<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 APRIL 30, 1999
----- -----------------------------
<S> <C>
Common Stock, $.01 par value 41,670,693
</TABLE>
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<PAGE> 2
EXPLANATORY NOTE
The registrant amends its Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999 as follows: (1) Part I, Item 1, Notes to Interim Condensed
Consolidated Financial Statements; (2) Part I, Item 2 Management's Discussion
and Analysis of Financial Condition and Results of Operations; (3) Part I, Item
3 Quantitative and Qualitative Disclosures About Market Risk; and Part II, Item
6 Exhibits and Reports on Form 8-K. The specific changes are incorporated into
the text, as amended, below.
The Financial Statements were restated as described in Note 1 to the
Financial Statements.
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
METROCALL, INC. AND SUBSIDIARIES
BALANCE SHEETS
(AS RESTATED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,436 $ 12,603
Accounts receivable, less allowance for doubtful accounts
of $6,196 as of December 31, 1998 and $6,758 as of March
31, 1999................................................ 44,694 38,613
Prepaid expenses and other current assets................. 8,843 10,132
---------- ----------
Total current assets................................ 61,973 61,348
---------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and leasehold improvements................ 15,079 15,218
Furniture, office equipment and vehicles.................. 64,438 66,636
Paging and plant equipment................................ 380,313 357,936
Less -- Accumulated depreciation and amortization......... (168,067) (145,612)
---------- ----------
291,763 294,178
---------- ----------
INTANGIBLE ASSETS, net of accumulated amortization of
approximately $219,960 as of December 31, 1998 and
$273,399 as of March 31, 1999............................. 894,707 842,806
OTHER ASSETS................................................ 2,595 4,162
---------- ----------
TOTAL ASSETS................................................ $1,251,038 $1,202,494
========== ==========
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 771 $ 687
Accounts payable.......................................... 37,533 33,136
Accrued expenses and other current liabilities............ 37,728 41,795
Deferred revenues and subscriber deposits................. 27,769 24,307
---------- ----------
Total current liabilities........................... 103,801 99,925
---------- ----------
CAPITAL LEASE OBLIGATIONS, less current maturities.......... 3,575 3,438
CREDIT FACILITY AND OTHER LONG-TERM DEBT, less current
maturities................................................ 40,444 69,427
SENIOR SUBORDINATED NOTES................................... 698,544 698,588
DEFERRED INCOME TAX LIABILITY............................... 209,642 193,961
MINORITY INTEREST IN PARTNERSHIP............................ 510 510
---------- ----------
Total liabilities................................... 1,056,516 1,065,849
---------- ----------
COMMITMENTS AND CONTINGENCIES
SERIES A CONVERTIBLE PREFERRED STOCK, 14% cumulative; par
value $.01 per share; 810,000 shares authorized; 209,203
shares issued and outstanding as of December 31, 1998 and
March 31, 1999, and a liquidation preference of $53,216
and $55,047 at December 31, 1998 and March 31, 1999,
respectively.............................................. 45,441 47,468
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 March 31, 1999, respectively, and a liquidation
preference of $18,391 and $0 at December 31, 1998 and
March 31, 1999, respectively.............................. 18,391 --
SERIES C CONVERTIBLE PREFERRED STOCK, 8% cumulative; par
value $.01 per share; 25,000 shares authorized; 9,595
shares issued and outstanding as of December 31, 1998 and
March 31, 1999, and a liquidation preference of $96,910
and $98,829 at December 31, 1998 and March 31, 1999,
respectively.............................................. 96,910 98,829
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; authorized
100,000,000 shares; 41,583,403 and 41,670,693 shares
issued and outstanding as of December 31, 1998 and March
31, 1999, respectively.................................. 416 417
Additional paid-in capital................................ 340,249 340,624
Accumulated deficit....................................... (306,885) (350,693)
---------- ----------
Total stockholders' equity (deficit)................ 33,780 (9,652)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $1,251,038 $1,202,494
========== ==========
</TABLE>
See notes to interim condensed consolidated financial statements.
3
<PAGE> 4
METROCALL, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(AS RESTATED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
REVENUES:
Service, rent and maintenance revenues.................... $ 92,038 $ 140,454
Product sales............................................. 11,293 14,576
----------- -----------
Total revenues.................................... 103,331 155,030
Net book value of products sold........................... 7,031 9,815
----------- -----------
96,300 145,215
----------- -----------
OPERATING EXPENSES:
Service, rent and maintenance expenses.................... 25,500 39,994
Selling and marketing..................................... 16,374 25,025
General and administrative................................ 28,544 41,352
Depreciation.............................................. 16,557 23,052
Amortization.............................................. 35,587 52,671
----------- -----------
122,562 182,094
----------- -----------
Loss from operations.............................. (26,262) (36,879)
INTEREST EXPENSE............................................ (14,901) (20,700)
INTEREST AND OTHER INCOME, NET.............................. 320 16
----------- -----------
LOSS BEFORE INCOME TAX BENEFIT.............................. (40,843) (57,563)
INCOME TAX BENEFIT.......................................... 10,519 15,550
----------- -----------
Net loss.......................................... (30,324) (42,013)
PREFERRED DIVIDENDS......................................... (2,348) (4,003)
GAIN ON REPURCHASE OF PREFERRED STOCK....................... -- 2,208
----------- -----------
Loss attributable to common stockholders.......... $ (32,672) $ (43,808)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS....................... $ (0.80) $ (1.05)
=========== ===========
Weighted-average common shares outstanding.................. 40,866,548 41,670,693
=========== ===========
</TABLE>
See notes to interim condensed consolidated financial statements.
4
<PAGE> 5
METROCALL, INC. AND SUBSIDIARIES
STATEMENT OF STOCKHOLDERS' EQUITY
(AS RESTATED)
(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............................ 87,290 1 375 -- 376
Preferred dividends........................ -- -- -- (4,003) (4,003)
Gain on repurchase of Series B Preferred... -- -- -- 2,208 2,208
Net loss................................... -- -- -- (42,013) (42,013)
---------- ---- -------- --------- --------
BALANCE, March 31, 1999.................... 41,670,693 $417 $340,624 $(350,693) $ (9,652)
========== ==== ======== ========= ========
</TABLE>
See notes to interim condensed consolidated financial statements.
5
<PAGE> 6
METROCALL, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(AS RESTATED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(30,324) $(42,013)
Adjustments to reconcile net loss to net cash provided by
operating activities--
Depreciation and amortization.......................... 52,144 75,723
Amortization of debt financing costs and debt
discount.............................................. 441 810
Decrease in deferred income taxes...................... (10,519) (15,681)
Cash provided by (used in) changes in assets and
liabilities:
Accounts receivable.................................... (893) 5,245
Prepaid expenses and other current assets.............. (1,639) (1,290)
Accounts payable....................................... (10,447) (4,397)
Accrued expenses and other current liabilities......... 4,357 4,069
Deferred revenues and subscriber deposits.............. 892 (3,462)
-------- --------
Net cash provided by operating activities......... 4,012 19,004
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net................................. (19,085) (25,466)
Additions to intangibles.................................. (606) (394)
Other..................................................... (570) (1,567)
-------- --------
Net cash used in investing activities............. (20,261) (27,427)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facility.......................... 6,000 29,000
Repurchase of Series B Preferred.......................... -- (16,240)
Deferred debt financing costs............................. -- (308)
Principal payments on long-term debt...................... (235) (238)
Net proceeds from issuance of common stock................ 205 376
-------- --------
Net cash provided by financing activities......... 5,970 12,590
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (10,279) 4,167
CASH AND CASH EQUIVALENTS, beginning of period.............. 24,896 8,436
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 14,617 $ 12,603
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest................................ $ 6,472 $ 17,405
======== ========
Cash payments for income taxes............................ $ -- $ 4
======== ========
</TABLE>
See notes to interim condensed consolidated financial statements.
6
<PAGE> 7
METROCALL INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 (SEC). The interim
condensed consolidated financial statements include the consolidated accounts of
Metrocall, Inc. and its majority owned subsidiaries (collectively, the "Company"
or "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
that are used when accounting for revenues, allowance for uncollectible
receivables, telecommunications expenses, and depreciation and amortization.
Actual results could differ from those estimates. The results of operations for
the three-month period ended March 31, 1999, are not necessarily indicative of
the results to be expected for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. Metrocall believes, however, that
its disclosures are adequate to make the information presented not misleading.
These interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in Metrocall's 1998 Annual Report on Form 10-K.
During 1996 and 1997 the Company was billed for local transport charges by
certain Regional Bell Operating Companies ("RBOCs") and the largest independent
telephone company. The Company disputes these billings under the
Telecommunications Act of 1996 (the "1996 Act") (see Note 6). The Company
initially expensed amounts as incurred for these disputed charges. Subsequently,
when identified as local transport charges, the Company reversed the expense and
recorded 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 filed by the Company, the Company 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 are 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
the Company, the Company will recognize the collections as a reduction of
service, rent and maintenance expense in the statement of operations in the
period received.
The impact of this restatement effected the Company's net loss, net loss
attributable to common stockholders and basic and diluted loss per share
attributable to common stockholders as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1999
--------- ---------
<S> <C> <C>
Net loss--previously reported............................... $(28,200) $(46,061)
Net loss--as restated....................................... (30,324) (42,013)
Loss attributable to common stockholders--previously
reported.................................................. $(30,548) $(47,856)
Loss attributable to common stockholders--as restated....... (32,672) (43,808)
Basic and diluted loss per share attributable to common
stockholders--previously reported......................... $ (0.75) $ (1.15)
Basic and diluted loss per share attributable to common
stockholders--as restated................................. (0.80) (1.05)
</TABLE>
7
<PAGE> 8
METROCALL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. RISKS AND OTHER IMPORTANT FACTORS
Metrocall has sustained net losses of $60.3 million and $129.1 million for
fiscal years 1997 and 1998 and $42.0 million for the quarter ended March 31,
1999. Those losses are significantly attributable to its consolidation and
growth strategies and capital expenditure requirements. Metrocall cannot assure
you that it can reverse such losses in the future. At March 31, 1999, Metrocall
had an accumulated deficit of approximately $350.7 million and a deficit in
working capital of $38.6 million. The Company'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 March 31, 1999, Metrocall had approximately $772.1
million outstanding under long-term debt and capital leases. Amounts available
under the Company's credit facility are subject to certain financial covenants
and other restrictions. At March 31, 1999, Metrocall was in compliance with each
of the covenants under its 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.
Metrocall is also subject to certain 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. Metrocall financed the repurchase from
borrowings under its credit facility.
5. EMPLOYEE STOCK OPTION AND OTHER BENEFIT PLANS
Stock Option Plans
During the three months ended March 31, 1999, the Board of Directors
approved grants of options to purchase 6,000 shares of Metrocall common stock to
current non-employee directors with exercise prices
8
<PAGE> 9
METROCALL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. EMPLOYEE STOCK OPTION AND OTHER BENEFIT PLANS -- (CONTINUED)
ranging from $4.31 to $5.63 per share, equal to the fair market value of the
Company's common stock on the date of grant.
Employee Stock Purchase Plan
In January 1999, Metrocall issued 87,290 shares of common stock under the
Metrocall, Inc. Employee Stock Purchase Plan with a purchase price of
approximately $4.31 per share.
6. CONTINGENCIES
Legal and Regulatory Matters
Metrocall 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 Metrocall's financial position or
results of operations.
Interconnect Complaint
Metrocall has filed complaints with the Federal Communications Commission
(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 Telecommunications Act of 1996
(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 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.
At March 31, 1999, the Company believes it is owed refunds from certain of
the RBOCs and the largest independent telephone company related to such local
transport charges paid during 1996 and 1997 of approximately $9.9 million. This
amount represents management's estimate; however, as these LEC receivables are
contingent upon a successful ruling on the Company's complaint, they have not
been recorded in the accompanying financial statements. Upon receipt, the
Company will recognize collections as a reduction of service, rent and
maintenance expense in the statement of operations. The Company stopped paying
and expensing local transport charges in 1998. Certain of the RBOCs have
continued to bill the Company for local transport charges pending resolution of
the Company's FCC complaints. Amounts billed to the Company in 1998 and the
first quarter of 1999, which it has not paid or expensed was approximately $10
million at March 31, 1999. The Company has not recorded such amounts as an
expense because it believes it is unlikely it will be obligated under the 1996
Act to pay such amounts.
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 the Company together with the financial
statements and the notes thereto which appear elsewhere in this quarterly report
and Metrocall's Annual Report on Form 10-K 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;
- our history of net operating losses;
- the restrictive covenants governing our indebtedness;
- 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;
- regulatory changes; and
- dependence on key suppliers.
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. Through its nationwide network, Metrocall
provides messaging services to over 1,000 U.S. cities, including the top 100
Standard Metropolitan Statistical Areas. Since 1993, Metrocall's subscriber base
has increased from less than 250,000 in 1993 to more than 5.75 million.
Metrocall has achieved this growth through a combination of internal growth and
a program of mergers and acquisitions. As of March 31, 1999, Metrocall was the
second largest paging company in the United States based on number of
subscribers.
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 Metrocall's services,
operating results benefit from this recurring revenue stream with minimal
requirements for incremental selling expenses or other fixed costs. The
Company's total revenues have
10
<PAGE> 11
increased by approximately 50% to $155.0 million for the quarter ended March 31,
1999 from $103.3 million for the quarter ended March 31, 1998. Overall,
subscribers have increased by approximately 1.7 million or approximately 41% to
nearly 5.8 million at March 31, 1999 from 4.1 million at March 31, 1998.
Approximately 29% of the growth in the subscriber base was generated internally
while 71% was 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 quarter ended March
31, 1999, capital expenditures totaled $25.5 million including approximately
$19.9 million for pagers, representing an increase in pagers on hand and net
increases and maintenance to the rental pager base. 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 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 flow 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 the
Company'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 continue to expand its geographic penetration and subscriber
base through future acquisitions if potential candidates are identified that
satisfy certain criteria including: valuation, geographic coverage, regulatory
licenses, type of consideration, availability of financing, and accretive and
de-leveraging benefits.
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 paging and
related services such as voice mail and pager repair and replacement.
Service, rent and maintenance revenues also include revenues derived from
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.
11
<PAGE> 12
- General and administrative expenses: include executive management,
accounting, office telephone, repairs and maintenance, management
information systems and employee benefits.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH 1998
The following table sets forth the amounts of revenues and the percentages
of net revenues (defined as total revenues less the net book value of products
sold) represented by certain items in Metrocall's Interim Condensed Consolidated
Statements of Operations and certain other information for the periods ended
March 31, 1998 and 1999.
<TABLE>
<CAPTION>
MARCH 31, % OF MARCH 31, % OF INCREASE OR
1998 REVENUES 1999 REVENUES (DECREASE)
---------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES
Service, rent and maintenance........ $ 92,038 95.6 $ 140,454 96.7 $ 48,416
Product sales........................ 11,293 11.7 14,576 10.0 3,283
---------- ----- ---------- ----- ----------
Total revenues............... 103,331 107.3 155,030 106.7 51,699
Net book value of products sold...... (7,031) (7.3) (9,815) (6.7) (2,784)
---------- ----- ---------- ----- ----------
Net revenues......................... $ 96,300 100.0 $ 145,215 100.0 $ 48,915
========== ===== ========== ===== ==========
ARPU................................... $ 7.28 $ 8.15 $ 0.87
Number of subscribers.................. 4,116,859 5,750,215 1,633,356
</TABLE>
Total revenues increased approximately $51.7 million, or approximately
50.0%, from $103.3 million for the three months ended March 31, 1998 ("1998") to
$155.0 million for the three months ended March 31, 1999 ("1999"). Net revenues
increased approximately $48.9 million, or 50.8%, from $96.3 million in 1998 to
$145.2 million in 1999. The increase in net revenues is the result of the
increase in subscriber growth due to internal growth through broadened
distribution channels and the increase in the subscriber base due to the AMD
acquisition. ARPU for paging services increased from $7.28 per unit in 1999 to
$8.15 per unit in 1999. The increases in ARPU was the result of internal growth
in our distribution channels, selected service rate increases, continued
migration of subscribers to alphanumeric devices and the impact of the
subscriber base acquired in the AMD acquisition. The AMD acquisition added
approximately 1.2 million premium subscribers to Metrocall's existing subscriber
base. Factors affecting ARPU in future periods include distribution mix of new
subscribers, competition and new technologies, among others. There can be no
assurance that ARPU will not decline in future periods.
Product sales which consist primarily of sales of paging equipment
increased approximately $3.3 million or 29.1% from $11.3 million in 1998 to
$14.6 million in 1999 and decreased as a percentage of net revenues from 11.7%
in 1998 to 10.0% in 1999. Net book value of products sold increased
approximately $2.8 million or 39.6% from $7.0 million in 1998 to $9.8 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.
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<PAGE> 13
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 periods ended March 31, 1998 and 1999.
<TABLE>
<CAPTION>
MARCH 31, % OF MARCH 31, % OF INCREASE OR
1998 REVENUES 1999 REVENUES (DECREASE)
--------- -------- --------- -------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Service, rent and maintenance................ $ 25,500 26.5 $ 39,994 27.5 $14,494
Selling and marketing........................ 16,374 17.0 25,025 17.2 8,651
General and administrative................... 28,544 29.6 41,352 28.5 12,808
Depreciation................................. 16,557 17.2 23,052 15.9 6,495
Amortization................................. 35,587 37.0 52,671 36.3 17,084
-------- ----- -------- ----- -------
$122,562 127.3 $182,094 125.4 $59,532
======== ===== ======== ===== =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1998 1999 INCREASE
--------- --------- --------
<S> <C> <C> <C>
OPERATING EXPENSES PER UNIT IN SERVICE
Monthly service, rent and maintenance....................... $2.09 $2.33 $0.24
Monthly selling and marketing............................... 1.34 1.46 0.12
Monthly general and administrative.......................... 2.34 2.42 0.08
----- ----- -----
Average monthly operating costs............................. $5.77 $6.21 $0.44
</TABLE>
Overall, Metrocall experienced an increase in average monthly operating
costs per unit in service (operating costs per unit before depreciation and
amortization) from 1998 to 1999. Average monthly operating cost per unit
increased from $5.77 per unit for 1998 to $6.21 per unit for 1999. Each
operating expense is discussed separately below.
Service, rent and maintenance expenses increased approximately $14.5
million from $25.5 million in 1998 to $40.0 million in 1999 and increased as a
percentage of net revenues from 26.5% in 1998 to 27.5% in 1999. Approximately
$15.2 million of this increase is 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. Service, rent
and maintenance expense per unit increased from $2.09 per unit in 1998 to $2.33
per unit in 1999 as a result of the above events. The Company expects its
service, rent and maintenance expenses to decrease as a percentage of revenues
and per subscriber unit in future periods as it renegotiates certain of its
telecommunications and third party services contracts and decommissions
redundant transmitter and tower sites. The Company expects such expense savings
to be partially offset by an increase in rental costs for other transmitter and
tower sites as the Company enhances its nationwide footprint, particularly in
the West and Midwest United States.
Selling and marketing expenses increased approximately $8.6 million from
$16.4 million in 1998 to $25.0 million in 1999 and increased as a percentage of
net revenues from 17.0% in 1998 to 17.2% in 1999. Approximately $5.9 million of
the increase in selling and marketing expenses is attributable to the operations
of AMD. Exclusive of this acquisition, the remaining expense increase was
primarily the result of increases in personnel costs ($1.3 million) related to
an increase in the employee sales base and advertising costs ($1.3 million)
related to further penetration in existing markets. Monthly selling and
marketing expense per unit has increased from $1.34 per unit in 1998 to $1.46
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 the Company continues to
increase its presence in existing markets and expand geographic coverage.
General and administrative expenses increased $12.8 million from $28.5
million in 1998 compared to $41.4 million in 1999, and decreased as a percentage
of net revenues from 29.6% in 1998 to 28.5% in
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<PAGE> 14
1998. The increase in general and administrative expenses is primarily
attributable to the AMD acquisition ($10.8 million) and increased expenses for a
variety of professional services ($1.0 million), including consulting costs for
year 2000 remediation efforts and health care. Monthly general and
administrative expense per unit has increased from $2.34 per unit in 1998 to
$2.42 per unit in 1999. The Company expects general and administrative expenses
to continue to decrease as a percentage of revenues and per subscriber unit as
remaining operating redundancies are eliminated from acquired companies.
Depreciation expense increased approximately $6.5 million from $16.6
million in 1998 to $23.1 million in 1999. The increase in depreciation expense
resulted primarily from depreciation expense on subscriber equipment acquired
mainly in the AMD acquisition ($4.9 million) and also from the depreciation of
other property, plant and equipment and computer hardware and software.
Amortization increased $17.1 million from $35.6 million in 1998 to $52.7
million in 1999 primarily as a result of the amortization of intangibles
recorded in connection with the AMD acquisition ($16.5 million.)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, INCREASE
1998 1999 (DECREASE)
--------- --------- ----------
<S> <C> <C> <C>
OTHER
Interest and other income, net.............................. $ 320 $ 16 $ (304)
Interest expense............................................ (14,901) (20,700) (5,799)
Income tax benefit.......................................... 10,519 15,550 5,031
Net loss.................................................... (30,324) (42,013) 11,689
Preferred dividends......................................... (2,348) (4,003) 1,655
Gain on repurchase of preferred stock....................... -- 2,208 2,208
EBITDA...................................................... 25,882 38,844 12,962
</TABLE>
Interest expense increased approximately $5.8 million from $14.9 million in
1998 to $20.7 million in 1999. Interest expense increased due to higher average
debt balances outstanding during 1999. Average debt balances were $165.1 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, and working capital requirements.
Metrocall's net loss increased approximately $11.7 million from $30.3
million in 1998 to $42.0 million in 1999. The increase in net loss was primarily
the result of increased depreciation and amortization and other operating
expenses associated with the acquisition of AMD, whose results were not included
in Metrocall's results of operations for the three months ended March 31, 1998.
This was offset partially by increases in net revenues related to an increase in
the Company's subscriber base as a result of internal growth and the AMD
acquisition. Metrocall expects net losses to continue in future periods.
Preferred dividends increased approximately $1.7 million from $2.4 million
in 1998 to $4.0 million in 1999. The increase was the result of higher dividends
paid 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 of pay-in-kind dividends on the Series A Preferred
and Series C Preferred. This increase was partially offset by the cessation of
dividends on the Series B Preferred which the Company 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 (earnings before interest, taxes, depreciation and amortization),
while not a measure under generally accepted accounting principles (GAAP), is a
standard measure of financial performance in the paging industry and 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
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<PAGE> 15
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 our covenants are calculated under our indentures and
our credit facility. EBITDA increased approximately $13.0 million to $38.9
million in 1999 from $25.9 million in 1998. As a percentage of net revenues,
EBITDA decreased from 26.9% in 1998 to 26.7% in 1999.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
For the three months ended March 31, 1999, Metrocall's cash provided by
operating activities increased by approximately $15.0 million from $4.0 million
for the three months ended March 31, 1998 to $19.0 million for the three months
ended March 31, 1999. The increase in cash provided by operating activities was
primarily attributable to the results of operations of AMD which was acquired in
October 1998 and the Company's internal growth.
Net cash used in investing activities increased approximately $7.2 million
from $20.2 million for the three months ended March 31, 1998 to $27.4 million
for the three months ended March 31, 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 $19.1 million
and $25.5 million for the three months ended March 31, 1998 and 1999,
respectively. Capital expenditures for the three months ended March 31, 1999
included approximately $19.9 million for pagers, representing increases in
pagers on hand and net increases and maintenance to the rental subscriber base.
The balance of capital expenditures included $1.8 million for information
systems and computer related equipment, $3.2 million for network construction
and development and $0.6 million for general purchases including leasehold
improvements and office equipment.
Total capital expenditures for the year ending December 31, 1999 are
estimated to be approximately $80.0 million primarily for the acquisition of
pagers, paging and transmission equipment and information systems enhancement.
Metrocall expects that its capital expenditures for the year ending December 31,
1999, will be financed through a combination of operating cash flow and
borrowings under its credit facility. Projected capital expenditures are subject
to change based on the progress of internal growth, general business and
economic conditions and competitive pressures. Future cash requirements include
debt service costs, primarily interest.
Net cash provided by financing activities increased approximately $6.6
million from $6.0 million for the three months ended March 31, 1998 to $12.6
million for the three months ended March 31, 1999. The increase was primarily
the result of additional borrowings under the Company's credit facility offset
by the repurchase of the Series B Preferred. During the three months ended March
31, 1999, the Company borrowed an additional $29.0 million under its credit
facility primarily to fund the repurchase of the Series B Preferred ($16.2
million) and for other working capital requirements and capital expenditures.
Working Capital
At March 31, 1999, Metrocall had a working capital deficit (current
liabilities exceeded current assets) of approximately $38.6 million. The Company
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.
The Company 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 the Company's balance sheet
or reflected as a capital expenditure
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<PAGE> 16
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. Although
the program is expected to be geared toward higher priced equipment users that
generate higher ARPU, it is anticipated that it will be offered across all of
Metrocall's direct distribution channels. There can be no assurance that the
Company will be successful in implementing this program, as intended.
Long-Term Debt
At December 31, 1998 and March 31, 1999, long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, INCREASE OR
1998 1999 (DECREASE)
------------ --------- -----------
<S> <C> <C> <C>
LONG-TERM DEBT
Borrowings under the credit facility........................ $ 40,000 $ 69,000 $29,000
Senior subordinated notes................................... 698,544 698,588 44
Capital leases and other debt............................... 4,790 4,552 (238)
-------- -------- -------
Total long-term debt................................... $743,334 $772,140 $28,806
======== ======== =======
</TABLE>
Borrowings and repayments under the credit facility. During the three
months ended March 31, 1999, Metrocall increased its net borrowings outstanding
under its credit facility by approximately $29.0 million from December 31, 1998.
During the three months ended March 31, 1999, the Company borrowed approximately
$50.0 million, which was used to fund the repurchase of the Series B Preferred
and for other working capital requirements and repaid approximately $21.0
million from cash generated from operating activities. At March 31, 1999, $69.0
million was outstanding under the credit facility. In addition, the Company
borrowed an additional $15.0 million in April 1999, increasing the amounts
outstanding under its credit facility to $84.0 million as of May 14, 1999.
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 March 31, 1999, Metrocall was in
compliance with all of these covenants.
The credit facility requires that Metrocall maintain a ratio of operating
cash flow, as defined in the credit facility agreement, to net cash interest
expense of at least 1.75. Although Metrocall was compliant with this covenant at
March 31, 1999, Metrocall believes it will need to increase its operating cash
flow during the three months ended June 30, 1999 to at least $36.5 million in
order to remain in compliance with this covenant at June 30, 1999. This belief
is based upon the $84.0 million of current borrowings outstanding under the
credit facility and estimated net cash interest expense for the three months
ended June 30, 1999. Metrocall does not believe it will be necessary to borrow
additional amounts under its credit facility during the three months ended June
30, 1999, however, there can be no assurance that the Company will not require
additional borrowings during this time period or in future periods. No assurance
can be given that Metrocall will be in compliance with the covenants of its
credit facility in future periods.
The credit facility 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.
Total debt at March 31, 1999 included $69.0 million outstanding under
Metrocall's credit facility which was subject to variable interest rate risk. To
the extent that interest rates fluctuate, the interest expense Metrocall
recognizes on borrowings outstanding on its credit facility could fluctuate. A
1/8% rate
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<PAGE> 17
change in the Company's weighted average interest rate would have caused
interest expense to increase or decrease by approximately $20,000 during the
three months ended March 31, 1999 based on its weighted average borrowings
outstanding during the period.
Senior subordinated notes. There are no significant principal payments
required under the senior subordinated notes indentures during fiscal year 1999.
Metrocall is required to register its $250 million aggregate principal amount of
11% senior subordinated notes, which were issued in a private placement in
December 1998, under the Securities Act of 1933, as amended, by June 22, 1999.
If this requirement is not met, the annual interest rate on the 11% senior
subordinated notes will increase by .5% until the notes are generally freely
transferable.
Series A and Series C Preferred. Dividends on the Company's Series A
Preferred and Series C Preferred accrue at a rate of 14% and 8%, respectively of
the stated value ($39.9 million and $95.0 million, respectively) per year.
Dividends may be paid in either cash or additional shares at Metrocall's option.
Under certain circumstances, as defined in the certificate of designation for
the Series A Preferred, the dividend rate on the Series A Preferred may increase
to 16% per year. Further, Metrocall is required to redeem all outstanding shares
of the Series A Preferred and Series C Preferred (including dividend shares) in
November 2008 and October 2010, respectively, unless the holders have previously
converted such shares to common stock. Accrued but unpaid dividends at March 31,
1999, were approximately $2.7 million and $2.9 million on the Series A Preferred
and the Series C Preferred, respectively.
Access to Future Capital
Since Metrocall had a significant net loss for the three months ended March
31, 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 $57.6 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,
Metrocall may be required to incur additional borrowings from time to time. In
April 1999, Metrocall borrowed an additional $15 million under its credit
facility, which it expects will satisfy any borrowing requirements in the second
quarter of 1999. Metrocall believes it will require additional borrowings under
its credit facility in the third and fourth quarters of 1999 but does not expect
that these additional borrowings will exceed $25.0-$30.0 million. There can be
no assurance that these borrowings will be required.
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 the Company's control, such as prevailing economic
conditions. Metrocall cannot assure you that, in the event the Company 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. While there are no current outstanding
commitments, Metrocall may continue to evaluate strategic acquisition candidates
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 financing may be required. No
assurance can be given that such additional financing would be available on
terms satisfactory to Metrocall.
Metrocall's shares of common stock have traded on the Nasdaq National
Market since Metrocall's initial public offering in July 1993. The Nasdaq
National Market listing maintenance standards require that, among other things,
either (1) Metrocall maintain net tangible assets of $4.0 million or (2)
Metrocall's common stock maintain a minimum bid price of at least $5.00 per
share for 30
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<PAGE> 18
consecutive trading days. Metrocall is currently out of compliance with these
maintenance standards. Unless Metrocall meets the minimum bid requirement for 10
consecutive trading days on or by July 14, 1999, Nasdaq will seek to delist the
Company from the National Market. Metrocall can appeal this action, thereby
staying the delisting. Alternatively, Metrocall can implement a reverse stock
split, which was authorized by the stockholders at Metrocall's annual meeting on
May 5, 1999, or transfer its listing to the Nasdaq Small Cap Market or another
exchange.
YEAR 2000 READINESS DISCLOSURE
The year 2000 issue generally refers to the issue of whether a company's
hardware, software or other related computer technologies can correctly process,
provide and/or receive date 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. Accordingly, Metrocall has implemented an
enterprise-wide program aimed at mitigating any adverse effects caused by 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 of their
Plan:
I. IDENTIFICATION AND ASSESSMENT OF POTENTIAL PROBLEM AREAS. Metrocall has
reviewed its computer hardware and software systems 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
assessed whether or not such systems are year 2000 compliant. Metrocall's
critical systems include: paging infrastructure and pagers, billing systems,
telephone services, financial systems and operating systems and hardware. For
each of these critical systems, Metrocall has identified the required steps that
will need to be taken for the critical system to be year 2000 compliant.
Metrocall also has developed or is in the process of developing a remediation or
validation plan to address the year 2000 concerns associated with each critical
system.
II. REMEDIATION OF IDENTIFIED PROBLEM AREAS. The remediation phase includes
correcting identified problem areas. This may include making hardware and
software revisions, developing replacement systems and eliminating
non-functional applications or system components. Metrocall is in various stages
of remediation for its critical and non-critical systems. Metrocall's goal is to
complete the substantial majority of its remediation efforts by September 1999.
III. VALIDATION. As Metrocall makes changes to applications and components
of its systems, it intends to validate and test those changes for year 2000
compliance. Metrocall plans to perform validation and testing on a system-wide
basis to ensure that any changes made are compatible with interacting systems.
Metrocall may also conduct acceptance testing, which is another technique to
confirm that proposed changes can be implemented, where it deems it to be
necessary. 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 that its
systems include both year 2000 compliant and non-compliant applications and
components. Metrocall intends to develop appropriate contingency recovery plans
to reduce potential impacts from non-compliant applications. Metrocall has begun
this phase for some of its systems and applications, and its goal is to achieve
completion of the entire phase by the end of the fourth quarter 1999.
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<PAGE> 19
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 they have supplied and to take
necessary corrective actions. In addition, it is possible that many of
Metrocall's interconnect carriers, energy suppliers and other primary vendors
will have year 2000 issues that may also affect it. 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 indicates 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 the 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 is in the process of determining
contingency plans for each of its critical systems if such systems are not year
2000 compliant. The contingency plans will address "likely" worst case scenarios
for each critical system. The contingency plans will also take into account, to
the extent Metrocall believes necessary, ways to address certain potential third
party non-compliance. At this time, Metrocall does not have sufficient
information to assess the likelihood of such worst case scenarios but
anticipates completion of such planning by September 30, 1999.
The following briefly describes each of the critical systems and their year
2000 readiness.
- PAGING INFRASTRUCTURE AND PAGERS. Metrocall has an extensive paging
infrastructure that provides services to its customers over a number of
different frequencies. Paging services are provided through Metrocall's
network of paging terminals, phone lines, paging towers, satellite
transmitters and nationwide air frequencies. In addition, Metrocall is
also identifying alternative means of providing service to ensure that
there is no interruption in the service provided to customers.
Metrocall provides messaging services through a network of paging
terminals, telephones, and transmitters. A message may originate in a
number of different ways. The PSTN (Public Switched Telephone Network) 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 regional Bell operating companies, major independent
local exchange carriers and interexchange carriers.
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 provides software for its
paging terminals. Currently this manufacturer is developing a software
upgrade to address year 2000 issues. Based on information provided by
this manufacturer, Metrocall expects this software to be commercially
available in June 1999. Metrocall will install this software on all its
effected paging terminals between June and September 1999. In the event
that the delivery date of the planned software upgrade is after June
1999, Metrocall is currently developing various contingency plans to
expedite its internal upgrade schedule in order that the software
upgrade, once delivered, can be installed on all of its affected paging
terminals by November 1999. In addition, Metrocall believes, based on its
own lab environment testing, that if Metrocall uses an existing version
of this manufacturer's paging software, Metrocall can continue to provide
uninterrupted or disrupted paging and messaging services to its
customers. This manufacturer has not certified that this existing version
of paging software is or will be year 2000 ready.
The transmitters and the transmitter control systems which 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 are now being evaluated to ensure continuing and
reliable service to our customers. Some hardware units will require
upgrade to support the required software. Those units will be upgraded at
the same time the software upgrades are performed.
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<PAGE> 20
Metrocall's 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's systems to operate, including the ability to
provide paging and other wireless messaging service, is dependent upon
these third-party networks and systems being year 2000 compliant. The
operators of these networks and systems are responsible for and have
begun addressing the year 2000 issue as it affects their networks and
systems.
Metrocall has taken an active role in working with industry groups to
develop procedures to test for year 2000 compliance and is working
closely with the PCIA (Personal Communications Industry Association),
which is coordinating year 2000 testing for the paging industry and its
infrastructure vendors. PCIA's Year 2000 Readiness Program for Paging
charter is as follows: member companies have agreed to share information
about their products and services within the PCIA group in an effort to
ensure year 2000 readiness for the paging industry. Metrocall believes
this sharing of year 2000 readiness status for equipment, systems and
services should shorten the amount of time to make elements critical to
the paging industry year 2000 compliant.
Metrocall expects to incur approximately $6.0 million for the remainder
of 1999 to support these paging infrastructure initiatives.
- PAGERS. Metrocall does not manufacture paging equipment and therefore
depends on several suppliers to ensure the paging equipment is year 2000
compliant. Metrocall has contacted its suppliers to ensure that these
suppliers are addressing year 2000 compliance issues relating to paging
equipment. Based on information provided by such suppliers, Metrocall
believes that the substantial majority of its pagers provided under lease
agreements to its customers are or will be year 2000 compliant.
- BILLING SYSTEMS. Metrocall currently utilizes three different billing
platforms that are used for recording and processing 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 Advance Messaging
Division. Its year 2000 readiness was previously tested and warranted by
AT&T Advance Messaging Division, the prior corporate owner. Metrocall has
scheduled upgrades to certain operating systems to promote proper
integration for the third and early fourth quarters 1999. Once the
upgrades have been completed, Metrocall will complete testing of the
platforms and their interfaces to the paging and financial systems.
Metrocall expects to incur approximately $1.5 million during the
remainder of 1999 on these initiatives.
- 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 40% of its remediation efforts have been
completed. Metrocall's goal is to complete this phase by the end of the
fourth quarter with validation and implementation completed by December
1999. The cost for these intitiatives for the remainder of 1999 is
expected to be approximately $1.0 million. Metrocall also is contacting
its external telephone service providers to determine their level of year
2000 readiness.
- FINANCIAL SYSTEMS. Metrocall's financial systems, which include accounts
payable, general ledger, fixed asset, purchase and inventory systems,
have been vendor-certified for year 2000 compliance.
20
<PAGE> 21
Metrocall is in the process of testing the financial systems for
functionality and data integrity between interfaces. Metrocall expects to
have all testing completed by the end of the third quarter of 1999.
Metrocall does not expect to incur any significant additional costs
related to year 2000 readiness for its financial systems.
- OPERATING SYSTEMS AND HARDWARE. Metrocall has identified and performed
year 2000 readiness assessment activities with regard to its network
operating systems. Certain of these systems are scheduled for software
upgrades that will improve their functionality. Approximately 80% of its
Netware locations, 95% of its NT Systems and 50% of its UNIX Systems have
been remediated. The remaining remediation efforts on its operating
systems are expected to be substantially completed by June 30, 1999.
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 approximately $3.5 million
for the remainder of 1999.
Metrocall is utilizing both internal and external resources to remediate
and test its systems for year 2000 compliance. Metrocall is incurring internal
labor as well as consulting and other expenses related to infrastructure and
facilities enhancements necessary to prepare its systems. Although it is the
Metrocall's goal that its systems be year 2000 compliant on or before December
31, 1999, there can be no assurance that the year 2000 program will be
successful or third parties on which Metrocall relies for certain services 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
There have been no material changes from the information provided in Item
7A of Metrocall's Annual Report on Form 10-K/A for the year ended December 31,
1998.
21
<PAGE> 22
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: July 2, 1999 METROCALL, INC.
By: /s/ VINCENT D. KELLY
------------------------------------
Vincent D. Kelly
Chief Financial Officer,
Treasurer and Executive Vice
President
22
<PAGE> 23
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.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(b) Reports on Form 8-K
Metrocall filed an amendment to a report on Form 8-K regarding the AMD
acquisition with the SEC on January 27, 1999.
23
<PAGE> 1
EXHIBIT 11.1
METROCALL, INC.
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(AS RESTATED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
--------------------------------------
1998 1999
---- ----
<S> <C> <C>
Net loss $ (30,324) $ (42,013)
Preferred dividends (2,348) (4,003)
Gain on redemption of preferred stock - 2,208
----------- -----------
Net loss attributable to common stockholders $ (32,672) $ (43,808)
=========== ===========
Weighted-average shares outstanding:
Shares outstanding, beginning of period 40,548,414 41,583,403
Shares issued in settlement of litigation 270,000 -
Shares issued in employee stock purchase plan 48,134 87,290
----------- -----------
Weighted-average shares outstanding 40,866,548 41,670,693
=========== ===========
Loss per share attributable to common stockholders $ (0.80) $ (1.05)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,603
<SECURITIES> 0
<RECEIVABLES> 45,371
<ALLOWANCES> 6,758
<INVENTORY> 2,222
<CURRENT-ASSETS> 61,348
<PP&E> 439,790
<DEPRECIATION> 145,612
<TOTAL-ASSETS> 1,202,494
<CURRENT-LIABILITIES> 99,925
<BONDS> 772,140
146,297
0
<COMMON> 417
<OTHER-SE> (10,069)
<TOTAL-LIABILITY-AND-EQUITY> 1,202,494
<SALES> 14,576
<TOTAL-REVENUES> 155,030
<CGS> 9,815
<TOTAL-COSTS> 182,094
<OTHER-EXPENSES> (16)
<LOSS-PROVISION> 3,557
<INTEREST-EXPENSE> 20,700
<INCOME-PRETAX> (57,563)
<INCOME-TAX> (15,550)
<INCOME-CONTINUING> (42,013)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (43,808)
<EPS-BASIC> (1.05)
<EPS-DILUTED> (1.05)
</TABLE>
