<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 54-1215634
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6677 RICHMOND HIGHWAY, ALEXANDRIA, VIRGINIA 22306
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 660-6677
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT NOVEMBER 2, 1999
----- -------------------------------
<S> <C>
Common Stock, $.01 par value 41,901,908
</TABLE>
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<PAGE> 2
METROCALL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Interim Condensed Consolidated Financial Statements
Balance Sheets, December 31, 1998 and September 30, 1999.... 3
Statements of Operations for the three and nine months ended
September 30, 1998 and 1999............................... 4
Statement of Stockholders' Equity/(Deficit) for the nine
months ended September 30, 1999........................... 5
Statements of Cash Flows for the nine months ended September
30, 1998 and 1999......................................... 6
Notes to Interim Condensed Consolidated Financial
Statements.................................................. 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 3 Quantitative and Qualitative Disclosures About Market
Risk........................................................ 24
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................... 25
Item 2 Changes in Securities....................................... 25
Item 3 Defaults Upon Senior Securities............................. 25
Item 4 Submission of Matters to a Vote of Security Holders......... 25
Item 5 Other Information........................................... 25
Item 6 Exhibits and Reports on Form 8-K............................ 26
SIGNATURES................................................................ 27
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
METROCALL, INC. AND SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 SEPTEMBER 30,
(AS RESTATED) 1999
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,436 $ 4,798
Accounts receivable, less allowance for doubtful accounts
of $6,196 as of December 31, 1998 and $6,406 as of
September 30, 1999...................................... 44,694 53,066
Prepaid expenses and other current assets................. 8,843 7,562
---------- ----------
Total current assets................................ 61,973 65,426
---------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and leasehold improvements................ 15,079 15,533
Furniture, office equipment and vehicles.................. 64,438 74,111
Paging and plant equipment................................ 380,313 386,777
Less -- Accumulated depreciation and amortization......... (168,067) (179,468)
---------- ----------
291,763 296,953
---------- ----------
INTANGIBLE ASSETS, net of accumulated amortization of
approximately $219,960 as of December 31, 1998 and
$380,048 as of September 30, 1999......................... 894,707 736,451
OTHER ASSETS................................................ 2,595 4,036
---------- ----------
TOTAL ASSETS................................................ $1,251,038 $1,102,866
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 771 $ 621
Accounts payable.......................................... 37,533 39,357
Accrued expenses and other current liabilities............ 37,728 38,311
Deferred revenues and subscriber deposits................. 27,769 27,271
---------- ----------
Total current liabilities........................... 103,801 105,560
---------- ----------
CAPITAL LEASE OBLIGATIONS, less current maturities.......... 3,575 3,155
CREDIT FACILITY AND OTHER LONG-TERM DEBT, less current
maturities................................................ 40,444 84,393
SENIOR SUBORDINATED NOTES................................... 698,544 698,565
DEFERRED INCOME TAX LIABILITY............................... 209,642 162,185
MINORITY INTEREST IN PARTNERSHIP............................ 510 510
---------- ----------
Total liabilities................................... 1,056,516 1,054,368
---------- ----------
COMMITMENTS AND CONTINGENCIES
SERIES A CONVERTIBLE PREFERRED STOCK, 14% cumulative; par
value $.01 per share; 810,000 shares authorized; 209,203
and 223,847 shares issued and outstanding as of December
31, 1998 and September 30,1999, respectively, and a
liquidation preference of $53,216 and $58,900 at December
31, 1998 and September 30, 1999, respectively............. 45,441 51,715
SERIES B JUNIOR CONVERTIBLE PREFERRED STOCK, 14% cumulative,
par value $.01 per share; 9,000 shares authorized; 1,808
shares and 0 shares issued and outstanding at December 31,
1998 and September 30, 1999, respectively, and a
liquidation preference of $18,391 and $0 at December 31,
1998 and September 30, 1999, respectively................. 18,391 --
SERIES C CONVERTIBLE PREFERRED STOCK, 8% cumulative; par
value $.01 per share; 25,000 shares authorized; 9,595 and
9,979 shares issued and outstanding as of December 31,
1998 and September 30, 1999, and a liquidation preference
of $96,910 and $102,782 at December 31, 1998 and September
30, 1999, respectively.................................... 96,910 102,782
STOCKHOLDERS' EQUITY/(DEFICIT):
Common stock, par value $.01 per share; authorized
100,000,000 shares; 41,583,403 and 41,861,908 shares
issued and outstanding as of December 31, 1998 and
September 30, 1999, respectively........................ 416 419
Additional paid-in capital................................ 340,249 341,013
Accumulated deficit....................................... (306,885) (447,431)
---------- ----------
Total stockholders' equity/(deficit)................ 33,780 (105,999)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)........ $1,251,038 $1,102,866
========== ==========
</TABLE>
See notes to interim condensed consolidated financial statements.
3
<PAGE> 4
METROCALL, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
1998
1998 1999 (AS RESTATED) 1999
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Service, rent and maintenance
revenues............................. $ 93,810 $ 136,601 $ 278,945 $ 416,004
Product sales........................... 12,080 15,152 33,529 46,409
----------- ----------- ----------- -----------
Total revenues.................. 105,890 151,753 312,474 462,413
Net book value of products sold......... (6,482) (8,777) (20,941) (28,489)
----------- ----------- ----------- -----------
99,408 142,976 291,533 433,924
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Service, rent and maintenance
expenses............................. 26,151 37,552 73,310 119,167
Selling and marketing................... 17,487 23,235 50,130 72,899
General and administrative.............. 28,185 42,663 85,872 126,831
Depreciation............................ 16,966 24,961 50,505 71,615
Amortization............................ 36,484 52,533 107,497 158,035
----------- ----------- ----------- -----------
125,273 180,944 367,314 548,547
----------- ----------- ----------- -----------
Loss from operations............ (25,865) (37,968) (75,781) (114,623)
INTEREST EXPENSE.......................... (16,011) (21,672) (47,035) (63,493)
INTEREST AND OTHER INCOME, NET............ 13 81 626 309
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT............ (41,863) (59,559) (122,190) (177,807)
INCOME TAX BENEFIT........................ 10,591 15,731 31,861 47,255
----------- ----------- ----------- -----------
Net loss........................ (31,272) (43,828) (90,329) (130,552)
PREFERRED DIVIDENDS....................... (2,499) (4,151) (7,271) (12,202)
GAIN ON REPURCHASE OF PREFERRED STOCK..... -- -- -- 2,208
----------- ----------- ----------- -----------
Loss attributable to common
stockholders.................. $ (33,771) $ (47,979) $ (97,600) $ (140,546)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS..... $ (0.83) $ (1.15) $ (2.39) $ (3.37)
=========== =========== =========== ===========
Weighted-average common shares
outstanding............................. 40,931,215 41,861,908 40,891,277 41,734,431
=========== =========== =========== ===========
</TABLE>
See notes to interim condensed consolidated financial statements.
4
<PAGE> 5
METROCALL, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY/(DEFICIT)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL
SHARES PAR PAID-IN ACCUMULATED
OUTSTANDING VALUE CAPITAL DEFICIT TOTAL
----------- ----- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998................ 41,583,403 $416 $340,249 $(306,885) $ 33,780
Issuance of shares in employee stock
purchase plan........................... 278,505 3 764 -- 767
Preferred dividends....................... -- -- -- (12,202) (12,202)
Gain on repurchase of Series B
Preferred............................... -- -- -- 2,208 2,208
Net loss.................................. -- -- -- (130,552) (130,552)
---------- ---- -------- --------- ---------
BALANCE, September 30, 1999............... 41,861,908 $419 $341,013 $(447,431) $(105,999)
========== ==== ======== ========= =========
</TABLE>
See notes to interim condensed consolidated financial statements.
5
<PAGE> 6
METROCALL, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998
(AS RESTATED) 1999
------------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(90,329) $(130,552)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization.......................... 158,002 229,650
Amortization of debt financing costs and debt
discount.............................................. 1,326 2,349
Decrease in deferred income taxes...................... (31,902) (47,457)
Cash provided by (used in) changes in assets and
liabilities:
Accounts receivable.................................... (855) (9,154)
Prepaid expenses and other current assets.............. 732 1,282
Account payable........................................ (19,507) 1,823
Accrued expenses and other current liabilities......... (5,709) 583
Deferred revenues and subscriber deposits.............. (1,402) (498)
-------- ---------
Net cash provided by operating activities......... 10,356 48,026
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net................................. (45,213) (76,805)
Other..................................................... (2,897) (2,069)
-------- ---------
Net cash used in investing activities............. (48,110) (78,874)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under credit facility...................... 23,000 44,000
Repurchase of Series B Preferred.......................... -- (16,240)
Principal payments on long-term debt...................... (5,612) (727)
Net proceeds from issuance of common stock................ 577 767
Deferred debt financing costs and other................... (2) (590)
-------- ---------
Net cash provided by financing activities......... 17,963 27,210
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (19,791) (3,638)
CASH AND CASH EQUIVALENTS, beginning of period.............. 24,896 8,436
-------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 5,105 $ 4,798
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest................................ $ 38,001 $ 58,392
======== =========
Cash payments for income taxes............................ $ -- $ --
======== =========
</TABLE>
See notes to interim condensed consolidated financial statements.
6
<PAGE> 7
METROCALL, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. GENERAL
The accompanying unaudited interim condensed consolidated financial
statements included herein have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission. The interim condensed
consolidated financial statements include the consolidated accounts of
Metrocall, Inc. and its majority owned subsidiaries (collectively, "Metrocall").
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair statement of the financial position, results
of operations and cash flows for the interim periods presented have been made.
The preparation of the financial statements includes estimates. Actual results
could differ from those estimates. The results of operations for the nine months
ended September 30, 1999 are not necessarily indicative of the results to be
expected for the full year. Some information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations. Metrocall believes, however, that its disclosures are adequate to
make the information presented not misleading. You should read these interim
condensed consolidated financial statements in conjunction with the consolidated
financial statements and notes to those consolidated financial statements
included in Metrocall's 1998 Annual Report on Form 10-K/A, filed on July 2,
1999.
During 1996 and 1997, Metrocall was billed for local transport charges by
certain Regional Bell Operating Companies (RBOCs) and the largest independent
telephone company. Metrocall has disputed these billings under the
Telecommunications Act of 1996 (the 1996 Act) (see Note 6). When Metrocall
identified that it had paid these local transport charges, it recorded such
payments made for these disputed billings as receivables. In June 1999, after
discussions with the staff of the SEC in connection with its review of
registration statements Metrocall had filed, Metrocall restated its financial
statements to reflect amounts paid in 1996 and 1997 as an expense in the period
incurred and not as a receivable. Collection of amounts is contingent upon a
successful FCC ruling (see Note 6). If amounts are collected from the RBOCs and
the largest independent telephone company for reimbursement of amounts paid by
Metrocall, Metrocall will recognize the collections as a reduction of service,
rent and maintenance expense in its statement of operations in the period
received.
The impact of this restatement affected Metrocall's net loss, net loss
attributable to common stockholders and basic and diluted loss per share
attributable to common stockholders as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
Net loss--previously reported.................. $(29,154) $(86,087)
Net loss--as restated.......................... (31,272) (90,329)
Loss attributable to common
stockholders--previously reported............ (31,653) (93,358)
Loss attributable to common stockholders--as
restated..................................... (33,771) (97,600)
Basic and diluted loss per share attributable
to common stockholders--previously
reported..................................... $ (0.77) $ (2.28)
Basic and diluted loss per share attributable
to common stockholders--as restated.......... (0.83) (2.39)
</TABLE>
2. RISKS AND OTHER IMPORTANT FACTORS
Metrocall sustained net losses of $60.3 million and $129.1 million for
fiscal years 1997 and 1998 and $130.6 million for the nine-month period ended
September 30, 1999. Those recurring losses were
7
<PAGE> 8
METROCALL INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RISKS AND OTHER IMPORTANT FACTORS -- (CONTINUED)
significantly attributable to its consolidation and growth strategies. Metrocall
cannot assure you that it can reverse such losses in the future. At September
30, 1999, Metrocall had an accumulated deficit of approximately $447.4 million
and a deficit in working capital of $40.1 million. Metrocall's business requires
substantial funds for capital expenditures and acquisitions, both of which
result in significant depreciation and amortization expenses. Additionally,
Metrocall has substantial levels of borrowing, which result in significant
interest expense, expected to be outstanding in the foreseeable future.
Metrocall therefore expects to continue to incur losses from operations.
Metrocall cannot assure you that it will achieve profitability in the future.
Metrocall's operations require the availability of substantial funds to
finance the maintenance and growth of its existing paging operations and
subscriber base, development and construction of future wireless communications
networks, expansion into new markets, and the acquisition of other wireless
communications companies. At September 30, 1999, Metrocall had approximately
$786.7 million outstanding under its credit facility, senior subordinated notes,
capital leases and other long-term debt. Amounts available under its credit
facility are subject to certain financial covenants and other restrictions. At
September 30, 1999, Metrocall was in compliance with each of the covenants under
its $200.0 million credit facility. Metrocall's ability to borrow additional
amounts in the future, including amounts currently available under the credit
facility is dependent on Metrocall's ability to comply with the provisions of
its credit facility as well as the availability of financing in the capital
markets. At September 30, 1999, Metrocall had $116.0 million of borrowings
available under its credit facility based on its total leverage covenant under
which total debt cannot exceed six-times annualized operating cash flow.
Metrocall is also subject to additional risks and uncertainties including,
but not limited to, changes in technology, business integration, competition,
regulation, litigation and subscriber turnover.
3. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Metrocall recognizes revenue under service, rental and maintenance
agreements with customers as the related services are performed. Sales of
equipment are recognized upon delivery.
Long-Lived Assets
Long-lived assets and identifiable intangibles to be held and used are
reviewed for impairment on a periodic basis and whenever events or changes in
circumstances indicate that the carrying amount should be reviewed. 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.
4. CAPITAL STOCK
On January 7, 1999, Metrocall repurchased and retired all of the
outstanding shares of the Series B Junior Convertible Preferred Stock (Series B
Preferred) plus accrued dividends, for $16.2 million, representing a discount of
$2.2 million from its carrying value. The $2.2 million discount from carrying
value was presented as an adjustment to preferred dividends in the accompanying
statement of operations entitled, "Gain on repurchase of preferred stock".
Metrocall financed the repurchase with borrowings under its credit facility.
8
<PAGE> 9
METROCALL INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. EMPLOYEE STOCK OPTION AND OTHER BENEFIT PLANS
Stock Option Plans
During the nine months ended September 30, 1999, Metrocall's Board of
Directors granted options to purchase 1,748,500 shares of common stock with
exercise prices ranging from $2.75 to $5.63 per share, equal to the fair market
value of the Metrocall's common stock on the date of grant.
Employee Stock Purchase Plan
Metrocall issued 87,290 and 191,215 shares of common stock on January 1,
1999 and July 1, 1999, respectively, under the Metrocall, Inc. Employee Stock
Purchase Plan with purchase prices of approximately $3.67 and $2.34 per share,
respectively.
6. CONTINGENCIES
Legal and Regulatory Matters
Metrocall is subject to legal and regulatory matters in the normal course
of business. Metrocall does not expect that the outcome of those matters will
have a material adverse effect on its financial position or results of
operations.
Interconnect Complaint
Metrocall has filed complaints with the Federal Communications Commission
against a number of RBOCs and the largest independent telephone company for
violations of the FCC's interconnection and local transport rules and the 1996
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 by the respective carriers since November 1, 1996, the
effective date of the FCC's transport rules. The briefing schedule for these
complaint proceedings ended in September 1998. The complaints remain pending
before the FCC. Since 1996, Bell Atlantic and Nynex have voluntarily ceased
charging Metrocall for interconnection.
On January 25, 1999, the U.S. Supreme Court concluded that the FCC had the
authority under the Communications Act of 1934, as amended, to adopt rules
necessary to carry out Sections 251 and 252 of the 1996 Act, including the
authority to preempt any state or local tariffs or interconnection agreements
contrary to those rules. The Supreme Court did not disturb the portion of the
appellate court's decision upholding the FCC's authority over interconnection
between local exchange carriers (LECs) and Commercial Mobile Radio Service
(CMRS) carriers. Metrocall believes that the Supreme Court's decision lends
further support to Metrocall's complaints. Metrocall also believes the Supreme
Court's ruling appears to validate the FCC's "proxy" pricing rules for LEC/CMRS
interconnection, and will provide support for Metrocall to obtain reciprocal
compensation for terminating LEC-originated traffic.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of financial
condition and results of operations of Metrocall together with the financial
statements and the notes to the financial statements which appear elsewhere in
this quarterly report and Metrocall's Annual Report on Form 10-K/A for the year
ended December 31, 1998.
Forward-looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements. We
have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
risks, uncertainties and assumptions, which include:
- our high leverage and need for substantial capital;
- our ability to service debt and the restrictive covenants governing our
indebtedness;
- our history of net operating losses;
- the amortization of our intangible assets;
- our ability to integrate the acquisition of the Advanced Messaging
Division of AT&T Wireless, the paging operations of AT&T;
- the risk associated with our ability to implement our business
strategies;
- the impact of competition and technological developments;
- satellite transmission failures;
- subscriber turnover;
- our ability to implement our Year 2000 readiness plan;
- litigation and regulatory changes;
- dependence on key suppliers; and
- reliance on key personnel.
Other matters set forth in this Quarterly Report on Form 10-Q may also
cause actual results to differ materially from those described in the
forward-looking statements. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Quarterly Report on Form 10-Q may not
occur.
OVERVIEW
Metrocall is a leading provider of local, regional, and national paging and
other wireless messaging services. Metrocall has a nationwide network through
which it provides messaging services to over 1,000 U.S. cities, including the
100 largest metropolitan areas. Since 1993, Metrocall's subscriber base has
increased from less than 250,000 in 1993 to more than 5.8 million as of
September 30, 1999. Metrocall has achieved this growth through a combination of
internal growth and a program of mergers and acquisitions. As of September 30,
1999, Metrocall was the third largest paging and wireless-messaging company in
the United States based on number of subscribers.
Metrocall 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 Metrocall's services,
operating results benefit from this recurring revenue stream with minimal
requirements for incremental selling expenses or other fixed costs. Metrocall's
total revenues have increased by approximately 43.3% and 48.0% to $151.8 million
and $462.4 million for the three month and
10
<PAGE> 11
nine month periods ended September 30, 1999, respectively, compared to $105.9
million and $312.5 million for the three month and nine month periods ended
September 30, 1998, respectively. Overall, subscribers have increased by
approximately 1.5 million or approximately 36% to 5.8 million at September 30,
1999 from 4.3 million at September 30, 1998. Approximately 20% of the growth in
the subscriber base was generated through internal distribution channels while
80% of the increase was attributable to the subscriber base acquired through the
acquisition of the Advanced Messaging Division (AMD) of AT&T Wireless, the
paging operations of AT&T, on October 2, 1998.
Metrocall's growth, whether internal or through acquisitions, requires
significant capital investment for paging equipment and technical
infrastructure. Metrocall also purchases paging equipment for that portion of
its subscriber base to which it leases pagers. During the three and nine month
periods ended September 30, 1999, capital expenditures totaled approximately
$24.9 million and $76.8 million, respectively. This includes approximately $16.6
million and $49.6 million for the three and nine month periods ended September
30, 1999, respectively, for pagers, representing an increase in pagers on hand
and net increases to the rental pager base. For the nine months ended September
30, 1999, capital expenditures were funded through a combination of cash
generated from operations and borrowings under the credit facility.
For the remainder of 1999, Metrocall's business strategy will be focused on
increasing stockholder value by expanding the subscriber base and increasing
revenues, cost efficiencies and operating cash flow. This focus will include the
following:
- Managing capital requirements and increasing free cash flow by:
-- continuing to focus on selling, rather than leasing, paging units
in order to reduce capital expenditure requirements per subscriber;
-- increasing revenues and cash flows through sales of value-added
advanced messaging and information services which generate higher
average monthly revenue per unit (ARPU) than standard messaging or
paging services; and
-- further increasing the utilization of the nationwide network to
serve more customers per frequency and expand presence in existing
markets with minimal capital outlay.
- Managing and lowering operating costs through cost containment
initiatives;
- Maximizing internal growth potential by continuing to broaden Metrocall's
distribution network and expanding target markets to capitalize on the
growing appeal of messaging and other wireless products; and
- Completing the integration of the operations of AMD.
Metrocall may also continue to expand its operations and subscriber base
through additional industry consolidation. While there are no current
outstanding commitments, potential future consolidation opportunities would be
evaluated on several key operating and financial elements including: geographic
presence and FCC regulatory licenses held; overall valuation of potential
target, including subscriber base and potential synergies; consideration to be
given; potential increase to net income and operating cash flow; and
availability of financing and the ability to reduce the combined companies
long-term debt. Such potential transactions 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
Metrocall.
RESULTS OF OPERATIONS
The definitions below will be helpful in understanding the discussion of
Metrocall's results of operations.
- 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
11
<PAGE> 12
paging and related services such as voice mail and pager repair and
replacement. Service, rent and maintenance revenues also include revenues
derived from cellular, PCS and long-distance services.
- ARPU means average monthly paging revenue per unit. ARPU 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. The ARPU
calculation excludes revenues derived from non-paging services such as
telemessaging 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 Metrocall's network systems and
customer support centers.
- Selling and marketing expenses include salaries, commissions and
administrative costs for Metrocall's sales force and related marketing
and advertising expenses.
- General and administrative expenses include executive management,
accounting, office telephone, repairs and maintenance, management
information systems and employee benefits.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH 1998
The following table sets forth the amounts of revenues and the percentages
of net revenues represented by certain items in Metrocall's Interim Condensed
Consolidated Statements of Operations and certain other information for the
three months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, % OF SEPTEMBER 30, % OF INCREASE OR
1998 REVENUES 1999 REVENUES (DECREASE)
------------- -------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Service, rent and maintenance........ $ 93,810 94.4 $ 136,601 95.5 $ 42,791
Product sales........................ 12,080 12.2 15,152 10.6 3,072
---------- ----- ---------- ----- ----------
Total revenues............... 105,890 106.6 151,753 106.1 45,863
Net book value of products sold...... (6,482) (6.6) (8,777) (6.1) (2,295)
---------- ----- ---------- ----- ----------
Net revenues......................... $ 99,408 100.0 $ 142,976 100.0 $ 43,568
========== ===== ========== ===== ==========
ARPU................................. $ 7.11 $ 7.78 $ 0.67
Number of subscribers................ 4,332,200 5,877,375 1,545,175
</TABLE>
Total revenues increased approximately $45.9 million, or approximately
43.3%, from $105.9 million for the three months ended September 30, 1998
("1998") to $151.8 million for the three months ended September 30, 1999
("1999"). Net revenues increased approximately $43.6 million, or 43.8%, from
$99.4 million in 1998 to $143.0 million in 1999. The increase in net revenues
was primarily the result of an increase in the number of subscribers receiving
Metrocall's paging and other wireless messaging services. The total number of
subscribers increased by 1.5 million since September 30, 1998. Of this growth,
Metrocall's direct and indirect distribution channels generated 20% and 80%
represented acquired subscribers from the AMD acquisition. ARPU for Metrocall's
paging services increased $0.67 from $7.11 per unit in 1998 to $7.78 per unit.
This increase was primarily the result of the high premium, value-added service
characteristics of the subscriber base acquired in the AMD acquisition along
with continued migration of subscribers to alphanumeric paging devices, internal
growth in Metrocall's distribution channels, and selected service rate
increases. Factors that may adversely affect ARPU in future periods include
distribution mix of new subscribers, competition and new technologies, among
others. There can be no assurance that ARPU will not decline in future periods.
Product sales, which consist primarily of sales of paging equipment,
increased approximately $3.1 million or 25.4% from $12.1 million in 1998 to
$15.2 million in 1999 and decreased as a percentage of net revenues from 12.2%
in 1998 to 10.6% in 1999. The net book value of products sold increased
approximately $2.3 million or 35.4% from $6.5 million in 1998 to $8.8 million in
1999 principally due to
12
<PAGE> 13
the increase in product sales, offset by increased depreciation expense. Pagers
are classified as property and depreciated over three years from their purchase
date.
The following tables set forth the amounts of operating expenses and
related percentages of net revenues represented by certain items in Metrocall's
Interim Condensed Consolidated Statements of Operations and certain other
information for the three months ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
1998 REVENUES 1999 REVENUES INCREASE
------------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Service, rent and maintenance............ $ 26,151 26.3 $ 37,552 26.3 $11,401
Selling and marketing.................... 17,487 17.6 23,235 16.3 5,748
General and administrative............... 28,185 28.4 42,663 29.8 14,478
Depreciation............................. 16,966 17.1 24,961 17.5 7,995
Amortization............................. 36,484 36.7 52,533 36.7 16,049
-------- ----- -------- ----- -------
$125,273 126.1 $180,944 126.6 $55,671
======== ===== ======== ===== =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, INCREASE OR
1998 1999 (DECREASE)
------------- ------------- -----------
<S> <C> <C> <C>
OPERATING EXPENSES PER UNIT IN SERVICE
Monthly service, rent and maintenance.................... $2.04 $2.14 $ 0.10
Monthly selling and marketing............................ 1.36 1.33 (0.03)
Monthly general and administrative....................... 2.20 2.43 0.23
----- ----- ------
Average monthly operating costs.......................... $5.60 $5.90 $ 0.30
</TABLE>
Average monthly operating costs per unit in service (operating expenses per
unit before depreciation and amortization) increased by $0.30 per unit in 1999
from $5.60 per unit in 1998 to $5.90 per unit in 1999. Each operating expense is
discussed separately below.
Service, rent and maintenance expenses increased approximately $11.4
million from $26.2 million in 1998 to $37.6 million in 1999 and remained
constant as a percentage of net revenues at 26.3%. Approximately $14.6 million
of this increase was the result of expenses incurred by the operations of AMD,
which was acquired in October 1998 and therefore not included in Metrocall's
operating results until the fourth quarter of 1998. The $14.6 million of
expenses incurred was comprised primarily of third-party dispatching,
telecommunications expenses and tower site rents. Excluding the impact of the
AMD acquisition, there was a $3.2 million net decline in service, rent and
maintenance expenses in 1999. This net decline was primarily attributable to a
reduction in telecommunications expenses partially offset by increased personnel
costs and tower site rents totaling approximately $1.5 million. Monthly service,
rent and maintenance expense per unit increased $0.10 from $2.04 per unit in
1998 to $2.14 per unit in 1999 primarily as a result of the additional expenses
incurred associated with the operations of AMD. Metrocall expects its service,
rent and maintenance expenses to decrease as a percentage of revenues and per
subscriber unit in future periods as it continues to renegotiate certain of its
telecommunications and third party services contracts and decommissions
redundant transmitter and tower sites. Metrocall expects such expense savings to
be partially offset by an increase in rental costs for other transmitter and
tower sites as Metrocall enhances its nationwide presence, particularly in the
Northwest and Midwest United States.
Selling and marketing expenses increased approximately $5.7 million from
$17.5 million in 1998 to $23.2 million in 1999 and decreased as a percentage of
net revenues from 17.6% in 1998 to 16.3% in 1999. Approximately $5.9 million of
the increase in selling and marketing expenses was attributable to increased
personnel costs related to the acquired AMD sales force. Exclusive the impact of
the AMD acquisition, there was a $0.2 million net decline in selling and
marketing expenses in 1999. This decline was the primarily the result of a
reduction in office rents and other third-party costs offset slightly by
expenses related to an increase in the employee sales base and advertising costs
totaling approximately $1.0 million related to further sales penetration in
existing markets. Monthly selling and marketing expense per unit
13
<PAGE> 14
decreased by $0.03 from $1.36 per unit in 1998 to $1.33 per unit in 1999 as a
result of these events and the impact of a larger subscriber base over which to
allocate such expenses. Selling and marketing expenses may increase in future
periods as a percentage of net revenues as Metrocall continues to increase and
intensify its competitive presence in existing markets and expand geographic
coverage.
General and administrative expenses increased approximately $14.5 million
from $28.2 million in 1998 to $42.7 million in 1999, and increased as a
percentage of net revenues from 28.4% in 1998 to 29.8% in 1999. Approximately
$7.9 million of the increase in general and administrative expenses was
attributable to the AMD acquisition primarily representing expenses incurred for
support staff, personnel costs and facilities rents. Exclusive of the AMD
acquisition, general and administrative expenses increased approximately $6.6
million, which was primarily the result of an increase in rent and facility
costs of approximately $3.0 million, technical consulting costs primarily
associated with year 2000 readiness efforts of $1.4 million, personnel costs of
$1.4 million and other expenses incurred of $0.8 million. Monthly general and
administrative expenses per unit increased by $0.23 from $2.20 per unit in 1998
to $2.43 per unit in 1999 as a result of these events.
Depreciation expense increased approximately $8.0 million from $17.0
million in 1998 to $25.0 million in 1999. The increase in depreciation expense
resulted primarily from depreciation expense on subscriber equipment and other
capitalized assets acquired mainly in the AMD acquisition and also from the
depreciation of additions to other property, plant and equipment and computer
hardware and software.
Amortization expense related to the amortization of identified intangible
assets of companies acquired by Metrocall increased approximately $16.0 million
from $36.5 million in 1998 to $52.5 million in 1999 primarily as a result of the
amortization of intangibles recorded in connection with the AMD acquisition.
Amortization expense was comprised of the following elements in 1998 and 1999:
<TABLE>
<CAPTION>
AMORTIZATION SEPTEMBER 30, SEPTEMBER 30,
PERIOD 1998 1999 INCREASE
------------ ------------- ------------- --------
<S> <C> <C> <C> <C>
Subscriber lists............................... 3 years $22,207 $36,098 $13,891
FCC licenses................................... 10 years 8,461 8,983 522
Goodwill....................................... 10 years 5,527 5,645 118
Other.......................................... various 289 1,807 1,518
------- ------- -------
$36,484 $52,533 $16,049
</TABLE>
Metrocall expects its amortization expense for the three months ended
December 31, 1999 to be consistent with its results for the three months ended
September 30, 1999. It also expects amortization expense to be significant in
fiscal year 2000 as it continues to amortize the subscriber lists acquired in
the 1997 merger with ProNet Inc. and the 1998 acquisition of AMD.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, INCREASE
1998 1999 (DECREASE)
------------- ------------- ----------
<S> <C> <C> <C>
OTHER
Interest expense......................................... $(16,011) $(21,672) $ 5,661
Interest and other income, net........................... 13 81 68
Income tax benefit....................................... 10,591 15,731 5,140
Net loss................................................. (31,272) (43,828) (12,566)
Preferred dividends...................................... (2,499) (4,151) 1,652
EBITDA................................................... $ 27,585 $ 39,526 $ 11,941
</TABLE>
Interest expense increased approximately $5.7 million from $16.0 million in
1998 to $21.7 million in 1999. Interest expense increased due to higher average
debt balances outstanding during 1999. Average debt balances were $167.0 million
greater in 1999 than in 1998 as a result of debt incurred related to the AMD
acquisition in October 1998, the repurchase of the Series B Preferred in January
1999, capital expenditures and working capital requirements.
14
<PAGE> 15
Metrocall's net loss increased approximately $12.6 million from $31.2
million in 1998 to $43.8 million in 1999. The increase in net loss was primarily
the result of increased depreciation and amortization expenses associated with
the acquisition of AMD, whose results were not included in Metrocall's results
of operations for the three months ended September 30, 1998. These expenses were
offset partially by the increase in earnings before interest, taxes,
depreciation and amortization (EBITDA) explained below. Metrocall expects net
losses to continue in future periods.
Preferred dividends increased approximately $1.7 million from $2.5 million
in 1998 to $4.2 million in 1999. The increase in preferred dividends was the
result of higher dividends paid in like-kind shares of preferred stock to the
holders of the Series A Convertible Preferred Stock (Series A Preferred) and the
Series C Convertible Preferred Stock (Series C Preferred) in 1999 due to the
compounding nature of these preferred stock series. This increase was partially
offset by the cessation of dividends on the Series B Preferred, which Metrocall
repurchased in January 1999.
EBITDA means earnings before interest, taxes, depreciation and
amortization. While not a measure under generally accepted accounting principles
(GAAP), EBITDA is a standard measure of financial performance in the paging
industry. EBITDA may not be comparable to similarly titled measures reported by
other companies since all companies do not calculate EBITDA in the same manner.
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 as defined by Metrocall is
used in its credit facility and senior subordinated note indentures as part of
the tests to determine its ability to incur debt and make restricted payments.
EBITDA increased approximately $11.9 million from $27.6 million in 1998 to $39.5
million in 1999. As a percentage of net revenues, EBITDA slightly decreased from
27.7% in 1998 to 27.6% in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH 1998
The following table sets forth the amounts of revenues and the percentages
of net revenues represented by certain items in Metrocall's Interim Condensed
Consolidated Statements of Operations and certain other information for the nine
months ended September 30, 1998 and 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, % OF SEPTEMBER 30, % OF INCREASE OR
1998 REVENUES 1999 REVENUES (DECREASE)
------------- -------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Service, rent and maintenance.......... $ 278,945 95.7 $ 416,004 95.9 $ 137,059
Product sales.......................... 33,529 11.5 46,409 10.7 12,880
---------- ----- ---------- ----- ----------
Total revenues............... 312,474 107.2 462,413 106.6 149,939
Net book value of products sold........ (20,941) (7.2) (28,489) (6.6) (7,548)
---------- ----- ---------- ----- ----------
Net revenues........................... $ 291,533 100.0 $ 433,924 100.0 $ 142,391
========== ===== ========== ===== ==========
ARPU................................... $ 7.30 $ 7.99 $ 0.69
Number of subscribers.................. 4,332,200 5,877,375 1,545,175
</TABLE>
Total revenues increased approximately $149.9 million, or approximately
48.0%, from $312.5 million for the nine months ended September 30, 1998 ("1998")
to $462.4 million for the nine months ended September 30, 1999 ("1999"). Net
revenues increased approximately $142.4 million, or 48.8%, from $291.5 million
in 1998 to $433.9 million in 1999. The increase in net revenues was the result
of an increase in the number of subscribers receiving Metrocall's paging and
other wireless messaging services. The total number of subscribers increased by
1.5 million since September 30, 1998. Of this growth, Metrocall's direct and
indirect distribution channels generated 20% and 80% was acquired in the AMD
acquisition. ARPU for Metrocall's paging services increased $0.69 per unit from
$7.30 per unit in 1998 to $7.99 per unit in 1999. The increase in ARPU was
primarily attributable to the high premium, value added characteristics of the
subscriber base acquired in the AMD acquisition, along with the continued
migration of subscribers to alphanumeric devices, and selected rate increases
partially offset by internal growth in Metrocall's reseller and strategic
alliance indirect distribution channels, which generate lower
15
<PAGE> 16
ARPU sales and lower operating costs per unit for Metrocall. Factors that may
adversely affect ARPU in future periods include distribution mix of new
subscribers, competition and new technologies, among others. There can be no
assurance that ARPU will not decline in future periods.
Product sales, which consist primarily of sales of paging equipment,
increased approximately $12.9 million or 38.4% from $33.5 million in 1998 to
$46.4 million in 1999 and decreased as a percentage of net revenues from 11.5%
in 1998 to 10.7% in 1999. Net book value of products sold increased
approximately $7.6 million or 36.0% from $20.9 million in 1998 to $28.5 million
in 1999 principally due to the increase in product sales, offset by increased
depreciation expense. Pagers are classified as property and depreciated over
three years from their date of acquisition.
The following tables set forth the amounts of operating expenses and
related percentages of net revenues represented by certain items in Metrocall's
Interim Condensed Consolidated Statements of Operations and certain other
information for the nine months ended September 30, 1998 and 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
1998 REVENUES 1999 REVENUES INCREASE
------------- -------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Service, rent and maintenance........... $ 73,310 25.1 $119,167 27.5 $ 45,857
Selling and marketing................... 50,130 17.2 72,899 16.8 22,769
General and administrative.............. 85,872 29.5 126,831 29.2 40,959
Depreciation............................ 50,505 17.3 71,615 16.5 21,110
Amortization............................ 107,497 36.9 158,035 36.4 50,538
-------- ----- -------- ----- --------
$367,314 126.0 $548,547 126.4 $181,233
======== ===== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 INCREASE
------------- ------------- --------
<S> <C> <C> <C>
OPERATING EXPENSES PER UNIT IN SERVICE
Monthly service, rent and maintenance...................... $1.91 $2.29 $0.38
Monthly selling and marketing.............................. 1.32 1.40 0.08
Monthly general and administrative......................... 2.33 2.44 0.11
----- ----- -----
Average monthly operating costs............................ $5.56 $6.13 $0.57
</TABLE>
Average monthly operating costs per unit in increased by $0.57 per unit in
1999 from $5.56 per unit in 1998 to $6.13 per unit in 1999. Each operating
expense is discussed separately below.
Service, rent and maintenance expenses increased approximately $45.9
million from $73.3 million in 1998 to $119.2 million in 1999 and increased as a
percentage of net revenues from 25.1% in 1998 to 27.5% in 1999. Approximately
$43.9 million of this increase was the result of expenses incurred by the
operations of AMD, which was acquired in October 1998 and therefore not included
in Metrocall's operating results until the fourth quarter of 1998. The $43.9
million of expenses incurred consisted primarily of third party dispatching,
telecommunications expenses, tower site rents and personnel costs. Excluding the
impact of the AMD acquisition, there was a $2.0 million net increase in service,
rent and maintenance expenses attributable to increases in personnel costs and
tower site rents offset by a reduction in telecommunications expenses. Monthly
service, rent and maintenance expense per unit increased $0.38 per unit from
$1.91 per unit in 1998 to $2.29 per unit in 1999 primarily as a result of the
additional expenses incurred associated with the operations of AMD. In future
periods, Metrocall, expects its service, rent and maintenance expenses to begin
to decrease as a percentage of revenues and per subscriber unit as it
renegotiates certain of its telecommunications and third party services
contracts and decommissions redundant transmitter and tower sites as it
continues its integration and elimination of operating redundancies from the AMD
acquisition. Metrocall expects such expense savings to be partially offset by an
increase in rental costs for other transmitter and tower sites as it enhances
its nationwide presence, particularly in the West and Midwest United States.
16
<PAGE> 17
Selling and marketing expenses increased approximately $22.8 million from
$50.1 million in 1998 to $72.9 million in 1999 and decreased slightly as a
percentage of net revenues from 17.2% in 1998 to 16.8% in 1999. Approximately
$17.4 million of the increase in selling and marketing expenses was the result
of expenses incurred by the operations of AMD, the majority of which was
attributable to sales personnel costs related to the acquired AMD sales force.
Exclusive of the impact of the AMD acquisition, the remaining selling and
marketing expense increase of $5.4 million was primarily the result of increases
in personnel costs of $3.4 million related to an increase in the employee sales
base and advertising costs of $2.4 million related to further penetration in
existing markets. Monthly selling and marketing expense per unit increased $0.08
from $1.32 per unit in 1998 to $1.40 per unit in 1999 as a result of these
events. Selling and marketing expenses may continue to increase as a percentage
of net revenues as Metrocall continues to increase its competitive presence in
existing markets and expand geographic coverage.
General and administrative expenses increased approximately $41.0 million
from $85.9 million in 1998 to $126.8 million in 1999, and decreased as a
percentage of net revenues from 29.5% in 1998 to 29.2% in 1999. Approximately
$28.0 million of the increase in general and administrative expenses was
attributable to the AMD acquisition, the majority of which included expenses
incurred for telephone support, facilities and personnel costs associated with
the AMD call center and invoicing and other expenses associated with customer
accounts. Excluding the impact of the AMD acquisition, general and
administrative expenses increased approximately $13.0 million, which was
primarily the result of an increase in office rent and facility costs of $4.2
million, professional services, including year 2000 readiness consulting of $3.3
million, personnel costs due to an increase in the number of employees from 1998
of $1.9 million and allowance for accounts receivables $1.2 million. As a result
of these events, monthly general and administrative expense per unit increased
$0.11 per unit from $2.33 per unit in 1998 to $2.44 per unit in 1999.
Depreciation expense increased approximately $21.1 million from $50.5
million in 1998 to $71.6 million in 1999. The increase in depreciation expense
resulted primarily from depreciation expense on subscriber equipment and other
capitalized assets acquired mainly in the AMD acquisition and also from the
depreciation of additions to other property, plant and equipment and computer
hardware and software.
Amortization expenses related to the amortization of identified intangible
assets of companies acquired by Metrocall increased approximately $50.5 million
from $107.5 million in 1998 to $158.0 million in 1999 primarily as a result of
the amortization of intangibles recorded in connection with the AMD acquisition.
Amortization expense was comprised of the following elements in 1998 and 1999:
<TABLE>
<CAPTION>
AMORTIZATION SEPTEMBER 30, SEPTEMBER 30,
PERIOD 1998 1999 INCREASE
------------ ------------- ------------- --------
<S> <C> <C> <C> <C>
Subscriber lists............................... 3 years $ 66,627 $108,347 $41,720
FCC licenses................................... 10 years 24,190 26,966 2,776
Goodwill....................................... 10 years 15,824 17,224 1,400
Other.......................................... various 856 5,498 4,642
-------- -------- -------
$107,497 $158,035 $50,538
</TABLE>
17
<PAGE> 18
Metrocall expects its amortization expenses to be significant in fiscal
year 2000 as it continues to amortize the subscriber lists acquired in the 1997
merger with ProNet Inc. and the 1998 acquisition of AMD.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, INCREASE
1998 1999 (DECREASE)
------------- ------------- ----------
<S> <C> <C> <C>
OTHER
Interest expense......................................... $(47,035) $(63,493) $16,458
Interest and other income, net........................... 626 309 (317)
Income tax benefit....................................... 31,861 47,255 15,394
Net loss................................................. (90,329) (130,552) 40,223
Preferred dividends...................................... (7,271) (12,202) 4,931
Gain on repurchase of preferred stock.................... -- 2,208 2,208
EBITDA................................................... $ 82,221 $115,027 $32,806
</TABLE>
Interest expense increased approximately $16.5 million from $47.0 million
in 1998 to $63.5 million in 1999. Interest expense increased due to higher
average debt balances outstanding during 1999. Average debt balances were $168.5
million greater in 1999 than in 1998 as a result of debt incurred related to the
AMD acquisition in October 1998, the repurchase of the Series B Preferred in
January 1999, capital expenditures and working capital requirements.
Metrocall's net loss increased approximately $40.3 million from $90.3
million in 1998 to $130.6 million in 1999. The increase in net loss was
primarily the result of increased depreciation, amortization and interest
expenses associated with the acquisition of AMD, whose results were not included
in Metrocall's results of operations for the nine months ended September 30,
1998. These expenses were offset partially by increases in Metrocall's EBITDA
for the nine-month period. Metrocall expects net losses to continue in future
periods.
Preferred dividends increased approximately $4.9 million from $7.3 million
in 1998 to $12.2 million in 1999. The increase was the result of higher
dividends paid in like-kind shares of preferred stock to the holders of the
Series A Preferred and the Series C Preferred during 1999 due to the compounding
nature of the preferred stock series. This increase was partially offset by the
cessation of dividends on the Series B Preferred, which Metrocall repurchased in
January 1999.
On January 7, 1999, Metrocall repurchased and retired all of the
outstanding shares of its Series B Preferred for $16.2 million, representing a
$2.2 million discount from its carrying value. The $2.2 million has been
reflected as gain for purposes of determining Metrocall's loss attributable to
common stockholders.
EBITDA increased approximately $32.8 million from $82.2 million in 1998 to
$115.0 million in 1999. As a percentage of net revenues, EBITDA decreased from
28.2% in 1998 to 26.5% in 1999.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
For the nine months ended September 30, 1999, Metrocall's cash provided by
operating activities increased by approximately $37.6 million from $10.4 million
for the nine months ended September 30, 1998 to $48.0 million for the nine
months ended September 30, 1999. The increase in cash provided by operating
activities was primarily the result of an improvement in operating cash flow.
Operating cash flow is defined as net loss plus adjustments to reconcile net
loss to net cash provided by operating activities, which adjustments include the
non-cash items of depreciation and amortization expenses and deferred income
taxes. Operating cash flow increased by $16.9 million from $37.1 million for the
nine months ended September 30, 1998 to $54.0 million for the nine months ended
September 30, 1999. The increase in operating cash flow was primarily the result
of the increase in EBITDA offset by the increase in interest expense for the
nine months ended September 30, 1999. The remaining increase in cash provided by
18
<PAGE> 19
operating activities was the result of a net increase in accounts payable and
accrued expenses as of September 30, 1999 compared to September 30, 1998, which
net increase was a result of higher operating expenses between periods. This
increase in accounts payable and accrued expenses was offset by an increase in
accounts receivable as of September 30, 1999 compared to September 30, 1998,
which was the result of higher revenues between periods.
Net cash used in investing activities increased approximately $30.8 million
from $48.1 million for the nine months ended September 30, 1998 to $78.9 million
for the nine months ended September 30, 1999. The increase in net cash used for
investing activities was primarily the result of an increase in purchases of
property and equipment. Capital expenditures were approximately $45.2 million
and $76.8 million for the nine months ended September 30, 1998 and 1999,
respectively. Capital expenditures for the nine months ended September 30, 1999
included approximately $49.6 million for paging devices, representing increases
in pagers on hand and net increases to the rental subscriber base. The balance
of capital expenditures was primarily for network construction and development
and information systems and computer related equipment. Total capital
expenditures for fiscal year 1999 are expected to approximate $90.0 million.
Metrocall expects to finance its capital expenditures for the remainder of
fiscal year 1999 through its operating cash flows. Projected capital
expenditures are subject to change based on the progress of internal growth,
general business and economic conditions and competitive pressures.
Net cash provided by financing activities increased approximately $9.2
million from $18.0 million for the nine months ended September 30, 1998 to $27.2
million for the nine months ended September 30, 1999. The increase was primarily
the result of additional borrowings under Metrocall's credit facility offset by
the repurchase of the Series B Preferred. During the nine months ended September
30, 1999, Metrocall borrowed an additional $44.0 million under its credit
facility primarily to fund the $16.2 million repurchase of the Series B
Preferred and for other working capital requirements and capital expenditures.
Working Capital
At September 30, 1999, Metrocall's working capital deficit (current
liabilities exceeded current assets) had decreased by $1.7 million to
approximately $40.1 million from December 31, 1998. Metrocall has experienced
such deficits in prior periods and believes such deficits are likely to
continue. Metrocall 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.
Metrocall is currently considering a program with a major financial
institution that would enable it to provide paging and other wireless messaging
equipment to customers under leases to be provided by a third party entity. It
is intended that if the program is implemented, the leased equipment and
associated debt financing would not be included on its balance sheet or
reflected as a capital expenditure because Metrocall would not retain a
substantial risk of ownership in the equipment. However, if Metrocall retains
substantial risk of ownership in the messaging equipment, the equipment and the
associated debt financing would be reflected on Metrocall's balance sheet and as
a capital expenditure. Metrocall expects some of its customers to utilize this
third party program to satisfy the funding requirements for advanced messaging
equipment such as 1.7-way and 2-way devices, which airtime services generate
higher service, rent and maintenance ARPU for Metrocall. Metrocall expects that
this program will be offered across all of its direct distribution channels.
There can be no assurance that Metrocall will be successful in implementing this
program as intended.
19
<PAGE> 20
Long-Term Debt
At December 31, 1998 and September 30, 1999, long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, INCREASE OR
1998 1999 (DECREASE)
------------ ------------- -----------
<S> <C> <C> <C>
LONG-TERM DEBT
Borrowings under the credit facility...................... $ 40,000 $ 84,000 $44,000
Senior subordinated notes................................. 698,544 698,565 19
Capital leases and other debt............................. 4,790 4,169 (619)
-------- -------- -------
Total long-term debt................................. $743,334 $786,734 $43,400
======== ======== =======
</TABLE>
Borrowings and repayments under the credit facility. During the nine
months ended September 30, 1999, Metrocall increased its net borrowings
outstanding under its credit facility by $44.0 million from December 31, 1998.
However, Metrocall did not increase the amount of borrowings outstanding under
its credit facility in the three months ended September 30, 1999. During the
nine months ended September 30, 1999, Metrocall borrowed $68.0 million, which
was used to fund the repurchase of the Series B Preferred and also for other
working capital requirements, and repaid $24.0 million from cash generated from
operating activities. At September 30, 1999, $84.0 million was outstanding under
the credit facility.
Subject to certain conditions, Metrocall may borrow up to $200.0 million
under its credit facility. Under the credit facility, Metrocall is required to
comply with or maintain certain financial and operating covenants including
certain financial ratios, such as total debt to annualized operating cash flow,
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 credit facility agreement). 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. The credit facility agreement also prohibits certain
changes in control of Metrocall, as defined. At September 30, 1999, Metrocall
was in compliance with all of these covenants. The credit facility also includes
a material adverse effect clause under which the credit facility could be in
default if there is any material adverse effect upon the business, assets,
liabilities, financial condition, results of operations, properties or business
of Metrocall. Metrocall believes that the declaration of a material adverse
effect default by its lenders is remote. At September 30, 1999, Metrocall had
$116.0 million of borrowings available under its credit facility based on its
total leverage covenant, which represented the entire undrawn amount available
under the credit facility.
Senior subordinated notes. There are no significant principal payments
required under the senior subordinated notes indentures during fiscal year 1999.
On August 2, 1999, Metrocall issued $250.0 million aggregate principal amount of
11% senior subordinated notes due 2008 that were registered under the Securities
Act of 1933, as amended. Metrocall exchanged these notes for 11% senior
subordinated notes issued in a private placement in December 1998.
Access to Future Capital
Since Metrocall had a significant net loss for the nine months ended
September 30, 1999, its fixed charges, which include primarily interest expenses
related to long term debt and operating leases, were in excess of earnings for
the period by approximately $177.8 million. Metrocall expects that its net
losses and deficiency of earnings to fixed charges will continue in the future.
Metrocall's business also requires substantial funds for capital
expenditures for paging and other wireless messaging equipment leased to its
customers. Additionally Metrocall has substantial levels of borrowing, which
results in significant interest expenses. Given these and the above factors,
through November 10, 1999, Metrocall borrowed an additional $4.0 million under
its credit facility. The borrowings
20
<PAGE> 21
were used for general corporate purposes. Metrocall does not expect to require
additional borrowings for the remainder of 1999. Metrocall may be required to
incur additional borrowings from time to time.
Metrocall's ability to access borrowings under the credit facility and to
meet its debt service and other obligations (including compliance with financial
covenants) will be dependent upon its future performance and its cash flows from
operations, which will be subject to financial, business and other factors,
certain of which are beyond Metrocall's control, such as prevailing economic
conditions. Metrocall cannot assure you that, in the event it was to require
additional financing, such additional financing would be available on terms
permitted by agreements relating to existing indebtedness or otherwise
satisfactory to it. Metrocall believes that funds generated by its operations,
together with those available under its credit facility, will be sufficient to
finance estimated capital expenditure requirements and to fund its existing
operations for the foreseeable future.
YEAR 2000 READINESS DISCLOSURE
The year 2000 issue generally refers to the issue of whether a company's
hardware, software or other computer technologies can correctly process, provide
and/or receive data after December 31, 1999. Metrocall utilizes software and
related computer technologies essential to its operations that may be affected
by the year 2000 issue. Successfully resolving the year 2000 issue is a company
priority. Accordingly, Metrocall has implemented an enterprise-wide program to
address the year the year 2000 issue. This program is supervised by an executive
oversight committee, which is chaired by Metrocall's Chief Financial Officer.
Metrocall's plan consists of the following phases:
I. Identification and Assessment of Potential Problem Areas
II. Remediation of Identified Problem Areas
III. Validation
IV. Implementation
V. Third Party Dependencies
VI. Contingency Planning
The following describes each phase and the status of each phase in
Metrocall's Plan:
I. IDENTIFICATION AND ASSESSMENT OF POTENTIAL PROBLEM AREAS. Metrocall has
reviewed its computer hardware and software technologies and the embedded
systems contained in its plant and facilities and related infrastructure for the
year 2000 issue. Metrocall has identified its critical and non-critical systems
and whether or not such systems are year 2000 compliant. Metrocall's critical
systems include: paging devices and infrastructure, billing systems, telephone
services, financial systems and operating systems and hardware. For each of
these systems, Metrocall has identified the required steps that will need to be
taken for the critical systems to be year 2000 compliant. Metrocall has also
developed remediation and/or validation plans to address year 2000 concerns
associated with each critical system.
II. REMEDIATION OF IDENTIFIED PROBLEM AREAS. The remediation phase includes
correcting identified problem areas which may include hardware and software
revisions, developing replacement systems and eliminating non-functional
applications or system components. Metrocall has completed a substantial portion
of the remediation efforts for its critical and non-critical systems.
III. VALIDATION. As Metrocall makes changes to applications and components
of its systems, it validates and tests those changes for year 2000 compliance.
Metrocall has performed validation and testing on a system-wide basis to ensure
that any changes made are compatible with interfacing systems. Metrocall is
currently undertaking this phase on many of its applications.
IV. IMPLEMENTATION. This phase involves integrating the systems changes
made in the remediation stage once they have been appropriately validated. As
Metrocall implements and integrates such changes, it may determine it systems
include both year 2000 compliant and non-compliant applications and components.
Metrocall has implemented a substantial majority of its remediated systems and
applications.
21
<PAGE> 22
It also has developed appropriate contingency recovery plans to reduce potential
impacts from non-compliant applications. Metrocall expects to complete its
entire implementation phase by December 1999.
V. THIRD PARTY DEPENDENCIES. Much of the technology employed in Metrocall's
critical systems was purchased from third parties. Accordingly, Metrocall is
dependent on those third parties to provide information to it with regard to the
impact of the year 2000 issue on the technology that they have supplied and to
take necessary corrective actions. In addition, it is possible that many of
Metrocall's telecommunications providers, energy suppliers and other primary
vendors will have year 2000 issues that may also affect them. Metrocall has
sought and will continue to seek confirmation from these parties that they are
developing and implementing plans to become year 2000 compliant in the event
that the year 2000 issue will affect them. Metrocall intends to validate system
processes that require interaction with vendor hardware or software in an effort
to ensure system readiness by December 31, 1999. Information Metrocall has
received from third parties to date indicate that the respondents are in the
process of implementing remediation plans in an effort to bring their systems
into year 2000 compliance. Metrocall's ability to complete the phases in its
remediation plan by the target dates and avoid disruption of paging and other
service depends on whether its suppliers can make necessary modifications to
their products by the projected delivery dates.
VI. CONTINGENCY PLANNING. Metrocall has developed contingency plans for
each of its critical systems if such systems are not year 2000 compliant. These
contingency plans address "likely" worst case scenarios for each critical system
and take into account, to the extent Metrocall believe necessary, ways to
address certain potential third party non-compliance. These plans are subject to
change as additional remediation and testing is performed to correct and
validate identified issues or as third parties provide additional details about
their year 2000 compliance.
The following briefly describes each of Metrocall's critical systems and
their year 2000 readiness.
- PAGING DEVICES. Metrocall does not manufacture paging devices and
therefore depends on the manufacturers of such paging equipment to ensure
that the devices are year 2000 compliant. Metrocall has contacted these
manufacturers to ensure that these manufacturers are addressing year 2000
compliance issues relating to such paging equipment. Based on the
information provided by such manufacturers, Metrocall believes that
substantially all of the paging devices currently in its inventory or
supplied by the manufacturers is year 2000 compliant. Certain of the
pager models carried by Metrocall will require manual resetting of the
calendar function on March 1, 2000, but the functionality of these paging
devices, including the ability of these devices to receive messages
through Metrocall's network, will not be impacted.
- PAGING INFRASTRUCTURE. Metrocall has an extensive paging infrastructure
through which it provides its messaging services. These services are
provided through a network of paging terminals, control systems, and
transmitters. A message may originate in a number of different ways. The
Public Switched Telephone Network (PSTN) is the source of most messaging
requests. The Telco Year 2000 Forum is handling year 2000 issues with the
PSTN. The Telco Year 2000 Forum is comprised of the RBOCs, major
independent LECs and interexchange carriers. In addition, Metrocall is
also identifying alternative means of providing service to ensure that
there is no interruption in the service provided to customers.
- PAGING TERMINALS. Metrocall has identified and performed certain year
2000 readiness assessment activities with regard to its paging software
and hardware, and is working with its primary vendor that developed the
software for its paging terminals. In June 1999, this manufacturer
certified and released a software upgrade to address year 2000 issues
that affect the existing switch software embedded in Metrocall's paging
terminals. Metrocall has completed its internal testing of the new
software to assure that the software elements are compliant with
Metrocall's year 2000 network guidelines. As of November 11, 1999,
Metrocall had installed this software version on 95% of its effected
paging terminals handling paging subscribers representing approximately
92% of its subscriber base. Metrocall expects to complete the
installation of the switch software on all of its remaining paging
terminals by the end of November 1999. Because the messaging switch
software
22
<PAGE> 23
is a critical element to its year 2000 readiness, Metrocall has developed
a contingency plans, which should enable it to continue operating those
machines that cannot be upgraded by year-end by using the existing
"older" version of this manufacturer's paging software. Metrocall
believes, based on its own lab environment testing, that if it continues
to use the existing software on its paging terminals, it can continue to
provide uninterrupted or disrupted paging and messaging services to its
customers. This manufacturer has not certified this older software
version, but has performed year 2000 assessment testing which shows that
the software has no issues that would affect paging services.
- CONTROL SYSTEMS. The control networks used by Metrocall in the delivery
of paging data to transmitters fall into one of two categories, analog or
digital control. The analog control systems have no computer, clock or
calendar functions involved in their operation and therefore have no year
2000 implications. Newer, computer-based control systems are dependent on
the proper operation of their time reference and many are referenced to
the Global Positioning System. The manufacturers of Metrocall's control
systems have certified that their digital control systems are year 2000
compliant with the requisite level of software and hardware. Metrocall
has installed those software and hardware components.
- TRANSMITTERS. The transmitters that Metrocall utilizes have passed year
2000 testing performed by their manufacturers. In addition, the
satellites Metrocall uses have been year 2000 certified by their
manufacturers. Redundant, backup, and alternative systems of messaging
and networking have been evaluated and remediated as necessary.
Metrocall systems are interconnected with numerous networks and systems
operated by third parties, including landline telecommunications
networks; long-distance networks; the networks of other wireless service
providers; and networks operated by utilities. The ability of Metrocall
systems to operate, including the ability to provide paging and other
wireless messaging services, is dependent upon these third-party networks
and systems being year 2000 compliant. The operators of these networks
are responsible for addressing the year 2000 issue in their own systems.
Metrocall expects to incur approximately $1.5 million during the fourth
quarter of 1999 to support these paging infrastructure initiatives.
- BILLING SYSTEMS. Metrocall currently utilizes three different billing
platforms that are used for the recordation and processing of customer
invoices. Two of these platforms are commercial software applications.
Metrocall has received vendor certification with respect to these
platforms' hardware, databases and the substantial majority of the
software. The third platform was developed by the former AT&T Wireless
Services, Inc. -- Messaging Division (AMD). Its year 2000 readiness was
previously tested and warranted by AMD's prior corporate owner. Metrocall
has substantially completed the scheduled upgrades to certain operating
systems to promote integration with systems that have been remediated for
year 2000 issues. In addition, it has completed, the testing of the
platforms and their interfaces to the paging and financial systems.
Metrocall does not expect to incur any additional significant costs
related to year 2000 readiness of its billing systems.
- TELEPHONE SERVICES. Metrocall's ability to provide paging and messaging
services is directly linked to its ability to accept and direct telephone
traffic over an extended network. In addition, its ability to sell
products, administer customer calls and communicate between offices is
dependent on its telephone network. Metrocall is currently in various
phases of the remediation and validation stages for its internal
telephone network. Approximately 75% of its remediation efforts have been
completed. Metrocall's goal is to complete this phase by December 1999
with validation and implementation completed by December 31, 1999. The
cost for these initiatives for the remainder of 1999 is expected to be
approximately $0.8 million. Metrocall is actively contacting its external
telephone service providers to determine their level of year 2000
readiness.
- FINANCIAL SYSTEMS. Metrocall's financial systems, which include its
accounts payable, general ledger, fixed assets, purchasing and inventory
systems, have been vendor-certified for year 2000
23
<PAGE> 24
compliance, in addition Metrocall has successfully completed the
validation of these financial systems for year 2000 readiness.
- OPERATING SYSTEMS AND HARDWARE. Metrocall has identified and performed
year 2000 assessment activities with regard to its network operating
systems. Certain of such systems are scheduled for software upgrades that
will improve their functionality. Approximately 100% of its Netware
locations, 100% of its NT Systems and 99% of its UNIX systems have been
remediated. Metrocall also has identified personal computers that are not
year 2000 compliant, which it intends to replace by December 31, 1999.
Metrocall expects the cost of these initiatives to be under $1.0 million
for the remainder of 1999.
Metrocall has utilized both internal and external resources to remediate
and test its systems for year 2000 compliance. Metrocall continues to incur
internal labor costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare its systems.
Although Metrocall believes it is taking all reasonable steps necessary to
operate successfully through and beyond the turn of the century, there can be no
assurance that Metrocall's year 2000 program will be successful or that its
interconnect carriers and primary vendors will also successfully address their
year 2000 issues. Metrocall is unable to predict the potential impact on its
financial condition and results of operations in the event its year 2000 program
is not successful.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Metrocall is exposed to risks associated with interest rate changes.
Metrocall does not foresee any significant changes in its exposure to
fluctuations in interest rates in the near future. At September 30, 1999, total
outstanding debt consisted of five issues of fixed rate, senior subordinated
notes and the credit facility, which had a variable interest rate:
FIXED RATE DEBT:
<TABLE>
<CAPTION>
EFFECTIVE INTEREST
PRINCIPAL BALANCE FAIR VALUE INTEREST RATE MATURITY PAYMENTS DUE
----------------- -------------- ------------- -------- -------------
<S> <C> <C> <C> <C>
$100.0 million.................... $ 75.0 million 19.28% 2005 Semi-Annually
$ 0.2 million.................... $ 0.2 million 11.88% 2005 Semi-Annually
$150.0 million.................... $ 90.0 million 19.89% 2007 Semi-Annually
$200.0 million.................... $130.0 million 19.08% 2007 Semi-Annually
$250.0 million.................... $161.3 million 19.55% 2008 Semi-Annually
</TABLE>
No principal repayments are due under these notes until maturity. If at
maturity Metrocall refinanced these notes at interest rates that are 1/4
percentage point higher than their stated rates, its per annum interest costs
would increase by $1.8 million. Based on the outstanding balances at September
30, 1999, a hypothetical immediate 1/4 percentage point change in interest rates
would change the fair value of its fixed rate debt obligations by approximately
$9.0 million.
VARIABLE RATE DEBT:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE INTEREST
PRINCIPLE BALANCE INTEREST RATE MATURITY PAYMENTS DUE
----------------- ---------------- -------- ------------
<S> <C> <C> <C>
$84.0 million................................... 7.84% 2004 Quarterly
</TABLE>
Metrocall's credit facility bears interest at floating rates and matures in
2004. As of September 30, 1999, there was $84.0 million outstanding under the
credit facility and $116.0 million available for future borrowings. Based on
weighted average borrowings outstanding under the credit facility during fiscal
year 1999, a 1/4 percentage point change in our weighted average interest rate
would have caused interest expense to increase or decrease by approximately $0.1
million. Repayments under the credit facility may be made at anytime without
penalty.
Metrocall currently has an interest rate cap agreement in place that caps
its interest rates on its floating rate debt at 8 1/2% on up to $50.0 million of
outstanding borrowings. This agreement expires in April 2000.
24
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal and Regulatory Matters
Metrocall is subject to legal and regulatory matters in the normal course
of business. Metrocall does not expect, that the outcome of those matters will
have a material adverse effect on its financial position or results of
operations.
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 1996 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 by
the respective carriers since November 1, 1996, the effective date of the FCC's
transport rules. The briefing schedule for these complaint proceedings ended in
September 1998. The complaints remain pending before the FCC.
On January 25, 1999, the U.S. Supreme Court concluded that the FCC had the
authority under the Communications Act of 1934, as amended, to adopt rules
necessary to carry out Sections 251 and 252 of the 1996 Act, including the
authority to preempt any state or local tariffs or interconnection agreements
contrary to those rules. The Supreme Court did not disturb the portion of the
appellate court's decision upholding the FCC's authority over interconnection
between local exchange carriers (LECs) and Commercial Mobile Radio Service
(CMRS) carriers. Metrocall believes that the Supreme Court's decision lends
further support to Metrocall's complaints. Metrocall also believes the Supreme
Court's ruling appears to validate the FCC's "proxy" pricing rules for LEC/CMRS
interconnection, and will provide support for Metrocall to obtain reciprocal
compensation for terminating LEC-originated traffic.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
25
<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
11.1 Statement re: computation of per share earnings.
27 Financial data schedule.
</TABLE>
(b) Reports on Form 8-K
Metrocall filed a Report on Form 8-K with the SEC on September 14, 1999
regarding the transfer of the trading of its common stock to the Nasdaq SmallCap
Market.
26
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1999 METROCALL, INC.
By: /s/ VINCENT D. KELLY
------------------------------------
Vincent D. Kelly
Chief Financial Officer,
Treasurer and Executive Vice
President
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<S> <C>
11.1 Statement re: computation of per share earnings.
27 Financial data schedule.
</TABLE>
28
<PAGE> 1
EXHIBIT 11.1
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Loss $ (31,272) $ (43,828) $ (90,329) $ (130,552)
Preferred dividends (2,499) (4,151) (7,271) (12,202)
Gain on repurchase of preferred stock -- -- -- 2,208
------------- ------------- ------------- --------------
Net loss attributable to common stockholders $ (33,771) $ (47,979) $ (97,600) $ (140,546)
============= ============= ============= ==============
Weighted-average shares outstanding:
Shares outstanding, beginning of period 40,548,414 41,670,693 40,548,414 41,583,403
Shares issued in settlement of litigation 270,000 - 270,000 -
Shares issued in employee stock purchase plan 112,801 191,215 72,863 151,028
------------- ------------- ------------- --------------
Weighted-average shares outstanding 40,931,215 41,861,908 40,891,277 41,734,431
------------- ------------- ------------- --------------
Loss per share attributable to common stockholders $ (0.83) $ (1.15) $ (2,39) $ (3.37)
------------- ------------- ------------- --------------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,798
<SECURITIES> 0
<RECEIVABLES> 59,472
<ALLOWANCES> 6,406
<INVENTORY> 2,188
<CURRENT-ASSETS> 65,426
<PP&E> 476,421
<DEPRECIATION> 179,468
<TOTAL-ASSETS> 1,102,866
<CURRENT-LIABILITIES> 105,560
<BONDS> 786,077
154,494
0
<COMMON> 419
<OTHER-SE> (106,418)
<TOTAL-LIABILITY-AND-EQUITY> 1,102,866
<SALES> 46,409
<TOTAL-REVENUES> 462,413
<CGS> 28,489
<TOTAL-COSTS> 548,547
<OTHER-EXPENSES> (309)
<LOSS-PROVISION> 12,364
<INTEREST-EXPENSE> 63,493
<INCOME-PRETAX> (177,807)
<INCOME-TAX> (47,255)
<INCOME-CONTINUING> (130,552)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (140,546)
<EPS-BASIC> (3.37)
<EPS-DILUTED> (3.37)
</TABLE>
