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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2003

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period from                     to                    

Commission File Number: 0-21924

METROCALL HOLDINGS, INC.

      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 Exchange 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 o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b-2) of the Exchange Act  Yes o  No x

      Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes x  No o

      Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

INDEX TO FORM 10-Q

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PART I. FINANCIAL INFORMATION

ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

METROCALL HOLDINGS, INC. AND SUBSIDIARIES

See notes to interim condensed consolidated financial statements.

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METROCALL HOLDINGS, INC. AND SUBSIDIARIES

See notes to interim condensed consolidated financial statements.

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METROCALL HOLDINGS, INC. AND SUBSIDIARIES

STATEMENT OF STOCKHOLDERS’ EQUITY

See notes to interim condensed consolidated financial statements.

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METROCALL HOLDINGS, INC. AND SUBSIDIARIES

See notes to interim condensed consolidated financial statements.

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METROCALL HOLDINGS, INC.

1.     Organization and Chapter 11 Emergence

      The accompanying unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). The interim condensed consolidated financial statements include the consolidated accounts of Metrocall Holdings, Inc. and our majority owned subsidiaries (collectively, the Company or Metrocall). In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the financial position, results of operations and cash flows for the interim periods presented have been made. The preparation of the financial statements includes estimates that are used when accounting for revenues, allowance for uncollectible receivables, telecommunications expenses, reorganization and restructuring expenses, certain accrued liabilities and depreciation and amortization. Actual results could differ from those estimates. The results of operations for the three and six-month periods ended June 30, 2003, are not necessarily indicative of the results to be expected for the full year. Some information and footnote disclosures normally included in financial statements or notes thereto prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. We believe, however, that our disclosures are adequate to make the information presented not misleading. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Metrocall’s 2002 Annual Report on Form 10-K.

Bankruptcy-Related Financial Reporting

      The consolidated financial statements of Metrocall, prior to its emergence from chapter 11 on October 8, 2002, (the “Predecessor Company”), were prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). Metrocall prepared the consolidated financial statements on a going-concern basis of accounting. This basis of accounting contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. Upon emergence from chapter 11, Metrocall (the “Reorganized Company”) restated its assets and liabilities, in accordance with SOP 90-7, on the fresh start basis of accounting which requires recording the assets on a fair value basis similar to those required by Statement of Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations.”

Exit from Chapter 11 and Plan of Reorganization

      On October 8, 2002, (the “Effective Date”), Metrocall, Inc. together with its licensing and operating subsidiaries Metrocall USA Inc. (Metrocall USA), Advanced Nationwide Messaging Corporation Inc. (ANMC), MSI Inc. (MSI), McCaw RCC Communications, Inc. (McCaw), and Mobilfone Service, LP (Mobilfone), (collectively, the “Debtors”) emerged from chapter 11 of the U.S. Bankruptcy Code pursuant to a Joint Plan of Reorganization (the “Plan”). Metrocall, Inc. and its subsidiaries are referred to herein as the Predecessor Company for the three and six month periods ended June 30, 2002. The reorganized company, Metrocall Holdings, Inc., together with its licensing and operating subsidiaries are collectively referred to herein as the Reorganized Company for periods commencing after October 8, 2002.

2.     Significant Accounting Policies

Basis of Presentation

      In connection with its emergence from the chapter 11 proceedings, the Reorganized Company adopted the provisions of SOP 90-7, which provides guidance for financial reporting by entities that have filed petitions under the Bankruptcy Code and have reorganized in accordance with the Bankruptcy Code. As a result of this application Metrocall’s financial results for the three and six months ended June 30, 2003 are prepared on a different basis than the financial results for the three and six months ended June 30, 2002. The

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Reorganized Company’s condensed consolidated financial statements are not comparable with those of the Predecessor Company’s.

      The accompanying condensed consolidated financial statements of the Reorganized Company include the accounts of Metrocall Holdings, Inc. and its wholly-owned subsidiaries Metrocall, Inc; Metrocall Ventures, Inc. (“Ventures”), which holds an interest in Beacon Peak Associates, Ltd. (“Beacon Peak”) and other limited partnership or LLC interests; and Metrocall USA, Inc. (MUSA) a non-operating wholly-owned subsidiary that holds certain regulatory licenses issued by the Federal Communications Commission and other intellectual property.

      The accompanying condensed consolidated financial statements of the Predecessor Company include the accounts of Metrocall, Inc. and its wholly owned operating subsidiaries ANMC, McCaw, Mobilfone, Ventures, and MUSA.

Revenue Recognition

      We recognize revenue under service, rental and maintenance agreements with customers as the related services are performed. We lease (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 one-way paging and ancillary equipment are recognized upon delivery. We bundle the sale of two-way paging equipment with the related service and recognize the revenue and related cost of sales over the expected customer relationship, which we estimate is one year.

Cash and Cash Equivalents

      Cash and cash equivalents consist primarily of cash and investments, 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.

Restricted Cash

      In accordance with the Plan, we had approximately $7.2 million of cash balances restricted for payment of administrative, disputed general unsecured claims of subsidiaries, and disputed tax claims related to the chapter 11 proceedings at June 30, 2003.

Reserve for Doubtful Accounts

      Estimates are used in determining the reserve for doubtful accounts, which includes a reserve for sales credits, and are based on historical collection experience, current trends and a percentage of the accounts receivable aging categories. In determining these percentages we consider historical write-offs, including comparisons of write-offs to provisions for doubtful accounts as a percentage of net revenues and the ratio of the reserve to gross receivables to historical levels. We also monitor collection amounts and statistics.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property and Equipment

      Property and equipment of the Reorganized Company was stated at estimated fair value as of the Effective Date of the Plan. Depreciation is computed using the straight-line method over the following estimated useful lives:

      New pagers and advanced messaging devices are depreciated using the half-year convention upon acquisition. Costs to refurbish pagers are charged to service, rent and maintenance expense. Subscriber equipment sold is recorded in the consolidated statements of operations at net book value at the date of sale. Devices leased to customers under operating leases continue to be depreciated over their remaining useful lives.

Long-Lived Assets

      We account for long-lived assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of by sale are reflected at the lower of their carrying amount or fair value less cost to sell.

Segment Reporting

      We operate in one reportable segment.

Reclassifications

      Certain 2002 amounts have been reclassified to conform to the 2003 presentation.

3.     Long-Term Debt

      Long-term debt and capital lease obligations consisted of the following ($’s in thousands)

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Senior Secured Promissory Note (the “Senior Note”). The Senior Note issued by Metrocall, Inc. on the Effective Date of the Plan was guaranteed by Metrocall Holdings, Inc. and its subsidiaries. The Senior Note accrued interest at the prime lending rate plus a margin of 2.875%. Interest payments were made on the last business day of each month. The Senior Note was secured by substantially all of our assets. During the three months ended March 31, 2003, we repaid $50.0 million aggregate principal amount of the Senior Notes and $487,605 of interest expense. On May 12, 2003, we repaid the balance of principal and interest outstanding on this note and satisfied and discharged this obligation in full.

      Senior Subordinated PIK Promissory Notes (the “PIK Notes”). The PIK Notes issued by Metrocall Holdings, Inc. on the Effective Date of the Plan were guaranteed by MUSA and Ventures. The notes accrued interest at a rate of 12% per annum due quarterly in arrears by issuance of additional PIK Notes until the Senior Note was fully repaid. Thereafter, interest was due and payable monthly in arrears in cash. The PIK Notes were scheduled to mature on December 31, 2004.

      The PIK Notes had a face amount of $20.0 million on their issuance date. We recorded the PIK Notes at their estimated fair value of approximately $17.0 million on the Effective Date representing a $3.0 million discount that will be accreted to the initial face amount based on the effective interest method over the maturity period of the PIK Notes. For the period January 1, 2003 through May 12, 2003, we issued approximately $1.5 million of additional PIK Notes representing interest that had accrued on such notes during the period. Once the Senior Notes were retired, prospective interest amounts that accrued on the PIK Notes became due and payable monthly in arrears. We repaid approximately $21.5 million aggregate principal amount of PIK Notes in cash in two installments of $10.0 million and $11.5 million on May 30, 2003 and June 30, 2003, respectively. As of June 30, 2003, we had repaid all amounts outstanding under the PIK Notes and had satisfied and discharged this obligation in full.

4.     Preferred Stock

      At June 30, 2003, we had approximately 6.0 million shares of series A redeemable preferred stock (series A preferred) outstanding. The series A preferred had an initial liquidation preference of $10.0 per share and accrues dividends at 15% per annum compounded quarterly. Dividends on the series A preferred accrue (but will not become payable) and increase the initial liquidation preference until the first complete fiscal quarter after the Senior and PIK Notes are repaid in full (i.e. September 30, 2003). Thereafter, dividends shall accrue and become payable in cash. As of June 30, 2003, the liquidation preference per share was approximately $11.13.

      After repayment of the Senior and PIK Notes, the series A preferred will be redeemed on a pro-rata basis, together with any and all unpaid accrued dividends to the redemption date on a quarterly basis by an amount equal to 100% of Unrestricted Cash over $10.0 million. Unrestricted cash is defined as cash on hand with Metrocall Holdings, Inc, Metrocall, Inc. and Metrocall USA, Inc. excluding (i) cash necessary to make distributions pursuant to the Plan or to establish reserves as may be required or permitted under the Plan or otherwise appropriate or (ii) cash encumbered by permitted liens.

      Mandatory redemptions will be made on a quarterly basis no later than 65 days following the end of a fiscal quarter. Pursuant to the series A preferred certificate of designation, we are required to redeem a minimum number of shares having an aggregate liquidation preference of $5.0 million preference amount and to provide holders between 30 and 60 days notice of redemption with each redemption. Metrocall also has the ability to redeem preferred shares at its option subject to the same minimum redemption amounts and notice requirements as with a mandatory redemption. We are required to redeem all series A preferred shares on or before December 31, 2006.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.     Employee Stock Option Plan

      In May 2003, our board of directors authorized, and our stockholders approved, the 2003 Stock Option Plan. On May 7, 2003, we granted nonqualified options for the purchase of up to 70,000 shares of common stock to certain members of senior management at an exercise price of $2.83 per share. The options vest over a 24-month period with half of the common stock available for issuance on May 7, 2004 and May 7, 2005, respectively. The options expire ten years after the date of the grant. We have accounted for these grants using the method of accounting prescribed by SFAS No. 123, “Accounting for Stock Compensation” and will recognize stock-based compensation expense for the grant equaling its fair value over the vesting period of each option grant.

      The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. In computing these amounts, we assumed risk-free interest rates of 1.37%, an expected life and vesting period of 24 months, an expected dividend yield of zero and an expected volatility of 62.12%. The weighted average fair value (computed consistent with SFAS No. 123) of options granted under the Plan was $7.38. The total expense for the option grants over the 24-month vesting period will be approximately $517,000. We have included stock-based compensation expense of approximately $58,000 within our general and administrative expenses for the three and six months ended June 30, 2003 with a corresponding credit to our additional paid-in capital.

Earnings Per Share

      The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share amounts):

6.     2003 Restructuring

      In February 2003, our Board of Directors approved a plan that would enable us to reorganize our corporate management and sales distribution function and to further centralize our national call center services and inventory fulfillment processes. Management believes that measures were necessary to maximize both operating and free cash flows.

      Such containment and reduction initiatives have or are expected to include:

      Reorganization of corporate management — Approximately 14 senior or corporate management positions were eliminated under the plan, all of which occurred by March 31, 2003. Many of the reductions are being taken in connection with the events described below.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Reorganization of sales distribution — In February 2003 under the plan, we consolidated the number of field sales regions under the leadership of regional vice presidents from 6 to 3. The consolidated regions include: the Eastern region, formerly comprised of the Northeast, Mid-Atlantic and Southeast regions; the Central region; and the Western region, formerly comprised of the West and Northwest regions. We also consolidated our corporate sales initiatives under the leadership of one senior vice president and consolidated the non-core database marketing sales group into our national call center. As a result of this consolidation, we have eliminated several corporate sales and marketing positions.

      Centralization of national call centers and inventory fulfillment — In March 2003 under the plan, we consolidated our national call center and credit and collection efforts into one existing location in Pensacola, Florida. These functions had been performed in two separate locations: Alexandria, Virginia and Pensacola, Florida. The consolidation has enabled us to reduce the number of staff and management positions required.

      In connection with the regional consolidation, the plan requires us to centralize our field customer service and inventory fulfillment functions into one or two main locations within each region. This process should enable us to more cost-effectively provide customer service, data entry and inventory fulfillment and permit us to reduce our operating expenses while maintaining adequate levels of customer service. This process should be completed by year-end.

      As a result of the aforementioned cost reduction plan, we have reduced our workforce by approximately 296 positions through June 30, 2003. Estimated annualized compensation and benefit expense savings of approximately $15.0 million have been achieved by implementing these reductions. Severance and related expenses of approximately $5.7 million were recognized in the three months ended March 31, 2003 of which $2.9 million was paid out by March 31, 2003 with the balance paid during the three months ended June 30, 2003.

7.     Commitments and Contingencies

      We are 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 our financial position or the results of operations.

8.     Recent Accounting Pronouncements

      In May 2003, the FASB issued SFAS 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity.

      This statement is effective for financial statements entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Metrocall plans to adopt SFAS 150 in the third quarter of 2003, which will result in the reclassification of our series A preferred as a liability.

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      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 quarterly report and on our Annual Report on Form 10-K for the year ended December 31, 2002.

Forward-looking Statements

      This Report on Form 10-Q includes or incorporates forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions which include:

	•	Our ability to implement our business strategies;
	•	The reliance of our current business model on a continued revenue stream from advanced messaging which is otherwise subject to certain risks;
	•	Our reliance on another messaging company, which recently reorganized under chapter 11 of the Bankruptcy Code, to provide access to a two-way messaging network;
	•	The impact of competition from other narrow-band businesses and emerging competition from broadband messaging services as well as ongoing and future technological developments which may render our products less attractive;
	•	Satellite transmission failures;
	•	Loss of subscribers and subscriber turnover;
	•	Litigation;
	•	Regulatory changes; and
	•	Dependence on key management personnel.

      Other matters set forth in this Report on Form 10-Q may also cause actual results to differ materially from those described in the forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur.

Overview

      We are a leading provider of local, regional and national one-way or “traditional” paging and two-way or “advanced wireless data and messaging” services. Through our one-way nationwide wireless network, we provide messaging services to over 1,000 U.S. cities, including the top 100 Standard Metropolitan Statistical Areas. We currently provide messaging services to approximately 3.1 million subscribers, including 0.2 million advanced messaging subscribers. As of June 30, 2003, we were the second largest messaging (paging) company in the United States based on the number of subscribers.

      We derive a majority of our revenues from fixed, periodic (usually monthly) fees, generally not dependent on usage, charged to subscribers for paging and wireless data services. While a subscriber continues to use its services, operating results benefit from this recurring revenue stream with minimal requirements for incremental selling expenses or fixed costs. While we expect to continue efforts to both maintain and add subscribers, our plan of reorganization had assumed a substantial downsizing of our operational platform.

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Further, we are focusing on certain segments of the market that provide greater revenue stability and higher margins.

      As a result of, among other things, the significant decline in revenues and subscribers experienced by Metrocall and its competitors in the wireless paging industry over the last several years, Metrocall and many of its competitors sought bankruptcy protection to execute financial restructurings necessary to continue operations. Our financial reorganization under chapter 11 of the U.S. Bankruptcy Code concluded with our emergence on October 8, 2002 and by June 30, 2003, we had repaid all of our bank debt issued under our Plan.

      Through the first six months of 2003, the paging industry continued to experience declines in revenues and subscriber units in service. In 2002, our net revenues (total revenues less the net book value of products sold) decreased approximately $85.0 million from 2001 and decreased approximately $4.5 million in the three months ended June 30, 2003 compared to the three months ended March 31, 2003. This rate of revenue decline is, on average, the same level as 2002. The declines in revenues we have experienced over these periods have been much lower than the reduction in revenues reported by the largest nationwide paging company. In 2002, our service, rent and maintenance; selling and marketing; and general and administrative expenses decreased approximately $85.0 million from 2001 and decreased approximately $5.5 million in the three months ended June 30, 2003 compared to the three months ended March 31, 2003. Although we have made significant strides in reducing these operating expenses, there can be no assurance that future declines in revenues will be matched with a commensurate reduction in these operating expenses. While we are focusing our sales and distribution efforts to mitigate the level of revenue loss, continued declines could potentially significantly reduce cash flows generated by operating activities in future periods.

Metrocall’s 2003 Business Strategy

      Our business objectives and operating strategy for 2003 have been focused on maximizing our operating and free cash flows. Key elements of this strategy have included:

	•	Subscriber retention efforts;
	•	Resale of complimentary communications products and services; and
	•	Cost containment and reduction.

      Subscriber retention efforts. We expect the demand for our traditional paging services and the related revenues to continue to decrease in 2003. Our subscriber retention efforts will continue to focus on customer service and sales efforts to our business, medical and government subscribers. We will support these efforts through our tiered field sales and corporate service model, designed to provide maximum support to customer accounts based on their size and billing potential. We believe that these customer accounts provide a higher average revenue per unit (“ARPU”) and lower deactivation percentage than subscribers serviced through indirect distribution channels.

      We believe that maintaining sufficient levels of customer service continues to be a key factor in mitigating potential subscriber churn. Our customer service representatives assist subscribers in managing their account activity including the movement of paging devices between personnel within an account. In addition, they address customer inquiries from existing or potential customers. As such, we provide customer service at both a field and national level to address the demands and expectations of different sizes and types of customers within our direct subscriber base.

      Resale of complementary communications products and services. We believe that product and technology competition result in increased traditional paging deactivation. As such, we have continued to offer advanced messaging services through alliances with Weblink Wireless, Inc. (“Weblink”), and other carriers and to sell cellular and PCS phones to subscribers that require wireless messaging beyond the capabilities of traditional paging. We sell cellular and PCS phone services through commission or residual-based alliance and

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dealer agreements with several carriers including AT&T Wireless, Inc. and Nextel, Inc. We believe these offerings assist to partially offset revenue losses associated with subscriber churn and enable us to continue to satisfy customer demands for a broader range of wireless products and services without our customers having to look outside of Metrocall when they could be subject to pressures to drop our traditional services in lieu of other forms of communication.

      We offer advanced messaging services using a narrowband PCS platform primarily through a strategic alliance agreement with Weblink. For the twelve months ended December 31, 2002 and the six months ended June, 2003, we generated revenues of approximately $59.8 million and $27.2 million, respectively from these services. As of June 30, 2003, approximately 189,000 subscribers received these services. Throughout 2003, we intend to continue this service offering although we expect the demand for this service to decline from 2002 levels. Similar to traditional paging, our sales and marketing efforts for the advanced messaging products will be targeted at business, medical and government customers. Presently there are several foreign manufacturers developing advanced messaging devices that utilize the ReFLEX™ protocol, which may be available in late 2003. We currently sell or lease advanced messaging devices to our subscribers from existing quantities of on-hand two-way equipment. This is possible due to purchases made from Motorola, Inc. prior to their exit from the pager manufacturing business in 2002. We believe that based on recent demand we have a sufficient supply of advanced messaging devices until at least the fourth quarter of 2003. Our advanced messaging results could be affected in future periods if there is delay in bringing new products to market or if their cost is prohibitive.

      Cost Containment and Reduction — Our 2002 Plan of Reorganization was predicated on a refinement of our operating structure that would reduce the amount of costs required to operate our business. During 2002, we took several steps to reduce our operating and capital expenditures. In 2003, our operating expenses have and are expected to further decline as a result of the implementation of several initiatives that further reduce our management hierarchy and realign our sales management and support functions into a much more streamlined organization focusing primarily on business and government customers.

      In February 2003, our Board of Directors approved a plan that would enable us to reorganize our corporate management and sales distribution function and to further centralize our national call center services and inventory fulfillment processes. Management believes these measures were necessary to maximize both operating and free cash flows. We also believe these reductions are possible due to the rationalization and centralization efforts we performed in 2001 and 2002 and the reduction in the number of subscribers to which we provide customer service or inventory fulfillment. We believe that we can further reduce our operating expenses and corporate structure in future periods as demand for our paging product and services decreases.

      Such containment and reduction initiatives have or are expected to include:

      Reorganization of corporate management — Between February and March 2003, we eliminated several senior or corporate management positions representing 25% of all such positions. Many of the reductions are being taken in connection with the events described below. Such reductions are possible because the size of our company in terms of employees, subscribers and revenues no longer requires a management structure that was designed to support a growth-oriented company.

      Reorganization of sales distribution — In February 2003, we consolidated the number of field sales regions under the leadership of regional vice presidents from 6 to 3. The consolidated regions include: the Eastern region, formerly comprised of the Northeast, Mid-Atlantic and Southeast regions; the Central region; and the Western region, formerly comprised of the West and Northwest regions. The reduction of operating regions has enabled us to further reduce general and administrative expenses associated with our field operations as each operating region has separate administrative support staff which now have been combined. In addition, we expect to continue to consolidate certain of our under-performing offices and markets into more established markets to increase operating margins in those markets throughout 2003.

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      In February 2003, we also consolidated our corporate sales initiatives under the leadership of one senior vice president and consolidated the non-core database marketing sales group into our national call center. The database marketing group primarily targeted consumer subscribers which are outside of our core business focus. As a result of this consolidation, we have eliminated several corporate sales and marketing positions.

      Centralization of national call centers and inventory fulfillment — In March 2003, we consolidated our national call center and credit and collection efforts into one existing location in Pensacola, Florida. These functions had been performed in two separate locations: Alexandria, Virginia and Pensacola, Florida. The consolidation has enabled us to reduce the number of staff and management positions required. In addition, we achieved certain operating efficiencies that were not possible earlier until the conversion of our final billing system platform, which occurred in December 2002. We now have one common platform under which we manage our subscriber invoicing, order fulfillment and customer service support.

      In connection with the regional consolidation, we will centralize our field customer service and inventory fulfillment functions into fewer locations within each region. This process should enable us to more cost-effectively provide customer service, data entry and inventory fulfillment and permit us to reduce our operating expenses while maintaining adequate levels of customer service. We expect to complete this initiative by year-end.

      Other initiatives — We expect to identify further areas of cost savings and efficiencies. Similar to the above events these are possible because the size of our subscriber base no longer warrants the continuation of such expenditures. We continue to review our technical, selling and marketing and administration functions for additional cost containment or avoidance initiatives. We expect to identify further opportunities to reduce our expenses during 2003 as the initiatives described above are completed and integrated through our operating structure.

      As a result of the aforementioned cost reduction plan, we have reduced our workforce by approximately 296 positions through June 30, 2003. Estimated annualized compensation and benefit expense savings of approximately $15.0 million have been achieved by implementing these reductions. Severance and related expenses of approximately $5.7 million were recognized in the three months ended March 31, 2003 of which $2.9 million was paid out by March 31, 2003 with the balance paid during the three months ended June 30, 2003.

Results of Operations

      The definitions below will be helpful in understanding the discussion of Metrocall’s results of operations.

	•	Service, rent and maintenance revenues: include primarily monthly, quarterly, semi-annually and annually billed recurring revenue, not generally dependent on usage, charged to subscribers for paging and related services such as voice mail and pager repair and replacement. Service, rent and maintenance revenues also include revenues derived from cellular and long distance services.
	•	Net revenues: include service, rent and maintenance revenues and sales of customer owned and maintained (“COAM”) pagers less net book value of products sold.
	•	Service, rent and maintenance expenses: include costs related to the management, operation and maintenance of our network systems and customer service support centers.
	•	Selling and marketing expenses: include salaries, commissions and administrative costs for our sales force and related marketing and advertising expenses.
	•	General and administrative expenses: include executive management, accounting, bad debt expenses, office telephone, repairs and maintenance, management information systems and employee benefits.

      For financial statement purposes, our results of operations and cash flows for 2002 have been separated as pre-and post- October 8, 2002 due to a change in basis of accounting in the underlying assets and liabilities.

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(Please refer to Note 2 to the notes to the consolidated financial statements for the fiscal year ended December 31, 2002 and Note 2 here-in). For purposes of the following discussion, we refer to our results prior to October 8, 2002 as results for our predecessor company and we refer to results of October 8, 2002 and after as results for the reorganized company. The results of the reorganized company and the predecessor company for the three and six months ended June 30, 2003 are discussed below. However for the reasons described in Note 2 to the notes to the consolidated financial statements in our December 31, 2002 Annual Report on Form 10-K and Note 2 herein, the predecessor company and reorganized company financial statements are not comparable. The following results are particularly of interest:

	•	Reorganization expenses of $2.5 million recognized by the Predecessor Company in the three and six months ended June 30, 2002 related to legal, financial and investment banking services related to our chapter 11 proceedings as well as severance related expenses and facility lease exit costs related to restructuring efforts;
	•	The cessation of recording contractual interest of $5.8 million by the Predecessor Company while we were in bankruptcy from June 3, 2002 to June 30, 2002.

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DISCUSSIONS OF THE SELECTED RESULTS OF OPERATIONS DATA FOR THE
THREE MONTHS ENDED JUNE 30, 2003 AND 2002

      The following table sets forth the amounts of revenues, expenses and the percentages of net revenues represented by certain items in Metrocall’s Interim Condensed Consolidated Statements of Operations and certain other information for the three month periods ended June 30, 2002 and 2003 (all dollars in thousands):