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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-21924
METROCALL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 54-1215634
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
6677 RICHMOND HIGHWAY, ALEXANDRIA, VIRGINIA 22306
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 660-6677
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS
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COMMON STOCK ($.01 PAR VALUE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the Registrant was approximately $139.1 million based on the closing sales price
on March 1, 1999.
COMMON STOCK, PAR VALUE $0.01 -- 41,639,878 SHARES OUTSTANDING ON MARCH 1, 1999
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of the Registrant to
be held May 5, 1999 was filed with the Commission within 120 days after the
close of the fiscal year and are incorporated by reference into Part III.
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EXPLANATORY NOTE
The registrant amends its Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 as follows: (1) Part I, Item I, Business, the section
titled "Metrocall's Paging and Wireless Messaging Operations -- Services and
Subscribers"; (2) Part I, Item 6, Selected Financial Data; (3) Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations; (4) Part II, Item 7A, Quantitative and Qualitative Disclosures About
Market Risk; (5) Part II, Item 8, Financial Statements and Supplementary Data;
and (6) Part IV, Item 14, Exhibits, Financial Statement Schedule and Reports on
Form 8-K. The specific changes are incorporated into the text, as amended,
below. No other changes were made.
The Financial Statements have been restated as described in Note 2 to the
Financial Statements.
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PART I
ITEM 1. BUSINESS
GENERAL
We are a leading provider of local, regional and national paging and other
wireless messaging services. Through our nationwide wireless network we provide
messaging services to over 1,000 U.S. cities, including the top 100 Standard
Metropolitan Statistical Areas (SMSAs). Since 1993, our subscriber base has
increased from less than 250,000 to more than 5.6 million. We have achieved this
growth through a combination of internal growth and a program of mergers and
acquisitions. As of December 31, 1998, we were the second largest messaging
company in the United States based on the number of subscribers.
PAGING AND WIRELESS MESSAGING INDUSTRY OVERVIEW
We believe that paging and wireless messaging is the most cost-effective
and reliable means of conveying a variety of information rapidly over a wide
geographic area either directly to a person traveling or to various fixed
locations. Conventional paging, as a one-way communications tool, is a
lower-cost way to communicate than existing two-way communication methods. For
example, the pagers and air time required to transmit a typical message cost
less than the equipment and air time for cellular and personal communications
services (PCS) telephones. Furthermore, pagers operate for longer periods due to
superior battery life, often exceeding one month on a single battery. Paging
subscribers generally pay a flat monthly service fee, which covers a certain
number of messages sent to the subscriber. In addition, pagers are unobtrusive
and portable and historically have withstood substantial technological advances
in the communications industry. Many mobile telephone customers use pagers in
conjunction with their telephones to screen incoming calls and minimize battery
wear and usage charges.
Although the U.S. paging industry has over 500 licensed paging companies,
we estimate that the ten largest paging companies, including us, currently serve
approximately 75% of the total paging subscribers in the United States. These
paging companies are facilities-based, Commercial Mobile Radio Service (CMRS)
providers, previously classified as either Radio Common Carrier (RCC) or Private
Carrier Paging (PCP) operators, servicing over 100,000 subscribers each in
multiple markets and regions.
We believe that the future of the paging and wireless communications
industry will include technological improvements that permit increased service
and applications, and consolidation of smaller, single-market operators and
larger, multi-market paging companies.
Recent technological advances include new paging services such as
"confirmation" or "response" paging that send a message back to the paging
system confirming that a paging message has been received, digitized voice
paging, two-way paging and notebook and sub-notebook computer wireless data
applications. Narrowband PCS offers the ability to provide some of these
services on an expanded basis. Narrowband PCS utilizes a two-way spectrum, which
offers advantages to the traditional one-way spectrum that some paging networks
use. The two-way spectrum enables a paging device to emit a signal that notifies
the network of the paging device's location and permits the network to send the
message to transmitters closest to the paging device. In contrast, a one-way
spectrum requires the message to be sent to all transmitters within a geographic
area and not necessarily to those transmitters closest to the paging device.
Therefore, a two-way spectrum utilizes less air time of the paging network and
creates more air time capacity particularly in the areas farthest from the
paging device. While these narrowband PCS services have been proven
technologically feasible, their economic viability has not been fully tested
based on the cost of licenses, infrastructure and capital requirements;
increased operating costs; and competitive, similarly priced two-way broadband
PCS and cellular services.
OUR BUSINESS STRATEGY
Our business strategy is to increase shareholder value by expanding our
subscriber base and increasing revenues, cost efficiencies, and operating cash
flow. Operating cash flow is defined as EBITDA (earnings
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before interest, taxes, depreciation and amortization). The principal elements
of this strategy include the following: Manage Capital Requirements and Increase
Free Cash Flow. Our key financial objective is to manage capital requirements
and increase free cash flow. We define free cash flow as operating cash flow
less capital expenditures and interest expense. To achieve this objective, we
focus on the following:
- focusing 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
- increasing the utilization of our fully developed nationwide network to
serve more customers per frequency and enter new markets with minimal
capital outlay.
Maximize Internal Growth Potential. We have grown internally by broadening
our distribution network and expanding our target market to capitalize on the
growing appeal of messaging and other wireless products and services. Since
December 31, 1994, we have added approximately 1.4 million new subscribers
through internal growth. We have expanded our direct and indirect distribution
channels to gain access to different market segments. As part of this strategy,
we have formed strategic alliances with:
- local, long-distance, cellular and PCS providers, such as AT&T Wireless
Services Inc. (AT&T Wireless), Bell Atlantic, Qwest, Vanguard Cellular
and ALLTEL;
- cable television companies, such as Adelphia Cable Communications and
Suburban Cable; and
- retail outlets, such as Circle K Stores, AutoZone, Ritz Camera and
Walgreens.
We have also developed strategic marketing relationships with America
Online and Washington Gas and Light Company, which are designed to further
enhance our market presence. We have also entered into a broadband PCS alliance
with AT&T Wireless, which will enable us to further diversify our product mix by
distributing AT&T's digital PCS wireless products and AT&T's Digital One Rate
(SM) service plans via our direct distribution channels. In 1999, we will
continue to expand our multi-tiered distribution network and marketing
relationships. We believe that these initiatives will continue to increase our
sales and broaden the range and diversity of products that we currently offer to
consumers.
Expand Market Presence through Consolidation. We have expanded our
subscriber base and geographic coverage through consolidation. On October 2,
1998, we acquired the Advanced Messaging Division (AMD) of AT&T Wireless, the
paging operations of AT&T. The AMD acquisition increased the size of our
subscriber base by adding 1.2 million subscribers to our existing customer base.
As part of the acquisition, we also acquired a 50KHz/50KHz narrowband personal
communications service license (NPCS license). We expect to realize the
following benefits from the AMD acquisition:
- Greater Scale and Scope. The AMD acquisition increases our geographic
presence to include Alaska, Arkansas, Colorado, Kansas, Minnesota,
Missouri, Oklahoma, Oregon, Utah and Washington. In addition, it adds to
our existing presence in the Northeast, Southeast, Midwest, Mid-Atlantic
and Southwest and West.
- Premium, High Revenue Customer Base. The AMD acquisition adds premium,
high revenue subscribers to our existing customer base. AMD's ARPU has
historically been higher than the paging industry average. AMD provided
its paging and messaging services to large business customers, which
typically generate higher ARPU than individual customers. Approximately
23% of AMD's subscribers were high-ARPU alphanumeric customers, one of
the highest percentages in the industry.
- Synergies. As we integrate AMD's operations with our own paging
operations, we expect to realize significant synergies. For example, AMD
provided nationwide paging services without the benefit of a nationwide
network. As a result, AMD spent $29.3 million in 1997 reselling other
carriers' services, which adversely affected its margins. Over time, we
expect to switch a portion of AMD's customers to our nationwide network,
which will reduce third-party costs and increase the utilization of our
network.
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In addition, we expect to realize significant annual cost savings from
elimination of duplicative AMD functions. We expect to complete the
integration of AMD by the fourth quarter of 1999.
Since July 1996, we have acquired the following companies, which have added
approximately 3.6 million subscribers:
<TABLE>
<CAPTION>
NO. OF
ACQUIRED COMPANY ACQUISITION DATE SUBSCRIBERS
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<S> <C> <C>
Parkway Paging, Inc. (Parkway)........................ July 16, 1996 140,000
Satellite Paging and Messaging Network (collectively,
Satellite).......................................... August 30, 1996 100,000
A+ Network, Inc. (A+ Network)......................... November 15, 1996 660,000
Page America Group, Inc. (Page America)............... July 1, 1997 198,000
ProNet Inc. (ProNet).................................. December 30, 1997 1,286,000
AMD................................................... October 2, 1998 1,215,000
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Total....................................... 3,599,000
=========
</TABLE>
We believe that our enhanced nationwide coverage will give us a competitive
advantage in gaining additional subscribers in the future. We may continue to
expand our geographic penetration and subscriber base through future
acquisitions, but only if we identify potential candidates that satisfy certain
criteria. These criteria include valuation, geographic coverage, regulatory
licenses, type of consideration, availability of financing and accretive and
de-leveraging benefits.
Pursue Cost-Efficient Technological Advances. We have pursued
technological advances that are proven, cost-efficient and consistent with our
strategy to increase free cash flow. For instance, we have historically
concentrated our capital spending on developing our local, regional and
nationwide one-way paging networks. We have also recently taken steps to enter
the two-way paging business now that the technology has been proven and gained
initial market acceptance. As part of the AMD acquisition, we acquired the NPCS
license in October 1998. Also, in October 1998, we entered into a five-year
strategic alliance with PageMart Wireless, Inc, a leading provider of paging and
messaging services to develop and offer narrowband PCS. Our alliance consists of
two phases: a switch-based resale phase and a shared network build-out phase. In
the first phase, we will provide narrowband PCS using PageMart's advanced
messaging transmit and receive network. We began offering guaranteed-delivery
messaging in the first quarter of 1999. We expect the first phase to permit us
to begin offering two-way messaging by the middle of 1999. In the second phase,
we will install and operate our own outbound narrowband PCS frequency on our
nationwide network and PageMart will provide turnkey installation and operation
of a receiver network. We believe this alliance will enable us to comply with
the FCC's mandated narrowband PCS build-out requirements. Under the alliance, we
will share certain capital expenditures and operating expenses. We believe that
the PageMart alliance will enable us to provide narrowband PCS in a faster and
more cost-effective manner than if we developed the network ourselves. The
development of the NPCS license acquired in the AMD acquisition and the PageMart
alliance will allow us to increase capacity and reduce our long-term cost of
message delivery through frequency reuse. It will also permit us to enter the
market for advanced messaging services, including two-way paging and data
intensive messaging. We are also pursuing other strategic marketing and
development efforts to deliver advanced messaging services, such as e-mail
notification and user-specific data services, to our paging subscribers through
the Internet.
Optimize Customer Relationships. We seek to maintain a close relationship
with our existing customers and to develop stronger relationships with the
subscribers of newly acquired companies by maintaining decentralized sales,
marketing and customer service operations and providing value-added services
tailored to customers' needs. The value-added services we provide are billed as
enhancements to our basic service and generally result in higher ARPU. Our
specific value-added services include:
- Direct View, which permits organizations to use our wireless network to
broadcast news, sports, stock data and general and customized information
to LED display signs;
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- Pager ID, which identifies the name of the person placing the call to the
pager;
- customized wireless messaging applications for specific segments of the
public, such as the medical community; and
- an enterprise-wide messaging management software and database system
Maintain Low Cost Operations and Improve Margins. A key component of our
business strategy is to make investments that improve our operating efficiencies
thereby leading to margin improvement. In 1998, our operating efficiencies
improved because we continued to invest in high quality, large capacity
infrastructure and systems updates and to centralize administrative and
back-office functions. During 1998, we implemented a new financial accounting
management information system, completed a number of billing system upgrades,
added a new inventory management system and began using an Internet based tower
site management application. We also integrated the administrative functions of
newly acquired companies which enabled us to reduce our general and
administrative expenses per subscriber.
We also believe that as use of our strategic alliances and other indirect
distribution channels increase, our operating costs will decrease as
participants in these channels typically bear a portion of our sales and
customer service expenses. Similarly, we believe our focus on maximizing monthly
recurring revenues and promoting value-added services will improve operating
margins. We also recently entered into a strategic long-term arrangement with
Motorola to optimize supply chain logistics. As part of this arrangement,
Motorola will ship pager units directly to our strategic retail partners. In
addition, we and Motorola will work to develop an electronic data interchange to
enhance Motorola's ability to supply page units to our customers. We expect this
distribution arrangement to reduce handling costs, inventory levels and cycle
times.
METROCALL'S PAGING AND WIRELESS MESSAGING OPERATIONS
Services and Subscribers
We currently provide four basic paging and wireless messaging services:
- digital display pagers, which permit a subscriber to receive a telephone
number or other numeric coded information and to store several such
numeric messages that the customer can recall when desired;
- alphanumeric display pagers, which allow the subscriber to receive and
store text messages from a variety of sources including the Internet;
- digital broadband and PCS phones and other products of AT&T under a
distribution agreement with AT&T Wireless, which allows users to place
and receive calls under AT&T's Digital One Rate(SM) service plans;
- advanced messaging devices, which provide guaranteed delivery of
messages.
We provide digital display and alphanumeric display in all of our markets.
Approximately 86% of our pagers in service at December 31, 1998 were digital
display. Alphanumeric display service, which was introduced in the mid-1980s,
has grown at increasing rates as users and dispatch centers overcome technical
and operational obstacles to sending messages. Currently, we market, under the
service mark "Notesender," a computer program designed for use in transmitting
alphanumeric messages from personal computers to pagers. In addition,
alphanumeric paging access is available via our Internet website,
www.metrocall.com, where any Internet user can access our on-line alphanumeric
paging software. Approximately 14% of our pagers in service at December 31, 1998
were alphanumeric display.
We also provide enhancements and ancillary services such as:
- personalized automated answering services, which allow a subscriber to
record a message that greets callers who reach the subscriber's voice
mailbox;
- message protection, which allows a subscriber to retrieve any calls that
come in during the period when the subscriber was beyond the reach of our
radio transmitters;
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- annual loss protection, which allows subscribers of leased pagers to
limit their cost of replacement upon loss or destruction of the pager;
and
- maintenance services, which are offered to subscribers who own their own
pagers.
Subscribers who use paging and wireless messaging services have
traditionally included small business operators and employees, professionals,
medical personnel, sales and service providers, construction and tradespeople,
and real estate brokers and developers; however, the appeal of paging to the
residential user is growing, with service increasingly being adopted by
individuals for private, nonbusiness uses such as communicating with family
members and friends.
Our subscribers either buy or lease their pagers for local, regional,
multi-regional or nationwide service. We receive additional revenue for enhanced
services such as voice mail, personalized greetings and One Touch(TM) service,
which is an advanced messaging service. Volume discounts on lease payments and
service fees are typically offered to large volume subscribers. In some
instances, our subscribers are resellers that purchase services at substantially
discounted rates, but are responsible for marketing, billing, collection and
related costs with respect to their customers.
Sales and Marketing
Our sales and marketing strategy incorporates a multi-tiered distribution
system designed to maximize internal growth and geographic presence. At December
31, 1998, the Company, through more than 250 sales and administrative offices
and retail outlets, employed a sales force of 1,505 sales representatives,
including our direct sales staff, telemarketing professionals and sales
representatives who call on retailers and resellers. Our major distribution
channels are described briefly below.
Direct Distribution Channels
- Direct Sales. Our direct sales personnel sell our messaging services and
products primarily to businesses, placing special emphasis on key
accounts of strategic importance to us. Our direct sales personnel
generally target businesses that have multiple work locations or have
highly mobile employees. Our sales compensation plans are designed to
motivate direct sales personnel to focus on selling rather than leasing
pagers, which reduces capital requirements, and to increase sales of
higher revenue product enhancements, such as nationwide coverage,
alphanumeric service, voice mail and One Touch(TM).
- Database Telemarketing. Our internal, professionally trained staff
generates sales by utilizing computerized lead management and
telemarketing techniques combined with our proprietary lead screening and
development protocol. Using acquired lists to focus their efforts, our
internal staff targets groups of consumers and small businesses who have
a propensity to use paging and messaging services but are either in a
region where we do not have a direct sales effort or have not been
reached by other distribution channels. In our marketing efforts, we use
only commercially available public information to analyze and target new
customers and do not use "Customer Proprietary Network Information" in a
way that would conflict with the Communications Act of 1934, as amended
(the "Communications Act"), or the Federal Communications Commission
(FCC) rules.
- Company-Owned Retail Stores. At December 31, 1998, we had over 100
Company-owned retail outlets. Our retail outlets are designed to sell
higher ARPU services to the consumer market segment directly while
providing us with a point of presence to enhance our brand recognition.
These retail outlets take a variety of forms, such as mall stores,
kiosks, mall carts, retail merchandising units and mall center locations.
Products sold to consumers at these locations include paging, messaging,
cellular, long distance and PCS services and related accessories. Many of
these locations function as customer service and payment centers in
addition to offices for direct sales representatives.
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Indirect Distribution Channels
- Resellers. We sell resellers bulk paging services for resale to their
own business clients and individual customers. We issue one monthly bill
to each reseller who is responsible for marketing, billing and
collection, and equipment maintenance. Through this channel, we achieve
high network utilization at low incremental cost, but realize much lower
ARPU than through other distribution channels.
- Retail Outlets. We sell pagers on a wholesale basis to retail outlets,
such as office supply, electronics and general merchandise chains, for
resale to their customers. We select these outlets based on factors such
as the number of stores in a region and the extent of their advertising.
These outlets then sell the pager itself and provide limited customer
service to the consumer. We provide sales incentives and advertising
support, and train sales personnel to enhance a retail outlet's
effectiveness and to ensure that the customer is well educated regarding
the product.
- Dealer Network. We contract with independent dealers, representatives
and agents, including such outlets as small cellular phone dealers and
independent specialty electronics stores. We typically use these dealers
to reach specific consumer niches (e.g., ethnic or non-English speaking
communities) and small businesses that are more efficiently accessed
through this channel than through our other distribution channels. In
addition to selling the pagers, independent dealers assist the subscriber
in choosing a service plan and collect the initial payments. We pay
independent dealers a commission when they place customers with us.
- Strategic Partners. We have entered into contractual agreements with
several selected national distribution partners who market our paging
services to their existing and future customers. We supply many of these
partners with custom branded turnkey solutions for network services,
products, customer services, billing, collections and fulfillment. Our
strategy is to provide these value-added services to enhance the business
relationship and margin opportunities for both parties. We have entered
into alliances with companies in the long distance, local exchange,
cable, Internet, retail, direct response and multi-level marketing
businesses and believe that these programs will help deliver paging
services to market segments that our other distribution channels may not
reach cost-effectively.
As part of the AMD acquisition, we signed an exclusive five-year national
distribution agreement with AT&T Wireless. Under the distribution agreement,
AT&T Wireless' retail stores exclusively offer our messaging products. In
addition, we are the exclusive supplier of messaging products for AT&T and its
affiliated companies that wish to sell paging and advanced messaging services.
- Affiliates. Through the A+ Network merger in 1996, we acquired a network
of paging carriers or affiliates that resell services on the 152.480 MHz
private carrier paging frequency. These affiliates are independent owners
of paging systems in various markets throughout the nation who sell
expanded coverage to their customers. Utilizing our infrastructure, these
independent networks provide wide area and nationwide paging on a single
channel. We provide expanded coverage options for approximately 85,000
subscribers through our affiliate network at December 31, 1998.
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Subscribers by Geographic Region. We set forth below the number of pagers
we have in service by geographic region.
NUMBER OF PAGERS IN SERVICE
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996(1) 1997(2) 1998(3)
--------- --------- ---------
<S> <C> <C> <C>
Northeast......................................... 227,022 714,363 772,463
Mid-Atlantic...................................... 558,318 623,077 693,631
Southeast......................................... 693,837 1,094,313 1,179,548
Midwest........................................... -- 232,105 400,150
Southwest......................................... 248,846 756,459 1,356,218
West.............................................. 414,328 610,519 768,829
Northwest......................................... -- -- 488,711
--------- --------- ---------
Total................................... 2,142,351 4,030,836 5,659,550
========= ========= =========
</TABLE>
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(1) Includes approximately 0.9 million pagers in service we acquired from our
1996 merger and acquisitions.
(2) Includes approximately 1.5 million pagers in service we acquired from our
1997 merger and acquisition.
(3) Includes approximately 1.2 million pagers in service we acquired in the AMD
acquisition.
Subscribers by Distribution Channel. We set forth below the respective
numbers and percentages of pagers that we service through our distribution
channels:
OWNERSHIP OF PAGERS IN SERVICE
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1996(1) 1997(2) 1998(3)
---------------------- ---------------------- ----------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
DIRECT CHANNELS:
Company-owned and leased to
subscribers................. 690,382 32% 1,184,193 29% 1,980,297 35%
Subscriber-owned (COAM)........ 271,837 13 430,582 11 629,352 11
Company-owned retail stores.... 114,192 5 223,510 6 207,493 4
INDIRECT CHANNELS:
Resellers...................... 865,221 41 1,965,354 49 2,369,686 42
Strategic Partners and
affiliates.................. 130,142 6 140,625 3 274,844 5
Retail......................... 70,577 3 86,572 2 197,878 3
--------- ----- --------- ----- --------- -----
Total.................. 2,142,351 100.0 4,030,836 100.0 5,659,550 100.0
========= ===== ========= ===== ========= =====
</TABLE>
- ---------------
(1) Includes approximately 0.9 million pagers in service we acquired from our
1996 merger and acquisitions.
(2) Includes approximately 1.5 million pagers in service we acquired from our
1997 merger and acquisition.
(3) Includes approximately 1.2 million pagers in service we acquired in the AMD
acquisition.
Network and Equipment
We have developed a state-of-the-art paging system deploying current
technology, which achieves optimal building penetration, wide-area coverage and
the ability to deliver new and enhanced paging services. This existing paging
transmission equipment has significant capacity to support future growth.
Our paging services are initiated when telephone calls are placed to our
Company-maintained paging terminals. These state-of-the-art terminals have a
modular design that allows significant future expansion by adding or replacing
modules rather than replacing the entire terminal. Our paging terminals direct
pages to our primary satellite, which signals terrestrial network transmitters
providing coverage throughout the service area.
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We have three exclusive nationwide licenses issued by the FCC and are
operating in each of the largest 100 SMSAs. We began operating the nationwide
network on one of those three channels in November 1993. We are also capable of
providing local paging in many markets served by the nationwide network by using
nationwide transmitters to carry local messages. Services provided through the
nationwide network are marketed to subscribers directly through our sales force
and indirectly through retailers and resellers. We also operate a series of
regional operating systems or networks consisting of primary networks serving
Arizona, California and Nevada, and the area from Boston to the Virginia/North
Carolina border.
In addition, we have initiated paging service through our "Global Messaging
Gateway," which is a satellite uplink facility located in Stockton, California.
We transmit a majority of our traffic through this facility. The facility
operates 24 hours per day, seven days per week. The use of this facility will
permit us to save costs as we phase out operating agreements with three
commercially owned satellite uplink facilities and will increase our control
over our paging system.
We do not manufacture any of the pagers or infrastructure equipment used in
our operations. While the equipment used in our paging operations is available
for purchase from multiple sources, we have historically limited the number of
suppliers to achieve volume cost savings and, therefore, depend on such
manufacturers to obtain sufficient inventory. We anticipate that equipment and
pagers will continue to be available to us in the foreseeable future, consistent
with normal manufacturing and delivery lead times but cannot assure you that we
will not experience unexpected delays in obtaining paging and infrastructure
equipment in the future. Such delays could have an adverse effect on our
operations and network development plans. We continually evaluate new
developments in paging technology in connection with the design and enhancement
of our paging systems and selection of products to be offered to subscribers.
As discussed above, we achieve cost savings by purchasing pagers at volume
discounts from a limited number of companies, including Motorola, Inc., from
which we currently purchase most of our pagers, and NEC America. We purchase our
transmitters and paging terminals from Motorola and Glenayre Electronics,
Incorporated.
Management Systems and Billing
We centralize certain operating functions and utilize common and
distributed billing and subscriber management systems. This permits us to reduce
costs, increase operating efficiencies, obtain synergies from acquisitions, and
focus regional management on sales and distribution.
The functions we have centralized into our national operations center in
Alexandria, Virginia include accounting, management information systems, and
inventory and order fulfillment. We have integrated the information systems of
the companies we have acquired into our structure, with the exception of AMD's
systems for which integration efforts will be progressing throughout 1999.
We also maintain three national call centers which are critical factors in
marketing and servicing the nationwide network to all markets in the United
States. Our centers handle customer inquiries from existing and potential
customers and support our distribution channels initiatives. Our three centers
are staffed with approximately 385 employees. Each center offers a toll-free
access number. One of our centers is open seven days per week, 24 hours per day.
Our other two centers are open six days a week and provide emergency service
seven days a week, 24 hours a day. We attempt to satisfy customers upon initial
inquiry to avoid repeat calls, thereby increasing customer satisfaction and
decreasing costs. We employ state-of-the-art call management equipment (such as
an automated call distribution system and interactive voice response
capabilities) to provide quality customer service and to track both the
productivity and the quality of the performance of our customer service
representatives.
COMPETITION
The wireless communications industry is very competitive. We compete mainly
with other regional and national paging providers. Certain long-distance
carriers and local exchange carriers (LECs) have also begun, or have announced
their intention to begin, marketing paging services jointly with other
telecommunications
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<PAGE> 11
services. We also compete with other companies that offer wireless
communications technology such as cellular telephone, specialized mobile radio
services and PCS. Some of our competitors have greater financial resources than
we do. We compete on the basis of price, coverage area, enhanced services,
transmission quality, systems reliability and customer service. We believe we
compare favorably with our competitors on these bases. However, to respond to
price competition, we may need to adjust our prices from time to time, which may
adversely affect our revenues and operating results.
Since 1988, we have competed with Paging Network, Inc. ("PageNet"), the
largest provider of paging services in the United States, in all of our major
markets. With our nationwide network, our principal competitors for national
accounts include, in addition to PageNet, Arch Communications Group, Inc.,
MobileMedia Communications, Inc. (using the trade name MobileComm), PageMart and
SkyTel Corporation. We are also aware of other paging companies that offer, or
intend to offer, nationwide paging services to their subscribers. In August
1998, Arch announced its intention to acquire the operations of MobileMedia,
which has been operating in bankruptcy since January 1997. Arch has stated that,
if this acquisition is consummated, the combined company would be the second
largest paging company based on number of subscribers.
In 1994, the FCC began auctioning licenses for new PCS spectrums. There are
two types of PCS, narrowband and broadband. Narrowband PCS is a communications
technology that uses a portion of the radio spectrum to transmit and receive
text messages and other data. Narrowband PCS provides advanced paging and
messaging capabilities, such as guaranteed and response messaging. Guaranteed
messaging ensures that if a subscriber travels outside the area covered by our
network or turns off the pager unit, the subscriber will receive the message
when he or she returns to the coverage area or turns on the unit. Response
messaging permits a subscriber to respond back to the sender of a message by
either selecting from a custom set of multiple choice responses sent with the
message or sending a response chosen from a set of predefined responses stored
in the unit.
Broadband PCS uses a larger portion of the radio spectrum than does
narrowband PCS and thereby permits more data to be transmitted and received.
Broadband PCS provides two-way messaging capability, which permits not only the
sender but also the recipient to communicate by voice or other messaging means.
New types of communications devices using broadband PCS include multi-functional
portable phones and imaging devices. PCS providers compete directly and
indirectly with the Company. Many narrowband and broadband PCS systems are now
providing commercial service. We recently entered into the PageMart alliance to
develop and offer advanced messaging services on a narrowband PCS platform and a
distribution agreement with AT&T Wireless to offer digital broadband PCS
telephones.
Developments in the wireless telecommunications industry, such as broadband
PCS, and enhancements of current technology have created new products and
services that compete with the paging services we currently offer. There can be
no assurance that we will not be adversely affected by such technological change
or future technological changes.
GOVERNMENT REGULATION
From time to time, federal and state legislators propose legislation that
could affect our business, either beneficially or adversely, such as by
increasing competition or affecting the cost of our operations. We cannot
predict the impact of such legislative actions on our operations. Additionally,
the FCC and, to a lesser extent, state regulatory bodies, may adopt rules,
regulations or policies that may affect our business. The following description
of certain regulatory factors does not purport to be a complete summary of all
present and proposed legislation and regulations pertaining to our operations.
Federal. Our paging operations are subject to extensive regulation by the
FCC under the Communications Act. Under the Communications Act, we are required
to obtain FCC licenses for the use of radio frequencies to conduct our paging
operations within specified geographic areas. These licenses set forth the
technical parameters, such as maximum power and tower height, under which we may
use such frequencies. We have historically provided paging services as both a
RCC operator and a PCP operator. Traditionally, RCC frequencies were assigned on
an exclusive basis to a single licensee in a service area; RCCs were subject
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<PAGE> 12
to regulation by the states as well as by the FCC and were required to provide
service to anyone requesting such service. PCP frequencies were assigned on a
shared basis (i.e., multiple parties in the same area could apply for and obtain
a license to use the same frequency); there were restrictions on eligibility of
PCP customers; and the states were preempted from regulating PCP entry, rates,
operation, terms of service, etc.
In 1993, the FCC adopted new rules to provide "channel exclusivity" to PCP
operators operating on certain 929 MHz frequencies, provided the licensee meets
certain qualifications. We have obtained nationwide exclusivity on two of our
929 MHz frequencies and one 931 MHz frequency (one 929 MHz frequency is used for
the nationwide network; the other 929 MHz frequency was obtained in the
FirstPAGE USA, Inc. merger in 1994; the 931 MHz frequency was obtained in the
ProNet merger). Under the FCC's current rules, no other entity may apply
anywhere in the United States to operate on these frequencies. However, any
incumbent PCP licensees, other than us, on our two nationwide 929 MHz
frequencies may continue to operate on these frequencies, but those other
licensees are not allowed to expand their paging services beyond their existing
coverage areas. Additionally, on our other 929 MHz frequencies, we have local
exclusivity in the Chicago, Illinois area, and regional exclusivity in the
Northeast, Mid-Atlantic, and Southeast regions of the United States.
PCP channels below 900 MHz are still allocated on a shared basis. We
acquired a 152.480 MHz shared frequency network through our A Network merger.
Applications for those frequencies are first processed through a frequency
coordinator, who attempts to minimize overcrowding on a given frequency. The
coordinator then files the applications with the FCC, which processes them on a
first-come, first-served basis. So long as a given PCP frequency is not
congested with multiple licensees, the subscriber would not perceive any
differences between shared PCP services and exclusive paging services. In most
areas of the country where we hold shared PCP licenses, we are the only paging
operator, or one of only a few operators, licensed on that particular frequency
in that area.
The FCC also requires paging licensees to construct their stations and
begin service to the public within a specified period of time (under the
site-specific rules, one year), and failure to do so results in termination of
the authorization. Under the traditional site-specific approach to paging
licensing, a licensee received a construction permit for facilities at a
specific site, and that permit automatically terminated if the facilities were
not timely constructed (RCC paging licensees were also required to notify the
FCC upon commencement of service) and the licensee failed to request an
extension prior to the deadline. The failure to construct some facilities did
not, however, affect other facilities in a licensee's system that had been
timely constructed and placed into operation. However, certain services that we
plan to offer in the future are subject to harsher penalties for failure to
construct. For example, the NPCS license that we acquired in the AMD acquisition
is subject to the condition that we build sufficient stations to cover 750,000
square kilometers, or 37.5% of the U.S. population, by the fifth anniversary of
the initial license grant; by the tenth anniversary of the grant, we must build
sufficient stations to cover 1,500,000 square kilometers, or 75% of the U.S.
population. As a result of the PageMart alliance, we expect to meet the FCC's
build out requirements for both of these anniversaries.
In August 1993, as part of its Omnibus Budget Reconciliation Act (the "1993
Budget Act"), Congress amended the Communications Act to, among other things,
replace the prior RCC and PCP definitions with two newly defined categories of
mobile radio services: CMRS and Private Mobile Radio Service (PMRS). The CMRS
definition essentially supplants the prior RCC definition. The FCC has
determined that PCP and RCC paging services are classified as CMRS. The FCC has
adopted technical, operational and licensing rules for CMRS, which became
effective for us in August 1996.
Pursuant to authority granted by the 1993 Budget Act, the FCC has
"forborne" from enforcing against all CMRS licensees the following common
carrier regulations under Title II of the Communications Act: any interstate
tariff requirements, including regulation of CMRS rates and practices; the
collection of intercarrier contracts; certification concerning interlocking
directorates; and FCC approval relating to market entry and exit. Additionally,
the 1993 Budget Act preempted state authority over CMRS entry and rate
regulation.
Paging licenses are issued by the FCC for terms of 10 years. Our current
licenses have expiration dates ranging from 1999 to 2009. Renewal applications
must be approved by the FCC. In the past, our FCC renewal applications have been
routinely granted. We are also required to obtain prior FCC approval for our
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<PAGE> 13
acquisition of radio licenses held by other companies, as well as transfers of
controlling interests of any entities that hold radio licenses. Although there
can be no assurance that any future renewal or transfer applications we file
will be approved or acted upon in a timely manner by the FCC, based on our
experience to date, we know of no reason to believe such applications would not
be approved or granted.
The Communications Act also places limitations on foreign ownership of CMRS
licenses. These foreign ownership restrictions limit the percentage of our stock
that may be owned or voted, directly or indirectly, by aliens or their
representatives, foreign governments or their representatives, or foreign
corporations. The Company's certificate of incorporation permits the redemption
of our common stock from stockholders where necessary to protect our compliance
with these requirements.
The FCC has authority to restrict the operation of licensed radio
facilities or to revoke or modify such licenses. The FCC may adopt changes to
its radio licensing rules at any time, and may impose fines for violations of
its rules. Some of our license applications were deemed "mutually exclusive"
with those of other paging companies. In the past, the FCC would have selected
among the mutually exclusive applicants by lottery; however, the FCC recently
dismissed all pending mutually exclusive paging applications, including ours, to
facilitate its transition to wide area licensing and auctions for paging
frequencies.
Paging licenses have traditionally been issued on a site-specific basis. In
February 1997, the FCC adopted rules to issue most paging licenses for large,
FCC-defined service areas. Although the rules are subject to a pending appeal
and petitions for reconsideration, if they become "final", the following changes
will occur. Licenses for 929 MHz PCP and 931 MHz RCC frequencies will be issued
for Rand McNally's "MTA" geographic areas; licenses for RCC frequencies in lower
frequency bands will be licensed in "Economic Areas" or "Eas." Shared PCP
frequencies will continue to be allocated on a shared basis and licensed in
accordance with existing, site-specific procedures; however, the FCC is
considering changes to the application and licensing rules for these
frequencies. Mutually exclusive geographic area applications for all RCC
frequencies and exclusive 929 MHz PCP frequencies will be awarded through an
auction process. The FCC has recently dismissed all pending mutually exclusive
applications for these frequencies, as well as all applications filed after July
31, 1996 regardless of mutual exclusivity. A filing "freeze" is in effect for
the non-nationwide, exclusive paging frequencies pending commencement of the
auctions. The FCC has not yet announced when paging auctions will begin, or the
order in which it will make the various frequencies and geographic areas
available for bidding. Incumbent licensees will be able to trade in their
existing licenses for a single "wide-area" license based upon their current
coverage; incumbents will be entitled to interference protection from the
auction winners and will be able to modify their facilities within that area,
but they will not be permitted to expand their existing coverage.
Because auctions are new to the paging industry, we cannot predict their
impact on our business. At least initially, competitive bidding may increase our
costs of obtaining licenses. The FCC's wide-area licensing and auction rules may
also serve as entry barriers to new participants in the industry. In any service
area where we are the successful bidder, or where we trade in our licenses for
"wide-area" licenses, we will save on the application costs associated with
modifying and adding facilities within our service areas, and no other entity
will be able to apply for our frequencies within those areas. Conversely, in
geographic areas where we are not the high bidder, our ability to expand our
service territories in those geographic areas will be curtailed. Our three
nationwide frequencies will not be subject to competitive bidding; although, the
FCC is considering imposing additional "build-out" requirements on nationwide
licensees.
The Telecommunications Act of 1996 (the "1996 Act") also amended the
Communications Act. The 1996 Act imposes a duty on all telecommunications
carriers to provide interconnection to other carriers, and requires LECs to,
among other things, establish reciprocal compensation arrangements for the
transport and termination of calls and provide other telecommunications carriers
access to the network elements on an unbundled basis on reasonable and
non-discriminatory rates, terms and conditions. The LECs are now prohibited from
charging paging carriers for the "transport and termination" of LEC-originated
local calls. This prohibition could lead to substantial cost savings for us.
Moreover, under the 1996 Act and the FCC's rules, paging carriers are entitled
to compensation from any local telecommunications carrier for local calls that
terminate on a paging network. This could lead to additional revenues for us.
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<PAGE> 14
The 1996 Act also requires the FCC to appoint an impartial entity to
administer telecommunications numbering and to make numbers available on an
equitable basis. In addition, the 1996 Act requires that state and local zoning
regulations shall not unreasonably discriminate among providers of "functionally
equivalent" wireless services, and shall not have the effect of prohibiting the
provision of personal wireless services. The 1996 Act provides for expedited
judicial review of state and local zoning decisions. Additionally, state and
local governments may not regulate the placement, construction and modification
of personal wireless service facilities on the basis of the environmental
effects of radio frequency emissions, if the facilities comply with the FCC's
requirements. Other provisions of the 1996 Act, however, may increase
competition, such as the provisions which allow the FCC to forbear from applying
regulations and provisions of the Communications Act to any class of carriers,
not only to CMRS, and the provisions allowing public utilities to provide
telecommunications services directly. These provisions may impose additional
regulatory costs (for example, provisions requiring contributions to universal
service by providers of interstate telecommunications). Some of these FCC rules
are subject to pending petitions for reconsideration and Court appeals. We
cannot predict the final outcome of any FCC proceeding or the possible impact of
future FCC proceedings.
State. The 1993 Budget Act preempts all state and local rate and entry
regulation of all CMRS operators. Entry regulations typically refer to the
process whereby an CMRS operator must apply to the state to obtain a certificate
to provide service in that state. Rate regulation typically refers to the
requirement that CMRS operators file a tariff describing our billing rates,
terms and conditions by which we provide paging services. Apart from rate and
entry regulations, some states may continue to regulate other aspects of our
business in the form of zoning regulations (subject to the 1996 Act's
prohibition on discrimination against or among wireless telecommunications
carriers), or "health and safety" measures. The 1993 Budget Act does not preempt
state authority to regulate such matters. Although there can be no assurances
given with respect to future state regulatory approvals, based on our experience
to date, we know of no reason to believe such approvals would not be granted.
In 1997, the FCC held that the Budget Act does not prohibit states from
imposing requirements of CMRS carriers to contribute to funding "universal"
telephone service within the states. Approximately 25 states now impose such
"universal service fund" obligations. The FCC's determination that the states
may impose those obligations is currently on appeal; if that determination is
upheld, we may incur additional costs in contributing to state universal service
funds, which we typically pass through to our subscribers.
Litigation. Metrocall has filed complaints with the FCC against a number
of Regional Bell Operating Companies (RBOCs) and the largest independent
telephone company for violations of the FCC's interconnection and local
transport rules and the 1996 Act. The complaints allege that these local
telephone companies are unlawfully charging the Company for local transport of
the telephone companies' local traffic. The Company has petitioned the FCC to
rule that these local transport charges are unlawful and to award the Company 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.
Metrocall believes the Supreme Court's ruling appears to validate the FCC's
"proxy" pricing rules for LEC/CMRS interconnection. In addition, the Supreme
Court also ruled that the FCC had the authority to preempt any state or local
tariffs or interconnection agreements contrary to those rules, which we believe
may support our complaints filed with the FCC. At December 31, 1998, Metrocall
had approximately $14 million of credits receivable included in prepaid expenses
and other current assets related to past charges assessed by the LECs for which
the Company is seeking reimbursement.
SEASONALITY
Generally, our operating results are not significantly affected by seasonal
factors.
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TRADEMARKS AND SERVICE MARKS
We use the following trademarks and service marks:
- "Metrocall" -- a registered trademark with the U.S. Patent and Trademark
Office;
- "Datacall," "Metronet," "Metromessage" and "In-Touch" -- service marks
under which we market our paging services.
- "Metrotext" -- a computer program designed for use in transmitting
alphanumeric messages from personal computers to pagers (copyright
registration has been granted).
- "Metrofax" and "The Power in Paging" -- service marks.
- "One Touch", "EZ Pack Paging" and "Notesender" -- service marks
(applications with the U.S. Patent and Trademark Office are pending).
EMPLOYEES
As of December 31, 1998, we employed approximately 3,800 full and part-time
people none of whom is represented by a labor union. We believe that our
relationship with our employees is good.
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ITEM 6. SELECTED FINANCIAL DATA
The consolidated statements of operations data for fiscal years 1994, 1996,
1997 and 1998 presented below include the results of operations of acquired
companies from their respective acquisition dates. In May 1997, we sold the
assets of our telemessaging operations, which were acquired through merger on
November 15, 1996. Therefore, the results of operations for the year ended
December 31, 1997 include telemessaging operations through the date of sale
only. Consolidated statements of operations data for fiscal year 1997 exclude
the operations of ProNet Inc., because this merger was completed on December 30,
1997. Units in service at December 31, 1997 include approximately 1.3 million
units acquired in the ProNet merger.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------- -------- ------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE, UNIT, AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Service, rent and maintenance revenues.... $49,716 $ 92,160 $124,029 $249,900 $ 416,352
Product sales............................. 8,139 18,699 25,928 39,464 48,372
------- -------- -------- -------- ---------
Total revenues................... 57,855 110,859 149,957 289,364 464,724
Net book value of products sold........... (6,962) (15,527) (21,633) (29,948) (31,791)
------- -------- -------- -------- ---------
50,893 95,332 128,324 259,416 432,933
Operating expenses:
Service, rent and maintenance............. 10,632 20,080 29,696 69,254 115,432
Selling and marketing..................... 7,313 15,546 24,101 53,802 73,546
General and administrative(a)............. 16,796 33,985 42,905 73,753 121,644
Depreciation and amortization............. 13,829 31,504 58,196 91,699 234,948
------- -------- -------- -------- ---------
Loss from operations...................... 2,323 (5,783) (26,574) (29,092) (112,637)
Interest and other income (expense)(b).... 161 314 (607) 156 849
Interest expense.......................... (3,726) (12,533) (20,424) (36,248) (64,448)
------- -------- -------- -------- ---------
Loss before income tax benefit and
extraordinary item...................... (1,242) (18,002) (47,605) (65,184) (176,236)
Income tax provision benefit.............. 152 595 1,021 4,861 47,094
------- -------- -------- -------- ---------
Loss before extraordinary item............ (1,090) (17,407) (46,584) (60,323) (129,142)
Extraordinary item(b)..................... (1,309) (2,695) (3,675) -- --
------- -------- -------- -------- ---------
Net loss.............................. (2,399) (20,102) (50,259) (60,323) (129,142)
Preferred dividends....................... -- -- (780) (7,750) (11,767)
------- -------- -------- -------- ---------
Loss attributable to common
stockholders........................ $(2,399) $(20,102) $(51,039) $(68,073) $(140,909)
======= ======== ======== ======== =========
Loss per share attributable to common
stockholders:
Loss per share before extraordinary item
attributable to common stockholders..... $ (0.14) $ (1.49) $ (2.91) $ (2.51) $ (3.43)
Extraordinary item, net of income tax
benefit............................. (0.16) (0.23) (0.23) -- --
------- -------- -------- -------- ---------
Loss per share attributable to common
stockholders........................ $ (0.30) $ (1.72) $ (3.14) $ (2.51) $ (3.43)
------- -------- -------- -------- ---------
</TABLE>
- ---------------
(a) Includes the impact of one-time, non-recurring amounts for severance and
other compensation costs incurred as part of a management reorganization of
approximately $2.0 million in fiscal year 1995.
(b) In fiscal years 1994 and 1995, we refinanced balances outstanding under our
then existing credit facilities and recorded extraordinary items of $1.3
million and $2.7 million, respectively, representing charges to expense
unamortized deferred financing costs and other costs, net of any income tax
benefits, related to those credit facilities. In 1996, we recorded an
extraordinary item for costs of approximately $3.7 million paid to purchase
the A+ Network 11 7/8% senior subordinated notes outstanding. In 1995, we
incurred breakage fees of approximately $1.7 million associated with the
termination of two interest rate swap agreements, which have been included
in interest and other income (expense).
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You should find the definitions below useful in understanding Metrocall's
operating and other data:
- - EBITDA means earnings before interest, taxes, depreciation and amortization,
and certain one-time charges. While not a measure under generally accepted
accounting principles, EBITDA is a standard measure of financial performance
in the paging industry. Metrocall believes EBITDA can be used to measure its
ability to service debt, fund capital expenditures and expand its business.
EBITDA as defined by Metrocall is used in its credit facility and indentures
as part of the tests to determine its ability to incur debt and make
restricted payments. EBITDA as defined by Metrocall 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. Cash expenditures for various long-term assets,
interest expense and income taxes have been, and will be, incurred which are
not reflected in the EBITDA presentations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial
Condition, Liquidity and Capital Resources" included in our Annual Report on
Form 10-K for the year ended December 31, 1998. In 1995, EBITDA excludes
non-recurring amounts of approximately $2.0 million incurred as part of a
management reorganization.
- - EBITDA margin is calculated by dividing EBITDA by the amount of total revenues
less the net book value of products sold.
- - ARPU is 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, long
distance and cellular telephone.
- - Average monthly operating expense per unit is calculated by dividing (a) total
recurring operating expenses before depreciation and amortization for the
period by (b) the average number of units in service for the period. For this
calculation, operating expenses exclude non-recurring amounts for severance
and other compensation costs incurred as part of a management reorganization
of approximately $2.0 million in 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1994(a) 1995 1996 1997 1998(a)
-------- -------- ------------- ------------- -------------
(AS RESTATED) (AS RESTATED) (AS RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE, UNIT, AND PER UNIT DATA)
<S> <C> <C> <C> <C> <C>
OPERATING AND OTHER DATA:
Net cash provided by operating
activities............................. $ 11,796 $ 14,000 $ 15,608 $ 27,166 $ 41,154
Net cash used in investing activities.... (19,227) (44,528) (327,904) (176,429) (191,747)
Net cash provided by financing
activities............................. 9,190 151,329 199,639 163,242 134,133
EBITDA(d)................................ 16,152 27,771 31,622 62,607 122,311
EBITDA margin(d)(e)...................... 31.7% 29.1% 24.6% 24.1% 28.3%
ARPU(f).................................. 10.53 9.15 8.01 8.25 7.57
Average monthly operating expense per
unit(g)................................ 7.36 6.71 6.35 6.74 5.71
Units in service (end of period)(a)...... 755,546 944,013 2,142,351 4,030,836 5,659,550
Units in service per employee (end of
period)................................ 1,007 1,047 1,086 1,366 1,512
Capital expenditures..................... 19,091 44,058 62,110 69,935 78,658
-------- -------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)...................... $ (5,277) $116,009 $ (8,396) $ (36,747) $ (41,828)
Cash and cash equivalents...................... 2,773 123,574 10,917 24,896 8,436
Total assets................................... 200,580 340,614 645,488 1,078,023 1,251,038
Total long-term debt, net of current portion... 101,346 153,803 327,092 598,989 742,563
Total stockholders' equity..................... 68,136 155,238 165,169 170,505 33,780
</TABLE>
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of the financial
condition and results of operations of the Company together with the
Consolidated Financial Statements and the notes to the Consolidated Financial
Statements included elsewhere in this Annual Report and the description of
Metrocall's business in "Business."
OVERVIEW
Metrocall is a leading provider of local, regional and national paging and
other wireless messaging services. Through its nationwide wireless network, the
Company provides messaging services to over 1,000 U.S. cities, including the top
100 SMSAs. Since 1993, Metrocall's subscriber base has increased from less than
250,000 to more than 5.6 million. Metrocall has achieved this growth through a
combination of internal growth and a program of mergers and acquisitions. As of
December 31, 1998, the Company was the second largest messaging company in the
United States based on the number of subscribers.
Metrocall derives a majority of its revenues from fixed, periodic (usually
monthly) fees, generally not dependent on usage, charged to subscribers for
paging services. While a subscriber continues to use the Company's services,
operating results benefit from this recurring stream with minimal requirements
for incremental selling expenses or fixed costs.
Metrocall has grown internally by broadening its distribution network and
expanding its target market to capitalize on the growing appeal of messaging and
other wireless products and services, to gain access to different market
segments and to increase the penetration and utilization of its nationwide
network. Since December 31, 1993, the Company has added approximately 1.4
million new subscribers through internal growth. Over the past three years,
Metrocall has emphasized a number of distribution channels that are
characterized by lower ARPU, such as resellers, and correspondingly lower
operating costs. To offset declines in ARPU and to capitalize on the growth of
paging and other wireless messaging services, the Company has expanded its
channels of distribution to include, among others, Company-owned and-operated
retail outlets, strategic partnerships and alliances, Internet sales, with each
distribution channel focusing on the sale rather than the lease of pagers. Some
of these channels tend to have higher ARPU's than the Company's strategic
partners and typical resellers, who purchase service in quantity at wholesale
rates. Furthermore, Metrocall has been successful in marketing enhanced
services, such as nationwide paging services, voice mail and other ancillary
services for its strategic partners and other alliances.
The Company has also grown significantly through mergers and acquisitions.
Since July 1996, Metrocall has acquired the following companies, adding
approximately 3.6 million subscribers to its subscriber base.
<TABLE>
<CAPTION>
ACQUIRED COMPANY ACQUISITION DATE NUMBER OF SUBSCRIBERS
- ---------------- ----------------- ---------------------
<S> <C> <C>
Parkway...................................... July 16, 1996 140,000
Satellite.................................... August 30, 1996 100,000
A+ Network................................... November 15, 1996 660,000
Page America................................. July 1, 1997 198,000
ProNet....................................... December 30, 1997 1,286,000
AMD.......................................... October 2, 1998 1,215,000
---------
Total.............................. 3,599,000
=========
</TABLE>
On October 2, 1998, Metrocall continued its consolidation efforts by
acquiring AMD, the paging operations of AT&T, which increased its customer base
by adding approximately 1.2 million subscribers. As part of the acquisition,
Metrocall also acquired the NPCS license. Metrocall expects to realize the
following benefits from the AMD acquisition:
- Greater Scale and Scope. The AMD acquisition increases the Company's
geographic presence to include Alaska, Arkansas, Colorado, Kansas,
Minnesota, Missouri, Oklahoma, Oregon, Utah and
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<PAGE> 19
Washington. In addition, it adds to the Company's existing presence in
the Northeast, Southeast, Midwest, Mid-Atlantic and Southwest and West.
- Premium, High Revenue Customer Base. The AMD acquisition adds premium,
high revenue subscribers to the Company's existing customer base. AMD's
ARPU has historically been higher than the paging industry average. AMD
provided its paging and messaging services to large business customers,
which typically generated a higher ARPU than individual customers.
Approximately 23% of AMD's subscribers were high-ARPU alphanumeric
customers, one of the highest percentages in the paging industry.
Synergies. As Metrocall continues to integrate AMD's paging operations
with its own paging operations, it expects to realize synergies as a combined
company. For example, AMD provided nationwide paging services without the
benefit of a nationwide network. As a result, AMD spent $29.3 million in 1997
reselling other carriers' services, which adversely affected its margins. Over
time, the Company expects to switch a portion of AMD's customers to its
nationwide network, which will reduce third-party costs and increase the
utilization of its network. Metrocall expects to realize approximately $8.5
million in annual cost savings by increasing utilization of our network and from
the elimination of duplicative AMD functions like executive staffing, finance
and other positions. The Company expects to complete the integration of AMD by
the fourth quarter of 1999. Metrocall cannot assure you that it will be able to
integrate AMD successfully or achieve the expected synergies.
Metrocall's growth, whether internal or through consolidation, requires
significant capital investment for paging equipment and technical
infrastructure. The Company also purchases pagers for that portion of its
subscriber base to which it leases pagers. During the year ended December 31,
1998, capital expenditures totaled $78.7 million, which included approximately
$51.4 million for pagers, representing increases in pagers on hand and net
increases and maintenance to the pager base. Metrocall estimates that capital
expenditures for the year ending December 31, 1999 will approximate $80.0
million, primarily for paging equipment paging, and transmission equipment and
information systems enhancements.
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.
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 of the Company's sales force and related marketing
and advertising expenses.
- General and administrative expenses: include costs related to executive
management, accounting, office telephone, repairs and maintenance,
management information systems, rent and employee benefits.
18
<PAGE> 20
Year Ended December 31, 1998 Compared With December 31, 1997
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 Consolidated Statements of
Operations and certain other information for fiscal years 1997 and 1998.
<TABLE>
<CAPTION>
% OF % OF INCREASE
REVENUES 1997 REVENUES 1998 REVENUES OR (DECREASE)
- -------- ---------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Service, rent and maintenance..... $ 249,900 96.3 $ 416,352 96.2 $ 166,452
Product sales..................... 39,464 15.2 48,372 11.1 8,908
---------- ----- ---------- ----- ----------
Total revenues.......... 289,364 111.5 464,724 107.3 175,360
Net book value of products sold... (29,948) (11.5) (31,791) (7.3) 1,843
---------- ----- ---------- ----- ----------
Net revenues............ $ 259,416 100.0 $ 432,933 100.0 $ 173,517
ARPU.............................. $ 8.25 $ 7.57 $ (0.68)
Number of subscribers............. 4,030,836 5,659,550 1,628,714
</TABLE>
Service, rent and maintenance revenues. Service, rent and maintenance
revenues increased approximately $166.5 million from $249.9 million in 1997 to
$416.4 million in 1998. The increase in revenues was primarily due to the 40.4%
growth in the Company's subscriber base. In 1998, Metrocall added approximately
414,000 subscribers or 10.3% through internal growth and added approximately 1.2
million subscribers or 30.1% through the AMD acquisition. Also in 1998 service,
rent and maintenance revenues included those revenues generated from the 1.3
million subscriber base acquired in the December 30, 1997 ProNet merger for
which no revenues were recognized during 1997 and the 1.2 million subscribers
Metrocall acquired from the AMD acquisition on October 2, 1998. The decline in
monthly ARPU of $0.68 per unit from 1997 to 1998 was attributable to the
Company's subscriber distribution mix and the related increase in subscribers in
its lower ARPU indirect reseller distribution channel. The decline in ARPU was
partially offset by the increase in the Company's rental base due to the AMD
acquisition, as AMD had higher revenue rental subscribers. Factors affecting
ARPU in future periods include, among other things, distribution mix of new
subscribers, competition and new technologies. Metrocall cannot assure that ARPU
will not decline in future periods.
Product sales revenues. Product sales revenues which primarily includes
sales of pagers increased approximately $8.9 million from $39.5 million in 1997
to $48.4 million in 1998 and decreased as a percentage of net revenues from
15.2% in 1997 to 11.2% in 1998. Net book value of products sold increased
approximately $1.8 million from $29.9 million in 1997 to $31.8 million in 1998
and decreased as a percentage of net revenues from 11.5% in 1997 to 7.3% in
1998. The increase in product sales revenues was directly attributable to higher
unit sales and greater geographic penetration related to the ProNet merger and
the AMD acquisition.
The following tables set forth the amounts of operating expenses and
related percentages of net revenues represented by certain items in Metrocall's
Consolidated Statements of Operations and certain other information for fiscal
years 1997 and 1998.
<TABLE>
<CAPTION>
% OF % OF
OPERATING EXPENSES 1997 REVENUES 1998 REVENUES INCREASE
- ------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Service, rent and maintenance.......... $ 69,254 26.7 $115,432 26.7 $ 46,178
Selling and marketing.................. 53,802 20.7 73,546 17.0 19,744
General and administrative............. 73,753 28.5 121,644 28.1 47,891
Depreciation and amortization.......... 91,699 35.3 234,948 54.3 143,249
-------- ----- -------- ----- --------
$288,508 111.2 $545,570 126.1 $257,062
======== ===== ======== ===== ========
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
OPERATING EXPENSES PER UNIT IN SERVICE 1997 1998 $ DECREASE
- -------------------------------------- ----- ----- ----------
<S> <C> <C> <C>
Monthly service, rent and maintenance....................... $2.37 $2.12 $(0.25)
Monthly selling and marketing............................... 1.84 1.35 (0.49)
Monthly general and administrative.......................... 2.53 2.24 (0.29)
----- ----- ------
Average monthly operating costs............................. $6.74 $5.71 $(1.03)
===== ===== ======
</TABLE>
Overall in 1998, Metrocall experienced an $1.03 reduction in average
monthly operating expense per unit. As discussed below, the Company's operating
results in 1998 included the operating expenses of Page America and ProNet for a
full fiscal year. In addition, the Company's 1998 operating results include the
operating expenses of AMD from the October 2, 1998 acquisition date. Each
operating expense is discussed separately below.
Service, rent and maintenance expenses. Service, rent and maintenance
expenses increased approximately $46.2 million from $69.3 million in 1997 to
$115.4 million in 1998. Metrocall's service, rent and maintenance expenses
increased in 1998 because they included the service, rent and maintenance
expenses of Page America and ProNet for a complete fiscal year ($37.7 million)
and the expenses of AMD for the fourth quarter of 1998 ($15.2 million).
Exclusive of the impact of the ProNet merger and the Page America and AMD
acquisitions, service, rent and maintenance expenses in 1998 remained relatively
flat compared to 1997 expenses with increases in tower rents and network repairs
and maintenance expenses being partially offset by a decrease in expenses due to
the divesture of Metrocall's telemessaging operations during 1997 for which no
expenses were recognized in 1998. Average monthly service, rent and maintenance
expense per unit slightly declined in 1998 as a result of the higher average
subscriber base throughout 1998. As Metrocall continues to expand its networks
in order to serve more subscribers and offer advanced messaging capabilities,
these expenses may increase.
Selling and marketing expenses. Selling and marketing expenses increased
approximately $19.7 million from $53.8 million in 1997 to $73.5 million in 1998
and decreased as a percentage of net revenues from 20.7% in 1997 to 17.0% in
1998. Selling and marketing expenses increased in 1998 because they included the
selling and marketing expenses of Page America and ProNet for a complete fiscal
year ($16.5 million) and the expenses of AMD for the fourth quarter of 1998
($5.3 million). The decrease in selling and marketing expenses as a percentage
of revenues in 1998 was primarily from the impact of the Company's recent merger
and acquisitions and the related higher revenues base. Metrocall expects that
selling and marketing expenses may increase as a percentage of revenues in the
future as it expands its presence in existing and new markets. Average monthly
selling and marketing expense per unit declined in 1998 as a result of the
higher average subscriber base throughout 1998.
General and administrative expenses. General and administrative expenses
increased approximately $47.9 million from $73.8 million in 1997 to $121.6
million in 1998 and decreased as a percentage of net revenues from 28.5% in 1997
to 28.1% in 1998. General and administrative expenses increased in 1998 because
they included the general and administrative expenses of Page America and ProNet
for a complete fiscal year ($30.4 million) and the expenses of AMD for the
fourth quarter of 1998 ($10.6 million). Exclusive of the impact of the merger
and acquisitions, general and administrative expenses increased for a variety of
professional services ($3.9 million) and additional operating personnel ($3.0
million). The decrease in general and administrative expenses as a percentage of
net revenues in 1998 was primarily from the benefit of economies of scale
related to the Company's recent merger and acquisitions and the related increase
in the revenue base. Metrocall expects general and administrative expenses per
unit to continue to decrease in 1999 as it gains additional synergies from the
AMD acquisition.
Depreciation and amortization expenses. Depreciation and amortization
expense increased approximately $143.2 million from $91.7 million in 1997 to
$234.9 million in 1998. The increase in total depreciation expense in 1998 was
approximately $20 million and resulted primarily from depreciation on additional
subscriber paging equipment and other plant and equipment acquired mainly in the
ProNet merger and Page America and AMD acquisitions. The increase in total
amortization expense in 1998 was approximately $123 million and resulted
primarily from amortization expenses on intangibles acquired in Metrocall's
recent
20
<PAGE> 22
merger and acquisitions and the reduction in estimated useful lives of certain
intangibles described below. Metrocall expects depreciation and amortization
expenses in 1999 to increase as a result of a full year's impact of the AMD
acquisition.
Effective January 1, 1998, the Company reduced the estimated useful lives
of certain intangibles, including goodwill, regulatory licenses issued by the
FCC and subscriber bases recorded in conjunction with acquisitions from 15 years
to 10 years for goodwill, from 25 years to 10 years for FCC licenses and from 5-
6 years for subscriber bases to 3 years. The impact of these changes was to
increase amortization expense in 1998 by approximately $26 million.
The following table indicates the recorded balances of certain intangible
assets, by acquisition, held by Metrocall at December 31, 1997, immediately
before the change in the amortization period for these assets:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
ACQUISITION ACQUISITION DATE GOODWILL FCC LICENSES SUBSCRIBER BASE
----------- ---------------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Parkway July 16, 1996 $ 12,966 $ 18,364 $ 1,957
Satellite August 30, 1996 2,334 19,412 2,141
A+ Network November 15, 1996 117,905 110,697 19,876
Page America July 1, 1997 0 30,364 29,533
ProNet December 30, 1997 20,706 71,475 205,582
Other acquisitions 39,942 62,561 5,400
-------- -------- --------
$193,853 $312,873 $264,489
======== ======== ========
</TABLE>
Metrocall reduced the period of amortization for amounts allocated to
goodwill from 15 to 25 years to 10 years for each of its acquisitions because of
the effects of technological and competitive pressures that had impacted the
industry and that were expected to continue. For instance, during late 1997 and
early 1998, technological developments occurred with respect to advanced
messaging devices and products which would compete against the traditional
paging businesses that Metrocall had acquired in 1996 and 1997. Accordingly,
Metrocall believed that the estimated useful life of the underlying goodwill
recorded from its acquisitions was shortened due to these technological
developments and the risks of increased competition and marketing pressures on
its traditional paging business. Metrocall also reduced the number of years it
amortized the balances of its subscriber bases acquired with each acquisition
because of the continued and heightened competitive pressures that it had
experienced and that were evident in the one-way paging industry and the
technological developments in the industry that it believed would create new
products and services, which would compete with Metrocall's paging services.
Metrocall believes the revision in its estimated lives was necessary to ensure
that the recorded balances of these intangible assets and the change to a ten
year amortization period for goodwill and three year amortization period for its
subscriber bases appropriately match the value and future benefits of these
assets.
Metrocall also reduced the period that it amortized amounts paid for FCC
licenses from 25 years to 10 years as a result of the new FCC auction rules and
other regulatory changes that occurred during 1997 and early 1998. The revised
amortization period now matches the 10 year FCC holding period on most licenses.
Metrocall believed that it was necessary to conform and limit its amortization
period to the FCC initial holding period for these licenses because of the
effects of the increased competition in the license auction process, the site
build-out requirements imposed on newly awarded licenses and the trade-in
provisions for wide-area licenses all of which could limit the period of time
that Metrocall holds a specific license.
21
<PAGE> 23
<TABLE>
<CAPTION>
$
OTHER 1997 1998 INCREASE
- ----- -------- --------- --------
<S> <C> <C> <C>
Interest and other income, net............................. $ 156 $ 849 $ 693
Interest expense........................................... (36,248) (64,448) 28,200
Income tax benefit......................................... 4,861 47,094 42,233
Net loss................................................... (60,323) (129,142) 68,819
Preferred dividends........................................ (7,750) (11,767) 4,017
EBITDA..................................................... 62,607 122,311 59,704
</TABLE>
Interest expense. The increase in interest expense in 1998 of
approximately $28.2 million was the result of higher average debt balances
outstanding during the fiscal year primarily associated with the additional debt
assumed with the ProNet merger and financing requirements of the AMD
acquisition. During 1998, total debt increased by $143.4 million to $743.3
million. Metrocall expects interest expense in 1999 to increase from 1998 due to
expected higher average debt balances during 1999.
Income tax benefit. The increase in the income tax benefit in 1998 of
approximately $42.2 million was the result of the tax benefit recorded on the
amortization of non-goodwill related intangible assets primarily generated from
the ProNet merger which occurred on December 30, 1997 for which no tax benefits
were generated in 1997 and the AMD acquisition which occurred on October 2,
1998.
Net loss. Metrocall's net loss increased approximately $68.8 million from
$60.3 million in 1997 to $129.1 million in 1998. The increase in net loss was
primarily the result of increased depreciation and amortization and other
operating expenses associated with the ProNet merger and the Page America and
AMD acquisitions offset by increases in net revenues related to an increase in
the Company's subscriber base as a result of internal growth and its recent
merger and acquisitions.
Preferred dividends. The increase in preferred dividends in 1998 of
approximately $4.0 million was the result of higher dividends paid to the
holders of the Series A Preferred and the Series B Preferred in 1998 and
dividends paid in the fourth quarter of 1998 to the holder of the Series C
Preferred. Dividends recognized on the Series A Preferred and the Series B
Preferred increased by $0.8 million and $1.3 million, respectively due to their
cumulative nature. On October 2, 1998, Metrocall issued 9,500 shares of the
Series C Preferred in connection with the AMD acquisition. Dividends recognized
on the Series C Preferred were approximately $1.9 million.
EBITDA. The increase in EBITDA in 1998 of approximately $59.7 million was
primarily the result of the increase in revenues in 1998 offset to a lesser
extent by the increase in operating expenses. Metrocall's EBITDA margin improved
from 24.1% in 1997 to 28.3% in 1998.
Year Ended December 31, 1997 Compared With December 31, 1996
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 Consolidated Statements of
Operations and certain other information for fiscal years 1996 and 1997.
<TABLE>
<CAPTION>
% OF % OF
REVENUES 1996 REVENUES 1997 REVENUES INCREASE
- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Service, rent and maintenance..... $ 124,029 96.7 $ 249,900 96.3 $ 125,871
Product sales..................... 25,928 20.2 39,464 15.2 13,536
---------- ----- ---------- ----- ----------
Total revenues.......... 149,957 116.9 289,364 111.5 139,407
Net book value of products sold... (21,633) (16.9) (29,948) (11.5) 8,315
---------- ----- ---------- ----- ----------
Net revenues............ $ 128,324 100.0 $ 259,416 100.0 $ 131,092
ARPU.............................. $ 8.01 $ 8.25 $ 0.24
Number of Subscribers............. 2,142,351 4,030,836 1,888,485
</TABLE>
Service, rent and maintenance revenues. Service, rent and maintenance
revenues increased approximately $125.9 million from $124.0 million in 1996 to
$249.9 million in 1997. Growth in the Company's
22
<PAGE> 24
subscriber base was the primary reason for the revenues increase. During 1997,
Metrocall's subscriber base grew by approximately 1.9 million, which included
approximately 1.3 million subscribers acquired in the ProNet merger. Monthly
ARPU for paging services increased by $0.24 due to subscriber revenue mix
acquired in the Company's merger with A+ Network in November 1996, general
service rate increases, the shift in the sales mix from primarily direct
distribution channels, especially the direct sales force, to indirect channels
and Company-owned retail stores, and the sale of enhanced paging services.
Product sales revenues. Product sales revenues increased approximately
$13.5 million from $25.9 million in 1996 to $39.5 million in 1997 and decreased
as a percentage of net revenues from 20.2% in 1996 to 15.2% in 1997. Net book
value of products sold increased approximately $8.3 million from $21.6 million
in 1996 to $29.9 million in 1997 principally because of the increase in product
sales, partially offset by increased depreciation expense. Metrocall's gross
margin on products sold increased from 16.6% in 1996 to 24.1% in 1997.
The following tables set forth the amounts of operating expenses and
related percentages of net revenues represented by certain items in Metrocall's
Consolidated Statements of Operations and certain other information for fiscal
years 1996 and 1997.
<TABLE>
<CAPTION>
% OF % OF
OPERATING EXPENSES 1996 REVENUES 1997 REVENUES INCREASE
- ------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Service, rent and maintenance.......... $ 29,696 23.1 $ 69,254 26.7 $ 39,558
Selling and marketing.................. 24,101 18.8 53,802 20.7 29,701
General and administrative............. 42,905 33.4 73,753 28.5 30,848
Depreciation and amortization.......... 58,196 45.4 91,699 35.3 33,503
-------- ----- -------- ----- --------
$154,898 120.7 $288,508 111.2 $133,610
======== ===== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
INCREASE
OPERATING EXPENSES PER UNIT IN SERVICE 1996 1997 OR (DECREASE)
- -------------------------------------- ----- ----- -------------
<S> <C> <C> <C>
Monthly service, rent and maintenance....................... $1.95 $2.37 $ 0.42
Monthly selling and marketing............................... 1.58 1.84 0.26
Monthly general and administrative.......................... 2.82 2.53 (0.29)
----- ----- ------
Average monthly operating expense........................... $6.35 $6.74 $ 0.39
</TABLE>
Overall in 1997, Metrocall experienced a $0.39 increase in average monthly
operating expense per unit. As discussed below, the Company's operating results
in 1997 included the operating expenses of the 1996 acquisitions of Parkway,
Satellite, and A+ Network for a full fiscal year. In addition, the operating
results include the operating expenses of Page America from the July 1, 1997
acquisition date.
Service, rent and maintenance expenses. Service, rent and maintenance
expenses increased approximately $39.6 million from $29.7 million in 1996 to
$69.3 million in 1997 and increased as a percentage of net revenues from 23.1%
in 1996 to 26.7% in 1997. In 1997, the overall increases in service, rent and
maintenance expenses and as a percentage of revenues were attributable to the
acquisitions of Parkway ($1.1 million), Satellite ($1.3 million), A+ Network
($22.7 million) and Page America ($2.6 million) completed during 1996 and 1997.
Additional increases were primarily due to increased site rental costs ($3.1
million) and increased personnel costs ($1.7 million) partially offset by
reductions in third party carrier costs ($1.9 million). The monthly service,
rent and maintenance expense per unit increased by $0.42 per unit as a result of
the above items.
Selling and marketing expenses. Selling and marketing expenses increased
approximately $29.7 million from $24.1 million in 1996 to $53.8 million in 1997
and increased as a percentage of net revenues from 18.8% in 1996 to 20.7% in
1997. The increase in selling and marketing expenses and the increase as a
percentage of net revenues were primarily associated with the 1996 and 1997
acquisitions, which added new sales offices and retail locations. Selling and
marketing expenses attributed to the acquired companies were Parkway ($1.0
million), Satellite ($0.8 million), A+ Network ($24.5 million) and Page America
($1.3 million). Additional increases were associated with the increased sales
staff and related costs ($1.5 million) and
23
<PAGE> 25
increased advertising and promotional costs ($0.1 million). Monthly selling and
marketing expense per unit increased in 1997 by $0.26 per unit due primarily to
increases in the Company's sales force as a result of acquisitions in new
geographic areas.
General and administrative expenses. General and administrative expenses
increased approximately $30.8 million from $42.9 million in 1996 to $73.8
million in 1997 and decreased as a percentage of net revenues from 33.4% in 1996
to 28.5% in 1997. The general and administrative expenses increase was primarily
the result of the acquired companies including the operating results of Parkway
($0.7 million), Satellite ($1.9 million), A+ Network ($21.3 million) and Page
America ($1.4 million). General and administrative expenses also increased
primarily due to increased expenses for billing, credit and collection
activities ($3.4 million) and additional operational and administrative
personnel ($3.7 million). The decrease in general and administrative expenses as
a percentage of net revenues was attributable to economies of scale recognized
from the 1996 and 1997 acquisitions and the related increase in the Company's
subscriber base.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased approximately $33.5 million from $58.2 million in 1996 to
$91.7 million in 1997. The increase in depreciation expense resulted primarily
from depreciation on increased levels of subscriber paging equipment and other
plant and operating equipment. Amortization expenses increased substantially
during 1997 due to the amortization expense of goodwill and other intangibles
related to the 1996 and 1997 acquisitions. Effective July 1, 1996, the Company
changed the estimated useful lives of certain intangibles acquired in 1994,
including goodwill and regulatory licenses issued by the FCC from 40 years to 15
years for goodwill and from 40 years to 25 years for FCC licenses. The impact of
these changes was to increase amortization expense for 1997 by approximately
$2.6 million.
<TABLE>
<CAPTION>
INCREASE OR
OTHER 1996 1997 (DECREASE)
- ----- -------- -------- -----------
<S> <C> <C> <C>
Interest and other income (expense)........................ $ (607) $ 156 $ 763
Interest expense........................................... (20,424) (36,248) 15,824
Income tax benefit......................................... 1,021 4,861 3,840
Extraordinary item......................................... (3,675) -- (3,675)
Net loss................................................... (50,259) (60,323) 10,064
Preferred dividends........................................ (780) (7,750) 6,970
EBITDA..................................................... 31,622 62,607 30,985
</TABLE>
Interest expense. The increase in interest expense of approximately $15.8
million in 1997 was due to a higher average level of debt outstanding during
1997 primarily associated with the financing of the 1996 and 1997 acquisitions.
Net loss. Metrocall's net loss increased approximately $10.0 million from
$50.3 million in 1996 to $60.3 million in 1997. The increase in net loss was
primarily the result of increased depreciation and amortization and other
operating expenses associated with the Parkway, Satellite and A+ Network and
Page America acquisitions offset by increases in net revenues related to an
increase in the Company's subscriber base as a result of internal growth and the
1996 and 1997 mergers and acquisitions.
Preferred dividends. The increase in preferred dividends in 1997 of
approximately $7.0 million was the result of an increase in dividends paid to
the holders of the Series A Preferred ($6 million) and dividends paid to the
holders of the Series B Preferred ($1 million).
EBITDA. EBITDA increased approximately $31.0 million from $31.6 million in
1996 to $62.6 million in 1997. EBITDA margin decreased from 24.6% in 1996 to
24.1% in 1997.
INFLATION
Inflation is presently not a material factor affecting Metrocall's
business. Traditional one-way paging system equipment and operating costs have
not increased and one-way pager costs have declined significantly
24
<PAGE> 26
in recent years. General operating expenses such as salaries, employee benefits
and occupancy costs are, however, subject to inflationary pressures.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the three years ended December 31, 1998, Metrocall's operations have
required significant funding, primarily to support mergers and acquisitions and
capital expenditures for paging infrastructure and equipment requirements.
Metrocall has met its funding requirements with cash generated from operating
activities, borrowings under its credit facilities and proceeds from its senior
subordinated notes offerings.
Cash Flows
For 1998, the Company's cash provided by operating activities increased
approximately $14.0 million or 51.5% from $27.2 million in 1997 to $41.2 million
in 1998. The increase in cash provided by operating activities was primarily
attributable to the effects of the ProNet merger and the AMD acquisition and
related synergies, and the Company's internal growth.
Net cash used in investing activities in 1998 increased by $15.3 million or
8.7% from $176.4 million in 1997 to $191.7 million in 1998. During 1998, the
Company borrowed $110 million under its credit facility to fund the cash portion
of the purchase price for the AMD acquisition. Capital expenditures for 1998
included approximately $51.4 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 $12.8 million for information
systems and computer related equipment, $12.7 million for network construction
and development and $1.7 million for general purchases including leasehold
improvements.
Net cash used in financing activities in 1998 decreased by $29.1 million or
17.8% from $163.2 million in 1997 to $134.1 million in 1998. During 1998,
Metrocall borrowed $133 million under its credit facility and repaid
approximately $234.2 million. Of the borrowings under the facility, $110 million
was used for the cash portion of the purchase price for the AMD acquisition and
the remaining amount was used for general corporate purposes. The repayments
made under the facility included $229 million using proceeds from the Company's
senior subordinated notes offering in 1998 as described below.
Working Capital
Working capital (defined as current assets less current liabilities) was a
deficit of $41.8 million and $36.7 million in 1998 and 1997, respectively. In
1998, current assets increased by approximately $0.6 million, primarily as a
result of increases in trade receivables and other current assets acquired in
the AMD acquisition offset by lower cash balances. Current liabilities increased
by approximately $5.7 million as a result of higher deferred revenue due to a
higher number of subscribers offset by lower other current liabilities.
LONG-TERM DEBT
At December 31, 1998 and 1997, long-term debt consisted of:
<TABLE>
<CAPTION>
INCREASE OR
LONG-TERM DEBT 1997 1998 (DECREASE)
- -------------- -------- -------- -----------
<S> <C> <C> <C>
Borrowings under the credit facility...... $141,165 $ 40,000 $(101,165)
Senior subordinated notes................. 452,534 698,544 246,010
Capital leases and other debt............. 6,242 4,790 (1,452)
-------- -------- ---------
Total long-term debt............ $599,941 $743,334 $ 143,393
======== ======== =========
</TABLE>
Borrowings and repayments under the credit facility. During 1998,
Metrocall reduced borrowings outstanding under its credit facility by
approximately $101.2 million. Repayments under the credit facility were funded
primarily with proceeds from the Company's senior subordinated notes offering in
1998. At the time of the 1998 notes offering, amounts outstanding under the
credit facility approximated $269 million, which had primarily included amounts
outstanding at December 31, 1997 and additional borrowings of
25
<PAGE> 27
$110 million used to fund the cash portion of the AMD purchase price. Through
March 1, 1999, Metrocall borrowed under the credit facility an additional $24
million of which $16.2 million was used to fund the repurchase of the Series B
Preferred and the remaining was used for general corporate purposes.
During 1998, Metrocall twice revised the terms of its credit facility to
accommodate the AMD acquisition and its 1998 notes offering. On October 2, 1998,
the Company and its bank lenders increased the amount of borrowings available
under the credit facility by $100 million to $400 million. The additional $100
million term loan facility was used to fund the cash portion of the AMD
acquisition. On December 22, 1998, the Company and its bank lenders reduced the
amount of borrowings available under the credit facility by $200 million to $200
million in connection with the 1998 notes offering. Subject to certain
conditions set forth in the Company's revised credit facility agreement,
Metrocall may borrow up to $200 million under two loan facilities through
December 31, 2004. The first facility (Facility A) is a $150 million reducing
revolving credit facility and the second (Facility B) is a $50 million reducing
term credit. The credit facility is secured by substantially all of Metrocall's
assets. Required quarterly principal repayments, as defined, begin on March 31,
2001 and continue through December 31, 2004.
Under the revised credit facility, the Company is required to comply with
certain financial and operating covenants. The Company is required to maintain
certain financial ratios, including 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 ownership control of Metrocall, as defined. At December 31, 1998, the
Company was in compliance with all of these covenants.
Proceeds raised from the issuance of senior subordinated notes. In December
1998, Metrocall completed a private placement of $250 million aggregate
principal amount of 11% senior subordinated notes due 2008. The notes bear
interest, payable semi-annually on March 15 and September 15. The notes may be
redeemed at the Company's option on or after September 15, 2003. The 1998 Notes
are unsecured obligations of the Company, subordinated to all of its present and
future senior indebtedness. The Company used the net proceeds from the notes of
approximately $242 million to repay outstanding indebtedness under its credit
facility and for other corporate purposes. The Company is required to register
the notes under the Securities Act by June 22, 1999. If this requirement is not
met, the annual interest rate on the 1998 Notes will increase by .5% until the
notes are generally freely transferable.
The notes contain various covenants that, among other restrictions, limit
Metrocall's ability to incur additional indebtedness, pay dividends, engage in
certain other transactions with affiliates, sell assets and engage in mergers
and consolidations except under certain conditions.
ACCESS TO FUTURE CAPITAL
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, the Company 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
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<PAGE> 28
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 consecutive trading days. At December 31, 1998, Metrocall met the
net tangible asset requirement. If in the future, the Company fails to meet
these standards, it could take a number of actions to maintain listing on a
national exchange including, among others, a reverse stock split, stock
repurchase program, or transfer of its listing to the Nasdaq SmallCap Market.
YEAR 2000 READINESS DISCLOSURE
The year 2000 issue consists of two primary shortcomings of many electronic
data processing systems that may make them unable to process year-date data
accurately beyond the year 1999. First, computer programmers consistently
abbreviated dates by eliminating the first two digits of the year, e.g. December
31, 1998 would become 12/31/98. This shortcut may cause electronic data
processing systems to recognize a date on January 1, 2000 as January 1, 1900 and
process data inaccurately or stop processing altogether. Second, the algorithm
used in some electronic data processing systems for calculating leap years is
unable to detect that the year 2000 is a leap year. Therefore, systems that are
not year 2000 compliant may not register the additional day, resulting in
incorrect date calculations.
Metrocall utilizes software and related computer technologies essential to
its operations that may be affected by the year 2000 issue. Accordingly, the
Company has devised an enterprise-wide program, consisting of the following
phases, aimed to mitigate the year 2000 issue.
Identification and Assessment of Potential Problem Areas. By March 30,
1999, Metrocall had inventoried a substantial portion of its computer hardware
and software systems and the embedded systems contained in its plant and
facilities and related infrastructure. This process was undertaken with the goal
of identifying the Company's critical and non-critical systems and assessing
whether or not such systems are year 2000 compliant. Metrocall's critical
systems include: paging infrastructure, billing systems, telephone services,
financial systems and operating systems and hardware. For each of these systems,
the Company has developed or is in the process of developing a validation or
remediation plan to address year 2000 concerns that have been identified.
Remediation of Identified Problem Areas. During Metrocall's identification
and assessment phase, it had identified requirements for certain systems that it
believes will enable these systems to become year 2000 compliant. The
remediation phase includes correcting identified problem areas. This may include
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 majority of its remediation efforts by September 1999.
Validation. As Metrocall makes changes to applications and components of
its systems, it intends to validate and test those changes for year 2000
compliance. The Company plans to perform validation and testing on a system-wide
basis to ensure that any changes made are compatible with interacting systems.
The Company may also conduct acceptance testing, where it deems it necessary.
Metrocall is currently undertaking this phase on certain applications.
Implementation. This phase involves integrating the systems changes
Metrocall made in the remediation stage once they have been appropriately
validated. As Metrocall implements and integrates such changes, it may still
discover that its systems include both year 2000 compliant and non-compliant
applications and components. Metrocall does not expect this combination to have
any significant adverse effect upon its operations but intends to develop
appropriate contingency recovery plans to reduce the risk of such effects.
Metrocall has begun this phase for certain systems' applications and the
Company's goal is to achieve completion of the entire phase by the end of the
fourth quarter 1999.
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<PAGE> 29
Third Parties. Metrocall believes that many of its interconnect carriers,
equipment suppliers and other primary vendors have year 2000 issues that may
affect the Company. Metrocall has sought and will continue to seek confirmation
from these parties that they are developing and implementing plans to become
year 2000 compliant. 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. Confirmations received to date have indicated
that such respondents are in the process of implementing remediation plans in an
effort to bring their systems into year 2000 compliance.
Contingency Plans. The Company is in the process of determining
contingency plans for each of its systems if such systems are not year 2000
compliant. The contingency plans will address "likely" worst case scenarios for
each system included in the year 2000 program. They will also consider, to the
extent Metrocall believes necessary, plans that 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 during 1999.
The following briefly describes each of Metrocall's critical systems and
their year 2000 readiness.
- Paging Infrastructure. Metrocall has an extensive paging infrastructure
that provides services to its customers over a number of different
frequencies. The Company 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
to the Company's paging infrastructure. Metrocall expects certain
software upgrades to be installed by the end of the third quarter of
1999, and those upgrades will be validated and tested shortly thereafter.
Certain of the Company's hardware units will require upgrade to support
the required software. Such units will be upgraded at the same time the
software upgrades are performed. Metrocall expects to incur approximately
$7 million during 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.
The Company 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 AMD. Its year
2000 readiness was previously tested and warranted by AMD's 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, the Company will
move forward with its testing of the platforms and their interfaces to
the paging and financial systems. Metrocall expects to incur
approximately $2.0 million during 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, the Company's 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. Metrocall's goal is to complete this phase by the end
of the fourth quarter, with validation and implementation completed by
December 1999. The Company's cost for these initiatives in 1999 is
expected to be approximately $1.5 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 asset, purchase and inventory
systems, have been vendor-certified for year 2000 compliance. The Company
is in process of testing the financial systems for functionality and data
integrity between interfaces. The Company expects to have all testing
completed by the end of the third quarter of 1999. Metrocall does not
expect to incur any significant 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 such systems are scheduled for software
upgrades that will improve their functionality and are year 2000
compliant. The
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<PAGE> 30
Company anticipates completing these upgrades throughout 1999 with
validation and implementation occurring shortly thereafter. Metrocall has
identified personal computers that are not year 2000 compliant and which
it intends to replace by December 31, 1999. The Company expects the cost
of these initiatives to be approximately $3.5 million.
Metrocall is utilizing both internal and external resources to remediate
and test its systems for year 2000 compliance. The Company 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
Metrocall's goal that its systems be year 2000 compliant on or before December
31, 1999, there can be no assurance that the Company'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.
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<PAGE> 31
RISK FACTORS
RISKS TO THE BUSINESS -- METROCALL'S BUSINESS MIGHT BE ADVERSELY AFFECTED BY
FACTORS BEYOND ITS CONTROL.
Metrocall believes that its future operating results and funds generated
from operations and available under its credit facility will be sufficient to
meet general corporate requirements and planned capital expenditures for the
foreseeable future. Metrocall however cannot identify nor can it control all
circumstances that could occur in the future that may adversely affect its
business and results of operations. Some of the circumstances that may occur and
may impair Metrocall's business are described below. If any of the following
circumstances were to occur, Metrocall's business, financial conditions or
results of operations could be materially adversely affected.
OPERATING LOSSES -- METROCALL HAS A HISTORY OF OPERATING LOSSES AND EXPECTS TO
CONTINUE TO INCUR OPERATING LOSSES IN THE FUTURE. AS A RESULT, WE MAY NOT BE
ABLE TO MEET OUR CASH NEEDS FROM OPERATIONS OR PAY OUR DEBT OBLIGATIONS.
Metrocall historically has had operating losses and expects these losses to
continue. These losses make it more difficult for us to meet our cash and other
working capital needs, to support our business operations and to pay our debt
obligations as they become due because we must rely on our ability to obtain
financing or we must try to generate additional revenue. The losses have
resulted because Metrocall has focused mainly on its consolidation and growth
strategies and its capital expenditure requirements, instead of focusing mainly
on current earnings. Metrocall has sustained net losses of $50.3 million, $60.3
million and $129.1 million for fiscal years 1996, 1997 and 1998. At December 31,
1998, Metrocall's accumulated deficit was approximately $306.9 million and its
working capital deficit was $41.8 million. Metrocall expects to continue to
incur losses from operations in the future because its business requires
substantial funds for capital expenditures and acquisitions, both of which cause
significant depreciation and amortization expenses. In addition, we have
substantial levels of borrowing, which causes significant interest expense,
expected to be outstanding in the foreseeable future. We cannot assure you that
we can reverse operating losses and achieve profitability in the future. We
cannot assure you that we will be able to meet all of our cash and other working
capital needs from operations in the future.
ABILITY TO COVER FIXED CHARGES -- METROCALL'S EARNINGS HAVE HISTORICALLY BEEN
INSUFFICIENT TO COVER FIXED CHARGES AND AS A RESULT METROCALL MIGHT NEED TO
BORROW ADDITIONAL AMOUNTS IN THE FUTURE.
In previous fiscal years, Metrocall's earnings have been insufficient to
cover its fixed charges. Fixed charges, as well as capital expenditure
requirements and other interest expense obligations, may cause Metrocall to
borrow additional amounts in the future.
Fixed charges primarily include interest expenses related to its long-term
debt. The insufficient amount of earnings is primarily attributable to
Metrocall's history of significant net losses. The chart below shows the extent
to which fixed charges exceed earnings.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amount of fixed charges................ $ 4,605 $ 14,171 $ 23,206 $ 43,213 $ 76,454
Deficiency of earnings to fixed
charges.............................. (1,242) (18,002) (47,605) (65,184) (176,236)
</TABLE>
In addition to the amount required to cover its fixed charges, Metrocall's
business requires substantial funds for capital expenditures for paging and
other wireless messaging equipment and for payment of significant interest
expenses associated with its substantial levels of borrowings. The substantial
amount of funds associated with Metrocall's business may require it to incur
additional borrowings from time to time. For 1999, Metrocall believes it will
need to borrowing additional amounts under its credit facility but does not
expect that amount to exceed approximately $40.0 million to $45.0 million.
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<PAGE> 32
SUBSTANTIAL AMOUNT OF INDEBTEDNESS -- OUR SUBSTANTIAL AMOUNT OF INDEBTEDNESS
COULD ADVERSELY AFFECT OUR BUSINESS OPERATIONS, LIMIT OUR ABILITY TO USE DEBT TO
FUND FUTURE CAPITAL NEEDS AND PREVENT US FROM MEETING OUR OBLIGATIONS UNDER OUR
DEBT INSTRUMENTS.
Metrocall has a substantial amount of indebtedness. The following chart
sets forth important credit information:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------
<S> <C>
Total indebtedness........................................ $743.3 million
Stockholders' equity...................................... 33.8 million
Debt to equity ratio...................................... 22.0x
</TABLE>
Our substantial indebtedness, along with the net operating losses and
working capital deficits we have sustained in recent periods, could adversely
affect our business. For example, it may:
- make it more difficult for us to satisfy our debt;
- require Metrocall to dedicate a substantial portion of our operating cash
flows from operations to pay interest expense;
- limit our ability to react to changes in market conditions, changes in
our industry and economic downturns;
- place Metrocall at a competitive disadvantage with respect to its ability
to finance future acquisitions or capital expenditures compared to its
competitors that have less debt;
- limit our ability to borrow additional funds; and
- cause Metrocall to be vulnerable to increases in interest rates because
its indebtedness under the credit facility bears interest at floating
rates, only a portion of which is hedged.
Our senior loan agreement and other debt allow us to incur more debt. At
March 31, 1999, our senior loan covenants would permit us to borrow an
additional $63.0 million. Further borrowings could increase these risks.
OPERATING AND FINANCIAL RESTRICTIONS -- METROCALL'S DEBT AGREEMENTS IMPOSE
OPERATING AND FINANCIAL RESTRICTIONS. IF METROCALL FAILS TO COMPLY WITH THESE
RESTRICTIONS, THE HOLDERS OF THE DEBT COULD DEMAND THAT METROCALL PAY THEM
IMMEDIATELY.
Metrocall's debt agreements impose significant operating and financial
restrictions. If we fail to comply with these restrictions, we would be in
default under the debt agreements and holders of the debt could demand that we
pay them immediately. If the debt holders were to demand immediate payment, we
cannot assure you that we would be able to pay or refinance the debt on
acceptable terms to us. In addition, if we fail to comply with a restriction in
our credit facility, the lenders under that credit facility could proceed
against the assets of Metrocall, which we pledged to the lenders as collateral
for the payment of the debt.
The restrictions in the debt agreements significantly limit or prohibit,
among other things:
- our ability to incur additional debt and particular types of debt,
- pay cash dividends,
- repurchase or redeem our capital stock,
- make investments or other payments,
- create security interests,
- engage in transactions with stockholders or affiliates,
- sell assets,
- issue or sell stock of subsidiaries,
- merger or consolidate with other companies.
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<PAGE> 33
In addition, we must comply with the financial ratios in our credit
facility and the restrictions imposed by our preferred stock. We cannot assure
you that we will be able to meet these financial ratios and restrictions in the
future.
INTANGIBLE ASSETS -- MOST OF METROCALL'S ASSETS ARE INTANGIBLE ASSETS WHOSE
VALUE MAY DECREASE FROM FACTORS BEYOND METROCALL'S CONTROL. IF THE VALUE OF
THOSE ASSETS WERE TO DECREASE AND METROCALL WERE REQUIRED TO SATISFY ITS DEBT
OBLIGATIONS BASED ON ITS ASSETS' VALUE, METROCALL MIGHT NOT BE ABLE TO SATISFY
THOSE DEBT OBLIGATIONS.
Most of Metrocall's assets are intangible assets. primarily FCC licenses
and certificates, goodwill, subscriber lists and deferred financing costs. At
December 31, 1998, our total assets were approximately $1,251.0 million, of
which net intangible assets were approximately $894.7 million. If we were
required to satisfy our obligations under our credit facility because, for
example, we defaulted under our debt agreements, became insolvent or were
liquidated, and our lenders under our credit facility proceeded against our
assets to satisfy those obligations, the value of our assets might not be
sufficient to satisfy those obligations. The reason the value of our assets
might be insufficient is because the value of intangible assets could be
impaired by factors beyond our control, such as changes in technology,
regulation, available financing or competitive pressures. We cannot assure you
that the value of our assets is or will be sufficient to repay our debt
obligations under our credit facility.
ADDITIONAL COMPETITION DUE TO TECHNOLOGICAL DEVELOPMENTS -- TECHNOLOGICAL
DEVELOPMENTS COULD LEAD TO INCREASED COMPETITION TO METROCALL.
Future technological developments in the wireless communications industry,
such as narrowband PCS and broadband PCS, could create new services or products
that compete with our paging and wireless messaging services. See "Competition"
in Part I, Item 1 for a discussion of these developments. That increased
competition might result in loss of existing or future subscribers, loss of
revenues and increase in expenses to stay competitive.
Developments in narrowband PCS, which provides advanced messaging
capabilities, could lead to increased competition. Some of our largest
competitors in the conventional paging market have narrowband PCS licenses,
which permit them to provide advanced messaging services on a nationwide basis.
We expect other companies to offer advanced messaging services and, as a result,
our growth in terms of subscriber base might be impaired. We intend to offer
advanced messaging services through our PageMart alliance in early 1999, but the
success of our offering of these services depends on several factors. Those
factors include market acceptance, cost of equipment and other capital
requirements, technological changes in wireless messaging services, competitors'
marketing and sales strategies, regulatory developments and general economic
conditions. These factors are beyond our control. We cannot assure you that our
offering of advanced messaging services will be beneficial to our business
operations or financial condition.
Development of broadband PCS could also lead to increased competition. Many
companies now provide wireless telephone service using broadband PCS technology
and either have begun or will begin providing paging services. As a result, we
might experience loss in subscribers, loss in revenues and increase in costs to
stay competitive.
Other changes in technology could lower the cost of competing services and
products to a level at which our services and products would become too costly
to offer or produce or would require us to reduce our prices. We cannot assure
you that we will be able to develop or introduce new services and products on a
timely basis and at competitive prices, if at all, nor can we assure you that
our profit margins, inventory costs and cash flows will not be adversely
affected by technological developments.
SATELLITE FAILURES -- METROCALL'S ABILITY TO DELIVER PAGING AND MESSAGING
SERVICES COULD BE INTERRUPTED IF SATELLITE FAILURES OCCUR.
Metrocall relies on satellite facilities operated by other companies to
control many of the transmitters on our nationwide and wide-area networks. Any
interruptions in satellite transmissions might result in loss of
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<PAGE> 34
subscribers, loss of revenues and increased costs to find alternative ways to
respond to the interruptions. Metrocall has no control over the operation and
maintenance of those satellite facilities. Metrocall also uses land-based
communications facilities such as microwave stations and landline telephone
facilities to connect and control the paging base station transmitters in its
networks. The failure or disruption of transmissions by these satellite and
other facilities could disrupt our paging and messaging services and impair our
results of operations. Metrocall recently initiated paging and messaging service
through a satellite facility in California. Metrocall transmits a majority of
its paging traffic through this facility. Any interruptions in satellite
transmissions from this facility could adversely affect Metrocall's ability to
gain more subscribers and increase its revenues.
SUBSCRIBER TURNOVER -- WHEN SUBSCRIBERS CANCEL OR SWITCH THEIR SERVICE, THE COST
TO ATTRACT NEW SUBSCRIBERS IS HIGHER THAN THE COST TO PROVIDE SERVICE TO
EXISTING SUBSCRIBERS AND AS A RESULT ADVERSELY AFFECTS METROCALL'S RESULTS OF
OPERATIONS.
Subscriber turnover adversely affects our results of operations because it
increases our fixed costs. When subscribers cancel their paging or other
messaging services or switch their service to another carrier, we attempt to
attract new subscribers to replace the disconnected subscribers. The sales and
marketing costs associated with attracting new subscribers exceed the costs to
continue servicing existing subscribers and increase our high fixed costs. For
the twelve months ended December 31, 1996, 1997 and 1998, our subscriber
turnover rates were 2.1%, 2.5% and 1.7%, respectively.
REGULATORY CHANGES AND COMPLIANCE -- CHANGES IN THE REGULATIONS THAT GOVERN
METROCALL'S BUSINESS MIGHT MAKE IT MORE DIFFICULT OR COSTLY TO OPERATE ITS
BUSINESS OR TO COMPLY WITH ITS CHANGES.
The FCC and to a lesser extent state regulatory agencies regulate
Metrocall's paging and messaging operations. Those agencies might take actions,
such as changing licensing requirements or the allocation of radio spectrum that
would make it more difficult or costly for Metrocall to operate its business.
For example, the FCC has adopted rules under which it will issue licenses that
would permit companies increase operating expenses to offer paging services on a
wide-area basis through competitive bidding. Metrocall believes these rules may
simplify its regulatory compliance burdens, particularly regarding adding or
relocating transmitter sites; however, those rules may also increase its costs
of obtaining paging licenses in the future. In addition, we cannot assure you
that we will be able to comply with all changes implemented by the agencies
regulating our business, such as changes in licensing or build-out requirements.
CHALLENGES OF ACQUISITIONS -- METROCALL MIGHT NOT BE ABLE TO IDENTIFY OR FINANCE
BUSINESSES TO ACQUIRE. METROCALL MAY NOT BE ABLE TO INTEGRATE SUCCESSFULLY
BUSINESSES IT HAS ALREADY ACQUIRED OR MANAGE ITS EXISTING BUSINESSES OPERATIONS
AS IT ACQUIRES AND INTEGRATES BUSINESS.
Metrocall might not be able to execute its growth strategy in the future if
it is unable to identify attractive businesses to acquire, to finance potential
acquisitions and to integrate acquired businesses. Even if Metrocall can pursue
an acquisition, it would encounter many obstacles before the acquisition could
be successful and increase its revenues or decrease its costs. The challenges of
acquisitions include:
- potential strain on management;
- unanticipated liabilities or contingencies from the acquired company;
- reduced earnings due to increased goodwill amortization, increased
interest costs, and costs related to integration;
- integrating the acquired business's financial, personnel, computer and
other systems into its own; and
- need to manage growth and implement controls and information systems
appropriate to a growing company.
If Metrocall is unsuccessful in meeting these challenges, its business
could suffer because of the diversion of management's attention away from
existing operations and the increase in costs. Metrocall is currently in
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<PAGE> 35
the process of integrating the recent acquisition of the Advanced Messaging
Division of AT&T Wireless. That acquisition poses certain risks for Metrocall's
business, e.g., the paging systems it acquired may not perform as expected; it
may face difficulties integrating the development, administrative, finance,
sales and marketing organizations of Advanced Messaging Division into its
organizations; Metrocall may face difficulties in integrating Advanced Messaging
Division's communications networks with its own networks and coordinating its
and Advanced Messaging Division's sales efforts. Metrocall also must reassure
Advanced Messaging Division's customers that their paging services will continue
uninterrupted.
DEPENDENCE ON KEY MANAGEMENT PERSONNEL -- IF METROCALL IS UNABLE TO RETAIN KEY
MANAGEMENT PERSONNEL, IT MIGHT NOT BE ABLE TO FIND SUITABLE REPLACEMENTS ON A
TIMELY BASIS AND ITS BUSINESS OPERATIONS MIGHT BE ADVERSELY AFFECTED.
Metrocall's existing operations and continued future development are
dependent to a significant extent upon the efforts and abilities of certain key
individuals, including William L. Collins III, its chief executive officer,
Steven D. Jacoby, its chief operating officer, and Vincent D. Kelly, its chief
financial officer. These individuals have substantial expertise and experience
in the paging and messaging industry, know the intricacies of Metrocall's
business operations and have insights into the future developments and goals of
the business. If Metrocall is unable to retain these individuals, it is unlikely
Metrocall could find individuals to replace them that would have the same degree
of expertise, experience, knowledge and insight into the industry and the
business operations. Even if Metrocall could find replacements, its business
would be impaired from the disruption associated with changes in management. For
example, Metrocall is largely dependent on these individuals in pursuing its
growth and consolidation strategies and in integrating successfully acquired
businesses such as Advanced Messaging Division. As a result, Metrocall's
business operations could be adversely affected. Metrocall has employment
contracts with the named individuals but does not have non-competition contracts
with or "key man"' life insurance for any of them.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Metrocall is exposed to risks associated with interest rate changes. We do
not foresee any significant changes on our exposure to fluctuations in interest
rates in the near future. At December 31, 1998, our total outstanding debt
consisted of five issues of fixed rate, senior subordinated notes and our credit
facility, which has a variable interest rate:
FIXED RATE DEBT:
<TABLE>
<CAPTION>
EFFECTIVE INTEREST PAYMENTS
PRINCIPAL BALANCE FAIR VALUE INTEREST RATE MATURITY DUE
- ----------------- -------------- ------------- -------- -----------------
<S> <C> <C> <C> <C>
$100.0 million $104.0 million 11.88% 2005 Semi-Annually
$ 0.3 million $ 0.3 million 11.88% 2005 Semi-Annually
$150.0 million $147.0 million 10.66% 2007 Semi-Annually
$200.0 million $190.0 million 10.05% 2007 Semi-Annually
$250.0 million $253.8 million 11.35% 2008 Semi-Annually
</TABLE>
No principal repayments are due under these notes until maturity. If at
maturity we refinanced these notes at interest rates that are a 1/8 percentage
point higher than shown above, our per annum interest costs would increase by
$0.9 million. Based on the outstanding balances at December 31, 1998, a
hypothetical immediate 1/8 percentage point change in interest rates would
change the fair value of our fixed rate debt obligations by approximately $4.4
million.
VARIABLE RATE DEBT:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
PRINCIPAL BALANCE FAIR VALUE INTEREST RATE MATURITY INTEREST PAYMENTS DUE
- ----------------- ------------- ---------------- -------- ---------------------
<S> <C> <C> <C> <C>
$40.0 million $40.0 million 7.62% 2004 Quarterly
</TABLE>
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Our credit facility bears interest at floating rates and has a maturity of
2004. As of December 31, 1998, $40.0 million was outstanding under the credit
facility and approximately $160.0 million was available. Based on weighted
average borrowings outstanding under the credit facility during fiscal year
1998, a 1/8 percentage point change in our weighted average interest rate would
have caused interest expense to increase or decrease by approximately $0.2
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 rate on its floating rate debt at 8 1/2% on up to $50.0 million of
outstanding borrowings. This agreement expires April 2, 2000.
35
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C>
FINANCIAL STATEMENTS:
Report of Arthur Andersen LLP, Independent Public
Accountants............................................ F-2
Consolidated Balance Sheets, as of December 31, 1997 and
1998................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1996, 1997 and 1998................. F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1996, 1997 and 1998..... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996, 1997 and 1998................. F-6
Notes to Consolidated Financial Statements................ F-7
FINANCIAL STATEMENT SCHEDULE:
Report of Arthur Andersen LLP, Independent Public
Accountants............................................ F-27
Schedule II Valuation and Qualifying Accounts............. F-28
</TABLE>
36
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following financial statements are included in Part II Item 8
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C>
FINANCIAL STATEMENTS:
Report of Arthur Andersen LLP, Independent Public
Accountants............................................ F-2
Consolidated Balance Sheets, as of December 31, 1997 and
1998................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1996, 1997 and 1998................. F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1996, 1997 and 1998..... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996, 1997 and 1998................. F-6
Notes to Consolidated Financial Statements................ F-7
FINANCIAL STATEMENT SCHEDULE:
Report of Arthur Andersen LLP, Independent Public
Accountants............................................ F-27
Schedule II Valuation and Qualifying Accounts............. F-28
</TABLE>
All other schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the financial statements
or notes thereto.
(b) REPORTS ON FORM 8-K
A report dated October 2, 1998, regarding the acquisition of the advanced
messaging division of AT&T Wireless Services, Inc., the paging operations of
AT&T, filed with the Commission on October 16, 1998.
(c) EXHIBITS
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
3.1 Restated Certificate of Incorporation of Metrocall, Inc.
(Metrocall).*
3.2 Eighth Amended and Restated Bylaws of Metrocall.*
4.1 Indenture for Metrocall 11% Senior Subordinated Notes due
2008, dated as of December 22, 1998.(a)
4.2 Indenture for 9 3/4% Senior Subordinated Notes due 2007
dated October 21, 1997.(b)
4.3 Indenture for Metrocall 10 3/8% Senior Subordinated Notes
due 2007 dated September 27, 1995.(c)
4.4 Indenture for ProNet Inc. (ProNet) 11 7/8% Senior
Subordinated Notes due 2005 ("ProNet Notes") dated June 15,
1995.(d)
4.5 Supplemental Indenture dated May 28, 1996 for ProNet Notes.*
4.6 Second Supplemental Indenture dated December 30, 1997 for
ProNet Notes.(e)
4.7 Indenture for A Network, Inc. 11 7/8% Senior Subordinated
Notes due 2005 ("A+ Notes") dated October 24, 1995.(f)
4.8 First Supplemental Indenture dated November 14, 1996, for A+
Notes.(g)
4.9 Second Supplemental Indenture dated November 15, 1996 for A+
Notes.(g)
4.10 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
C Convertible Preferred Stock of Metrocall.(h)
4.11 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
A Convertible Preferred Stock of Metrocall.(i)
10.1 Fourth Amended and Restated Loan Agreement by and among
Metrocall, certain lenders and Toronto Dominion (Texas),
Inc. as administrative agent, dated as of December 22,
1998.(a)
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.2 Stock Purchase Agreement by and among Metrocall and AT&T
Wireless Services, Inc., McCaw Communications Companies,
Inc., and AT&T Two Way Messaging Communications, Inc. dated
June 26, 1998.(k)
10.3 Stockholders Voting Agreement and Proxy between AT&T
Wireless Services, Inc. and certain stockholders of
Metrocall dated June 26, 1998.(l)
10.4 Voting Agreement between AT&T Wireless Services, Inc. and
Page America Group, Inc. dated June 26, 1998.(l)
10.5 Registration Rights Agreement between Metrocall and McCaw
Communications Companies, Inc. dated October 1, 1998.(h)
10.6 Amended and Restated Asset Purchase Agreement by and among
Page America Group, Inc., Page America of New York, Inc.,
Page America of Illinois, Inc., Page America Communications
of Indiana, Inc., Page America of Pennsylvania, Inc.
(collectively "Page America") and Metrocall, Inc. dated as
of January 30, 1997.(m)
10.7 Amendment to Asset Purchase Agreement by and among Page
America and Metrocall dated as of March 28, 1997.(m)
10.8 Registration Rights Agreement dated July 1, 1997 by and
between Page America Group, Inc. and Metrocall.(n)
10.9 Registration Rights Agreement dated July 1, 1997 by and
among Page America and Metrocall.(n)
10.10 Indemnity Escrow Agreement dated July 1, 1997 by and among
Page America, Metrocall and First Union National Bank of
Virginia.(n)
10.11 Agreement and Plan of Merger dated as of August 8, 1997,
between Metrocall and ProNet.(o)
10.12 Stockholders Voting Agreement dated as of August 8, 1997,
among ProNet and certain stockholders of Metrocall listed
therein.(o)
10.13 Employment Agreement between Metrocall and William L.
Collins, III.(p)
10.14 Amendment to Employment Agreement between Metrocall and
William L. Collins, III.(r)
10.15 Employment Agreement between Metrocall and Steven D.
Jacoby.(p)
10.16 Amendment to Employment Agreement between Metrocall and
Steven D. Jacoby.(r)
10.17 Second Amendment to Employment Agreement between Metrocall
and Steven D. Jacoby.(s)
10.18 Employment Agreement between Metrocall and Vincent D.
Kelly.(p)
10.19 Amendment to Employment Agreement between Metrocall and
Vincent D. Kelly.(r)
10.20 Second Amendment to Employment Agreement between Metrocall
and Vincent D. Kelly.(s)
10.21 Change of Control Agreement between Metrocall and William L.
Collins, III.(p)
10.22 Change of Control Agreement between Metrocall and Steven D.
Jacoby.(p)
10.23 Change of Control Agreement between Metrocall and Vincent D.
Kelly.(p)
10.24 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and Jackie R. Kimzey.(q)
10.25 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and David J. Vucina.(m)
10.26 Letter Agreement dated August 8, 1997, between Metrocall and
Jackie R. Kimzey.(q)
10.27 Letter Agreement dated August 8, 1997, between Metrocall and
David J. Vucina.(q)
10.28 Letter Agreement dated August 8, 1997, between Metrocall and
Jan E. Gaulding.(q)
10.29 Letter Agreement dated August 8, 1997, between Metrocall and
Mark A. Solls.(q)
10.30 Letter Agreement dated August 8, 1997, between Metrocall and
Jeffery A. Owens.(q)
10.31 Directors' Stock Option Plan, as amended.(t)
10.32 Metrocall 1996 Stock Option Plan.(u)
10.33 Metrocall 1996 Stock Option Plan, as amended.(t)
10.34 Metrocall Amended Employee Stock Purchase Plan.(v)
10.35 Registration Rights Agreement dated December 22, 1998
between Metrocall and Morgan Stanley & Co. Incorporated,
NationsBanc Montgomery Securities LLC, TD Securities (USA)
Inc., First Union Capital Markets and BancBoston Roberston
Stephens Inc.(w)
10.36 Deed of Lease between Douglas and Joyce Jemal, as landlord,
and Metrocall, as tenant, dated April 14, 1994.(x)
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.37 Lease Agreement dated December 20, 1983 between Beacon
Communications Associates, Ltd. and a predecessor of
Metrocall.(y)
10.38 Non-disclosure/No Conflict Agreement dated May 16, 1996
between Metrocall and Elliot H. Singer.(z)
10.39 Placement Agreement dated December 17, 1998 between
Metrocall and Morgan Stanley & Co. Incorporated, NationsBanc
Montgomery Securities LLC, TD Securities (USA) Inc., First
Union Capital Markets and BancBoston Roberston Stephens
Inc.(w)
11.1 Statement re computation of per share earnings.*
21.1 Subsidiaries of Metrocall, Inc.(w)
23.2 Consent of Arthur Andersen LLP, as independent public
accountants for Metrocall.*
27.1 December 31, 1998 Financial Data Schedule.*
27.2 December 31, 1997 Financial Data Schedule.*
27.3 December 31, 1996 Financial Data Schedule.*
</TABLE>
- ---------------
* Filed herewith.
(a) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on January 4, 1999.
(b) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 23, 1997.
(c) Incorporated by reference to Metrocall's Registration Statement on Form S-1,
as amended (File No. 33-96042) filed with the Commission on September 27,
1995.
(d) Incorporated by reference to ProNet's Current Report on Form 8-K filed with
the Commission on July 5, 1995.
(e) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 filed with the Commission on May 15, 1998.
(f) Incorporated by reference to the Registration Statement on Form S-1 of A+
Communications, Inc., as amended (File No. 33-95208) filed with the
Commission on September 18, 1995.
(g) Incorporated by reference to Metrocall's Annual Report on Form 10-K for the
year ended December 31, 1996 filed with the Commission on March 31, 1997.
(h) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 16, 1998.
(i) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(j) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 2, on Form S-4 (File No. 333-36079) filed with the Commission on
November 5, 1997.
(k) Incorporated by reference to Metrocall's Definitive Proxy Statement on
Schedule 14A filed with the Commission on August 31, 1998.
(l) Incorporated by reference to Metrocall's Quarterly Report on Form 8-K filed
July 7, 1998.
(m) Incorporated by reference to Metrocall's Registration Statement on Form S-4,
as amended (File No. 333-21231) initially filed with the Commission on
February 5, 1997.
(n) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on July 14, 1997.
(o) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on August 12, 1997.
(p) Incorporated by reference to Metrocall's Registration Statement on Form S-4,
as amended (File No. 333-06919) filed with the Commission on June 27, 1996.
(q) Incorporated by reference to Metrocall's Registration Statement on Form S-4,
as amended (File No. 333-36079) filed with the Commission on September 22,
1997.
39
<PAGE> 41
(r) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 filed with the Commission on November
14, 1997.
(s) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 filed with the Commission on August 14,
1998.
(t) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders held on May 5, 1999.
(u) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders held on May 1, 1996.
(v) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 1, on Form S-4 (File No. 333-36079) filed with the Commission on October
27, 1997.
(w) Incorporated by reference to Metrocall's Annual Report on Form 10-K for the
year ended December 31, 1998 filed with the Commission on March 31, 1999.
(x) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994 filed with the Commission on November
14, 1994.
(y) Incorporated by reference to Metrocall's Registration Statement on Form S-1,
as amended (File No. 33-63886) filed with the Commission on July 12, 1993.
(z) Incorporated by reference to Metrocall's Tender Offer Statement on Schedule
14D-1, filed with the Commission on May 22, 1996.
40
<PAGE> 42
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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 on this 2nd day of
July, 1999.
METROCALL, INC.
By: /s/ VINCENT D. KELLY
------------------------------------
Vincent D. Kelly
Chief Financial Officer,
Executive Vice President and
Treasurer
41
<PAGE> 43
METROCALL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------- ----
<S> <C>
FINANCIAL STATEMENTS:
Report of Arthur Andersen LLP, Independent Public
Accountants............................................ F-2
Consolidated Balance Sheets, as of December 31, 1997 and
1998................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1996, 1997 and 1998................. F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1996, 1997 and 1998..... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996, 1997 and 1998................. F-6
Notes to Consolidated Financial Statements................ F-7
FINANCIAL STATEMENT SCHEDULE:
Report of Arthur Andersen LLP, Independent Public
Accountants............................................ F-27
Schedule II Valuation and Qualifying Accounts............. F-28
</TABLE>
F-1
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metrocall, Inc.:
We have audited the accompanying consolidated balance sheets (as
restated -- see Note 2) of Metrocall, Inc., and subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows (all as restated -- see Note 2) for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metrocall, Inc., and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
June 23, 1999
F-2
<PAGE> 45
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AS RESTATED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 24,896 $ 8,436
Accounts receivable, less allowance for doubtful accounts
of $6,843 and $6,196 as of December 31, 1997 and 1998,
respectively............................................ 30,208 44,694
Prepaid expenses and other current assets (Note 4)........ 6,256 8,843
---------- ----------
Total current assets............................... 61,360 61,973
---------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and leasehold improvements................ 16,364 15,079
Furniture, office equipment and vehicles.................. 46,588 64,438
Paging and plant equipment................................ 276,993 380,313
Less -- Accumulated depreciation and amortization......... (115,357) (168,067)
---------- ----------
224,588 291,763
---------- ----------
INTANGIBLE ASSETS, net of accumulated amortization of
approximately $58,352 and $219,960 at December 31, 1997
and 1998, respectively.................................... 790,128 894,707
OTHER ASSETS................................................ 1,947 2,595
---------- ----------
TOTAL ASSETS....................................... $1,078,023 $1,251,038
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 952 $ 771
Accounts payable.......................................... 35,160 37,533
Accrued expenses and other current liabilities (Note 4)... 46,141 37,728
Deferred revenues and subscriber deposits................. 15,854 27,769
---------- ----------
Total current liabilities.......................... 98,107 103,801
CAPITAL LEASE OBLIGATIONS, less current maturities (Note
5)........................................................ 4,282 3,575
CREDIT FACILITY AND OTHER LONG-TERM DEBT, less current
maturities (Note 5)....................................... 142,173 40,444
SENIOR SUBORDINATED NOTES (Note 5).......................... 452,534 698,544
DEFERRED INCOME TAX LIABILITY............................... 155,930 209,642
MINORITY INTEREST IN PARTNERSHIP............................ 510 510
---------- ----------
Total liabilities.................................. 853,536 1,056,516
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SERIES A CONVERTIBLE PREFERRED STOCK, 14% cumulative; par
value $.01 per share; 810,000 shares authorized; 182,726
shares and 209,203 shares issued and outstanding as of
December 31, 1997 and 1998, respectively and a liquidation
preference of $46,481 and $53,216 at December 31, 1997 and
1998, respectively (Note 6)............................... 37,918 45,441
SERIES B JUNIOR CONVERTIBLE PREFERRED STOCK, 14% cumulative;
par value $.01 per share; 9,000 shares authorized; 1,579
shares and 1,808 shares issued and outstanding as of
December 31, 1997 and 1998, respectively and a liquidation
preference of $16,064 and $18,391 at December 31, 1997 and
1998, respectively (Note 6)............................... 16,064 18,391
SERIES C CONVERTIBLE PREFERRED STOCK, 8% cumulative; par
value $.01 per share; 25,000 shares authorized; 9,595
shares issued and outstanding and a liquidation preference
of $96,910 at December 31, 1998 (Note 6).................. -- 96,910
STOCKHOLDERS' EQUITY (Notes 3 and 6):
Common stock, par value $.01 per share; 100,000,000 shares
authorized; 40,548,414 and 41,583,403 shares issued and
outstanding at December 31, 1997 and 1998,
respectively............................................ 405 416
Additional paid-in capital................................ 336,076 340,249
Accumulated deficit....................................... (165,976) (306,885)
---------- ----------
170,505 33,780
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $1,078,023 $1,251,038
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 46
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AS RESTATED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Service, rent and maintenance..................... $ 124,029 $ 249,900 $ 416,352
Product sales..................................... 25,928 39,464 48,372
----------- ----------- -----------
Total revenues............................ 149,957 289,364 464,724
Net book value of products sold..................... (21,633) (29,948) (31,791)
----------- ----------- -----------
128,324 259,416 432,933
OPERATING EXPENSES:
Service, rent and maintenance..................... 29,696 69,254 115,432
Selling and marketing............................. 24,101 53,802 73,546
General and administrative........................ 42,905 73,753 121,644
Depreciation and amortization..................... 58,196 91,699 234,948
----------- ----------- -----------
154,898 288,508 545,570
----------- ----------- -----------
Loss from operations...................... (26,574) (29,092) (112,637)
INTEREST AND OTHER INCOME (expense)................. (607) 156 849
INTEREST EXPENSE.................................... (20,424) (36,248) (64,448)
----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY
ITEM.............................................. (47,605) (65,184) (176,236)
INCOME TAX BENEFIT.................................. 1,021 4,861 47,094
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM...................... (46,584) (60,323) (129,142)
EXTRAORDINARY ITEM (Note 5)......................... (3,675) -- --
----------- ----------- -----------
Net loss.................................. (50,259) (60,323) (129,142)
PREFERRED DIVIDENDS (Note 6)........................ (780) (7,750) (11,767)
----------- ----------- -----------
Loss attributable to common stockholders....... $ (51,039) $ (68,073) $ (140,909)
=========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS:
Basic and diluted loss per share before
extraordinary item attributable to common
stockholders................................... $ (2.91) $ (2.51) $ (3.43)
Basic and diluted extraordinary item, net of
income tax benefit............................. (0.23) -- --
----------- ----------- -----------
Basic and diluted loss per share attributable to
common stockholders............................ $ (3.14) $ (2.51) $ (3.43)
=========== =========== ===========
Weighted-average common shares outstanding........ 16,252,782 27,086,654 41,029,601
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 47
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AS RESTATED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL
SHARES PAID-IN ACCUMULATED
OUTSTANDING PAR VALUE CAPITAL DEFICIT TOTAL
----------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995................ 14,626,255 $146 $201,956 $ (46,864) $155,238
Issuance of shares in employee stock
purchase plan (Note 7)............... 11,942 -- 110 -- 110
Shares issued in Satelite acquisition... 1,771,869 18 10,408 -- 10,426
Exercise of stock options (Note 7)...... 4,739 -- 5 -- 5
Shares issued in merger with A+
Network.............................. 8,106,330 81 42,477 -- 42,558
Warrants issued in connection with
Series A Preferred Stock (Note 6).... -- -- 7,871 -- 7,871
Preferred dividends (Note 6)............ -- -- -- (780) (780)
Net loss................................ -- -- -- (50,259) (50,259)
---------- ---- -------- --------- --------
BALANCE, December 31, 1996................ 24,521,135 245 262,827 (97,903) 165,169
Issuance of shares in employee stock
purchase plan (Note 7)............... 109,747 1 429 -- 430
Adjustment to shares issued in Satelite
acquisition.......................... 74,085 1 (213) -- (212)
Shares issued in acquisition of Radio
and Communications Consultants, Inc.
and Advanced Cellular Telephone, Inc.
(Note 3)............................. 494,279 5 2,899 -- 2,904
Issuance of shares in Page America
acquisition (Note 3)................. 3,911,856 39 18,787 -- 18,826
Exercise of stock options (Note 7)...... 1,896 -- 2 -- 2
Shares issued in ProNet Merger (Note
3)................................... 11,435,416 114 51,345 -- 51,459
Preferred dividends (Note 6)............ -- -- -- (7,750) (7,750)
Net loss................................ -- -- -- (60,323) (60,323)
---------- ---- -------- --------- --------
BALANCE, December 31, 1997................ 40,548,414 405 336,076 (165,976) 170,505
Issuance of shares in employee stock
purchase plan and other (Note 7)..... 134,989 2 573 -- 575
Shares issued in settlement of
litigation related to the ProNet
Merger (Note 3)...................... 900,000 9 3,600 -- 3,609
Preferred dividends (Note 6)............ -- -- -- (11,767) (11,767)
Net loss................................ -- -- -- (129,142) (129,142)
---------- ---- -------- --------- --------
BALANCE, December 31, 1998................ 41,583,403 $416 $340,249 $(306,885) $ 33,780
========== ==== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 48
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AS RESTATED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (50,259) $ (60,323) $(129,142)
Adjustments to reconcile net loss to net cash provided
by operating activities --
Depreciation and amortization...................... 58,196 91,699 234,948
Amortization of debt financing costs............... 620 1,152 1,771
Decrease in deferred income taxes.................. (1,483) (5,400) (47,391)
Gain on liquidation of investment (Note 2)......... -- -- (130)
Write-off of deferred acquisition costs............ 388 -- --
Minority interest in loss of investments........... 207 -- --
Writedown of equity investment..................... 238 240 --
Gain on sale of equipment.......................... (1,188) -- --
Extraordinary item................................. 3,675 -- --
Changes in current assets and liabilities, net of
effects from acquisitions:
Accounts receivable................................ (2,626) (1,408) (2,387)
Prepaid expenses and other current assets.......... (450) 2,531 (1,693)
Accounts payable................................... 5,841 372 2,175
Deferred revenues and subscriber deposits.......... 2,126 (2,481) (12,263)
Accrued expenses and other current liabilities..... 323 784 (4,734)
--------- --------- ---------
Net cash provided by operating activities..... 15,608 27,166 41,154
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired...... (260,600) (113,466) (110,000)
Capital expenditures, net............................. (62,110) (69,935) (78,658)
Proceeds from sale of telemessaging operations........ -- 11,000 --
Additions to intangibles.............................. (3,853) (5,070) (1,885)
Other................................................. (1,341) 1,042 (1,204)
--------- --------- ---------
Net cash used in investing activities......... (327,904) (176,429) (191,747)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock............ 115 432 577
Net proceeds from preferred stock offering (Note 6)... 38,323 -- --
Proceeds from long-term debt (Note 5)................. 194,904 364,261 248,260
Principal payments on long-term debt.................. (25,464) (194,222) (104,362)
Debt tender and consent solicitation costs............ (3,675) -- --
Deferred debt financing costs......................... (4,562) (7,240) (10,332)
Other................................................. (2) 11 (10)
--------- --------- ---------
Net cash provided by financing activities..... 199,639 163,242 134,133
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.... (112,657) 13,979 (16,460)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......... 123,574 10,917 24,896
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 10,917 $ 24,896 $ 8,436
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 49
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND RISK FACTORS
Metrocall, Inc. and subsidiaries (the "Company" or "Metrocall"), is a
leading provider of local, regional and national paging and other wireless
messaging services in the United States. Through our nationwide wireless
network, the Company provides messaging services to over 1,000 U.S. cities,
including the top 100 Standard Metropolitan Statistical Areas.
Risks and Other Important Factors
The Company sustained net losses of $50.3 million, $60.3 million and $129.1
million for the years ended December 31, 1996, 1997 and 1998, respectively. The
Company's loss from operations for the year ended December 31, 1998 was $112.6
million. In addition, at December 31, 1998, the Company had an accumulated
deficit of approximately $306.9 million and a deficit in working capital of
$41.8 million. The Company's losses from operations and its net losses are
expected to continue for additional periods in the future. There can be no
assurance that the Company's operations will become profitable.
The Company's operations require the availability of substantial funds to
finance the maintenance and growth of its existing paging operations and
subscriber base, development and construction of future wireless communications
networks, expansion into new markets, and the acquisition of other wireless
communication companies. At December 31, 1998, the Company had incurred
approximately $743.3 million in long-term debt and capital leases. Amounts
available under the Company's credit facility are subject to certain financial
covenants and other restrictions. At December 31, 1998, approximately $160.0
million of additional borrowings were available to the Company under its credit
facility. The Company's ability to borrow additional amounts in the future is
dependent on its ability to comply with the provisions of its credit facility as
well as availability of financing in the capital markets.
The Company is also subject to certain additional risks and uncertainties
including changes in technology, business integration, competition, subscriber
turnover and regulation.
2. SIGNIFICANT ACCOUNTING POLICIES
Restatement of Financial Statements
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 8). 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 on a
successful FCC ruling (see Note 8). If amounts are collected from these 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.
F-7
<PAGE> 50
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The impact of this restatement increased the Company's loss before
extraordinary item, net loss and net loss per basic and diluted share
attributable to common stockholders as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Loss before extraordinary item -- previously reported....... $(46,476) $(57,322) $(173,578)
Loss before extraordinary item -- as restated............... (47,605) (65,184) (176,236)
Net loss -- previously reported............................. $(49,130) $(52,461) $(126,484)
Net loss -- as restated..................................... (50,259) (60,323) (129,142)
Basic and diluted loss per share before extraordinary item
attributable to common stockholders -- previously
reported.................................................. $ (2.84) $ (2.22) $ (3.37)
Basic and diluted loss per share before extraordinary item
attributable to common stockholders -- as restated........ (2.91) (2.51) (3.43)
Basic and diluted loss per share attributable to common
stockholders -- previously reported....................... $ (3.07) $ (2.22) $ (3.37)
Basic and diluted loss per share attributable to common
stockholders -- as restated............................... (3.14) (2.51) (3.43)
</TABLE>
Principles of Consolidation
In addition to Metrocall, the accompanying consolidated financial
statements include the accounts of Metrocall's 61% interest in Beacon Peak
Associates Ltd. ("Beacon Peak") and Metrocall of Virginia, Inc. and Metrocall,
USA, Inc., nonoperating wholly owned subsidiaries that hold certain of the
Company's regulatory licenses issued by the Federal Communications Commission
(the "FCC"). Beacon Peak owns land, adjacent to the Company's headquarters
building, which is valued at cost. The minority interest in Beacon Peak was
$510,000 as of December 31, 1997 and 1998.
Metrocall had a 20% interest in Beacon Communications Associates ("Beacon
Communications"), which was liquidated in November 1998 and had been included in
the consolidated financial statements through the date of sale. Beacon
Communications owns the building that is the Company's headquarters. Since
Beacon Communications' debt related to the building was guaranteed by the
Company's lease (expiring 2008) and because the Company had made the only
substantive investment in Beacon Communications, the accounts of Beacon
Communications had been consolidated in the accompanying financial statements up
until its liquidation.
All significant intercompany transactions have been eliminated in
consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes revenue under service, rental and maintenance
agreements with customers as the related services are performed. The Company
leases (as lessor) radio pagers under operating leases. Substantially all the
leases are on a month-to-month basis. Advance billings for services are deferred
and recognized as revenue when earned. Sales of equipment are recognized upon
delivery.
F-8
<PAGE> 51
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Cash equivalents consist primarily of repurchase agreements, all having
maturities of ninety days or less when purchased. The carrying amount reported
in the accompanying balance sheets for cash equivalents approximates fair value
due to the short-term maturity of these instruments.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives.
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and leasehold improvements................. 10-31
Furniture and office equipment....................... 5-10
Vehicles............................................. 3-5
Subscriber paging equipment.......................... 3
Transmission and plant equipment..................... 5-12
</TABLE>
All new pagers are depreciated using the half-year convention upon
acquisition. Pagers sold are recorded in the consolidated statement of
operations at their net book value at the date of sale. Betterments to acquired
pagers and the net book value of lost pagers are charged to depreciation
expense. Pagers leased to customers under operating leases continue to be
depreciated over their remaining useful lives. As of December 31, 1997 and 1998
the balance of subscriber equipment was $64.1 million and $101.8 million,
respectively, net of accumulated depreciation of $63.0 million and $87.8
million, respectively.
Purchases of property and equipment in the accompanying consolidated
statements of cash flows are reflected net of the net book value of products
sold to approximate the net addition to subscriber equipment.
The Company currently purchases a significant amount of its subscriber
paging equipment from one supplier. Although there are other manufacturers of
similar subscriber paging equipment, the inability of this supplier to provide
equipment required by the Company could result in a decrease of pager placements
and decline in sales, which could adversely affect operating results.
Intangible Assets
Intangible assets, net of accumulated amortization, consist of the
following at December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, AMORTIZATION
-------------------- PERIOD IN
1997 1998 YEARS
-------- -------- ------------
<S> <C> <C> <C>
State certificates and FCC licenses....... $312,873 $325,116 10
Goodwill.................................. 194,675 198,692 10
Subscriber lists.......................... 264,489 328,651 3
Debt financing costs...................... 14,979 23,540 8-12
Covenants................................. 1,658 17,125 3
Other..................................... 1,454 1,583 3-7
-------- --------
$790,128 $894,707
======== ========
</TABLE>
Debt financing costs represent fees and other costs incurred in connection
with the issuance of long-term debt. These costs are amortized as interest
expense over the term of the related debt using the effective interest rate
method.
F-9
<PAGE> 52
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Lived Assets
Long-lived assets and identifiable intangibles, including goodwill
allocated thereto, 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. The Company has determined that there has
been no permanent impairment in the carrying value of long-lived assets
reflected in the accompanying balance sheets.
The Company annually evaluates enterprise level goodwill for impairment by
comparing estimated future undiscounted cash flows over the remaining life of
the goodwill to the carrying value of the goodwill. If an impairment exists,
entity level goodwill is written down to its fair value based on estimated
future cash flows of the Company discounted at risk adjusted interest rates.
Effective January 1, 1998, the Company reduced the estimated useful lives
of certain intangibles recorded in connection with acquisitions from 15 years to
10 years for goodwill, from 25 years to 10 years for FCC licenses and from 5-6
years for subscriber bases to 3 years. The impact of these changes was to
increase amortization expense for the year ended December 31, 1998, by
approximately $26.0 million.
Loss Per Common Share Attributable to Common Stockholders
Basic earnings per share is computed by dividing income (loss) available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share is similar to basic earnings per
share, except the weighted-average number of common shares outstanding is
increased to include dilutive stock options and warrants. Stock options and
warrants were not included in the computation of loss per share as the effect
would be antidilutive. As a result, the basic and diluted earnings per share
amounts are identical.
Income Taxes
As prescribed by Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes," the Company utilizes the asset and liability
method of accounting for income taxes. Under this method, deferred income taxes
are recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities, less valuation allowances, if required.
Reclassifications
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform with the current year's presentation.
3. MERGERS, ACQUISITIONS AND DISPOSITIONS
Presented below is a summary of the Company's merger and acquisitions
completed during 1997 and 1998. The transactions have all been accounted for as
purchases for financial reporting purposes and the operating results of the
purchased businesses have been included in the statements of operations from the
dates of acquisition.
Page America Group, Inc. ("Page America")
On July 1, 1997, the Company acquired substantially all the assets of Page
America and subsidiaries. The total purchase price of approximately $63.7
million included consideration of approximately $25.0 million in cash, 1,500
shares of the Series B Junior Convertible Preferred Stock (Series B Preferred)
(see Note 6)
F-10
<PAGE> 53
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
having a value upon liquidation equal to its stated value, 3,911,856 shares of
Common Stock and assumed liabilities and transaction fees and expenses of
approximately $5.5 million for a total purchase price of $58.8 million. The cash
portion of the purchase price including fees and expenses was funded through
borrowings under the Company's credit facility.
ProNet Inc. ("ProNet")
On December 30, 1997, the Company completed the merger of ProNet with and
into Metrocall (the "ProNet Merger"), pursuant to the terms of the Agreement and
Plan of Merger dated August 8, 1997. Under the terms of the ProNet Merger,
Metrocall issued 0.90 shares of Common Stock for each share of ProNet common
stock, or approximately 12.3 million shares of Common Stock (including 900,000
shares issued in 1998 as settlement of certain ProNet litigation) for a total
price of $55.1 million. In connection with the ProNet Merger, the Company
assumed ProNet's $100.0 million aggregate principal amount of 11 7/8% senior
subordinated notes, due in 2005 and refinanced indebtedness outstanding under
ProNet's credit facility with borrowings under the Company's credit facility.
AT&T Wireless Messaging Division ("AMD")
On October 2, 1998, the Company completed a stock purchase agreement with
AT&T Wireless Services, Inc. ("Wireless"), McCaw Communications Companies, Inc.
and AT&T Two Way Messaging Communications, Inc. to acquire the stock of certain
subsidiaries of Wireless that operated the paging and messaging services
business of AT&T. The Company also acquired a nationwide 50KHz/50KHz narrowband
personal communication services license in the transaction. The purchase price
for the business and license acquired was $110.0 million in cash and 9,500
shares of the Series C Convertible Preferred Stock (the "Series C Preferred")
(see Note 6) having a value upon liquidation equal to its stated value. The
total purchase price was $205 million. The cash portion of the purchase price,
including fees and expenses, was funded through borrowings under the Company's
credit facility.
The purchase prices for the Page America, ProNet and AMD transactions have
been allocated as follows (in thousands):
<TABLE>
<CAPTION>
1997
-------------------- 1998
PAGE --------
AMERICA PRONET AMD
------- --------- --------
<S> <C> <C> <C>
Plant and equipment................................ $ 2,610 $ 60,381 $ 64,215
Accounts receivable and other assets............... 846 13,007 18,773
Noncompete agreements.............................. -- -- 17,833
Customer lists..................................... 29,533 205,582 162,428
FCC licenses and state certificates................ 29,759 71,475 45,385
Goodwill........................................... -- 50,516 --
Liabilities assumed................................ (3,467) (226,417) (30,531)
Direct acquisition costs........................... (456) (6,277) --
Deferred income tax liability...................... -- (113,199) (73,103)
------- --------- --------
Total purchase price allocation $58,825 $ 55,068 $205,000
======= ========= ========
Cash paid.......................................... $25,000 $ 55,068 $110,000
Capital stock issued............................... 33,825 -- 95,000
------- --------- --------
$58,825 $ 55,068 $205,000
======= ========= ========
</TABLE>
F-11
<PAGE> 54
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price allocation for the AMD acquisition may be subject to
adjustment for changes in estimates related to costs to be incurred to close
duplicate facilities of AMD and to settle pending legal and other contingencies.
The resolution of these matters is not expected to have a material impact on the
Company's financial condition or its results of future operations.
The unaudited pro forma information presented below reflects the
acquisitions of Page America, ProNet and AMD as if each had occurred on January
1, 1997. The results are not necessarily indicative of future operating results
or of what would have occurred had the acquisitions actually been consummated on
that date (in thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Revenues.................................................... $ 602,368 $ 613,211
Loss attributable to common stockholders.................... $(213,288) $(165,680)
Loss per share attributable to common stockholders.......... $ (5.26) $ (4.04)
</TABLE>
Radio and Communications Consultants, Inc.
On February 5, 1997, the Company acquired 100% of the outstanding common
stock of Radio and Communications Consultants, Inc. and Advanced Cellular
Telephone, Inc. (collectively, "RCC") by means of a merger of Metrocall of
Shreveport, Inc., a wholly owned subsidiary of Metrocall formed to effect the
merger with RCC. The merger was financed through the issuance of 494,279 shares
of the Common Stock, approximately $0.8 million in cash and assumed liabilities
of approximately $0.2 million. The Company also recorded a deferred tax
liability of approximately $1.3 million in connection with this transaction. The
RCC acquisition was accounted for as a purchase for financial accounting
purposes.
Disposition of Telemessaging Assets
On May 9, 1997, the Company completed the sale of the assets of the
telemessaging business acquired in the merger with A+ Network, Inc. in November
1996 pursuant to the terms of an Asset Purchase Agreement for proceeds totaling
$11.0 million in cash. For the period from January 1, 1997 through the date of
disposition, the telemessaging business generated net revenues of approximately
$3.7 million and operating income of approximately $0.1 million. No gain or loss
was recognized upon the sale for financial reporting purposes as the carrying
value of net assets sold approximated the net proceeds received.
4. SUPPLEMENTARY BALANCE SHEET INFORMATION
Company prepaid expenses and other current assets and accrued expenses and
other current liabilities consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Tax refunds............................................... $ -- $ 2,000
Inventory................................................. 2,663 2,406
Prepaid advertising....................................... 1,603 1,101
</TABLE>
F-12
<PAGE> 55
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deposits.................................................. 1,151 1,258
Other..................................................... 839 2,078
------- -------
TOTAL............................................. $ 6,256 $ 8,843
======= =======
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued severance, payroll and payroll taxes.............. $13,729 $11,542
Accrued acquisition liabilities........................... 13,579 3,321
Accrued interest payable.................................. 9,461 14,216
Accrued state and local taxes............................. 2,955 4,981
Accrued insurance claims.................................. 1,616 1,047
Other..................................................... 4,801 2,621
------- -------
TOTAL............................................. $46,141 $37,728
======= =======
</TABLE>
5. LONG-TERM DEBT AND LEASE OBLIGATIONS
Company debt consists of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Credit facility, interest at a floating rate, defined below,
with principal payments beginning March 2001.............. $141,165 $ 40,000
10 3/8% Senior subordinated notes due in 2007 (the "1995
Notes")................................................... 150,000 150,000
9 3/4% Senior subordinated notes due in 2007 (the "1997
Notes")................................................... 200,000 200,000
11 7/8% Senior subordinated notes due in 2005 (the "ProNet
Notes")................................................... 100,000 100,000
11% Senior subordinated notes due in 2008 (the "1998
Notes")(net of unamortized discount of $1,740 in 1998).... -- 248,260
11 7/8% Senior subordinated notes due in 2005 (the "A+
Notes")................................................... 2,534 284
Capital lease obligations at a weighted average interest
rate of 9.7%.............................................. 5,104 4,282
Other....................................................... 1,138 508
-------- --------
599,941 743,334
Less -- Current portion..................................... 952 771
-------- --------
Long-term portion........................................... $598,989 $742,563
======== ========
</TABLE>
Annual maturities of long-term debt after December 31, 1999 are as follows
(in thousands): $643 in 2000; $735 in 2001; $836 in 2002; $949 in 2003 and
$739,400 thereafter.
F-13
<PAGE> 56
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998 and 1997, the estimated fair value of the Company's
long-term debt excluding capital lease obligations is listed below. The fair
value of the senior subordinated notes is based on market quotes as of the dates
indicated (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Credit facility................................. $141,165 $141,165 $ 40,000 $ 40,000
Senior subordinated notes....................... 452,534 460,784 698,544 695,045
Other........................................... 1,138 1,050 508 503
-------- -------- -------- --------
Total debt, excluding capital
leases.............................. $594,837 $602,999 $739,052 $735,548
======== ======== ======== ========
</TABLE>
Credit Facility
In October 1997, the Company and its bank lenders executed an amended and
restated credit agreement (the "1997 Credit Agreement"). Under the 1997 Credit
Agreement, subject to certain conditions, the Company was able to borrow up to
$300 million under two reducing loan facilities. On October 2, 1998, the Company
and its bank lenders amended and restated the 1997 Credit Agreement to increase
the amount of borrowings available under the 1997 Credit Agreement, as amended,
to $400 million. The additional $100 million term loan facility was used to fund
the cash portion of the AMD acquisition.
On December 22, 1998, the Company revised its $400 million credit facility
and entered into a fourth amended and restated loan agreement with its bank
lenders (the "1998 Credit Agreement"). Subject to certain conditions set forth
in the 1998 Credit Agreement, the Company may borrow up to $200 million under
two loan facilities through December 31, 2004. The first facility ("Facility A")
is a $150 million reducing revolving credit facility and the second ("Facility
B") is a $50 million reducing term credit facility (together Facility A and
Facility B are referred to as the "Credit Facility"). The Credit Facility is
secured by substantially all the assets of the Company. Required quarterly
principal repayments, as defined, begin on March 31, 2001 and continue through
December 31, 2004.
The 1998 Credit Agreement requires compliance with certain financial and
operating covenants. The Company is required to maintain certain financial
ratios, including 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 1998 Credit
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 1998 Credit
Agreement also prohibits certain changes in ownership control of Metrocall, as
defined. At December 31, 1998, the Company was in compliance with all of these
covenants. The Credit Agreement 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 the Company. The Company
believes that the declaration of a material adverse effect default by its
lenders is remote.
Under the Credit Facility, the Company may designate all or any portion of
the borrowings outstanding as either a floating base rate advance or a
Eurodollar rate advance with an applicable margin that ranges from 0.625% to
1.875% for base rate advances and 1.750% to 3.000% for Eurodollar rate advances.
The predefined margins are based upon the level of indebtedness outstanding
relative to annualized cash flow, as defined in the 1998 Credit Agreement.
Commitment fees of 0.375% to 0.750% per year (depending on the level of
Metrocall's indebtedness outstanding to annualized cash flow) are charged on the
average unborrowed balance and will be charged to interest expense as incurred.
F-14
<PAGE> 57
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company incurred loan origination fees and direct financing costs in
connection with its Credit Facility and amendments thereto, of approximately
$3.6 million, which are being amortized and charged to interest expense over the
term of the facility.
The weighted-average balances outstanding under the Company's credit
facilities for the years ended December 31, 1996, 1997 and 1998 were
approximately $39.9 million, $170.0 million and $178.6 million, respectively.
For the years ended December 31, 1996, 1997 and 1998, interest expense relating
to the Company's credit facilities was approximately $3.7 million, $15.5 million
and $13.1 million, respectively, at weighted-average interest rates of 9.4%,
9.2%, and 7.3% respectively. The effective interest rates as of December 31,
1997 and 1998 were 8.2% and 7.8%, respectively. As of December 31, 1998,
approximately $160.0 million of additional borrowings were available to the
Company under its Credit Facility.
Senior Subordinated Notes
10 3/8% Senior Subordinated Notes
In October 1995, the Company completed a public offering of $150.0 million
aggregate principal amount of 10 3/8% senior subordinated notes due 2007 (the
"1995 Notes"). Interest on the 1995 Notes is payable semi-annually on April 1
and October 1. The 1995 Notes are general unsecured obligations subordinated in
right to the Company's existing long-term debt and other senior obligations, as
defined.
The 1995 Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain circumstances.
The 1995 Notes may be redeemed at the Company's option after October 1,
2000. The following redemption prices are applicable to any optional redemption
of the 1995 Notes by the Company during the 12-month period beginning on October
1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2000.............................................. 105.188%
2001.............................................. 103.458
2002.............................................. 101.729
2003 and thereafter............................... 100.000
</TABLE>
In the event of a change in control of the Company, as defined, each holder
of the 1995 Notes will have the right, at such holder's option, to require the
Company to purchase that holder's 1995 Notes at a purchase price equal to 101%
of the principal amount thereof, plus any accrued and unpaid interest to the
date of repurchase.
9 3/4% Senior Subordinated Notes
In October 1997, the Company completed a private placement of $200.0
million aggregate principal amount of 9 3/4% senior subordinated notes due 2007
(the "1997 Notes"). The 1997 Notes bear interest, payable semi-annually on
January 15 and July 15. The Notes are callable beginning November 1, 2002. The
1997 Notes are unsecured obligations of the Company. The Company used the net
proceeds from the 1997 Notes, approximately $193.0 million, to repay outstanding
indebtedness under its Credit Facility. In March 1998, the 1997 Notes were
registered under the Securities Act pursuant to an exchange offer.
The 1997 Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain circumstances.
F-15
<PAGE> 58
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1997 Notes may be redeemed, in whole or in part, at any time on or
after November 1, 2002, at the option of the Company. The following redemption
prices, plus any accrued and unpaid interest to, but not including, the
applicable redemption date, are applicable to any optional redemption of the
1997 Notes by the Company during the 12-month period beginning on November 1 of
the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2002.............................................. 104.8750%
2003.............................................. 102.4375
2004 and thereafter............................... 100.0000
</TABLE>
In the event of a change of control of the Company, as defined, each holder
of the 1997 Notes will have the right, at such holder's option, to require the
Company to repurchase that holder's 1997 Notes at a purchase price equal to 101%
of the principal amount thereof, plus any accrued and unpaid interest to the
date of repurchase.
11 7/8% Senior Subordinated Notes (the "A+ Notes")
In connection with the A+ Network merger, the Company offered to purchase
all $125.0 million of A+ Network's 11 7/8% senior subordinated notes due 2005
for $1,005 per $1,000 principal amount plus accrued and unpaid interest (the
"Offer"). Concurrent with the Offer, the Company solicited consents to amend the
indenture governing the A+ Notes to eliminate substantially all restrictive
covenants and certain related events of default contained therein in exchange
for a payment of $5.00 for each $1,000 principal amount of the A+ Notes. Of the
total outstanding, approximately $122.5 million of the A+ Notes were validly
tendered and retired. The Company incurred fees of approximately $3.7 million in
connection with the tender and consent process which has been recorded as an
extraordinary item for the year ended December 31, 1996. In December 1998, the
Company redeemed an additional $2.3 million of the A+ Notes for approximately
$1,005 per $1,000 principal amount plus accrued and unpaid interest. At December
31, 1998, $284,000 of the A+ Notes were outstanding.
11 7/8% Senior Subordinated Notes (the "ProNet Notes")
In connection with the ProNet merger, the Company assumed all $100.0
million aggregate principal amount of ProNet's 11 7/8% senior subordinated notes
due 2005. The ProNet Notes bear interest, payable semi-annually on June 15 and
December 15. The ProNet Notes are general unsecured obligations subordinated in
right to the Company's existing long-term debt and other senior obligations, as
defined.
The ProNet Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain other transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain conditions.
The ProNet Notes may be redeemed at the Company's option on or after June
15, 2000. The following redemption prices are applicable to any optional
redemption of the ProNet Notes by the Company during the 12-month period
beginning on June 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2000.............................................. 105.938%
2001.............................................. 103.958
2002.............................................. 101.979
2003 and thereafter............................... 100.000
</TABLE>
F-16
<PAGE> 59
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the event of a change of control of the Company, as defined, each holder
of the ProNet Notes will have the right to require that the Company repurchase
such holder's ProNet Notes at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase.
11% Senior Subordinated Notes
In December 1998, the Company completed a private placement of $250.0
million aggregate principal amount of 11% senior subordinated notes due 2008
(the "1998 Notes"). The 1998 Notes bear interest, payable semi-annually on March
15 and September 15. The 1998 Notes are unsecured obligations of the Company,
subordinated in right to the Company's existing long-term debt and other senior
obligations, as defined. The Company used the net proceeds from the 1998 Notes
to repay approximately $229.0 million of indebtedness under its credit facility.
The Company is required to register the 1998 Notes under the Securities Act of
1933 within six months of their placement. If this requirement is not met, the
annual interest rate on the 1998 Notes will increase by .5% until the 1998 Notes
are generally freely transferable.
The 1998 Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain other transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain conditions.
The 1998 Notes may be redeemed at the Company's option on or after
September 15, 2003. The following redemption prices are applicable to any
optional redemption of the 1998 Notes by the Company during the 12-month period
beginning on September 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003.............................................. 105.500%
2004.............................................. 103.667
2005.............................................. 101.833
2006 and thereafter............................... 100.000
</TABLE>
In the event of a change of control of the Company, as defined, each holder
of the 1998 Notes will have the right to require that the Company repurchase
such holder's 1998 Notes at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase.
Lease Obligations
The Company is party to several capital lease agreements for computer
equipment and office space. Future minimum rental commitments for capital leases
are as follows (in thousands): $1,100 in 1999, $896 in 2000, $923 in 2001, $951
in 2002, $980 in 2003 and $751 thereafter. At December 31, 1998, aggregate
future minimum capital lease payments were $5,601 including interest of $1,319.
The Company has an option to acquire a 51% interest in the property housing
certain office space. The Company may exercise the option through December 31,
1999. At the time the option is exercised, the Company, along with the owners of
the remaining 49% interest in the property, will contribute the property to a
general partnership for which the Company will serve as a general partner and
receive a 51% equity interest. When, if ever, the Company exercises the purchase
option to the Purchase Agreement, the purchase price will be approximately $2.9
million, the estimated fair market value at the date of the lease agreement.
The Company has various operating lease arrangements (as lessee) for office
space and communications equipment sites. Rental expenses related to operating
leases were approximately (in thousands) $8,612, $21,675 and $37,362 for the
years ended December 31, 1996, 1997 and 1998, respectively.
Minimum rental payments as of December 31, 1998, required under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows (in thousands): $37,567 in 1999, $24,657 in 2000, $21,318 in
2001, $16,504 in 2002, $12,073 in 2003 and $51,453 thereafter.
F-17
<PAGE> 60
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for lease agreements between the Company and related parties
for office space, tower sites and transmission systems, excluding consolidated
entities, was approximately (in thousands) $334, $761, and $1,033 for the years
ended December 31, 1996, 1997 and 1998, respectively. The Company leases office
and warehouse space from a company owned by a director of the Company. The
annual rental commitment under these leases is approximately $525,000. The
Company believes the terms of these leases are at least as favorable as those
that could be obtained from a non-affiliated party.
6. CAPITAL STOCK
The authorized capital stock of Metrocall consists of 100,000,000 shares of
Common Stock and 1,000,000 shares of preferred stock, par value $0.01 per share
("Preferred Stock"), of which 810,000 shares have been designated as the Series
A Convertible Preferred Stock (the "Series A Preferred"), 9,000 shares have been
designated as Series B Preferred and 25,000 shares have been designated as the
Series C Preferred.
Common Stock
Because the Company holds licenses from the FCC, no more than 20 percent of
its Common Stock may, in the aggregate, be owned directly, or voted by a foreign
government, a foreign corporation, or resident of a foreign country. The
Company's amended and restated certificate of incorporation permits the
redemption of the Common Stock from stockholders, where necessary, to protect
the Company's regulatory licenses. Such stock may be redeemed at fair market
value or, if the stock was purchased within one year of such redemption, at the
lesser of fair market value or such holder's purchase price.
Series A Preferred
On November 15, 1996, the Company issued 159,600 shares of Series A
Preferred, together with the warrants discussed below, for $250 per share or
$39.9 million. At December 31, 1998, there were 209,203 shares of the Series A
Preferred outstanding, including 26,477 shares issued as dividends during 1998.
Each share of the Series A Preferred has a stated value of $250 per share and
has a liquidation preference over shares of the Company's Common Stock equal to
the stated value. The Series A Preferred carries a dividend of 14% of the stated
value per year, payable semi-annually in cash or in additional shares of the
Series A Preferred, at the Company's option. Upon the occurrence of a triggering
event, as defined in the certificate of designation for the Series A Preferred,
and so long as the triggering event continues, the dividend rate increases to
16% per year. Triggering events include, among other things, (i) the Company
issues or incurs indebtedness or equity securities senior with respect to
payment of dividends or distributions on liquidation or redemption to the Series
A Preferred in violation of limitations set forth in the certificate of
designation, and (ii) default on the payment of indebtedness in an amount of
$5,000,000 or more. At December 31, 1997 and 1998, accrued but unpaid dividends
were approximately $799,000 and $915,000, respectively.
Holders of the Series A Preferred have the right, beginning five years from
the date of issuance, to convert their Series A Preferred (including shares
issued as dividends) into shares of Common Stock based on the market price of
the Common Stock at the time of conversion. The Series A Preferred may, at the
holders' option, be converted sooner upon a change of control of Metrocall, as
defined in the certificate of designation. The Series A Preferred must be
redeemed on November 15, 2008, for an amount equal to the stated value plus
accrued and unpaid dividends.
The Series A Preferred may be redeemed by the Company in whole or in part
(subject to certain minimums) beginning November 15, 1999. Prior to then, the
Series A Preferred may be redeemed by the Company in whole in connection with a
sale of the Company (as described in the Series A Preferred certificate of
designation) unless the holders have exercised their rights to convert to
Metrocall Common Stock in connection with the transaction. The redemption price
prior to November 15, 2001, is equal to the stated value of the shares of the
Series A Preferred, plus accrued and unpaid dividends, and a redemption
F-18
<PAGE> 61
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
premium, as defined. After November 15, 2001, the Series A Preferred Stock may
be redeemed for the stated value of $250 per share, without a premium.
Holders of the Series A Preferred have the right to elect two members to
the Company's Board of Directors. If a triggering event has occurred and is
continuing, the holders of the Series A Preferred have the right to elect
additional directors so that directors elected by such holders shall constitute
no less than 40% of the members of the Board of Directors. The Company is
required to obtain the approval of the holders of not less than 75% of the
Series A Preferred before undertaking (i) any changes in Metrocall's certificate
of incorporation and bylaws that adversely affect the rights of holders of the
Series A Preferred, (ii) a liquidation, winding up or dissolution of the Company
or the purchase of shares of capital stock of Metrocall from holders of over 5%
of the issued and outstanding voting securities, (iii) any payment of dividends
on or redemption of Common Stock; or (iv) issuance of any additional shares of
the Series A Preferred (except in payment of dividends) or any shares of capital
stock having preferences on liquidation or dividends ranking equally to the
Series A Preferred. The Company is also required to obtain approval of holders
of not less than a majority of the issued and outstanding Series A Preferred
before undertaking (i) any acquisition involving consideration having a value
equal to or greater than 50% of the market capitalization of the Company or (ii)
any sale of the Company unless Metrocall redeems the Series A Preferred.
Series B Preferred
On July 1, 1997, the Company issued 1,500 shares of the Series B Preferred
in connection with the Page America transaction (see Note 3). Each share of the
Series B Preferred has a stated value of $10,000 per share and a liquidation
preference, which is junior to the Series A Preferred but senior to the shares
of Metrocall Common Stock, equal to its stated value. The Series B Preferred
carries a dividend of 14% of the stated value per year, payable semi-annually in
cash or in additional shares of the Series B Preferred, at the Company's option.
During 1998, the Company issued 229 additional shares of the Series B Preferred
as dividends. At December 31, 1997 and 1998, accrued but unpaid dividends on the
Series B Preferred were approximately $276,000 and $316,000, respectively.
In January 1999, the Company repurchased and retired all the Series B
Preferred shares outstanding for $16.2 million.
Series C Preferred
On October 2, 1998, the Company issued 9,500 shares of the Series C
Preferred in connection with the AMD acquisition (see Note 3). Each share of the
Series C Preferred has a stated value of $10,000 per share and a liquidation
preference, which is junior to the Series A Preferred and the Series B Preferred
but senior to the shares of Metrocall Common Stock, equal to its stated value.
The Series C Preferred carries a dividend of 8% of the stated value per year,
payable semi-annually in cash or in additional shares of the Series C Preferred,
at the Company's option. During 1998, the Company issued 95 additional shares of
the Series C Preferred as dividends. At December 31, 1998, accrued but unpaid
dividends on the Series C Preferred were approximately $960,000.
Metrocall granted the holder of the Series C Preferred certain registration
rights with respect to the Series C Preferred and the Common Stock into which
the Series C Preferred may be converted. The effect of these registration rights
is to allow the holder or its transferees to freely transfer either the Series C
Preferred or any Common Stock it obtains through conversion. The holder or its
transferees also have a one-time right to require Metrocall to participate in an
underwritten public offering of the Series C Preferred or Common Stock.
Beginning on the fifth anniversary of the initial issuance, the Series C
Preferred holders has the right to convert all, but not part, of the Series C
Preferred shares into that number of shares of Common Stock equal
F-19
<PAGE> 62
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to the accreted stated value of the shares converted divided by the conversion
price. The conversion price of the Series C Preferred shares is $10.40, subject
to adjustment for any Common Stock dividends, stock splits or reverse stock
splits.
The Series C Preferred must be redeemed on the twelfth anniversary of the
initial issuance for an amount equal to the stated value, plus accrued and
unpaid dividends. The Series C Preferred may also be redeemed by the Company in
whole, but not in part, beginning on the third anniversary of the initial
issuance for an amount equal to the stated value, plus accrued and unpaid
dividends, and a redemption premium, as defined.
Warrants
In connection with the issuance of the Series A Preferred, discussed above,
the Company issued on November 15, 1996, warrants to purchase Common Stock. Each
warrant represents the right of the holder to purchase 18.266 shares of Common
Stock or an aggregate of 2,915,254 shares of Common Stock. The exercise price
per share is $7.40. The warrants expire November 15, 2001.
The total value allocated to the warrants for financial reporting purposes,
$7.9 million or $2.70 per share, is being accreted over the term of the Series A
Preferred as preferred dividends.
7. EMPLOYEE STOCK OPTION AND OTHER BENEFIT PLANS
1993 Stock Option Plan
In 1993, the Company adopted a Stock Option Plan (the "1993 Plan"). Under
the 1993 Plan, as amended, options to purchase up to an aggregate of 975,000
shares of Common Stock were reserved for grants to key employees of the Company.
The 1993 Plan limits the maximum number of shares that may be granted to any
person eligible under the 1993 Plan to 325,000. All options have been issued
with exercise prices equal to the fair market value at date of grant. All
options granted under the 1993 Plan become fully vested and exercisable on the
second anniversary of the date of grant. Each option granted under the 1993 Plan
will terminate no later than ten years after the date the option was granted.
In 1993, the Company also adopted a Directors Stock Option Plan (the
"Directors Plan"). Under the Directors Plan, options to purchase up to an
aggregate of 25,000 shares of Common Stock are available for grants to directors
of the Company who are neither officers nor employees of the Company ("Eligible
Director"). Options issued under the Directors Plan vest fully on the six-month
anniversary of the date of grant. Each Eligible Director was also granted an
option to purchase 1,000 shares of Common Stock on the first and second
anniversaries of the grant date of the initial option if the director continues
to be an Eligible Director on each of such anniversary dates.
1996 Stock Option Plan
In May 1996, the Company's stockholders approved the Metrocall 1996 Stock
Option Plan (as amended, the "1996 Plan"). Under the 1996 Plan, options to
purchase up to an aggregate of 6 million shares of Common Stock have been
reserved for grant to key employees, officers and nonemployee directors
("Qualified Directors"). The 1996 Plan limits the maximum number of shares that
may be granted to any person eligible under the 1996 Plan to 1 million. If any
option granted under the 1996 Plan expires or terminates prior to exercise in
full, the shares subject to that option shall be available for future grants
under the 1996 Plan. Substantially all employees and Qualified Directors of the
Company are eligible to participate in the 1996 Plan. All options granted under
the 1996 Plan become fully vested and exercisable on the second anniversary of
the date of grant. Each option granted under the 1996 Plan will terminate no
later than ten years from the date the option was granted.
F-20
<PAGE> 63
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the 1996 Plan, both incentive stock options and nonstatutory stock
options are available for grant to employees. For incentive stock options, the
option price shall not be less than the fair market value of a share of Common
Stock on the date the option is granted. For nonstatutory options, the option
price shall not be less than the par value of Common Stock. All options granted
to Qualified Directors shall be nonstatutory options. Upon approval of the 1996
Plan, each Qualified Director was granted an initial option to purchase 10,000
shares of Common Stock. Thereafter, every Qualified Director will be granted an
initial option to purchase 10,000 shares of Common Stock at the time the
Qualified Director commences service on the Board of Directors. Subsequently,
each Qualified Director who received an initial grant of an option shall receive
an additional option to purchase 1,000 shares of Common Stock on each
anniversary of the initial option, provided that the director continues to be a
Qualified Director on each anniversary date. Options granted to Qualified
Directors shall become fully vested six months after the date of grant. The
exercise price for options granted to Qualified Directors shall be the fair
market value of Common Stock on the date the option is granted.
In connection with the mergers of A+ Network, Inc. in 1996 and ProNet in
1997, the Company exchanged options to purchase Metrocall Common Stock with
former option holders of the acquired companies. The Company issued options to
acquire 468,904 and 1,212,539 shares of Common Stock to former A+ Network and
ProNet option holders, respectively, in exchange for their options held. The
options issued by the Company were fully vested and exercisable upon issuance.
In September 1996, the Compensation Committee of the Board of Directors
approved a change in the exercise price for substantially all outstanding Common
Stock options for then current employees and officers. The new exercise price
was $7.94 per share, the fair market value on the date of the change. In
February 1997, the Compensation Committee approved a change in the exercise
price for substantially all outstanding options for then current employees,
officers and directors. The new exercise price was $6.00 per share, the fair
market value on the date of the change. Each repricing established a new
measurement date for the options.
Employee Stock Purchase Plan
In May 1996, the Company's stockholders approved the Metrocall, Inc.
Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the Stock
Purchase Plan up to 1 million shares of Common Stock may be purchased by
eligible employees of the Company through payroll deductions of up to 15% of
their eligible compensation. Substantially all full-time employees are eligible
to participate in the Stock Purchase Plan. Participants may elect to purchase
shares of Common Stock at the lesser of 85% of the fair market value on either
the first or last trading day of each payroll deduction period. No employee may
purchase in one calendar year shares of Common Stock having an aggregate fair
market value in excess of $25,000. Employees purchased 11,942 shares, 109,747
shares and 136,885 shares of Common Stock in 1996, 1997, and 1998, respectively,
under the Stock Purchase Plan. At December 31, 1998, 85,752 shares of Common
Stock were due to Stock Purchase Plan participants.
Accounting for Stock-Based Compensation
The Company accounts for its stock option plans under Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees." In
accordance with the recognition requirements set forth under this pronouncement,
no compensation expense was recognized for the three years ended December 31,
1998 because the Company had granted options to acquire Common Stock at exercise
prices equal to the fair value of the Common Stock on the dates of grant. In
1996, the Company elected to adopt SFAS No. 123 "Accounting for Stock Based
Compensation" for disclosure purposes only.
For disclosure purposes, the fair value of each stock purchase and option
grant was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions in 1996, 1997, and 1998,
respectively: expected volatility of 60.6%, 64.4% and 69.7%, risk free interest
rate of
F-21
<PAGE> 64
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6.4%, 5.7% and 4.7%, and expected life of ten years for all option grants. The
weighted-average fair value of stock options granted in 1996, 1997 and 1998 was
$5.89, $4.35, and $4.15 respectively. The weighted-average fair value of stock
purchase rights in 1996, 1997 and 1998 was $6.56 per share, $4.67 per share, and
$5.23 per share respectively.
Under the above model, the total value of stock options granted in 1996,
1997 and 1998 was $6.7 million, $3.0 million and $7.0 million, respectively,
which would be recognized ratably on a pro forma basis over the two year vesting
period, and the total value of the stock purchase rights granted in 1996, 1997
and 1998 was $307,000, $575,000, and $913,000, respectively. Had compensation
costs for the Company's stock-based compensation and purchase plans been
determined in accordance with SFAS No. 123, the Company's loss and loss per
share information would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Pro forma loss before extraordinary item
attributable to common stockholders............. $(50,718) $(72,664) $(146,673)
Pro forma loss attributable to common
stockholders.................................... (54,393) (72,664) (146,673)
Pro forma loss per share before extraordinary item
attributable to common stockholders............. (3.12) (2.68) (3.57)
Pro forma loss per share attributable to common
stockholders.................................... (3.35) (2.68) (3.57)
</TABLE>
The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, and, accordingly, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE WEIGHTED-AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
--------- -------------- ----------------
<S> <C> <C> <C>
Options outstanding, December 31, 1995............. 798,958 $1.035-$22.125 $17.75
Options granted.................................. 656,216 5.625-21.25 17.70
Options issued in A+ Network merger.............. 468,904 6.04 6.04
Options exercised................................ (4,739) 1.035 1.04
Options canceled................................. (172,337) 6.044-20.25 18.11
--------- -------------- ------
Options outstanding, December 31, 1996............. 1,747,002 $1.035-$22.125 $ 8.18
Options granted.................................. 685,000 6.00 6.00
Options issued in Pro Net merger................. 1,212,539 6.42 6.42
Options exercised................................ (1,896) 1.04 1.04
Options canceled................................. (171,990) 6.00-20.25 14.16
--------- -------------- ------
Options outstanding, December 31, 1997............. 3,470,655 $1.035-$22.125 $ 6.84
Options granted.................................. 1,679,000 5.125-6.75 5.13
Options exercised................................ -- -- --
Options canceled................................. (144,802) 5.125-6.67 5.90
--------- -------------- ------
Options outstanding, December 31, 1998............. 5,004,853 $1.035-$22.125 $ 5.84
========= ============== ======
Options exercisable, December 31, 1996............. 966,417 $1.035-$22.125 $ 6.64
Options exercisable, December 31, 1997............. 2,362,655 $1.035-$22.125 $ 6.28
Options exercisable, December 31, 1998............. 2,972,353 $1.035-$22.125 $ 6.17
</TABLE>
F-22
<PAGE> 65
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE OPTIONS OUTSTANDING
--------------------------------------------------- -------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING LIFE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.00-$2.00.......... 21,323 5.0 $ 1.04 21,323 $ 1.04
$2.01-$5.00.......... 96,524 8.9 3.95 96,524 3.95
$8.01-$12.99......... 2,830,182 8.5 6.19 4,862,682 5.85
$13.00-$19.00........ 12,324 5.4 14.56 12,324 14.56
$19.01-$22.13........ 12,000 5.3 19.93 12,000 19.93
--------- --- ------ --------- ------
2,972,353 8.5 $ 6.17 5,004,853 $ 5.84
========= === ====== ========= ======
</TABLE>
Profit Sharing Plan and Retirement Benefits
The Metrocall, Inc. Savings and Retirement Plan (the "Plan"), a combination
employee savings plan and discretionary profit-sharing plan, covers
substantially all full-time employees. The Plan qualifies under section 401(k)
of the Internal Revenue Code (the "IRC"). Under the Plan, participating
employees may elect to voluntarily contribute on a pretax basis between 1% and
15% of their salary up to the annual maximum established by the IRC. The Company
has agreed to match 50% of the employee's contribution, up to 4% of each
participant's gross salary. Contributions made by the Company vest 20% per year
beginning on the second anniversary of the participant's employment. Other than
the Company's matching obligations, discussed above, profit sharing
contributions are discretionary. The Company's expenses for contributions under
the Plan were $112,000, $372,000 and $150,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
8. CONTINGENCIES
Legal and Regulatory Matters
The Company is subject to certain legal and regulatory matters in the
normal course of business. In the opinion of management, the outcome of such
assertions will not have a material adverse effect on the financial position or
the results of the operations of the Company.
Interconnect Complaint
The Company 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 the Company
for local transport of the telephone companies' local traffic. The Company has
petitioned the FCC to rule that these local transport charges are unlawful and
to award it a reimbursement or credit for any past charges assessed by the
respective carrier and paid by the Company 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. As of December 31, 1997 and 1998, 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 $11.6
million and $10.7 million, respectively. These amounts represent management's
estimate; however, as these LEC refunds are contingent upon a successful ruling
on the Company's complaint, they have not been recorded in the accompanying
financial statements as of December 31, 1997 and 1998. 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 stopped assessing the
F-23
<PAGE> 66
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company such charges and have refunded the Company amounts due, however, 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 by these RBOCs, which it has not paid or expensed were
approximately $7.0 million at December 31, 1998. 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. INCOME TAXES
As of December 31, 1998, the Company had net operating loss and investment
tax credit carryforwards of approximately $251.3 million and $1.2 million,
respectively, which expire in the years 1999 through 2012. The benefits of these
carryforwards may be limited in the future if there are significant changes in
the ownership of the Company. Net operating loss carryforwards may be used to
offset up to 90 percent of the Company's alternative minimum taxable income. The
provision for alternative minimum tax will be allowed as a credit carryover
against regular tax in the future in the event regular tax exceeds alternative
minimum tax expense. To the extent that acquired net operating losses are
utilized in future periods, the benefit will first be recognized to reduce
acquired intangible assets before reducing the provision for income taxes.
The tax effect of the net operating loss and investment tax credit
carryforwards, together with net temporary differences, represents a net
deferred tax asset for which management has reserved 100% due to the uncertainty
of future taxable income. These carryforwards will provide a benefit for
financial reporting purposes when utilized to offset future taxable income.
The components of net deferred tax assets (liabilities) were as follows as
of December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 1,085 $ 2,611
Management reorganization................................. 1,279 610
Contributions............................................. -- 169
New pagers on hand........................................ 935 1,468
Intangibles............................................... 6,170 13,668
Other..................................................... 2,418 7,688
Investment tax credit carryforward........................ 1,204 1,204
Net operating loss carryforwards.......................... 106,435 111,932
--------- ---------
Total deferred tax assets......................... 119,526 139,350
========= =========
Deferred tax liabilities:
Basis differences attributable to purchase accounting..... (155,930) (209,642)
Depreciation and amortization expense..................... (10,184) (11,677)
Other..................................................... (1,701) (10,517)
--------- ---------
Total deferred tax liabilities.................... (167,815) (231,836)
========= =========
Net deferred tax liability.................................. (57,280) (104,135)
Less: Valuation allowance................................... (107,641) (117,156)
--------- ---------
$(155,930) $(209,642)
========= =========
</TABLE>
F-24
<PAGE> 67
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax benefit for the years ended December 31, 1996, 1997 and
1998, is primarily the result of the amortization of the basis differences
attributable to purchase accounting and is composed of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Income tax (provision) benefit
Current --
Federal.............................................. $ -- $ -- $ --
State................................................ (447) (539) (310)
Deferred --
Federal.............................................. 1,277 4,698 41,755
State................................................ 191 702 5,649
------ ------ -------
$1,021 $4,861 $47,094
====== ====== =======
</TABLE>
The benefit for income taxes for the years ended December 31, 1996, 1997
and 1998, results in effective rates that differ from the Federal statutory rate
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
------ ------ -----
<S> <C> <C> <C>
Statutory Federal income tax rate........................... 35.0% 35.0% 35.0%
Effect of graduated rates................................... (1.0) (1.0) (1.0)
State income taxes, net of Federal tax benefit.............. 4.6 5.3 4.6
Net operating losses for which no tax benefit is currently
available................................................. (24.7) (9.1) (8.4)
Permanent differences....................................... (11.8) (22.7) (6.1)
----- ----- ----
2.1% 7.5% 26.7%
===== ===== ====
</TABLE>
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company made cash payments for interest of $19.1 million, $30.2 million
and $58.0 million for the years ended December 31, 1996, 1997 and 1998,
respectively. The Company made cash payments for income taxes of $264,000,
$539,000 and $690,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
During 1996, 1997, and 1998, the Company issued capital stock to effect
certain acquisitions as described in Note 3.
F-25
<PAGE> 68
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. UNAUDITED QUARTERLY FINANCIAL DATA
The following table of quarterly financial data has been prepared from the
financial records of the Company, without audit, and reflects all adjustments
that are, in the opinion of management, necessary for a fair presentation of the
results of operations for the interim periods presented (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------- ------------------- ------------------- -------------------
1997 1998 1997 1998 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $ 66,753 $103,331 $ 70,297 $103,254 $ 75,019 $105,890 $ 77,295 $152,249
Loss from operations...... (4,932) (26,262) (6,698) (23,654) (6,272) (25,865) (11,190) (36,856)
Loss attributable to
common stockholders..... (13,812) (32,672) (14,669) (31,157) (17,088) (33,771) (22,504) (43,309)
Loss per share
attributable to common
stockholders............ (0.56) (0.80) (0.59) (0.76) (0.59) (0.83) (0.77) (1.04)
</TABLE>
The above unaudited quarterly financial data has been restated as described
in Note 2. The impact of this restatement by quarter is shown below (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------- ------------ --------------- ----------------
1997 1998 1997 1998 1997 1998 1997 1998
----- ------ ----- ---- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................................... $ -- $ -- $ -- $-- $ -- $ -- $ -- $ --
Increase (decrease) in loss from
operations................................. 504 2,124 756 -- 1,068 2,118 5,534 (1,584)
Increase (decrease) in loss attributable to
common stockholders........................ 504 2,124 756 -- 1,068 2,118 5,534 (1,584)
Increase (decrease) in loss per share
attributable to common stockholders........ 0.02 0.05 0.04 -- 0.04 0.06 0.19 (0.04)
</TABLE>
The sum of the per share amounts may not equal the annual amounts because
of the changes in the weighted-average number of shares outstanding during the
year.
F-26
<PAGE> 69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metrocall, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Metrocall, Inc., and subsidiaries, and
have issued our report thereon dated June 23, 1999. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
included on page F-28 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
June 23, 1999
F-27
<PAGE> 70
SCHEDULE II
METROCALL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES ACQUIRED(1) DEDUCTIONS(2) OF YEAR
- ----------- ---------- ---------- ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful
accounts...................... $ 968 $ 4,575 $1,927 $ 4,509 $2,961
====== ======= ====== ======= ======
Year ended December 31, 1997
Allowance for doubtful
accounts...................... $2,961 $ 9,963 $4,609 $10,690 $6,843
====== ======= ====== ======= ======
Year ended December 31, 1998
Allowance for doubtful
accounts...................... $6,843 $13,418 $1,377 $15,442 $6,196
====== ======= ====== ======= ======
</TABLE>
- ---------------
(1) Allowance for doubtful accounts acquired in 1996 for the Parkway Paging,
Satellite Paging, Message Network and A+ Network, 1997 for Page America and
ProNet and 1998 for AMD (see Note 3 -- Notes to Consolidated Financial
Statements).
(2) Deductions represent write-offs of accounts receivable.
F-28
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
3.1 Restated Certificate of Incorporation of Metrocall, Inc.
(Metrocall).(w)
3.2 Eighth Amended and Restated Bylaws of Metrocall.(w)
4.1 Indenture for Metrocall 11% Senior Subordinated Notes due
2008, dated as of December 22, 1998.(a)
4.2 Indenture for 9 3/4% Senior Subordinated Notes due 2007
dated October 21, 1997.(b)
4.3 Indenture for Metrocall 10 3/8% Senior Subordinated Notes
due 2007 dated September 27, 1995.(c)
4.4 Indenture for ProNet Inc. (ProNet) 11 7/8% Senior
Subordinated Notes due 2005 ("ProNet Notes") dated June 15,
1995.(d)
4.5 Supplemental Indenture dated May 28, 1996 for ProNet
Notes.(w)
4.6 Second Supplemental Indenture dated December 30, 1997 for
ProNet Notes.(e)
4.7 Indenture for A+ Network, Inc. 11 7/8% Senior Subordinated
Notes due 2005 ("A+ Notes") dated October 24, 1995.(f)
4.8 First Supplemental Indenture dated November 14, 1996, for A+
Notes.(g)
4.9 Second Supplemental Indenture dated November 15, 1996 for A+
Notes.(g)
4.10 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
C Convertible Preferred Stock of Metrocall.(h)
4.11 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
A Convertible Preferred Stock of Metrocall.(i)
10.1 Fourth Amended and Restated Loan Agreement by and among
Metrocall, certain lenders and Toronto Dominion (Texas),
Inc. as administrative agent, dated as of December 22,
1998.(a)
10.2 Stock Purchase Agreement by and among Metrocall and AT&T
Wireless Services, Inc., McCaw Communications Companies,
Inc., and AT&T Two Way Messaging Communications, Inc. dated
June 26, 1998.(k)
10.3 Stockholders Voting Agreement and Proxy between AT&T
Wireless Services, Inc. and certain stockholders of
Metrocall dated June 26, 1998.(l)
10.4 Voting Agreement between AT&T Wireless Services, Inc. and
Page America Group, Inc. dated June 26, 1998.(l)
10.5 Registration Rights Agreement between Metrocall and McCaw
Communications Companies, Inc. dated October 1, 1998.(h)
10.6 Amended and Restated Asset Purchase Agreement by and among
Page America Group, Inc., Page America of New York, Inc.,
Page America of Illinois, Inc., Page America Communications
of Indiana, Inc., Page America of Pennsylvania, Inc.
(collectively "Page America") and Metrocall, Inc. dated as
of January 30, 1997.(m)
10.7 Amendment to Asset Purchase Agreement by and among Page
America and Metrocall dated as of March 28, 1997.(m)
10.8 Registration Rights Agreement dated July 1, 1997 by and
between Page America Group, Inc. and Metrocall.(n)
10.9 Registration Rights Agreement dated July 1, 1997 by and
among Page America and Metrocall.(n)
10.10 Indemnity Escrow Agreement dated July 1, 1997 by and among
Page America, Metrocall and First Union National Bank of
Virginia.(n)
10.11 Agreement and Plan of Merger dated as of August 8, 1997,
between Metrocall and ProNet.(o)
10.12 Stockholders Voting Agreement dated as of August 8, 1997,
among ProNet and certain stockholders of Metrocall listed
therein.(o)
10.13 Employment Agreement between Metrocall and William L.
Collins, III.(p)
10.14 Amendment to Employment Agreement between Metrocall and
William L. Collins, III.(r)
10.15 Employment Agreement between Metrocall and Steven D.
Jacoby.(p)
10.16 Amendment to Employment Agreement between Metrocall and
Steven D. Jacoby.(r)
10.17 Second Amendment to Employment Agreement between Metrocall
and Steven D. Jacoby.(s)
10.18 Employment Agreement between Metrocall and Vincent D.
Kelly.(p)
10.19 Amendment to Employment Agreement between Metrocall and
Vincent D. Kelly.(r)
10.20 Second Amendment to Employment Agreement between Metrocall
and Vincent D. Kelly.(s)
10.21 Change of Control Agreement between Metrocall and William L.
Collins, III.(p)
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <S>
10.22 Change of Control Agreement between Metrocall and Steven D.
Jacoby.(p)
10.23 Change of Control Agreement between Metrocall and Vincent D.
Kelly.(p)
10.24 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and Jackie R. Kimzey.(q)
10.25 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and David J. Vucina.(m)
10.26 Letter Agreement dated August 8, 1997, between Metrocall and
Jackie R. Kimzey.(q)
10.27 Letter Agreement dated August 8, 1997, between Metrocall and
David J. Vucina.(q)
10.28 Letter Agreement dated August 8, 1997, between Metrocall and
Jan E. Gaulding.(q)
10.29 Letter Agreement dated August 8, 1997, between Metrocall and
Mark A. Solls.(q)
10.30 Letter Agreement dated August 8, 1997, between Metrocall and
Jeffery A. Owens.(q)
10.31 Directors' Stock Option Plan, as amended.(t)
10.32 Metrocall 1996 Stock Option Plan.(u)
10.33 Metrocall 1996 Stock Option Plan, as amended.(t)
10.34 Metrocall Amended Employee Stock Purchase Plan.(v)
10.35 Registration Rights Agreement dated December 22, 1998
between Metrocall and Morgan Stanley & Co. Incorporated,
NationsBanc Montgomery Securities LLC, TD Securities (USA)
Inc., First Union Capital Markets and BancBoston Roberston
Stephens Inc.(w)
10.36 Deed of Lease between Douglas and Joyce Jemal, as landlord,
and Metrocall, as tenant, dated April 14, 1994.(x)
10.37 Lease Agreement dated December 20, 1983 between Beacon
Communications Associates, Ltd. and a predecessor of
Metrocall.(y)
10.38 Non-disclosure/No Conflict Agreement dated May 16, 1996
between Metrocall and Elliot H. Singer.(z)
10.39 Placement Agreement dated December 17,1998 between Metrocall
and Morgan Stanley & Co. Incorporated, NationsBanc
Montgomery Securities LLC, TD Securities (USA) Inc., First
Union Capital Markets and BancBoston Roberston Stephens
Inc.(w)
11.1 Statement re computation of per share earnings.*
21.1 Subsidiaries of Metrocall, Inc.(w)
23.2 Consent of Arthur Andersen LLP, as independent public
accountants for Metrocall.*
27.1 December 31, 1998 Financial Data Schedule.*
27.2 December 31, 1997 Financial Data Schedule.*
27.3 December 31, 1996 Financial Data Schedule.*
</TABLE>
- ------------
<TABLE>
<C> <S>
* Filed herewith.
(a) Incorporated by reference to Metrocall's Current Report on
Form 8-K filed with the Commission on January 4, 1999.
(b) Incorporated by reference to Metrocall's Current Report on
Form 8-K filed with the Commission on October 23, 1997.
(c) Incorporated by reference to Metrocall's Registration
Statement on Form S-1, as amended (File No. 33-96042) filed
with the Commission on September 27, 1995.
(d) Incorporated by reference to ProNet's Current Report on Form
8 Metrocall's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 filed with the Commission on May 15,
1998.
(e) Incorporated by reference to Metrocall's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 filed with
the Commission on May 15, 1998.
(f) Incorporated by reference to the Registration Statement on
Form S-1 of A Communications, Inc., as amended (File No.
33-95208) filed with the Commission on September 18, 1995.
(g) Incorporated by reference to Metrocall's Annual Report on
Form 10-K for the year ended December 31, 1996 filed with
the Commission on March 31, 1997.
</TABLE>
<PAGE> 73
<TABLE>
<S> <C>
(h) Incorporated by reference to Metrocall's Current Report on
Form 8-K filed with the Commission on October 16, 1998.
(i) Incorporated by reference to Metrocall's Current Report on
Form 8-K filed with the Commission on November 21, 1996.
(j) Incorporated by reference to Metrocall's Registration
Statement, Amendment No. 2, on Form S-4 (File No. 333-36079)
filed with the Commission on November 5, 1997.
(k) Incorporated by reference to Metrocall's Definitive Proxy
Statement on Schedule 14A filed with the Commission on
August 31, 1998.
(l) Incorporated by reference to Metrocall's Quarterly Report on
Form 8-K filed July 7, 1998.
(m) Incorporated by reference to Metrocall's Registration
Statement on Form S-4, as amended (File No. 333-21231)
initially filed with the Commission on February 5, 1997.
(n) Incorporated by reference to Metrocall's Current Report on
Form 8-K filed with the Commission on July 14, 1997.
(o) Incorporated by reference to Metrocall's Current Report on
Form 8-K filed with the Commission on August 12, 1997.
(p) Incorporated by reference to Metrocall's Registration
Statement on Form S-4, as amended (File No. 333-06919) filed
with the Commission on June 27, 1996.
(q) Incorporated by reference to Metrocall's Registration
Statement on Form S-4, as amended (File No. 333-36079) filed
with the Commission on September 22, 1997.
(r) Incorporated by reference to Metrocall's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997 filed
with the Commission on November 14, 1997.
(s) Incorporated by reference to Metrocall's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 filed with the
Commission on August 14, 1998.
(t) Incorporated by reference to Metrocall's Proxy Statement
filed for the Annual Meeting of Stockholders held on May 5,
1999.
(u) Incorporated by reference to Metrocall's Proxy Statement
filed for the Annual Meeting of Stockholders held on May 1,
1996.
(v) Incorporated by reference to Metrocall's Registration
Statement, Amendment No. 1, on Form S-4 (File No. 333-36079)
filed with the Commission on October 27, 1997.
(w) Incorporated by reference to Metrocall's Annual Report on
Form 10-K for the year ended December 31, 1998 filed with
the Commission on March 31, 1999.
(x) Incorporated by reference to Metrocall's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994 filed
with the Commission on November 14, 1994.
(y) Incorporated by reference to Metrocall's Registration
Statement on Form S-1, as amended (File No. 33-63886) filed
with the Commission on July 12, 1993.
(z) Incorporated by reference to Metrocall's Tender Offer
Statement on Schedule 14D-1, filed with the Commission on
May 22, 1996.
</TABLE>
<PAGE> 1
Exhibit 11.1
METROCALL, INC.
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(AS RESTATED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1996 1997 1998
---------- --------- ----------
Net loss $ (46,584) $ (60,323) $ (129,142)
Preferred dividends (780) (7,750) (11,767)
---------- --------- ----------
Net loss before extraordinary item
attributable to common
stock holders (47,364) (68,073) (140,909)
Extraordinary item (3,675)
---------- --------- ----------
Net loss attributable to common
stockholders $ (51,039) $ (68,073) $ (140,909)
========== ========= ==========
Weighted-average shares outstanding:
Shares outstanding, beginning of
period 14,626 24,521 40,548
Shares issued in acquisitions 1,619 2,492
Share issued for exercise of stock
options 2 1
Shares issued in settlement of litigation 390
Shares issued in employee stock purchase
plan 6 73 91
--------- --------- ----------
Weighted-average shares outstanding 16,253 27,087 41,030
========= ========= ==========
Net loss before extraordinary item
attributable to common stockholders $ (2.91) $ (2.51) $ (3.43)
Extraordinary item (0.23)
---------- ---------- ----------
Loss per share attributable to common
stockholders $ (3.14) $ (2.51) $ (3.43)
========== ========= ==========
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement of our reports dated June 23, 1999
included in Metrocall's Form 10-K/A for the year ended December 31, 1998 and to
all references to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
ARTHUR ANDERSEN LLP
Washington, D.C.
July 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,436
<SECURITIES> 0
<RECEIVABLES> 50,890
<ALLOWANCES> 6,196
<INVENTORY> 2,406
<CURRENT-ASSETS> 61,973
<PP&E> 459,830
<DEPRECIATION> 168,067
<TOTAL-ASSETS> 1,251,038
<CURRENT-LIABILITIES> 103,801
<BONDS> 743,334
160,742
0
<COMMON> 416
<OTHER-SE> 33,364
<TOTAL-LIABILITY-AND-EQUITY> 1,251,038
<SALES> 48,372
<TOTAL-REVENUES> 464,724
<CGS> 31,791
<TOTAL-COSTS> 545,570
<OTHER-EXPENSES> (849)
<LOSS-PROVISION> 13,418
<INTEREST-EXPENSE> 64,448
<INCOME-PRETAX> (176,236)
<INCOME-TAX> (47,094)
<INCOME-CONTINUING> (129,142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (140,909)
<EPS-BASIC> (3.43)
<EPS-DILUTED> (3.43)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 24,896
<SECURITIES> 0
<RECEIVABLES> 37,051
<ALLOWANCES> 6,843
<INVENTORY> 2,663
<CURRENT-ASSETS> 61,360
<PP&E> 339,945
<DEPRECIATION> (115,357)
<TOTAL-ASSETS> 1,078,023
<CURRENT-LIABILITIES> 98,107
<BONDS> 599,941
53,982
0
<COMMON> 405
<OTHER-SE> 170,100
<TOTAL-LIABILITY-AND-EQUITY> 1,078,023
<SALES> 39,464
<TOTAL-REVENUES> 289,364
<CGS> 29,948
<TOTAL-COSTS> 288,508
<OTHER-EXPENSES> (156)
<LOSS-PROVISION> 9,963
<INTEREST-EXPENSE> 36,248
<INCOME-PRETAX> (65,184)
<INCOME-TAX> (4,861)
<INCOME-CONTINUING> (60,323)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (68,073)
<EPS-BASIC> (2.51)
<EPS-DILUTED> (2.51)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,917
<SECURITIES> 0
<RECEIVABLES> 23,866
<ALLOWANCES> 2,961
<INVENTORY> 0
<CURRENT-ASSETS> 36,374
<PP&E> 230,672
<DEPRECIATION> (77,260)
<TOTAL-ASSETS> 645,448
<CURRENT-LIABILITIES> 44,770
<BONDS> 594,838
31,231
0
<COMMON> 245
<OTHER-SE> 164,924
<TOTAL-LIABILITY-AND-EQUITY> 645,448
<SALES> 25,928
<TOTAL-REVENUES> 149,957
<CGS> 21,633
<TOTAL-COSTS> 154,898
<OTHER-EXPENSES> 607
<LOSS-PROVISION> 4,575
<INTEREST-EXPENSE> 20,424
<INCOME-PRETAX> (47,605)
<INCOME-TAX> (1,021)
<INCOME-CONTINUING> (46,584)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,675)
<CHANGES> 0
<NET-INCOME> (51,039)
<EPS-BASIC> (3.14)
<EPS-DILUTED> (3.14)
</TABLE>
