares of Common Stock.
The Series B Preferred must be redeemed on the twelfth anniversary of the
initial issuance for an amount equal to the stated value, plus accrued and
unpaid dividends. The Series B Preferred may also be redeemed by the Company in
whole or in part at any time for an amount equal to the stated value of the
shares to be redeemed plus accrued and unpaid dividends. If Metrocall elects to
redeem Series B Preferred, the holders thereof will have the right to convert
any shares of Series B Preferred that was then convertible into Metrocall Common
Stock within 15 business days after receipt of notice of redemption. The Company
may be limited by the terms of the Series A Preferred in completing any
redemption while the Series A Preferred remains outstanding.
The Company is required to obtain the approval of holders of a majority of
the issued and outstanding Series B Preferred before undertaking (i) any changes
in Metrocall's certificate of incorporation and Bylaws that adversely affect the
rights of the holders of Series B Preferred and (ii) any changes in the Series B
Preferred certificate of designation. The Series B Preferred also contains
restrictions on the ability of Metrocall to incur any debt or issue securities
(other than the Series A Preferred) that are senior to the Series B Preferred.
Warrants
In connection with the issuance of the Series A Preferred, discussed above,
the Company issued on November 15, 1996, warrants to purchase 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 of Common Stock. The exercise price
per share is $7.40. 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, will be accreted over the term of the Series A
Preferred as preferred dividends.
STOCK OPTION PLANS
1993 Stock Option Plan
In 1993, the Company adopted a Stock Option Plan (the "1993 Plan"). Under
the 1993 Plan, as amended, options to purchase up to an aggregate of 975,000
shares of Common Stock were reserved for grants to key employees of the Company.
The 1993 Plan limits the maximum number of shares that may be granted to any
person eligible under the 1993 Plan to 325,000. All options have been issued
with exercise prices equal to the fair market value at date of grant. All
options granted under the 1993 Plan become fully vested and exercisable on the
second anniversary of the date of grant. Each option granted under the 1993 Plan
will terminate no later than ten years after the date the option was granted.
In 1993, the Company also adopted a Directors Stock Option Plan (the
"Directors Plan"). Under the Directors Plan, options to purchase up to an
aggregate of 25,000 shares of Common Stock are available for grants to directors
of the Company who are neither officers nor employees of the Company ("Eligible
F-21
<PAGE> 61
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK AND STOCK RIGHTS -- (CONTINUED)
Director"). Options issued under the Directors Plan vest fully on the six-month
anniversary of the date of grant. Each Eligible Director was also granted an
option to purchase 1,000 shares of Common Stock on the first and second
anniversaries of the grant date of the initial option if the director continues
to be an Eligible Director on each of such anniversary dates.
1996 Stock Option Plan
In May 1996, the Company's stockholders approved the Metrocall 1996 Stock
Option Plan (as amended, the "1996 Plan"), amendments to which were approved by
the stockholders in November 1996 and December 1997. Under the 1996 Plan,
options to purchase up to an aggregate of 4,016,000 shares of Common Stock have
been reserved for grant to key employees, officers and nonemployee directors who
have never been employed by the Company ("Qualified Directors"). The 1996 Plan
limits the maximum number of shares that may be granted to any person eligible
under the 1996 Plan to 750,000. If any option granted under the 1996 Plan
expires or terminates prior to exercise in full, the shares subject to that
option shall be available for future grants under the 1996 Plan. Substantially
all employees and Qualified Directors of the Company are eligible to participate
in the 1996 Plan. Each option granted under the 1996 Plan will terminate no
later than ten years after the date the option was granted.
Under the 1996 Plan, both incentive stock options and nonstatutory stock
options are available for grant to employees. For incentive stock options, the
option price shall not be less than the fair market value of a share of Common
Stock on the date the option is granted. For nonstatutory options, the option
price shall not be less than the par value of Common Stock. All options granted
to Qualified Directors shall be nonstatutory options. Upon approval of the 1996
Plan, each Qualified Director was granted an initial option to purchase 10,000
shares of Common Stock. Thereafter, every Qualified Director will be granted an
initial option to purchase 10,000 shares of Common Stock at the time the
Qualified Director commences service on the board of directors. Subsequently,
each Qualified Director who received an initial grant of an option shall receive
an additional option to purchase 1,000 shares of Common Stock on each
anniversary of the initial option, provided that the director continues to be a
Qualified Director on each anniversary date. Options granted to Qualified
Directors shall become fully vested six months after the date of grant. The
exercise price for options granted to Qualified Directors shall be the fair
market value of Common Stock on the date the option is granted.
In connection with the merger of Metrocall and A+ Network, Metrocall
exchanged options to purchase shares of Common Stock with former A+ Network
option holders. These options are fully vested and exercisable and have an
exercise price of approximately $6.04 per share.
In connection with merger of Metrocall and ProNet, Metrocall will issue
options to acquire 1,212,539 shares of Common Stock under the 1996 Plan in
exchange for options previously granted by ProNet and outstanding at December
30, 1997, the effective date of the ProNet Merger. These options are fully
vested and exercisable with an average exercise price of approximately $6.42 per
share. The Company expects to formally issue Metrocall stock options to the
former ProNet optionees during early 1998 and has therefore reflected these
options as outstanding as of December 31, 1997.
F-22
<PAGE> 62
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK AND STOCK RIGHTS -- (CONTINUED)
Pursuant to the stock option plans discussed above, the Board of Directors
has approved the issuances of the following Common Stock options.
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
YEAR ENDED DECEMBER 31, 1995 PRICE 1996 PRICE 1997 PRICE
- ----------------------- -------------- --------- -------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of period........... 529,387 $15.75 798,958 $17.75 1,747,002 $ 8.18
Granted............... 303,500 20.24 656,216 17.70 685,000 6.00
Canceled.............. (12,500) 20.10 (172,337) 18.11 (171,990) 14.16
Issued in ProNet
Merger.............. -- -- -- -- 1,212,539 6.42
Issued in A+ Network
merger.............. -- -- 468,904 6.04
Exercised............. (21,429) 2.21 (4,739) 1.04 (1,896) 1.04
-------------- ------ -------------- ------ -------------- ------
Outstanding, end of
period.............. 798,958 $17.75 1,747,002 $ 8.18 3,470,655 $ 6.84
============== ====== ============== ====== ============== ======
Options exercisable... 339,958 966,417 2,362,655
Option price range --
options
outstanding......... $1.035-$22.125 $1.035-$22.125 $1.035-$22.125
Option price range --
options
exercisable......... $ 1.035-$19.50 $1.035-$22.125 $1.035-$22.125
</TABLE>
On September 18, 1996 the Compensation Committee of the Board of Directors
approved a change in the exercise price for substantially all outstanding Common
Stock options for current employees and officers. The new exercise price was
$7.94 per share, the fair market value on the date of the change. 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. Each repricing establishes a
new measurement date for the options.
Employee Stock Purchase Plan
In May 1996, the Company's stockholders approved the Metrocall, Inc.
Employee Stock Purchase Plan (the "Stock Purchase Plan"). The stockholders
approved an amendment to the Stock Purchase Plan in December 1997 including an
increase in the number of shares authorized for issuance from 300,000 to
1,000,000 shares. Substantially all full-time employees are eligible to
participate in the Stock Purchase Plan. Participants in the Stock Purchase Plan
may elect to purchase shares of Common Stock at the lesser of 85% of the fair
market value on either the first or last trading day of each payroll deduction
period. No employee may purchase in one calendar year shares of Common Stock
having an aggregate fair market value in excess of $25,000. In July 1996, 11,942
shares were issued under the Stock Purchase Plan for $9.24 per share. In January
1997 and July 1997, 34,770 shares and 74,977 shares were issued to participants
in the Stock Purchase Plan at prices of $4.14 and $3.80 per share, respectively.
At December 31, 1997, 48,134 shares were due participants in the Stock Purchase
Plan at a price of $4.09 per share. The weighted-average fair value of shares
sold in 1996 and 1997 was $6.56 per share and $4.67 per share, respectively.
F-23
<PAGE> 63
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK AND STOCK RIGHTS -- (CONTINUED)
SFAS No. 123, "Accounting for Stock-Based Compensation"
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option and stock purchase plans. Since the Company has
granted options to acquire Common Stock at an exercise price equal to the fair
value of the Common Stock on the date of grant, no compensation cost has been
recognized for its stock option and stock purchase plans other than for
approximately $285,000 of compensation expense recognized in 1995 upon amending
option agreements with certain former employees (see Note 5). Had compensation
cost for the Company's stock-based compensation and purchase plans been
determined for 1995, 1996 and 1997 grants using the fair value at the grant
dates for awards under those plans consistent with the method of SFAS Statement
No. 123, the Company's loss and loss per share information would have been
increased to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Loss before extraordinary item As reported $(17,407) $(46,235) $(60,211)
attributable to common stockholders..... Pro forma (17,779) (49,589) (64,802)
Loss attributable to common As reported (20,102) (49,910) (60,211)
stockholders............................ Pro forma (20,474) (53,264) (64,802)
Loss per share before extraordinary item As reported (1.49) (2.84) (2.22)
attributable to common stockholders..... Pro forma (1.52) (3.05) (2.39)
Loss per share attributable to common As reported (1.72) (3.07) (2.22)
stockholders............................ Pro forma (1.75) (3.28) (2.39)
</TABLE>
Because the Statement No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The weighted-average fair value of options granted in 1995, 1996 and 1997
was $7.34, $5.89 and $4.35, respectively, after the effect of repricing
discussed above. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions.
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Risk Free Rate.................................. 6.43% 6.43% 5.74%
Expected Life................................... 10 years 10 years 10 years
Expected Volatility............................. 60.6% 60.6% 64.4%
</TABLE>
9. 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
the results of the operations of the Company.
Source One Wireless, Inc.
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
F-24
<PAGE> 64
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
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. In March 1998, by
agreement of the parties, the lawsuit was dismissed and the parties agreed in
principle to an equal division of the escrow account plus accrued interest.
Americom Paging Corporation
Contact Communications, Inc. ("Contact"), a wholly-owned subsidiary of
ProNet, entered into an agreement dated May 1995 to acquire substantially all of
the assets of Americom Paging Corporation ("Americom"). On July 2, 1997, two of
the former principal shareholders of Americom brought an action in Texas state
court seeking damages from ProNet (and subsequently Metrocall as successor in
interest to ProNet), Contact and ProNet's former Chief Executive Officer in
connection with the transaction. The plaintiffs alleged claims under Texas state
common law and the Texas Securities Act and sought compensatory and punitive
damages. Metrocall asserted counterclaims for damages for breach of the purchase
agreement. In March 1998, by mutual agreement, the parties agreed to settle the
action for a settlement payment by Metrocall to the plaintiffs of $2.4 million.
Each party released all claims against the others, and all counterclaims were
dismissed with prejudice. The settlement payment was accrued at December 31,
1997 as part of the purchase accounting in connection with ProNet Merger.
Interconnect Complaint
Metrocall has filed complaints with the FCC against a number of RBOCs and
the largest independent telephone company for violations of the FCC's
interconnection and local transport rules and the Telecom Act. The complaints
allege that these local telephone companies are unlawfully charging Metrocall
for local transport of the telephone companies' local traffic. Metrocall has
petitioned the FCC to rule that these local transport charges are unlawful and
to award Metrocall a reimbursement for any past charges assessed. Also,
Metrocall has asked the FCC to resolve these complaints within the five month
statutory deadline for complaint proceedings established under the Telecom Act
(see Note 4).
Leases
The Company has various leasing arrangements (as lessee) for office space
and communications equipment sites. Rental expense related to operating leases
was approximately $4,818,000, $8,612,000 and $21,675,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
Minimum rental payments as of December 31, 1997, required under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows (in thousands):
<TABLE>
<S> <C>
1998........................................................ $23,994
1999........................................................ 18,849
2000........................................................ 6,935
2001........................................................ 4,242
2002........................................................ 1,601
Thereafter.................................................. 794
-------
$56,415
=======
</TABLE>
Rent expense for lease agreements between the Company and related parties
for office space, tower sites and transmission systems, excluding consolidated
entities, was approximately $359,000, $334,000 and $761,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
F-25
<PAGE> 65
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company leases office and warehouse space from a company owned by a
director of the Company. The annual rental commitment under these leases, which
expire in 1998, is approximately $525,000. The Company believes the terms of
these leases are at least as favorable as those that could be obtained from a
non-affiliated party.
Profit Sharing Plan and Retirement Benefits
In 1995, the Company adopted the Metrocall, Inc. Savings and Retirement
Plan (the "Plan") a combination employee savings plan and discretionary
profit-sharing plan that covers substantially all full-time employees. The Plan
qualifies under section 401(k) of the Internal Revenue Code (the "IRC"). Under
the Plan, participating employees may elect to voluntarily contribute on a
pretax basis between 1% and 15% of their salary up to the annual maximum
established by the IRC. The Company has agreed to match 25% of the employee's
contribution, up to 3% of each participant's gross salary. Contributions made by
the Company vest 20% per year beginning on the second anniversary of the
participant's employment. Other than the Company's matching obligations,
discussed above, profit sharing contributions are discretionary. The Company's
expense for contributions under the Plan and the Company's previous profit
sharing plan, recorded in the accompanying consolidated statements of operations
were $93,000, $112,000 and $372,000 for the years ended December 31, 1995, 1996
and 1997, respectively.
10. EQUITY INVESTMENT
The Company acquired a 33 1/3% interest in Solo America, a national sales
and marketing distribution company. In its relationship with Solo America, the
Company has agreed to advance $1 million to Solo America, payable in three
installments, in exchange for Solo America's efforts to market the Company's
paging products and services. Through December 31, 1997, the Company has made
equity installments totaling $666,666. The Company has fully reserved against
this investment in Solo America at December 31, 1997.
11. INCOME TAXES
As of December 31, 1997, the Company had net operating loss and investment
tax credit carryforwards of approximately $244.2 million and $1.2 million,
respectively, which expire in the years 1999 through 2012. The benefits of these
carryforwards may be limited in the future if there are significant changes in
the ownership of the Company. Net operating loss carryforwards may be used to
offset up to 90 percent of the Company's alternative minimum taxable income. The
provision for alternative minimum tax will be allowed as a credit carryover
against regular tax in the future in the event regular tax exceeds alternative
minimum tax expense. To the extent that acquired net operating losses are
utilized in future periods, the benefit will first be recognized to reduce
acquired intangible assets before reducing the provision for income taxes.
Under the provisions of SFAS No. 109, the tax effect of the net operating
loss and investment tax credit carryforwards, together with net temporary
differences, represents a net deferred tax asset for which management has
reserved 100% due to the uncertainty of future taxable income. These
carryforwards will provide a benefit for financial reporting purposes when
utilized to offset future taxable income.
F-26
<PAGE> 66
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES -- (CONTINUED)
The components of net deferred tax assets (liabilities) were as follows as
of December 31, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................... $ 502 $ 1,085
Management reorganization......................... 217 1,279
New pagers on hand................................ 971 935
Intangibles....................................... 2,182 6,170
Other............................................. 887 2,418
Investment tax credit carryforward................ -- 1,204
Net operating loss carryforwards.................. 48,979 97,444
-------- ---------
Total deferred tax assets.................... 53,738 110,535
======== =========
Deferred tax liabilities:
Basis differences attributable to purchase
accounting...................................... (76,687) (155,930)
Depreciation and amortization expense............. (9,449) (10,184)
Other............................................. (143) (1,701)
-------- ---------
Total deferred tax liabilities............... (86,279) (167,815)
======== =========
Net deferred tax liability............................. (32,541) (57,280)
Less: Valuation allowance.............................. (44,146) (98,650)
-------- ---------
$(76,687) $(155,930)
======== =========
</TABLE>
The income tax benefit for the years ended December 31, 1995, 1996 and
1997, is primarily the result of the amortization of the basis differences
attributable to purchase accounting and is composed of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
Income tax (provision) benefit
Current --
Federal.................................... $(36) $ -- $ --
State...................................... (55) (447) (539)
Deferred --
Federal.................................... 597 1,277 4,698
State...................................... 89 191 702
---- ------ ------
$595 $1,021 $4,861
==== ====== ======
</TABLE>
F-27
<PAGE> 67
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES -- (CONTINUED)
The benefit for income taxes for the years ended December 31, 1995, 1996
and 1997, results in effective rates that differ from the Federal statutory rate
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Statutory Federal income tax rate...................... 35.0% 35.0% 35.0%
Effect of graduated rates.............................. (1.0) (1.0) (1.0)
State income taxes, net of Federal tax benefit......... 2.8 4.6 5.3
Net operating losses for which no tax benefit is
currently available.................................. (30.9) (24.6) (8.1)
Permanent differences.................................. (2.6) (11.8) (22.7)
----- ----- -----
3.3% 2.2% 8.5%
===== ===== =====
</TABLE>
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company made cash payments for interest of $9.5 million, $19.1 million
and $30.2 million for the years ended December 31, 1995, 1996 and 1997,
respectively. The Company made cash payments for income taxes of $55,000,
$264,000 and $539,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
A capital lease obligation of $3.2 million was incurred when the Company
entered into a lease for new office space in 1994 (see Note 6). A capital lease
obligation of $2.1 million was incurred when the Company amended its
pre-existing office space lease in January 1997. In 1996, the Company executed a
lease agreement for computer equipment which is treated as a capital lease
obligation for financial reporting purposes of $1.1 million.
During 1996 and 1997, the Company issued stock to effect certain
acquisitions as discussed in Note 3.
13. INTERIM FINANCIAL DATA (UNAUDITED)
The following table of quarterly financial data has been prepared from the
financial records of the Company, without audit, and reflects all adjustments
that are, in the opinion of management, necessary for a fair presentation of the
results of operations for the interim periods presented:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------ ------------------- ------------------- -------------------
1996 1997 1996 1997 1996 1997 1996 1997
------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $29,939 $ 66,753 $ 32,048 $ 70,297 $ 36,622 $ 75,019 $ 51,348 $ 77,295
Loss from operations........... (4,770) (4,428) (8,093) (5,942) (7,118) (5,204) (5,464) (5,656)
Loss before extraordinary item
attributable to common
stockholders................. (7,689) (13,308) (10,955) (13,913) (14,315) (16,020) (13,276) (16,970)
Loss attributable to common
stockholders................. (7,689) (13,308) (10,955) (13,913) (14,315) (16,020) (16,951) (16,970)
Loss per share before
extraordinary item
attributable to common
stockholders................. (0.53) (0.54) (0.75) (0.55) (0.94) (0.55) (0.65) (0.58)
Loss per share attributable to
common
stockholders................. (0.53) (0.54) (0.75) (0.55) (0.94) (0.55) (0.83) (0.58)
</TABLE>
The sum of the per share amounts may not equal the annual amounts because
of the changes in the weighted-average number of shares outstanding during the
year. Net loss for the three months ended December 31, 1996, includes charges
for extraordinary items, net of applicable tax benefit for the write-off of
costs associated with the repurchase of the A+ Notes of $3,675,000 ($0.23 per
share) discussed in Note 6.
F-28
<PAGE> 68
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metrocall, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Metrocall, Inc., and subsidiaries, and
have issued our report thereon dated February 9, 1998 (except with respect to
the matters discussed under Source One Wireless, Inc. and Americom Paging
Corporation in Note 9 as to which the date is March 26, 1998). Our audits were
made for the purpose of forming an opinion on those statements taken as a whole.
The schedule included on page F-30 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states, in
all material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 9, 1998
(except with respect to the matters discussed under
Source One Wireless, Inc. and Americom Paging
Corporation in Note 9 as to which the date is
March 26, 1998)
F-29
<PAGE> 69
SCHEDULE II
METROCALL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES ACQUIRED (1) DEDUCTIONS (2) YEAR
----------- ---------- ---------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful
accounts......................... $2,961 $9,963 $4,609 $10,690 $6,843
====== ====== ====== ======= ======
Year ended December 31, 1996
Allowance for doubtful
accounts......................... $ 968 $4,575 $1,927 $ 4,509 $2,961
====== ====== ====== ======= ======
Year ended December 31, 1995
Allowance for doubtful
accounts......................... $1,150 $3,414 $ -- $ 3,596 $ 968
====== ====== ====== ======= ======
</TABLE>
- ---------------
(1) Allowance for doubtful accounts acquired in 1996 for the Parkway Paging,
Satellite Paging, Message Network and A+ Network and 1997 for PageAmerica
and ProNet. (see Note 3 -- Notes to Consolidated Financial Statements).
(2) Deductions represent write-offs of accounts receivable.
F-30
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation of
Metrocall, as amended.(g)
3.3 Sixth Amended and Restated Bylaws of Metrocall.(g)
4.1 Indenture for Metrocall 10 3/8% Senior Subordinated Notes
due 2007 dated September 27, 1995 including form of
Notes.(h)
4.2 Indenture for A+ Network, Inc. 11 7/8% Senior Subordinated
Notes due 2005 ("A+ Notes") dated October 24, 1995.(i)
4.3 First Supplemental Indenture dated November 14, 1996, for A+
Notes.(j)
4.4 Second Supplemental Indenture dated November 15, 1996, for
A+ Notes.(j)
4.5 Indenture for 9 3/4% Senior Subordinated Notes due 2007
dated October 21, 1997, including form of Notes.(k)
4.6 Indenture for ProNet Inc. 11 7/8% Senior Subordinated Notes
due 2005 ("ProNet Notes") dated June 15, 1995.(t)
10.1 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)
10.2 Amendment to Asset Purchase Agreement by and among Page
America and Metrocall dated as of March 28, 1997.(a)
10.3 Form of Certificate of Designation, Number, Powers,
Preferences and Relative, Participating, Optional and Other
Rights of Series A Convertible Preferred Stock of
Metrocall(b)
10.4 Form of Certificate of Designation, Number, Powers,
Preferences and Relative, Participating, Optional and Other
Rights of Series B Junior Convertible Preferred Stock of
Metrocall(c)
10.5 Registration Rights Agreement dated July 1, 1997 by and
between Page America Group, Inc. and Metrocall.(d)
10.6 Registration Rights Agreement dated July 1, 1997 by and
among Page America and Metrocall.(d)
10.7 Indemnity Escrow Agreement dated July 1, 1997 by and among
Page America, Metrocall and First Union National Bank of
Virginia.(d)
10.8 Agreement and Plan of Merger dated as of August 8, 1997,
between Metrocall and ProNet Inc. ("ProNet")(e)
10.9 Stockholders Voting Agreement dated as of August 8, 1997,
among ProNet Inc. and certain stockholders of Metrocall
listed therein.(e)
10.10 Option Agreement dated as of August 8, 1997, between
Metrocall and ProNet(e)
10.11 Amendment to Option Agreement dated as of August 29, 1997,
between Metrocall and ProNet(f)
10.12 Agreement and Plan of Merger dated as of May 16, 1996,
between Metrocall and A+ Network, Inc.(u)
10.13 Amendment to Agreement and Plan of Merger between Metrocall
and A+ Network, Inc.(l)
10.14 Shareholders' Option Sale Agreement dated as of May 16, 1996
between Metrocall and certain shareholders of A+ Network,
Inc. listed therein.(u)
10.15 Metrocall Stockholders Voting Agreement dated as of May 16,
1996 between A+ Network, Inc. and certain stockholders of
Metrocall listed therein.(u)
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S> <C>
10.16 Agreement and Plan of Merger entered into effective May 16,
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.(l)
10.17 Agreement of Merger by and among Metrocall, PPI Acquisition
Corp., Parkway Paging, Inc., certain shareholders of Parkway
Paging, Inc., and George W. Bush, dated February 26,
1996.(v)
10.18 Asset Purchase Agreement 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, 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.)(v)
10.19 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, Bertman M. Wachtel,
Edward R. Davalos and Kevan D. Bloomgren, and Metrocall.(w)
10.20 Employment Agreement between Metrocall and William L.
Collins, III.(l)
10.21 Employment Agreement between Metrocall and Steven D.
Jacoby.(l)
10.22 Employment Agreement between Metrocall and Vincent D.
Kelly.(l)
10.23 Change of Control Agreement between Metrocall and William L.
Collins, III.(l)
10.24 Change of Control Agreement between Metrocall and Steven D.
Jacoby.(l)
10.25 Change of Control Agreement between Metrocall and Vincent D.
Kelly.(l)
10.26 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and Jackie R. Kimzey.(m)
10.27 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and David J. Vucina.(m)
10.28 Letter Agreement dated August 8, 1997, between Metrocall and
Jackie R. Kimzey.(m)
10.29 Letter Agreement dated August 8, 1997, between Metrocall and
David J. Vucina.(m)
10.30 Letter Agreement dated August 8, 1997, between Metrocall and
Jan E. Gaulding.(m)
10.31 Letter Agreement dated August 8, 1997, between Metrocall and
Mark A. Solls.(m)
10.32 Letter Agreement dated August 8, 1997, between Metrocall and
Jeffery A. Owens.(m)
10.33 Amendment to Employment Agreement between Metrocall and
William L. Collins, III.(s)
10.34 Amendment to Employment Agreement between Metrocall and
Steven D. Jacoby.(s)
10.35 Amendment to Employment Agreement between Metrocall and
Vincent D. Kelly.(s)
10.36 Directors' Stock Option Plan, as amended.(n)
10.37 Metrocall 1996 Stock Option Plan.(z)
10.38 Metrocall 1996 Stock Option Plan, as amended.(n)
10.39 Metrocall Amended Employee Stock Purchase Plan.(r)
10.40 Variable Common Rights Agreement between Metrocall and First
Union National Bank of Virginia, Rights Agent, dated as of
November 15, 1996, including Form of Certificate
representing Variable Common Rights.(o)
10.41 Unit Purchase Agreement dated as of November 15, 1996, among
Metrocall and Certain Purchasers.(p)
10.42 Warrant Agreement dated as of November 15, 1996, between
Metrocall and the First National Bank of Boston, Warrant
Agent.(p)
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S> <C>
10.43 Second Amended and Restated Loan Agreement dated as of
October 21, 1997, among Metrocall, the financial
institutions signatory thereto, and Toronto-Dominion
(Texas), Inc., as Administrative Agent.(q)
10.44 Registration Rights Agreement, dated October 21, 1997
between Metrocall and Morgan Stanley & Co. Incorporated, TD
Securities (USA), Inc., First Union Capital Markets Corp.
and Nationsbank Montgomery Securities, Inc.(g)
10.45 Deed of Lease between Douglas and Joyce Jemal, as landlord,
and Metrocall, as tenant, dated April 14, 1994.(x)
10.46 Lease Agreement dated December 20, 1983 between Beacon
Communications Associates, Ltd. and a predecessor of
Metrocall.(y)
10.47 Agreement dated May 16, 1996 among Metrocall and Ray D.
Russenberger and Elliott H. Singer regarding voting for
director.(u)
10.48 Non-disclosure/No Conflict Agreement dated May 16, 1996
between Metrocall and Ray D. Russenberger.(u)
10.49 Non-disclosure/No Conflict Agreement dated May 16, 1996
between Metrocall and Elliott H. Singer.(u)
10.50 Employment Agreement dated May 16, 1996 between Metrocall
and Charles A. Emling III.(u)
11.1 Statement re computation of per share earnings.
21.1 Subsidiaries of Metrocall, Inc.
23.2 Consent of Arthur Andersen LLP, as independent public
accountants for Metrocall.
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 Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(c) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 1, on Form S-4 (File No. 333-21231) filed with the Commission on April
15, 1997.
(d) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on July 14, 1997.
(e) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on August 12, 1997.
(f) Incorporated by reference to Metrocall's Current Report on Form 8-K, as
amended, filed with the Commission on September 8, 1997.
(g) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-44329), filed with the Commission on January
15, 1998.
(h) 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.
(i) 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.
(j) 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.
(k) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 23, 1997.
(l) 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> 73
(m) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-36079), filed with the Commission on
September 22, 1997.
(n) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders held on May 7, 1997.
(o) 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.
(p) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(q) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 2, on Form S-4 (File No. 333-36079) filed with the Commission on
November 5, 1997.
(r) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 1, on Form S-4 (File No. 333-36079) filed with the Commission on
October 27, 1997.
(s) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, filed with the Commission on November
14, 1997.
(t) Incorporated by reference to ProNet's Current Report on Form 8-K filed with
the Commission on July 5, 1995.
(u) Incorporated by reference to Metrocall's Tender Offer Statement on Schedule
14D-1, filed with the Commission on May 22, 1996.
(v) 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.
(w) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on September 13, 1996, as amended on October 1, 1996.
(x) 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.
(y) 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.
(z) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders held on May 1, 1996.
<PAGE> 1
EXHIBIT 11.1
METROCALL, INC
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Loss before extraordinary item........................... $ (17,407) $ (45,455) $ (52,461)
Preferred dividends.................................... -- (780) (7,750)
---------- ---------- ----------
Net loss before extraordinary item attributable to common
stockholders........................................... (17,407) (46,235) (60,211)
Extraordinary item..................................... (2,695) (3,675) --
---------- ---------- ----------
Net loss attributable to common stockholders............. $ (20,102) $ (49,910) $ (60,211)
========== ========== ==========
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Shares outstanding, beginning of period................ 10,605 14,626 24,521
Shares issued in acquisitions.......................... -- 1,619 2,492
Shares issued for exercise of stock options............ 11 2 1
Shares issued in 1995 equity offering.................. 1,052 -- --
Shares issued in employee stock purchase plan.......... -- 6 73
---------- ---------- ----------
Weighted-average shares outstanding.................... 11,668 16,253 27,087
========== ========== ==========
Loss per share before extraordinary item attributable to
common stockholders.................................... $ (1.49) $ (2.84) $ (2.22)
Extraordinary item..................................... (0.23) (0.23) --
---------- ---------- ----------
Loss per share attributable to common stockholders....... $ (1.72) $ (3.07) $ (2.22)
========== ========== ==========
</TABLE>
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF METROCALL, INC.
Metrocall USA, Inc. (a Delaware corporation)
Contact Communications Inc. (a Delaware corporation)
Contact Communications of Massachusetts, Inc. (a Massachusetts corporation)
Electronic Tracking Systems, Inc. (a Delaware corporation)
ProNet Subsidiary, Inc. (a Delaware corporation)
Metropolitan Houston Paging Services, Inc. (a Texas corporation)
Professional Communications Systems, Inc. (a Texas corporation)
The Message Express, Inc. (a New York corporation)
Beepers To Go, Inc. (a Delaware corporation)
A.G.R. Electronics, Inc. (a Florida corporation)
Contact Communications of Pennsylvania, Inc. (a Pennsylvania corporation)
Beepers To Go, Inc. (a New York corporation)
A+ Acquisition Subsidiary, Inc. (a Tennessee corporation)
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated February 9, 1998, included in this Form 10-K into
Metrocall's previously filed Registration Statements on Form S-3, File No.
33-81606; Form S-3, File No. 33-92520; Form S-3, File No. 333-13123; Form S-3,
File No. 333-19139; Form S-3, File No. 333-24607; Form S-3, File No. 333-31719;
Form S-8, File No. 33-83452; Form S-8, File No. 33-99556; and Form S-8, File No.
333-29595.
ARTHUR ANDERSEN LLP
Washington, D.C.
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 24,896
<SECURITIES> 0
<RECEIVABLES> 37,051
<ALLOWANCES> 6,843
<INVENTORY> 2,663
<CURRENT-ASSETS> 73,476
<PP&E> 339,945
<DEPRECIATION> 115,357
<TOTAL-ASSETS> 1,087,014
<CURRENT-LIABILITIES> 98,107
<BONDS> 599,941
53,982
0
<COMMON> 405
<OTHER-SE> 179,496
<TOTAL-LIABILITY-AND-EQUITY> 1,087,014
<SALES> 39,464
<TOTAL-REVENUES> 289,364
<CGS> 29,948
<TOTAL-COSTS> 280,646
<OTHER-EXPENSES> (156)
<LOSS-PROVISION> 9,963
<INTEREST-EXPENSE> 36,248
<INCOME-PRETAX> (57,322)
<INCOME-TAX> (4,861)
<INCOME-CONTINUING> (52,461)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,461)
<EPS-PRIMARY> (2.22)
<EPS-DILUTED> (2.22)
</TABLE>
