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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For The Quarterly Period Ended March 31, 2004

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

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 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 Exchange Rule 12(b-2)     Yes x  No o

      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:

METROCALL HOLDINGS, INC. AND SUBSIDIARIES

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

BALANCE SHEETS

See notes to interim condensed consolidated financial statements.

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METROCALL HOLDINGS, INC. AND SUBSIDIARIES

STATEMENTS OF OPERATIONS

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

STATEMENTS OF CASH FLOWS

See notes to interim condensed consolidated financial statements.

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METROCALL HOLDINGS, INC.

1.     Organization

      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, restructuring expenses, and depreciation and amortization. Actual results could differ from those estimates. The results of operations for the three-month period ended March 31, 2004, 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 the 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 our 2003 Annual Report on Form 10-K.

      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”) that was confirmed by the U.S. Bankruptcy Court for the District of Delaware, (the “Bankruptcy Court”) by an order entered on September 26, 2002.

2.     Significant Accounting Policies

Basis of Presentation

      The accompanying condensed consolidated financial statements include the accounts of Metrocall Holdings, Inc. and its wholly-owned subsidiaries Metrocall, Inc; Metrocall Ventures, Inc. (“Ventures”), 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. Intercompany transactions have been eliminated in consolidation.

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. A majority of these 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. Beginning July 1, 2003, we adopted the provisions of EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.

      Under EITF 00-21, we concluded that revenues associated with two-way messaging device sales and the provision of related messaging services represented separable units of accounting. Accordingly, we began to recognize two-way service revenue over the period the service is performed and revenue from two-way device sales upon delivery. Prior to its adoption, we had bundled the sale of two-way messaging devices with the related airtime or messaging service and recognized the revenue over the estimated customer relationship. The impact from the adoption of EITF 00-21 was not material to the three months ended March 31, 2004.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cash and Cash Equivalents

      Cash and cash equivalents consist primarily of investments, all having maturities of ninety days or less when purchased. The carrying amount reported in the accompanying balance sheets for each equivalents approximates fair value due to the short-term maturity of these instruments.

Reserve for Doubtful Accounts

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

Property and Equipment

      Property and equipment was stated at 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.

Change in Accounting for Redeemable Preferred Stock

      We have applied the provisions of SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, to our financial statements beginning after July 1, 2003. As a result, our series A preferred, which is a mandatory redeemable security, has been classified as a liability on our December 31, 2003 and March 31, 2004 balance sheets. In addition, dividends and accretion of our series A preferred incurred after June 30, 2003 have been reflected as an element of interest expense and as a reduction to net income. Prior to the adoption of SFAS 150, we had reflected these items as a reduction to

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

retained earnings and a reduction in the determination of income available to common stockholders. Please refer to Note 5.

Stock-Based Compensation

      We follow SFAS No. 123, Accounting for Stock-Based Compensation, which establishes a fair-value based method of accounting for stock-based compensation plans.

Income Taxes

      We account for income taxes under the provision of SFAS No. 109, Accounting for Income Taxes. 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.

      During the three months ended March 31, 2004, we experienced a change in ownership as defined in sections 382 and 383 of the Internal Revenue Code. The deferred tax asset related to certain net operating loss and other tax credit carryforwards totaling $7.0 million and the related valuation allowance were reduced to zero as a result of this change. Accordingly, this reduction had no impact on net deferred tax asset balances.

      Pursuant to SFAS 109, we are required to evaluate the recoverability of our deferred tax assets on an ongoing basis. This evaluation should consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, it is more likely than not that some portion or all of our net deferred tax assets will not be realized in future periods. At March 31, 2004, total deferred assets were recorded net of a valuation allowance of $28.5 million on the accompanying balance sheet.

      Our tax provision for the three months ended March 31, 2004 was based on our estimated effective tax rate for fiscal year 2004 of 41.6%. For purposes of determining our income tax provision and the effective tax rate, interest expense related to accretion and dividends on series A preferred stock, which is not deductible for tax purposes, was excluded from our taxable income computation, which had the impact of increasing our effective income tax rate.

Earnings Per Share

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

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Segment Reporting

      Metrocall operates in one reportable segment.

Reclassifications

      Certain 2003 amounts have been reclassified to conform to the 2004 presentation.

3.     Formation and Investment in GTES, LLC

      On February 11, 2004, our wholly-owned subsidiary, Ventures entered into an agreement with Glenayre Electronics, Inc., a subsidiary of Glenayre Technologies, Inc. to form GTES, LLC (GTES). GTES offers product sales, maintenance services, software development and product development to the wireless industry as an authorized licensee of paging infrastructure technology owned by Glenayre Electronics, Inc.

      Pursuant to the terms of the agreement, Ventures contributed cash of $2.0 million in exchange for a 51% fully diluted ownership interest in GTES. As a result of our majority ownership interest, we have consolidated GTES into our financial statements from February 11, 2004, the date of our investment. We have a commitment to fund annual cash flow deficits, if any, of GTES up to $1.5 million during the initial three year period following the investment date. This infusion may be in the form of an additional capital contribution or debt instrument.

4.     Acquisition of Assets

      On November 18, 2003, we acquired the majority of the operating assets and assumed certain liabilities of Weblink Wireless, Inc. and certain of its subsidiaries. We accounted for the asset acquisition under the purchase method of accounting for financial reporting purposes pursuant to SFAS 141, Business Combinations, and accordingly, the results of Weblink’s operations have been included in our financial statements since that date. In addition, Metrocall and Weblink also entered into a Management and Spectrum Lease Agreement under which Weblink will provide certain services, and lease to us the spectrum usage rights granted under FCC licenses pending the FCC’s approval of the transfer of such licenses to Metrocall becoming final. The purchase price for the assets acquired was approximately $42.8 million, which was allocated to the assets acquired based on their estimated fair values, as of November 18, 2003.

      The purchase price allocation may be subject to adjustment for changes in estimates related to costs to be incurred to close and exit duplicate facilities, and to settle pending legal and other contingencies. The resolution of these matters is not expected to have a material impact on our financial condition or results of future operations. In connection with the transaction, we expected to incur $8.1 million in restructuring costs primarily as a result of severance and relocation of workforce and the elimination of duplicate facilities that we expected to undertake as a result of the acquisition. We recognized such costs as a liability assumed as of the acquisition date. These restructuring costs consisted of $4.9 million of employee termination and other benefits of approximately 280 employees expected to be paid in 2004; $0.4 million related to the closure of facilities, $1.6 million of long-term asset retirement obligations and $1.2 million of other current liabilities. Of this liability, $1.2 million of these costs had been paid between the acquisition date and December 31, 2003. An additional $1.8 million was paid in the three months ended March 31, 2004 as a result of severance obligations incurred from the release of approximately 224 employees. As of March 31, 2004, our remaining restructuring obligation was approximately $5.1 million. We expect to pay out the remaining liability in 2004, except for long-term asset retirement obligations of approximately $1.6 million, which are expected to be paid out over the next ten years.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.     Series A Redeemable Preferred Stock

      At December 31, 2003 and March 31, 2004, our authorized preferred stock consisted of 8.5 million shares of 15% cumulative Series A Preferred Stock, par value $0.01 per share (series A preferred). As of December 31, 2003 and March 31, 2004, 4,196,187 shares and 606,499 shares of the series A preferred were outstanding, respectively, with a liquidation preference of approximately $46.7 million and $6.7 million, respectively. At December 31, 2003 and March 31, 2004, approximately 6,710 shares of series A preferred stock were available for issuance to satisfy certain claims under the Plan.

      From their issuance date through June 30, 2003, dividends on the series A preferred accrued at a rate of 15% per annum compounded quarterly (but did not become payable) and increased the initial liquidation preference from $10.0 per share on their issuance date on October 7, 2002 to approximately $11.13 per share as of June 30, 2003. Following the June 30, 2003 final repayment of the senior secured promissory and senior subordinated PIK promissory notes issued in connection with the Plan, dividends that accrued subsequent to that date became payable in cash on the last day of each fiscal quarter end. We paid cash dividends of approximately $1.0 million on March 31, 2004. On March 31, 2004, we also announced that we would redeem the remaining issued and outstanding shares of series A preferred with an aggregate liquidation preference of $6.7 million, and accrued and unpaid dividends thereon, on May 17, 2004.

      Beginning July 1, 2003, we adopted the provisions of SFAS No. 150. Pursuant to SFAS No. 150, the series A preferred, due to its mandatory redeemable provisions, has been classified as a liability on the accompanying balance sheet. In addition, subsequent to June 30, 2003, we recorded dividends and accretion expenses on the series A preferred as a component of interest expense in the determination of net income for the period. Prior to July 1, 2003, dividends and accretion expenses had been excluded from net income and reflected as a reduction to net income in the determination of income available to common stockholders. Under the provisions of SFAS 150, no prior periods (periods ending prior to July 1, 2003) were re-classified to conform to the presentation stipulated by the Statement.

      As such, dividends and accretion on series A preferred for the three months ended March 31, 2004 and March 31, 2003 consisted of:

6.     Common Stock

      At December 31, 2003, our authorized common stock consisted of 7.5 million shares, par value $0.01 per share. At December 31, 2003 and March 31, 2004, there were 5,461,160 and 5,462,285 shares of common

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

stock outstanding, respectively. At December 31, 2003 and March 31, 2004, approximately 38,840 shares of common stock were available for issuance to satisfy remaining claims under the Plan.

      Holders of the common stock have voting rights which in the aggregate constitute 5% of the total voting power of Metrocall Holdings, Inc. until the series A preferred has been fully redeemed. Cash dividend payments on common stock are not permitted until the series A preferred is fully redeemed.

7.     Employee Stock Option Plan

      In May 2003, our board of directors authorized and stockholders approved, the 2003 Stock Option Plan. On May 7, 2003, we granted nonqualified options for the purchase of up to 350,000 shares of common stock to certain of its employees at an exercise price of $0.566 per share. Of the options granted on May 7, 2003, 3,000 shares and 1,875 shares were forfeited during 2003 and the three months ended March 31, 2004, respectively and 1,125 were exercised during the three months ended March 31, 2004 . The remaining options vest over a 24-month period with half of the common stock available for issuance on May 7, 2004 and 2005, respectively and expire ten years after their date of grant. On September 25, 2003, the board of directors approved grants of 10,000 options to each of the six Qualified Directors. The additional 60,000 options were granted at an exercise price of $0.566 per share and shall only become vested and exercisable if the Qualified Director is re-elected as a director of Metrocall upon the expiration of his applicable current term as a director (either at the 2004 annual meeting of stockholders for four of the non-employee directors, or at the 2005 annual meeting of stockholders for two of the non-employee directors). These options expire in 2013. We accounted for these grants using the method of accounting prescribed by SFAS No. 123 and recognized 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 for the 344,000 and 60,000 shares of 1.37% and 1.47%, respectively, an expected life and vesting periods as noted above, an expected dividend yield of zero and an expected volatility of 62.12% and 60.61%, respectively. The weighted average fair value per share (computed consistent with SFAS No. 123) of options granted in May and September 2003 was $1.48 and $28.84, respectively. The total expense for the option grants over the total vesting period will be approximately $2.2 million of which stock-based compensation expense of approximately $0.6 million was recognized and reflected as a general and administrative expense in the three months ended March 31, 2004.

8.     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 believed that these measures were necessary to maximize net cash provided by operating activities.

      Such reduction initiatives included:

      Reorganization of corporate management — Approximately 14 senior corporate management positions were eliminated under the plan, all of which occurred by March 31, 2003. Many of the eliminated positions were as a result of the events described below.

      Reorganization of sales distribution — In February 2003 under this plan, we consolidated the number of field sales regions under the leadership of a regional vice president from 6 to 3. The consolidated regions included: 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 North West regions. In addition, we 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 the reorganization, several corporate sales and marketing positions were eliminated.

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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 including Alexandria, Virginia and Pensacola, Florida. The consolidation has enabled us to reduce the number of staff and management positions required from the two locations.

      As a result of the aforementioned cost reduction plan that occurred during the three months ended March 31, 2003, we reduced our workforce by a total of 203 positions. Severance expenses of approximately $5.7 million was recognized during the three months ended March 31, 2003. All amounts expensed under this cost reduction plan in 2003 were paid out during 2003.

9.     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 the financial position or the results of the operations.

10.     Proposed Merger with Arch Wireless, Inc.

      On March 29, 2004, we announced that we had entered into a merger agreement with Arch Wireless, Inc. The merger is conditioned on, among other things, receiving shareholder and regulatory approvals. The merger agreement contemplates that after the merger, Metrocall and Arch will be wholly-owned subsidiaries of a recently-formed Delaware corporation, referred to as “Holding Company.” Metrocall and Arch intend that the merger will constitute a tax-free transaction to the extent that shareholders receive stock rather than cash in the merger.

      Pending receipt of shareholder and regulatory approvals, the merger will be consummated and:

	•	Metrocall common stockholders will receive 1.876 shares of Holding Company common stock for each share that they own, subject to adjustment for unanticipated changes in the number of fully diluted shares of outstanding common stock of Metrocall and/or Arch prior to the completion of the merger. Holders of two million shares of Metrocall common stock outstanding immediately prior to the effectiveness of the merger will receive, in lieu of Holding Company common stock, $75.00 per share in cash. Prior to the effective date of the merger, Metrocall common stockholders will have the right to elect to receive cash consideration for all, none or a portion of their shares of Metrocall common stock. To the extent Metrocall common stockholders as a group elect to receive cash for more or less than two million shares of Metrocall common stock, the mix of stock and cash consideration payable to Metrocall common stockholders will be adjusted on a pro rata basis so that exactly two million shares of Metrocall common stock outstanding immediately prior to the effectiveness of the merger are exchanged for cash. The approximately four million shares of Metrocall common stock anticipated to be remaining on a fully diluted basis at the time of the merger would be converted into approximately 7.56 million shares of Holding Company common stock at the exchange ratio of 1.876 Holding Company shares for each Metrocall share. Upon completion of the merger, it is anticipated that there will be approximately 27.49 million shares of Holding Company common stock outstanding, on a fully diluted basis. As a result, former stockholders and holders of outstanding options and warrants of Metrocall will own approximately 27.5% of the outstanding common stock of Holding Company on a fully diluted basis.
	•	Arch common stockholders will receive one share of Holding Company common stock for each share that they own. On a fully diluted basis, it is anticipated that there will be approximately 19.93 million shares of Arch common stock outstanding at the time of the merger. As a result, former stockholders and holders of outstanding options of Arch will own 72.5% of the outstanding common stock of

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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

		Holding Company on a fully diluted basis and accordingly it is expected that Arch will be the “accounting acquirer” for accounting purposes.

      Pursuant to the merger agreement, we are required to redeem and/or defease all of our remaining issued and outstanding shares and shares reserved for issuance of series A preferred and Arch is required to redeem all of its subsidiary’s 12% Subordinated Secured Compounding Notes prior to the consummation of the merger. In addition, Holding Company will be required to secure financing of up to $150.0 million to fund the cash consideration to be received by Metrocall stockholders.

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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, 2003.

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:

	•	Loss of subscribers of traditional paging services and advanced messaging services;
	•	Increased competition resulting from technological advances;
	•	Any failure to obtain FCC approvals for licenses;
	•	Regulatory changes;
	•	Satellite transmission failures;
	•	Inability to maintain cost reductions;
	•	Difficult comparison of operating results associated with our adoption of fresh-start accounting;
	•	The challenges to integrate the operating assets we acquired from WebLink Wireless, Inc. (WebLink) into our operations;
	•	Dependence on key management personnel; and
	•	Ability to consummate the merger with Arch Wireless, Inc.

      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. Metrocall undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q 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 nationwide wireless network, we provide messaging services to over 1,000 U.S. cities, including the top 100 Standard Metropolitan Statistical Areas (SMSAs). Metrocall currently provides messaging services to approximately 3.2 million subscribers, including 0.3 million advanced messaging subscribers.

     Proposed Merger with Arch Wireless, Inc.

      On March 29, 2004, we announced that we had entered into a merger agreement with Arch Wireless, Inc. The merger is conditioned on, among other things, receiving shareholder and regulatory approvals. The merger agreement contemplates that after the merger, Metrocall and Arch will be wholly-owned subsidiaries of a recently-formed Delaware corporation, referred to as “Holding Company.” Metrocall and Arch intend that the merger will constitute a tax-free transaction to the extent that shareholders receive stock rather than cash in the merger.

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      Pending receipt of shareholder and regulatory approvals, the merger will be consummated and:

	•	Metrocall common stockholders will receive 1.876 shares of Holding Company common stock for each share that they own, subject to adjustment for unanticipated changes in the number of fully diluted shares of common stock of Metrocall and/or Arch prior to the completion of the merger. Holders of two million shares of Metrocall common stock outstanding immediately prior to the effectiveness of the merger will receive, in lieu of Holding Company common stock, $75.00 per share in cash. Prior to the effective date of the merger, Metrocall common stockholders will have the right to elect to receive cash consideration for all, none or a portion of their shares of Metrocall common stock. To the extent Metrocall common stockholders as a group elect to receive cash for more or less than two million shares of Metrocall common stock, the mix of stock and cash consideration payable to Metrocall common stockholders will be adjusted on a pro rata basis so that exactly two million shares of Metrocall common stock outstanding immediately prior to the effectiveness of the merger are exchanged for cash. The approximately four million shares of Metrocall common stock anticipated to be remaining on a fully diluted basis at the time of the merger would be converted into approximately 7.56 million shares of Holding Company common stock at the exchange ratio of 1.876 Holding Company shares for each Metrocall share. Upon completion of the merger, it is anticipated that there will be approximately 27.49 million shares of Holding Company common stock outstanding, on a fully diluted basis. As a result, former stockholders and holders of outstanding options and warrants of Metrocall will own approximately 27.5% of the outstanding common stock of Holding Company on a fully diluted basis.
	•	Arch common stockholders will receive one share of Holding Company common stock for each share that they own. On a fully diluted basis, it is anticipated that there will be approximately 19.93 million shares of Arch common stock outstanding at the time of the merger. As a result, former stockholders and holders of outstanding options of Arch will own 72.5% of the outstanding common stock of Holding Company on a fully diluted basis and accordingly it is expected that Arch will be the accounting acquirer for accounting purposes.

      Pursuant to the merger agreement, we are required to redeem and/or defease all of our remaining issued and outstanding shares and shares reserved for issuance of series A preferred stock and Arch is required to redeem all of its subsidiary’s 12% Subordinated Secured Compounding Notes prior to consummation of the merger. In addition, Holding Company and its subsidiaries will be required to secure financing of up to $150.0 million to the fund the cash consideration to be received by our shareholders. We have issued a notice of redemption dated March 31, 2004, for the remaining outstanding shares of our series A preferred scheduled for May 17, 2004. Arch announced on April 29, 2004, that it will redeem the 12% Subordinated Secured Compounding Notes on May 28, 2004.

      We anticipate that shares of Holding Company common stock will be listed on NASDAQ National Market, and have agreed with Arch to use our reasonable best efforts to obtain such listing. In addition, we have agreed with Arch to cooperate with each other and to use our reasonable best efforts to take all actions and do all things necessary to complete the merger, including obtaining all necessary consents and required approvals and obtaining financing to pay the cash consideration to Metrocall stockholders. If Metrocall and Arch are able to obtain regulatory consents and approvals and the requisite financing in a timely manner, we expect to complete the merger during the second half of 2004.

      We may not be able to obtain the regulatory consents and approvals in a timely manner or at all or such regulatory consents and approvals may be subject to conditions. On May 5, 2004, the U.S. Department of Justice submitted a Request for Additional Information and Documentary Material, commonly referred to as a “second request,” to each of Arch and Metrocall. Arch and Metrocall are in the process of gathering information to respond to this second request, and are working cooperatively with the U.S. Department of Justice as it reviews the merger. If any conditions such as divestiture are imposed, or if there is any delay in

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obtaining any regulatory consent or approval, that may delay the completion of the merger and could even cause abandonment of the merger. In addition, events or circumstances causing harm to the businesses and results of operations of Metrocall or Arch, the paging industry generally, the debt finance markets and other unanticipated conditions may result in our failure to obtain financing sufficient to complete the transaction on terms acceptable to us or at all, which could also cause abandonment of the merger.

      Following completion of the merger, Vincent D. Kelly, our President and Chief Executive Officer, will serve as President and Chief Executive Officer as well as a member of the Board of Directors of Holding Company. Royce Yudkoff, the Chairman of our Board of Directors, will serve as the Chairman of the Board of Directors of Holding Company. The Board of Directors of Holding Company will be comprised of nine individuals, Messrs. Kelly and Yudkoff and two other Metrocall designees selected from the Metrocall board of directors, including four Arch designees selected from the Arch board of directors, and David C. Abrams, a representative of Abrams Capital, a major shareholder of Arch. Prior to the closing, the merger agreement provides that Mr. Kelly may select additional individuals to serve as officers of Holding Company and make other decisions regarding the operations of Holding Company, but any such decisions are subject to approval by a majority of the individuals comprising Holding Company board.

      We and Arch expect to file a joint proxy statement/prospectus as part of a registration statement on Form S-4 with the SEC. You are urged to read the joint proxy statement/prospectus contained in the registration statement, the final joint proxy statement/prospectus when it becomes available and any other relevant documents filed with the SEC because they will contain important information regarding us, Arch, Holding Company and the proposed merger. You will be able to obtain these documents free of charge at the Securities and Exchange Commission’s website at www.sec.gov. In addition, documents filed with the SEC by us, Arch and Holding Company with respect to the proposed merger may be obtained free of charge by contacting us at Metrocall Holdings, Inc., 6677 Richmond Highway, Alexandria, Virginia 22306, Attention: Timothy J. Dietz, Investor Relations, telephone (703) 660-6677 x6231.

     Acquisition of Assets of WebLink Wireless Inc. and Consent Decree

      On November 18, 2003, Metrocall, Inc. acquired certain assets and assumed certain liabilities of WebLink Wireless, Inc. and certain of its subsidiaries (“the WebLink Acquired Assets”). On November 25, 2003, we filed applications with the FCC seeking its consent to the assignment of WebLink’s FCC licenses to Metrocall, and on May 4, 2004, the FCC granted its consent. While the FCC’s review of our applications was pending, it began an investigation into whether there had been an unauthorized transfer of control of WebLink’s FCC licensed facilities by WebLink to Metrocall as part of the WebLink acquisition, prior to the receipt of the FCC’s consent. On April 23, 2004, the FCC adopted a consent decree that was agreed to by WebLink and Metrocall to resolve and terminate the FCC’s investigation. In the consent decree, which was released on April 28, 2004, the FCC agreed to terminate its investigation without any finding of liability on the part of WebLink or Metrocall. As part of the consent decree, WebLink and Metrocall did not admit to any liability and each of them agreed to make a voluntary contribution of $25,000 to the United States Treasury. The consent decree also provided for Metrocall to adopt and implement a company-wide compliance plan to require periodic education of all employees concerning the FCC’s rules concerning spectrum leasing and the need for prior approval of assignments of FCC licenses.

      The Enforcement Bureau of the FCC further agreed that, in the absence of material new evidence, it would not, on its own motion, initiate or recommend to the FCC, any new proceeding that is the subject of the Consent Decree. The Bureau further agreed that, in the absence of material new evidence related to such matter, it would not use the facts developed in this proceeding through the effective date of the Consent Decree or the existence of the Consent Decree to initiate on its own motion, or recommend to the FCC, any proceeding, formal or informal, or take any action on its own motion against WebLink or Metrocall with respect to their basic qualifications to be or continue to be an FCC licensee.

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Metrocall’s Business Strategy

      Our business objectives and operating strategy for 2004 will focus on maximizing the amount of cash flows provided by our operating activities. Key elements of this strategy will include:

	•	Subscriber retention efforts;
	•	Cost containment and reduction and integration of WebLink operations;
	•	Focus on marketing of advanced messaging and other services.

      Subscriber retention efforts. We expect the demand for our traditional paging services and the related revenues to continue to decrease throughout the remainder of 2004. Our subscriber retention efforts will continue to focus on customer service and sales efforts to our business, medical and government subscribers. Our subscriber retention efforts continue to be focused on retaining the subscriber base that we acquired with the WebLink Acquired Assets in November 2003. Retention efforts are supported 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 monthly revenue per unit (“ARPU”) and lower deactivation percentages than subscribers serviced through indirect distribution channels.

      We also believe that maintaining sufficient levels of customer service continues to be a key factor in averting 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 continue to provide customer service at both a field and national level to address the demands and expectations of our direct subscriber base.

      Cost Containment and Reduction and Integration of WebLink Operations — We have continued our focus on reducing the expenses required to operate our business and paging and advanced messaging networks. As a result of the acquisition of the WebLink Acquired Assets in November 2003, we expect to reduce the operating expenses incurred by each of the companies on a stand-alone basis. Areas where we believe redundancies exist and where potential cost savings can be realized include certain satellite transmission and delivery systems, transmitter site locations, duplicative sales, customer service and inventory distribution functions and back-office support functions such as human resources, accounting and executive management. In 2004, we expect to integrate a substantial portion of the acquired operations into our operations and to realize cost synergies from the elimination of many of the redundancies described above.

      From the integration activities for full fiscal year 2004, we expect to recognize approximately $19.0 million of operating synergies in our combined service, rent and maintenance, selling and marketing, and general and administrative expenses. For the three months ended March 31, 2004, we recognized approximately $4.4 million of expense savings from each companies stand-alone operating expenses incurred in the three months ended December 31, 2003. We can provide no assurance that we will be able to achieve the expected savings for 2004.

      Focus on Advanced Messaging and Other Services — With the WebLink Acquired Assets, we obtained the physical narrowband PCS network and infrastructure through which we provide our advanced messaging services. Prior to this time, we had a strategic alliance agreement with WebLink to resell on this network. For the three months ended March 31, 2004, we generated revenues of approximately $20.5 million from these services. As of March 31, 2004, approximately 340,000 subscribers received these services. We continue marketing our advanced messaging services and continue to provide wholesale carrier services and telemetry services that WebLink had offered to its customers. Although we expect to see demand for these services to decrease during 2004 from 2003 levels, we will continue to directly target business and government customers and to provide separate support to the wholesale carriers that have use of the network.

      We continue to sell PCS phones to subscribers that require wireless messaging beyond the capabilities of traditional paging. Metrocall currently sells cellular and PCS phone services through alliance and dealer

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agreements with several carriers including Nextel and AT&T Wireless. 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. In the three month period ended 2004, we recognized total revenues of approximately $1.5 million from these services.

Results of Operations

      General — 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 messaging services. As long as a subscriber continues on our service, our operating results benefit from this recurring revenue stream with minimal requirements for incremental selling expenses or fixed costs. Revenues are generally dependent on the number of units in service and the monthly charge per unit. The number of units in service changes based upon the number of subscribers we add and the number of subscribers that may deactivate their service. Our business strategy continues to focus our sales and marketing efforts on subscriber demographics that provide greater revenue stability and higher margins mainly in our direct distribution channels. While we expect to continue efforts to both maintain and add subscribers, our operating structure has been scaled back over the past thirty-six months mainly through reduction-in-force initiatives and other expense reductions related to operations consolidations.

      Metrocall’s services are marketed through our direct and indirect sales force. We focus our efforts on our direct sales channel which sells or leases devices to enterprise customers in business, healthcare, government and emergency services sectors. Our indirect sales force sells access to our networks to third parties, resellers, or other telecommunications carriers who then resell the messaging services to their customers. Our indirect channel, which we have de-emphasized, is characterized by lower ARPU and has experienced a higher disconnect rate than our direct channel.

      The following table sets forth units in service associated with our channels of distribution:

      The following table sets forth the service, rent and maintenance revenues realized for each of our distribution channels:

	a)	Direct service, rent and maintenance revenues include $2,076 and $1,849 realized for non-paging revenues for the three months ended March 31, 2004 and 2003, respectively.

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      The following table sets forth our net deactivations associated with our channels of distribution for the respective three month period stated.

      Our consolidated ARPU has increased to $8.44 in 2004 from $7.59 in 2003. This increase was primarily attributable to a greater number of our subscribers receiving advanced messaging services due to the acquisition of the Weblink Acquired Assets. We experienced increases in ARPUs of both distribution channels as a result of this.

      The following table reflects the ARPU associated with each of our distribution channels:

	(a)	ARPU is derived by dividing the weighted average units in service for each distribution channel for the respective period into service, rent and maintenance revenue (excluding revenues from PCS and cellular placements and revenues generated from the operations of GTES) and then dividing by 3.

      Our total revenues which include the total of service, rent and maintenance revenues and product sales were $90.7 million and $87.4 million for the three months ended March 31, 2004 and 2003, respectively. The increase in our revenues from 2003 to 2004 of $3.3 million was comprised of increases attributable to the operations acquired from WebLink of $18.0 million, the revenues realized by GTES, LLC of $0.6 million and a decrease attributable to the legacy operations of Metrocall units in service of $15.3 million. The $15.3 million decrease was comprised of the following decreases on a quarterly basis from March 31, 2003 including reductions of $4.6 million in the three months ended June 30, 2003; $3.2 million in the three months ended September 30, 2003; $1.6 million in the three months ended December 31, 2003 and $5.9 million in the three months ended March 31, 2004. For the three months ended March 31, 2004, we experienced an increase in the rate of revenue losses compared to the prior sequential three month periods comprised of decreases in service, rent and maintenance revenues of $4.2 million and product sales of $1.7 million. We expect that our total revenues will continue to decline in future quarters.

      The expenses that we categorize as service, rent and maintenance; selling and marketing; and general and administrative are very important to our management of overall expenses:

	•	Service, rent and maintenance expenses: These expenses include the costs related to the management, operation and maintenance of our networks and the provisioning of our paging and advanced messaging services. It also includes costs related to the refurbishment of paging devices used by our subscribers and inventory fulfillment costs.
	•	Selling and marketing expenses: These expenses include the salaries, commissions and administrative costs of our sales force and related marketing and advertising expenses.

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	•	General and administrative expenses: These expenses include costs associated with providing customer service, billing and collections, bad debts and other administrative functions such as information technology, human resources, executive management, finance and accounting.

      The total of our cost of products sold, service, rent and maintenance, selling and marketing and general and administrative expenses was $65.9 million and $63.2 million for the three months ended March 31, 2004 and 2003, respectively. In 2004, although the total of these expenses decreased $2.7 million from 2003 levels, this net decrease was offset by $16.9 million of additional expenses as a result of expenses incurred in the operations acquired in the WebLink asset acquisition and $0.4 million related to the operations of GTES, which were not included in the 2003 period.

      The following table sets forth the amounts of revenues, expenses and the percentages of total revenues represented by certain items in our Interim Condensed Consolidated Statements of Operations and certain other information for the three month periods ended March 31, 2004 and 2003 (all dollars in thousands):

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          Consolidated Revenues

      Service, rent and maintenance revenues increased $4.0 million to $86.8 million for the three months ended March 31, 2004 (“2004”), from $82.8 million for the three months ended March 31, 2003 (“2003”). Service, rent and maintenance revenues for 2004 included $18.0 million and $0.6 million related to the WebLink Acquired Assets and the revenues realized from GTES operations in 2004. Excluding these revenues, our service, rent and maintenance revenues decreased $14.6 million from the 2003 period.