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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number: 0-21924
METROCALL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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)
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 $564.9 million based on the closing sales price
on March 3, 2000.
COMMON STOCK, PAR VALUE $0.01 -- 43,561,715 SHARES OUTSTANDING ON MARCH 3, 2000
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of the Registrant to
be held May 3, 2000 which will be 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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TABLE OF CONTENTS
PAGE
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PART I
Item 1 Business.................................................... 3
Item 2 Properties.................................................. 16
Item 3 Legal Proceedings........................................... 16
Item 4 Submission of Matters to a Vote of Security Holders......... 16
PART II
Item 5 Market for Metrocall's Common Stock and Related Security
Holder Matters.............................................. 17
Item 6 Selected Financial Data..................................... 20
Item 7 Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 22
Item 7A Quantitative and Qualitative Disclosures about Market
Risk........................................................ 40
Item 8 Financial Statements and Supplementary Data................. 42
Item 9 Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure........................................ 42
Item 10 Directors and Executive Officers of the Company............. 43
Item 11 Executive Compensation...................................... 43
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
Item 13 Certain Relationships and Related Transactions.............. 43
Item 14 Exhibits.................................................... 44
Signatures........................................................... 48
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes or incorporates 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 including, among
other things those discussed under "Business" and "Management's Discussion and
Analysis of Financial Condition, and Results of Operations," and as follows:
- Metrocall's history of net operating losses;
- Metrocall's ability to cover fixed charges;
- Metrocall's high leverage and need for substantial capital;
- Metrocall's ability to service debt;
- the restrictive covenants governing Metrocall's indebtedness;
- the amortization of Metrocall's intangible assets;
- the impact of competition and technological developments;
- satellite transmission failures;
- subscriber turnover;
- regulatory changes;
- Metrocall's ability to implement its business strategies;
- the risks associated with Metrocall's investment in a newly formed
technology-based joint venture;
- dependence on key suppliers; and
- dependence on key management personnel.
Other matters set forth in this Annual Report on Form 10-K 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 Annual Report on Form 10-K might not
occur.
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PART I
ITEM 1. BUSINESS
GENERAL
Metrocall is a leading provider of local, regional and national paging and
other wireless messaging services. Through its nationwide wireless network,
Metrocall provides messaging services to over 1,000 U.S. cities, including the
top 100 Standard Metropolitan Statistical Areas (SMSAs). Since 1993, Metrocall's
subscriber base has increased from less than 250,000 to more than 5.9 million.
Metrocall has achieved this growth through a combination of internal growth and
a program of mergers and acquisitions. As of December 31, 1999, Metrocall was
the third largest messaging company in the United States based on the number of
subscribers. Metrocall was formed in October 1982 and had its initial public
offering for its common stock in July 1993.
WIRELESS MESSAGING INDUSTRY OVERVIEW
Metrocall believes 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. Traditional paging, as a one-way communications tool, is a way
to communicate at a lower cost than current two-way communication methods, such
as cellular and personal communication services (PCS) telephones. For example,
the paging and messaging equipment and air time required to transmit an average
message cost less than the equipment and air time for cellular and PCS
telephones. Furthermore, pagers operate for longer periods due to superior
battery life, often exceeding one month on a single battery. Numeric and
alphanumeric subscribers generally pay a flat monthly service fee, which covers
a fixed number of messages sent to the subscriber. In addition, these paging and
messaging devices are unobtrusive and portable and historically have withstood
substantial technological advances in the communications industry. Many mobile
telephone customers also use paging and messaging devices in conjunction with
their telephones to screen incoming calls and minimize battery wear and usage
charges.
Although the U.S. one-way paging industry has over 500 licensed paging
companies, Metrocall estimates that the eight largest paging companies,
including Metrocall, currently serve approximately 75% of the total paging
subscribers in the United States. These 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.
Metrocall expects that the future of the one-way paging and messaging industry
will include technological improvements that permit increased service and
applications, and consolidation of smaller, single-market operators and larger,
multi-market paging companies.
Metrocall is seeking to develop and market advanced wireless messaging,
which uses narrowband PCS networks and currently includes two-way messaging and
other short messaging based services and applications. Metrocall believes that
this relatively new method of communication is also a way to communicate at a
lower cost than other forms of two-way wireless communications and for longer
periods of time due to superior battery life. In addition, advanced messaging
devices, which are supported by the ReFLEX(TM) communications technology, cover
a substantially larger geographic area than broadband PCS networks. Because
advanced wireless messaging uses narrowband PCS networks, which utilize a
two-way spectrum, advanced messaging devices offer advantages over the
traditional one-way spectrum that some paging networks use. The two-way spectrum
enables a wireless device to emit a signal that notifies the network of the
device's location and permits the network to send the message to transmitters
closest to the messaging 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 messaging device. Therefore, a
two-way spectrum utilizes less air-time of the spectrum and creates more air
time efficiency, particularly in the areas farthest from the messaging device.
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Examples of advanced messaging services include:
- "Confirmation" or "response" messaging, which sends a message back to the
network confirming that a message has been received;
- two-way messaging, which permits users to communicate wirelessly with,
among other things, Internet e-mail, fax machines, one-way alphanumeric
pagers and two-way messaging devices;
- short message "information pulls," which enable subscribers to receive
customized stock quotes/portfolio information, weather reports, Internet
information access, corporate Intranet information retrieval and other
information selected by a subscriber.
Metrocall believes the future of the advanced wireless messaging industry
will include technological improvements and advancements that will provide
greater flexibility and additional wireless applications and content programs.
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, and increased operating
costs, and competitive, similarly priced two-way broadband PCS and cellular
services.
OUR BUSINESS STRATEGY
Metrocall's business strategy is to increase shareholder value by expanding
its subscriber base and product portfolio, and increasing revenues, cost
efficiencies and operating cash flow. Operating cash flow is defined as EBITDA
(earnings before interest, taxes, depreciation and amortization). The principal
elements of this strategy include the following:
Manage Capital Requirements and Increase Free Cash Flow. Metrocall's key
financial objective is to manage capital requirements and increase free cash
flow. Metrocall defines free cash flow as operating cash flow less capital
expenditures and interest expense. To achieve this objective, Metrocall focuses
on the following:
- primarily selling, rather than leasing, paging and advanced messaging
units 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 traditional paging services; and
- increasing the utilization of Metrocall's developed nationwide network to
serve more customers per frequency and enter new markets with minimal
capital outlay.
Maximize Internal Growth Potential. 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. Since December 31, 1994, Metrocall has added approximately 1.6 million
new subscribers through internal growth. Metrocall has expanded its direct and
indirect distribution channels to gain access to different market segments. As
part of this strategy, Metrocall has formed strategic alliances with:
- local, long-distance, cellular and PCS providers, such as AT&T Wireless
Services, Inc. (AT&T Wireless), Bell Atlantic, Qwest and ALLTEL;
- digital subscriber line (DSL) provider Covad Communications, Inc. and
Internet service provider (ISP) PSINet Inc. (PSINet);
- MicroStrategy Incorporated and Strategy.com for personalized financial
information under "MyOnTheGoPortfolio"(SM) and "OnTheGoInfo"(SM);
- cable television companies, such as Adelphia Cable Communications; and
- retail outlets, such as Circle K Stores, Ritz Camera and Walgreens.
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Metrocall has strategic marketing relationships with America Online,
PageMaster Corporation, a national promotions company, and Washington Gas and
Light Company, which are designed to further enhance its market presence.
Metrocall has a national distribution agreement through 2003 with AT&T Wireless,
which enables Metrocall exclusively to distribute its paging and wireless
messaging products in over 670 AT&T Wireless retail stores. Metrocall also has a
broadband PCS distribution alliance with AT&T Wireless, which has enabled it to
further diversify its product mix by distributing AT&T's digital PCS wireless
products and AT&T's Digital One Rate(SM) service plans via Metrocall's direct
distribution channels. In 2000, Metrocall may continue to expand its
multi-tiered distribution network and marketing relationships. Metrocall
believes that these initiatives will continue to increase its service revenues
and equipment sales and broaden the range and diversity of products that are
currently offered to consumers.
Expand Market Presence through Consolidation and Diversification. Metrocall
has expanded its subscriber base and geographic coverage through consolidation
of other paging and messaging companies. Since 1996, Metrocall has acquired
approximately 3.6 million subscribers through mergers and acquisitions through
December 31, 1999:
ACQUISITION NO. OF
ACQUIRED COMPANY DATE SUBSCRIBERS
---------------- ----------------- -----------
Parkway Paging, Inc (Parkway).............. July 16, 1996 140,000
Satellite Paging (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
Advanced Messaging Division of AT&T
Wireless (AMD)........................... October 2, 1998 1,215,000
---------
Total................................. 3,599,000
=========
Metrocall believes that its enhanced nationwide coverage gives it a competitive
advantage in gaining additional subscribers. In February 2000, Metrocall agreed
to acquire NationPage, Inc. in a stock purchase transaction with a subsidiary of
AT&T Corp. This acquisition will add approximately 80,000 subscribers located
principally in eastern Pennsylvania, New Jersey and upstate New York.
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;
- Federal Communications Commission (FCC) regulatory licenses held;
- overall valuation of potential target, including subscriber base and
potential synergies;
- consideration to be given;
- potential increase to free cash flow and operating 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 is subject to a number of conditions, including agreement by holders
of PageNet's outstanding senior unsecured notes to exchange their notes for Arch
common stock. Metrocall has had and may continue to have informal discussions
with certain holders of these notes about whether Metrocall might be able to
present an alternative consolidation transaction to the Arch merger. Metrocall
has not made any offer with respect to PageNet, and there is no assurance that
Metrocall will make any such proposal or that the proposal would be successful.
Metrocall also engages, from time to time, in discussions with other industry
participants about potential consolidation transactions. Again, there can be no
assurance that any such discussion will lead to a consolidation transaction.
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Metrocall has also sought to increase its market presence through its
recent formation and investment in Inciscent, Inc. (Inciscent). Inciscent is a
technology-based joint venture that Metrocall originally formed in November 1999
under the name Metrocall.net. Inciscent is expected to be a full service
business-to-business wired-to-wireless application service provider (ASP) that
will offer a suite of technology services to small office/home office (SOHO) and
small to medium-sized businesses. These services will include broadband Internet
access, domain hosting, e-mail services, auction notification and confirmation,
data solutions and wireless e-mail. On February 8, 2000, Metrocall, an affiliate
of Hicks, Muse, Tate & Furst Incorporated (HMTF), PSINet and Aether Systems,
Inc. (Aether) agreed to invest in Inciscent through the purchase of Series A
Convertible Preferred Stock of Inciscent for cash, notes, and/or services.
Metrocall believes that its investment in Inciscent will provide financial and
strategic benefits, such as permitting Metrocall to complement its products and
services with those of Inciscent. Metrocall believes the complementary nature of
Inciscent's services with Metrocall's products and services will enable
Metrocall to diversify and expand its market presence to all areas associated
with wireless messaging.
Pursue Cost-Efficient Technological Advances. Metrocall has pursued
technological advances that are proven, cost-efficient and consistent with its
strategy to increase free cash flow. Metrocall has historically concentrated its
capital spending on the development of its local, regional and nationwide
one-way paging networks. Recently, Metrocall began offering advanced messaging
products and services using narrowband PCS now that the technology that has been
proven and gained initial market acceptance. Metrocall was able to begin
offering these services with minimal capital outlay because it acquired an FCC
narrowband PCS license in connection with the AMD acquisition. In 1998,
Metrocall formed a five-year strategic alliance with WebLink Wireless, Inc.
(WebLink, formerly known as PageMart Wireless, Inc.), a leading provider of
paging and messaging services to develop and offer narrowband PCS. Metrocall's
alliance with WebLink consists of two phases: a switch-based resale phase and a
shared network build-out phase. The alliance is currently in its first phase in
which Metrocall provides narrowband PCS using WebLink's advanced messaging
transmit and receive network. Metrocall began offering guaranteed-delivery
messaging during 1999 and launched two-way and data-intensive messaging services
in the first quarter of 2000. In the second phase, Metrocall will install and
operate its own outbound narrowband PCS frequency on its nationwide network and
WebLink will provide turnkey installation and operation of a receiver network.
Metrocall believes this alliance will enable it to comply with the FCC's
mandated narrowband PCS build-out requirements. Under the alliance, Metrocall
shares a portion of capital expenditures and operating expenses. Metrocall
believes that the WebLink alliance has enabled it to provide narrowband PCS in a
faster and more cost-effective manner than if it had developed and funded the
network itself. The development of the narrowband PCS license acquired in the
AMD acquisition and the WebLink alliance will allow Metrocall to increase
capacity and reduce its long-term cost of message delivery through frequency
reuse.
Metrocall has taken other steps to ensure that it is better positioned to
take advantage of technological advances. In mid-1999, Metrocall upgraded its
nationwide network to support new Internet applications, two-way messaging and
enhanced services. The upgrade has permitted Metrocall to offer subscribers
enhanced voicemail, wireless e-mail and Internet-based information services in
addition to its current set of alphanumeric messaging, guaranteed message
delivery and voicemail services. In April 1999, Metrocall and other leading
paging and wireless messaging companies and manufacturers joined forces in a
broad alliance to develop and market devices referred to as personal data
assistants (PDAs) embedded with the ReFLEX(TM) communications technology. This
alliance, named the Personal Communicator Wireless Alliance, will work with PDA
manufacturers to create a variety of handheld messaging devices that provide
two-way wireless messaging for consumers. Metrocall believes this initiative
will further increase its ability to offer more products and services to its
customer base.
Optimize Customer Relationships. Metrocall seeks to maintain a close
relationship with its 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 provided by
Metrocall are billed as enhancements to its basic service and generally result
in higher ARPU. Metrocall's specific value-added services include:
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- Direct View, which permits organizations to use Metrocall's wireless
network to broadcast news, sports, stock data and general and customized
information to LED display signs;
- customized information content using Metrocall's OnTheGoInfo(SM) suite of
information services;
- My2Way, which permits subscribers to communicate with other two-way
devices by sending and receiving e-mail, accessing information on demand
and browsing the Internet;
- 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.
Maintaining Low Cost Operations and Improve Margins. A key component of
Metrocall's business strategy is to make investments that improve its operating
efficiencies, which lead to margin improvement. During 1999, Metrocall's
operating efficiencies improved because it focused on eliminating redundant
costs within its business as it substantially completed the integration of AMD
and its other acquisitions, and renegotiated several telecommunications and
other contracts, which reduced its service, rent and maintenance costs per
subscriber, particularly in the last half of 1999. Metrocall expects to continue
its cost containment efforts during 2000 as it further identifies redundant
costs within its operations and reduces the number of separate billing systems
it operates.
Metrocall also believes that as use of its strategic alliances and other
indirect distribution channels increase, its operating costs will decrease as
participants in these channels typically bear a portion of Metrocall's sales and
customer service expenses. Similarly, Metrocall believes its focus on maximizing
monthly recurring revenues and promoting value-added services with higher ARPU
will improve operating margins.
METROCALL'S PAGING AND WIRELESS MESSAGING OPERATIONS
Products and Services
Metrocall currently provides four principal paging and wireless messaging
products:
- digital display messaging devices, which permits 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 messaging devices, which allows 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
and two-way messaging.
Metrocall provides digital display and alphanumeric display devices in all
of its markets. At December 31, 1999, approximately 86% of its subscriber
devices in service were digital display devices and approximately 14% were
alphanumeric display devices. 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,
Metrocall markets, 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 its Internet
website, www.metrocall.com, where any Internet user can access Metrocall's
on-line alphanumeric paging and messaging software.
During the first quarter of 2000, Metrocall began deploying two-way
messaging services to its subscribers, which, among other capabilities, gives
subscribers the ability to communicate wirelessly with pagers, fax machines and
Internet e-mail. Metrocall expects to begin offering these subscribers enhanced
services
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including customized content and information services, unified messaging, and
web enabled wireless notification and messaging.
Metrocall also provides 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
Metrocall's radio transmitters;
- annual loss protection, which allows subscribers of leased messaging
devices to limit their cost of replacement upon loss or destruction of
the device; and
- maintenance services, which are offered to subscribers who own their own
pagers.
Subscribers who use wireless messaging services have traditionally included
small business operators and employees, professionals, medical personnel, sales
and service providers, construction and trades-people, and real estate brokers
and developers. However, the appeal of paging and wireless messaging to the
residential user is growing, with service increasingly being adopted by
individuals for private, non-business uses such as communicating with family
members and friends.
Metrocall subscribers either buy or lease their wireless devices for local,
regional, multi-regional or nationwide service. It receives additional revenue
for enhanced services, such as voice mail, personalized greetings and One
Touch(SM) service. Metrocall typically offers volume discounts on lease payments
and service fees to its large volume subscribers. In some instances, Metrocall's
subscribers are resellers that purchase services at substantially discounted
rates, but are responsible for marketing, billing, collection and related costs
with respect to the resellers' customers. For each of the three years ended
December 31, 1999, over 90% of Metrocall's service, rent and maintenance
revenues were generated from its traditional one-way messaging services.
Sales and Marketing
Metrocall's sales and marketing strategy incorporates a multi-tiered
distribution system designed to maximize internal growth and geographic
presence. At December 31, 1999, Metrocall through more than 230 sales and
administrative offices and retail outlets, employed a sales force of over 1,500
sales representatives, including its direct sales staff, telemarketing
professionals and sales representatives who call on retailers and resellers.
Metrocall's major distribution channels are described briefly below.
Direct Distribution Channels
- Direct Sales. Metrocall's direct sales personnel sell its messaging
services and products primarily to businesses, placing special emphasis
on key strategic accounts. Metrocall's direct sales personnel generally
target businesses that have multiple work locations or have highly mobile
employees. Metrocall's sales compensation plans are designed to motivate
direct sales personnel to focus on selling rather than leasing one-way
pagers and advanced messaging devices, which reduces capital
requirements, and to increase sales of higher revenue product
enhancements, such as nationwide coverage, alphanumeric service, voice
mail, One Touch(SM) service and My2Way service.
- Database Telemarketing. Metrocall's internal, professionally trained
staff generates sales by utilizing computerized lead management and
telemarketing techniques combined with its proprietary lead screening and
development protocol. Using acquired lists to focus its efforts,
Metrocall's 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 Metrocall does not have a direct sales
effort or has not been reached by other distribution channels. In
Metrocall's marketing efforts, it uses only commercially available public
information to analyze and target new customers and does not use
"Customer Proprietary Network Information" in a way that would conflict
with applicable law or FCC rules.
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- Company-Owned Retail Stores. At December 31, 1999, Metrocall had over 120
company-owned retail outlets. Metrocall's retail outlets are designed to
sell higher ARPU services to the consumer market segment directly while
providing Metrocall with a point of presence to enhance its 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, narrowband, broadband 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.
Indirect Distribution Channels
- Resellers. Metrocall sells resellers bulk paging and messaging services
for resale to the resellers' own business clients and individual
customers. Metrocall issues one monthly bill to each reseller who is
responsible for marketing, billing and collection, and equipment
maintenance. Through this channel, Metrocall achieves high network
utilization at low incremental cost, but realizes much lower ARPU than
through other distribution channels.
- Retail Outlets. Metrocall sells paging and other messaging devices on a
wholesale basis to retail outlets, such as office supply, electronics and
general merchandise chains, for resale to their customers. Metrocall
selects 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
devices and provide limited customer service to the consumer. Metrocall
provides sales incentives and advertising support and trains sales
personnel to enhance a retail outlet's effectiveness and to ensure that
the customer is well educated regarding the product.
- Dealer Network. Metrocall contracts with independent dealers,
representatives and agents, including such outlets as small cellular
phone dealers and independent specialty electronics stores. Metrocall
typically uses 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 Metrocall's
other distribution channels. In addition to selling the paging and other
wireless devices, independent dealers assist the subscriber in choosing a
service plan and collect the initial payments. Metrocall pays independent
dealers commissions based on their sales of Metrocall services.
- Strategic Partners. Metrocall has entered into contractual agreements
with several selected national distribution partners who market its
services to their existing and future customers. Metrocall supplies many
of these partners with custom branded turnkey solutions for network
services, products, customer services, billing, collections and
fulfillment. Metrocall's strategy is to provide these value-added
services to enhance the business relationship and margin opportunities
for both parties. Metrocall has entered into alliances with companies in
the long distance, local exchange, cable, Internet, retail, direct
response and multi-level marketing businesses and believes that these
programs will help deliver paging and advanced messaging services to
market segments that its other distribution channels may not reach
cost-effectively.
- Affiliates. Metrocall operates a network of paging and messaging carriers
or affiliates that resell services on the 152.480 MHz private carrier
paging frequency. These affiliates are independent owners of paging and
messaging systems in various markets throughout the nation who sell
expanded coverage to their customers. Utilizing Metrocall's
infrastructure, these independent networks provide wide area and
nationwide paging on a single channel.
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Subscribers by Geographic Region. Set forth below is the number of
messaging devices that Metrocall has in service by geographic region.
NUMBER OF PAGERS AND WIRELESS DEVICES IN SERVICE
FOR THE YEARS ENDED DECEMBER 31, 1997(1) 1998(2) 1999
-------------------------------- --------- --------- ---------
Northeast........................................ 714,363 772,463 781,663
Mid-Atlantic..................................... 623,077 693,631 799,775
Southeast........................................ 1,094,313 1,179,548 1,261,545
Midwest.......................................... 232,105 400,150 431,072
Southwest........................................ 756,459 1,356,218 1,448,090
West............................................. 610,519 768,829 750,000
Northwest........................................ -- 488,711 455,794
--------- --------- ---------
Total....................................... 4,030,836 5,659,550 5,927,939
========= ========= =========
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(1) Includes approximately 1.5 million pagers in service acquired from its 1997
merger and acquisition.
(2) Includes approximately 1.2 million pagers in service acquired in the AMD
acquisition.
Subscribers by Distribution Channel. Set forth below is the respective
numbers and percentages of messaging devices that Metrocall services through its
distribution channels:
OWNERSHIP OF PAGERS AND WIRELESS DEVICES IN SERVICE
1997(1) 1998(2) 1999
---------------------- ---------------------- ----------------------
FOR THE YEARS ENDED DECEMBER 31, NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
- -------------------------------- --------- ---------- --------- ---------- --------- ----------
DIRECT CHANNELS:
Company-owned and leased to
subscribers.............. 1,184,193 29% 1,980,297 35% 1,925,903 33%
Subscriber-owned (COAM)..... 430,582 11 629,352 11 616,829 10
Company-owned retail stores.. 223,510 6 207,493 4 184,010 3
INDIRECT CHANNELS:
Resellers................... 1,965,354 49 2,369,686 42 2,579,286 44
Strategic Partners and
affiliates............... 140,625 3 274,844 5 475,487 8
Retail...................... 86,572 2 197,878 3 146,424 2
--------- --- --------- --- --------- ---
Total.................... 4,030,836 100 5,659,550 100 5,927,939 100
========= === ========= === ========= ===
- ---------------
(1) Includes approximately 1.5 million pagers in service acquired from its 1997
merger and acquisition.
(2) Includes approximately 1.2 million pagers in service acquired in the AMD
acquisition.
Network and Equipment
Metrocall has developed a state-of-the-art paging and messaging system
utilizing current narrowband PCS technology, which achieves superior building
penetration, wide-area coverage and the ability to deliver new and enhanced
messaging services. This existing transmission equipment has significant
capacity to support future growth.
Metrocall's messaging services are initiated when telephone calls or short
message based text services are placed to its company-maintained paging and
messaging terminals. These terminals have a modular design that allows
significant future expansion by adding or replacing modules rather than
replacing the entire terminal. Metrocall's terminals direct pages and other
messages from the Public Switched Telephone Network
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(PSTN) or from the Internet to Metrocall's primary satellite transmission hub,
which signals terrestrial network transmitters providing coverage throughout the
service area.
Metrocall has three exclusive nationwide one-way frequencies and a
nationwide 50/50 KHz narrowband personal communication (NPCS) license issued by
the FCC and is operating in each of the largest 100 SMSAs. Metrocall began
operating its nationwide network on one of the three one-way frequencies in
November 1993. Metrocall developed a special home gateway switch that allows all
of Metrocall's existing regional based paging and messaging terminals to route
two-way messaging data to this centralized gateway for delivery into the two-way
ReFLEX(TM) network. Metrocall is also capable of providing local paging and
messaging in many markets served by its nationwide network by using nationwide
transmitters to carry local messages. Services provided through the nationwide
network are marketed to subscribers directly through Metrocall's sales force and
indirectly through retailers and resellers. Metrocall also operates a series of
regional operating systems or networks serving Arizona, California, Utah, Texas,
Florida, Illinois, Oregon, Washington, Colorado and Nevada; the area from Boston
to the Virginia/North Carolina border; and a ten state region in the Southeast
United States.
In addition, Metrocall transmits a majority of its paging and messaging
traffic through its "Global Messaging Gateway," which is a satellite uplink
facility located in Stockton, California. The facility operates 24 hours per
day, seven days per week. The use of this facility permits Metrocall to save
costs as it phases out operating agreements with three commercially owned
satellite uplink facilities and increases Metrocall control over its network
infrastructure.
Metrocall does not manufacture any of the messaging devices or
infrastructure equipment used in its operations. Although several entities sell
the equipment used in Metrocall's operations, Metrocall has historically limited
the number of suppliers to achieve volume cost savings, and, therefore, depends
on a few suppliers to obtain sufficient inventory. Metrocall purchases most of
its pagers and messaging devices from Motorola, Inc. Metrocall purchases its
transmitters and terminals from Motorola and Glenayre Electronics. Metrocall
anticipates that equipment and messaging devices will continue to be available
to it in the foreseeable future, consistent with normal manufacturing and
delivery lead times, but cannot assure you that it will not experience
unexpected delays in obtaining one-way and two-way messaging devices and
infrastructure equipment in the future. A significant number of delays could
have an adverse effect on Metrocall's operations, network development plans and
future revenues. Metrocall continually evaluates new developments in wireless
messaging technology in connection with the design and enhancement of its
messaging systems and selection of products to be offered to subscribers.
Management Systems and Billing
Metrocall has centralized certain operating functions and utilizes common
billing and subscriber management systems. This permits Metrocall to reduce
costs, increase operating efficiencies, obtain synergies from acquisitions, and
focus regional management on sales and distribution.
The functions Metrocall has centralized into its national operations center
in Alexandria, Virginia include accounting, management information systems, and
inventory and order fulfillment. It has also integrated the information systems
of the acquired companies into its structure.
Metrocall also maintains three national call centers, which are critical
factors in marketing and servicing the nationwide network to all markets in the
United States. Metrocall's centers handle customer inquiries from existing and
potential customers and support its distribution channels initiatives. Its three
centers are staffed with approximately 385 employees. Each center offers a
toll-free access number. One of these centers is open seven days per week, 24
hours per day. The other two centers are open six days a week and provide
emergency service seven days a week, 24 hours a day. Metrocall attempts to
satisfy customers upon initial inquiry to avoid repeat calls, thereby increasing
customer satisfaction and decreasing costs. Metrocall employs state-of-the-art
call management equipment (such as an automated call distribution system and
interactive voice response capabilities) to provide quality customer service and
to track both the productivity and the quality of the performance of its
customer service representatives.
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COMPETITION
The wireless communications industry is very competitive. Metrocall has
competed by maintaining competitive pricing of its products and services, by
providing a broad assortment of coverage options using its own messaging network
infrastructure and through quality, reliable customer service. Metrocall
competes with hundreds of companies that provide only local basic one-way paging
service. Metrocall also offers enhanced and advanced messaging services, such as
alphanumeric messaging, guaranteed messaging, voice mail, two-way messaging,
customized information content delivery services and broadband PCS telephones.
The products and services that Metrocall offers compete directly and
indirectly with a myriad of wireless communication products and services. For
instance, product bundling of PCS telephones with short messaging services is
becoming more common. In addition, the pricing of flat rate digital broadband
PCS services is declining to a level that competes directly with the traditional
paging services Metrocall offers.
Although some of Metrocall's competitors are small, privately owned
companies servicing one market, others are large diversified telecommunications
companies that serve several markets. Some of these competitors possess
financial, technical and other resources greater than those of Metrocall. Major
wireless messaging providers that Metrocall competes with in more than one
market include: PageNet, Arch, WebLink, Skytel, a subsidiary of MCIWorldcom,
Inc., Airtouch/Vodafone, Nextel Communications, Inc., BellSouth Wireless Data,
Bell Atlantic, SBC Communications, Inc. and American Mobile Satellite
Corporation.
In November 1999, PageNet and Arch announced their intention to merge.
After completion of this merger, the combined company is expected to have
approximately 15.7 million subscribers and a significantly reduced leverage,
which may place Metrocall at a competitive disadvantage.
The intensity of competition for communication service customers will
continue to increase as wireless communications products and technologies
continue to be developed and offer new and different services and applications.
In addition, FCC regulation concerning auctioning of new spectrum for wireless
communication services has created additional potential sources of competition.
Furthermore, entities offering service on wireless two-way communications
technology, including cellular, digital broadband PCS, narrowband PCS and
providers of specialized mobile radio and mobile satellite services, also
compete with the services Metrocall provides. There can be no assurance that
such product and technology developments and regulatory processes will not
adversely affect Metrocall.
Metrocall holds one narrowband PCS license and offers narrowband PCS
services in connection with its alliance with WebLink. Some of Metrocall's
competitors also hold narrowband PCS licenses. Two competitors, PageNet and
Skytel currently offer narrowband PCS data services from their own networks.
Metrocall expects that the services that will be provided by these entities will
compete with the narrowband PCS and other paging and messaging services it
provides.
GOVERNMENT REGULATION
From time to time, federal and state legislators propose legislation that
could affect Metrocall's business, either beneficially or adversely, such as by
increasing competition or affecting the cost of its operations. Additionally,
the FCC and, to a lesser extent, state regulatory bodies, may adopt rules,
regulations or policies that may affect Metrocall's business. Metrocall cannot
predict the impact of such legislative actions on its operations. 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
Metrocall's operations.
Federal. Metrocall's operations are subject to extensive regulation by the
FCC under the Communications Act of 1934, as amended (the "Communications Act").
Under the Communications Act, Metrocall is required to obtain FCC licenses for
the use of radio frequencies to conduct its operations within specified
geographic areas. These licenses set forth the technical parameters, such as
maximum power and tower height, under which Metrocall may use such frequencies.
Metrocall has 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 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
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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. The states were preempted from regulating such matters as PCP
entry, rates, operation and terms of service. The historical distinctions
between RCC and PCP paging have been largely eliminated by the 1993 Omnibus
Budget Reconciliation Act (the "1993 Budget Act"), which 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 supplanted
the prior RCC definition. The FCC has classified both PCP and RCC paging
services as CMRS, and adopted rules applicable to CMRS carriers, which became
effective in 1996.
In 1993, the FCC adopted new rules to provide "channel exclusivity" to
paging operators operating on certain 929 MHz frequencies if they met certain
qualifications. Metrocall has obtained nationwide exclusivity on two of its 929
MHz frequencies and one 931 MHz frequency. Under the FCC's current rules, no
other entity may apply anywhere in the United States to operate on these
frequencies. However, any incumbent paging licensees, other than Metrocall, on
Metrocall's 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 Metrocall's
other 929 MHz frequencies, it has local exclusivity in the Chicago, Illinois
area, and regional exclusivity in the Northeast, Mid-Atlantic, and Southeast
regions of the United States.
Certain paging channels below 900 MHz are still allocated on a shared
basis. Metrocall acquired a 152.480 MHz shared frequency network through its 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 paging
frequency is not congested with multiple licensees, the subscriber would not
perceive any differences between shared paging services and exclusive paging
services. In most areas of the country where Metrocall holds shared paging
licenses, it is 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 (paging licensees authorized under Part 22 of the FCC's
Rules 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 Metrocall has recently begun to offer are subject
to harsher penalties for failure to construct. For example, the NPCS license
Metrocall acquired in the AMD acquisition is subject to the condition that
Metrocall 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, it must build sufficient stations to
cover 1,500,000 square kilometers, or 75% of the U.S. population. As a result of
the WebLink alliance, Metrocall has met the first construction benchmark and
expects to meet the FCC's 10-year build out requirements.
Under the 1993 Budget Act, the FCC has "forbearance" authority, which means
it need not enforce 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. The
Telecommunications Act of 1996 (the "1996 Act") provided the FCC with additional
forbearance authority with regard to all telecommunications services. Pursuant
to that authority, the FCC has forborne from requiring wireless carriers to
receive prior FCC approval for certain non-substantial corporate stock transfers
and reorganizations.
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Paging licenses are issued by the FCC for 10-year terms. Metrocall's
current licenses have expiration dates ranging from 2000 to 2010. The FCC must
approve renewal applications. In the past, the FCC has routinely granted
Metrocall's FCC renewal applications. Metrocall is also required to obtain prior
FCC approval for its 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 Metrocall files will be approved or acted upon in a timely manner
by the FCC, Metrocall knows of no reason to believe such applications would not
be approved or granted, based upon its experience to date.
The Communications Act also places limitations on foreign ownership of CMRS
licenses. These foreign ownership restrictions limit the percentage of Metrocall
common stock that may be owned or voted, directly or indirectly, by aliens or
their representatives, foreign governments or their representatives, or foreign
corporations. Metrocall's certificate of incorporation permits the redemption of
its common stock from stockholders where necessary to protect its 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 Metrocall's 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
Metrocall's, to facilitate its transition to wide area licensing and auctions
for paging frequencies. As a result, the FCC will award exclusive paging
frequencies through an auction process.
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 pending appeals,
the following changes have been made subject to those appeals. Licenses for 929
MHz and 931 MHz frequencies will be issued for "Major Economic Area" or "MEA"
geographic areas; licenses for exclusive paging frequencies in lower frequency
bands will be licensed in "Economic Areas" or "EAs." Shared paging 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 exclusive paging 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. Licensing for those frequencies is now governed by the FCC's
auction process. The auction for 929 MHz and 931 MHz MEA licenses ended on March
2, 2000. Metrocall was the high bidder on 145 "MEA" licenses, with winning bids
totaling $681,800. In February 2000, Metrocall had submitted an "up-front"
payment of $650,000, which will be credited toward the amount of its winning
bids. Metrocall must now submit formal "long form" applications for the MEA
licenses on which it was high bidder and will be required to pay the balance of
its winning bids before those MEA licenses will be issued. Metrocall will timely
file its "long form" applications and pay the balance of its winning bids.
Metrocall knows of no reason why its "long form" applications would not be
granted.
Future auctions will be held for the paging frequencies below 900 MHz, and
for the 929-931 MHz licenses on which no party bid during the recently completed
auction. Neither of those future auctions has yet been scheduled. Incumbent
licensees that have not or do not bid (or who bid unsuccessfully) at the
applicable auction will be able to trade in their existing licenses for a single
"wide-area" license based upon their current coverage. Incumbents are 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, Metrocall cannot predict
their impact on its business. At least initially, competitive bidding increaseS
the 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 Metrocall was the successful bidder, or where it bids
successfully in a future auction, or where it trades in its licenses for
"wide-area" licenses, Metrocall will save on the application costs associated
with modifying and
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adding facilities within its service areas, and no other entity will be able to
apply for its frequencies within those areas. Conversely, in geographic areas
where it is not the high bidder, Metrocall's ability to expand its service
territories in those geographic areas will be curtailed. Metrocall's three
nationwide frequencies will not be subject to competitive bidding; although, the
FCC is considering imposing additional "build-out" requirements on nationwide
licensees.
The 1996 Act imposes a duty on all telecommunications carriers to provide
interconnection to other carriers, and requires local exchange carriers (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
Metrocall. Moreover, under the 1996 Act and the FCC's rules, paging carriers are
entitled to compensation from any local exchange carrier for local calls that
terminate on a paging network, which has already led to additional revenues for
Metrocall.
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.
Metrocall 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 a 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 billing rates, terms
and conditions by which operators provide paging services. Apart from rate and
entry regulations, some states may continue to regulate other aspects of
Metrocall's 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 Metrocall's
experience to date, it knows 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 was upheld on appeal by the U.S. Court of Appeals
for the Fifth Circuit; a petition requesting the U.S. Supreme Court's review of
the Fifth Circuit's decision has been filed. If the Fifth Circuit's decision is
upheld, Metrocall will continue to incur additional costs in contributing to
state universal service funds, which Metrocall typically passes through to its
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 Metrocall for local transport of the telephone companies'
local traffic. Metrocall has petitioned the FCC to rule that these local
transport charges are unlawful and to award Metrocall a
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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. Metrocall
believes the Supreme Court rulings may support its complaints filed with the
FCC. In addition, a recent Ninth Circuit decision, Pacific Bell v. Cook Telecom,
Inc., held in favor of a paging company on not only the issues that are pending
in Metrocall's FCC complaints, but also on paging carriers' rights to receive
compensation from the LECs for paging carriers' termination of local traffic.
Furthermore, in mid-1999, Metrocall signed interconnection agreements with Bell
Atlantic, signifying resolution of the interconnection issue with at least one
RBOC.
SEASONALITY
Generally, Metrocall's operating results are not significantly affected by
seasonal factors.
TRADEMARKS AND SERVICE MARKS
Metrocall uses the following trademarks and service marks:
- "Metrocall" -- a registered trademark and service mark with the U.S.
Patent and Trademark Office;
- "Datacall," "Metronet," "Metromessage," "In-Touch," "Metrofax," "The
Power in Paging," "Message Track" and "One Touch" -- service marks under
which Metrocall markets its paging , messaging and personalized
information services;
- "Metrotext" -- a computer program designed for use in transmitting
alphanumeric messages from personal computers to pagers (copyright
registration has been granted);
- "America's Wireless Network," "Notesender," "MyOnTheGoPortfolio" and
"OnTheGoInfo" -- service marks (applications with the U.S. Patent and
Trademark Office are pending).
EMPLOYEES
As of December 31, 1999, Metrocall employed approximately 3,571 full and
part-time people none of whom is represented by a labor union. Metrocall
believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
Metrocall does not hold title to any significant real property; although,
Metrocall and its affiliates own interests in certain properties. At December
31, 1999, Metrocall leased commercial office and retail space, including its
executive offices, at more than 300 locations used in its operations. These
office leases provided for monthly payments ranging from approximately $300 to
$108,700 and expire, subject to renewal options, on various dates through
December 2010.
Metrocall also leases numerous sites under long-term leases for its
transmitters on commercial broadcast towers, buildings and other fixed
structures. At December 31, 1999, Metrocall leased these transmitter sites for
monthly rentals ranging from approximately $420 to $5,700 that expire, subject
to renewal options, on various dates through June 2029.
ITEM 3. LEGAL PROCEEDINGS
Information regarding contingencies and legal proceedings is included in
Note 8 of the Notes to the Consolidated Financial Statements for the year ended
December 31, 1999, which is included under Item 8 of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR METROCALL'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
STOCK TRADING
Metrocall's common stock is traded on the Nasdaq SmallCap Market under the
symbol "MCLL."
COMMON STOCK PRICE RANGES
1998 1999
------------ ------------
HIGH LOW HIGH LOW
---- ----- ---- -----
Quarter ended March 31...................................... $7 1/2 $4 5/8 $5 3/4 $2 11/16
Quarter ended June 30....................................... 7 5/8 5 3/8 4 2 1/16
Quarter ended September 30.................................. 7 7/16 4 1/2 4 3/8 1 3/16
Quarter ended December 31................................... 6 1/16 2 11/16 3 1/8 1 1/8
On March 3, 2000, the last reported sales price of Metrocall's common stock
on the Nasdaq SmallCap Market was $14.00 per share, and there were 1,705
registered stockholders of record.
DIVIDEND POLICY
Metrocall has not declared or paid any cash dividends or distributions on
its common stock since its initial public offering of common stock in July 1993.
Metrocall does not anticipate paying any cash dividends on its common stock in
the foreseeable future. Future cash dividends, if any, will be determined by its
Board of Directors. Certain covenants in Metrocall's credit facility, its
indentures and the terms of its Series A Convertible Preferred Stock (the
"Series A Preferred") restrict or prohibit the payment of cash dividends on
Metrocall's common stock. In addition, if Metrocall pays or sets aside for
payment any dividend or distribution on its common stock (other than dividends
or distributions paid solely in shares of common stock or rights, options or
warrants to purchase common stock) before October 2, 2003, holders of the Series
C Convertible Preferred Stock (the "Series C Preferred") also will be entitled
to receive a certain amount of those payments.
As discussed below, Metrocall has issued shares of each of its series of
preferred stock to the respective holders of those series of preferred stock in
lieu of cash dividends.
UNREGISTERED SECURITIES
Series A Preferred. On November 15, 1996, Metrocall issued 159,600 shares
of the Series A Preferred and 159,600 warrants representing the right to
purchase an aggregate of 2.915 million shares of common stock (the "Warrants").
The aggregate purchase price for the Series A Preferred and the Warrants was
$39.9 million. The purchasers of these securities were John Hancock Mutual Life
Insurance Company, SunAmerica, Inc. and UBS Capital, LLC. Because the securities
were sold to qualified institutional buyers in a transaction not involving a
public offering, the sale was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act").
Each share of the Series A Preferred has a stated value of $250 per share,
a liquidation preference and redemption value equal to its stated value, certain
redemption rights and the right to elect two directors (subject to increase upon
the occurrence of certain events) to Metrocall's Board of Directors. The Series
A Preferred carries a dividend of 14% (subject to increase upon the occurrence
of certain events), payable semi-annually in cash or in additional shares of the
Series A Preferred, at Metrocall's option. In addition, beginning November 15,
2001, holders of the Series A Preferred have the right to convert their Series A
Preferred (including shares issued as dividends) into shares of common stock
based upon the market price of common stock at the time of conversion. The
Series A Preferred may, at the option of holders, be converted sooner upon
certain change of control events of Metrocall, as defined in the Certificate of
Designation for the
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Series A Preferred. During 1998 and 1999, Metrocall issued 26,477 and 30,314
additional shares, respectively, of the Series A Preferred as dividends to the
holders of the Series A Preferred.
Through February 1, 2000, each Warrant represented the right of the holder
to purchase 18.266 shares of common stock, or an aggregate of 2.915 million
shares. The exercise price per share was $7.40. The Warrants expire November 15,
2001. Metrocall has registered the resale of 2.915 million shares that may be
obtained upon exercise of the Warrants under the Securities Act.
The exercise price of the Warrants is subject to adjustment in the event
Metrocall sells common stock in private transactions for less than 80% of the
exercise price. In this event, the exercise price in effect will be reduced to
125% of the price at which the new equity is sold. The Warrants also include
other customary anti-dilution provisions. As a result of the agreements for
common stock investments in Metrocall entered into on February 2, 2000, as
further described below and in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, the exercise price of the
Warrants and the number of shares of common stock that may be purchased upon
exercise of the Warrants have been adjusted. The exercise price of the Warrants
was reduced to $2.74 per share. Under the anti-dilution provisions of the
Warrants, the number of shares of common stock that may be purchased upon
exercise of each Warrant increased to 18.531 shares of common stock, or an
aggregate of 2.958 million shares. The exercise price of the Warrants and number
of shares of common stock that may be purchased upon exercise of the Warrants
may be further adjusted in the future as a result of anti-dilution and other
provisions of the Warrants.
Series C Preferred. On October 2, 1998, Metrocall issued 9,500 shares of
the Series C Preferred in connection with the AMD acquisition to AT&T Wireless,
the sole holder of the Series C Preferred. 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 but senior to the shares of common stock, equal
to its stated value. The Series C Preferred carries a dividend of 8% of the
stated value per year, payable semiannually in cash or in additional shares of
the Series C Preferred, at Metrocall's option. Metrocall did not register the
Series C Preferred under the Securities Act. Since this issuance, Metrocall has
issued stock dividends of 95 shares and 783 shares of additional shares of
Series C Preferred during 1998 and 1999, respectively. Metrocall has not
registered these shares.
As further described in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," on February 2, 2000, Metrocall
and AT&T Wireless entered into a Securities Exchange Agreement under which AT&T
Wireless agreed to exchange its shares of Series C Preferred for 13,250,000
shares of Metrocall common stock and, if applicable, non-voting common stock
equivalents in the form of a new series of Metrocall preferred stock. AT&T
Wireless' voting interest in Metrocall will be limited to 19.9% of the total
issued and outstanding shares of Metrocall common stock. To the extent
13,250,000 shares of Metrocall common stock exceeds 19.9% of the total issued
and outstanding shares of Metrocall common stock after consummation of the
exchange, AT&T Wireless will receive shares of Series D Non-Voting Participating
Convertible Preferred Stock (the "Series D Preferred"). The Series D Preferred
will have rights substantially equivalent to those of the common stock, except
that it will have limited voting rights. AT&T Wireless may convert the Series D
Preferred shares at any time. Metrocall has the right to convert the Series D
Preferred into common stock so long as the number of converted shares of common
stock does not equal or exceed 20% of the issued and outstanding common stock at
the time of the conversion. Metrocall has agreed to register for resale the
shares of Metrocall common stock AT&T Wireless receives or can receive upon
conversion of the Series D Preferred from the exchange within 180 days after
consummation of the exchange. If the three common stock investments described
below close substantially simultaneously with the closing of the exchange of the
Series C Preferred, Metrocall will not issue any shares of the Series D
Preferred. Because the exchange is a transaction not involving a public
offering, the transaction is exempt from registration pursuant to Section 4(2)
of the Securities Act.
Common Stock. On November 1, 1999, Metrocall issued 40,000 shares of
common stock as a performance award under the Pinnacle Reseller Program between
ProNet, predecessor-in-interest to Metrocall, and Coldwell Communications, Inc.
Metrocall has not registered these shares, but is obligated to do so.
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Because the issuance did not involve a public offering, the issuance was exempt
from registration under Section 4(2) of the Securities Act.
As further described in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," on February 2, 2000, Metrocall
entered into common stock purchase agreements with each of three equity
investors: HMTF, PSINet and Aether. Each of the three companies will acquire
approximately 7.8 million shares of common stock. Each investor will pay $2.19
per share, or a total of approximately $17.0 million or $51.0 million in the
aggregate. Each of the three investors will have the right to nominate a
representative to Metrocall's Board of Directors. Metrocall will use the
proceeds from the sale of its common stock to reduce outstanding debt.
Metrocall also granted HMTF two options to purchase additional shares of
Metrocall common stock. Metrocall granted an option to purchase 8,333,333 shares
of common stock (Option I), at an exercise price of $3.00 per share, subject to
adjustment under certain events. Option I may be exercised by HMTF in whole but
not in part, at any time on or before the first anniversary of the closing.
Metrocall also granted HMTF (i) an option to purchase 12,500,000 shares of
common stock at an exercise price of $4.00 per share plus (ii) if HMTF has not
exercised Option I, 8,333,333 shares of common stock at an exercise price per
share of $3.00, in each case subject to adjustment under certain events
(collectively, Option II). Option II may be exercised in whole or in part but
only in connection with the issuance of new equity for cash to finance a
business combination or acquisition (by means of merger, consolidation,
exchange, or acquisition of assets, or otherwise) involving Metrocall or any of
its subsidiaries and an aggregate transactional consideration to the other
entity or its equity and debt holders or to Metrocall and its equity and debt
holders having a fair value (as determined in good faith by Metrocall's Board of
Directors) of at least $50 million (a Qualified Transaction). Option II will
terminate on the second anniversary of the closing, except that it can be
extended if there are pending active discussions with respect to a potential
Qualified Transaction or material changes in the terms of a Qualified
Transaction. The Option I and Option II transactions are subject to the
expiration of the applicable Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the HSR Act) waiting period, the receipt of any required
consent of the FCC, and other customary closing conditions.
Metrocall has agreed to register for resale the shares of common stock that
each of the three equity investors will receive, subject in each case to certain
conditions and limitations. Because the common stock investments are
transactions not involving a public offering, each investment is exempt from
registration pursuant to Section 4(2) of the Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial and other data of
Metrocall. The historical financial data has been derived from the audited
consolidated financial statements and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and Metrocall's consolidated financial statements,
related notes to the consolidated financial statements and other financial
information included in the consolidated financial statements.
The consolidated statements of operations data for fiscal years 1996, 1997
and 1998 presented below include the results of operations of the acquired
companies from their respective acquisition dates. In May 1997 and November
1999, Metrocall sold the assets of its telemessaging operations and its
electronic tracking business, which were acquired through mergers on November
15, 1996 and December 30, 1997, respectively. Therefore, the results of
operations for fiscal years 1997 and 1999 include the results of operations of
these operations through their respective disposition dates. Consolidated
statements of operations data for fiscal year 1997 exclude the operations of
ProNet 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.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ----------- -----------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE, UNIT, AND PER UNIT DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Service, rent and maintenance revenues........... $ 92,160 $124,029 $249,900 $ 416,352 $ 548,700
Product sales.................................... 18,699 25,928 39,464 48,372 61,487
-------- -------- -------- --------- ---------
Total revenues............................. 110,859 149,957 289,364 464,724 610,187
Net book value of products sold.................. (15,527) (21,633) (29,948) (31,791) (39,071)
-------- -------- -------- --------- ---------
95,332 128,324 259,416 432,933 571,116
Operating expenses:
Service, rent and maintenance.................... 20,080 29,696 69,254 115,432 146,961
Selling and marketing............................ 15,546 24,101 53,802 73,546 97,051
General and administrative(a).................... 33,985 42,905 73,753 121,644 170,591
Depreciation and amortization.................... 31,504 58,196 91,699 234,948 307,344
-------- -------- -------- --------- ---------
Loss from operations............................. (5,783) (26,574) (29,092) (112,637) (150,831)
Interest and other income (expense)(b)........... 314 (607) 156 849 407
Interest expense................................. (12,533) (20,424) (36,248) (64,448) (85,115)
-------- -------- -------- --------- ---------
Loss before income tax benefit and extraordinary
item........................................... (18,002) (47,605) (65,184) (176,236) (235,539)
Income tax provision benefit..................... 595 1,021 4,861 47,094 63,055
-------- -------- -------- --------- ---------
Loss before extraordinary item................... (17,407) (46,584) (60,323) (129,142) (172,484)
Extraordinary item(b)............................ (2,695) (3,675) -- -- --
-------- -------- -------- --------- ---------
Net loss....................................... (20,102) (50,259) (60,323) (129,142) (172,484)
Preferred dividends.............................. -- (780) (7,750) (11,767) (16,462)
Gain on repurchase of preferred stock............ -- -- -- -- 2,208
-------- -------- -------- --------- ---------
Loss attributable to common stockholders....... $(20,102) $(51,039) $(68,073) $(140,909) $(186,738)
======== ======== ======== ========= =========
Loss per share attributable to common
stockholders:
Loss per share before extraordinary item
attributable to common stockholders.......... $ (1.49) $ (2.91) $ (2.51) $ (3.43) ($ 4.47)
Extraordinary item, net of income tax
benefit...................................... (0.23) (0.23) -- -- --
-------- -------- -------- --------- ---------
Loss per share attributable to common
stockholders................................. $ (1.72) $ (3.14) $ (2.51) $ (3.43) $ (4.47)
======== ======== ======== ========= =========
- ---------------
a) Includes the impact of one-time, non-recurring charges 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, Metrocall refinanced balances outstanding
under its 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, Metrocall 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,
Metrocall 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 following 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 and wireless messaging 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 generally accepted accounting
principles (GAAP). Cash expenditures for various long-term assets,
interest expense and income taxes that have been, and will be, incurred
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" for
discussion of significant capital requirements and commitments. In 1995,
EBITDA excludes non-recurring charges of approximately $2.0 million
incurred as part of a management reorganization.
- EBITDA margin is calculated by dividing (a) EBITDA by (b) 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 and long distance services.
- Average monthly operating expense per unit is calculated by dividing (a)
total recurring operating expenses before depreciation and amortization
for the period by (b) the average number of units in service for the
period. For this calculation, operating expenses exclude non-recurring
charges for severance and other compensation costs incurred as part of a
management reorganization of approximately $2.0 million in 1995.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ----------- ----------- ----------- ------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE, UNIT, AND PER UNIT DATA
OPERATING AND OTHER DATA:
Net cash provided by operating activities...... $ 14,000 $ 15,608 $ 27,166 $ 41,154 $ 64,534
Net cash used in investing activities.......... $(44,528) $(327,904) $(176,429) $(191,747) $ (88,228)
Net cash provided by financing activities...... $151,329 $ 199,639 $ 163,242 $ 134,133 $ 18,045
EBITDA......................................... $ 27,771 $ 31,622 $ 62,607 $ 122,311 $ 156,513
EBITDA margin.................................. 29.1% 24.6% 24.1% 28.3% 27.4%
ARPU........................................... $ 9.15 $ 8.01 $ 8.25 $ 7.57 $ 7.86
Average monthly operating expense per unit..... $ 6.71 $ 6.35 $ 6.74 $ 5.71 $ 5.95
Units in service (end of period)............... 944,013 2,142,351 4,030,836 5,659,550 5,927,939
Units in service per employee (end of
period)...................................... 1,047 1,086 1,366 1,512 1,660
Capital expenditures........................... $ 44,058 $ 62,110 $ 69,935 $ 78,658 $ 93,327
-------- --------- --------- --------- ----------
1995 1996 1997 1998 1999
-------- ------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)....................... $116,009 $(8,396) $ (36,747) $ (41,828) $ (36,908)
Cash and cash equivalents....................... 123,574 10,917 24,896 8,436 2,787
Total assets.................................... 340,614 645,488 1,078,023 1,251,038 1,025,547
Total long-term debt, net of current portion.... 153,803 327,092 598,989 742,563 776,984
Total stockholders' equity/(deficit)............ 155,238 165,169 170,505 33,780 (152,134)
-------- ------- ---------- ---------- ----------
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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 Metrocall 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,
Metrocall 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 5.9 million. Metrocall has achieved this growth
through a combination of internal growth and a program of mergers and
acquisitions. As of December 31, 1999, Metrocall was the third 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 and wireless messaging services. While a subscriber continues to use its
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, 1994, Metrocall has added approximately 1.6 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,
Metrocall 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
Metrocall'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.
Metrocall has also grown significantly through mergers and acquisitions.
Since July 1996, Metrocall has added approximately 3.6 million subscribers to
its subscriber base through mergers and acquisitions through December 31, 1999:
ACQUISITION NUMBER OF
ACQUIRED COMPANY DATE SUBSCRIBERS
---------------- ----------------- -----------
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
===========
Metrocall believes that its enhanced nationwide coverage gives it a competitive
advantage in gaining additional subscribers. In February 2000, Metrocall agreed
to acquire NationPage, Inc. in a stock purchase transaction with a subsidiary of
AT&T Corp. This acquisition will add approximately 80,000 subscribers located
principally in eastern Pennsylvania, New Jersey and upstate New York.
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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 to free cash flow and operating 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 and PageNet announced that they had agreed to merge.
Completion of this merger is subject to a number of conditions, including
agreement by holders of PageNet's outstanding senior unsecured notes to exchange
their notes for Arch common stock. Metrocall has had and may continue to have
informal discussions with certain holders of these notes about whether Metrocall
might be able to present an alternative to the Arch merger. Metrocall has not
made any offer with respect to PageNet, and there is no assurance that Metrocall
will make any such proposal or that the proposal would be successful. Metrocall
also engages, from time to time, in discussions 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's growth, whether internal or through consolidation, requires
significant capital investment for messaging equipment and technical
infrastructure. Metrocall also purchases pagers and messaging devices for that
portion of its subscriber base to which it leases pagers and messaging devices.
During the year ended December 31, 1999, capital expenditures totaled
approximately $93.3 million, which included approximately $59.9 million for
subscribers equipment, representing increases in pagers and messaging devices on
hand and net increases and maintenance to the pager and messaging base.
Metrocall estimates capital expenditures for the year ending December 31, 2000
will approximate $90.0 million, primarily for paging and messaging equipment,
transmission equipment and information system enhancements.
Exchange of the Series C Preferred
On February 2, 2000, Metrocall and AT&T Wireless entered into a Securities
Exchange Agreement under which AT&T Wireless, as the sole holder of Metrocall's
Series C Preferred, agreed to exchange 10,378 shares of Series C Preferred,
representing all of the issued and outstanding shares of the Series C Preferred,
for 13,250,000 shares of Metrocall common stock and, if applicable, non-voting
common stock equivalents in the form of a new series of Metrocall preferred
stock. AT&T Wireless' voting interest in Metrocall will be limited to 19.9% of
the total issued and outstanding shares of Metrocall common stock. To the extent
13,250,000 shares of Metrocall common stock exceeds 19.9% of the total issued
and outstanding shares of Metrocall common stock, AT&T Wireless will receive
shares of the Series D Preferred. The Series D Preferred will have rights
substantially equivalent to those of the common stock, except that it will have
limited voting rights. AT&T Wireless may convert the Series D Preferred shares
at any time. Metrocall has the right to convert the Series D Preferred into
common stock so long as the number of converted shares of common stock does not
equal or exceed 20% of the issued and outstanding common stock at the time of
the conversion.
The consummation of the exchange is subject to the expiration of the
applicable HSR Act waiting period, the receipt of any required FCC consent and
other customary closing conditions. Metrocall expects that these conditions will
be satisfied and that the exchange will be consummated on or before March 31,
2000.
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AT&T Wireless has agreed to deliver to Metrocall an irrevocable proxy
granting a person designated by Metrocall full power and authority, for one year
commencing on the consummation of the exchange, to vote all shares of Metrocall
common stock that AT&T Wireless receives from the exchange in accordance with
the recommendation of the Board of Directors for Metrocall. This proxy will not
apply to any matter to which a holder of the Series D Preferred has the right to
vote under the Certificate of Designation for that series or applicable law.
AT&T Wireless has limited rights to sell all or a portion of the shares it
receives from the exchange at any time more than six months after consummation
of the exchange in privately negotiated sales to any person or group that
Metrocall and AT&T Wireless has not designated as restricted and subject to
Metrocall's right of negotiation and the transferee's consent to be bound by the
Securities Exchange Agreement. In addition, AT&T Wireless may sell all or
portion of the shares of Metrocall common stock it receives from the exchange at
any time more than twelve months after consummation of the exchange in one or
more sales in any available over-the-counter market for the common stock and/or
through any exchange on which the common stock is then traded, subject to the
following permitted period sales: 2,650,000 shares of common stock beginning 12
months after consummation of the exchange; an additional 2,650,000 shares of
common stock beginning 18 months after consummation of the exchange; an
additional 2,650,000 shares beginning 24 months after consummation of the
exchange; and the remaining 5,300,000 shares of common stock beginning 30 months
after consummation of the exchange.
Metrocall has agreed to register for resale the shares of Metrocall common
stock AT&T Wireless receives or can receive upon conversion of the Series D
Preferred from the exchange within 180 days after consummation of the exchange.
If the three common stock investments described below close substantially
simultaneously with the closing of the exchange of the Series C Preferred,
Metrocall will not issue any shares of the Series D Preferred.
The Series C Preferred had a carrying value of approximately $104.8 million
at December 31, 1999. Based on this carrying value, Metrocall expects to record
a credit of approximately $77.0 million to its accumulated deficit on the
exchange, excluding transaction costs, in fiscal year 2000. In addition, this
amount also will be reflected as a gain for purposes of determining Metrocall's
net income (loss) attributable to common stockholders in fiscal year 2000.
Common Stock Investments
On February 2, 2000, Metrocall entered into common stock purchase
agreements with each of three equity investors: HMTF, PSINet and Aether. Each of
the three companies will acquire approximately 7.8 million shares of common
stock. Each investor will pay $2.19 per share or a total of approximately $17.0
million or $51.0 million in the aggregate. Each of the three investors will have
the right to nominate a representative to Metrocall's Board of Directors.
Metrocall will use the proceeds from the sale of its common stock to reduce
outstanding debt.
Each transaction is subject to the completion of the exchange of the Series
C Preferred, the expiration of the applicable HSR Act waiting period, the
receipt of any required consent of the FCC, the completion of the other common
stock equity investments and other customary closing conditions. Metrocall
expects that these conditions will be satisfied and that the transactions will
be consummated on or before March 31, 2000.
Metrocall also granted HMTF two options to purchase additional shares of
Metrocall common stock. Metrocall granted an option to purchase 8,333,333 shares
of common stock (Option I), at an exercise price of $3.00 per share, subject to
adjustment under certain events. Option I may be exercised by HMTF in whole but
not in part, at any time on or before the first anniversary of the closing.
Metrocall also granted HMTF (i) an option to purchase 12,500,000 shares of
common stock at an exercise price of $4.00 per share plus (ii) if HMTF has not
exercised Option I, 8,333,333 shares of common stock at an exercise price per
share of $3.00, in each case subject to adjustment under certain events
(collectively, Option II). Option II may be exercised in whole or in part but
only in connection with the issuance of new equity for cash to finance a
business combination or acquisition (by means of merger, consolidation,
exchange, or acquisition of assets, or otherwise) involving Metrocall or any of
its subsidiaries and an aggregate transactional consideration to the
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other entity or its equity and debt holders or to Metrocall and its equity and
debt holders having a fair value (as determined in good faith by Metrocall's
Board of Directors) of at least $50 million (a Qualified Transaction). Option II
will terminate on the second anniversary of the closing, except that it can be
extended if there are pending active discussions with respect to a potential
Qualified Transaction or material changes in the terms of a Qualified
Transaction. The Option I and Option II transactions are subject to the
expiration of the applicable HSR Act waiting period, the receipt of any required
consent of the FCC, and other customary closing conditions.
PSINet and Aether will each deliver to Metrocall irrevocable proxies
pursuant to which their respective shares will be voted for the nominees of
Metrocall's Board of Directors for the election to the Board for the twelve
month period following the closing. PSINet and Aether will not, directly or
indirectly, sell, transfer or otherwise dispose of their shares for a period of
twelve months after the closing, with certain exceptions, unless the investor
has first delivered to Metrocall an offer for Metrocall to repurchase such
shares.
Each of the three equity investors also agreed to certain limitations, for
a period of twenty-four months after the closing. These limitations include the
following: each investor will not, directly or indirectly, (i) increase its
beneficial ownership of any securities or rights or options to acquire
beneficial ownership of any securities of Metrocall, except by way of stock
dividends, stock splits or distributions made by Metrocall to holders of common
stock (Aether may acquire up to 15% of the issued and outstanding common stock,
and HMTF may acquire up to 15% of the issued and outstanding common stock, which
15% ownership limit does not include the shares issuable under or purchased
pursuant to the Option Agreement); (ii) make any public announcement with
respect to or submit to Metrocall any proposal for the acquisition of securities
of Metrocall or for any merger, consolidation, or business combination involving
Metrocall or its affiliates or for a any purchase of a substantial portion of
the assets of Metrocall or its affiliates; (iii) make, or in any way participate
in, any "solicitation" of "proxies" to vote any voting securities of Metrocall
or become a participant in any "election contest" (as those terms are defined in
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
Exchange Act)); (iv) form, join, or in any way participate in a "group" (within
the meaning of Section 13(d)(3) of the Exchange Act) with respect to any voting
securities of Metrocall; or (v) seek to influence or influence the management or
policies of Metrocall, with the exception of the investor's designee on the
Board of Directors may act to take action in his capacity as a director of
Metrocall.
Metrocall has agreed to register for resale the shares of Metrocall common
stock that each of the three equity investors will receive, subject in each case
to certain conditions and limitations.
Formation of Inciscent
Inciscent is a technology-based joint venture that Metrocall originally
formed in November 1999 under the name Metrocall.net. Inciscent is expected to
be a full service business-to-business wired-to-wireless application service
provider (ASP) that will offer a suite of technology services to small
office/home office (SOHO) and small to medium-sized businesses. These services
will include broadband Internet access, domain hosting, unified messaging,
filtered wireless content, auction notification and confirmation, data solutions
and wireless e-mail. In addition, Inciscent will offer hosting and delivery of
enterprise applications via the Internet and wireless data networks.
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On February 8, 2000, Metrocall and the following investors entered into an
agreement to purchase a percentage of the Series A Convertible Preferred Stock
of Inciscent for cash, notes and/or services totaling an aggregate value of
$30.0 million. The ownership splits for Inciscent's preferred stock will be as
follows:
INVESTORS PERCENTAGE
--------- ----------
Metrocall................................................... 50.0%
Aether...................................................... 33.0
HMTF........................................................ 6.3
PSINet...................................................... 6.3
DB Capital Partners, Inc. .................................. 2.7
Other investors............................................. 1.7
-----
Total.................................................. 100.0%
=====
The investments by Aether, HMTF and PSINet are in addition to their
investments in Metrocall's common stock. Inciscent also issued shares of its
common stock to key personnel of Inciscent and Metrocall. Metrocall will not
receive any of the proceeds received by Inciscent for Inciscent's preferred
stock. Metrocall will provide Inciscent with air-time and other services and
access to its subscriber base in exchange for its 50% interest in Inciscent's
Series A Convertible Preferred Stock. Inciscent will have a seven person board
of directors, three of whom will be appointed by Metrocall, two by Aether, and
one each by PSINet and HMTF.
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 primarily related
to the management, operation and maintenance of Metrocall's network
systems and infrastructure.
- Selling and marketing expenses: include salaries, commissions and
administrative costs of our sales force and related marketing and
advertising expenses.
- General and administrative expenses: include costs related to executive
management, accounting, office telephone, management information systems,
facilities and employee benefits.
Year Ended December 31, 1999 Compared With December 31, 1998
The following table sets forth the amount of revenues and the percentage 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 1999 and 1998.
% OF % OF
REVENUES 1998 REVENUES 1999 REVENUES INCREASE
-------- ---------- -------- ---------- -------- --------
Service, rent and maintenance............. $ 416,352 96.2 $ 548,700 96.0 $132,348
Product sales............................. 48,372 11.1 61,487 10.8 13,115
---------- -------- ---------- -------- --------
Total revenues....................... 464,724 107.3 610,187 106.8 145,463
Net book value of products sold........... (31,791) (7.3) (39,071) (6.8) (7,280)
---------- -------- ---------- -------- --------
Net revenues......................... $ 432,933 100.0 $ 571,116 100.0 138,183
========== ======== ========== ======== ========
ARPU...................................... $ 7.57 $ 7.86 $ 0.29
Number of Subscribers..................... 5,659,550 5,927,939 268,389
26
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Service, rent and maintenance revenues. Service, rent and maintenance
revenues increased approximately $132.3 million, or 31.8%, from $416.4 million
in 1998 to $548.7 million in 1999. The increase in revenues was due to the
268,389 increase in the number of subscribers receiving Metrocall's paging and
other wireless messaging services which was generated through internal growth
during 1999 and the 1.2 million subscribers acquired in the AMD acquisition in
October 1998. Metrocall's average service, rent and maintenance revenue per unit
(ARPU) for paging and messaging services increased $0.29 from $7.57 per unit in
1998 to $7.86 per unit. This increase was primarily the result of the high
premium, value-added service characteristics of the subscribers acquired in the
AMD acquisition, for which Metrocall provided services for an entire year in
1999. Service, rent and maintenance revenues also increased due to the continued
migration of subscribers to alphanumeric paging devices and selected rate
increases partially offset by a reduction in subscribers in direct distribution
channels and growth in the strategic alliances and reseller indirect
distribution channels, which are characterized by lower ARPU and lower operating
costs. Although Metrocall's revenue increased during 1999, the change in its
subscriber mix during the year benefited the indirect distribution channels,
which are characterized by lower ARPUs. Metrocall expects that revenues and ARPU
may be affected by a full year's impact of the factors described above as well
as continued competitive pressures within its industry. In 2000, Metrocall will
introduce two-way messaging services primarily within its direct distribution
channels. Metrocall expects that this product service may generate higher ARPU
than its current services. Metrocall does not expect a significant revenue
impact from the new two-way services in the first half of 2000 based on current
product availability estimates.
Product sales revenues. Product sales revenues increased approximately
$13.1 million from $48.4 million to $61.5 million in 1999 and decreased as a
percentage of net revenues from 11.1% in 1998 to 10.8% in 1999. The increase in
product sales was the result of the operations of AMD being included in
Metrocall's operations for a full fiscal year. Net book value of products sold
increased approximately $7.3 million from $31.8 million in 1998 to $39.1 million
in 1999 and decreased as a percentage of net revenues from 7.3% in 1998 to 6.8%
in 1999. On November 1, 1999 Metrocall completed the sale of its electronic
tracking business. Product sales revenues generated from this business were only
recognized through October 1999. Product sales attributable to the electronic
tracking business were approximately $6.0 million through October 31, 1999,
which represented a decrease of approximately $200,000 in 1999 from the twelve
months ended December 31, 1998.
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 1998 and 1999.
% OF % OF
OPERATING EXPENSES 1998 REVENUES 1999 REVENUES INCREASE
------------------ -------- -------- -------- -------- --------
Service, rent and maintenance.............. $115,432 26.7 $146,961 25.7 $ 31,529
Selling and marketing...................... 73,546 17.0 97,051 17.0 23,505
General and administrative................. 121,644 28.1 170,591 29.9 48,947
Depreciation............................... 75,111 17.4 96,985 16.9 21,874
Amortization............................... 159,837 36.9 210,359 36.9 50,522
-------- ----- -------- ----- --------
$545,570 126.1 $721,947 126.4 $176,377
======== ===== ======== ===== ========
OPERATING EXPENSES PER UNIT IN SERVICE 1998 1999 INCREASE OR (DECREASE)
-------------------------------------- ----- ----- ----------------------
Monthly service, rent and maintenance....................... $2.12 $2.11 $(0.01)
Monthly selling and marketing............................... 1.35 1.39 0.04
Monthly general and administrative.......................... 2.24 2.45 0.21
----- ----- ------
Average monthly operating expense........................... $5.71 $5.95 $ 0.24
===== ===== ======
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Overall, in 1999, Metrocall experienced an increase in its historical
average monthly operating expense per unit in service (operating expenses per
unit before depreciation and amortization) of $0.24 per unit. The increase in
the unit cost was primarily attributable to additional operating expenses
incurred by the operations of AMD, which was acquired on October 2, 1998. At the
time of the acquisition, AMD average monthly operating costs per unit had ranged
between $9.50 and $10.00 per unit over a base of approximately 1.2 million
subscribers. This average cost per unit was significantly above the $5.57
average cost per unit incurred by Metrocall on its 4.2 million unit subscriber
base for the nine-month period through September 30, 1998. Metrocall was able to
minimize the cost impact of AMD's operations on Metrocall's operating results
through its integration efforts. As Metrocall integrated AMD operations into its
own structure, Metrocall was able to achieve over $8.0 million of synergies in
its integration of AMD and reduce the amount of expenses incurred through AMD's
operations by converting a portion of AMD's customers onto Metrocall's network,
which reduced third-party paging service costs and increased network utilization
and from the elimination of duplicative AMD functions such as executive
staffing, finance and other positions. Metrocall has substantially completed its
integration efforts however continues to migrate existing AMD customers onto its
network.
Service, rent and maintenance expenses. Service, rent and maintenance
expenses increased approximately $31.5 million from $115.4 million in 1998 to
$147.0 million in 1999 and decreased as a percentage of revenues from 26.7% in
1998 to 25.7% in 1999. Approximately $31.7 million of this increase was the
result of expenses incurred by the operations of AMD, which was acquired in
October 1998 and therefore not included in Metrocall's operating results until
the fourth quarter of 1998. The expenses incurred were comprised primarily of
third-party dispatching, telecommunications expenses and tower site rents.
Monthly service, rent and maintenance expense per unit of $2.11 in 1999 has
decreased $0.01 per unit from $2.12 in 1998. Service, rent and maintenance
expenses have decreased as a percentage of revenues 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 may be flat in 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 costs associated with
operating leases for two-way messaging equipment.
Selling and marketing expenses. Selling and marketing expenses increased
approximately $23.5 million from $73.5 million in 1998 to $97.1 million in 1999
and remained flat as a percentage of net revenues at 17%. Approximately $17.6
million of the increase in selling and marketing expenses was attributable to
increased personnel costs related to the acquired AMD sales force. Exclusive of
the AMD acquisition, selling and marketing expenses have increased as a result
of an increase in the sales force in existing markets. Monthly selling and
marketing costs per unit increased was a result of the events described above.
Selling and marketing expenses may increase in future periods as a percentage of
net revenues as Metrocall continues to increase and intensify its competitive
presence in existing markets and launches its two way messaging services.
General and administrative expenses. General and administrative expenses
increased approximately $48.9 million from $121.6 million in 1998 to $170.6
million in 1999 and increased as a percentage of net revenue from 28.1% in 1998
to 29.9% in 1999. Approximately $24.3 million of the increase in general and
administrative expenses was attributable to the AMD acquisition primarily
representing expenses incurred for support staff, personnel costs and facilities
rents. Monthly general and administrative expenses per unit increased by $0.21
from $2.24 in 1998 to $2.45 in 1999 as a result of these events. Exclusive of
the AMD acquisition, general and administrative expenses increased $24.6
million, which was primarily the result of an increase in rent and facility
costs of approximately $3.0 million, technical consulting costs primarily
associated with year 2000 readiness efforts of $6.1 million, personnel costs of
$5.1 million and other expenses incurred of $10.4.
Depreciation expense. Depreciation expense increased approximately $21.9
million from $75.1 million in 1998 to $97.0 million in 1999. This increase was
primarily the result of depreciation expense recognized on subscriber paging
equipment and other plant and equipment acquired in the AMD acquisition and 1999
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depreciation expense on 1998 and 1999 additions to property, plant and equipment
and computer hardware and software.
Amortization expense. Amortization expense related to the amortization of
identified intangible assets of companies acquired by Metrocall increased
approximately $50.5 million from $159.8 million in 1998 to $210.4 million in
1999. This increase was primarily as a result of the amortization of intangibles
recorded in connection with the AMD acquisition. Amortization expense was
comprised of the following elements in 1998 and 1999:
AMORTIZATION DECEMBER 31, DECEMBER 31,
AMORTIZATION EXPENSES PERIOD 1998 1999 INCREASE
--------------------- ------------ ------------ ------------ --------
Subscriber lists................................ 3 years $102,652 $144,349 $41,697
FCC licenses.................................... 10 years 33,189 36,023 2,834
Goodwill........................................ 10 years 21,354 22,869 1,515
Other........................................... Various 2,642 7,118 4,476
-------- -------- -------
$159,837 $210,359 $50,522
======== ======== =======
Metrocall expects amortization expense to be significant in fiscal years
2000 and 2001 as it amortizes amounts allocated to subscriber lists of acquired
companies.
INCREASE OR
OTHER 1998 1999 (DECREASE)
----- --------- --------- -----------
Interest and other income net............................... $ 849 $ 407 $ (442)
Interest expense............................................ (64,448) (85,115) 20,667
Income tax benefit.......................................... 47,094 63,055 15,961
Net loss.................................................... (129,142) (172,484) 43,342
Preferred dividends......................................... (11,767) (16,462) 4,695
Gain on Series B repurchase................................. -- 2,208 2,208
EBITDA...................................................... 122,311 156,512 34,201
========= ========= ========
Interest expense. The increase in interest expense in 1999 of approximately
$20.7 million was the result of higher average debt balances outstanding during
the fiscal year. Total debt increased $34.3 million from $743.3 million in 1998
to $777.6 million in 1999. Average debt balances were $151.8 million greater in
1999 than in 1998 as a result of debt incurred in connection with the AMD
acquisition in October 1998, the repurchase of the Series B preferred in January
1999 and working capital requirements.
Income tax benefit. The increase in the income tax benefit in 1999 of
approximately $16.0 million was the result of a full year's impact of the tax
benefit recorded on the amortization of non-goodwill related intangible assets
generated from the AMD acquisition.
Net loss. Metrocall's net loss increased approximately $43.3 million from
$129.1 million in 1998 to $172.4 million in 1999. The increase in net loss was
primarily the result of the increase in depreciation, amortization and interest
expenses in 1999 offset by the increase in EBITDA.
Preferred dividends. The increase in preferred dividends of $4.7 million
was the result of higher dividends paid to the holders of the Series A Preferred
due to the compounding nature of the preferred stock and a full year's dividend
distribution to the holder of the Series C Preferred. These dividend payments
were offset by the impact of the repurchase of the Series B Preferred, which
occurred in January 1999. Subsequent to December 31, 1999, AT&T Wireless agreed
to exchange the Series C Preferred for common stock. Assuming this transaction
is consummated, no dividends on the Series C Preferred will be incurred after
December 31, 1999. In addition, one holder of Series A Preferred has surrendered
shares of Series A Preferred in payment for the exercise of Warrants, which will
reduce the amount of dividends that will accrue on the Series A Preferred in
future periods.
Gain on Series B Repurchase. In January 1999, Metrocall repurchased and
retired all of the outstanding shares of its Series B Preferred for $16.2
million, representing a $2.2 million discount from its carrying value.
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30
The $2.2 million has been reflected as a gain for purposes of determining
Metrocall's loss attributable to common stockholders.
EBITDA. The increase in EBITDA in 1999 of approximately $34.2 million was
primarily the result of the increase in revenues in 1999 offset to a lesser
extent the increase in operating expenses. Metrocall's EBITDA margin decreased
from 28.3% in 1998 to 27.4% in 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH DECEMBER 31, 1997
The following table sets forth the amounts of revenues and the percentage
of net revenues represented by certain items in Metrocall's Consolidated
Statements of Operations and certain other information for fiscal years 1997 and
1998.
% OF % OF INCREASE
REVENUES 1997 REVENUES 1998 REVENUES OR (DECREASE)
-------- ---------- -------- ---------- -------- -------------
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
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 Metrocall'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,
Metrocall's 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 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
Metrocall's subscriber distribution mix and the related increase in the lower
ARPU indirect reseller distribution channel. The decline in ARPU was partially
offset by the increase in the rental base due to the AMD acquisition, which was
characterized with high revenue rental subscribers.
Product sales revenues. Product sales revenues 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.
% OF % OF
OPERATING EXPENSES 1997 REVENUES 1998 REVENUES INCREASE
------------------ -------- -------- -------- -------- --------
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
======== ===== ======== ===== ========
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SEPARATING EXPENSES PER UNIT IN SERVICE 1997 1998 (DECREASE)
--------------------------------------- ----- ----- ----------
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)
===== ===== ======
Overall in 1998, Metrocall experienced a reduction of $1.03 per unit in
average monthly operating expense per unit. As discussed below, Metrocall's
operating results in 1998 included the operating expenses of Page America and
ProNet for a full fiscal year. In addition, the 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. 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 in 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.
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 recent merger and
acquisitions and the related higher revenues base. 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 recent merger and acquisitions and the related increase in the
revenue base.
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 $20.0 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 $123.0 million and
resulted primarily from amortization expenses on intangibles acquired in
Metrocall's recent merger and acquisitions and the reduction in estimated useful
lives of certain intangibles described below.
Effective January 1, 1998, Metrocall 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 $26.0 million.
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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 amortization period for these assets.
FCC SUBSCRIBER
ACQUISITION ACQUISITION DATE GOODWILL LICENSES BASE
----------- ----------------- -------- -------- ----------
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 -- 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
======== ======== ========
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 an 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 years FCC holding 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.
OTHER 1997 1998 INCREASE
----- -------- --------- --------
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
======== ========= =======
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.
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.
32
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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 subscriber base as a result of internal growth and 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. EBITDA margin improved from 24.1%
in 1997 to 28.3% in 1998.
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 in recent
years. This reduction in costs has been reflected in lower prices charged to our
subscribers. 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, 1999, Metrocall's operations have
required significant funding, primarily to support mergers and acquisitions and
capital expenditures for paging and messaging 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. Metrocall's net cash flows from operating activities increased
approximately $23.0 million or 56.1% from $41.2 million for the twelve months
ended December 31, 1998 to $64.5 million for the twelve months ended December
31, 1999. Approximately $13.5 million of the increase was attributable to the
increase in EBITDA offset by an increase in interest expense for the
twelve-month period ended December 31, 1999. The remaining $9.5 million increase
was primarily the result of improvements in Metrocall's working capital position
at December 31, 1999.
Net cash used in investing activities decreased approximately $103.5
million or 54.0% from $191.7 million for the twelve months ended December 31,
1998 to $88.2 million for the twelve months ended December 31, 1999. The net
decrease was primarily the result of a decrease in cash required for business
acquisitions in 1999, partially offset by increases in capital expenditures.
During 1998, Metrocall acquired AMD for a purchase price of $205.0 million
including cash of $110.0 million. There were no similar acquisition events in
1999. In addition, capital expenditures increased by $14.6 million in the twelve
months ended December 31, 1999, which was attributable to internal subscriber
growth, and capital requirements for AMD operations, which was acquired in
October 1998. Capital expenditures in 1999 included approximately $59.9 million
for subscriber equipment, representing increases of devices on hand and net
increases to the rental subscriber base. The balance of capital expenditures was
primarily for network and infrastructure development and information systems and
computer related equipment. Total capital expenditures for fiscal year 2000 are
expected to approximate $90.0 million. During 1999, Metrocall also sold the
assets of its electronic tracking business for approximately $12.7 million,
which included net cash proceeds of $8.5 million.
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Net cash provided by financing activities decreased approximately $116.3
million from $134.1 million for the twelve months ended December 31, 1998 to
$18.0 million for the twelve months ended December 31, 1999. During fiscal year
1999, Metrocall borrowed an additional $35.0 million under its credit facility
primarily to fund the $16.2 million repurchase of the Series B Preferred and
other working capital and capital expenditure requirements. Metrocall also used
the cash proceeds received in the sale of its electronic tracking business to
reduce outstanding bank borrowings. During 1998, cash provided by financing
activities included net borrowings of approximately $143.8 million, which was
primarily used to fund the $110.0 million cash acquisition cost of AMD and
general working capital requirements.
Working Capital. Metrocall's working capital (defined as current assets
less current liabilities) deficit improved by $4.9 million from a deficit of
$41.8 million at December 31, 1998 to $36.9 million at December 31, 1999. The
improvement in working capital was the result of an increase in accounts
receivable, primarily the result of an increase in revenues, and decreases in
cash and accounts payable balances primarily related to the timing of payments
to Metrocall's vendors for its operating expenses.
Long-Term Debt. At December 31, 1999 and 1998, long-term debt consisted of:
INCREASE
LONG-TERM DEBT 1998 1999 OR (DECREASE)
-------------- -------- -------- -------------
Borrowings under the credit facility........................ $ 40,000 $ 75,000 $35,000
Senior subordinated notes................................... 698,544 698,608 64
Capital leases and other debt............................... 4,790 4,019 (771)
-------- -------- -------
Total long-term debt................................... $743,334 $777,627 $34,293
======== ======== =======
Borrowings and repayments under the credit facility. During 1999, net
borrowings under the credit facility increased by $35.0 million, which
represented gross borrowings of $81.0 million, net of repayments of $46.0
million. Approximately $16.0 million of the net borrowings were used to
repurchase the Series B Preferred and the remainder was used for general
corporate purposes. Of the $46.0 million repaid, approximately $9.0 million was
from the proceeds received from the sale of the electronic tracking business and
$37.0 million was from cash generated from operating activities.
Subject to certain conditions set forth in its credit facility agreement,
as amended, 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 credit facility, Metrocall is required to comply with financial
and operating covenants. It 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, 1999, Metrocall was in compliance with
all of these covenants. At December 31, 1999 based on the terms of its financial
and operating covenants, Metrocall had $125.0 million available under its credit
facility, which represents the entire undrawn amount.
Under the credit facility, Metrocall will be required to apply 50% of the
net proceeds of the equity investments by PSINet, Aether and HMTF, or
approximately $25.0 million, to a permanent reduction of the Facility A and
Facility B commitments. Metrocall has requested its bank group to waive this
requirement and to make certain other amendments to the credit facility,
including extension of the maturity and amortization periods of the loans,
modification of leverage covenants, and approval of the establishment of
Inciscent. Metrocall expects to complete these amendments, subject to bank
approval, by March 31, 2000.
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As described above, in February 2000, Metrocall entered into agreements to
issue new equity for approximately $51.0 million. In addition, Metrocall has
issued an option to HMTF to purchase additional shares that, if exercised, would
yield an additional $25.0 million. Metrocall expects to use the proceeds of
these equity issuances to reduce outstanding debt, either by repayments of
outstanding loans under the credit facility or repurchase of subordinated debt.
Metrocall may also seek to reduce leverage and interest expense by offering
to exchange common stock for its outstanding subordinated debt.
Access to Future Capital. Metrocall's ability to access borrowings under
its credit facility and to meet its debt service and other obligations
(including compliance with financial covenants) will be dependent upon its
future performance and 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 those available
under its credit facility, will be sufficient to finance estimated capital
expenditure requirements and to fund existing operations for the foreseeable
future.
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, METROCALL MAY NOT
BE ABLE TO MEET ITS CASH NEEDS FROM OPERATIONS OR PAY DEBT OBLIGATIONS.
Metrocall historically has had operating losses and expects these losses to
continue. These losses make it more difficult for it to meet its cash and other
working capital needs, to support its business operations and to pay its debt
obligations as they become due because Metrocall must rely on its ability to
obtain financing or generate additional revenues. 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 $60.3 million, $129.1 million
and $172.5 million for fiscal years 1997, 1998 and 1999. At December 31, 1999,
Metrocall's accumulated deficit was approximately $493.6 million and its working
capital deficit was $36.9 million. Metrocall expects to continue to incur losses
from operations in the future because it expenses significant amounts for
depreciation expenses from capital expenditures and amortization expenses
related to intangible assets recorded on acquisitions. In addition, Metrocall
has substantial levels of borrowing, which cause significant interest expense,
expected to be outstanding in the foreseeable future. Metrocall cannot assure
you that it can reverse operating losses and achieve profitability in the future
and that it will be able to meet all of its 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 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.
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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.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
(DOLLARS IN THOUSANDS
Amount of fixed charges................. $ 14,171 $ 23,206 $ 43,213 $ 76,454 $ 99,789
Deficiency of earnings to fixed
charges............................... $(18,002) $(47,605) $(65,184) $(176,236) $(235,539)
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 borrowing from time to time.
SUBSTANTIAL AMOUNT OF INDEBTEDNESS - METROCALL'S SUBSTANTIAL AMOUNT OF
INDEBTEDNESS COULD ADVERSELY AFFECT ITS BUSINESS OPERATIONS, LIMIT ITS ABILITY
TO USE DEBT TO FUND FUTURE CAPITAL NEEDS AND PREVENT METROCALL FROM MEETING ITS
OBLIGATIONS UNDER ITS DEBT INSTRUMENTS.
Metrocall has a substantial amount of indebtedness. The following chart
forth sets forth important credit information:
AT DECEMBER 31, 1999
----------------------
(DOLLARS IN THOUSANDS)
Total indebtedness, less cash balances of $2,787......... $774,840
Fourth quarter ended annualized operating cash flow...... $165,940
Leverage ratio........................................... 4.67 to 1.00
Stockholders' equity (deficit)........................... $(152,134)
Debt to equity ratio..................................... (5.11) to 1.00
Metrocall's substantial amount of indebtedness, along with the net
operating losses and working capital deficits it has sustained in recent
periods, could adversely affect its business. For example, it may:
- make it more difficult for Metrocall to satisfy its debt obligations;
- require Metrocall to dedicate a substantial portion of its operating cash
flows from operations to pay interest expense;
- limit its ability to react to changing market conditions, changes in its
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 its ability to borrow additional funds; and
- cause Metrocall to be vulnerable to increases in interest rates because a
substantial amount of its indebtedness under the credit facility bears
interest at floating rates, only a portion of which is hedged.
Metrocall's credit facility agreement and other debt allows it to incur
more debt. As of December 31, 1999, Metrocall was permitted to borrow an
additional $125.0 million. Further borrowings could increase these risks.
METROCALL'S OPERATING AND FINANCIAL RESTRICTIONS - METROCALL'S DEBT AGREEMENTS
IMPOSE SIGNIFICANT 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 Metrocall fails to comply with these restrictions, it would be
in default under the debt agreements and holders of the debt could demand
immediate payment. If the debt holders were to demand immediate payment,
Metrocall could not assure you that it would be able to pay or refinance the
debt on acceptable terms to Metrocall. In addition, if
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Metrocall fails to comply with a restriction in its credit facility, the lenders
under that credit facility could proceed against the assets of Metrocall, which
Metrocall 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, Metrocall's ability to:
- incur additional debt and particular types of debt;
- pay cash dividends;
- repurchase or redeem its 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; and
- merge or consolidate with other companies.
In addition, Metrocall must comply with financial ratios in its credit
facility and the restrictions imposed by its preferred stock. Metrocall cannot
assure you that it 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, 1999, Metrocall's total assets were approximately $1,025.5 million,
of which net intangible assets were approximately $682.0 million. If Metrocall
was required to satisfy its obligations under its credit facility because, for
example, it defaulted under its debt agreements, became insolvent or was
liquidated, and their lenders under the credit facility proceeded against
Metrocall's assets to satisfy those obligations, the value of its assets might
not be sufficient to satisfy those obligations. The reason the value of
Metrocall's assets might be insufficient is because the value of intangible
assets could be impaired by factors beyond Metrocall's control, such as changes
in technology, regulation, and available financing or competitive pressures.
Metrocall cannot assure you that the value of its assets is or will be
sufficient to repay its debt obligations under the 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 Metrocall's paging and wireless messaging services. 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 Metrocall's largest
competitors in the traditional paging market have narrowband PCS licenses, which
permit them to provide advanced messaging services on a nationwide basis.
Metrocall expects other companies to offer advanced messaging services and, as a
result, Metrocall's growth in terms of subscriber base might be impaired.
Metrocall intends to offer two-way and continue providing other advanced
messaging services through its WebLink alliance in early 2000, but the success
of offering these services depends on several factors. Those factors include
market acceptance, cost of equipment and other
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capital requirements, technological changes in wireless messaging services,
competitors' marketing and sales strategies, regulatory developments and general
economic conditions. These factors are beyond Metrocall's control. Metrocall
cannot assure you that its offering of these services will be beneficial to its
business operations or financial condition.
Further developments 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
service. As result, Metrocall might experience losses in subscribers and
recurring revenues and cost increases to stay competitive.
Other changes in technology could lower the cost of competing services and
products to a level at which Metrocall's services and products would become too
costly to offer or produce or would require it to reduce its prices. Metrocall
cannot assure you that it will be able to develop or introduce new services and
products on a timely basis and at competitive prices, if at all, nor can
Metrocall assure you that its 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 transmits a majority of its paging and messaging traffic through
its "Global Messaging Gateway," which is a satellite uplink facility. Any
satellite interruption in transmissions might result in loss of subscribers,
loss of revenues and increased costs to find alternative ways to respond to the
interruptions. Disruptions may also impair its ability to gain more subscribers
and increase its revenues. 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 satellites and other facilities
also could disrupt Metrocall's paging and messaging services and impair its
results of operations.
SUBSCRIBER TURNOVER - WHEN SUBSCRIBERS CANCEL OR SWITCH THEIR SERVICE, THE COST
TO ATTRACT NEW SUBSCRIBERS IS HIGHER THAN THE COST TO PROVIDE SERVICES TO
EXISTING SUBSCRIBERS AND, AS A RESULT, ADVERSELY AFFECTS METROCALL'S RESULTS OF
OPERATIONS.
Subscriber turnover adversely affects Metrocall's results of operations
because it increases fixed costs. When subscribers cancel their paging or other
messaging services or switch their service to another carrier, Metrocall
attempts 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, 1997, 1998 and 1999, Metrocall's
subscriber turnover rates were 2.5%, 1.7% and 1.8%, 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 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 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, Metrocall cannot assure you that it will be
able to comply with all changes implemented by the agencies regulating its
business, such as changes in licensing or build-out requirements.
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CHALLENGES OF ACQUISITIONS - METROCALL MIGHT NOT BE ABLE IDENTIFY OR FINANCE
BUSINESSES TO ACQUIRE. METROCALL MAY NOT BE ABLE TO INTEGRATE SUCCESSFULLY
BUSINESSES IT ACQUIRES OR MANAGE ITS EXISTING BUSINESS OPERATIONS AS IT ACQUIRES
AND INTEGRATES OTHER BUSINESSES.
Metrocall might not be able to execute its growth strategy in the future if
it is unable to identify attractive businesses to acquire, to negotiate
acceptable terms, 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 intangible asset 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.
INVESTMENT IN INCISCENT--INCISCENT IS SUBJECT TO ALL THE RISKS ASSOCIATED WITH A
START-UP HIGH TECHNOLOGY COMPANY. AS A RESULT, METROCALL'S INVESTMENT IN
INCISCENT IS SUBJECT TO THOSE RISKS AND METROCALL CANNOT ASSURE YOU THAT IT WILL
BENEFIT FINANCIALLY OR STRATEGICALLY FROM ITS INVESTMENT.
Inciscent is subject to all the risks associated with a start-up high
technology company in a market that is likely to have numerous competitors
offering wireless application services. Metrocall cannot guarantee that it will
realize the financial benefits or strategic objectives it expects from its
investment in Inciscent. The success of Metrocall's investment in Inciscent will
depend on Inciscent's ability to develop, market and sell its wireless
application services. Inciscent's ability to do those things, among others, is
subject to the following:
- Technology. The wireless application services that Inciscent intends to
offer require technology that is still being developed and has not been
fully proven. Even if the technology becomes sufficiently developed,
Inciscent may not have the financial, technical and other resources to
obtain and apply the technology it needs for its services. Metrocall
cannot guarantee that the technology required for the services of
Inciscent will be sufficiently developed or will be available to
Inciscent. In addition, the development of the technology may lag behind
the demands of customers. Metrocall cannot assure you that by the time
the technology is sufficiently developed, consumers will still demand the
wireless application services that Inciscent intends to offer.
- Market Acceptance. The market for wireless application services is
relatively new, and its commercial viability has not been demonstrated.
Metrocall cannot assure you that the wireless services offered by
Inciscent or by Inciscent's competitors will find market acceptance.
Inciscent's ability to generate recurring revenue will depend on its
ability to sign agreements with third parties. Inciscent may not be able
to find or attract a sufficient number of customers to generate any
revenue for the indefinite future.
- Competitors. The market for business-to-business wired-to-wireless
application services is attracting a number of companies, some of which
may have greater resources than Inciscent. As there are more entrants
into the market, Inciscent may lose existing or potential customers to
those entrants or may not be able to offer its services at a competitive
price.
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ANTI-TAKEOVER DEFENSES -- METROCALL HAS ANTI-TAKEOVER DEFENSES THAT COULD DELAY
OR PREVENT AN ACQUISITION AND COULD ADVERSELY AFFECT THE PRICE OF ITS COMMON
STOCK.
Metrocall's certificate of incorporation, bylaws and debt instruments and
Delaware law could delay, defer or prevent an acquisition or change of control
of Metrocall or otherwise adversely affect the price of its common stock. These
provisions include:
- Metrocall has a classified board of directors, which means only a portion
of its board members' terms expire in any given year, thus preventing a
third party from replacing the entire board of directors at one time.
- Metrocall can issue shares of preferred stock without stockholder
approval, which means that the board could issue shares with special
voting rights or other provisions that could deter a takeover.
- Metrocall has a shareholder rights plan, which gives holders of common
stock the ability to purchase additional shares of common stock at a
bargain price if, among other things, a person acquires 20% of the
outstanding common stock.
- Acquisition of more than 50% of Metrocall's voting stock, or replacement
of a majority of the board in certain circumstances, could trigger a
default under Metrocall's credit facility. Also, the same events could
require Metrocall to repurchase its subordinated notes at 101% of
principals plus accrued interest.
- Section 203 of the Delaware law governing corporations will, with some
exceptions, prohibit Metrocall from engaging in any business combination
with an "interested stockholder" for a three-year period after that
stockholder meets the definition of an "interested stockholder."
In addition, each of AT&T Wireless and the three common stock investors has
agreed to restrictions on its ability to take actions to influence control of
Metrocall for a period of time. The presence of these restrictions and the
limitations on the actions of these investors could deter a potential
acquisition, given the total amount of issued and outstanding shares of common
stock in Metrocall that they will own in the aggregate.
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 developments 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. 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.
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ITEM 7A. 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 December 31, 1999, total
outstanding debt consisted of five issues of fixed rate, senior subordinated
notes and the credit facility, which had a variable interest rate:
FIXED RATE DEBT:
PRINCIPAL EFFECTIVE INTEREST PAYMENTS
BALANCE FAIR VALUE INTEREST RATE MATURITY DUE
--------- ---------------- ------------- -------- -----------------
$100.0 million $ 68.0 million 17.46% 2005 Semi-Annually
$ 0.2 million $ 0.2 million 11.88% 2005 Semi-Annually
$150.0 million $ 93.0 million 16.73% 2007 Semi-Annually
$200.0 million $118.0 million 16.53% 2007 Semi-Annually
$250.0 million $150.0 million 18.38% 2008 Semi-Annually
No principal repayments are due under these notes until maturity. If at
maturity Metrocall refinanced these notes at interest rates that are 1/4
percentage point higher than their stated rates, its per annum interest costs
would increase by $1.8 million. Based on the outstanding balances at December
31, 1999 a hypothetical immediate 1/2 percentage point change in interest rates
would change the fair value of its fixed rate debt obligations by approximately
$13.5 million.
VARIABLE RATE DEBT:
PRINCIPAL WEIGHTED AVERAGE INTEREST PAYMENTS
BALANCE FAIR VALUE INTEREST RATE MATURITY DUE
--------- ---------------- ---------------- -------- -----------------
$75.0 million $75.0 million 8.9% 2004 Quarterly
Metrocall's credit facility bears interest at floating rates and matures in
2004. As of December 31, 1999, there was $75.0 million outstanding under the
credit facility and $125.0 million available for future borrowings. Based on
weighted average borrowings outstanding under the credit facility during fiscal
year 1999, a 1/4 percentage point change in our weighted average interest rate
would have caused interest expense to increase or decrease by approximately $0.2
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 rates, excluding margin fees, on its floating rate debt at 8 1/2%
on up to $50.0 million of outstanding borrowings. This agreement expires on
April 3, 2000.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DESCRIPTION PAGE
----------- ----
FINANCIAL STATEMENTS:
Report of Arthur Andersen LLP, Independent Public
Accountants........................................... F-2
Consolidated Balance Sheets, as of December 31, 1998
and 1999.............................................. F-3
Consolidated Statements of Operations for the three
years ended December 31, 1997, 1998 and 1999.......... F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1997, 1998 and 1999.... F-5
Consolidated Statements of Cash Flows for the three
years ended December 31, 1997, 1998 and 1999.......... F-6
Notes to Consolidated Financial Statements............. F-7
FINANCIAL STATEMENT SCHEDULE:
Report of Arthur Andersen LLP, Independent Public
Accountants........................................... F-26
Schedule II Valuation and Qualifying Accounts............... F-27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning our directors and executive officers is incorporated
by reference from our Proxy Statement for the Annual Meeting of Stockholders to
be held on May 3, 2000 (the "2000 Proxy Statement") under the caption "Election
of Directors -- Information as to Nominees and Continuing Directors."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
from the 2000 Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the stock ownership of each person known to Metrocall
to be the beneficial owner of more than 5% of the common stock of each director
and executive officer of Metrocall and all directors and executive officers as a
group is incorporated by reference from the 2000 Proxy Statement under the
caption "Beneficial Ownership of Common Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference from the 2000 Proxy Statement under the caption
"Certain Relationships and Related Transactions."
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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
DESCRIPTION PAGE
----------- ----
FINANCIAL STATEMENTS:
Report of Arthur Andersen LLP, Independent Public
Accountants........................................... F-2
Consolidated Balance Sheets, as of December 31, 1998
and 1999.............................................. F-3
Consolidated Statements of Operations for the three
years ended December 31, 1997, 1998 and 1999.......... F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1997, 1998 and 1999.... F-5
Consolidated Statements of Cash Flows for the three
years ended December 31, 1997, 1998 and 1999.......... F-6
Notes to Consolidated Financial Statements............. F-7
FINANCIAL STATEMENT SCHEDULE:
Report of Arthur Andersen LLP, Independent Public
Accountants........................................... F-26
Schedule II Valuation and Qualifying Accounts.......... F-27
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
None
(C) EXHIBITS
The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1 Restated Certificate of Incorporation of Metrocall, Inc.
(Metrocall), as amended.+
3.2 Eighth Amended and Restated Bylaws of Metrocall.(a)
4.1 Rights Agreement, dated as of February 25, 2000, between
Metrocall and First Chicago Trust Company of New York, as
Rights Agent.(b)
4.2 Indenture for Metrocall 11% Senior Subordinated Notes due
2008, dated as of December 22, 1998.(c)
4.3 Indenture for 9 3/4% Senior Subordinated Notes due 2007
dated October 21, 1997.(d)
4.4 Indenture for Metrocall 10 3/8% Senior Subordinated Notes
due 2007 dated September 27, 1995.(e)
4.5 Indenture for ProNet Inc. (ProNet) 11 7/8% Senior
Subordinated Notes due 2005 ("ProNet Notes") dated June 15,
1995.(f)
4.6 Supplemental Indenture dated May 28, 1996 for ProNet
Notes.(a)
4.7 Second Supplemental Indenture dated December 30, 1997 for
ProNet Notes.(g)
4.8 Indenture for A+ Network, Inc. 11 7/8% Senior Subordinated
Notes due 2005 ("A+ Notes") dated October 24, 1995.(h)
4.9 First Supplemental Indenture dated November 14, 1996 for A+
Notes.(i)
4.10 Second Supplemental Indenture dated November 15, 1996 for A+
Notes.(i)
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EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
4.11 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
A Convertible Preferred Stock of Metrocall.(j)
4.12 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
C Convertible Preferred Stock of Metrocall.(k)
4.13 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
E Junior Participating Preferred Stock as filed with the
Secretary of State of the State of Delaware on February 25,
2000.(b)
4.14 Warrant Agreement between Metrocall and the First National
Bank of Boston as Warrant Agent dated as of November 15,
1996.(l)
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.(c)
10.2 Securities Exchange Agreement by and between AT&T Wireless
Services, Inc. and Metrocall dated February 2, 2000.+
10.3 Common Stock Purchase Agreement by and between HMTF Bridge
MC I, LLC and Metrocall dated February 2, 2000.+
10.4 Common Stock Purchase Agreement by and between Aether
Systems, Inc. and Metrocall dated February 2, 2000.+
10.5 Common Stock Purchase Agreement by and between PSINet Inc.
and Metrocall dated February 2, 2000.+
10.6 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.(m)
10.7 Registration Rights Agreement between Metrocall and McCaw
Communications Companies, Inc. dated October 1, 1998.(k)
10.8 Unit Purchase Agreement among Metrocall and the entities
listed thereto dated November 15, 1996.(l)
10.9 Registration Rights Agreement among Metrocall and the
entities listed thereto dated November 15, 1996.(l)
10.10 Employment Agreement between Metrocall and William L.
Collins III.(n)
10.11 Amendment to Employment Agreement between Metrocall and
Williams L. Collins III.(o)
10.12 Second Amendment to Employment Agreement between Metrocall
and Williams L. Collins III.(p)
10.13 Third Amendment to Employment Agreement between Metrocall
and Williams L. Collins III.(q)
10.14 Employment Agreement between Metrocall and Steven D.
Jacoby.(n)
10.15 Amendment to Employment Agreement between Metrocall and
Steven D. Jacoby.(o)
10.16 Second Amendment to Employment Agreement between Metrocall
and Steven D. Jacoby.(p)
10.17 Third Amendment to Employment Agreement between Metrocall
and Steven D. Jacoby.(q)
10.18 Employment Agreement between Metrocall and Vincent D.
Kelly.(n)
10.19 Amendment to Employment Agreement between Metrocall and
Vincent D. Kelly.(o)
10.20 Second Amendment to Employment Agreement between Metrocall
and Vincent D. Kelly.(p)
10.21 Third Amendment to Employment Agreement between Metrocall
and Vincent D. Kelly.(q)
10.22 Change of Control Agreement between Metrocall and William L.
Collins III.(n)
10.23 Change of Control Agreement between Metrocall and Steven D.
Jacoby.(n)
10.24 Change of Control Agreement between Metrocall and Vincent D.
Kelly.(n)
10.25 Noncompetition Agreement between Metrocall and Jackie R.
Kimzey dated August 8, 1997.(r)
10.26 Noncompetition Agreement between Metrocall and David J.
Vucina dated August 8, 1997.(r)
10.27 Metrocall 1996 Stock Option Plan, as amended.(s)
10.28 Metrocall Amended Employee Stock Purchase Plan.(t)
10.29 Directors' Stock Option Plan, as amended.(u)
45
46
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.30 Deed of Lease between Douglas and Joyce Jemal, as landlord,
and Metrocall, as tenant, dated April 14, 1994.(v)
10.31 Lease Agreement dated December 20, 1983 between Beacon
Communications Associates, Ltd. and a predecessor of
Metrocall.(w)
10.32 Consulting, No Conflict and Nondisclosure Agreement dated
May 16, 1996 between Metrocall and Elliott H. Singer.+
10.33 Amendment to Consulting, No Conflict and Nondisclosure
Agreement dated October 1, 1999 between Metrocall and
Elliott H. Singer.+
10.34 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.(a)
11.1 Statement re computation of per share earnings.+
21.1 Subsidiaries of Metrocall, Inc.+
23.2 Consent of Arthur Andersen LLP, as independent public
accountants for Metrocall.+
27.1 Financial Data Schedule.+
- ---------------
+ Filed herewith.
(a) 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.
(b) Incorporated by reference to Metrocall's Registration Statement on Form 8-A
filed with the Commission on February 25, 2000.
(c) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on January 4, 1999.
(d) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 23, 1997.
(e) 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.
(f) Incorporated by reference to ProNet's Current Report on Form 8-K filed with
the Commission on July 5, 1995.
(g) 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.
(h) 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.
(i) 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.
(j) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(k) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 16, 1998.
(l) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(m) Incorporated by reference to Metrocall's Proxy Statement filed with the
Commission on August 31, 1998.
(n) 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.
(o) 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.
46
47
(p) 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.
(q) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 filed with the Commission on August 13,
1999.
(r) 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.
(s) Incorporated by reference to Metrocall's Proxy Statement filed with the
Commission on April 5, 1999.
(t) 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.
(u) Incorporated by reference to Metrocall's Annual Report on Form 10-K/A, as
amended, for the year ended December 31, 1993 filed with the Commission on
July 21, 1994.
(v) 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.
(w) 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.
47
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 10th day of
March, 2000.
METROCALL, INC.
By: /s/ RICHARD M. JOHNSTON
------------------------------------
Richard M. Johnston
Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RICHARD M. JOHNSTON Chairman of the Board March 10, 2000
- -------------------------------------
Richard M. Johnston
/s/ WILLIAM L. COLLINS, III Vice Chairman of the Board, March 7, 2000
- ------------------------------------- President, Chief Executive Officer
William L. Collins, III and Director
Chief Financial Officer, Executive March 10, 2000
/s/ VINCENT D. KELLY Vice President, and Treasurer
- ------------------------------------- (Principal Financial and Accounting
Vincent D. Kelly Officer)
/s/ HARRY L. BROCK, JR. Director March 3, 2000
- -------------------------------------
Harry L. Brock, Jr.
/s/ FRANCIS A. MARTIN, III Director March 8, 2000
- -------------------------------------
Francis A. Martin, III
/s/ RONALD V. APRAHAMIAN Director March 4, 2000
- -------------------------------------
Ronald V. Aprahamian
/s/ MICHAEL GREENE Director March 10, 2000
- -------------------------------------
Michael Greene
/s/ ROYCE R. YUDKOFF Director March 10, 2000
- -------------------------------------
Royce R. Yudkoff
/s/ JACKIE R. KIMZEY Director March 7, 2000
- -------------------------------------
Jackie R. Kimzey
/s/ EDWARD E. JUNGERMAN Director March 4, 2000
- -------------------------------------
Edward E. Jungerman
/s/ MAX D. HOPPER Director March 10, 2000
- -------------------------------------
Max D. Hopper
48
49
METROCALL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
NUMBER
---------
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... F-2
Consolidated Balance Sheets, as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1997,
1998 and 1999............................................. F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1997, 1998 and 1999........ F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997,
1998 and 1999............................................. F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metrocall, Inc.:
We have audited the accompanying consolidated balance sheets of Metrocall,
Inc. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
ARTHUR ANDERSEN LLP
Vienna, Virginia
February 4, 2000
F-2
51
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
DECEMBER 31,
------------------------
1998 1999
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 8,436 $ 2,787
Accounts receivable, less allowance for doubtful accounts
of $6,196 and $7,103 as of December 31, 1998 and 1999,
respectively............................................ 44,694 52,015
Prepaid expenses and other current assets................. 8,843 3,333
---------- ----------
Total current assets............................... 61,973 58,135
---------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and leasehold improvements................ 15,079 15,685
Furniture, office equipment and vehicles.................. 64,438 76,962
Paging and plant equipment................................ 380,313 377,047
Less -- Accumulated depreciation and amortization......... (168,067) (192,329)
---------- ----------
291,763 277,365
---------- ----------
INTANGIBLE ASSETS, net of accumulated amortization of
approximately $219,960 and $433,088 at December 31, 1998
and 1999, respectively.................................... 894,707 682,026
OTHER ASSETS................................................ 2,595 8,021
---------- ----------
TOTAL ASSETS....................................... $1,251,038 $1,025,547
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 771 $ 643
Accounts payable.......................................... 37,533 28,144
Accrued expenses and other current liabilities............ 37,728 42,022
Deferred revenues and subscriber deposits................. 27,769 24,235
---------- ----------
Total current liabilities.......................... 103,801 95,044
---------- ----------
CAPITAL LEASE OBLIGATIONS, less current maturities (Note
5)........................................................ 3,575 3,001
CREDIT FACILITY AND OTHER LONG-TERM DEBT, less current
maturities (Note 5)....................................... 40,444 75,375
SENIOR SUBORDINATED NOTES (Note 5).......................... 698,544 698,608
DEFERRED INCOME TAX LIABILITY............................... 209,642 146,387
MINORITY INTEREST IN PARTNERSHIP............................ 510 510
---------- ----------
Total liabilities.................................. 1,056,516 1,018,925
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)
SERIES A CONVERTIBLE PREFERRED STOCK, 14% cumulative; par
value $.01 per share; 810,000 shares authorized; 209,203
shares and 239,517 shares issued and outstanding as of
December 31, 1998 and 1999, respectively and a liquidation
preference of $53,216 and $60,927 at December 31, 1998 and
1999, respectively (Note 6)............................... 45,441 53,939
SERIES B JUNIOR CONVERTIBLE PREFERRED STOCK, 14% cumulative;
par value $.01 per share; 9,000 shares authorized; 1,808
shares and 0 shares issued and outstanding as of December
31, 1998 and 1999, respectively and a liquidation
preference of $18,391 and $0 at December 31, 1998 and
1999, respectively (Note 6)............................... 18,391 --
SERIES C CONVERTIBLE PREFERRED STOCK, 8% cumulative; par
value $.01 per share; 25,000 shares authorized; 9,595
shares and 10,378 shares issued and outstanding as of
December 31, 1998 and 1999, respectively and a liquidation
preference of $96,910 and $104,817 at December 31, 1998
and 1999 respectively (Note 6)............................ 96,910 104,817
STOCKHOLDERS' EQUITY (Note 6)
Common stock, par value $.01 per share; 100,000,000 shares
authorized; 41,583,403 shares and 41,901,908 shares
issued and outstanding at December 31, 1998 and 1999,
respectively............................................ 416 419
Additional paid-in capital................................ 340,249 341,070
Accumulated deficit....................................... (306,885) (493,623)
---------- ----------
33,780 (152,134)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $1,251,038 $1,025,547
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
52
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
REVENUES:
Service, rent and maintenance............................. $ 249,900 $ 416,352 $ 548,700
Product sales............................................. 39,464 48,372 61,487
----------- ----------- -----------
Total revenues.................................... 289,364 464,724 610,187
Net book value of products sold............................. (29,948) (31,791) (39,071)
----------- ----------- -----------
259,416 432,933 571,116
OPERATING EXPENSES:
Service, rent and maintenance............................. 69,254 115,432 146,961
Selling and marketing..................................... 53,802 73,546 97,051
General and administrative................................ 73,753 121,644 170,591
Depreciation and amortization............................. 91,699 234,948 307,344
----------- ----------- -----------
288,508 545,570 721,947
----------- ----------- -----------
Loss from operations.............................. (29,092) (112,637) (150,831)
INTEREST AND OTHER INCOME, NET.............................. 156 849 407
INTEREST EXPENSE............................................ (36,248) (64,448) (85,115)
----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT.............................. (65,184) (176,236) (235,539)
INCOME TAX BENEFIT.......................................... 4,861 47,094 63,055
----------- ----------- -----------
Net loss.......................................... (60,323) (129,142) (172,484)
PREFERRED DIVIDENDS (Note 6)................................ (7,750) (11,767) (16,462)
GAIN ON REPURCHASE OF PREFERRED STOCK....................... -- -- 2,208
----------- ----------- -----------
Loss attributable to common stockholders.......... $ (68,073) $ (140,909) $ (186,738)
=========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic and diluted loss per share attributable to common
stockholders........................................... $ (2.51) $ (3.43) $ (4.47)
=========== =========== ===========
Weighted-average common shares outstanding................ 27,086,654 41,029,601 41,773,789
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
53
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK
----------------------- ADDITIONAL
SHARES PAID-IN ACCUMULATED
OUTSTANDING PAR VALUE CAPITAL DEFICIT TOTAL
----------- --------- ---------- ----------- ---------
BALANCE, December 31, 1996...................... 24,521,135 $245 $262,827 $ (97,903) $ 165,169
Issuance of shares in employee stock purchase
plan....................................... 109,747 1 429 -- 430
Adjustment to shares issued in Satellite
Acquisition................................ 74,085 1 (213) -- (212)
Shares issued in acquisition of Radio and
Communications Consultants, Inc. and
Advanced Cellular Telephone, Inc. ......... 494,279 5 2,899 -- 2,904
Issuance of shares in Page America
acquisition................................ 3,911,856 39 18,787 -- 18,826
Exercise of stock options (Note 7)............ 1,896 -- 2 -- 2
Shares issued in ProNet Merger................ 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............... 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
Issuance of shares in employee stock purchase
plan and other (Note 7).................... 318,505 3 821 -- 824
Preferred dividends (Note 6).................. -- -- -- (16,462) (16,462)
Gain on repurchase of Series B Preferred (Note
6)......................................... -- -- -- 2,208 2,208
Net loss...................................... -- -- -- (172,484) (172,484)
---------- ---- -------- --------- ---------
BALANCE, December 31, 1999...................... 41,901,908 $419 $341,070 $(493,623) $(152,134)
========== ==== ======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
54
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (60,323) $(129,142) $(172,484)
Adjustments to reconcile net loss to net cash provided by
operating activities --
Depreciation and amortization.......................... 91,699 234,948 307,344
Amortization of debt financing costs................... 1,152 1,771 3,130
Decrease in deferred income taxes...................... (5,400) (47,391) (63,255)
Other.................................................. 240 (130) --
Changes in current assets and liabilities, net of effects
from acquisitions:
Accounts receivable.................................... (1,408) (2,387) (9,275)
Prepaid expenses and other current assets.............. 2,531 (1,693) 1,157
Accounts payable....................................... 372 2,175 (9,237)
Deferred revenues and subscriber deposits.............. (2,481) (12,263) 1,865
Accrued expenses and other current liabilities......... 784 (4,734) 5,289
--------- --------- ---------
Net cash provided by operating activities......... 27,166 41,154 64,534
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired.......... (113,466) (110,000) --
Capital expenditures, net................................. (69,935) (78,658) (93,327)
Proceeds from sale of businesses (Note 3)................. 11,000 -- 8,572
Additions to intangibles.................................. (5,070) (1,885) (819)
Other..................................................... 1,042 (1,204) (2,654)
--------- --------- ---------
Net cash used in investing activities............. (176,429) (191,747) (88,228)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt (Note 5)..................... 364,261 248,260 81,000
Repayment of long-term debt (Note 5)...................... -- -- (46,000)
Principal payments on long-term debt...................... (194,222) (104,362) (882)
Repurchase of Series B Preferred.......................... -- -- (16,240)
Net proceeds from issuance of common stock................ 432 577 767
Deferred debt financing costs and other................... (7,229) (10,342) (600)
--------- --------- ---------
Net cash provided by financing activities......... 163,242 134,133 18,045
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 13,979 (16,460) (5,649)
CASH AND CASH EQUIVALENTS, beginning of period.............. 10,917 24,896 8,436
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 24,896 $ 8,436 $ 2,787
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
55
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND RISK FACTORS
Metrocall, Inc. and subsidiaries, is a leading provider of local, regional
and national paging and other wireless messaging services in the United States.
Through its nationwide wireless network, Metrocall provides messaging services
to over 1,000 U.S. cities, including the top 100 Standard Metropolitan
Statistical Areas.
Risks and Other Important Factors
Metrocall sustained net losses of $60.3 million, $129.1 million and $172.5
million for the years ended December 31, 1997, 1998 and 1999, respectively.
Metrocall's loss from operations for the year ended December 31, 1999 was $150.8
million. In addition, at December 31, 1999, Metrocall had an accumulated deficit
of approximately $493.6 million and a deficit in working capital of $36.9
million. Metrocall's losses from operations and net losses are expected to
continue for additional periods in the future. There can be no assurance that
its operations will become profitable.
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 December 31, 1999, Metrocall had approximately
$777.6 million outstanding under its credit facility, senior subordinated notes,
capital leases and other long-term debt. Amounts available under its credit
facility are subject to certain financial covenants and other restrictions. At
December 31, 1999, Metrocall was in compliance with each of the covenants under
its $200.0 million credit facility. Metrocall's ability to borrow additional
amounts in the future, including amounts currently available under the credit
facility is dependent on Metrocall's ability to comply with the provisions of
its credit facility as well as the availability of financing in the capital
markets. At December 31, 1999, Metrocall had $125.0 million of additional
borrowings available under its credit facility based on its total leverage
covenant under which total debt cannot exceed six-times annualized operating
cash flow.
Metrocall is also subject to additional risks and uncertainties including,
but not limited to, changes in technology, business integration, competition,
government regulation and subscriber turnover.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
In addition to Metrocall, the accompanying consolidated financial
statements include the accounts of Metrocall's 61% interest in Beacon Peak
Associates Ltd. ("Beacon Peak") and Metrocall of Virginia, Inc. and Metrocall,
USA, Inc., nonoperating wholly owned subsidiaries that hold certain regulatory
licenses issued by the Federal Communications Commission (the "FCC"). Beacon
Peak owns land adjacent to Metrocall's headquarters building. The minority
interest in Beacon Peak was $510,000 as of December 31, 1998 and 1999.
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
Metrocall recognizes revenue under service, rental and maintenance
agreements with customers as the related services are performed. Metrocall
leases (as lessor) pagers and messaging devices 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-7
56
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.
YEARS
-----
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
New pagers and advanced messaging devices are depreciated using the
half-year convention upon acquisition. Betterments to acquired pagers and the
net book value of lost pagers are charged to depreciation expense. Subscriber
equipment sold is recorded in the consolidated statement of operations at their
net book value at the date of sale. Betterments to acquired subscriber equipment
and the net book value of lost subscriber equipment is charged to depreciation
expense. Devices leased to customers under operating leases continue to be
depreciated over their remaining useful lives. As of December 31, 1998 and 1999,
the balance of subscriber equipment was $101.8 million and $183.3 million,
respectively, net of accumulated depreciation of $87.8 million and $79.1
million, respectfully.
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.
Metrocall 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 Metrocall 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, 1998 and 1999 (dollars in thousands):
DECEMBER 31, AMORTIZATION
------------------- PERIOD IN
1998 1999 YEARS
-------- -------- ------------
State certificates and FCC licenses......................... $325,116 $289,155 10
Goodwill.................................................... 198,692 175,404 10
Customer lists.............................................. 328,651 184,617 3
Debt financing costs........................................ 23,540 21,184 8-12
Non-compete covenants....................................... 17,125 10,406 3
Other....................................................... 1,583 1,260 3-7
-------- --------
$894,707 $682,026
======== ========
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-8
57
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. Metrocall has determined that there has
been no impairment in the carrying value of long-lived assets reflected in the
accompanying balance sheets.
Metrocall currently 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 goodwill. If an impairment exists, entity
level goodwill is written down to its fair value based on estimated future cash
flows of Metrocall discounted at risk adjusted interest rates.
Effective January 1, 1998, Metrocall 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 loss attributable 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 in any period
presented 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," Metrocall 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. ACQUISITION AND DISPOSITION
AT&T Wireless Messaging Division ("AMD")
On October 2, 1998, Metrocall closed on a stock purchase agreement with
AT&T Wireless Services, Inc. ("AT&T Wireless"), McCaw Communications Companies,
Inc. and AT&T Two Way Messaging Communications, Inc. to acquire the stock of
certain subsidiaries of AT&T Wireless that operated the paging and messaging
services business of AT&T Corporation and a nationwide 50KHz/50KHz narrowband
personal communication services license. The purchase price for the business and
license acquired was $110.0 million in cash and 9,500 shares of Series C
Preferred Stock (see Note 6) having a value upon liquidation equal to its stated
value. The total purchase price was $205.0 million. The cash portion of the
purchase price, including fees and expenses, was funded through borrowings under
Metrocall's credit facility. The acquisition was accounted for as a purchase for
financial reporting purposes.
F-9
58
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price was allocated as follows (in thousands):
Plant and equipment......................................... $ 64,215
Accounts receivable and other assets........................ 18,773
Non compete agreements...................................... 17,833
Customer lists.............................................. 162,428
FCC licenses and state certificates......................... 45,385
Liabilities assumed......................................... (30,531)
Deferred income tax liability............................... (73,103)
--------
Total purchase price allocation................... $205,000
========
Cash paid................................................... 110,000
Series C Preferred issued................................... $ 95,000
--------
Total consideration............................... $205,000
========
The unaudited pro forma information presented below reflects the
acquisition as if it had occurred on January 1, 1998. The results are not
necessarily indicative of future operating results or of what would have
occurred had the acquisition actually been consummated on that date (in
thousands, except per share data).
YEAR ENDED
DECEMBER 31,
1998
------------
Revenues.................................................... $ 613,211
Loss attributable to common stockholders.................... $(165,680)
Loss per share attributable to common stockholders.......... $ (4.04)
Sale of Electronic Tracking Systems Business
Effective November 1, 1999, Metrocall sold to a third party the assets of
its Electronic Tracking Systems business that Metrocall had acquired in its
December 1997 merger with ProNet. Total proceeds were approximately $12.7
million including cash proceeds of approximately $8.6 million and a note
receivable of approximately $4.1 million. Metrocall recorded the note receivable
at its fair value on the accompanying balance sheet. No gain or loss was
recognized on the transaction for financial reporting purposes.
F-10
59
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUPPLEMENTARY BALANCE SHEET INFORMATION
Prepaid expenses and other current assets and accrued expenses and other
current liabilities consist of (in thousands):
DECEMBER 31,
(IN THOUSANDS)
------------------
1998 1999
------- -------
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Inventory of electronic tracking systems business......... $ 2,406 $ --
Tax refunds............................................... 2,000 --
Deposits.................................................. 1,258 --
Prepaid advertising....................................... 1,101 1,282
Prepaid insurance......................................... 887 556
Other..................................................... 1,191 1,495
------- -------
TOTAL............................................. $ 8,843 $ 3,333
======= =======
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued interest payable.................................. $14,216 $21,829
Accrued severance, payroll and payroll taxes.............. 11,542 7,813
Accrued state and local taxes............................. 4,981 5,817
Accrued insurance claims.................................. 1,047 1,771
Accrued acquisition liabilities........................... 3,321 2,217
Other..................................................... 2,621 2,575
------- -------
TOTAL............................................. $37,728 $42,022
======= =======
5. LONG-TERM DEBT AND LEASE OBLIGATIONS
Long-term debt consists of the following (in thousands):
DECEMBER 31,
--------------------
1998 1999
-------- --------
Credit Facility, interest at a floating rate, defined below,
with principal payments beginning March 2001.............. $ 40,000 $ 75,000
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 and $1,566 in 1998
and 1999)................................................. 248,260 248,434
11 7/8% Senior subordinated notes due in 2005 (the "A+
Notes")................................................... 284 174
Capital lease obligations at a weighted average interest
rate of 9.7%.............................................. 4,282 3,575
Other....................................................... 508 444
-------- --------
743,334 777,627
Less -- Current portion..................................... 771 643
-------- --------
Long-term portion........................................... $742,563 $776,984
======== ========
Annual maturities of long-term debt after December 31, 1999 are as follows
(in thousands): $643 in 2000; $735 in 2001; $836 in 2002; $25,948 in 2003;
$50,813 in 2004 and $698,652 thereafter.
F-11
60
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated fair value of the 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.
DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Credit Facility.................................. $ 40,000 $ 40,000 $ 75,000 $ 75,000
Senior subordinated notes........................ 698,544 695,045 698,608 429,174
Other............................................ 508 503 444 444
-------- -------- -------- --------
Total debt, excluding capital leases... $739,052 $735,548 $774,052 $504,618
======== ======== ======== ========
Credit Facility
In October 1997, Metrocall and its bank lenders executed an amended and
restated credit agreement (the "1997 Credit Agreement"). Under the 1997 Credit
Agreement, subject to certain conditions, Metrocall was able to borrow up to
$300 million under two reducing loan facilities. On October 2, 1998, Metrocall
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, Metrocall revised the $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, 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 facility (together Facility A and Facility
B are referred to as the "Credit Facility"). 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. As of December 31, 1999, approximately $125.0 million of additional
borrowings were available under the Credit Facility.
The 1998 Credit Agreement requires compliance with certain financial and
operating covenants. Metrocall 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, among other restrictions, 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, 1999,
Metrocall 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 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.
Under the Credit Facility, Metrocall 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)
F-12
61
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are charged on the average undrawn balance of the Facility A commitment and are
charged to interest expense as incurred.
YEAR ENDED DECEMBER 31,
-------------------------------
OTHER CREDIT FACILITY DATA 1997 1998 1999
-------------------------- -------- -------- -------
Weighted average balances outstanding....................... $170,000 $178,600 $79,536
Interest expense............................................ $ 15,500 $ 13,100 $ 7,067
Weighted average interest rate.............................. 9.2% 7.3% 8.9%
Effective interest rate..................................... 8.2% 7.8% 8.9%
Senior Subordinated Notes
10 3/8% SENIOR SUBORDINATED NOTES
In October 1995, Metrocall issued $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 Metrocall's
existing long-term debt and other senior obligations, as defined. The 1995 Notes
contain various covenants that, among other restrictions, limit the Metrocall's
ability 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 Metrocall's option after October 1, 2000
at the following redemption prices plus accrued and unpaid interest during the
12-month period beginning on October 1 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2000........................................................ 105.188%
2001........................................................ 103.458
2002........................................................ 101.729
2003 and thereafter......................................... 100.000
In the event of a change in control of Metrocall, as defined, each holder
of the 1995 Notes will have the right, at such holder's option, to require
Metrocall 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, Metrocall issued $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 1997 Notes
are callable beginning November 1, 2002. The 1997 Notes are unsecured
obligations of Metrocall, subordinated to all its present and future senior
indebtedness. The 1997 Notes contain various covenants that, among other
restrictions, limit Metrocall's ability to incur additional indebtedness, pay
dividends, engage in certain transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain circumstances.
The 1997 Notes may be redeemed at Metrocall's option on or after November
1, 2002 at the following redemption prices plus accrued and unpaid interest
during the 12-month period beginning on November 1 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2002........................................................ 104.8750%
2003........................................................ 102.4375
2004 and thereafter......................................... 100.0000
F-13
62
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the event of a change of control of Metrocall, as defined, each holder
of the 1997 Notes will have the right, at such holder's option, to require
Metrocall 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")
During 1998 and 1999, Metrocall redeemed approximately $2.3 million and
$110,000 of aggregate principal of 11 7/8% senior subordinated notes due 2005.
At December 31, 1998 and 1999, $284,000 and $174,000 of the A+ Notes were
outstanding. The A+ Notes bear interest, payable semi-annually on May 1 and
November 1.
11 7/8% Senior Subordinated Notes (the "ProNet Notes")
In connection with the ProNet merger, Metrocall assumed $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 Metrocall's existing long-term debt and other senior obligations, as
defined. The ProNet 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.
The ProNet Notes may be redeemed at Metrocall's option on or after June 15,
2000 at the following redemption prices plus accrued and unpaid interest during
the 12-month period beginning on June 15 of the years indicated below:
YEAR PERCENTAGE
- ---- ----------
2000........................................................ 105.938%
2001........................................................ 103.958
2002........................................................ 101.979
2003 and thereafter......................................... 100.000
In the event of a change of control of Metrocall, as defined, each holder
of the ProNet Notes will have the right to require that Metrocall 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 (the "1998 Notes")
In December 1998, Metrocall 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 Notes are callable beginning September 15, 2003. The 1998
Notes are unsecured obligations of Metrocall, subordinated to all its present
and future senior indebtedness. During 1999, Metrocall registered the 1998 Notes
under the Securities Act of 1933. The 1998 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.
The 1998 Notes may be redeemed at the Metrocall's option on or after
September 15, 2003 at the following redemption prices plus accrued and unpaid
interest during the 12-month period beginning on September 15 of the years
indicated below:
YEAR PERCENTAGE
- ---- ----------
2003........................................................ 105.500%
2004........................................................ 103.667
2005........................................................ 101.833
2006 and thereafter......................................... 100.000
F-14
63
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the event of a change of control of Metrocall, as defined, each holder
of the 1998 Notes will have the right to require that Metrocall 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
Metrocall is party to one capital lease agreement for office space. The
future minimum rental commitment under this lease is as follows (in thousands):
$896 in 2000, $923 in 2001, $951 in 2002, $980 in 2003 and $752 in 2004. At
December 31, 1999, the aggregate future minimum capital lease payment was $4,502
including interest of $927.
Metrocall has various operating lease arrangements (as lessee) for office
space and communications equipment sites. Rental expenses related to operating
leases were approximately (in thousands) $21,675, $37,362 and $48,311 for the
years ended December 31, 1997, 1998 and 1999, respectively.
Minimum rental payments as of December 31, 1999, required under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows (in thousands): $27,091 in 2000, $17,550 in 2001, $10,079 in
2002, $4,622 in 2003, $1,917 in 2004 and $422 thereafter.
Rent expense for lease agreements with related parties for office space,
tower sites and transmission systems, excluding consolidated entities, was
approximately (in thousands) $761, $1,033, and $997 for the years ended December
31, 1997, 1998 and 1999, respectively. Metrocall leases office and warehouse
space from a company owned by a director. The annual rental commitment under
these leases, is approximately $570,000. Metrocall 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
At December 31, 1999, Metrocall's authorized capital stock consisted 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") and 25,000 shares have been designated as the Series C Convertible
Preferred Stock (the "Series C Preferred"). Metrocall repurchased and retired
its Series B Junior Convertible Preferred Stock (the "Series B Preferred") in
January 1999. In January 2000, Metrocall's stockholders approved the increase of
the number of shares of common stock authorized to 200,000,0000 shares.
Common Stock
Because the FCC places limitations on foreign ownership of its licenses, no
more than 20 percent of Metrocall's common stock may, in the aggregate, be owned
directly, or voted by a foreign government, a foreign corporation, or resident
of a foreign country. Metrocall's amended and restated certificate of
incorporation permits the redemption of the common stock from stockholders,
where necessary, to protect its 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 lower of fair market value or such holder's purchase price.
Series A Preferred
At December 31, 1999, there were 239,517 shares of the Series A Preferred
outstanding, including 30,314 Series A Preferred shares issued during 1999 as
dividends and accrued but unpaid dividends were approximately $1.0 million. Each
share of the Series A Preferred has a stated value of $250 per share and has a
liquidation preference over shares of Metrocall'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 Metrocall'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 events, (i) Metrocall
issues or incurs indebtedness or equity securities senior with respect to
payment of dividends or distributions
F-15
64
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
Beginning November 15, 1999, Metrocall had the ability to redeem the Series
A Preferred in whole or in part (subject to certain minimums). 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
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 Series A Preferred have the right to elect two members to
Metrocall'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. Metrocall 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 Metrocall
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. Metrocall 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 Metrocall unless it redeems the Series A Preferred.
Series B Preferred
Through January 1999, the Board of Directors had designated 9,000 shares of
Preferred Stock as Series B Junior Convertible Preferred Stock (the "Series B
Preferred"). In January 1999, Metrocall repurchased and retired all 1,808 issued
and outstanding shares of the Series B Preferred for approximately $16.2
million, representing a discount of $2.2 million from its carrying value. The
gain on the repurchase was treated as an adjustment to the loss attributable to
common stockholders and has been included in Metrocall's earnings per share
calculations.
Series C Preferred
At December 31, 1999, there were 10,378 shares of the Series C Preferred
outstanding, including 783 shares of Series C Preferred issued during 1999 as
dividends. Accrued but unpaid dividends were approximately $1.0 million. Each
share of Series C Preferred had 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 C
Preferred carried 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
Metrocall's option.
On February 2, 2000, Metrocall and the sole holder agreed to exchange
Metrocall common stock for the Series C Preferred. Please refer to Note 11,
"Subsequent Events."
Warrants
In connection with the issuance of the Series A Preferred discussed above,
Metrocall issued warrants to purchase common stock. Each warrant represented the
right of the holder to purchase 18.266 shares of common stock or an
F-16
65
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
On February 2, 2000, in connection with the common stock investments the
exercise price of the Warrants and the number of shares of common stock that may
be purchased upon exercise of the Warrants have been adjusted. Please refer to
Note 11, "Subsequent Events."
7. EMPLOYEE STOCK OPTION AND OTHER BENEFIT PLANS
STOCK OPTION PLANS
1993 Stock Option Plan
Under the 1993 Metrocall Stock Option Plan, as amended, (the "1993 Plan"),
options to purchase up to an aggregate of 975,000 shares of common stock were
reserved for grants to key employees. 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 of the common stock at the 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.
Under the 1993 Metrocall Directors Stock Option Plan (the "Directors
Plan"), options to purchase up to an aggregate of 25,000 shares of common stock
are available for grants to members of the Board of Directors who are neither
officers nor employees of Metrocall ("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
Under the Metrocall 1996 Stock Option Plan (as amended, the "1996 Plan"),
options to purchase up to an aggregate of 8 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 in any
calendar year. 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 Metrocall 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.
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 1997 ProNet merger, Metrocall exchanged options to
purchase 1,212,539 shares of its common stock with former option holders of the
acquired company, in exchange for their options held. The options issued by
Metrocall were fully vested and exercisable upon issuance.
F-17
66
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the Compensation Committee of the Board of Directors
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. The
repricing established a new measurement date for the options.
Employee Stock Purchase Plan
Under the Metrocall, Inc. 1996 Employee Stock Purchase Plan (the "Stock
Purchase Plan"), up to 1 million shares of common stock may be purchased by
eligible employees 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 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 were issued 109,747 shares, 138,413 shares and 276,967 shares
of common stock in 1997, 1998, and 1999, respectively, under the Stock Purchase
Plan. At December 31, 1999, 201,109 shares of common stock were due to Stock
Purchase Plan participants, which were subsequently issued in January 2000.
Accounting for Stock-Based Compensation
Metrocall 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,
1999 because Metrocall had granted options to acquire common stock at exercise
prices equal to the fair value of the common stock on the dates of grant.
Metrocall adopted 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 1997, 1998, and 1999,
respectively: expected volatility of 64.4%, and 69.7%, and 79.77% risk free
interest rate of 5.7%, 4.7% and 6.4%, and expected life of ten years for all
option grants. The weighted-average fair value of stock options granted in 1997,
1998 and 1999 was $4.35 per share, $4.15 per share, and $2.88 per share
respectively. The weighted-average fair value of stock purchase rights in 1997,
1998 and 1999 was $4.67 per share, $5.23 per share, and $2.21 per share
respectively.
Under the above model, the total value of stock options granted in 1997,
1998 and 1999 was approximately $3.0 million, $7.0 million and $5.0 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 1997, 1998 and 1999 was $583,000, $913,000, and $865,000,
respectively. Had compensation cost for Metrocall compensation and purchase
plans been determined in accordance with SFAS No. 123, Metrocall loss and loss
per share information would have been increased to the pro forma amounts
indicated below:
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- --------- ---------
Pro forma loss attributable to common stockholders......... $(72,664) $(146,673) $(190,077)
Pro forma loss per share attributable to common
stockholders............................................. (2.68) (3.57) (4.55)
The resulting pro forma compensation cost may not be representative of that
to be expected in future years.
F-18
67
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions are summarized as follows:
NUMBER OF EXERCISE WEIGHTED-AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
--------- -------------- ----------------
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 ProNet 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........................................... 1,681,700 5.125-6.75 5.13
Options exercised......................................... -- -- --
Options canceled.......................................... (144,802) 5.125-6.67 5.90
--------- -------------- -----
Options outstanding, December 31, 1998...................... 5,007,553 $1.035-$22.125 $5.84
Options granted........................................... 1,748,500 2.75-5.6250 3.38
Options exercised......................................... -- -- --
Options canceled.......................................... (287,395) 3.2190-19.50 6.07
--------- -------------- -----
Options outstanding, December 31, 1999...................... 6,468,658 $1.035-$22.125 $5.16
========= ============== =====
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
Options exercisable, December 31, 1999...................... 3,465,658 $1.035-$22.125 $6.06
The following table summarizes information about the options outstanding at
December 31, 1999:
OPTIONS EXERCISABLE OPTIONS OUTSTANDING
------------------------------- ---------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER WEIGHTED-AVERAGE NUMBER REMAINING LIFE WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE OUTSTANDING (YEARS) EXERCISE PRICE
- --------------- ----------- ---------------- ----------- ---------------- ----------------
$1.035-$2.21................. 21,323 $1.035 21,323 4.0 $1.035
$2.21-$4.425................. 76,510 3.69 1,646,010 9.2 3.25
$4.43-$6.63.................. 2,458,670 5.91 3,892,170 6.9 5.62
$6.64-$8.85.................. 900,155 6.67 900,155 2.7 6.67
$8.86-$22.13................. 9,000 17.87 9,000 4.9 17.87
--------- ------ --------- --- ------
3,465,658 $ 6.06 6,468,658 6.9 $ 5.16
========= ====== ========= === ======
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. Metrocall
has agreed to match 50% of the employee's contribution, up to 4% of each
participant's gross salary. Contributions made by Metrocall vest 20% per year
beginning on the second anniversary of the participant's employment. Other than
Metrocall's matching obligations, discussed above, profit sharing contributions
are discretionary. Metrocall's expenses for contributions under the Plan
recorded were $372,000, $150,000 and $1,426,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
F-19
68
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CONTINGENCIES
Legal and Regulatory Matters
Metrocall is subject to certain legal and regulatory matters in the normal
course of business. In the opinion of management, the outcome of such assertions
will not have a material adverse effect on the financial position or the results
of the operations of Metrocall.
9. INCOME TAXES
As of December 31, 1999, Metrocall had net operating loss and investment
tax credit carryforwards of approximately $252 million and $1.2 million,
respectively, which expire in the years 2000 through 2019. The benefits of these
carryforwards may be limited in the future as a result of historical changes in
the ownership of Metrocall. Net operating loss carryforwards may be used to
offset up to 90 percent of Metrocall'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, 1998 and 1999 (in thousands):
DECEMBER 31,
----------------------
1998 1999
--------- ---------
Deferred tax assets:
Allowance for doubtful accounts........................... $ 2,611 $ 2,729
Management reorganization................................. 610 732
Contributions............................................. 169 241
New pagers on hand........................................ 1,468 735
Intangibles............................................... 13,668 14,126
Other..................................................... 7,688 6,388
Investment tax credit carryforward........................ 1,204 1,204
Net operating loss carryforwards.......................... 100,283 100,565
--------- ---------
Total deferred tax assets......................... 127,701 126,720
========= =========
Deferred tax liabilities:
Basis differences attributable to purchase accounting..... (209,642) (146,387)
Depreciation and amortization expense..................... (11,677) (10,096)
Other..................................................... (10,517) (14,900)
--------- ---------
Total deferred tax liabilities.................... (231,836) (171,383)
========= =========
Net deferred tax liability.................................. (104,135) (44,663)
Less: Valuation allowance................................... (105,507) (101,724)
--------- ---------
$(209,642) $(146,387)
========= =========
F-20
69
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax benefit for the years ended December 31, 1997, 1998 and
1999, is primarily the result of the amortization of the basis differences
attributable to purchase accounting and is composed of the following (in
thousands):
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------- -------
Income tax (provision) benefit
Current --
Federal................................................ $ -- $ -- $ --
State.................................................. (539) (310) --
Deferred --
Federal................................................ 4,698 41,755 55,174
State.................................................. 702 5,649 7,881
------ ------- -------
$4,861 $47,094 $63,055
====== ======= =======
The benefit for income taxes for the years ended December 31, 1997, 1998
and 1999, results in effective rates that differ from the Federal statutory rate
as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1998 1999
----- ---- ----
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.............. 5.3 4.6 4.6
Net operating losses for which no tax benefit is currently
available................................................. (9.1) (5.8) (8.6)
Permanent differences....................................... (22.7) (6.1) (4.8)
----- ---- ----
7.5% 26.7% 25.2%
===== ==== ====
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Metrocall made cash payments for interest of $30.2 million, $58.0 million
and $74.1 million for the years ended December 31, 1997, 1998, and 1999
respectively. Given Metrocall's recurring net losses, nominal income tax
payments were made for each of the three years ended December 31, 1999.
During 1997 and 1998, Metrocall issued capital stock to effect certain
acquisitions as reflected in the consolidated statements of stockholders' equity
and as described in Notes 3 and 6. In 1999, Metrocall received a note receivable
with a face amount of $4,068,000 as part of the sales consideration of its
electronic trading systems business, which was recorded at its fair value in
other assets on the accompanying balance sheet.
11. SUBSEQUENT EVENTS
Exchange of Series C Preferred
On February 2, 2000, Metrocall and AT&T Wireless entered into a Securities
Exchange Agreement under which AT&T Wireless agreed to exchange its shares of
Series C Preferred for 13,250,000 shares of Metrocall common stock and, if
applicable, non-voting common stock equivalents in the form of a new series of
Metrocall preferred stock. AT&T Wireless' voting interest in Metrocall will be
limited to 19.9% of the total issued and outstanding shares of Metrocall common
stock. To the extent 13,250,000 shares of Metrocall common stock exceeds 19.9%
of the total issued and outstanding Metrocall common stock, AT&T Wireless will
receive shares of Series D Non-Voting Participating Convertible Preferred Stock
(the "Series D Preferred"). The Series D Preferred will have rights
substantially equivalent to those of the common stock, except that it will have
limited voting rights. AT&T Wireless may convert the Series D Preferred shares
at any time. Metrocall has the right to convert the Series D Preferred into
common stock so long as the
F-21
70
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
number of converted shares of common stock does not equal or exceed 20% of the
issued and outstanding common stock at the time of the conversion.
The consummation of the exchange is subject to the expiration of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), and the receipt of any required consent of
the FCC and other customary closing conditions. Metrocall expects that these
conditions will be met by March 31, 2000.
AT&T Wireless has agreed to deliver to Metrocall an irrevocable proxy
granting a person designated by Metrocall full power and authority, for one year
commencing on the consummation of the exchange, to vote all shares of Metrocall
common stock that AT&T Wireless receives from the exchange in accordance with
the recommendation of the Board of Directors for Metrocall. This proxy will not
apply to any matter to which a holder of the Series D Preferred has the right to
vote under the Certificate of Designation for that series or applicable law.
AT&T Wireless has limited rights to sell all or a portion of the shares it
receives from the exchange at any time more than six months after consummation
of the exchange in privately negotiated sales to any person or group that
Metrocall and AT&T Wireless has not designated as restricted and subject to
Metrocall's right of negotiation and the transferee's consent to be bound by the
Securities Exchange Agreement. In addition, AT&T Wireless may sell all or any
portion of the shares of Metrocall common stock it receives from the exchange at
any time more than twelve months after consummation of the exchange in one or
more sales in any available over-the-counter market for the common stock and/or
through any exchange on which the common stock is then traded, subject to the
following permitted period sales: 2,650,000 shares of common stock beginning 12
months after consummation of the exchange; an additional 2,650,000 shares of
common stock beginning 18 months after consummation of the exchange; an
additional 2,650,000 shares beginning 24 months after consummation of the
exchange; and the remaining 5,300,000 shares of common stock beginning 30 months
after consummation of the exchange.
Metrocall has agreed to register for resale the shares of Metrocall common
stock AT&T Wireless receives or can receive upon conversion of the Series D
Preferred from the exchange within 180 days after consummation of the exchange.
If the three common investments described below close substantially
simultaneously with the closing of the exchange of the Series C Preferred,
Metrocall will not issue any shares of the Series D Preferred.
Common Stock Investments
On February 2, 2000, Metrocall entered into common stock purchase
agreements with each of three equity investors: PSINet Inc. (PSINet), Aether
Systems, Inc. (Aether) and HMTF Bridge MC I, LLC, an affiliate of Hicks, Muse,
Tate & Furst Incorporated (HMTF). Each of the three companies will acquire
approximately 7.8 million shares of common stock. Each investor will pay $2.19
per share or a total of approximately $17.0 million. Each of the three entities
will have the right to nominate a representative to Metrocall's Board of
Directors. Metrocall will use the proceeds from the sale of its common stock to
reduce outstanding debt.
Each transaction is subject to the completion of Series C Preferred
exchange, the expiration of the applicable HSR Act waiting period, the receipt
of any required consent of the FCC, the completion of the other common stock
equity investments and other customary closing conditions. Metrocall expects
that these conditions will be satisfied and that the transactions will be
consummated by March 31, 2000.
Metrocall also granted HMTF two options to purchase additional shares of
Metrocall common stock. Metrocall granted an option to purchase 8,333,333 shares
of common stock (Option I), at an exercise price of $3.00 per share, subject to
adjustment under certain events. Option I may be exercised by HMTF in whole but
not in part, at any time on or before the first anniversary of the closing.
Metrocall also granted HMTF (i) an option to purchase 12,500,000 shares of
common stock at an exercise price of $4.00 per share plus, (ii) if HMTF has not
exercised Option I, 8,333,333 shares of common stock at an exercise price per
share of $3.00, in each case subject to adjustment under certain events
(collectively, Option II). Option II may be exercised in whole or in part but
only in connection with the issuance of new equity for cash to finance a
business combination or acquisition (by means of merger, consolidation,
exchange, or
F-22
71
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition of assets, or otherwise) involving Metrocall or any of its
subsidiaries and an aggregate transactional consideration to the other entity or
its equity and debt holders or to Metrocall and its equity and debt holders
having a fair value (as determined in good faith by Metrocall's Board of
Directors) of at least $50,000,000 (a Qualified Transaction). Option II will
terminate on the second anniversary of the closing, except that it can be
extended if there are pending active discussions with respect to a potential
Qualified Transaction or material changes in the terms of a Qualified
Transaction. The Option I and Option II transactions are subject to the
expiration of the applicable HSR Act waiting period, the receipt of any required
consent of the FCC, and other customary closing conditions.
PSINet and Aether will each deliver to Metrocall irrevocable proxies
pursuant to which their respective shares will be voted for as nominees for the
election to Metrocall's Board of Directors for the twelve month period following
the closing. PSINet and Aether will not, directly or indirectly, sell, transfer
or otherwise dispose of their shares for a period of twelve months after the
closing, with certain exceptions, unless the investor has first delivered to
Metrocall an offer for Metrocall to repurchase such shares.
Each of the three equity investors also agreed to certain limitations, for
a period of twenty-four months after the closing. These limitations include the
following: each investor will not, directly or indirectly, (i) increase its
beneficial ownership of any securities or rights or options to acquire
beneficial ownership of any securities of Metrocall, except by way of stock
dividends, stock splits or distributions made by Metrocall to holders of common
stock (Aether may acquire up to 15% of the issued and outstanding common stock,
and HMTF may acquire up to 15% of the issued and outstanding common stock, of
which 15% ownership limit does not include the shares issuable under or
purchased pursuant to the Option Agreement); (ii) make any public announcement
with respect to or submit to Metrocall any proposal for the acquisition of
securities of Metrocall or for any merger, consolidation, or business
combination involving Metrocall or its affiliates or for any purchase of a
substantial portion of the assets of Metrocall or its affiliates; (iii) make, or
in any way participate in, any "solicitation" of "proxies" to vote any voting
securities of Metrocall or become a participant in any "election contest" (as
those terms are defined in Regulation 14A under the Securities Exchange Act of
1934, as amended (the Exchange Act)); (iv) form, join, or in any way participate
in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) with
respect to any voting securities of Metrocall; or (v) seek to influence or
influence the management or policies of Metrocall, with the exception of the
investor's designee on the Board of Directors may act to take action in his
capacity as a director of Metrocall.
As a result of the above investments, the exercise price of the Warrants
and the number of shares of common stock that may be purchased upon exercise of
the Warrants have been adjusted. The exercise price of the Warrants was reduced
to $2.74 per share. Under the anti-dilution provisions of the Warrants, the
number of shares of common stock that may be purchased upon exercise of each
Warrant increased to 18.531 shares of common stock, or an aggregate of 2,957,529
F-23
72
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares. The exercise price of the Warrants and number of shares of common stock
that may be purchased upon exercise of the Warrants may be further adjusted in
the future as a result of anti-dilution and other provisions of the Warrants.
PREFERRED STOCK RIGHTS PLAN
In February 2000, the Board of Directors adopted a stockholders' rights
plan and declared a dividend distribution of one preferred share purchase right
("Right") for each outstanding share of the common stock. The distribution is
payable to stockholders of record at the close of business on March 6, 2000.
Each Right, when exercisable, entitles the registered holder to purchase from
Metrocall 1/1000th of a share of Series E Junior Participating Preferred Stock,
par value $.01 per share (the "Series E Preferred") at a price of $50 per
1/1000th share, subject to adjustment (the "Purchase Price"). For purposes of
the Rights Plan, the Board of Directors has designated 100,000 shares of Series
E Preferred, which may be increased or decreased by the Board of Directors.
The Rights will be attached to all certificates representing shares of
common stock outstanding as of March 6, 2000. The Rights will separate from the
common stock and a distribution of Right Certificates (as defined below) will
occur upon the earlier of the following dates (the earlier of such dates, the
"Distribution Date"): (1) twenty (20) business days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of the outstanding shares of common stock (the "Share
Acquisition Date"), or (2) twenty (20) business days (or such later date as the
Board of Directors may determine) following the commencement of, or announcement
of an intention to make, a tender offer or exchange offer the consummation of
which would result in the beneficial ownership by a person (other than the
Excluded Persons as defined below) of 20% or more of the outstanding shares of
common stock, in either (1) or (2) other than pursuant to a Qualified Offer (as
defined below).
The Rights Agreement contains exceptions from the definition of Acquiring
Person for the following persons (the "Excluded Persons"): (1) Metrocall, (2)
any wholly owned subsidiary of the Metrocall, (3) any employee benefit plan of
Metrocall or any subsidiary of Metrocall or any person holding shares of common
stock for or pursuant to the terms of any such employee benefit plan, (4) AT&T
Wireless Services, its affiliates and associates, with respect to the exchange
of Series C Preferred Stock for shares of common stock and common stock
equivalents, as described above, and (5) HMTF, its affiliates and associates,
with respect to acquisitions of common stock permitted under the Common Stock
Purchase Agreement described above.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on February 25, 2010, unless earlier redeemed or
exchanged by Metrocall as provided in the Rights Agreement.
In the event that a person (other than the Excluded Persons) becomes the
beneficial owner of 20% or more of the then outstanding shares of common stock
(except pursuant to an offer for all outstanding shares of common stock and on
terms that at least a majority of independent directors determine to be fair to
and otherwise in the best interests of Metrocall and its stockholders (a
"Qualified Offer")) (a "Flip-in Event"), each holder of a Right will, after the
end of the Redemption Period (defined below), have the right to exercise the
Right by purchasing, for an amount equal to the Purchase Price, shares of common
stock (or, in certain circumstances, cash, property or other securities of
Metrocall) having a value (determined pursuant to a formula set forth in the
Rights Agreement) equal to two times such amount. Notwithstanding any of the
foregoing, following the occurrence of a Flip-in Event, all Rights that are, or
(under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person will be null and void. However,
Rights are not exercisable following the occurrence of a Flip-in Event until
such time as the Rights are no longer redeemable by Metrocall as set forth
below.
In the event that, at any time following the Share Acquisition Date, (1)
Metrocall is acquired in a merger or other consolidation transaction in which
Metrocall is not the surviving corporation (other than a merger or consolidation
transaction that follows a Qualified Offer), (2) Metrocall engages in a merger
or consolidation transaction (other than a merger or consolidation transaction
that follows a Qualified Offer) in which Metrocall is the surviving corporation
and its common stock is changed into or exchanged for other securities or
assets, or (3) 50% or more of Metrocall's assets or
F-24
73
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earning power is sold or transferred (other than to Metrocall or a wholly owned
subsidiary of Metrocall), each holder of a Right (except Rights that previously
have been voided as set forth above) shall, after the expiration of the
Redemption Period (defined below), have the right to receive, upon exercise,
common stock of the acquiring company having a value equal to two times the
Purchase Price of the Right.
At any time after a person or group of affiliated or associated persons
becomes an Acquiring Person, the Board of Directors may exchange the Rights
(other than Rights owned by such person or group, which have become void), in
whole or in part, at an exchange ratio of one share of common stock, per Right
(subject to adjustment).
The Purchase Price payable, and the number of 1/1000ths of a Preferred
Share or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution to holders of the
Rights in certain circumstances.
In general, the Board of Directors may cause Metrocall to redeem the Rights
in whole, but not in part, at any time during the period commencing on March 6,
2000, and ending on the earlier of the close of business on (1) the 20th day
following the Share Acquisition Date or (2) February 25, 2010 (the "Redemption
Period") at a price of $.0001 per Right (payable in cash, common stock or other
consideration deemed appropriate by the Board of Directors). Until a Right is
exercised, the holder thereof, as such, will have no rights as a stockholder of
Metrocall, including, without limitation, the right to vote or to receive
dividends.
12. UNAUDITED QUARTERLY FINANCIAL DATA
The following table of quarterly financial data has been prepared from the
financial records of Metrocall, 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:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------- ------------------- ------------------- -------------------
1998 1999 1998 1999 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues............................. $103,331 $155,030 $103,254 $155,630 $105,890 $151,753 $152,249 $147,774
Loss from operations................. (26,262) (36,879) (23,654) (39,776) (25,865) (37,968) (36,856) (36,208)
Loss attributable to common
stockholders....................... (32,672) (43,808) (31,157) (48,759) (33,771) (47,979) (43,309) (46,192)
Loss per share attributable to common
stockholders....................... (0.80) (1.05) (0.76) (1.17) (0.83) (1.15) (1.04) (1.10)
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-25
74
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metrocall, Inc.:
We have audited, in accordance with auditing standards generally accepted
in the United States, the consolidated financial statements of Metrocall, Inc.
and subsidiaries, and have issued our report thereon dated February 4, 2000. Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The schedule included on page F-27 is the responsibility of
Metrocall'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
Vienna, Virginia
February 4, 2000
F-26
75
SCHEDULE II
METROCALL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
ADDITIONS
------------------------
BALANCE AT CHARGE TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES ACQUIRED(1) DEDUCTIONS(2) OF YEAR
----------- ---------- --------- ----------- ------------- -------
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
====== ======= ====== ======= ======
Year ended December 31, 1999
Allowance for doubtful accounts................. $6,196 $15,306 -- $14,399 $7,103
====== ======= ====== ======= ======
- ---------------
(1) Allowance for doubtful accounts acquired in 1997 for Page America, Inc. and
ProNet, Inc. and 1998 for AT&T Wireless Messaging Division. (See Note
3 -- Notes to Consolidated Financial Statements).
(2) Deductions represent write-offs of accounts receivable.
F-27
76
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1 Restated Certificate of Incorporation of Metrocall, Inc.
(Metrocall), as amended.+
3.2 Eighth Amended and Restated Bylaws of Metrocall.(a)
4.1 Rights Agreement, dated as of February 25, 2000, between
Metrocall and First Chicago Trust Company of New York, as
Rights Agent.(b)
4.2 Indenture for Metrocall 11% Senior Subordinated Notes due
2008, dated as of December 22, 1998.(c)
4.3 Indenture for 9 3/4% Senior Subordinated Notes due 2007
dated October 21, 1997.(d)
4.4 Indenture for Metrocall 10 3/8% Senior Subordinated Notes
due 2007 dated September 27, 1995.(e)
4.5 Indenture for ProNet Inc. (ProNet) 11 7/8% Senior
Subordinated Notes due 2005 ("ProNet Notes") dated June 15,
1995.(f)
4.6 Supplemental Indenture dated May 28, 1996 for ProNet
Notes.(a)
4.7 Second Supplemental Indenture dated December 30, 1997 for
ProNet Notes.(g)
4.8 Indenture for A+ Network, Inc. 11 7/8% Senior Subordinated
Notes due 2005 ("A+ Notes") dated October 24, 1995.(h)
4.9 First Supplemental Indenture dated November 14, 1996 for A+
Notes.(i)
4.10 Second Supplemental Indenture dated November 15, 1996 for A+
Notes.(i)
4.11 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
A Convertible Preferred Stock of Metrocall.(j)
4.12 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
C Convertible Preferred Stock of Metrocall.(k)
4.13 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
E Junior Participating Preferred Stock as filed with the
Secretary of State of the State of Delaware on February 25,
2000.(b)
4.14 Warrant Agreement between Metrocall and the First National
Bank of Boston as Warrant Agent dated as of November 15,
1996.(l)
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.(c)
10.2 Securities Exchange Agreement by and between AT&T Wireless
Services, Inc. and Metrocall dated February 2, 2000.+
10.3 Common Stock Purchase Agreement by and between HMTF Bridge
MC I, LLC and Metrocall dated February 2, 2000.+
10.4 Common Stock Purchase Agreement by and between Aether
Systems, Inc. and Metrocall dated February 2, 2000.+
10.5 Common Stock Purchase Agreement by and between PSINet Inc.
and Metrocall dated February 2, 2000.+
10.6 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.(m)
10.7 Registration Rights Agreement between Metrocall and McCaw
Communications Companies, Inc. dated October 1, 1998.(k)
10.8 Unit Purchase Agreement among Metrocall and the entities
listed thereto dated November 15, 1996.(l)
10.9 Registration Rights Agreement among Metrocall and the
entities listed thereto dated November 15, 1996.(l)
10.10 Employment Agreement between Metrocall and William L.
Collins III.(n)
10.11 Amendment to Employment Agreement between Metrocall and
Williams L. Collins III.(o)
10.12 Second Amendment to Employment Agreement between Metrocall
and Williams L. Collins III.(p)
10.13 Third Amendment to Employment Agreement between Metrocall
and Williams L. Collins III.(q)
10.14 Employment Agreement between Metrocall and Steven D.
Jacoby.(n)
10.15 Amendment to Employment Agreement between Metrocall and
Steven D. Jacoby.(o)
10.16 Second Amendment to Employment Agreement between Metrocall
and Steven D. Jacoby.(p)
10.17 Third Amendment to Employment Agreement between Metrocall
and Steven D. Jacoby.(q)
77
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.18 Employment Agreement between Metrocall and Vincent D.
Kelly.(n)
10.19 Amendment to Employment Agreement between Metrocall and
Vincent D. Kelly.(o)
10.20 Second Amendment to Employment Agreement between Metrocall
and Vincent D. Kelly.(p)
10.21 Third Amendment to Employment Agreement between Metrocall
and Vincent D. Kelly.(q)
10.22 Change of Control Agreement between Metrocall and William L.
Collins III.(n)
10.23 Change of Control Agreement between Metrocall and Steven D.
Jacoby.(n)
10.24 Change of Control Agreement between Metrocall and Vincent D.
Kelly.(n)
10.25 Noncompetition Agreement between Metrocall and Jackie R.
Kimzey dated August 8, 1997.(r)
10.26 Noncompetition Agreement between Metrocall and David J.
Vucina dated August 8, 1997.(r)
10.27 Metrocall 1996 Stock Option Plan, as amended.(s)
10.28 Metrocall Amended Employee Stock Purchase Plan.(t)
10.29 Directors' Stock Option Plan, as amended.(u)
10.30 Deed of Lease between Douglas and Joyce Jemal, as landlord,
and Metrocall, as tenant, dated April 14, 1994.(v)
10.31 Lease Agreement dated December 20, 1983 between Beacon
Communications Associates, Ltd. and a predecessor of
Metrocall.(w)
10.32 Consulting, No Conflict and Nondisclosure Agreement dated
May 16, 1996 between Metrocall and Elliott H. Singer.+
10.33 Amendment to Consulting, No Conflict and Nondisclosure
Agreement dated October 1, 1999 between Metrocall and
Elliott H. Singer.+
10.34 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.(a)
11.1 Statement re computation of per share earnings.+
21.1 Subsidiaries of Metrocall, Inc.+
23.2 Consent of Arthur Andersen LLP, as independent public
accountants for Metrocall.+
27.1 Financial Data Schedule.+
- ---------------
+ Filed herewith.
(a) 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.
(b) Incorporated by reference to Metrocall's Registration Statement on Form 8-A
filed with the Commission on February 25, 2000.
(c) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on January 4, 1999.
(d) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 23, 1997.
(e) 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.
(f) Incorporated by reference to ProNet's Current Report on Form 8-K filed with
the Commission on July 5, 1995.
(g) 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.
(h) 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.
(i) 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.
(j) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on November 21, 1996.
78
(k) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 16, 1998.
(l) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(m) Incorporated by reference to Metrocall's Proxy Statement filed with the
Commission on August 31, 1998.
(n) 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.
(o) 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.
(p) 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.
(q) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 filed with the Commission on August 13,
1999.
(r) 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.
(s) Incorporated by reference to Metrocall's Proxy Statement filed with the
Commission on April 5, 1999.
(t) 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.
(u) Incorporated by reference to Metrocall's Annual Report on Form 10-K/A, as
amended, for the year ended December 31, 1993 filed with the Commission on
July 21, 1994.
(v) 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.
(w) 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.