<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-21924
METROCALL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-1215634
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No..)
6677 RICHMOND HIGHWAY, ALEXANDRIA, VIRGINIA 22306
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: (703) 660-6677
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
CLASS OUTSTANDING AT AUGUST 1, 2000
Common Stock, $.01 par value 87,575,728
<PAGE> 2
METROCALL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
NUMBER
--------------------------------------------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1 Interim Condensed Consolidated Financial Statements
Balance Sheets, December 31, 1999 and June 30, 2000................................. 3
Statements of Operations for the three and six months ended June 30, 1999 and 2000 4
Statement of Stockholders' Equity/(Deficit) for the six months ended June 30, 2000 5
Statements of Cash Flows for the six months ended June 30, 1999 and 2000......... 6
Notes to Interim Condensed Consolidated Financial Statements..................... 7
Management's Discussion and Analysis of Financial Condition and Results of
Item 2 Operations...................................................................... 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk.......................... 23
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................................... 24
Item 2 Changes in Securities............................................................... 24
Item 3 Defaults Upon Senior Securities..................................................... 24
Item 4 Submission of Matters to a Vote of Security Holders................................. 25
Item 5 Other Information................................................................... 25
Item 6 Exhibits and Reports on Form 8-K.................................................... 25
SIGNATURES........................................................................................................ 26
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
METROCALL, INC. AND SUBSIDIARIES
BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------------ -------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents........................................................ $ 2,787 $ 40,420
Accounts receivable, less allowance for doubtful accounts of $6,196 as of
December 31, 1999 and $6,858 as of June 30, 2000, respectively................ 52,015 44,729
Prepaid expenses and other current assets........................................ 3,333 5,062
------------------ -------------------
Total current assets.................................................. 58,135 90,211
------------------ -------------------
PROPERTY AND EQUIPMENT:
Land, buildings and leasehold improvements....................................... 15,685 16,049
Furniture, office equipment and vehicles......................................... 76,962 85,167
Paging and plant equipment....................................................... 377,047 350,854
Less - Accumulated depreciation and amortization................................. (192,329) (182,070)
------------------ -------------------
277,365 270,000
INTANGIBLE ASSETS, net of accumulated amortization of approximately
$433,088 as of December 31, 1999 and $538,642 as of June 30, 2000, respectively.. 682,026 593,227
OTHER ASSETS........................................................................ 8,021 22,558
------------------ -------------------
TOTAL ASSETS........................................................................ $1,025,547 $ 975,996
------------------ -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt............................................. $ 643 $ 687
Accounts payable................................................................. 28,144 19,809
Accrued expenses and other current liabilities................................... 42,022 42,020
Deferred revenues and subscriber deposits........................................ 24,235 22,706
------------------ -------------------
Total current liabilities.......................................... 95,044 85,222
------------------ -------------------
CAPITAL LEASE OBLIGATIONS, less current maturities.................................. 3,001 2,682
LONG-TERM DEFERRED REVENUE ......................................................... - 11,239
CREDIT FACILITY AND OTHER LONG-TERM DEBT, less current maturities................... 75,375 105,339
SENIOR SUBORDINATED NOTES........................................................... 698,608 649,688
DEFERRED INCOME TAX LIABILITY....................................................... 146,387 117,283
MINORITY INTEREST IN PARTNERSHIP.................................................... 510 510
------------------ -------------------
Total liabilities.................................................. 1,018,925 971,963
COMMITMENTS AND CONTINGENCIES
SERIES A CONVERTIBLE PREFERRED STOCK, 14% cumulative; par
value $.01 per share; 810,000 shares authorized; 239,517 and 243,516 shares
Issued and outstanding as of December 31, 1999 and June 30, 2000,
respectively, and a liquidation preference of $60,927 and $60,879 at
December 31, 1999 and June 30, 2000, respectively............................... 53,939 55,655
SERIES C CONVERTIBLE PREFERRED STOCK, 8% cumulative; par value $.01 per share;
25,000 shares authorized; 10,378 and 0 shares issued and outstanding as of
December 31, 1999 and June 30, 2000, and a liquidation preference of
$104,817 and $0 at December 31, 1999 and June 30, 2000, respectively............ 104,817 -
STOCKHOLDERS' EQUITY/(DEFICIT):
Common stock, par value $.01 per share; authorized 200,000,000 shares;
41,901,908 and 85,401,723 shares issued and outstanding as of December 31,
1999 and June 30, 2000, respectively............................................. 419 854
Additional paid-in capital.......................................................... 341,070 540,497
Accumulated deficit................................................................. (493,623) (592,973)
------------------ -------------------
Total stockholders' equity/(deficit)................................................ (152,134) (51,622)
------------------ -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT) $1,025,547 $ 975,996
========== =========
------------------ -------------------
</TABLE>
See notes to interim condensed consolidated financial statements.
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METROCALL, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------------------
1999 2000 1999 2000
------------------------------------------------------------------------
REVENUES:
<S> <C> <C> <C> <C>
Service, rent and maintenance revenues................. $ 138,949 $ 126,884 $ 279,403 $ 255,391
Product sales.......................................... 16,681 13,783 31,257 25,328
------------------------------------------------------------------------
Total revenues......................................... 155,630 140,667 310,660 280,719
Net book value of products sold........................ (9,897) (9,402) (19,712) (17,167)
------------------------------------------------------------------------
145,733 131,265 290,948 263,552
------------------------------------------------------------------------
OPERATING EXPENSES:
Service, rent and maintenance expenses................. 41,621 32,742 81,615 63,150
Selling and marketing.................................. 24,639 27,034 49,664 51,465
General and administrative............................. 42,816 41,479 84,168 82,868
Depreciation........................................... 23,602 27,877 46,654 53,887
Amortization........................................... 52,831 52,223 105,502 104,380
------------------------------------------------------------------------
185,509 181,355 367,603 355,750
------------------------------------------------------------------------
Loss from operations................................... (39,776) (50,090) (76,655) (92,198)
INTEREST EXPENSE....................................... (21,121) (21,180) (41,821) (42,744)
INTEREST AND OTHER INCOME, NET......................... 212 (140) 228 179
------------------------------------------------------------------------
LOSS BEFORE INCOME TAX BENEFIT AND
EXTRAORDINARY ITEM...................................... (60,685) (71,410) (118,248) (134,763)
INCOME TAX BENEFIT...................................... 15,974 15,371 31,524 31,020
LOSS BEFORE EXTRAORDINARY ITEM (44,711) (56,039) (86,724) (103,743)
EXTRAORDINARY ITEM (net of income taxes of $0.2
million) - 15,787 - 15,787
------------------------------------------------------------------------
Net loss................................................ (44,711) (40,252) (86,724) (87,956)
PREFERRED DIVIDENDS..................................... (4,048) (2,299) (8,051) (5,086)
SERIES C PREFERRED EXCHANGE INDUCEMENT.................. - - - (6,308)
GAIN ON REPURCHASE OF PREFERRED STOCK................... - - 2,208 -
------------------------------------------------------------------------
Loss attributable to common stockholders................ $ (48,759) $ (42,551) $ (92,567) $ (99,350)
------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER SHARE
ATTRIBUTABLE TO COMMON
STOCKHOLDERS:.......................................
Loss per share before extraordinary item attributable
to common stockholders................................... $ (1.17) $ (0.70) $ (2.22) $ ( 1.74)
Extraordinary item, net of income tax benefit - 0.19 - 0.24
------------------------------------------------------------------------
Basic and diluted loss per share attributable to
common stockholders...................................... $ (1.17) $ (0.51) $ (2.22) $ (1.50)
========== ========== ========== ==========
Weighted-average common shares outstanding............... 41,670,693 83,355,628 41,670,693 66,169,421
</TABLE>
See notes to interim condensed consolidated financial statements.
Page 4
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STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------
ADDITIONAL
PAR PAID-IN ACCUMULATED
SHARES OUTSTANDING VALUE CAPITAL DEFICIT TOTAL
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999................... 41,901,908 $ 419 $ 341,070 $ (493,623) $ (152,134)
Common stock issued for employee stock
and benefit plans.......................... 686,750 7 3,017 - 3,024
Common stock issued upon exercise of
warrants.................................. 1,102,920 11 2,667 2,678
Common stock issued in exchange for Series
C Preferred stock......................... 13,250,000 133 105,235 - 105,368
Common stock issued in exchange for senior
subordinated notes ....................... 5,048,512 50 31,163 31,213
Other common stock issuances................. 23,411,633 234 51,037 - 51,271
Series C Preferred exchange inducement - - 6,308 (6,308) -
Preferred dividends.......................... - - - (5,086) (5,086)
Net loss..................................... - - - (87,956) (87,956)
------------------------------------------------------------------------------------
BALANCE, June 30, 2000....................... 85,401,723 $ 854 $ 540,497 $ (592,973) $ (51,622)
====================================================================================
</TABLE>
See notes to interim condensed consolidated financial statements.
Page 5
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METROCALL, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 2000
-------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss........................................................................... $ (86,724) $(87,956)
Adjustments to reconcile net loss to net cash provided by operating activities--
Extraordinary item - (15,787)
Depreciation and amortization................................................... 152,156 158,267
Equity in loss of Inciscent - 881
Amortization of debt financing costs and debt discount.......................... 1,581 1,353
Deferred income taxes.......................................................... (31,715) (31,020)
Cash provided by (used in) changes in assets and liabilities:
Accounts Receivable............................................................. (8,319) 8,505
Prepaid expenses and other current assets....................................... (478) (1,582)
Accounts payable................................................................ (1,285) (8,335)
Accrued expenses and other current liabilities.................................. 7,304 (927)
Deferred revenues and subscriber deposits....................................... 979 (5,233)
-------------------- ------------------
Net cash (used) provided by operating activities......................... 33,499 18,166
-------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses net of cash acquired - (12,575)
Capital expenditures, net.......................................................... (51,914) (45,152)
Other.............................................................................. (1,779) (2,755)
-------------------- ------------------
Net cash used in investing activities.................................... (53,693) (60,482)
-------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facility,net .............................................. 44,000 30,000
Repurchase of Series B Preferred................................................... (16,240) -
Deferred debt financing costs...................................................... (390) (1,304)
Principal payments on long-term debt............................................... (592) (310)
Net proceeds from issuance of common stock......................................... 376 51,563
-------------------- ------------------
Net cash provided by financing activities................................ 27,154 79,949
-------------------- ------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................................. (6,960) 37,633
CASH AND CASH EQUIVALENTS, beginning of period........................................ 8,436 2,787
-------------------- ------------------
CASH AND CASH EQUIVALENTS, end of period.............................................. $ 15,396 $40,420
==================== ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for interest............................................................ $ 32,348 $17,077
Cash payments for income taxes - -
Fair value of common stock exchanged for senior subordinated notes - $31,342
Fair value of assets acquired in business acquisition - $15,218
Less cash paid for acquisition - (12,575)
-------------------- ------------------
Liabilities assumed - $2,643
==================== ==================
</TABLE>
See notes to interim condensed consolidated financial statements.
Page 6
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METROCALL INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
1. GENERAL
The accompanying unaudited interim condensed consolidated financial
statements included herein have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (SEC). The interim
condensed consolidated financial statements include the consolidated accounts of
Metrocall, Inc. and its majority owned subsidiaries (collectively, "Metrocall").
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair statement of the financial position, results
of operations and cash flows for the interim periods presented have been made.
The preparation of the financial statements includes estimates that are used
when accounting for revenues, allowance for uncollectible receivables,
telecommunications expenses, depreciation and amortization and certain accruals.
Actual results could differ from those estimates. The results of operations for
the six months ended June 30, 2000, are not necessarily indicative of the
results to be expected for the full year. Some information and footnote
disclosures normally included in financial statements or notes thereto prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to SEC rules and regulations. Metrocall believes, however,
that its disclosures are adequate to make the information presented not
misleading. You should read these interim condensed consolidated financial
statements in conjunction with the consolidated financial statements and notes
thereto included in Metrocall's 1999 Annual Report on Form 10-K.
2. RISKS AND OTHER IMPORTANT FACTORS
Metrocall sustained net losses of $129.1 million, $172.5 million and
$88.0 million for fiscal years 1998, 1999 and the six months ended June 30,
2000, respectively. Those losses were significantly attributable to its
consolidation and growth strategies and capital expenditure requirements.
Metrocall cannot assure you that it can reverse such losses in the future. At
June 30, 2000, Metrocall had an accumulated deficit of approximately $593.0
million. Metrocall's losses from operations and net losses are expected to
continue. Metrocall cannot assure you that it will achieve profitability in the
future.
Metrocall's operations require the availability of substantial funds
to finance the maintenance and growth of its existing paging operations and
subscriber base, development and construction of future wireless communications
networks, expansion into new markets, and the acquisition of other wireless
communications companies. At June 30, 2000, Metrocall had approximately $758.4
million outstanding under its credit facility, senior subordinated notes,
capital leases and other long-term debt. At June 30, 2000, Metrocall was in
compliance with each of the covenants under its $200.0 million credit facility.
(See Footnote 5) Metrocall's ability to borrow additional amounts in the future,
including amounts currently available under the credit facility, is dependent on
Metrocall's ability to comply with the provisions of its credit facility as well
as the availability of financing in the capital markets. Amounts available under
the credit facility are subject to certain financial covenants and other
restrictions. At June 30, 2000, Metrocall had approximately $2.0 million of
additional borrowings available under its credit facility based on its total
leverage covenant under which net debt cannot exceed six times annualized EBITDA
(also known as annualized operating cash flow). Metrocall believes that this
covenant is currently its most restrictive financial covenant. In the event that
Metrocall's EBITDA continues to decrease on a quarterly basis in the third
quarter or future quarters, Metrocall could violate one or more of the covenants
of its credit facility.
Metrocall is also subject to additional risks and uncertainties
including, but not limited to, changes in technology, business integration,
competition, regulation, litigation and subscriber turnover.
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3. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Metrocall recognizes revenue under service, rental and maintenance
agreements with customers as the related services are performed. Sales of
equipment are recognized upon delivery.
Long-Lived Assets
Long-lived assets and identifiable intangibles to be held and used
are reviewed for impairment on a periodic basis and whenever events or changes
in circumstances indicate that the carrying amount should be addressed.
Impairment is measured by comparing the book value to the estimated undiscounted
future cash flows expected to result from use of the assets and their eventual
disposition. Metrocall believes that no permanent impairment in the carrying
value of long-lived assets existed at June 30, 2000.
4. INVESTMENT IN INCISCENT, INC. (INCISCENT)
On March 17, 2000, Metrocall purchased 50.0% of Inciscent's Series A
Convertible Preferred Stock in exchange for $15.0 million of in-kind services
and a license to access Metrocall's subscriber base. Metrocall has accounted for
its preferred investment similar to the equity method of accounting. At March
31, 2000, Metrocall has reflected its investment in Inciscent in other assets
and its obligation for in-kind services and access to its subscriber base as
deferred revenue on the accompanying balance sheet. Metrocall recognizes revenue
on the in-kind services provided to Inciscent as they are performed. Metrocall
will recognize revenue ratably on the license to access its customer base over
the five-year license period. During the six months ended June 30, 2000,
Metrocall had recognized losses associated with its preferred stock investment
of $881, which are included in interest and other, net.
5. LONG-TERM DEBT
Credit Facility
On March 17, 2000, Metrocall and its bank lenders entered into a
Fifth Amended and Restated Credit Facility (the "credit facility"). Under the
credit facility, subject to certain conditions, Metrocall may borrow up to
$200.0 million under two loan facilities. Facility A is a $150.0 million
reducing revolving credit facility, and Facility B is a $50.0 million term loan
facility. The credit facility is secured by substantially all of the assets of
Metrocall. Required quarterly repayments begin on March 31, 2002, and continue
through June 1, 2005 for both facilities. The final maturity of the facilities
is June 1, 2005.
The credit facility contains various covenants that, among other
restrictions, require Metrocall to maintain certain financial ratios, including
net debt to annualized operating cash flow (not to exceed 6.0 to 1.0 through
December 31, 2000 and declining thereafter), senior debt to annualized operating
cash flow (not to exceed 1.75 to 1.0 through December 31, 2000 and declining to
1.5 to 1.0 thereafter), 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). The covenants also limit additional indebtedness and future mergers
and acquisitions without the approval of the lenders and restrict the payment of
cash dividends and other stockholder distributions by Metrocall during the term
of the credit facility. The credit facility also prohibits certain changes in
ownership of Metrocall, as defined in the credit agreement. The credit facility
also includes a material adverse effect clause under which it could be in
default if there is any material adverse effect upon Metrocall's assets,
liabilities, financial condition, results of operations, properties or business.
Metrocall believes that the declaration of a material adverse effect default by
its bank lenders is remote.
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Effective June 30, 2000, Metrocall and its bank lenders entered into
the First Amendment to the credit facility, which amended the operating cash
flow to interest expense ratio covenant for the three months ended June 30, 2000
and September 30, 2000 reducing this covenant to a ratio of 1.50 to 1.00. This
ratio will revert back to 1.75 to 1.00 for the three months ended December 31,
2000. Had the amendment not been made, Metrocall would have not been in
compliance with this covenant for the three months ended June 30, 2000.
Metrocall believes it will remain in compliance with each of the covenants of
its credit facility for at least the next twelve months.
Senior Subordinated Notes
During the six months ended June 30, 2000, Metrocall issued
5,048,512 shares of its common stock in exchange for $49,099,000 aggregate
principal amount of its outstanding senior subordinated notes. The aggregate
principal amount of senior subordinated notes retired by series are reflected
below:
<TABLE>
<CAPTION>
<S> <C> <C>
11 7/8 % senior subordinated notes due 2005 ......................$ 7,032,000
10 3/8 % senior subordinated notes due 2007 ....................... 11,317,000
9 3/4 % senior subordinated notes due 2007 ....................... 17,250,000
11 % senior subordinated notes due 2008 .......................... 13,500,000
-----------
$ 49,099,000
===========
</TABLE>
As a result of these exchanges, Metrocall recognized an
extraordinary gain of $15.8 million, which represented the difference between
the carrying value of the notes at the time of the exchange and the fair value
of the common stock issued less the write-off of a portion of the related
deferred financing costs and a provision for income taxes. Metrocall conducted
these exchanges without registration under the Securities Act of 1933 in
reliance upon the exemption in section 3(a)(9) of that Act.
6. CONTINGENCIES
Legal and Regulatory Matters
Metrocall is subject to legal and regulatory matters in the normal
course of business. Metrocall does not expect that the outcome of those matters
will have a material adverse effect on its financial position or results of
operations.
7. EMPLOYEE STOCK OPTION AND OTHER BENEFIT PLANS
STOCK OPTION PLANS
During the six months ended June 30, 2000, the Board of Directors
approved grants of options to purchase 2,305,000 shares of Metrocall common
stock to current officers, employees and directors with exercise prices ranging
from $1.97 to $9.00 per share, a price equal to or greater than the fair market
value on the date of grant.
EMPLOYEE STOCK PURCHASE PLAN
Metrocall issued 201,109 and 225,617 shares of common stock, on
January 1, 2000 and July 1, 2000, respectively, under the Metrocall, Inc. Stock
Purchase Plan with purchase prices of approximately $1.69 and $1.44 per share,
respectively.
Page 9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis of financial
condition and results of operations of Metrocall together with the financial
statements and the notes to the financial statements which appear elsewhere in
this quarterly report and Metrocall's Annual Report on Form 10-K for the year
ended December 31, 1999.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking
statements. Metrocall has based these forward-looking statements on its current
expectations and projections about future events. These forward-looking
statements are subject to risks, uncertainties and assumptions, which include:
- Metrocall's high leverage and need for substantial capital;
- Metrocall's ability to service debt;
- Metrocall's history of net operating losses;
- the restrictive covenants governing Metrocall's indebtedness and
the need to comply with such covenants;
- the amortization of its intangible assets;
- Metrocall's ability to cover fixed charges;
- Metrocall's ability to implement its business strategies;
- the impact of competition and technological developments;
- satellite transmission failures;
- subscriber turnover;
- the risks associated with Metrocall's investment in Inciscent;
- litigation;
- regulatory changes;
- dependence on key suppliers and the impact of delays in receiving
sufficient supplies of two-way messaging products; and,
- reliance on key personnel.
Other matters set forth in this Quarterly Report on Form 10-Q may
also cause actual results to differ materially from those described in the
forward-looking statements. Metrocall undertakes no obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this Quarterly Report on
Form 10-Q may not occur.
Page 10
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OVERVIEW
Metrocall is a leading provider of local, regional, and national
paging and other wireless messaging services. Metrocall has a nationwide network
through which it provides messaging services to over 1,000 U.S. cities,
including the top 100 Standard Metropolitan Statistical Areas. Since 1993,
Metrocall's subscriber base has increased from less than 250,000 in 1993 to more
than 6.1 million. Metrocall has achieved this growth through a combination of
internal growth and a program of mergers and acquisitions. As of June 30, 2000,
Metrocall was the third largest paging and wireless-messaging company in the
United States based on number of subscribers.
Metrocall believes that its enhanced nationwide coverage gives it a
competitive advantage in gaining additional subscribers. On May 1, 2000,
Metrocall acquired NationPage, Inc. (NationPage) in a stock purchase transaction
with AT&T Wireless, Inc. This acquisition added approximately 50,000 new
subscribers located principally in eastern Pennsylvania, New Jersey and upstate
New York. Metrocall also engages, from time to time, in discussion with other
industry participants about potential consolidation transactions. Again, there
can be no assurance that any such discussion will lead to a consolidation
transaction.
Metrocall believes that the paging and wireless messaging industry
is likely to undergo additional consolidation and has announced that it intends
to participate in the consolidation process. Potential future consolidations
would be evaluated on several key operating and financial elements including:
- Geographic presence;
- FCC regulatory licenses held;
- Overall valuation of potential target, including subscriber base
and potential synergies;
- Consideration to be given;
- Potential increase of operating cash flow and free cash flow; and,
- Availability of financing and the ability to reduce the combined
companies long-term debt.
Any potential transaction 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.
In November 1999, Arch Communications Group, Inc. (Arch) and
Paging Network, Inc. (PageNet) announced that they had agreed to merge.
Completion of this merger was subject to a number of conditions, including
agreement by holders of PageNet's outstanding senior subordinated notes to
exchange their notes for Arch common stock. Since that time, the terms of
an Arch/PageNet transaction have been incorporated into a proposed plan of
reorganization in PageNet's bankruptcy proceedings.
In July 2000, Metrocall made an alternate proposal to the board of
directors of PageNet to acquire PageNet. Information about the proposal is
set forth in Current Reports on Form 8-K and other public filings made with the
SEC by Metrocall. There can be no assurance that Metrocall will be successful
in consummating any transaction involving PageNet.
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Metrocall's growth, whether internal or through acquisitions,
requires significant capital investment for paging equipment and technical
infrastructure. Metrocall also purchases subscriber devices for that portion of
its subscriber base to which it leases pagers. During the three and six month
periods ended June 30, 2000, capital expenditures totaled $23.7 million and
$45.2 million, respectively. This included approximately $14.1 million and $30.2
million for subscriber equipment for the three and six months ended June 30,
2000, respectively, representing an increase in paging and advanced messaging
devices on hand and on rent or lease. Metrocall estimates capital expenditures
for the year ending December 31, 2000 will approximate $90.0 million and consist
primarily of one-way and two-way messaging devices, transmission equipment, and
information system enhancements.
For the remainder of 2000, Metrocall's business strategy will
include the following:
- Managing capital requirements and increasing free cash flow by:
- continuing to focus on selling, rather than leasing,
one-way or two-way messaging devices in order to reduce
capital expenditure requirements per subscriber;
- increasing revenues associated with the recent
introduction of two-way messaging products and air-time
services, which will generate higher ARPU than
traditional paging services;
- increasing revenues and cash flows through sales of
value-added advanced messaging and information services
which generate higher average monthly revenue per unit
(ARPU) than standard messaging or paging services; and
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<PAGE> 13
- further increasing the utilization of the nationwide
network to serve more customers per frequency and expand
presence in existing markets with minimal capital
outlay.
- Managing and lowering operating costs through cost containment
initiatives; and other operational efficiencies such as the recent
combination of Metrocall's commercial and internal voice mail and
data networking over the same Asynchronous Transfer Mode (ATM)
network; and,
- Maximizing internal growth potential by continuing to broaden
Metrocall's distribution network and expanding target markets to
capitalize on the growing appeal of two-way and advanced messaging
products and other wireless products and applications.
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.
- ARPU means average monthly paging revenue per unit. ARPU is
calculated by dividing (a) service, rent and maintenance revenues
for the period by (b) the average number of units in service for the
period. The ARPU calculation excludes revenues derived from
non-paging services such as long-distance.
- 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 Metrocall's network
systems and customer service centers.
- Selling and marketing expenses: include costs related to salaries,
commissions and administrative costs for Metrocall's sales force and
related marketing and advertising expenses.
- General and administrative expenses: include costs related to
salaries, bonuses and support and overhead costs of executive
management, accounting, administration, customer billing, human
resources and management information systems.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH 1999
The following table sets forth the amounts of revenues and the
percentages of net revenues (defined as total revenues less the net book value
of products sold) represented by certain items in Metrocall's Interim Condensed
Consolidated Statements of Operations and certain other information for the
three months ended June 30, 1999 and 2000:
<TABLE>
<CAPTION>
INCREASE OR
REVENUES JUNE 30, 1999 % OF REVENUES JUNE 30, 2000 % OF REVENUES (DECREASE)
----------------------------------------------------- ----------------- ----------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Service, rent and maintenance $138,949 95.3 $ 126,884 96.7 $(12,065)
Product sales 16,681 11.4 13,783 10.5 (2,898)
----------------- ----------------- ----------------- ----------------- --------------------
Total revenues 155,630 106.7 140,667 107.2 (14,963)
Net book value of products sold (9,897) (6.7) (9,402) (7.2) 495
----------------- ----------------- ----------------- ----------------- --------------------
Net revenues $145,733 100.0 $131,265 100.00 $(14,468)
</TABLE>
Page 13
<PAGE> 14
<TABLE>
<S> <C> <C> <C>
ARPU $ 7.92 $ 6.99 $(0.93)
Number of subscribers 5,811,705 6,103,610 291,905
</TABLE>
Total revenues decreased approximately $14.9 million, or
approximately 9.6%, from $155.6 million for the three months ended June 30, 1999
("1999") to $140.7 million for the three months ended June 30, 2000 ("2000").
Net revenues decreased approximately $14.4 million, or 9.9%, from $145.7 million
in 1999 to $131.3 million in 2000. ARPU for paging services decreased from $7.92
per unit in 1999 to $6.99 per unit in 2000. The decrease in net revenues was
primarily the result of a change in subscriber mix, which benefited the indirect
distribution channels, which are characterized by lower ARPU. Since June 30,
1999, the total number of subscribers receiving air-time services has increased
by 291,905 of this increase, approximately 50,000 new subscribers were added
with the acquisition of NationPage in May 2000. The majority of the remaining
increase occurred in Metrocall's strategic alliance distribution channel. This
channel is characterized by lower ARPU but is characterized by lower operating
costs as the alliance party provides a portion of the marketing, billing and
other services for the subscriber. In addition, since June 30, 1999, Metrocall
has also experienced a 37,500 decline in the number of subscribers in its direct
distribution channels, channels which are characteristically higher ARPU in
nature. Metrocall expects that revenues and ARPU will continue to be affected by
the shift in distribution mix that occurred during 1999 and may continue to
decrease within its traditional one-way business during the remainder of 2000 as
two-way messaging products and other competing messaging products and
technologies attract existing subscribers. Metrocall expects to focus its direct
sales and marketing resources over the remainder of 2000 to concentrate on
selling newly available two-way messaging products and air-time services and
other advanced messaging products to existing and new subscribers. These
products and services are generally characterized by higher ARPU than
Metrocall's current ARPU.
Metrocall purchases most of its two-way messaging devices from two
manufacturers which have missed their product shipment deadlines for the two-way
messaging devices that Metrocall has ordered by several quarters. While these
manufacturers' production time has begun to improve, Metrocall's distribution
pipeline will not be fully stocked until the fourth quarter of 2000, or the
first quarter of 2001 if production cannot catch up with demand. Metrocall's
expectations about its sales efforts for the remainder of 2000 depend on whether
these suppliers fulfill their production and shipment schedules going forward.
Metrocall cannot assure you that it will not experience further delays in
obtaining two-way messaging from these manufacturers or other suppliers in the
future. A significant number of delays could have an adverse effect on
Metrocall's operations and future revenues.
Product sales decreased approximately $2.9 million or 17.3% from
$16.7 million in 1999 to $13.8 million in 2000 and decreased as a percentage of
net revenues from 11.4% in 1999 to 10.5% in 2000. Net book value of products
sold decreased approximately $0.5 million or 5.0% from $9.9 million in 1999 to
$9.4 million in 2000 and increased as a percentage of net revenues from 6.7% in
1999 to 7.2% in 2000. The majority of the decrease in product sales is
attributable to the sale of Metrocall's electronic tracking business, which
occurred in November 1999. Product sales generated from this business were
approximately $3.6 million through June 30, 1999.
The following tables set forth the amounts of operating expenses and
related percentages of net revenues represented by certain items in Metrocall's
Interim Condensed Consolidated Statements of Operations and certain other
information for the three months ended June 30, 1999 and 2000:
<TABLE>
<CAPTION>
JUNE 30, % OF JUNE 30, % OF INCREASE OR
OPERATING EXPENSES 1999 REVENUES 2000 REVENUES (DECREASE)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service, rent and maintenance $ 41,621 28.6 $ 32,742 24.9 $ (8,879)
Selling and marketing 24,639 16.9 27,034 20.6 2,395
General and administrative 42,816 29.4 41,479 31.6 (1,337)
Depreciation 23,602 16.2 27,877 21.2 4,275
Amortization 52,831 36.3 52,223 39.8 (608)
---------------------------------------------------------------------------------------------
$185,509 127.4 $181,355 138.1 $(4,154)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, INCREASE OR
OPERATING EXPENSES PER UNIT IN SERVICE 1999 2000 DECREASE
-------------------------------------------------------------- ------------------ -------------------
<S> <C> <C> <C>
Monthly service, rent and maintenance $2.40 $1.80 $(0.60)
Monthly selling and marketing 1.42 1.49 0.07
Monthly general and administrative 2.47 2.29 (0.18)
------------------- ------------------ -------------------
Average monthly operating costs $6.29 $5.58 $(0.71)
</TABLE>
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<PAGE> 15
Overall, Metrocall experienced a decrease in average monthly
operating costs per unit in service (operating costs per unit before
depreciation and amortization) from 1999 to 2000. Average monthly operating cost
per unit decreased $0.71 from $6.29 per unit for 1999 to $5.58 per unit for
2000. Each operating expense is discussed separately below.
Service, rent and maintenance expenses decreased approximately $8.9
million from $41.6 million in 1999 to $32.7 million in 2000 and decreased as a
percentage of net revenues from 28.6% in 1999 to 24.9% in 2000. Monthly service,
rent and maintenance expense per unit has decreased from $2.40 per unit in 1999
to $1.80 per unit in 2000. Service, rent and maintenance expenses have decreased
primarily due to a decrease in telecommunication expenses as a result of
renegotiated telecommunications contracts, deconstruction of redundant tower
sites and other cost reduction initiatives. Metrocall expects that its service,
rent and maintenance expenses for its traditional paging services to be flat for
the remainder of 2000 and may increase compared to the three months ended June
30, 2000. This is due to service costs related to providing two-way messaging
services as Metrocall expands its two-way messaging services and incurs
additional telecommunications costs and costs associated with operating leases
for two-way messaging equipment.
Selling and marketing expenses increased approximately $2.4 million
from $24.6 million in 1999 to $27.0 million in 2000 and increased as a
percentage of net revenues from 16.9% 1999 to 20.6% in 2000. The overall expense
increase was primarily the result of an increase in personnel costs related to
an increase in the employee sales base and advertising costs related to
launching two-way messaging services offset by a decrease in third-party sales
commissions. Selling and marketing expenses increased as a percentage of
revenues during 2000 as a result of the decline in revenues. Monthly selling and
marketing expenses per unit has increased from $1.42 per unit in 1999 to $1.49
per unit in 2000 as a result of the above mentioned events. Metrocall expects
that selling and marketing expenses may decrease slightly in amount and as a
percentage of revenue in the three months ended September 30, 2000 compared to
the three months ended June 30, 2000 but will increase when compared to the
three months ended September 30, 1999 as Metrocall continues to promote two-way
messaging services.
General and administrative expenses decreased approximately $1.3
million from $42.8 million in 1999 to $41.5 million in 2000 and increased as a
percentage of net revenues from 29.4% in 1999 to 31.6% in 2000. The decrease in
general and administrative expenses was the result of a reduction in expenses
related to year 2000 readiness preparation, which were incurred solely in 1999
and improved customer collection experience. General and administrative expenses
increased as a percentage of net revenue due to the decline in revenues. Monthly
general and administrative expense per unit has decreased from $2.47 per unit in
1999 to $2.29 per unit in 2000 due to the increase in the subscriber base since
June 30, 1999. Metrocall expects general and administrative expenses will remain
consistent on a quarterly basis for the remainder of 2000 and expects that they
will slightly decline when compared to what Metrocall incurred in the comparable
quarter of 1999.
Depreciation expense increased approximately $4.3 million from $23.6
million in 1999 to $27.9 million in 2000. The increase in depreciation expense
resulted primarily from depreciation expense on subscriber equipment and
property, plant and equipment and computer hardware and software that had been
acquired since June 30, 1999.
Amortization decreased $0.6 million from $52.8 million in 1999 to
$52.2 million in 2000 primarily as a result of a small number of intangible
assets, which became fully amortized during 2000. Amortization expense was
comprised of the following elements in 1999 and 2000:
<TABLE>
<CAPTION>
AMORTIZATION PERIOD JUNE 30, 1999 JUNE 30, 2000 INCREASE OR (DECREASE)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Subscriber lists............ 3 years $36,100 $36,017 $(183)
FCC licenses............... 10 years 8,918 9,010 92
Goodwill.................. 10 years 5,934 5,346 (588)
Other....................... various 1,879 1,850 (29)
------------------------------------------------------------------------------------------------------
</TABLE>
Page 15
<PAGE> 16
<TABLE>
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$52,831 $52,223 $(608)
======================================================================================================
</TABLE>
Metrocall expects that amortization expenses will continue to be a
significant non-cash operating expense for the remainder of 2000 and 2001 as it
amortizes amounts allocated to subscriber lists of acquired companies.
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, INCREASE OR
OTHER 1999 2000 (DECREASE)
-------------------------------------------------------------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Interest and other, net $ 212 $(140) $(352)
Interest expense (21,121) (21,180) 59
Income tax benefit 15,974 15,371 (603)
Extraordinary item, net of income taxes - 15,787 15,787
Net loss (44,711) (40,252) (4,459)
Preferred dividends (4,048) (2,299) (1,749)
EBITDA 36,657 30,010 (6,648)
</TABLE>
Interest expense increased approximately $0.1 million from $21.1
million in 1999 to $21.2 million in 2000 due to higher average interest rates
for the three months ended June 30, 2000.
Income tax benefit decreased approximately $0.6 million from $16.0
million in 1999 to $15.4 million in 2000. The decrease in the income tax benefit
represented the tax impact related to the decline in non-goodwill related
amortization expenses.
Extraordinary item represents the net extraordinary gain recorded as
a result of the exchange of $49.099 million aggregate principal amount of
Metrocall's senior subordinated notes into Metrocall's common stock. The $15.8
million net gain represented the difference between the carrying value of the
notes at the time of exchange and the fair value of the common stock issued less
the write-off of a portion of the deferred financing costs and a provision for
income taxes.
Metrocall's net loss decreased approximately $4.4 million from $44.7
million in 1999 to $40.3 million in 2000. The decrease in net loss was primarily
the result of decreases in operating expenses partially offset by the decrease
in revenues. Metrocall expects net losses to continue in future periods.
Preferred dividends decreased approximately $1.7 million from $4.0
million in 1999 to $2.3 million in 2000. The decrease was primarily the result
of the cessation of dividends on the Series C Preferred in February 2000 after
the exchange of the Series C Preferred for Metrocall common stock.
EBITDA means earnings before interest, taxes, depreciation and
amortization and equity in income (loss) amounts associated with Metrocall's
investment in Inciscent. While not a measure under generally accepted accounting
principles, EBITDA is a standard measure of financial performance in the paging
industry. EBITDA may not be comparable to similarly titled measures reported by
other companies since all companies do not calculate EBITDA in the same manner.
EBITDA should not be considered as an alternative to net income (loss) from
operations, cash flows from operating activities, or any other measure of
financial performance under GAAP. EBITDA as defined by Metrocall is used in its
credit facility and senior subordinated note indentures as part of the tests to
determine its ability to incur debt and make restricted payments. EBITDA
decreased $6.7 million from $36.7 million in 1999 to $30.0 million in 2000. The
decrease is due to the decrease in net revenue of $14.5 million offset by the
decrease in Metrocall's service, rent and maintenance, selling and marketing
and general and administrative expenses of $7.8 million. EBITDA margin
decreased from 25.2 % in 1999 to 22.9% in 2000.
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<PAGE> 17
EBITDA may continue to decrease until such time as Metrocall can produce
meaningful revenue contribution from the new two-way messaging products and
services.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH 1999
The following table sets forth the amounts of revenues and the
percentages of net revenues (defined as total revenues less the net book value
of products sold) represented by certain items in Metrocall's Interim Condensed
Consolidated Statements of Operations and certain other information for the six
months ended June 30, 1999 and 2000.
<TABLE>
<CAPTION>
INCREASE OR
REVENUES JUNE 30, 1999 % OF REVENUES JUNE 30, 2000 % OF REVENUES (DECREASE)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service, rent and maintenance $ 279,403 96.0 $ 255,391 96.9 $ (24,012)
Product sales 31,257 10.7 25,328 9.6 (5,929)
--------------------------------------------------------------------------------------------
Total revenues 310,660 106.7 280,719 106.5 (29,941)
Net book value of products sold (19,712) (6.7) (17,167) (6.5) 2,545
--------------------------------------------------------------------------------------------
Net revenues $ 290,948 100.0 $ 263,552 100.0 $ (27,396)
ARPU $ 8.03 $7.09 $ (0.94)
Number of subscribers 5,811,705 6,103,610 291,905
</TABLE>
Total revenues decreased approximately $30.0 million, or
approximately 9.6%, from $310.7 million for the six months ended June 30, 1999
("1999") to $280.7 million for the six months ended June 30, 2000 ("2000"). Net
revenues decreased approximately $27.3 million, or 9.4%, from $290.9 million in
1999 to $263.6 million in 2000. ARPU for paging services decreased from $8.03
per unit in 1999 to $7.09 per unit in 2000. The decrease in net revenues was
primarily the result of a change in subscriber mix, which benefited the
indirect distribution channels, which are characterized by lower ARPU. Since
June 30, 1999, the total number of subscribers receiving air-time services has
increased by 291,905. Of this increase, approximately 50,000 new subscribers
were added with the acquisition of NationPage in May 2000. The majority of the
remaining increase occurred in Metrocall's strategic alliance distribution
channel. This channel is characterized by lower ARPU but is characterized by
lower operating costs as the alliance party provides a portion of the
marketing, billing and other services for the subscriber. In addition, since
June 30, 1999, Metrocall has also experienced a 37,500 decline in the number of
subscribers in its direct distribution channels, channels which are
characteristically higher ARPU in nature. Metrocall expects that revenues and
ARPU will continue to be affected by the shift in distribution mix that
occurred during 1999 and may continue to decrease within its traditional
one-way business during the remainder of 2000 as two-way messaging products and
other competing messaging products and technologies attract existing
subscribers. Metrocall expects to focus its direct sales and marketing
resources over the remainder of 2000 on selling newly available two-way
messaging products and airtime services and other advanced messaging products
to existing and new subscribers. These products and service are generally
characterized by higher ARPU than Metrocall's current ARPU.
Product sales decreased approximately $6.0 million or 19.0% from
$31.3 million in 1999 to $25.3 million in 2000 and decreased as a percentage of
net revenues from 10.7% in 1999 to 9.6% in 2000. Net book value of products sold
decreased approximately $2.5 million or 12.9% from $19.7 million in 1999 to
$17.2 million in 2000 and decreased as a percentage of net revenues from 6.7% in
1999 to 6.5% in 2000. The majority of the decrease in product sales is
attributable to the sale of Metrocall's electronic tracking business, which
occurred in November 1999. Product sales generated from this business were
approximately $3.6 million through June 30, 1999.
The following tables set forth the amounts of operating expenses and
related percentages of net revenues represented by certain items in Metrocall's
Interim Condensed Consolidated Statements of Operations and certain other
information for the six months ended June 30, 1999 and 2000.
Page 17
<PAGE> 18
<TABLE>
<CAPTION>
JUNE 30, %OF JUNE 30, % OF INCREASE OR
OPERATING EXPENSES 1999 REVENUES 2000 REVENUE (DECREASE)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service, rent and maintenance $ 81,615 28.1 $ 63,150 24.0 $(18,465)
Selling and marketing 49,664 17.1 51,465 19.5 1,801
General and administrative 84,168 28.9 82,868 31.4 (1,300)
Depreciation 46,654 16.0 53,887 20.4 7,233
Amortization 105,502 36.3 104,380 39.6 (1,122)
--------------------------------------------------------------------------------------------------
$ 367,603 126.4 $355,750 134.9 $(11,854)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
OPERATING EXPENSES PER UNIT IN SERVICE 1999 2000 DECREASE
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Monthly service, rent and maintenance $2.37 $1.75 $(0.62)
Monthly selling and marketing 1.44 1.43 (0.01)
Monthly general and administrative 2.44 2.30 (0.14)
----------------------------------------------------------
Average monthly operating costs $6.25 $5.48 $(0.77)
</TABLE>
Overall, Metrocall experienced a decrease in average monthly
operating costs per unit in service (operating costs per unit before
depreciation and amortization) from 1999 to 2000. Average monthly operating cost
per unit decreased from $6.25 per unit for 1999 to $5.48 per unit for 2000. Each
operating expense is discussed separately below.
Service, rent and maintenance expenses decreased approximately $18.4
million from $81.6 million in 1999 to $63.2 million in 2000 and decreased as a
percentage of net revenues from 28.1% in 1999 to 24.0% in 2000. Monthly service,
rent and maintenance expenses per unit decreased from $2.37 per unit in 1999 to
$1.75 per unit in 2000. Service, rent and maintenance expense have decreased as
a percentage of revenues primarily due to a decrease in telecommunication
expense as a result of renegotiated telecommunications contracts, deconstruction
of redundant tower sites and other cost reduction initiatives. Metrocall expects
that its service, rent and maintenance expenses for its traditional paging
services may be flat for the remainder of 2000 and may increase due to service
costs related to providing two-way messaging services as Metrocall expands its
two-way message services and incurs additional telecommunications costs and
costs associated with operating leases for two-way messaging equipment.
Selling and marketing expenses increased approximately $1.8 million
from $49.7 million in 1999 to $51.5 million in 2000 and increased as a
percentage of net revenues from 17.1% in 1999 to 19.5% in 2000. The overall
expense increase was primarily the result of an increase in personnel costs
associated with an increase in Metrocall's sales force and an increase in
advertising costs associated with the launch of two-way messaging services in
the six months ended June 30, 2000. Selling and marketing expenses increased as
a percentage of revenues during 2000 as a result of the reduction in revenues.
Monthly selling and marketing expenses per unit has decreased from $1.44 per
unit in 1999 to $1.43 per unit in 2000 as a result of the increase in the
subscriber base from June 30, 1999.
General and administrative expenses decreased approximately $1.3
million in 2000, and increased as a percentage of net revenues from 28.9% in
1999 to 31.4% in 2000. The decrease in general and administrative expenses was
the primarily the result of a decrease in billing related expenses, a reduction
in expenses related to year 2000 readiness preparation, which were incurred
solely in 1999 and improved collection experience. General and administrative
expenses have increased as a percentage of net revenues due to the reduction in
revenues. Monthly general and administrative expense per unit has decreased from
$2.44 per unit in 1999 to $2.30 per unit in 2000 due to their increase in the
subscriber base since June 30, 1999.
Depreciation expense increased approximately $7.2 million from $46.7
million in 1999 to $53.9 million in 2000. The increase in depreciation expense
resulted primarily from depreciation expense on
Page 18
<PAGE> 19
subscriber equipment and property, plant and equipment and computer hardware and
software that has been acquired since June 30, 1999.
Amortization decreased $1.1 million from $105.5 million in 1999 to
$104.4 million in 2000 primarily as a result of a small number of intangible
assets, which became fully amortized during 2000. Amortization expense was
comprised of the following elements in 1999 and 2000:
<TABLE>
<CAPTION>
AMORTIZATION PERIOD JUNE 30, 1999 JUNE 30, 2000 INCREASE OR (DECREASE)
-------------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C>
Subscriber lists............ 3 years $72,248 $71,975 $(273)
FCC licenses............... 10 years 17,983 17,994 11
Goodwill.................. 10 years 11,579 10,991 (588)
Other........................ various 3,692 3,420 (272)
-------------------------- --------------------------------------------------
$105,502 $104,380 $(1,122)
-------------------------- --------------------------------------------------
</TABLE>
Metrocall expects that amortization expenses will continue to be a
significant non-cash operating expense for the remainder of 2000 and 2001 as it
amortizes amounts allocated to subscriber lists of acquired companies.
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, INCREASE
OTHER 1999 2000 (DECREASE)
------------------------------------------------ --------------------- ---------------------- -----------------------
<S> <C> <C> <C>
Interest and other income, net $ 228 $ 179 $ (49)
Interest expense (41,821) (42,744) 923
Income tax benefit 31,524 31,020 (504)
Extraordinary item, net of income taxes - 15,787 15,787
Net loss (86,724) (87,956) 1,232
Preferred dividends (8,051) (5,086) (2,965)
Series C Preferred exchange inducement - (6,308) 6,308
Gain on repurchase of preferred stock 2,208 - (2,208)
EBITDA 75,501 66,069 (9,432)
</TABLE>
Interest expense increased approximately $0.9 million from $41.8
million in 1999 to $42.7 million in 2000. Interest expense increased due to
higher average debt balances outstanding during 1999. Average debt balances were
$23.1 million greater in 2000 than in 1999 as a result of debt incurred for
general corporate purposes in 2000.
Income tax benefit decreased approximately $0.5 million from $31.5
million in 1999 to $31.0 million in 2000. The decrease in the income tax benefit
represents the tax impact related to the decline in non-goodwill related
amortization expenses.
Extraordinary item represents the net extraordinary gain recorded as
a result of the exchange of $49.099 million aggregate principal amount of
Metrocall's senior subordinated notes into Metrocall's common stock. The $15.8
million net gain represents the difference between the carrying value of the
notes at the time of exchange and the fair value of the common stock issued less
the write-off of a portion of the related deferred financing costs and a
provision for income taxes.
Metrocall's net loss increased approximately $1.3 million from $86.7
million in 1999 to $88.0 million in 2000. The increase in net loss was primarily
the result of decreases in revenues partially offset by decreases in operating
expenses and the extraordinary item. Metrocall expects net losses to continue
in future periods.
Page 19
<PAGE> 20
Preferred dividends decreased approximately $3.0 million in 2000
from $8.1 million in 1999 to $5.1 million in 2000. The decrease was the result
of the cessation of dividends on the Series C Preferred in February 2000 after
the exchange of the Series C Preferred for Metrocall common stock.
Series C Preferred exchange inducement - In February 2000, Metrocall
and the holder of all the issued and outstanding shares of Metrocall's Series C
Preferred reached an agreement in which the holder of the Series C Preferred
agreed to exchange such shares for 13.25 million shares of Metrocall common
stock. The number of shares of common stock issued by Metrocall in the
transaction was approximately 3.1 million shares in excess of what Metrocall
would have issued had the holder elected to convert the Series C Preferred based
on its original conversion provisions. However, under the original conversion
terms the holder of the Series C Preferred would have not had the ability to
convert their holdings until October 2003. The $6.3 million inducement expense
represents the fair market value of the 3.1 million additional shares of common
stock that were issued by Metrocall. At the time of the transaction, the
carrying value of the Series C Preferred was approximately $105.4 million and
represented an obligation to Metrocall because the holder had the option to
require Metrocall to redeem the Series C Preferred in cash at the end of its
maturity period in 2010. If held to maturity, Metrocall may have been required
to redeem the Series C Preferred in cash for an amount of approximately $239.0
million. Metrocall recorded the issuance of common stock and the reduction of
the $105.4 million carrying value of the Series C Preferred as an increase to
stockholders' equity, which represented an excess of $78.6 million over the fair
value of the common stock issued by Metrocall of $26.8 million.
Gain on repurchase of preferred stock - In January 1999, Metrocall
repurchased and retired all of the outstanding shares of its Series B Junior
Convertible Preferred Stock for $16.2 million, representing a $2.2 million
discount from its carrying value.
EBITDA decreased approximately $9.4 million from $75.5 million in
1999 to $66.1 million in 2000. As a percentage of net revenues, EBITDA decreased
from 25.9% in 1999 to 25.1% in 2000.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
For the six months ended June 30, 2000, Metrocall's cash provided by
operating activities decreased by approximately $15.3 million from $33.5 million
for the six months ended June 30, 1999 to $18.2 million for the six months ended
June 30, 2000. This decrease was primarily the result of an increase in the loss
of operations of $15.5 million for the period and certain changes in working
capital including for the period decreases in accrued expenses and other current
liabilities and deferred revenue balances offset by the reduction in accounts
receivable. Accrued expenses and other current liabilities decreased during the
six months ended June 30, 2000 as the result of an overall expense reduction.
Decreases in deferred revenue balances and accounts receivable were result of a
reduction in revenues during the six months ended June 30, 2000.
Net cash used in investing activities increased approximately $6.8
million from $53.7 million for the six months ended June 30, 1999 to $60.5
million for the six months ended June 30, 2000. The increase in net cash used
for investing activities was primarily the result of the acquisition of
NationPage, Inc. for approximately $12.5 million, partially offset by a
reduction in capital expenditures. Capital expenditures were approximately $51.9
million and $45.2 million for the quarters ended June 30, 1999 and 2000,
respectively. Capital expenditures for the six months ended June 30, 2000
included approximately $30.2 million for one-way and two-way messaging devices,
representing increases in pagers on hand and net increases to the rental and
lease subscriber base. The balance of capital expenditures included $5.9 million
for information systems and computer related equipment, $6.4 million for network
construction and development and $2.7 million for general purchases including
leasehold improvements and office equipment. Total capital expenditures for the
year ending December 31, 2000 are estimated to be approximately $90.0 million
and primarily consist of messaging devices, paging and transmission
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<PAGE> 21
equipment and information systems enhancements. Metrocall expects that its
capital expenditures for the year ending December 31, 2000, will be financed
through a combination of operating cash flow and borrowings. Projected capital
expenditures are subject to change based on internal growth, general business
and economic conditions and competitive pressures.
Net cash provided by financing activities increased approximately
$52.7 million from $27.2 million for the six months ended June 30, 1999 to $79.9
million for the six months ended June 30, 2000. The increase was primarily the
result of net proceeds received from the common stock investments made by HMTF,
PSINet, and Aether of approximately $51.0 million.
WORKING CAPITAL
Metrocall's working capital improved by $41.9 million from a deficit
of ($36.9) million at December 31, 1999 to $5.0 million at June 30, 2000. The
improvement in working capital was primarily the result of an increase in cash
and cash equivalents at June 30, 2000 as a result of the proceeds received from
the common stock investments described above, a decrease in accounts payable and
accrued expenses balances related to the timing of payments to Metrocall's
vendors for its operating expenses offset by a decrease in accounts receivable
as a result of improved collections experience and the decrease in revenues.
LONG-TERM DEBT
At December 31, 1999 and June 30, 2000, long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, INCREASE OR
1999 2000 (DECREASE)
------------------------------------------------ ----------------------- ----------------- ----------------------
<S> <C> <C> <C>
Borrowings under the credit facility $75,000 $105,000 $30,000
Senior subordinated notes 698,608 649,688 (48,920)
Capital leases and other debt 4,019 3,708 (311)
----------------------- ----------------- ----------------------
Total long-term debt $777,627 $758,396 $(19,231)
======================= ================= ======================
</TABLE>
Borrowings and Repayments under the Credit Facility. During the six
months ended June 30, 2000, Metrocall increased its net borrowings outstanding
under its credit facility by approximately $30.0 million from December 31, 1999.
These funds were used primarily for general corporate purposes.
On March 17, 2000, Metrocall and its bank lenders entered into a
Fifth Amended and Restated Credit Facility (the "credit facility"). Subject to
certain conditions, Metrocall may borrow up to $200.0 million under the
facility. Under the credit facility, Metrocall is required to comply with or
maintain certain financial and operating covenants including certain financial
ratios, such as total net 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.
Effective June 30, 2000, Metrocall and these lenders entered into
the First Amendment to the credit facility, which amended the operating cash
flow to interest expense ratio covenant for the three months ended June 30, 2000
and September 30, 2000 reducing this covenant to a ratio of 1.50 to 1.00. This
ratio will increase to 1.75 to 1.00 for the three months ended December 31,
2000. Had the amendment not been made, Metrocall would have not been in
compliance with this covenant for the three months ended June 30, 2000.
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<PAGE> 22
Metrocall expects to maintain compliance with this covenant in future periods
however can give you no assurances that it will be able to.
At June 30, 2000, Metrocall was in compliance with all of the
covenants of its credit facility. At June 30, 2000, $105.0 million was
outstanding under the credit facility and $2.0 million of additional borrowings
were available to Metrocall based on its total leverage covenant, its most
restrictive financial covenant. Metrocall's total leverage ratio was 5.98 to
1.00 at June 30, 2000. Metrocall expects existing cash balances and cash flows
from operations to be sufficient to meet general corporate requirements for the
remainder of 2000 and the foreseeable future.
As described above, certain of the covenants under the credit
facility are determined based on Metrocall's quarterly EBITDA, which is also
referred to as operating cash flow. In the event that Metrocall's EBITDA
continues to decrease in the third quarter or future quarters, Metrocall could
violate one or more of the covenants under its credit facility. In the event
that this occurs, Metrocall could be viewed to be in default of its credit
facility and Metrocall's bank lenders could prevent it from borrowing any
additional amounts under the credit facility until the default is cured or may
require that all of the outstanding borrowings be repaid. Under this
circumstance, there can be no assurance that the bank lenders would grant a
waiver for the covenant that was in default or that Metrocall would be able to
pay or refinance such outstanding borrowings on acceptable terms to Metrocall.
There can be no assurance that Metrocall will continue to remain in compliance
with the covenants of its credit facility.
Senior subordinated notes. There are no principal payments required
under the senior subordinated notes during the year ending 2000. Between April
20, 2000 and June 30, 2000, in multiple transactions, Metrocall issued 5,048,512
shares of its common stock in exchange for $49,099,000 aggregate principal
amounts of its outstanding senior subordinated notes. The aggregate principal
amounts of senior subordinated note series retired is reflected below:
<TABLE>
<S> <C> <C>
11 7/8% senior subordinated notes due 2005 $ 7,032,000
10 3/8% senior subordinated notes due 2007 11,317,000
9 3/4% senior subordinated notes due 2007 17,250,000
11% senior subordinated notes due 2008 13,500,000
------------
$49,099,000
============
</TABLE>
Subsequent to June 30, 2000, Metrocall issued additional 1,945,800
shares of its common stock in exchange for $18,250,000 aggregate principal
amount of its senior subordinate notes. Metrocall expects to save approximately
$7.1 million in interest expense on an annual basis as a result of these
transactions.
Metrocall conducted these exchanges without registration under the
Securities Act of 1933 in reliance upon the exemption in section 3(a)(9) of that
act. Metrocall may rely on this exemption in the future and may seek to engage
in additional exchanges of its common stock for its senior subordinated notes in
the future if market conditions permit.
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 including its ability to increase the number of subscribers
receiving and operating revenues generated by two-way messaging products and
services, and its cash flows from operations. These dependencies will be subject
to financial, business and other factors, certain of which are beyond
Metrocall's control, such as prevailing economic conditions. Metrocall cannot
assure you that, in the event, it were 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 existing cash
balances and 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Metrocall is exposed to risks associated with interest rate changes.
Metrocall does not foresee any significant changes in its exposure to
fluctuations in interest rates in the near future. At June 30, 2000, its total
outstanding debt consisted of five issues of fixed rate, senior subordinated
notes and its credit facility, which had 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>
$92.9 million $70.4 million 15.68% 2005 Semi-Annually
$0.2 million $0.2 million 11.88% 2005 Semi-Annually
$138.7 million $96.7 million 14.87% 2007 Semi-Annually
$182.8 million $124.7 million 12.29% 2007 Semi-Annually
$236.5 million $165.0 million 15.77% 2008 Semi-Annually
</TABLE>
No principal repayments are due under these notes until maturity. If
at maturity Metrocall refinanced these notes at interest rates that are 1/4
percentage point higher than their stated rates, its per annum interest costs
would increase by $0.9 million. Based on the outstanding balances at June 30,
2000 a hypothetical immediate 1/4 percentage point change in interest rates
would change the fair value of Metrocall's fixed rate debt obligations by
approximately $3.0 million.
VARIABLE RATE DEBT:
<TABLE>
<CAPTION>
Interest Payments
Principal Balance Weighted Average Interest Rate Maturity Due
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 105.0 million 9.28% 2004 Quarterly
</TABLE>
Metrocall's credit facility bears interest at floating rates and
has a maturity of 2005. As of June 30, 2000, there was $105.0 million
outstanding under the credit facility. Based on weighted average borrowings
outstanding under the credit facility during the six months ended fiscal year
2000, a 1/4 percentage point change in Metrocall's 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LEGAL AND REGULATORY MATTERS
Metrocall is subject to legal and regulatory matters in the normal
course of business. Metrocall does not expect, that the outcome of those matters
will have a material adverse effect on its financial position or results of
operations.
ITEM 2. CHANGE IN SECURITIES
This Item 2 hereby incorporates by reference the information
included in footnote 5 to the interim financial statements set forth in Part I
of this Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At Metrocall's Annual Meeting of Stockholders held on May 3, 2000,
the following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
WITHHELD/ BROKER
PROPOSAL FOR AGAINST ABSTAIN NONVOTES
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Election of four directors:
1. Williams L. Collins III .................... 33,237,984 2,403,243 - None
2. Edward E. Jungerman .................. 33,237,614 2,403,618 - None
3. Francis A. Martin III ...................... 33,241,004 2,400,228 - None
4. Harold S. Wills ........................... 33,235,874 2,405,358
Amendment to the Metrocall 1996 Stock Option
Plan.......................................... 7,671,294 7,158,847 228,205 None
Amendment to the Metrocall Employee Stock Purchase
Plan.......................................... 11,513,170 3,306,306 238,870 None
Ratification of Arthur Andersen LLP as independent
public accountants............................ 35,319,495 119,706 202,031 None
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
<S> <C> <C>
10.1 Fourth Amendment to Employment Agreement between Metrocall and
William L. Collins, III.
10.2 Fourth Amendment to Employment Agreement between Metrocall and
Steven D. Jacoby.
10.3 Fourth Amendment to Employment Agreement between Metrocall and
Vincent D. Kelly
10.4 First Amendment to the Fifth Amended and Restated
11.1 Statement re: computation of per share earnings.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
Metrocall filed a Current Report on Form 8-K with the
SEC on April 21, 2000 regarding the issuance of shares
of Metrocall common stock in exchange for Metrocall
senior subordinated notes.
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<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000 METROCALL, INC.
By s/ Vincent D. Kelly
------------------------------------
Chief Financial Officer, Treasurer and
Executive Vice President
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<PAGE> 27
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
10.1 Fourth Amendment to Employment Agreement between Metrocall and
William L. Collins, III.
10.2 Fourth Amendment to Employment Agreement between Metrocall and
Steven D. Jacoby.
10.3 Fourth Amendment to Employment Agreement between Metrocall and
Vincent D. Kelly
10.4 First Amendment to the Fifth Amended and Restated and Restated
Loan Agreement
11.1 Statement re: computation of per share earnings.
27 Financial Data Schedule.
Page 27
