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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-21924
METROCALL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-1215634
(State of incorporation) (I.R.S. Employer Identification No.)
6677 RICHMOND HIGHWAY, ALEXANDRIA, 22306
VIRGINIA (Zip Code)
(Address of Principal Executive
Offices)
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
COMMON STOCK ($.01 PAR VALUE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the Registrant was approximately $139.1 million based on the closing sales price
on March 1, 1999.
COMMON STOCK, PAR VALUE $0.01 -- 41,639,878 SHARES OUTSTANDING ON MARCH 1, 1999
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of the Registrant to
be held May 5, 1999 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.................................................. 14
ITEM 3: Legal Proceedings........................................... 14
ITEM 4: Submission of Matters to a Vote of Security Holders......... 14
PART II
ITEM 5: Market for Metrocall's Common Stock and Related Stockholder
Matters................................................... 15
ITEM 6: Selected Financial Data..................................... 17
ITEM 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
ITEM 7A: Quantitative and Qualitative Disclosures About Market
Risk...................................................... 32
ITEM 8: Financial Statements and Supplementary Data................. 32
ITEM 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 32
PART III
ITEM 10: Directors and Executive Officers of the Registrant.......... 32
ITEM 11: Executive Compensation...................................... 32
ITEM 12: Security Ownership of Certain Beneficial Owners and
Management................................................ 32
ITEM 13: Certain Relationships and Related Transactions.............. 32
PART IV
ITEM 14: Exhibits, Financial Statement Schedule and Reports on Form
8-K....................................................... 33
Signatures.................................................................. 37
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 including, among
other things those discussed under "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations". These uncertainties
include:
- our high leverage and need for substantial capital;
- our ability to service debt;
- our history of net operating losses;
- the restrictive covenants governing our indebtedness;
- the amortization of our intangible assets;
- our ability to integrate the AMD acquisition;
- our ability to implement our business strategies;
- the impact of competition and technological developments;
- satellite transmission failures;
- subscriber turnover;
- our ability to implement our Year 2000 readiness plan;
- litigation;
- regulatory changes; and
- dependence on key suppliers.
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. 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 Annual Report on Form 10-K might not occur.
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PART I
ITEM 1. BUSINESS
GENERAL
We are a leading provider of local, regional and national paging and other
wireless messaging services. Through our nationwide wireless network we provide
messaging services to over 1,000 U.S. cities, including the top 100 Standard
Metropolitan Statistical Areas (SMSAs). Since 1993, our subscriber base has
increased from less than 250,000 to more than 5.6 million. We have achieved this
growth through a combination of internal growth and a program of mergers and
acquisitions. As of December 31, 1998, we were the second largest messaging
company in the United States based on the number of subscribers.
PAGING AND WIRELESS MESSAGING INDUSTRY OVERVIEW
We believe that paging and wireless messaging is the most cost-effective
and reliable means of conveying a variety of information rapidly over a wide
geographic area either directly to a person traveling or to various fixed
locations. Conventional paging, as a one-way communications tool, is a
lower-cost way to communicate than existing two-way communication methods. For
example, the pagers and air time required to transmit a typical message cost
less than the equipment and air time for cellular and personal communications
services (PCS) telephones. Furthermore, pagers operate for longer periods due to
superior battery life, often exceeding one month on a single battery. Paging
subscribers generally pay a flat monthly service fee, which covers a certain
number of messages sent to the subscriber. In addition, pagers are unobtrusive
and portable and historically have withstood substantial technological advances
in the communications industry. Many mobile telephone customers use pagers in
conjunction with their telephones to screen incoming calls and minimize battery
wear and usage charges.
Although the U.S. paging industry has over 500 licensed paging companies,
we estimate that the ten largest paging companies, including us, currently serve
approximately 75% of the total paging subscribers in the United States. These
paging companies are facilities-based, Commercial Mobile Radio Service (CMRS)
providers, previously classified as either Radio Common Carrier (RCC) or Private
Carrier Paging (PCP) operators, servicing over 100,000 subscribers each in
multiple markets and regions.
We believe that the future of the paging and wireless communications
industry will include technological improvements that permit increased service
and applications, and consolidation of smaller, single-market operators and
larger, multi-market paging companies.
Recent technological advances include new paging services such as
"confirmation" or "response" paging that send a message back to the paging
system confirming that a paging message has been received, digitized voice
paging, two-way paging and notebook and sub-notebook computer wireless data
applications. Narrowband PCS offers the ability to provide some of these
services on an expanded basis. Narrowband PCS utilizes a two-way spectrum, which
offers advantages to the traditional one-way spectrum that some paging networks
use. The two-way spectrum enables a paging device to emit a signal that notifies
the network of the paging device's location and permits the network to send the
message to transmitters closest to the paging device. In contrast, a one-way
spectrum requires the message to be sent to all transmitters within a geographic
area and not necessarily to those transmitters closest to the paging device.
Therefore, a two-way spectrum utilizes less air time of the paging network and
creates more air time capacity particularly in the areas farthest from the
paging device. While these narrowband PCS services have been proven
technologically feasible, their economic viability has not been fully tested
based on the cost of licenses, infrastructure and capital requirements;
increased operating costs; and competitive, similarly priced two-way broadband
PCS and cellular services.
OUR BUSINESS STRATEGY
Our business strategy is to increase shareholder value by expanding our
subscriber base and increasing revenues, cost efficiencies, and operating cash
flow. Operating cash flow is defined as EBITDA (earnings before interest,
taxes, depreciation and amortization). The principal elements of this strategy
include the following:
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Manage Capital Requirements and Increase Free Cash Flow. Our key financial
objective is to manage capital requirements and increase free cash flow. We
define free cash flow as operating cash flow less capital expenditures and
interest expense. To achieve this objective, we focus on the following:
- focusing on selling, rather than leasing, paging units in order to reduce
capital expenditure requirements per subscriber;
- increasing revenues and cash flow through sales of value-added advanced
messaging and information services which generate higher average monthly
revenue per unit (ARPU) than standard messaging or paging services; and
- increasing the utilization of our fully developed nationwide network to
serve more customers per frequency and enter new markets with minimal
capital outlay.
Maximize Internal Growth Potential. We have grown internally by broadening
our distribution network and expanding our target market to capitalize on the
growing appeal of messaging and other wireless products and services. Since
December 31, 1994, we have added approximately 1.4 million new subscribers
through internal growth. We have expanded our direct and indirect distribution
channels to gain access to different market segments. As part of this strategy,
we have formed strategic alliances with:
- local, long-distance, cellular and PCS providers, such as AT&T Wireless
Services Inc. (AT&T Wireless), Bell Atlantic, Qwest, Vanguard Cellular and
ALLTEL;
- cable television companies, such as Adelphia Cable Communications and
Suburban Cable; and
- retail outlets, such as Circle K Stores, AutoZone, Ritz Camera and
Walgreens.
We have also developed strategic marketing relationships with America
Online and Washington Gas and Light Company, which are designed to further
enhance our market presence. We have also entered into a broadband PCS alliance
with AT&T Wireless, which will enable us to further diversify our product mix by
distributing AT&T's digital PCS wireless products and AT&T's Digital One Rate
(SM) service plans via our direct distribution channels. In 1999, we will
continue to expand our multi-tiered distribution network and marketing
relationships. We believe that these initiatives will continue to increase our
sales and broaden the range and diversity of products that we currently offer to
consumers.
Expand Market Presence through Consolidation. We have expanded our
subscriber base and geographic coverage through consolidation. On October 2,
1998, we acquired the Advanced Messaging Division (AMD) of AT&T Wireless, the
paging operations of AT&T. The AMD acquisition increased the size of our
subscriber base by adding 1.2 million subscribers to our existing customer base.
As part of the acquisition, we also acquired a 50KHz/50KHz narrowband personal
communications service license (NPCS license). We expect to realize the
following benefits from the AMD acquisition:
- Greater Scale and Scope. The AMD acquisition increases our geographic
presence to include Alaska, Arkansas, Colorado, Kansas, Minnesota,
Missouri, Oklahoma, Oregon, Utah and Washington. In addition, it adds to
our existing presence in the Northeast, Southeast, Midwest, Mid-Atlantic
and Southwest and West.
- Premium, High Revenue Customer Base. The AMD acquisition adds premium,
high revenue subscribers to our existing customer base. AMD's ARPU has
historically been higher than the paging industry average. AMD provided
its paging and messaging services to large business customers, which
typically generate higher ARPU than individual customers. Approximately
23% of AMD's subscribers were high-ARPU alphanumeric customers, one of the
highest percentages in the industry.
- Synergies. As we integrate AMD's operations with our own paging
operations, we expect to realize significant synergies. For example, AMD
provided nationwide paging services without the benefit of a nationwide
network. As a result, AMD spent $29.3 million in 1997 reselling other
carriers' services, which adversely affected its margins. Over time, we
expect to switch a portion of AMD's customers to our nationwide network,
which will reduce third-party costs and increase the utilization of our
network. In addition, we expect to realize significant annual cost
savings from elimination of duplicative AMD functions. We expect to
complete the integration of AMD by the fourth quarter of 1999.
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Since July 1996, we have acquired the following companies, which have added
approximately 3.6 million subscribers:
ACQUIRED COMPANY ACQUISITION DATE NO. OF SUBSCRIBERS
---------------- ---------------------- ------------------
Parkway Paging, Inc. (Parkway)............... July 16, 1996 140,000
Satellite Paging and Messaging Network
(collectively, Satellite).................. August 30, 1996 100,000
A+ Network, Inc. (A+ Network)................ November 15, 1996 660,000
Page America Group, Inc. (Page America)...... July 1, 1997 198,000
ProNet Inc. (ProNet)......................... December 30, 1997 1,286,000
AMD.......................................... October 2, 1998 1,215,000
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Total.............................. 3,599,000
=========
We believe that our enhanced nationwide coverage will give us a competitive
advantage in gaining additional subscribers in the future. We may continue to
expand our geographic penetration and subscriber base through future
acquisitions, but only if we identify potential candidates that satisfy certain
criteria. These criteria include valuation, geographic coverage, regulatory
licenses, type of consideration, availability of financing and accretive and
de-leveraging benefits.
Pursue Cost-Efficient Technological Advances. We have pursued
technological advances that are proven, cost-efficient and consistent with our
strategy to increase free cash flow. For instance, we have historically
concentrated our capital spending on developing our local, regional and
nationwide one-way paging networks. We have also recently taken steps to enter
the two-way paging business now that the technology has been proven and gained
initial market acceptance. As part of the AMD acquisition, we acquired the NPCS
license in October 1998. Also, in October 1998, we entered into a five-year
strategic alliance with PageMart Wireless, Inc, a leading provider of paging and
messaging services to develop and offer narrowband PCS. Our alliance consists of
two phases: a switch-based resale phase and a shared network build-out phase. In
the first phase, we will provide narrowband PCS using PageMart's advanced
messaging transmit and receive network. We began offering guaranteed-delivery
messaging in the first quarter of 1999. We expect the first phase to permit us
to begin offering two-way messaging by the middle of 1999. In the second phase,
we will install and operate our own outbound narrowband PCS frequency on our
nationwide network and PageMart will provide turnkey installation and operation
of a receiver network. We believe this alliance will enable us to comply with
the FCC's mandated narrowband PCS build-out requirements. Under the alliance, we
will share certain capital expenditures and operating expenses. We believe that
the PageMart alliance will enable us to provide narrowband PCS in a faster and
more cost-effective manner than if we developed the network ourselves. The
development of the NPCS license acquired in the AMD acquisition and the PageMart
alliance will allow us to increase capacity and reduce our long-term cost of
message delivery through frequency reuse. It will also permit us to enter the
market for advanced messaging services, including two-way paging and data
intensive messaging. We are also pursuing other strategic marketing and
development efforts to deliver advanced messaging services, such as e-mail
notification and user-specific data services, to our paging subscribers through
the Internet.
Optimize Customer Relationships. We seek to maintain a close relationship
with our existing customers and to develop stronger relationships with the
subscribers of newly acquired companies by maintaining decentralized sales,
marketing and customer service operations and providing value-added services
tailored to customers' needs. The value-added services we provide are billed as
enhancements to our basic service and generally result in higher ARPU. Our
specific value-added services include:
- Direct View, which permits organizations to use our wireless network to
broadcast news, sports, stock data and general and customized information
to LED display signs;
- Pager ID, which identifies the name of the person placing the call to the
pager;
- customized wireless messaging applications for specific segments of the
public, such as the medical community; and
- an enterprise-wide messaging management software and database system
Maintain Low Cost Operations and Improve Margins. A key component of our
business strategy is to make investments that improve our operating efficiencies
thereby leading to margin improvement. In 1998, our operating efficiencies
improved because we
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continued to invest in high quality, large capacity infrastructure and systems
updates and to centralize administrative and back-office functions. During
1998, we implemented a new financial accounting management information system,
completed a number of billing system upgrades, added a new inventory management
system and began using an Internet based tower site management application. We
also integrated the administrative functions of newly acquired companies which
enabled us to reduce our general and administrative expenses per subscriber.
We also believe that as use of our strategic alliances and other indirect
distribution channels increase, our operating costs will decrease as
participants in these channels typically bear a portion of our sales and
customer service expenses. Similarly, we believe our focus on maximizing monthly
recurring revenues and promoting value-added services will improve operating
margins. We also recently entered into a strategic long-term arrangement with
Motorola to optimize supply chain logistics. As part of this arrangement,
Motorola will ship pager units directly to our strategic retail partners. In
addition, we and Motorola will work to develop an electronic data interchange to
enhance Motorola's ability to supply page units to our customers. We expect this
distribution arrangement to reduce handling costs, inventory levels and cycle
times.
METROCALL'S PAGING AND WIRELESS MESSAGING OPERATIONS
Services and Subscribers
We currently provide four basic paging and wireless messaging services:
- digital display pagers, which permit a subscriber to receive a telephone
number or other numeric coded information and to store several such
numeric messages that the customer can recall when desired;
- alphanumeric display pagers, which allow the subscriber to receive and
store text messages from a variety of sources including the Internet;
- digital broadband and PCS phones and other products of AT&T under a
distribution agreement with AT&T Wireless, which allows users to place and
receive calls under AT&T's Digital One Rate(SM) service plans;
- advanced messaging devices, which provide guaranteed delivery of
messages.
We provide digital display and alphanumeric display in all of our markets.
Approximately 86% of our pagers in service at December 31, 1998 were digital
display. Alphanumeric display service, which was introduced in the mid-1980s,
has grown at increasing rates as users and dispatch centers overcome technical
and operational obstacles to sending messages. Currently, we market, under the
service mark "Notesender," a computer program designed for use in transmitting
alphanumeric messages from personal computers to pagers. In addition,
alphanumeric paging access is available via our Internet website,
www.metrocall.com, where any Internet user can access our on-line alphanumeric
paging software. Approximately 14% of our pagers in service at December 31,
1998 were alphanumeric display.
We also provide enhancements and ancillary services such as:
- personalized automated answering services, which allow a subscriber to
record a message that greets callers who reach the subscriber's voice
mailbox;
- message protection, which allows a subscriber to retrieve any calls that
come in during the period when the subscriber was beyond the reach of our
radio transmitters;
- annual loss protection, which allows subscribers of leased pagers to
limit their cost of replacement upon loss or destruction of the pager; and
- maintenance services, which are offered to subscribers who own their own
pagers.
Subscribers who use paging and wireless messaging services have
traditionally included small business operators and employees, professionals,
medical personnel, sales and service providers, construction and tradespeople,
and real estate brokers and developers;
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however, the appeal of paging to the residential user is growing, with service
increasingly being adopted by individuals for private, nonbusiness uses such as
communicating with family members and friends.
Our subscribers either buy or lease their pagers for local, regional,
multi-regional or nationwide service. We receive additional revenue for enhanced
services such as voice mail, personalized greetings and One Touch(TM) service,
which is an advanced messaging service. Volume discounts on lease payments and
service fees are typically offered to large volume subscribers. In some
instances, our subscribers are resellers that purchase services at substantially
discounted rates, but are responsible for marketing, billing, collection and
related costs with respect to their customers.
Sales and Marketing
Our sales and marketing strategy incorporates a multi-tiered distribution
system designed to maximize internal growth and geographic presence. At December
31, 1998, the Company, through more than 250 sales and administrative offices
and retail outlets, employed a sales force of 1,505 sales representatives,
including our direct sales staff, telemarketing professionals and sales
representatives who call on retailers and resellers. Our major distribution
channels are described briefly below.
Direct Distribution Channels
- Direct Sales. Our direct sales personnel sell our messaging services and
products primarily to businesses, placing special emphasis on key accounts
of strategic importance to us. Our direct sales personnel generally target
businesses that have multiple work locations or have highly mobile
employees. Our sales compensation plans are designed to motivate direct
sales personnel to focus on selling rather than leasing pagers, which
reduces capital requirements, and to increase sales of higher revenue
product enhancements, such as nationwide coverage, alphanumeric service,
voice mail and One Touch(TM).
- Database Telemarketing. Our internal, professionally trained staff
generates sales by utilizing computerized lead management and
telemarketing techniques combined with our proprietary lead screening and
development protocol. Using acquired lists to focus their efforts, our
internal staff targets groups of consumers and small businesses who have a
propensity to use paging and messaging services but are either in a region
where we do not have a direct sales effort or have not been reached by
other distribution channels. In our marketing efforts, we use only
commercially available public information to analyze and target new
customers and do not use "Customer Proprietary Network Information" in a
way that would conflict with the Communications Act of 1934, as amended
(the "Communications Act"), or the Federal Communications Commission (FCC)
rules.
- Company-Owned Retail Stores. At December 31, 1998, we had over 100
Company-owned retail outlets. Our retail outlets are designed to sell
higher ARPU services to the consumer market segment directly while
providing us with a point of presence to enhance our brand recognition.
These retail outlets take a variety of forms, such as mall stores, kiosks,
mall carts, retail merchandising units and mall center locations. Products
sold to consumers at these locations include paging, messaging, cellular,
long distance and PCS services and related accessories. Many of these
locations function as customer service and payment centers in addition to
offices for direct sales representatives.
Indirect Distribution Channels
- Resellers. We sell resellers bulk paging services for resale to their
own business clients and individual customers. We issue one monthly bill
to each reseller who is responsible for marketing, billing and collection,
and equipment maintenance. Through this channel, we achieve high network
utilization at low incremental cost, but realize much lower ARPU than
through other distribution channels.
- Retail Outlets. We sell pagers on a wholesale basis to retail outlets,
such as office supply, electronics and general merchandise chains, for
resale to their customers. We select these outlets based on factors such
as the number of stores in a region and the extent of their advertising.
These outlets then sell the pager itself and provide limited customer
service to the consumer. We provide sales incentives and advertising
support, and train sales personnel to enhance a retail outlet's
effectiveness and to ensure that the customer is well educated regarding
the product.
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- Dealer Network. We contract with independent dealers, representatives
and agents, including such outlets as small cellular phone dealers and
independent specialty electronics stores. We typically use these dealers
to reach specific consumer niches (e.g., ethnic or non-English speaking
communities) and small businesses that are more efficiently accessed
through this channel than through our other distribution channels. In
addition to selling the pagers, independent dealers assist the subscriber
in choosing a service plan and collect the initial payments. We pay
independent dealers a commission when they place customers with us.
- Strategic Partners. We have entered into contractual agreements with
several selected national distribution partners who market our paging
services to their existing and future customers. We supply many of these
partners with custom branded turnkey solutions for network services,
products, customer services, billing, collections and fulfillment. Our
strategy is to provide these value-added services to enhance the business
relationship and margin opportunities for both parties. We have entered
into alliances with companies in the long distance, local exchange,
cable, Internet, retail, direct response and multi-level marketing
businesses and believe that these programs will help deliver paging
services to market segments that our other distribution channels may not
reach cost-effectively.
As part of the AMD acquisition, we signed an exclusive five-year national
distribution agreement with AT&T Wireless. Under the distribution
agreement, AT&T Wireless' retail stores exclusively offer our messaging
products. In addition, we are the exclusive supplier of messaging products
for AT&T and its affiliated companies that wish to sell paging and
advanced messaging services.
- Affiliates. Through the A+ Network merger in 1996, we acquired a network
of paging carriers or affiliates that resell services on the 152.480 MHz
private carrier paging frequency. These affiliates are independent owners
of paging systems in various markets throughout the nation who sell
expanded coverage to their customers. Utilizing our infrastructure, these
independent networks provide wide area and nationwide paging on a single
channel. We provide expanded coverage options for approximately 85,000
subscribers through our affiliate network at December 31, 1998.
Subscribers by Geographic Region. We set forth below the number of pagers
we have in service by geographic region.
NUMBER OF PAGERS IN SERVICE
DECEMBER 31,
---------------------------------
1996(1) 1997(2) 1998(3)
--------- --------- ---------
Northeast.......................................... 227,022 714,363 772,463
Mid-Atlantic....................................... 558,318 623,077 693,631
Southeast.......................................... 693,837 1,094,313 1,179,548
Midwest............................................ -- 232,105 400,150
Southwest.......................................... 248,846 756,459 1,356,218
West............................................... 414,328 610,519 768,829
Northwest.......................................... -- -- 488,711
--------- --------- ---------
Total.................................... 2,142,351 4,030,836 5,659,550
========= ========= =========
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(1) Includes approximately 0.9 million pagers in service we acquired from our
1996 merger and acquisitions.
(2) Includes approximately 1.5 million pagers in service we acquired from our
1997 merger and acquisition.
(3) Includes approximately 1.2 million pagers in service we acquired in the AMD
acquisition.
Subscribers by Distribution Channel. We set forth below the respective
numbers and percentages of pagers that we service through our distribution
channels:
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OWNERSHIP OF PAGERS IN SERVICE
DECEMBER 31,
------------------------------------------------------------------------
1996(1) 1997(2) 1998(3)
---------------------- ---------------------- ----------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
--------- ---------- --------- ---------- --------- ----------
DIRECT CHANNELS:
Company-owned and
leased to
subscribers..... 690,382 32% 1,184,193 29% 1,980,297 35%
Subscriber-owned
(COAM).......... 271,837 13 430,582 11 629,352 11
Company-owned
retail stores... 114,192 5 223,510 6 207,493 4
INDIRECT CHANNELS:
Resellers.......... 865,221 41 1,965,354 49 2,369,686 42
Strategic Partners
and
affiliates...... 130,142 6 140,625 3 274,844 5
Retail............. 70,577 3 86,572 2 197,878 3
--------- ----- --------- ----- --------- -----
Total...... 2,142,351 100.0 4,030,836 100.0 5,659,550 100.0
========= ===== ========= ===== ========= =====
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(1) Includes approximately 0.9 million pagers in service we acquired from our
1996 merger and acquisitions.
(2) Includes approximately 1.5 million pagers in service we acquired from our
1997 merger and acquisition.
(3) Includes approximately 1.2 million pagers in service we acquired in the AMD
acquisition.
Network and Equipment
We have developed a state-of-the-art paging system deploying current
technology, which achieves optimal building penetration, wide-area coverage and
the ability to deliver new and enhanced paging services. This existing paging
transmission equipment has significant capacity to support future growth.
Our paging services are initiated when telephone calls are placed to our
Company-maintained paging terminals. These state-of-the-art terminals have a
modular design that allows significant future expansion by adding or replacing
modules rather than replacing the entire terminal. Our paging terminals direct
pages to our primary satellite, which signals terrestrial network transmitters
providing coverage throughout the service area.
We have three exclusive nationwide licenses issued by the FCC and are
operating in each of the largest 100 SMSAs. We began operating the nationwide
network on one of those three channels in November 1993. We are also capable of
providing local paging in many markets served by the nationwide network by using
nationwide transmitters to carry local messages. Services provided through the
nationwide network are marketed to subscribers directly through our sales force
and indirectly through retailers and resellers. We also operate a series of
regional operating systems or networks consisting of primary networks serving
Arizona, California and Nevada, and the area from Boston to the Virginia/North
Carolina border.
In addition, we have initiated paging service through our "Global Messaging
Gateway," which is a satellite uplink facility located in Stockton, California.
We transmit a majority of our traffic through this facility. The facility
operates 24 hours per day, seven days per week. The use of this facility will
permit us to save costs as we phase out operating agreements with three
commercially owned satellite uplink facilities and will increase our control
over our paging system.
We do not manufacture any of the pagers or infrastructure equipment used in
our operations. While the equipment used in our paging operations is available
for purchase from multiple sources, we have historically limited the number of
suppliers to achieve volume cost savings and, therefore, depend on such
manufacturers to obtain sufficient inventory. We anticipate that equipment and
pagers will continue to be available to us in the foreseeable future, consistent
with normal manufacturing and delivery lead times but cannot assure you that we
will not experience unexpected delays in obtaining paging and infrastructure
equipment in the future. Such delays could have an adverse effect on our
operations and network development plans. We continually evaluate new
developments in paging technology in connection with the design and enhancement
of our paging systems and selection of products to be offered to subscribers.
As discussed above, we achieve cost savings by purchasing pagers at volume
discounts from a limited number of companies, including Motorola, Inc., from
which we currently purchase most of our pagers, and NEC America. We purchase our
transmitters and paging terminals from Motorola and Glenayre Electronics,
Incorporated.
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Management Systems and Billing
We centralize certain operating functions and utilize common and
distributed billing and subscriber management systems. This permits us to reduce
costs, increase operating efficiencies, obtain synergies from acquisitions, and
focus regional management on sales and distribution.
The functions we have centralized into our national operations center in
Alexandria, Virginia include accounting, management information systems, and
inventory and order fulfillment. We have integrated the information systems of
the companies we have acquired into our structure, with the exception of AMD's
systems for which integration efforts will be progressing throughout 1999.
We also maintain three national call centers which are critical factors in
marketing and servicing the nationwide network to all markets in the United
States. Our centers handle customer inquiries from existing and potential
customers and support our distribution channels initiatives. Our three centers
are staffed with approximately 385 employees. Each center offers a toll-free
access number. One of our centers is open seven days per week, 24 hours per day.
Our other two centers are open six days a week and provide emergency service
seven days a week, 24 hours a day. We attempt to satisfy customers upon initial
inquiry to avoid repeat calls, thereby increasing customer satisfaction and
decreasing costs. We employ state-of-the-art call management equipment (such as
an automated call distribution system and interactive voice response
capabilities) to provide quality customer service and to track both the
productivity and the quality of the performance of our customer service
representatives.
COMPETITION
The wireless communications industry is very competitive. We compete mainly
with other regional and national paging providers. Certain long-distance
carriers and local exchange carriers (LECs) have also begun, or have announced
their intention to begin, marketing paging services jointly with other
telecommunications services. We also compete with other companies that offer
wireless communications technology such as cellular telephone, specialized
mobile radio services and PCS. Some of our competitors have greater financial
resources than we do. We compete on the basis of price, coverage area, enhanced
services, transmission quality, systems reliability and customer service. We
believe we compare favorably with our competitors on these bases. However, to
respond to price competition, we may need to adjust our prices from time to
time, which may adversely affect our revenues and operating results.
Since 1988, we have competed with Paging Network, Inc. ("PageNet"), the
largest provider of paging services in the United States, in all of our major
markets. With our nationwide network, our principal competitors for national
accounts include, in addition to PageNet, Arch Communications Group, Inc.,
MobileMedia Communications, Inc. (using the trade name MobileComm), PageMart and
SkyTel Corporation. We are also aware of other paging companies that offer, or
intend to offer, nationwide paging services to their subscribers. In August
1998, Arch announced its intention to acquire the operations of MobileMedia,
which has been operating in bankruptcy since January 1997. Arch has stated that,
if this acquisition is consummated, the combined company would be the second
largest paging company based on number of subscribers.
In 1994, the FCC began auctioning licenses for new PCS spectrums. There are
two types of PCS, narrowband and broadband. Narrowband PCS provides enhanced or
advanced paging and messaging capabilities, such as "confirmation" or "response"
paging. Broadband PCS provides new types of communications devices that include
multi-functional portable phones and imaging devices. PCS providers compete
directly and indirectly with the Company. Many narrowband and broadband PCS
systems are now providing commercial service. We recently entered into the
PageMart alliance to develop and offer advanced messaging services on a
narrowband PCS platform and a distribution agreement with AT&T Wireless to offer
digital broadband PCS telephones.
Developments in the wireless telecommunications industry, such as broadband
PCS, and enhancements of current technology have created new products and
services that compete with the paging services we currently offer. There can be
no assurance that we will not be adversely affected by such technological change
or future technological changes.
GOVERNMENT REGULATION
From time to time, federal and state legislators propose legislation that
could affect our business, either beneficially or adversely, such as by
increasing competition or affecting the cost of our operations. We cannot
predict the impact of such legislative actions on our operations. Additionally,
the FCC and, to a lesser extent, state regulatory bodies, may adopt rules,
regulations or policies that may
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affect our business. The following description of certain regulatory factors
does not purport to be a complete summary of all present and proposed
legislation and regulations pertaining to our operations.
Federal. Our paging operations are subject to extensive regulation by the
FCC under the Communications Act. Under the Communications Act, we are required
to obtain FCC licenses for the use of radio frequencies to conduct our paging
operations within specified geographic areas. These licenses set forth the
technical parameters, such as maximum power and tower height, under which we may
use such frequencies. We have historically provided paging services as both a
RCC operator and a PCP operator. Traditionally, RCC frequencies were assigned on
an exclusive basis to a single licensee in a service area; RCCs were subject to
regulation by the states as well as by the FCC and were required to provide
service to anyone requesting such service. PCP frequencies were assigned on a
shared basis (i.e., multiple parties in the same area could apply for and obtain
a license to use the same frequency); there were restrictions on eligibility of
PCP customers; and the states were preempted from regulating PCP entry, rates,
operation, terms of service, etc.
In 1993, the FCC adopted new rules to provide "channel exclusivity" to PCP
operators operating on certain 929 MHz frequencies, provided the licensee meets
certain qualifications. We have obtained nationwide exclusivity on two of our
929 MHz frequencies and one 931 MHz frequency (one 929 MHz frequency is used for
the nationwide network; the other 929 MHz frequency was obtained in the
FirstPAGE USA, Inc. merger in 1994; the 931 MHz frequency was obtained in the
ProNet merger). Under the FCC's current rules, no other entity may apply
anywhere in the United States to operate on these frequencies. However, any
incumbent PCP licensees, other than us, on our two nationwide 929 MHz
frequencies may continue to operate on these frequencies, but those other
licensees are not allowed to expand their paging services beyond their existing
coverage areas. Additionally, on our other 929 MHz frequencies, we have local
exclusivity in the Chicago, Illinois area, and regional exclusivity in the
Northeast, Mid-Atlantic, and Southeast regions of the United States.
PCP channels below 900 MHz are still allocated on a shared basis. We
acquired a 152.480 MHz shared frequency network through our A+ Network merger.
Applications for those frequencies are first processed through a frequency
coordinator, who attempts to minimize overcrowding on a given frequency. The
coordinator then files the applications with the FCC, which processes them on a
first-come, first-served basis. So long as a given PCP frequency is not
congested with multiple licensees, the subscriber would not perceive any
differences between shared PCP services and exclusive paging services. In most
areas of the country where we hold shared PCP licenses, we are the only paging
operator, or one of only a few operators, licensed on that particular frequency
in that area.
The FCC also requires paging licensees to construct their stations and
begin service to the public within a specified period of time (under the
site-specific rules, one year), and failure to do so results in termination of
the authorization. Under the traditional site-specific approach to paging
licensing, a licensee received a construction permit for facilities at a
specific site, and that permit automatically terminated if the facilities were
not timely constructed (RCC paging licensees were also required to notify the
FCC upon commencement of service) and the licensee failed to request an
extension prior to the deadline. The failure to construct some facilities did
not, however, affect other facilities in a licensee's system that had been
timely constructed and placed into operation. However, certain services that we
plan to offer in the future are subject to harsher penalties for failure to
construct. For example, the NPCS license that we acquired in the AMD acquisition
is subject to the condition that we build sufficient stations to cover 750,000
square kilometers, or 37.5% of the U.S. population, by the fifth anniversary of
the initial license grant; by the tenth anniversary of the grant, we must build
sufficient stations to cover 1,500,000 square kilometers, or 75% of the U.S.
population. As a result of the PageMart alliance, we expect to meet the FCC's
build out requirements for both of these anniversaries.
In August 1993, as part of its Omnibus Budget Reconciliation Act (the "1993
Budget Act"), Congress amended the Communications Act to, among other things,
replace the prior RCC and PCP definitions with two newly defined categories of
mobile radio services: CMRS and Private Mobile Radio Service (PMRS). The CMRS
definition essentially supplants the prior RCC definition. The FCC has
determined that PCP and RCC paging services are classified as CMRS. The FCC has
adopted technical, operational and licensing rules for CMRS, which became
effective for us in August 1996.
Pursuant to authority granted by the 1993 Budget Act, the FCC has
"forborne" from enforcing against all CMRS licensees the following common
carrier regulations under Title II of the Communications Act: any interstate
tariff requirements, including regulation of CMRS rates and practices; the
collection of intercarrier contracts; certification concerning interlocking
directorates; and FCC approval relating to market entry and exit. Additionally,
the 1993 Budget Act preempted state authority over CMRS entry and rate
regulation.
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Paging licenses are issued by the FCC for terms of 10 years. Our current
licenses have expiration dates ranging from 1999 to 2009. Renewal applications
must be approved by the FCC. In the past, our FCC renewal applications have been
routinely granted. We are also required to obtain prior FCC approval for our
acquisition of radio licenses held by other companies, as well as transfers of
controlling interests of any entities that hold radio licenses. Although there
can be no assurance that any future renewal or transfer applications we file
will be approved or acted upon in a timely manner by the FCC, based on our
experience to date, we know of no reason to believe such applications would not
be approved or granted.
The Communications Act also places limitations on foreign ownership of CMRS
licenses. These foreign ownership restrictions limit the percentage of our stock
that may be owned or voted, directly or indirectly, by aliens or their
representatives, foreign governments or their representatives, or foreign
corporations. The Company's certificate of incorporation permits the redemption
of our common stock from stockholders where necessary to protect our compliance
with these requirements.
The FCC has authority to restrict the operation of licensed radio
facilities or to revoke or modify such licenses. The FCC may adopt changes to
its radio licensing rules at any time, and may impose fines for violations of
its rules. Some of our license applications were deemed "mutually exclusive"
with those of other paging companies. In the past, the FCC would have selected
among the mutually exclusive applicants by lottery; however, the FCC recently
dismissed all pending mutually exclusive paging applications, including ours, to
facilitate its transition to wide area licensing and auctions for paging
frequencies.
Paging licenses have traditionally been issued on a site-specific basis. In
February 1997, the FCC adopted rules to issue most paging licenses for large,
FCC-defined service areas. Although the rules are subject to a pending appeal
and petitions for reconsideration, if they become "final", the following changes
will occur. Licenses for 929 MHz PCP and 931 MHz RCC frequencies will be issued
for Rand McNally's "MTA" geographic areas; licenses for RCC frequencies in lower
frequency bands will be licensed in "Economic Areas" or "Eas." Shared PCP
frequencies will continue to be allocated on a shared basis and licensed in
accordance with existing, site-specific procedures; however, the FCC is
considering changes to the application and licensing rules for these
frequencies. Mutually exclusive geographic area applications for all RCC
frequencies and exclusive 929 MHz PCP frequencies will be awarded through an
auction process. The FCC has recently dismissed all pending mutually exclusive
applications for these frequencies, as well as all applications filed after July
31, 1996 regardless of mutual exclusivity. A filing "freeze" is in effect for
the non-nationwide, exclusive paging frequencies pending commencement of the
auctions. The FCC has not yet announced when paging auctions will begin, or the
order in which it will make the various frequencies and geographic areas
available for bidding. Incumbent licensees will be able to trade in their
existing licenses for a single "wide-area" license based upon their current
coverage; incumbents will be entitled to interference protection from the
auction winners and will be able to modify their facilities within that area,
but they will not be permitted to expand their existing coverage.
Because auctions are new to the paging industry, we cannot predict their
impact on our business. At least initially, competitive bidding may increase our
costs of obtaining licenses. The FCC's wide-area licensing and auction rules may
also serve as entry barriers to new participants in the industry. In any service
area where we are the successful bidder, or where we trade in our licenses for
"wide-area" licenses, we will save on the application costs associated with
modifying and adding facilities within our service areas, and no other entity
will be able to apply for our frequencies within those areas. Conversely, in
geographic areas where we are not the high bidder, our ability to expand our
service territories in those geographic areas will be curtailed. Our three
nationwide frequencies will not be subject to competitive bidding; although, the
FCC is considering imposing additional "build-out" requirements on nationwide
licensees.
The Telecommunications Act of 1996 (the "1996 Act") also amended the
Communications Act. The 1996 Act imposes a duty on all telecommunications
carriers to provide interconnection to other carriers, and requires LECs to,
among other things, establish reciprocal compensation arrangements for the
transport and termination of calls and provide other telecommunications carriers
access to the network elements on an unbundled basis on reasonable and
non-discriminatory rates, terms and conditions. The LECs are now prohibited from
charging paging carriers for the "transport and termination" of LEC-originated
local calls. This prohibition could lead to substantial cost savings for us.
Moreover, under the 1996 Act and the FCC's rules, paging carriers are entitled
to compensation from any local telecommunications carrier for local calls that
terminate on a paging network. This could lead to additional revenues for us.
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
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discriminate among providers of "functionally equivalent" wireless services,
and shall not have the effect of prohibiting the provision of personal wireless
services. The 1996 Act provides for expedited judicial review of state and
local zoning decisions. Additionally, state and local governments may not
regulate the placement, construction and modification of personal wireless
service facilities on the basis of the environmental effects of radio frequency
emissions, if the facilities comply with the FCC's requirements. Other
provisions of the 1996 Act, however, may increase competition, such as the
provisions which allow the FCC to forbear from applying regulations and
provisions of the Communications Act to any class of carriers, not only to
CMRS, and the provisions allowing public utilities to provide
telecommunications services directly. These provisions may impose additional
regulatory costs (for example, provisions requiring contributions to universal
service by providers of interstate telecommunications). Some of these FCC rules
are subject to pending petitions for reconsideration and Court appeals. We
cannot predict the final outcome of any FCC proceeding or the possible impact
of future FCC proceedings.
State. The 1993 Budget Act preempts all state and local rate and entry
regulation of all CMRS operators. Entry regulations typically refer to the
process whereby an CMRS operator must apply to the state to obtain a certificate
to provide service in that state. Rate regulation typically refers to the
requirement that CMRS operators file a tariff describing our billing rates,
terms and conditions by which we provide paging services. Apart from rate and
entry regulations, some states may continue to regulate other aspects of our
business in the form of zoning regulations (subject to the 1996 Act's
prohibition on discrimination against or among wireless telecommunications
carriers), or "health and safety" measures. The 1993 Budget Act does not preempt
state authority to regulate such matters. Although there can be no assurances
given with respect to future state regulatory approvals, based on our experience
to date, we know of no reason to believe such approvals would not be granted.
In 1997, the FCC held that the Budget Act does not prohibit states from
imposing requirements of CMRS carriers to contribute to funding "universal"
telephone service within the states. Approximately 25 states now impose such
"universal service fund" obligations. The FCC's determination that the states
may impose those obligations is currently on appeal; if that determination is
upheld, we may incur additional costs in contributing to state universal service
funds, which we typically pass through to our subscribers.
Litigation. Metrocall has filed complaints with the FCC against a number
of Regional Bell Operating Companies (RBOCs) and the largest independent
telephone company for violations of the FCC's interconnection and local
transport rules and the 1996 Act. The complaints allege that these local
telephone companies are unlawfully charging the Company for local transport of
the telephone companies' local traffic. The Company has petitioned the FCC to
rule that these local transport charges are unlawful and to award the Company a
reimbursement or credit for any past charges assessed by the respective carriers
since November 1, 1996, the effective date of the FCC's transport rules. The
briefing schedule for these complaint proceedings ended in September 1998. The
complaints remain pending before the FCC. On January 25, 1999, the U.S. Supreme
Court concluded that the FCC had the authority under the Communications Act to
adopt rules necessary to carry out Sections 251 and 252 of the 1996 Act.
Metrocall believes the Supreme Court's ruling appears to validate the FCC's
"proxy" pricing rules for LEC/CMRS interconnection. In addition, the Supreme
Court also ruled that the FCC had the authority to preempt any state or local
tariffs or interconnection agreements contrary to those rules, which we believe
may support our complaints filed with the FCC. At December 31, 1998, Metrocall
had approximately $14 million of credits receivable included in prepaid expenses
and other current assets related to past charges assessed by the LECs for which
the Company is seeking reimbursement.
SEASONALITY
Generally, our operating results are not significantly affected by seasonal
factors.
TRADEMARKS AND SERVICE MARKS
We use the following trademarks and service marks:
- "Metrocall" -- a registered trademark with the U.S. Patent and Trademark
Office;
- "Datacall," "Metronet," "Metromessage" and "In-Touch" -- service marks
under which we market our paging services.
- "Metrotext" -- a computer program designed for use in transmitting
alphanumeric messages from personal computers to pagers (copyright
registration has been granted).
- "Metrofax" and "The Power in Paging" -- service marks.
- "One Touch", "EZ Pack Paging" and "Notesender" -- service marks
(applications with the U.S. Patent and Trademark Office are pending).
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EMPLOYEES
As of December 31, 1998, we employed approximately 3,800 full and part-time
people none of whom is represented by a labor union. We believe that our
relationship with our employees is good.
ITEM 2. PROPERTIES
We do not hold title to any significant real property; although, we and our
affiliates own interests in certain properties. At December 31, 1998, we leased
commercial office and retail space at more than 250 locations used in
conjunction with our operations. These office leases provide for monthly
payments ranging from approximately $250 to $107,000 and expire, subject to
renewal options, on various dates through July 2012.
In April 1994, we entered into a 10-year lease for additional office space
near our headquarters. The lease may be renewed for two additional five-year
periods. The lease, as amended, provides for annual rents of approximately
$814,000, with annual escalation of 3%. In connection with this lease, we have
exercised an option to acquire a 51% interest in the property for approximately
$2.9 million and expect to close this purchase in mid-1999.
We also lease numerous sites under long-term leases for our transmitters on
commercial broadcast towers, buildings and other fixed structures. At December
31, 1998, we leased these transmitter sites for monthly rentals ranging from
approximately $80 to $14,400 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, 1998, 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 THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
STOCK TRADING
Our common stock is traded on the Nasdaq National Market under the symbol
"MCLL."
COMMON STOCK PRICE RANGES
1997 1998
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
Quarter ended March 31.............................. $7 1/2 $4 1/8 $7 1/2 $4 5/8
Quarter ended June 30............................... 5 5/8 3 3/4 7 5/8 5 3/8
Quarter ended September 30.......................... 7 9/16 4 13/16 7 7/16 4 1/2
Quarter ended December 31........................... 7 3/8 4 1/8 6 1/16 2 11/16
On March 1, 1999, the last reported sales price of our common stock on the
Nasdaq National Market was $3 7/8 per share and, there were 1,347 stockholders
of record.
DIVIDEND POLICY
We have not declared or paid any cash dividends or distributions on our
common stock since our initial public offering of common stock in July 1993. We
do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Future cash dividends, if any, will be determined by our
Board of Directors. Certain covenants in our credit facility, our indentures and
the terms of the Series A Convertible Preferred Stock (the "Series A Preferred")
restrict or prohibit the payment of cash dividends on our common stock. In
addition, if we pay or set aside for payment any dividend or distribution on our
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, we have issued shares of each of our series of
preferred stock to the respective holders of those series of preferred stock in
lieu of cash dividends. In addition, we paid the holder of the Series C
Preferred approximately $7,000 of cash dividends in lieu of fractional shares of
the Series C Preferred, and received the consent of the holders of the Series A
Preferred for such cash payment.
UNREGISTERED SECURITIES:
Series A Preferred. On November 15, 1996, we 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 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.
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 directors of the Company. 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 the Company'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 the Company, as defined in the Certificate
of Designation for the Series A Preferred. During 1997 and 1998, we issued
23,126 and 26,477 additional shares of the Series A Preferred as dividends to
the holders of the Series A Preferred.
Each Warrant represents 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 is $7.40. The Warrants contain certain provisions for adjustment in the
exercise price in the event we sell common stock or rights to purchase common
stock in private transactions for less than 125% of the then current market
price and
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other customary anti-dilution provisions. The Warrants expire November 15,
2001. We have registered the resale of shares that may be obtained upon
exercise of the Warrants under the Securities Act.
Series B Preferred. On July 1, 1997, we issued 1,500 shares of the Series
B Junior Convertible Preferred Stock (the "Series B Preferred") in connection
with our acquisition of Page America. Each share of the Series B Preferred has a
stated value of $10,000 per share and a liquidation preference, which is junior
to the Series A Preferred but senior to the shares of common stock, equal to its
stated value. The Series B Preferred carries a dividend of 14% of the stated
value per year, payable semi-annually in cash or in additional shares of Series
B Preferred, at the Company's option. We registered the Series B Preferred under
the Securities Act. During 1997 and 1998, we issued to Page America 79 and 229
additional shares of Series B Preferred as dividends, which shares were not
registered.
The holders of the Series B Preferred have the right to convert up to 25%
of the number of the Series B Preferred initially issued (plus shares of the
Series B Preferred issued as dividends on such shares, and as dividends on such
dividends) into shares of common stock at the current market value of the common
stock, as defined, on September 1, 1997, December 1, 1997, March 1, 1998 and
June 1, 1998. As of December 31, 1998, no shares of Series B Preferred had been
converted. We registered up to 3,500,000 shares of common stock issuable upon
the conversion of the Series B Preferred.
On January 7, 1999, we repurchased and retired all of the outstanding
shares of the Series B Preferred for $16.2 million using borrowings from our
credit facility.
Series C Preferred. On October 2, 1998, we issued 9,500 shares of the
Series C Preferred in connection with the AMD acquisition. Each share of the
Series C Preferred has a stated value of $10,000 per share and a liquidation
preference, which is junior to the Series A Preferred and the Series B Preferred
but senior to the shares of 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 the
Company's option. We did not register the Series C Preferred under the
Securities Act. In December 1998, we issued the holder of the Series C Preferred
95 additional shares of Series C Preferred and $7,000 cash in lieu of fractional
shares as dividends. We did not register these shares.
Metrocall granted the holder of the Series C Preferred certain registration
rights with respect to the Series C Preferred and the common stock into which
the Series C Preferred may be converted. The effect of these registration rights
is to allow the holder or its transferees to freely transfer either the Series C
Preferred or any common stock it obtains through conversion. The holder or its
transferees also have a one-time right to require Metrocall to participate in an
underwritten public offering of the Series C Preferred or common stock.
The holder of the Series C Preferred may not sell or transfer its shares
for a period of 18 months from their date of issuance. The holder of the Series
C Preferred may convert its Series C Preferred shares into common stock
beginning on October 2, 2003 at a conversion price of $10.40 per Series C
Preferred share, subject to adjustment.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1994(a) 1995 1996(a) 1997(a) 1998(a)
---------- ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE, UNIT, AND PER UNIT DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Service, rent and maintenance revenues............ $ 49,716 $ 92,160 $ 124,029 $ 249,900 $ 416,352
Product sales..................................... 8,139 18,699 25,928 39,464 48,372
--------- --------- ----------- ----------- -----------
Total revenues.............................. 57,855 110,859 149,957 289,364 464,724
Net book value of products sold................... (6,962) (15,527) (21,633) (29,948) (31,791)
--------- --------- ----------- ----------- -----------
50,893 95,332 128,324 259,416 432,933
Operating expenses:
Service, rent and maintenance..................... 10,632 20,080 28,567 61,392 112,774
Selling and marketing............................. 7,313 15,546 24,101 53,802 73,546
General and administrative(b)..................... 16,796 33,985 42,905 73,753 121,644
Depreciation and amortization..................... 13,829 31,504 58,196 91,699 234,948
--------- --------- ----------- ----------- -----------
Loss from operations.............................. (2,323) (5,783) (25,445) (21,230) (109,979)
Interest and other income (expense)(c)............ 161 314 (607) 156 849
Interest expense.................................. (3,726) (12,533) (20,424) (36,248) (64,448)
--------- --------- ----------- ----------- -----------
Loss before income tax benefit and extraordinary
item............................................ (1,242) (18,002) (46,476) (57,322) (173,578)
Income tax provision benefit...................... 152 595 1,021 4,861 47,094
--------- --------- ----------- ----------- -----------
Loss before extraordinary item.................... (1,090) (17,407) (45,455) (52,461) (126,484)
Extraordinary item(c)............................. (1,309) (2,695) (3,675) -- --
--------- --------- ----------- ----------- -----------
Net loss........................................ (2,399) (20,102) (49,130) (52,461) (126,484)
Preferred dividends............................... -- -- (780) (7,750) (11,767)
--------- --------- ----------- ----------- -----------
Loss attributable to common stockholders........ $ (2,399) $ (20,102) $ (49,910) $ (60,211) $ (138,251)
========= ========= =========== =========== ===========
Loss per share attributable to common
stockholders:
Loss per share before extraordinary item
attributable to common stockholders........... $ (0.14) $ (1.49) $ (2.84) $ (2.22) $ (3.37)
Extraordinary item, net of income tax benefit... (0.16) (0.23) (0.23) -- --
--------- --------- ----------- ----------- -----------
Loss per share attributable to common
stockholders.................................. $ (0.30) $ (1.72) $ (3.07) $ (2.22) $ (3.37)
--------- --------- ----------- ----------- -----------
OPERATING AND OTHER DATA:
Net cash provided by operating activities......... $ 11,796 $ 14,000 $ 15,608 $ 27,166 $ 41,154
Net cash used in investing activities............. (19,227) (44,528) (327,904) (176,429) (191,747)
Net cash provided by financing activities......... 9,190 151,329 199,639 163,242 134,133
EBITDA(d)......................................... 16,152 27,771 32,751 70,469 124,969
EBITDA margin(d)(e)............................... 31.7% 29.1% 25.5% 27.2% 28.9%
ARPU(f)........................................... 10.53 9.15 8.01 8.25 7.57
Average monthly operating expense per unit(g)..... 7.36 6.71 6.28 6.47 5.66
Units in service (end of period)(a)............... 755,546 944,013 2,142,351 4,030,836 5,659,550
Units in service per employee (end of period)..... 1,007 1,047 1,086 1,366 1,512
Capital expenditures.............................. 19,091 44,058 62,110 69,935 78,658
--------- --------- ----------- ----------- -----------
1994 1995 1996 1997 1998
-------- -------- --------- ---------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)............................... $ (5,277) $116,009 $ (7,267) $ (24,631) $ (27,876)
Cash and cash equivalents............................... 2,773 123,574 10,917 24,896 8,436
Total assets............................................ 200,580 340,614 646,577 1,087,014 1,262,687
Total long-term debt, net of current portion............ 101,346 153,803 327,092 598,989 742,563
Total stockholders' equity.............................. 68,136 155,238 166,298 179,496 45,429
17
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- ---------------
(a) Consolidated statements of operations data for fiscal years 1994, 1996, 1997
and 1998 include the results of operations of acquired companies from their
respective acquisition dates. In May 1997, we sold the assets of our
telemessaging operations (acquired through merger on November 15, 1996);
therefore, results of operations for the year ended December 31, 1997
include telemessaging operations through the date of sale only. Consolidated
statements of operations data for fiscal year 1997 exclude the operations of
ProNet because the 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.
(b) 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.
(c) In fiscal years 1994 and 1995, we refinanced balances outstanding under our
then existing credit facilities and recorded extraordinary items of $1.3
million and $2.7 million, respectively, representing charges to expense
unamortized deferred financing costs and other costs, net of any income tax
benefits, related to those credit facilities. In 1996, we recorded an
extraordinary item for costs of approximately $3.7 million paid to purchase
the A+ Network 11 7/8% senior subordinated notes outstanding. In 1995, we
incurred breakage fees of approximately $1.7 million associated with the
termination of two interest rate swap agreements, which have been included
in interest and other income (expense).
(d) EBITDA (earnings before interest, taxes, depreciation and amortization, and
certain one-time charges), while not a measure under generally accepted
accounting principles (GAAP), is a standard measure of financial performance
in the paging industry; EBITDA should not be considered in isolation or as
an alternative to net income (loss), income (loss) from operations, cash
flows from operating activities, or any other measure of performance under
GAAP. EBITDA is, however, an approximation of the primary financial measure
by which our covenants are calculated under our indentures and our credit
facility. 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.
(e) EBITDA margin is calculated by dividing (a) EBITDA by (b) the amount of
total revenues less the net book value of products sold.
(f) ARPU (average monthly paging revenue per unit) is calculated by dividing (a)
service, rent and maintenance revenues for the period by (b) the average
number of units in service for the period. The ARPU calculation excludes
revenues derived from non-paging services such as telemessaging, long
distance and cellular telephone.
(g) 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.
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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 the Company together with the
Consolidated Financial Statements and the notes to the Consolidated Financial
Statements included elsewhere in this Annual Report and the description of
Metrocall's business in "Business."
OVERVIEW
Metrocall is a leading provider of local, regional and national paging and
other wireless messaging services. Through its nationwide wireless network, the
Company provides messaging services to over 1,000 U.S. cities, including the top
100 SMSAs. Since 1993, Metrocall's subscriber base has increased from less than
250,000 to more than 5.6 million. Metrocall has achieved this growth through a
combination of internal growth and a program of mergers and acquisitions. As of
December 31, 1998, the Company was the second largest messaging company in the
United States based on the number of subscribers.
Metrocall derives a majority of its revenues from fixed, periodic (usually
monthly) fees, generally not dependent on usage, charged to subscribers for
paging services. While a subscriber continues to use the Company's services,
operating results benefit from this recurring stream with minimal requirements
for incremental selling expenses or fixed costs.
Metrocall has grown internally by broadening its distribution network and
expanding its target market to capitalize on the growing appeal of messaging and
other wireless products and services, to gain access to different market
segments and to increase the penetration and utilization of its nationwide
network. Since December 31, 1993, the Company has added approximately 1.4
million new subscribers through internal growth. Over the past three years,
Metrocall has emphasized a number of distribution channels that are
characterized by lower ARPU, such as resellers, and correspondingly lower
operating costs. To offset declines in ARPU and to capitalize on the growth of
paging and other wireless messaging services, the Company has expanded its
channels of distribution to include, among others, Company-owned and-operated
retail outlets, strategic partnerships and alliances, Internet sales, with each
distribution channel focusing on the sale rather than the lease of pagers. Some
of these channels tend to have higher ARPU's than the Company's strategic
partners and typical resellers, who purchase service in quantity at wholesale
rates. Furthermore, Metrocall has been successful in marketing enhanced
services, such as nationwide paging services, voice mail and other ancillary
services for its strategic partners and other alliances.
The Company has also grown significantly through mergers and acquisitions.
Since July 1996, Metrocall has acquired the following companies, adding
approximately 3.6 million subscribers to its subscriber base.
ACQUISITION
ACQUIRED COMPANY DATE NUMBER OF 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
=========
On October 2, 1998, Metrocall continued its consolidation efforts by
acquiring AMD, the paging operations of AT&T, which increased its customer base
by adding approximately 1.2 million subscribers. As part of the acquisition,
Metrocall also acquired the NPCS license. Metrocall expects to realize the
following benefits from the AMD acquisition:
- Greater Scale and Scope. The AMD acquisition increases the Company's
geographic presence to include Alaska, Arkansas, Colorado, Kansas,
Minnesota, Missouri, Oklahoma, Oregon, Utah and Washington. In addition,
it adds to the Company's existing presence in the Northeast, Southeast,
Midwest, Mid-Atlantic and Southwest and West.
- Premium, High Revenue Customer Base. The AMD acquisition adds premium,
high revenue subscribers to the Company's existing customer base. AMD's
ARPU has historically been higher than the paging industry average. AMD
provided its
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21
paging and messaging services to large business customers, which
typically generated a higher ARPU than individual customers.
Approximately 23% of AMD's subscribers were high-ARPU alphanumeric
customers, one of the highest percentages in the paging industry.
Synergies. As Metrocall continues to integrate AMD's paging operations
with its own paging operations, Metrocall expects to realize significant
synergies. For example, AMD provided nationwide paging services without the
benefit of a nationwide network. As a result, AMD spent $29.3 million in 1997
reselling other carriers' services, which adversely affected its margins. Over
time, the Company expects to switch a portion of AMD's customers to its
nationwide network, which will reduce third-party costs and increase the
utilization of its network. In addition, Metrocall expects to realize
significant annual cost savings from elimination of duplicative AMD functions.
The Company expects to complete the integration of AMD by the fourth quarter of
1999. Metrocall cannot assure you that it will be able to integrate AMD
successfully or achieve the expected synergies.
Metrocall's growth, whether internal or through consolidation, requires
significant capital investment for paging equipment and technical
infrastructure. The Company also purchases pagers for that portion of its
subscriber base that it leases pagers to. During the year ended December 31,
1998, capital expenditures totaled $78.7 million, which included approximately
$51.4 million for pagers, representing increases in pagers on hand and net
increases and maintenance to the pager base. Metrocall estimates that capital
expenditures for the year ending December 31, 1999 will approximate $95.0
million.
RESULTS OF OPERATIONS
The definitions below will be helpful in understanding the discussion of
Metrocall's results of operations.
- Service, rent and maintenance revenues: include primarily monthly,
quarterly, semi-annually and annually billed recurring revenue, not
generally dependent on usage, charged to subscribers for paging and
related services such as voice mail and pager repair and replacement.
Service, rent and maintenance revenues also include revenues derived from
cellular and long distance services.
- Net revenues: include service, rent and maintenance revenues and sales
of customer owned and maintained (COAM) pagers less net book value of
products sold.
- Service, rent and maintenance expenses: include costs related to the
management, operation and maintenance of the Company's network systems
and customer support centers.
- Selling and marketing expenses: include salaries, commissions and
administrative costs of the Company's sales force and related marketing
and advertising expenses.
- General and administrative expenses: include costs related to executive
management, accounting, office telephone, repairs and maintenance,
management information systems, rent and employee benefits.
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22
Year Ended December 31, 1998 Compared With December 31, 1997
The following table sets forth the amounts of revenues and the percentages
of net revenues (defined as total revenues less the net book value of products
sold) represented by certain items in Metrocall's Consolidated Statements of
Operations and certain other information for fiscal years 1997 and 1998.
% 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 the Company's subscriber base. In 1998, Metrocall added approximately
414,000 subscribers or 10.3% through internal growth and added approximately 1.2
million subscribers or 30.1% through the AMD acquisition. Also in 1998 service,
rent and maintenance revenues included those revenues generated from the 1.3
million subscriber base acquired in the December 30, 1997 ProNet merger for
which no revenues were recognized during 1997 and the 1.2 million subscribers
Metrocall acquired from the AMD acquisition on October 2, 1998. The decline in
monthly ARPU of $0.68 per unit from 1997 to 1998 was attributable to the
Company's subscriber distribution mix and the related increase in its lower ARPU
indirect reseller distribution channel. The decline in ARPU was partially offset
by the increase in the Company's rental base due to the AMD acquisition, as AMD
had higher revenue rental subscribers. Factors affecting ARPU in future periods
include, among other things, distribution mix of new subscribers, competition
and new technologies. Metrocall cannot assure that ARPU will not decline in
future periods.
Product sales revenues. Product sales revenues 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. Metrocall's gross margin
on product sales increased from 24.1% in 1997 to 34.3% in 1998 as a result of
increased depreciation taken on units sold that resulted in a lower book value
and higher margin at the sales date. Pagers are classified as property and
depreciated from the date of 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.
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23
% OF % OF
OPERATING EXPENSES 1997 REVENUES 1998 REVENUES INCREASE
------------------ -------- -------- -------- -------- --------
Service, rent and maintenance.............. $ 61,392 23.7 $112,774 26.0 $ 51,382
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
-------- ----- -------- ----- --------
$280,646 108.2 $542,912 125.4 $262,266
======== ===== ======== ===== ========
OPERATING EXPENSES PER UNIT IN SERVICE 1997 1998 $ DECREASE
-------------------------------------- ----- ----- ----------
Monthly service, rent and maintenance....................... $2.10 $2.07 $(0.03)
Monthly selling and marketing............................... 1.84 1.35 (0.49)
Monthly general and administrative.......................... 2.53 2.24 (0.29)
----- ----- ------
Average monthly operating costs............................. $6.47 $5.46 $(0.81)
===== ===== ======
Overall in 1998, Metrocall experienced an $0.81 reduction in average
monthly operating expense per unit. As discussed below, the Company's operating
results in 1998 included the operating expenses of Page America and ProNet for a
full fiscal year. In addition, the Company's 1998 operating results include the
operating expenses of AMD from the October 2, 1998 acquisition date. Each
operating expense is discussed separately below.
Service, rent and maintenance expenses. Service, rent and maintenance
expenses increased approximately $51.4 million from $61.4 million in 1997 to
$112.8 million in 1998 and increased as a percentage of net revenues from 23.7%
in 1997 to 26.0% in 1998. Metrocall's service, rent and maintenance expenses
increased in 1998 because they included the service, rent and maintenance
expenses of Page America and ProNet for a complete fiscal year ($37.7 million)
and the expenses of AMD for the fourth quarter of 1998 ($15.2 million).
Exclusive of the impact of the ProNet merger and the Page America and AMD
acquisitions, service, rent and maintenance expenses in 1998 remained relatively
flat compared to 1997 expenses with increases in tower rents and network repairs
and maintenance expenses being partially offset by a decrease in expenses due to
the divesture of Metrocall's telemessaging operations during 1997 for which no
expenses were recognized in 1998. In 1998, Metrocall also continued to withhold
payment and expense recognition of LEC charges in its various service areas for
any facilities used by those LECs to transport local calls to the Company's
local paging networks as provided under the 1996 Act and the FCC's rules
regarding local transport. At December 31, 1998, Metrocall had approximately $14
million of credits receivable included in prepaid expenses and other current
assets related to past charges assessed by the LECs for which the Company is
seeking reimbursement. The increase in service, rent and maintenance expenses as
a percentage of net revenues in 1998 was the result of the recent mergers and
acquisitions. Average monthly service, rent and maintenance expense per unit
slightly declined in 1998 as a result of the higher average subscriber base
throughout 1998. As Metrocall continues to expand its networks in order to serve
more subscribers and offer advanced messaging capabilities, these expenses may
increase.
Selling and marketing expenses. Selling and marketing expenses increased
approximately $19.7 million from $53.8 million in 1997 to $73.5 million in 1998
and decreased as a percentage of net revenues from 20.7% in 1997 to 17.0% in
1998. Selling and marketing expenses increased in 1998 because they included the
selling and marketing expenses of Page America and ProNet for a complete fiscal
year ($16.5 million) and the expenses of AMD for the fourth quarter of 1998
($5.3 million). The decrease in selling and marketing expenses as a percentage
of revenues in 1998 was primarily from the impact of the Company's recent
merger and acquisitions and the related higher revenues base. Metrocall expects
that selling and marketing expenses may increase as a percentage of revenues in
the future as it expands its presence in existing and new markets. Average
monthly selling and marketing expense per unit declined in 1998 as a result of
the higher average subscriber base throughout 1998.
General and administrative expenses. General and administrative expenses
increased approximately $47.9 million from $73.8 million in 1997 to $121.6
million in 1998 and decreased as a percentage of net revenues from 28.5% in 1997
to 28.1% in 1998. General and administrative expenses increased in 1998 because
they included the general and administrative expenses of Page America and ProNet
for a complete fiscal year ($30.4 million) and the expenses of AMD for the
fourth quarter of 1998 ($10.6 million). Exclusive of the impact of the merger
and acquisitions, general and administrative expenses increased for a variety of
professional services ($3.9 million) and additional operating personnel ($3.0
million). The decrease in general and administrative expenses as a percentage of
net
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24
revenues in 1998 was primarily from the benefit of economies of scale related
to the Company's recent merger and acquisitions and the related increase in the
revenue base. Metrocall expects general and administrative expenses per unit to
continue to decrease in 1999 as it gains additional synergies from the AMD
acquisition.
Depreciation and amortization expenses. Depreciation and amortization
expense increased approximately $143.2 million from $91.7 million in 1997 to
$234.9 million in 1998. The increase in total depreciation expense in 1998 was
approximately $20 million and resulted primarily from depreciation on additional
subscriber paging equipment and other plant and equipment acquired mainly in the
ProNet merger and Page America and AMD acquisitions. The increase in total
amortization expense in 1998 was approximately $123 million and resulted
primarily from amortization expenses on intangibles acquired in Metrocall's
recent merger and acquisitions and the reduction in estimated useful lives of
certain intangibles described below. Metrocall expects depreciation and
amortization expenses in 1999 to increase as a result of a full year's impact of
the AMD acquisition. Effective January 1, 1998, the Company reduced the
estimated useful lives of certain intangibles, including goodwill, regulatory
licenses issued by the FCC and subscriber bases recorded in conjunction with
acquisitions from 15 years to 10 years for goodwill, from 25 years to 10 years
for FCC licenses and from 5-6 years for subscriber bases to 3 years. The impact
of these changes was to increase amortization expense in 1998 by approximately
$26 million.
$
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.................................................... (52,461) (126,484) 74,023
Preferred dividends......................................... (7,750) (11,767) 4,017
EBITDA...................................................... $ 70,469 $ 124,969 $54,500
Interest expense. The increase in interest expense in 1998 of
approximately $28.2 million was the result of higher average debt balances
outstanding during the fiscal year primarily associated with the additional debt
assumed with the ProNet merger and financing requirements of the AMD
acquisition. During 1998, total debt increased by $143.4 million to $743.3
million. Metrocall expects interest expense in 1999 to increase from 1998 due to
expected higher average debt balances during 1999.
Income tax benefit. The increase in the income tax benefit in 1998 of
approximately $42.2 million was the result of the tax benefit recorded on the
amortization of non-goodwill related intangible assets primarily generated from
the ProNet merger which occurred on December 30, 1997 for which no tax benefits
were generated in 1997 and the AMD acquisition which occurred on October 2,
1998.
Net loss. Metrocall's net loss increased approximately $74.0 million from
$52.4 million in 1997 to $126.5 million in 1998. The increase in net loss was
primarily the result of increased depreciation and amortization and other
operating expenses associated with the ProNet merger and the Page America and
AMD acquisitions offset by increases in net revenues related to an increase in
the Company's subscriber base as a result of internal growth and its recent
merger and acquisitions.
Preferred dividends. The increase in preferred dividends in 1998 of
approximately $4.0 million was the result of higher dividends paid to the
holders of the Series A Preferred and the Series B Preferred in 1998 and
dividends paid in the fourth quarter of 1998 to the holder of the Series C
Preferred. Dividends recognized on the Series A Preferred and the Series B
Preferred increased by $0.8 million and $1.3 million, respectively due to their
cumulative nature. On October 2, 1998, Metrocall issued 9,500 shares of the
Series C Preferred in connection with the AMD acquisition. Dividends recognized
on the Series C Preferred were approximately $1.9 million.
EBITDA. The increase in EBITDA in 1998 of approximately $54.5 million was
primarily the result of the increase in revenues in 1998 offset to a lesser
extent by the increase in operating expenses. Metrocall's EBITDA margin improved
from 27.2% in 1997 to 28.9% in 1998.
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25
Year Ended December 31, 1997 Compared With December 31, 1996
The following table sets forth the amounts of revenues and the percentages
of net revenues (defined as total revenues less the net book value of products
sold) represented by certain items in Metrocall's Consolidated Statements of
Operations and certain other information for fiscal years 1996 and 1997.
% OF % OF
REVENUES 1996 REVENUES 1997 REVENUES INCREASE
-------- ---------- -------- ---------- -------- ----------
Service, rent and maintenance........... $ 124,029 96.7 $ 249,900 96.3 $ 125,871
Product sales........................... 25,928 20.2 39,464 15.2 13,536
---------- ----- ---------- ----- ----------
Total revenues................ 149,957 116.9 289,364 111.5 139,407
Net book value of products sold......... (21,633) (16.9) (29,948) (11.5) 8,315
---------- ----- ---------- ----- ----------
Net revenues.................. $ 128,324 100.0 $ 259,416 100.0 $ 131,092
ARPU.................................... $ 8.01 $ 8.25 $ 0.24
Number of Subscribers................... 2,142,351 4,030,836 1,888,485
Service, rent and maintenance revenues. Service, rent and maintenance
revenues increased approximately $125.9 million from $124.0 million in 1996 to
$249.9 million in 1997. Growth in the Company's subscriber base was the primary
reason for the revenues increase. During 1997, Metrocall's subscriber base grew
by approximately 1.9 million, which included approximately 1.3 million
subscribers acquired in the ProNet merger. Monthly ARPU for paging services
increased by $0.24 due to subscriber revenue mix acquired in the Company's
merger with A+ Network in November 1996, general service rate increases, the
shift in the sales mix from primarily direct distribution channels, especially
the direct sales force, to indirect channels and Company-owned retail stores,
and the sale of enhanced paging services.
Product sales revenues. Product sales revenues increased approximately
$13.5 million from $25.9 million in 1996 to $39.5 million in 1997 and decreased
as a percentage of net revenues from 20.2% in 1996 to 15.2% in 1997. Net book
value of products sold increased approximately $8.3 million from $21.6 million
in 1996 to $29.9 million in 1997 principally because of the increase in product
sales, partially offset by increased depreciation expense. Metrocall's gross
margin on products sold increased from 16.6% in 1996 to 24.1% in 1997.
The following tables set forth the amounts of operating expenses and
related percentages of net revenues represented by certain items in Metrocall's
Consolidated Statements of Operations and certain other information for fiscal
years 1996 and 1997.
% OF % OF
OPERATING EXPENSES 1996 REVENUES 1997 REVENUES INCREASE
------------------ -------- -------- -------- -------- --------
Service, rent and maintenance................ $ 28,567 22.3 $ 61,392 23.7 $ 32,825
Selling and marketing........................ 24,101 18.8 53,802 20.7 29,701
General and administrative................... 42,905 33.4 73,753 28.5 30,848
Depreciation and amortization................ 58,196 45.4 91,699 35.3 33,503
-------- ----- -------- ----- --------
$153,769 119.8 $280,646 108.2 $128,677
======== ===== ======== ===== ========
INCREASE
OPERATING EXPENSES PER UNIT IN SERVICE 1996 1997 OR (DECREASE)
-------------------------------------- ----- ----- -------------
Monthly service, rent and maintenance....................... $1.88 $2.10 $0.22
Monthly selling and marketing............................... 1.58 1.84 0.26
Monthly general and administrative.......................... 2.82 2.53 (0.29)
----- ----- -----
Average monthly operating expense........................... $6.28 $6.47 $0.19
Overall in 1997, Metrocall experienced a $0.19 increase in average monthly
operating expense per unit. As discussed below, the Company's operating results
in 1997 included the operating expenses of the 1996 acquisitions of Parkway,
Satellite, and A+ Network
24
26
for a full fiscal year. In addition, the operating results include the
operating expenses of Page America from the July 1, 1997 acquisition date.
Service, rent and maintenance expenses. Service, rent and maintenance
expenses increased approximately $32.8 million from $28.6 million in 1996 to
$61.4 million in 1997 and increased as a percentage of net revenues from 22.3%
in 1996 to 23.7% in 1997. In 1997, the overall increases in service, rent and
maintenance expenses and as a percentage of revenues were attributable to the
acquisitions of Parkway ($1.1 million), Satellite ($1.3 million), A+ Network
($22.7 million) and Page America ($2.6 million) completed during 1996 and 1997.
Additional increases were primarily due to increased site rental costs ($3.1
million) and increased personnel costs ($1.7 million) partially offset by
reductions in third party carrier costs ($1.9 million). In 1997, the Company
ceased paying LECs in its various service areas for any facilities used by those
LECs to transport local calls to Metrocall's local paging networks as provided
under the 1996 Act and the FCC's rules regarding local transport, which had
reduced third party carriers costs by approximately $8.2 million. The monthly
service, rent and maintenance expense per unit increased by $0.22 per unit as a
result of the above items.
Selling and marketing expenses. Selling and marketing expenses increased
approximately $29.7 million from $24.1 million in 1996 to $53.8 million in 1997
and increased as a percentage of net revenues from 18.8% in 1996 to 20.7% in
1997. The increase in selling and marketing expenses and the increase as a
percentage of net revenues were primarily associated with the 1996 and 1997
acquisitions, which added new sales offices and retail locations. Selling and
marketing expenses attributed to the acquired companies were Parkway ($1.0
million), Satellite ($0.8 million), A+ Network ($24.5 million) and Page America
($1.3 million). Additional increases were associated with the increased sales
staff and related costs ($1.5 million) and increased advertising and promotional
costs ($0.1 million). Monthly selling and marketing expense per unit increased
in 1997 by $0.26 per unit due primarily to increases in the Company's sales
force as a result of acquisitions in new geographic areas.
General and administrative expenses. General and administrative expenses
increased approximately $30.8 million from $42.9 million in 1996 to $73.8
million in 1997 and decreased as a percentage of net revenues from 33.4% in 1996
to 28.5% in 1997. The general and administrative expenses increase was primarily
the result of the acquired companies including the operating results of Parkway
($0.7 million), Satellite ($1.9 million), A+ Network ($21.3 million) and Page
America ($1.4 million). General and administrative expenses also increased
primarily due to increased expenses for billing, credit and collection
activities ($3.4 million) and additional operational and administrative
personnel ($3.7 million). The decrease in general and administrative expenses
as a percentage of net revenues was attributable to economies of scale
recognized from the 1996 and 1997 acquisitions and the related increase in the
Company's subscriber base.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased approximately $33.5 million from $58.2 million in 1996 to
$91.7 million in 1997. The increase in depreciation expense resulted primarily
from depreciation on increased levels of subscriber paging equipment and other
plant and operating equipment. Amortization expenses increased substantially
during 1997 due to the amortization expense of goodwill and other intangibles
related to the 1996 and 1997 acquisitions. Effective July 1, 1996, the Company
changed the estimated useful lives of certain intangibles acquired in 1994,
including goodwill and regulatory licenses issued by the FCC from 40 years to 15
years for goodwill and from 40 years to 25 years for FCC licenses. The impact of
these changes was to increase amortization expense for 1997 by approximately
$2.6 million.
INCREASE OR
OTHER 1996 1997 (DECREASE)
----- -------- -------- -----------
Interest and other income (expense)......................... $ (607) $ 156 $ 763
Interest expense............................................ (20,424) (36,248) 15,824
Income tax benefit.......................................... 1,021 4,861 3,840
Extraordinary item.......................................... (3,675) -- (3,675)
Net loss.................................................... (49,130) (52,461) 3,331
Preferred dividends......................................... (780) (7,750) 6,970
EBITDA...................................................... $ 32,751 $ 70,469 $ 37,718
Interest expense. The increase in interest expense of approximately $15.8
million in 1997 was due to a higher average level of debt outstanding during
1997 primarily associated with the financing of the 1996 and 1997 acquisitions.
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Net loss. Metrocall's net loss increased approximately $3.3 million from
$49.1 million in 1996 to $52.5 million in 1997. The increase in net loss was
primarily the result of increased depreciation and amortization and other
operating expenses associated with the Parkway, Satellite and A+ Network and
Page America acquisitions offset by increases in net revenues related to an
increase in the Company's subscriber base as a result of internal growth and the
1996 and 1997 mergers and acquisitions.
Preferred dividends. The increase in preferred dividends in 1997 of
approximately $7.0 million was the result of an increase in dividends paid to
the holders of the Series A Preferred ($6 million) and dividends paid to the
holders of the Series B Preferred ($1 million).
EBITDA. EBITDA increased approximately $37.7 million from $32.8 million in
1996 to $70.5 million in 1997. EBITDA margin increased from 25.5% in 1996 to
27.2% in 1997.
INFLATION
Inflation is presently not a material factor affecting Metrocall's
business. Traditional one-way paging system equipment and operating costs have
not increased and one-way pager costs have declined significantly in recent
years. General operating expenses such as salaries, employee benefits and
occupancy costs are, however, subject to inflationary pressures.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the three years ended December 31, 1998, Metrocall's operations have
required significant funding, primarily to support mergers and acquisitions and
capital expenditures for paging infrastructure and equipment requirements.
Metrocall has met its funding requirements with cash generated from operating
activities, borrowings under its credit facilities and proceeds from its senior
subordinated notes offerings.
Cash Flows
For 1998, the Company's cash provided by operating activities increased
approximately $14.0 million or 51.5% from $27.2 million in 1997 to $41.2 million
in 1998. The increase in cash provided by operating activities was primarily
attributable to the effects of the ProNet merger and the AMD acquisition and
related synergies, and the Company's internal growth.
Net cash used in investing activities in 1998 increased by $15.3 million or
8.7% from $176.4 million in 1997 to $191.7 million in 1998. During 1998, the
Company borrowed $110 million under its credit facility to fund the cash portion
of the purchase price for the AMD acquisition. Capital expenditures for 1998
included approximately $51.4 million for pagers, representing increases in
pagers on hand and net increases and maintenance to the rental subscriber base.
The balance of capital expenditures included $12.8 million for information
systems and computer related equipment, $12.7 million for network construction
and development and $1.7 million for general purchases including leasehold
improvements.
Net cash used in financing activities in 1998 decreased by $29.1 million or
17.8% from $163.2 million in 1997 to $134.1 million in 1998. During 1998,
Metrocall borrowed $133 million under its credit facility and repaid
approximately $234.2 million. Of the borrowings under the facility, $110 million
was used for the cash portion of the purchase price for the AMD acquisition and
the remaining amount was used for general corporate purposes. The repayments
made under the facility included $229 million using proceeds from the Company's
senior subordinated notes offering in 1998 as described below.
Working Capital
Working capital (defined as current assets less current liabilities) was a
deficit of $27.9 million and $24.6 million in 1998 and 1997, respectively. In
1998, current assets increased by approximately $2.5 million, primarily as a
result of increases in trade receivables and other current assets acquired in
the AMD acquisition offset by lower cash balances. Current liabilities increased
by approximately $5.7 million as a result of higher deferred revenue due to a
higher number of subscribers offset by lower other current liabilities.
LONG-TERM DEBT
At December 31, 1998 and 1997, long-term debt consisted of:
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INCREASE OR
LONG-TERM DEBT 1997 1998 (DECREASE)
-------------- -------- -------- -----------
Borrowings under the credit facility........................ $141,165 $ 40,000 $(101,165)
Senior subordinated notes................................... 452,534 698,544 246,010
Capital leases and other debt............................... 6,242 4,790 (1,452)
-------- -------- ---------
Total long-term debt.............................. $599,941 $743,334 $ 143,393
======== ======== =========
Borrowings and repayments under the credit facility. During 1998,
Metrocall reduced borrowings outstanding under its credit facility by
approximately $101.2 million. Repayments under the credit facility were funded
primarily with proceeds from the Company's senior subordinated notes offering in
1998. At the time of the 1998 notes offering, amounts outstanding under the
credit facility approximated $269 million, which had primarily included amounts
outstanding at December 31, 1997 and additional borrowings of $110 million used
to fund the cash portion of the AMD purchase price. Through March 1, 1999,
Metrocall borrowed under the credit facility an additional $24 million of which
$16.2 million was used to fund the repurchase of the Series B Preferred and the
remaining was used for general corporate purposes.
During 1998, Metrocall twice revised the terms of its credit facility to
accommodate the AMD acquisition and its 1998 notes offering. On October 2, 1998,
the Company and its bank lenders increased the amount of borrowings available
under the credit facility by $100 million to $400 million. The additional $100
million term loan facility was used to fund the cash portion of the AMD
acquisition. On December 22, 1998, the Company and its bank lenders reduced the
amount of borrowings available under the credit facility by $200 million to $200
million in connection with the 1998 notes offering. Subject to certain
conditions set forth in the Company's revised credit facility agreement,
Metrocall may borrow up to $200 million under two loan facilities through
December 31, 2004. The first facility (Facility A) is a $150 million reducing
revolving credit facility and the second (Facility B) is a $50 million reducing
term credit. The credit facility is secured by substantially all of Metrocall's
assets. Required quarterly principal repayments, as defined, begin on March 31,
2001 and continue through December 31, 2004.
Under the revised credit facility, the Company is required to comply with
certain financial and operating covenants. The Company is required to maintain
certain financial ratios, including total debt to annualized operating cash
flow, senior debt to annualized operating cash flow, annualized operating cash
flow to pro forma debt service, total sources of cash to total uses of cash, and
operating cash flow to interest expense (in each case, as such terms are defined
in the credit facility agreement). The covenants also limit additional
indebtedness and future mergers and acquisitions without the approval of the
lenders and restrict the payment of cash dividends and other stockholder
distributions by Metrocall. The credit facility agreement also prohibits certain
changes in ownership control of Metrocall, as defined. At December 31, 1998, the
Company was in compliance with all of these covenants.
Proceeds raised from the issuance of senior subordinated notes. In
December 1998, Metrocall completed a private placement of $250 million aggregate
principal amount of 11% senior subordinated notes due 2008. The notes bear
interest, payable semi-annually on March 15 and September 15. The notes may be
redeemed at the Company's option on or after September 15, 2003. The 1998 Notes
are unsecured obligations of the Company, subordinated to all of its present and
future senior indebtedness. The Company used the net proceeds from the notes of
approximately $242 million to repay outstanding indebtedness under its credit
facility and for other corporate purposes. The Company is required to register
the notes under the Securities Act by June 22, 1999. If this requirement is not
met, the annual interest rate on the 1998 Notes will increase by .5% until the
notes are generally freely transferable.
The notes contain various covenants that, among other restrictions, limit
Metrocall's ability to incur additional indebtedness, pay dividends, engage in
certain other transactions with affiliates, sell assets and engage in mergers
and consolidations except under certain conditions.
ACCESS TO FUTURE CAPITAL
Metrocall's ability to access borrowings under the credit facility and to
meet its debt service and other obligations (including compliance with financial
covenants) will be dependent upon its future performance and its cash flows from
operations, which will be subject to financial, business and other factors,
certain of which are beyond the Company's control, such as prevailing economic
conditions. Metrocall cannot assure you that, in the event the Company was to
require additional financing, such additional financing would be available on
terms permitted by agreements relating to existing indebtedness or otherwise
satisfactory to it. Metrocall believes that funds generated by its operations,
together with those available under its credit facility, will be sufficient to
finance estimated capital expenditure requirements and to fund its existing
operations for the foreseeable future. While there are no current
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outstanding commitments, the Company may continue to evaluate strategic
acquisition candidates in the future. Potential future acquisitions would be
evaluated on significant strategic opportunities such as geographic coverage
and regulatory licenses and other factors including overall valuation,
consideration to be given and the availability of financing. Such potential
acquisitions may result in substantial capital requirements for which
additional financing may be required. No assurance can be given that such
additional financing would be available on terms satisfactory to Metrocall.
Metrocall's shares of common stock have traded on the Nasdaq National
Market since Metrocall's initial public offering in July 1993. The Nasdaq
National Market listing maintenance standards require that, among other things,
either (1) Metrocall maintain net tangible assets of $4.0 million or (2)
Metrocall's common stock maintain a minimum bid price of at least $5.00 per
share for 30 consecutive trading days. At December 31, 1998, Metrocall met the
net tangible asset requirement. If in the future, the Company fails to meet
these standards, it could take a number of actions to maintain listing on a
national exchange including, among others, a reverse stock split, stock
repurchase program, or transfer of its listing to the Nasdaq SmallCap Market.
YEAR 2000 READINESS DISCLOSURE
The year 2000 issue consists of two primary shortcomings of many electronic
data processing systems that may make them unable to process year-date data
accurately beyond the year 1999. First, computer programmers consistently
abbreviated dates by eliminating the first two digits of the year, e.g. December
31, 1998 would become 12/31/98. This shortcut may cause electronic data
processing systems to recognize a date on January 1, 2000 as January 1, 1900 and
process data inaccurately or stop processing altogether. Second, the algorithm
used in some electronic data processing systems for calculating leap years is
unable to detect that the year 2000 is a leap year. Therefore, systems that are
not year 2000 compliant may not register the additional day, resulting in
incorrect date calculations.
Metrocall utilizes software and related computer technologies essential to
its operations that may be affected by the year 2000 issue. Accordingly, the
Company has devised an enterprise-wide program, consisting of the following
phases, aimed to mitigate the year 2000 issue.
Identification and Assessment of Potential Problem Areas. By March 30,
1999, Metrocall had inventoried a substantial portion of its computer hardware
and software systems and the embedded systems contained in its plant and
facilities and related infrastructure. This process was undertaken with the goal
of identifying the Company's critical and non-critical systems and assessing
whether or not such systems are year 2000 compliant. Metrocall's critical
systems include: paging infrastructure, billing systems, telephone services,
financial systems and operating systems and hardware. For each of these systems,
the Company has developed or is in the process of developing a validation or
remediation plan to address year 2000 concerns that have been identified.
Remediation of Identified Problem Areas. During Metrocall's identification
and assessment phase, it had identified requirements for certain systems that it
believes will enable these systems to become year 2000 compliant. The
remediation phase includes correcting identified problem areas. This may include
hardware and software revisions, developing replacement systems and eliminating
non-functional applications or system components. Metrocall is in various stages
of remediation for its critical and non-critical systems. Metrocall's goal is to
complete the majority of its remediation efforts by September 1999.
Validation. As Metrocall makes changes to applications and components of
its systems, it intends to validate and test those changes for year 2000
compliance. The Company plans to perform validation and testing on a system-wide
basis to ensure that any changes made are compatible with interacting systems.
The Company may also conduct acceptance testing, where it deems it necessary.
Metrocall is currently undertaking this phase on certain applications.
Implementation. This phase involves integrating the systems changes
Metrocall made in the remediation stage once they have been appropriately
validated. As Metrocall implements and integrates such changes, it may still
discover that its systems include both year 2000 compliant and non-compliant
applications and components. Metrocall does not expect this combination to have
any significant adverse effect upon its operations but intends to develop
appropriate contingency recovery plans to reduce the risk of such effects.
Metrocall has begun this phase for certain systems' applications and the
Company's goal is to achieve completion of the entire phase by the end of the
fourth quarter 1999.
Third Parties. Metrocall believes that many of its interconnect carriers,
equipment suppliers and other primary vendors have year 2000 issues that may
affect the Company. Metrocall has sought and will continue to seek confirmation
from these parties that they are developing and implementing plans to become
year 2000 compliant. Metrocall intends to validate system processes that require
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interaction with vendor hardware or software in an effort to ensure system
readiness by December 31, 1999. Confirmations received to date have indicated
that such respondents are in the process of implementing remediation plans in an
effort to bring their systems into year 2000 compliance.
Contingency Plans. The Company is in the process of determining
contingency plans for each of its systems if such systems are not year 2000
compliant. The contingency plans will address "likely" worst case scenarios for
each system included in the year 2000 program. They will also consider, to the
extent Metrocall believes necessary, plans that address certain potential third
party non-compliance. At this time, Metrocall does not have sufficient
information to assess the likelihood of such worst case scenarios but
anticipates completion of such planning during 1999.
The following briefly describes each of Metrocall's critical systems and
their year 2000 readiness.
- Paging Infrastructure. Metrocall has an extensive paging infrastructure
that provides services to its customers over a number of different
frequencies. The Company has identified and performed certain year 2000
readiness assessment activities with regard to its paging software and
hardware, and is working with its primary vendor that provides software
to the Company's paging infrastructure. Metrocall expects certain
software upgrades to be installed by the end of the third quarter of
1999, and those upgrades will be validated and tested shortly
thereafter. Certain of the Company's hardware units will require upgrade
to support the required software. Such units will be upgraded at the
same time the software upgrades are performed. Metrocall expects to
incur approximately $7 million during 1999 to support these paging
infrastructure initiatives.
- Billing Systems. Metrocall currently utilizes three different billing
platforms that are used for the recordation and processing of customer
invoices. Two of these platforms are commercial software applications.
The Company has received vendor certification with respect to these
platforms' hardware, databases and the substantial majority of the
software. The third platform was developed by the former AMD. Its year
2000 readiness was previously tested and warranted by AMD's prior
corporate owner. Metrocall has scheduled upgrades to certain operating
systems to promote proper integration for the third and early fourth
quarters 1999. Once the upgrades have been completed, the Company will
move forward with its testing of the platforms and their interfaces to
the paging and financial systems. Metrocall expects to incur
approximately $2.0 million during 1999 on these initiatives.
- Telephone Services. Metrocall's ability to provide paging and messaging
services is directly linked to its ability to accept and direct
telephone traffic over an extended network. In addition, the Company's
ability to sell products, administer customer calls and communicate
between offices is dependent on its telephone network. Metrocall is
currently in various phases of the remediation and validation stages for
its internal telephone network. Metrocall's goal is to complete this
phase by the end of the fourth quarter, with validation and
implementation completed by December 1999. The Company's cost for these
initiatives in 1999 is expected to be approximately $1.5 million.
Metrocall is actively contacting its external telephone service
providers to determine their level of year 2000 readiness.
- Financial Systems. Metrocall's financial systems, which include its
accounts payable, general ledger, fixed asset, purchase and inventory
systems, have been vendor-certified for year 2000 compliance. The Company
is in process of testing the financial systems for functionality and data
integrity between interfaces. The Company expects to have all testing
completed by the end of the third quarter of 1999. Metrocall does not
expect to incur any significant costs related to year 2000 readiness for
its financial systems.
- Operating Systems and Hardware. Metrocall has identified and performed
year 2000 readiness assessment activities with regard to its network
operating systems. Certain of such systems are scheduled for software
upgrades that will improve their functionality and are year 2000
compliant. The Company anticipates completing these upgrades throughout
1999 with validation and implementation occurring shortly thereafter.
Metrocall has identified personal computers that are not year 2000
compliant and which it intends to replace by December 31, 1999. The
Company expects the cost of these initiatives to be approximately $3.5
million.
Metrocall is utilizing both internal and external resources to remediate
and test its systems for year 2000 compliance. The Company is incurring internal
labor as well as consulting and other expenses related to infrastructure and
facilities enhancements necessary to prepare its systems. Although it is
Metrocall's goal that its systems be year 2000 compliant on or before December
31, 1999, there can be no assurance that the Company's year 2000 program will be
successful or that its interconnect carriers and primary vendors
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will also successfully address their year 2000 issues. Metrocall is unable to
predict the potential impact on its financial condition and results of
operations in the event its year 2000 program is not successful.
ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS AND FINANCIAL CONDITION
As the Company has described in this Annual Report on Form 10-K, 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. However, Metrocall's ability to meet its debt service and other
obligations is dependent upon such future performance, which will be subject to
factors beyond its control.
The risks and uncertainties described below are not the only ones Metrocall
faces. Additional risks and uncertainties not presently known to the Company or
that the Company currently deems immaterial may also impair its business
operations. If any of the following risks actually occur, Metrocall's business,
financial condition or results of operations could be materially adversely
affected.
Metrocall Has a History of Operating Losses. Metrocall has sustained net
losses of $49.1 million, $52.5 million and $126.5 million for fiscal years 1996,
1997 and 1998. Those losses are significantly attributable to its consolidation
and growth strategies and capital expenditure requirements. Metrocall cannot
assure you that it can reverse such losses in the future. In addition, at
December 31, 1998, Metrocall's accumulated deficit was approximately $295.2
million and its working capital deficit was $27.9 million. The Company's
business requires substantial funds for capital expenditures and acquisitions,
both of which cause significant depreciation and amortization expenses.
Additionally, Metrocall has substantial levels of borrowing, which results in
significant interest expense, expected to be outstanding in the foreseeable
future. Metrocall therefore expects to continue to incur losses from operations.
Metrocall cannot assure you that it will achieve profitability in the future.
Metrocall's Substantial Indebtedness May Have Operating
Consequences. Metrocall had total debt outstanding of approximately $743.3
million at December 31, 1998. This substantial indebtedness, along with the net
operating losses and working capital deficits it has sustained in recent
periods, may have consequences for the Company. For example, it may:
- make it more difficult for the Company to satisfy its debt;
- 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 the Company to be vulnerable to increases in interest rates because
a substantial amount of its indebtedness under the credit facility bears
interest at floating rates.
Total debt at December 31, 1998 included $40 million outstanding under
Metrocall's credit facility which was subject to variable interest rate risk. To
the extent that interest rates fluctuate, the interest expense Metrocall
recognizes on borrowings outstanding on its credit facility could fluctuate. A
1/8% rate change in the Company's weighted average interest rate in 1998 would
have caused interest expense to increase or decrease by approximately $0.2
million based on its weighted average borrowings outstanding during the year.
Metrocall's Debt Agreements Impose Operating and Financial
Restrictions. Metrocall's debt agreements impose significant operating and
financial restrictions. Such restrictions will affect, and in many respects,
significantly limit or prohibit, among other things,
- Metrocall's ability to incur additional indebtedness and certain types of
indebtedness,
- pay cash dividends,
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- repurchase or redeem its capital stock,
- make certain investments or other restricted payments,
- create liens,
- engage in transactions with stockholders or affiliates,
- sell assets,
- issue or sell stock of subsidiaries,
- merge or consolidate with other companies.
Metrocall's credit facility requires the Company to maintain certain
financial ratios. The terms of the Company's preferred stock also contain
certain restrictive covenants. Events beyond Metrocall's control could affect
its ability to meet these financial ratio tests and restrictive covenants, and
Metrocall cannot assure you that it will meet them.
If Metrocall does not comply with these restrictions, it could lead to
default even if the Company can currently pay its scheduled debt obligations. If
there was a default, the holders could demand immediate payment of the debt.
This could cause much of Metrocall's other debt to be accelerated. Metrocall
cannot assure you that it would be able to pay or refinance this debt on
acceptable terms in that event. A breach of any of the covenants contained in
its credit facility result in an event of default. This could allow MetrocallIs
lenders to declare all amounts outstanding under the credit facility to be
immediately due and payable. In addition, the Company's lenders could proceed
against the collateral granted to them to secure that indebtedness. If the
amounts outstanding under the credit facility are accelerated, Metrocall cannot
assure you that its assets will be sufficient to repay in full the money owed to
the banks or to its other debt holders.
Most of Metrocall's Assets Are Classified as Intangible. At December 31,
1998, Metrocall's total assets were approximately $1,262.7 million including net
intangible assets of approximately $892.4 million. A majority of Metrocall's
assets consist of FCC licenses and certificates, goodwill, subscriber lists,
deferred financing costs and certain other intangibles. The carrying value of
these assets could be impaired in the future due to changes in technology,
regulation, available financing or competitive pressures in any of the Company's
individual markets. Because a majority of the Company's assets are intangible,
they might not be sufficient to repay all of Metrocall's debt if secured
creditors foreclose on assets pledged to them.
Technological Developments Could Affect Metrocall's Business. Future
technological advances in the wireless communications industry could create new
services or products that compete with Metrocall's paging and wireless messaging
services.
Developments in narrowband PCS could affect Metrocall's business.
Narrowband PCS provides enhanced or advanced paging and messaging capabilities,
such as "confirmation" or "response" paging. The Company intends to participate
actively in this business through its alliance with PageMart. Advanced messaging
services marketed by other companies have, to date, had mixed market acceptance.
The success of advanced messaging services could be affected by
circumstances other than market acceptance. These include cost of equipment and
other capital requirements, technological changes in wireless messaging
services, competitors' marketing and sales strategies, regulatory developments
and general economic conditions. Additionally, several of the Company's largest
competitors in the traditional paging market have narrowband PCS licenses that
provide them nationwide coverage. Some of those competitors have had a
significant lead on Metrocall in the deployment of narrowband PCS systems.
Metrocall's business may also be affected by the development of broadband
PCS, which offers two-way voice communications and messaging services. Broadband
PCS competes with cellular telephone services and enhanced specialized mobile
radio services, as well as with conventional paging services. These broadband
services are now offering alphanumeric paging and voice mail included in their
handset and monthly fee. Several broadband PCS systems currently operate in the
United States. Additionally, other existing or prospective radio
services -- such as non-geostationary mobile satellite services -- potentially
could compete with the Company. These broadband services could adversely impact
the demand for our paging and advanced messaging services.
Changes in technology could lower the cost of competing services and
products to a level at which the Company's services and products would become
less competitive or at which the Company would be required 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 the Company assure you that its margins, inventory costs and cash flows
will not be adversely affected by technological developments.
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Technological changes also may affect the value of pagers that Metrocall
owns and leases to its subscribers. If the Company's subscribers request more
technologically advanced pagers, Metrocall may incur additional inventory costs
and capital expenditures if it is required to replace pagers leased to its
subscribers within a short period of time.
Metrocall Could Be Affected by Satellite Failures. Metrocall relies on
satellite facilities operated by other companies to control many of the
transmitters on our nationwide and wide-area networks. Metrocall has no control
over the operation and maintenance of those satellite facilities. The Company
also uses land-based communications facilities such as microwave stations and
landline telephone facilities to connect and control the paging base station
transmitters in its networks. The failure or disruption of transmissions by
these satellite facilities could disrupt the Company's paging services.
Metrocall recently initiated paging service through a satellite global uplink
facility in California. The Company transmits a majority of its paging traffic
through this facility. Any unmitigated interruptions in satellite transmissions
or in transmissions from the satellite uplink facility could adversely affect
Metrocall's business and results of operations.
Subscriber Turnover Can Adversely Affect Metrocall's Results of
Operations. The results of operations of paging service providers can be
significantly affected when subscribers cancel their service or switch their
service to other carriers. The sales and marketing costs associated with
attracting new subscribers are much higher than the costs of providing service
to existing customers. Because Metrocall's business has high fixed costs,
disconnections directly and adversely affect its results of operations.
Metrocall's Business Could Be Affected by Changes in Regulations. The FCC
and, to a lesser extent, various state regulatory agencies regulate Metrocall's
paging operations. The Company cannot assure you that those agencies will not
take actions that would have a material adverse effect on Metrocall's business.
Changes in regulation of paging businesses or the allocation of radio spectrum
for services that compete with the Company's business could adversely affect its
results of operations. For example, the FCC has adopted rules under which the
FCC will issue paging licenses on a wide-area basis through competitive bidding.
Although the Company believes that these rules may simplify its regulatory
compliance burdens, particularly regarding adding or relocating transmitter
sites, those rule changes may increase Metrocall's costs of obtaining paging
licenses in the future.
Additional Acquisitions Will Require Successful Integration and May Pose
Other Risks. Metrocall has achieved much of its growth through acquisitions. It
may pursue more acquisitions in the future. Metrocall's success will then depend
upon its ability to identify attractive candidates, to finance potential
acquisitions and to integrate their business. The challenges of acquisitions
include:
- potential strain on management;
- unanticipated liabilities or contingencies from the acquired company;
- reduced earnings due to increased goodwill amortization, increased
interest costs, and costs related to integration;
- integrating the acquired business's financial, personnel, computer and
other systems into its own; and
- need to manage growth and implement controls and information systems
appropriate to a growing company.
If Metrocall is unsuccessful in meeting these challenges, its business
could be adversely affected. The Company is currently in the process of
integrating the recent acquisition of AMD. That acquisition poses certain risks
for Metrocall's business, e.g., the paging systems it acquired may not perform
as expected; it may face difficulties integrating the development,
administrative, finance, sales and marketing organizations of AMD into its
organizations; the Company may face difficulties in integrating AMD's
communications networks with its own networks and coordinating its and AMD's
sales efforts. Metrocall must reassure AMD's customers that their paging
services will continue uninterrupted.
Metrocall Relies on Key Management Personnel. Metrocall depends on the
efforts and abilities of a number of its current key management, sales, support
and technical personnel, including William L. Collins III, Steven D. Jacoby and
Vincent D. Kelly. Metrocall's success will depend to a large extent on its
ability to retain and attract key employees. The loss of certain of these
employees or the Company's inability to retain or attract key employees in the
future could have an adverse effect on its operations. The Company has
employment contracts with, but does not have "key man" life insurance for, each
of the individuals named above.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning this item is included within Management's Discussion
and Analysis of Financial Condition and Results of Operations under the caption
"Additional Factors Affecting Future Operating Results and Financial Condition."
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, 1997 and
1998................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1996, 1997 and 1998................. F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1996, 1997 and 1998..... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996, 1997 and 1998................. F-6
Notes to Consolidated Financial Statements................ F-7
FINANCIAL STATEMENT SCHEDULE:
Report of Arthur Andersen LLP, Independent Public
Accountants............................................ F-22
Schedule II Valuation and Qualifying Accounts............. F-23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 5, 1999, (the "1999 Proxy Statement") under the caption "Election
of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference
from the 1999 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 the
Company 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 1999 Proxy Statement
under the caption "Stock Ownership."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference from the 1999 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, 1997 and
1998................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1996, 1997 and 1998................. F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1996, 1997 and 1998..... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996, 1997 and 1998................. F-6
Notes to Consolidated Financial Statements................ F-7
FINANCIAL STATEMENT SCHEDULE:
Report of Arthur Andersen LLP, Independent Public
Accountants............................................ F-22
Schedule II Valuation and Qualifying Accounts............. F-23
All other schedules are omitted because they are not required,
inapplicable, or the information is otherwise shown in the financial statements
or notes thereto.
(b) Reports on Form 8-K
A report dated October 2, 1998, regarding the acquisition of the advanced
messaging division of AT&T Wireless Services, Inc., the paging operations of
AT&T, filed with the Commission on October 16, 1998.
(c) Exhibits
The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1 Restated Certificate of Incorporation of Metrocall, Inc.
(Metrocall).*
3.2 Eighth Amended and Restated Bylaws of Metrocall.*
4.1 Indenture for Metrocall 11% Senior Subordinated Notes due
2008, dated as of December 22, 1998.(a)
4.2 Indenture for 9 3/4% Senior Subordinated Notes due 2007
dated October 21, 1997.(b)
4.3 Indenture for Metrocall 10 3/8% Senior Subordinated Notes
due 2007 dated September 27, 1995.(c)
4.4 Indenture for ProNet Inc. (ProNet) 11 7/8% Senior
Subordinated Notes due 2005 ("ProNet Notes") dated June 15,
1995.(d)
4.5 Supplemental Indenture dated May 28, 1996 for ProNet Notes.*
4.6 Second Supplemental Indenture dated December 30, 1997 for
ProNet Notes.(e)
4.7 Indenture for A+ Network, Inc. 11 7/8% Senior Subordinated
Notes due 2005 ("A+ Notes") dated October 24, 1995.(f)
4.8 First Supplemental Indenture dated November 14, 1996, for A+
Notes.(g)
4.9 Second Supplemental Indenture dated November 15, 1996 for A+
Notes.(g)
4.10 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
C Convertible Preferred Stock of Metrocall.(h)
4.11 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
A Convertible Preferred Stock of Metrocall.(i)
34
36
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.1 Fourth Amended and Restated Loan Agreement by and among
Metrocall, certain lenders and Toronto Dominion (Texas),
Inc. as administrative agent, dated as of December 22, 1998.
(a)
10.2 Stock Purchase Agreement by and among Metrocall and AT&T
Wireless Services, Inc., McCaw Communications Companies,
Inc., and AT&T Two Way Messaging Communications, Inc. dated
June 26, 1998. (k)
10.3 Stockholders Voting Agreement and Proxy between AT&T
Wireless Services, Inc. and certain stockholders of
Metrocall dated June 26, 1998. (l)
10.4 Voting Agreement between AT&T Wireless Services, Inc. and
Page America Group, Inc. dated June 26, 1998. (l)
10.5 Registration Rights Agreement between Metrocall and McCaw
Communications Companies, Inc. dated October 1, 1998. (h)
10.6 Amended and Restated Asset Purchase Agreement by and among
Page America Group, Inc., Page America of New York, Inc.,
Page America of Illinois, Inc., Page America Communications
of Indiana, Inc., Page America of Pennsylvania, Inc.
(collectively "Page America") and Metrocall, Inc. dated as
of January 30, 1997. (m)
10.7 Amendment to Asset Purchase Agreement by and among Page
America and Metrocall dated as of March 28, 1997. (m)
10.8 Registration Rights Agreement dated July 1, 1997 by and
between Page America Group, Inc. and Metrocall. (n)
10.9 Registration Rights Agreement dated July 1, 1997 by and
among Page America and Metrocall. (n)
10.10 Indemnity Escrow Agreement dated July 1, 1997 by and among
Page America, Metrocall and First Union National Bank of
Virginia. (n)
10.11 Agreement and Plan of Merger dated as of August 8, 1997,
between Metrocall and ProNet. (o)
10.12 Stockholders Voting Agreement dated as of August 8, 1997,
among ProNet and certain stockholders of Metrocall listed
therein. (o)
10.13 Employment Agreement between Metrocall and William L.
Collins, III. (p)
10.14 Amendment to Employment Agreement between Metrocall and
William L. Collins, III. (r)
10.15 Employment Agreement between Metrocall and Steven D. Jacoby.
(p)
10.16 Amendment to Employment Agreement between Metrocall and
Steven D. Jacoby. (r)
10.17 Second Amendment to Employment Agreement between Metrocall
and Steven D. Jacoby. (s)
10.18 Employment Agreement between Metrocall and Vincent D. Kelly.
(p)
10.19 Amendment to Employment Agreement between Metrocall and
Vincent D. Kelly. (r)
10.20 Second Amendment to Employment Agreement between Metrocall
and Vincent D. Kelly. (s)
10.21 Change of Control Agreement between Metrocall and William L.
Collins, III. (p)
10.22 Change of Control Agreement between Metrocall and Steven D.
Jacoby. (p)
10.23 Change of Control Agreement between Metrocall and Vincent D.
Kelly. (p)
10.24 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and Jackie R. Kimzey. (q)
10.25 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and David J. Vucina. (m)
10.26 Letter Agreement dated August 8, 1997, between Metrocall and
Jackie R. Kimzey. (q)
10.27 Letter Agreement dated August 8, 1997, between Metrocall and
David J. Vucina. (q)
10.28 Letter Agreement dated August 8, 1997, between Metrocall and
Jan E. Gaulding. (q)
10.29 Letter Agreement dated August 8, 1997, between Metrocall and
Mark A. Solls. (q)
10.30 Letter Agreement dated August 8, 1997, between Metrocall and
Jeffery A. Owens. (q)
10.31 Directors' Stock Option Plan, as amended. (t)
10.32 Metrocall 1996 Stock Option Plan. (u)
10.33 Metrocall 1996 Stock Option Plan, as amended. (t)
10.34 Metrocall Amended Employee Stock Purchase Plan. (v)
10.35 Registration Rights Agreement dated December 22, 1998
between Metrocall and Morgan Stanley & Co. Incorporated,
NationsBanc Montgomery Securities LLC, TD Securities (USA)
Inc., First Union Capital Markets and BancBoston Roberston
Stephens Inc.*
10.36 Deed of Lease between Douglas and Joyce Jemal, as landlord,
and Metrocall, as tenant, dated April 14, 1994. (w)
10.37 Lease Agreement dated December 20, 1983 between Beacon
Communications Associates, Ltd. and a predecessor of
Metrocall. (x)
35
37
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.38 Non-disclosure/No Conflict Agreement dated May 16, 1996
between Metrocall and Elliot H. Singer.(y)
10.39 Placement Agreement dated December 17,1998 between Metrocall
and Morgan Stanley & Co. Incorporated, NationsBanc
Montgomery Securities LLC, TD Securities (USA) Inc., First
Union Capital Markets and BancBoston Roberston Stephens
Inc.*
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 Current Report on Form 8-K filed
with the Commission on January 4, 1999.
(b) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 23, 1997.
(c) Incorporated by reference to Metrocall's Registration Statement on Form
S-1, as amended (File No. 33-96042) filed with the Commission on September
27, 1995.
(d) Incorporated by reference to ProNet's Current Report on Form 8-K filed with
the Commission on July 5, 1995.
(e) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 filed with the Commission on May 15, 1998.
(f) Incorporated by reference to the Registration Statement on Form S-1 of A+
Communications, Inc., as amended (File No. 33-95208) filed with the
Commission on September 18, 1995.
(g) Incorporated by reference to Metrocall's Annual Report on Form 10-K for the
year ended December 31, 1996 filed with the Commission on March 31, 1997.
(h) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 16, 1998.
(i) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(j) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 2, on Form S-4 (File No. 333-36079) filed with the Commission on
November 5, 1997.
(k) Incorporated by reference to Metrocall's Definitive Proxy Statement on
Schedule 14A filed with the Commission on August 31, 1998.
(l) Incorporated by reference to Metrocall's Quarterly Report on Form 8-K filed
July 7, 1998.
(m) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-21231) initially filed with the Commission
on February 5, 1997.
(n) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on July 14, 1997.
(o) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on August 12, 1997.
(p) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-06919) filed with the Commission on June 27,
1996.
(q) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-36079) filed with the Commission on
September 22, 1997.
36
38
(r) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 filed with the Commission on November
14, 1997.
(s) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 filed with the Commission on August 14,
1998.
(t) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders held on May 7, 1997.
(u) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders held on May 1, 1996.
(v) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 1, on Form S-4 (File No. 333-36079) filed with the Commission on
October 27, 1997.
(w) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994 filed with the Commission on November
14, 1994.
(x) 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.
(y) Incorporated by reference to Metrocall's Tender Offer Statement on Schedule
14D-1, filed with the Commission on May 22, 1996.
37
39
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 31st day of
March, 1999.
METROCALL, INC.
By: /s/ RICARD 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 31, 1999
- ------------------------------------------------
RICHARD M. JOHNSTON
/s/ WILLIAM L. COLLINS, III Vice Chairman of the Board, March 31, 1999
- ------------------------------------------------ President,
WILLIAM L. COLLINS, III Chief Executive Officer and
Director
/s/ VINCENT D. KELLY Chief Financial Officer, March 31, 1999
- ------------------------------------------------ Executive
VINCENT D. KELLY Vice President, and Treasurer
(Principal Financial and
Accounting Officer)
/s/ HARRY L. BROCK, JR. Director March 31, 1999
- ------------------------------------------------
HARRY L. BROCK, JR.
/s/ ELLIOTT H. SINGER Director March 31, 1999
- ------------------------------------------------
ELLIOTT H. SINGER
/s/ FRANCIS A. MARTIN III Director March 31, 1999
- ------------------------------------------------
FRANCIS A. MARTIN, III
/s/ RONALD V. APRAHAMIAN Director March 31, 1999
- ------------------------------------------------
RONALD V. APRAHAMIAN
/s/ MICHAEL GREENE Director March 31, 1999
- ------------------------------------------------
MICHAEL GREENE
/s/ ROYCE R. YUDKOFF Director March 31, 1999
- ------------------------------------------------
ROYCE R. YUDKOFF
/s/ JACKIE R. KIMZEY Director March 31, 1999
- ------------------------------------------------
JACKIE R. KIMZEY
/s/ EDWARD E. JUNGERMAN Director March 31, 1999
- ------------------------------------------------
EDWARD E. JUNGERMAN
/s/ MAX D. HOPPER Director March 31, 1999
- ------------------------------------------------
MAX D. HOPPER
38
40
METROCALL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION PAGE
----------- ----
FINANCIAL STATEMENTS:
Report of Arthur Andersen LLP, Independent Public
Accountants............................................ F-2
Consolidated Balance Sheets, as of December 31, 1997 and
1998................................................... F-3
Consolidated Statements of Operations for the three years
ended December 31, 1996, 1997 and 1998................. F-4
Consolidated Statements of Stockholders' Equity for the
three years ended December 31, 1996, 1997 and 1998..... F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996, 1997 and 1998................. F-6
Notes to Consolidated Financial Statements................ F-7
FINANCIAL STATEMENT SCHEDULE:
Report of Arthur Andersen LLP, Independent Public
Accountants............................................ F-22
Schedule II Valuation and Qualifying Accounts............. F-23
F-1
41
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, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metrocall, Inc., and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 5, 1999
F-2
42
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 24,896 $ 8,436
Accounts receivable, less allowance for doubtful
accounts of $6,843 and $6,196 as of December 31, 1997
and 1998, respectively................................. 30,208 44,694
Prepaid expenses and other current assets (Note 4)...... 18,372 22,795
---------- ----------
Total current assets............................... 73,476 75,925
---------- ----------
PROPERTY AND EQUIPMENT:
Land, buildings and leasehold improvements.............. 16,364 15,079
Furniture, office equipment and vehicles................ 46,588 64,438
Paging and plant equipment.............................. 276,993 380,313
Less -- Accumulated depreciation and amortization....... (115,357) (168,067)
---------- ----------
224,588 291,763
---------- ----------
INTANGIBLE ASSETS, net of accumulated amortization of
approximately $58,352 and $219,960 at December 31, 1997
and 1998, respectively.................................... 787,003 892,404
OTHER ASSETS................................................ 1,947 2,595
---------- ----------
TOTAL ASSETS....................................... $1,087,014 $1,262,687
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.................... $ 952 $ 771
Accounts payable........................................ 35,160 37,533
Accrued expenses and other current liabilities (Note
4)..................................................... 46,141 37,728
Deferred revenues and subscriber deposits............... 15,854 27,769
---------- ----------
Total current liabilities.......................... 98,107 103,801
CAPITAL LEASE OBLIGATIONS, less current maturities (Note
5)........................................................ 4,282 3,575
CREDIT FACILITY AND OTHER LONG-TERM DEBT, less current
maturities (Note 5)....................................... 142,173 40,444
SENIOR SUBORDINATED NOTES (Note 5).......................... 452,534 698,544
DEFERRED INCOME TAX LIABILITY............................... 155,930 209,642
MINORITY INTEREST IN PARTNERSHIP............................ 510 510
---------- ----------
Total liabilities.................................. 853,536 1,056,516
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SERIES A CONVERTIBLE PREFERRED STOCK, 14% cumulative; par
value $.01 per share; 810,000 shares authorized; 182,726
shares and 209,203 shares issued and outstanding as of
December 31, 1997 and 1998, respectively and a liquidation
preference of $46,481 and $53,216 at December 31, 1997 and
1998, respectively (Note 6)............................... 37,918 45,441
SERIES B JUNIOR CONVERTIBLE PREFERRED STOCK, 14% cumulative;
par value $.01 per share; 9,000 shares authorized; 1,579
shares and 1,808 shares issued and outstanding as of
December 31, 1997 and 1998, respectively and a liquidation
preference of $16,064 and $18,391 at December 31, 1997 and
1998, respectively (Note 6)............................... 16,064 18,391
SERIES CONVERTIBLE PREFERRED STOCK, 8% cumulative; par value
$.01 per share; 25,000 shares authorized; 9,595 shares
issued and outstanding and a liquidation preference of
$96,910 at December 31, 1998 (Note 6)..................... -- 96,910
STOCKHOLDERS' EQUITY (Notes 3 and 6):
Common stock, par value $.01 per share; 100,000,000 shares
authorized; 40,548,414 and 41,583,403 shares issued and
outstanding at December 31, 1997 and 1998,
respectively............................................ 405 416
Additional paid-in capital................................ 336,076 340,249
Accumulated deficit....................................... (156,985) (295,236)
---------- ----------
179,496 45,429
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $1,087,014 $1,262,687
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
43
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
YEAR ENDED DECEMBER 31,
1996 1997 1998
----------- ----------- -----------
REVENUES:
Service, rent and maintenance...................... $ 124,029 $ 249,900 $ 416,352
Product sales...................................... 25,928 39,464 48,372
----------- ----------- -----------
Total revenues................................ 149,957 289,364 464,724
Net book value of products sold......................... (21,633) (29,948) (31,791)
----------- ----------- -----------
128,324 259,416 432,933
OPERATING EXPENSES:
Service, rent and maintenance...................... 28,567 61,392 112,774
Selling and marketing.............................. 24,101 53,802 73,546
General and administrative......................... 42,905 73,753 121,644
Depreciation and amortization...................... 58,196 91,699 234,948
----------- ----------- -----------
153,769 280,646 542,912
----------- ----------- -----------
Loss from operations.......................... (25,445) (21,230) (109,979)
INTEREST AND OTHER INCOME (expense)..................... (607) 156 849
INTEREST EXPENSE........................................ (20,424) (36,248) (64,448)
----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM... (46,476) (57,322) (173,578)
INCOME TAX BENEFIT...................................... 1,021 4,861 47,094
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM.......................... (45,455) (52,461) (126,484)
EXTRAORDINARY ITEM (Note 5)............................. (3,675) -- --
----------- ----------- -----------
Net loss...................................... (49,130) (52,461) (126,484)
PREFERRED DIVIDENDS (Note 6)............................ (780) (7,750) (11,767)
----------- ----------- -----------
Loss attributable to common stockholders........... $ (49,910) $ (60,211) $ (138,251)
=========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic and diluted loss per share before
extraordinary item attributable to common
stockholders..................................... $ (2.84) $ (2.22) $ (3.37)
Basic and diluted extraordinary item, net of income
tax benefit...................................... (0.23) -- --
----------- ----------- -----------
Basic and diluted loss per share attributable to
common stockholders.............................. $ (3.07) $ (2.22) $ (3.37)
=========== =========== ===========
Weighted-average common shares outstanding......... 16,252,782 27,086,654 41,029,601
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
44
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, 1995............. 14,626,255 $146 $201,956 $ (46,864) $ 155,238
Issuance of shares in employee stock
purchase plan (Note 7)............ 11,942 -- 110 -- 110
Shares issued in Satelite
acquisition....................... 1,771,869 18 10,408 -- 10,426
Exercise of stock options (Note 7)... 4,739 -- 5 -- 5
Shares issued in merger with A+
Network........................... 8,106,330 81 42,477 -- 42,558
Warrants issued in connection with
Series A Preferred Stock (Note
6)................................ -- -- 7,871 -- 7,871
Preferred dividends (Note 6)......... -- -- -- (780) (780)
Net loss............................. -- -- -- (49,130) (49,130)
---------- ---- -------- --------- ---------
BALANCE, December 31, 1996............. 24,521,135 245 262,827 (96,774) 166,298
Issuance of shares in employee stock
purchase plan (Note 7)............ 109,747 1 429 -- 430
Adjustment to shares issued in
Satelite acquisition.............. 74,085 1 (213) -- (212)
Shares issued in acquisition of Radio
and Communications Consultants,
Inc. and Advanced Cellular
Telephone, Inc. (Note 3).......... 494,279 5 2,899 -- 2,904
Issuance of shares in Page America
acquisition (Note 3).............. 3,911,856 39 18,787 -- 18,826
Exercise of stock options (Note 7)... 1,896 -- 2 -- 2
Shares issued in ProNet Merger (Note
3)................................ 11,435,416 114 51,345 -- 51,459
Preferred dividends (Note 6)......... -- -- -- (7,750) (7,750)
Net loss............................. -- -- -- (52,461) (52,461)
---------- ---- -------- --------- ---------
BALANCE, December 31, 1997............. 40,548,414 405 336,076 (156,985) 179,496
Issuance of shares in employee stock
purchase plan and other (Note
7)................................ 134,989 2 573 -- 575
Shares issued in settlement of
litigation related to the ProNet
Merger (Note 3)................... 900,000 9 3,600 -- 3,609
Preferred dividends (Note 6)......... -- -- -- (11,767) (11,767)
Net loss............................. -- -- -- (126,484) (126,484)
---------- ---- -------- --------- ---------
BALANCE, December 31, 1998............. 41,583,403 $416 $340,249 $(295,236) $ 45,429
========== ==== ======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
45
METROCALL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (49,130) $ (52,461) $(126,484)
Adjustments to reconcile net loss to net cash provided
by operating activities --
Depreciation and amortization.................... 58,196 91,699 234,948
Amortization of debt financing costs............. 620 1,152 1,771
Decrease in deferred income taxes................ (1,483) (5,400) (47,391)
Gain on liquidation of investment (Note 2)....... -- -- (130)
Write-off of deferred acquisition costs.......... 388 -- --
Minority interest in loss of investments......... 207 -- --
Writedown of equity investment................... 238 240 --
Gain on sale of equipment........................ (1,188) -- --
Extraordinary item............................... 3,675 -- --
Changes in current assets and liabilities, net of
effects from acquisitions:
Accounts receivable.............................. (2,626) (1,408) (2,387)
Prepaid expenses and other current assets........ (1,579) (5,331) (4,351)
Accounts payable................................. 5,841 372 2,175
Deferred revenues and subscriber deposits........ 2,126 (2,481) (12,263)
Accrued expenses and other current liabilities... 323 784 (4,734)
--------- --------- ---------
Net cash provided by operating activities... 15,608 27,166 41,154
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired...... (260,600) (113,466) (110,000)
Capital expenditures, net............................. (62,110) (69,935) (78,658)
Proceeds from sale of telemessaging operations........ -- 11,000 --
Additions to intangibles.............................. (3,853) (5,070) (1,885)
Other................................................. (1,341) 1,042 (1,204)
--------- --------- ---------
Net cash used in investing activities....... (327,904) (176,429) (191,747)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock............ 115 432 577
Net proceeds from preferred stock offering (Note 6)... 38,323 -- --
Proceeds from long-term debt (Note 5)................. 194,904 364,261 248,260
Principal payments on long-term debt.................. (25,464) (194,222) (104,362)
Debt tender and consent solicitation costs............ (3,675) -- --
Deferred debt financing costs......................... (4,562) (7,240) (10,332)
Other................................................. (2) 11 (10)
--------- --------- ---------
Net cash provided by financing activities... 199,639 163,242 134,133
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....... (112,657) 13,979 (16,460)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 123,574 10,917 24,896
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 10,917 $ 24,896 $ 8,436
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
46
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND RISK FACTORS
Metrocall, Inc. and subsidiaries (the "Company" or "Metrocall"), is a
leading provider of local, regional and national paging and other wireless
messaging services in the United States. Through our nationwide wireless
network, the Company provides messaging services to over 1,000 U.S. cities,
including the top 100 Standard Metropolitan Statistical Areas.
Risks and Other Important Factors
The Company sustained net losses of $49.1 million, $52.5 million and $126.5
million for the years ended December 31, 1996, 1997 and 1998, respectively. The
Company's loss from operations for the year ended December 31, 1998 was $110.0
million. In addition, at December 31, 1998, the Company had an accumulated
deficit of approximately $295.2 million and a deficit in working capital of
$27.9 million. The Company's losses from operations and its net losses are
expected to continue for additional periods in the future. There can be no
assurance that the Company's operations will become profitable.
The Company's operations require the availability of substantial funds to
finance the maintenance and growth of its existing paging operations and
subscriber base, development and construction of future wireless communications
networks, expansion into new markets, and the acquisition of other wireless
communication companies. At December 31, 1998, the Company had incurred
approximately $743.3 million in long-term debt and capital leases. Amounts
available under the Company's credit facility are subject to certain financial
covenants and other restrictions. At December 31, 1998, approximately $160.0
million of additional borrowings were available to the Company under its credit
facility. The Company's ability to borrow additional amounts in the future is
dependent on its ability to comply with the provisions of its credit facility as
well as availability of financing in the capital markets.
The Company is also subject to certain additional risks and uncertainties
including changes in technology, business integration, competition, subscriber
turnover and regulation.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
In addition to Metrocall, the accompanying consolidated financial
statements include the accounts of Metrocall's 61% interest in Beacon Peak
Associates Ltd. ("Beacon Peak") and Metrocall of Virginia, Inc. and Metrocall,
USA, Inc., nonoperating wholly owned subsidiaries that hold certain of the
Company's regulatory licenses issued by the Federal Communications Commission
(the "FCC"). Beacon Peak owns land, adjacent to the Company's headquarters
building, which is valued at cost. The minority interest in Beacon Peak was
$510,000 as of December 31, 1997 and 1998.
Metrocall had a 20% interest in Beacon Communications Associates ("Beacon
Communications"), which was liquidated in November 1998 and had been included in
the consolidated financial statements through the date of sale. Beacon
Communications owns the building that is the Company's headquarters. Since
Beacon Communications' debt related to the building was guaranteed by the
Company's lease (expiring 2008) and because the Company had made the only
substantive investment in Beacon Communications, the accounts of Beacon
Communications had been consolidated in the accompanying financial statements up
until its liquidation.
All significant intercompany transactions have been eliminated in
consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
47
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes revenue under service, rental and maintenance
agreements with customers as the related services are performed. The Company
leases (as lessor) radio pagers under operating leases. Substantially all the
leases are on a month-to-month basis. Advance billings for services are deferred
and recognized as revenue when earned. Sales of equipment are recognized upon
delivery.
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 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.
Purchases of property and equipment in the accompanying consolidated
statements of cash flows are reflected net of the net book value of products
sold to approximate the net addition to subscriber equipment.
The Company currently purchases a significant amount of its subscriber
paging equipment from one supplier. Although there are other manufacturers of
similar subscriber paging equipment, the inability of this supplier to provide
equipment required by the Company could result in a decrease of pager placements
and decline in sales, which could adversely affect operating results.
Intangible Assets
Intangible assets, net of accumulated amortization, consist of the
following at December 31, 1997 and 1998 (in thousands):
DECEMBER 31, AMORTIZATION
------------------- PERIOD IN
1997 1998 YEARS
-------- -------- ------------
State certificates and FCC licenses................. $312,873 $325,116 10
Goodwill............................................ 191,550 196,389 10
Subscriber lists.................................... 264,489 328,651 3
Debt financing costs................................ 14,979 23,540 8-12
Covenants........................................... 1,658 17,125 3
Other............................................... 1,454 1,583 3-7
-------- --------
$787,003 $892,404
======== ========
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.
Long-Lived Assets
Long-lived assets and identifiable intangibles to be held and used are
reviewed for impairment on a periodic basis and whenever events or changes in
circumstances indicate that the carrying amount should be reviewed. Impairment
is measured by comparing the book value to the estimated undiscounted future
cash flows expected to result from use of the assets and their eventual
disposition. The Company has determined that there has been no permanent
impairment in the carrying value of long-lived assets reflected in the
accompanying balance sheets.
F-8
48
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1998, the Company reduced the estimated useful lives
of certain intangibles recorded in connection with acquisitions from 15 years to
10 years for goodwill, from 25 years to 10 years for FCC licenses and from 5-6
years for subscriber bases to 3 years. The impact of these changes was to
increase amortization expense for the year ended December 31, 1998, by
approximately $26.0 million.
Loss Per Common Share Attributable to Common Stockholders
Basic earnings per share is computed by dividing income (loss) available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share is similar to basic earnings per
share, except the weighted-average number of common shares outstanding is
increased to include dilutive stock options and warrants. Stock options and
warrants were not included in the computation of loss per share as the effect
would be antidilutive. As a result, the basic and diluted earnings per share
amounts are identical.
Income Taxes
As prescribed by Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes," the Company utilizes the asset and liability
method of accounting for income taxes. Under this method, deferred income taxes
are recognized for the tax consequences of temporary differences by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities, less valuation allowances, if required.
Reclassifications
Certain amounts in the prior years' consolidated financial statements have
been reclassified to conform with the current year's presentation.
3. MERGERS, ACQUISITIONS AND DISPOSITIONS
Presented below is a summary of the Company's merger and acquisitions
completed during 1997 and 1998. The transactions have all been accounted for as
purchases for financial reporting purposes and the operating results of the
purchased businesses have been included in the statements of operations from the
dates of acquisition.
Page America Group, Inc. ("Page America")
On July 1, 1997, the Company acquired substantially all the assets of Page
America and subsidiaries. The total purchase price of approximately $63.7
million included consideration of approximately $25.0 million in cash, 1,500
shares of the Series B Junior Convertible Preferred Stock (Series B Preferred)
(see Note 6) having a value upon liquidation equal to its stated value,
3,911,856 shares of Common Stock and assumed liabilities and transaction fees
and expenses of approximately $4.9 million. The cash portion of the purchase
price including fees and expenses was funded through borrowings under the
Company's credit facility.
ProNet Inc. ("ProNet")
On December 30, 1997, the Company completed the merger of ProNet with and
into Metrocall (the "ProNet Merger"), pursuant to the terms of the Agreement and
Plan of Merger dated August 8, 1997. Under the terms of the ProNet Merger,
Metrocall issued 0.90 shares of Common Stock for each share of ProNet common
stock, or approximately 12.3 million shares of Common Stock (including 900,000
shares issued in 1998 as settlement of certain ProNet litigation). In connection
with the ProNet Merger, the Company assumed ProNet's $100.0 million aggregate
principal amount of 11 7/8% senior subordinated notes, due in 2005 and
refinanced indebtedness outstanding under ProNet's credit facility with
borrowings under the Company's credit facility.
AT&T Wireless Messaging Division ("AMD")
On October 2, 1998, the Company completed a stock purchase agreement with
AT&T Wireless Services, Inc. ("Wireless"), McCaw Communications Companies, Inc.
and AT&T Two Way Messaging Communications, Inc. to acquire the stock of certain
subsidiaries of Wireless that operated the paging and messaging services
business of AT&T. The Company also acquired a nationwide 50KHz/50KHz narrowband
personal communication services license in the transaction. The purchase price
for the business and license acquired was $110.0 million in cash and 9,500
shares of the Series C Convertible Preferred Stock (the "Series C Preferred")
(see Note 6) having a value upon liquidation equal to its stated value. The cash
portion of the purchase price, including fees and expenses, was funded through
borrowings under the Company's credit facility.
F-9
49
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase prices for the Page America, ProNet and AMD transactions have
been allocated as follows (in thousands):
1997 1998
-------------------- ---------
PAGE
AMERICA PRONET AMD
-------- --------- ---------
Plant and equipment................................. $ 2,610 $ 60,381 $ 64,215
Accounts receivable and other assets................ 846 15,310 18,773
Noncompete agreements............................... -- -- 17,833
Customer lists...................................... 29,533 205,582 162,428
FCC licenses and state certificates................. 29,759 71,475 45,385
Goodwill............................................ -- 18,403 --
Liabilities assumed................................. (28,467) (230,026) (140,531)
Direct acquisition costs............................ (456) (6,277) --
Deferred income tax liability....................... -- (83,389) (73,103)
-------- --------- ---------
$ 33,825 $ 51,459 $ 95,000
======== ========= =========
The purchase price allocation for the AMD acquisition may be subject to
adjustment for changes in estimates related to costs to be incurred to close
duplicate facilities and to settle pending legal and other contingencies. The
resolution of these matters is not expected to have a material impact on the
Company's financial condition or its results of future operations.
The unaudited pro forma information presented below reflects the
acquisitions of Page America, ProNet and AMD as if each had occurred on January
1, 1997. The results are not necessarily indicative of future operating results
or of what would have occurred had the acquisitions actually been consummated on
that date (in thousands, except per share data).
YEAR ENDED
DECEMBER 31,
---------------------
1997 1998
--------- ---------
Revenues.................................................... $ 602,368 $ 613,211
Loss attributable to common stockholders.................... $(214,191) $(165,353)
Loss per share attributable to common stockholders.......... $ (5.28) (4.03)
Radio and Communications Consultants, Inc.
On February 5, 1997, the Company acquired 100% of the outstanding common
stock of Radio and Communications Consultants, Inc. and Advanced Cellular
Telephone, Inc. (collectively, "RCC") by means of a merger of Metrocall of
Shreveport, Inc., a wholly owned subsidiary of Metrocall formed to effect the
merger with RCC. The merger was financed through the issuance of 494,279 shares
of the Common Stock, approximately $0.8 million in cash and assumed liabilities
of approximately $0.2 million. The Company also recorded a deferred tax
liability of approximately $1.3 million in connection with this transaction. The
RCC acquisition was accounted for as a purchase for financial accounting
purposes.
Disposition of Telemessaging Assets
On May 9, 1997, the Company completed the sale of the assets of the
telemessaging business acquired in the merger with A+ Network, Inc. in November
1996 pursuant to the terms of an Asset Purchase Agreement for proceeds totaling
$11.0 million in cash. For the period from January 1, 1997 through the date of
disposition, the telemessaging business generated net revenues of approximately
$3.7 million and operating income of approximately $0.1 million. No gain or loss
was recognized upon the sale for financial reporting purposes as the carrying
value of net assets sold approximated the net proceeds received.
F-10
50
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUPPLEMENTARY BALANCE SHEET INFORMATION
Company prepaid expenses and other current assets and accrued expenses and
other current liabilities consist of (in thousands):
DECEMBER 31,
-----------------
1997 1998
------- -------
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Refunds due from local exchange carriers (see Note 8)..... $12,116 $13,952
Tax refunds............................................... -- 2,000
Inventory................................................. 2,663 2,406
Prepaid advertising....................................... 1,603 1,101
Deposits.................................................. 1,151 1,258
Other..................................................... 839 2,078
------- -------
TOTAL............................................. $18,732 $22,795
======= =======
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued severance, payroll and payroll taxes.............. $13,729 $11,542
Accrued acquisition liabilities........................... 13,579 3,321
Accrued interest payable.................................. 9,461 14,216
Accrued state and local taxes............................. 2,955 4,981
Accrued insurance claims.................................. 1,616 1,047
Other..................................................... 4,801 2,621
------- -------
TOTAL............................................. $46,141 $37,728
======= =======
5. LONG-TERM DEBT AND LEASE OBLIGATIONS
Company debt consists of (in thousands):
DECEMBER 31,
-------------------
1997 1998
-------- --------
Credit facility, interest at a floating rate, defined below,
with principal payments beginning March 2001.............. $141,165 $ 40,000
10 3/8% Senior subordinated notes due in 2007 (the "1995
Notes")................................................... 150,000 150,000
9 3/4% Senior subordinated notes due in 2007 (the "1997
Notes")................................................... 200,000 200,000
11 7/8% Senior subordinated notes due in 2005 (the "ProNet
Notes")................................................... 100,000 100,000
11% Senior subordinated notes due in 2008 (the "1998
Notes")(net of unamortized discount of $1,740 in 1998).... -- 248,260
11 7/8% Senior subordinated notes due in 2005 (the "A+
Notes")................................................... 2,534 284
Capital lease obligations at a weighted average interest
rate of 9.7%.............................................. 5,104 4,282
Other....................................................... 1,138 508
-------- --------
599,941 743,334
Less -- Current portion..................................... 952 771
-------- --------
Long-term portion........................................... $598,989 $742,563
======== ========
Annual maturities of long-term debt after December 31, 1999 are as follows
(in thousands): $643 in 2000; $735 in 2001; $836 in 2002; $949 in 2003 and
$739,400 thereafter.
At December 31, 1998 and 1997, the estimated fair value of the Company's
long-term debt excluding capital lease obligations is listed below. The fair
value of the senior subordinated notes is based on market quotes as of the dates
indicated (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Credit facility........................... $141,165 $141,165 $ 40,000 $ 40,000
Senior subordinated notes................. 452,534 460,784 698,544 695,045
Other..................................... 1,138 1,050 508 503
-------- -------- -------- --------
Total debt, excluding capital
leases........................ $594,837 $602,999 $739,052 $735,548
======== ======== ======== ========
F-11
51
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Facility
In October 1997, the Company and its bank lenders executed an amended and
restated credit agreement (the "1997 Credit Agreement"). Under the 1997 Credit
Agreement, subject to certain conditions, the Company was able to borrow up to
$300 million under two reducing loan facilities. On October 2, 1998, the Company
and its bank lenders amended and restated the 1997 Credit Agreement to increase
the amount of borrowings available under the 1997 Credit Agreement, as amended,
to $400 million. The additional $100 million term loan facility was used to fund
the cash portion of the AMD acquisition.
On December 22, 1998, the Company revised its $400 million credit facility
and entered into a fourth amended and restated loan agreement with its bank
lenders (the "1998 Credit Agreement"). Subject to certain conditions set forth
in the 1998 Credit Agreement, the Company may borrow up to $200 million under
two loan facilities through December 31, 2004. The first facility ("Facility A")
is a $150 million reducing revolving credit facility and the second ("Facility
B") is a $50 million reducing term credit facility (together Facility A and
Facility B are referred to as the "Credit Facility"). The Credit Facility is
secured by substantially all the assets of the Company. Required quarterly
principal repayments, as defined, begin on March 31, 2001 and continue through
December 31, 2004.
The 1998 Credit Agreement requires compliance with certain financial and
operating covenants. The Company is required to maintain certain financial
ratios, including total debt to annualized operating cash flow, senior debt to
annualized operating cash flow, annualized operating cash flow to pro forma debt
service, total sources of cash to total uses of cash, and operating cash flow to
interest expense (in each case, as such terms are defined in the 1998 Credit
Agreement). The covenants also limit additional indebtedness and future mergers
and acquisitions without the approval of the lenders and restrict the payment of
cash dividends and other stockholder distributions by Metrocall. The 1998 Credit
Agreement also prohibits certain changes in ownership control of Metrocall, as
defined. At December 31, 1998, the Company was in compliance with all of these
covenants.
Under the Credit Facility, the Company may designate all or any portion of
the borrowings outstanding as either a floating base rate advance or a
Eurodollar rate advance with an applicable margin that ranges from 0.625% to
1.875% for base rate advances and 1.750% to 3.000% for Eurodollar rate advances.
The predefined margins are based upon the level of indebtedness outstanding
relative to annualized cash flow, as defined in the 1998 Credit Agreement.
Commitment fees of 0.375% to 0.750% per year (depending on the level of
Metrocall's indebtedness outstanding to annualized cash flow) are charged on the
average unborrowed balance and will be charged to interest expense as incurred.
The Company incurred loan origination fees and direct financing costs in
connection with its Credit Facility and amendments thereto, of approximately
$3.6 million, which are being amortized and charged to interest expense over the
term of the facility.
The weighted-average balances outstanding under the Company's credit
facilities for the years ended December 31, 1996, 1997 and 1998 were
approximately $39.9 million, $170.0 million and $178.6 million, respectively.
For the years ended December 31, 1996, 1997 and 1998, interest expense relating
to the Company's credit facilities was approximately $3.7 million, $15.5 million
and $13.1 million, respectively, at weighted-average interest rates of 9.4%,
9.2%, and 7.3% respectively. The effective interest rates as of December 31,
1997 and 1998 were 8.2% and 7.8%, respectively. As of December 31, 1998,
approximately $160.0 million of additional borrowings were available to the
Company under its Credit Facility.
Senior Subordinated Notes
10 3/8% Senior Subordinated Notes
In October 1995, the Company completed a public offering of $150.0 million
aggregate principal amount of 10 3/8% senior subordinated notes due 2007 (the
"1995 Notes"). Interest on the 1995 Notes is payable semi-annually on April 1
and October 1. The 1995 Notes are general unsecured obligations subordinated in
right to the Company's existing long-term debt and other senior obligations, as
defined.
The 1995 Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain circumstances.
F-12
52
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1995 Notes may be redeemed at the Company's option after October 1,
2000. The following redemption prices are applicable to any optional redemption
of the 1995 Notes by the Company during the 12-month period beginning on October
1 of the years indicated below:
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 the Company, as defined, each holder
of the 1995 Notes will have the right, at such holder's option, to require the
Company to purchase that holder's 1995 Notes at a purchase price equal to 101%
of the principal amount thereof, plus any accrued and unpaid interest to the
date of repurchase.
9 3/4% Senior Subordinated Notes
In October 1997, the Company completed a private placement of $200.0
million aggregate principal amount of 9 3/4% senior subordinated notes due 2007
(the "1997 Notes). The 1997 Notes bear interest, payable semi-annually on
January 15 and July 15. The Notes are callable beginning November 1, 2002. The
1997 Notes are unsecured obligations of the Company. The Company used the net
proceeds from the 1997 Notes, approximately $193.0 million, to repay outstanding
indebtedness under its Credit Facility. In March 1998, the 1997 Notes were
registered under the Securities Act pursuant to an exchange offer.
The 1997 Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain circumstances.
The 1997 Notes may be redeemed, in whole or in part, at any time on or
after November 1, 2002, at the option of the Company. The following redemption
prices, plus any accrued and unpaid interest to, but not including, the
applicable redemption date, are applicable to any optional redemption of the
1997 Notes by the Company during the 12-month period beginning on November 1 of
the years indicated below:
YEAR PERCENTAGE
---- ----------
2002........................................................ 104.8750%
2003........................................................ 102.4375
2004 and thereafter......................................... 100.0000
In the event of a change of control of the Company, as defined, each holder
of the 1997 Notes will have the right, at such holder's option, to require the
Company to repurchase that holder's 1997 Notes at a purchase price equal to 101%
of the principal amount thereof, plus any accrued and unpaid interest to the
date of repurchase.
11 7/8% Senior Subordinated Notes (the "A+ Notes")
In connection with the A+ Network merger, the Company offered to purchase
all $125.0 million of A+ Network's 11 7/8% senior subordinated notes due 2005
for $1,005 per $1,000 principal amount plus accrued and unpaid interest (the
"Offer"). Concurrent with the Offer, the Company solicited consents to amend the
indenture governing the A+ Notes to eliminate substantially all restrictive
covenants and certain related events of default contained therein in exchange
for a payment of $5.00 for each $1,000 principal amount of the A+ Notes. Of the
total outstanding, approximately $122.5 million of the A+ Notes were validly
tendered and retired. The Company incurred fees of approximately $3.7 million in
connection with the tender and consent process which has been recorded as an
extraordinary item for the year ended December 31, 1996. In December 1998, the
Company redeemed an additional $2.3 million of the A+ Notes for approximately
$1,005 per $1,000 principal amount plus accrued and unpaid interest. At December
31, 1998, $284,000 of the A+ Notes were outstanding.
11 7/8% Senior Subordinated Notes (the "ProNet Notes")
In connection with the ProNet merger, the Company assumed all $100.0
million aggregate principal amount of ProNet's 11 7/8% senior subordinated notes
due 2005. The ProNet Notes bear interest, payable semi-annually on June 15 and
December 15. The ProNet Notes are general unsecured obligations subordinated in
right to the Company's existing long-term debt and other senior obligations, as
defined.
F-13
53
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The ProNet Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain other transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain conditions.
The ProNet Notes may be redeemed at the Company's option on or after June
15, 2000. The following redemption prices are applicable to any optional
redemption of the ProNet Notes by the Company during the 12-month period
beginning on June 15 of the years indicated below:
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 the Company, as defined, each holder
of the ProNet Notes will have the right to require that the Company repurchase
such holder's ProNet Notes at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase.
11% Senior Subordinated Notes
In December 1998, the Company completed a private placement of $250.0
million aggregate principal amount of 11% senior subordinated notes due 2008
(the "1998 Notes"). The 1998 Notes bear interest, payable semi-annually on March
15 and September 15. The 1998 Notes are unsecured obligations of the Company,
subordinated in right to the Company's existing long-term debt and other senior
obligations, as defined. The Company used the net proceeds from the 1998 Notes
to repay approximately $229.0 million of indebtedness under its credit facility.
The Company is required to register the 1998 Notes under the Securities Act of
1933 within six months of their placement. If this requirement is not met, the
annual interest rate on the 1998 Notes will increase by .5% until the 1998 Notes
are generally freely transferable.
The 1998 Notes contain various covenants that, among other restrictions,
limit the ability of the Company to incur additional indebtedness, pay
dividends, engage in certain other transactions with affiliates, sell assets and
engage in mergers and consolidations except under certain conditions.
The 1998 Notes may be redeemed at the Company's option on or after
September 15, 2003. The following redemption prices are applicable to any
optional redemption of the 1998 Notes by the Company during the 12-month period
beginning on September 15 of the years indicated below:
YEAR PERCENTAGE
---- ----------
2003........................................................ 105.500%
2004........................................................ 103.667
2005........................................................ 101.833
2006 and thereafter......................................... 100.000
In the event of a change of control of the Company, as defined, each holder
of the 1998 Notes will have the right to require that the Company repurchase
such holder's 1998 Notes at a purchase price equal to 101% of the principal
amount thereof plus accrued and unpaid interest to the date of repurchase.
Lease Obligations
The Company is party to several capital lease agreements for computer
equipment and office space. Future minimum rental commitments for capital leases
are as follows (in thousands): $1,100 in 1999, $896 in 2000, $923 in 2001, $951
in 2002, $980 in 2003 and $751 thereafter. At December 31, 1998, aggregate
future minimum capital lease payments were $5,601 including interest of $1,319.
The Company has an option to acquire a 51% interest in the property housing
certain office space. The Company may exercise the option through December 31,
1999. At the time the option is exercised, the Company, along with the owners of
the remaining 49% interest in the property, will contribute the property to a
general partnership for which the Company will serve as a general partner and
receive a 51% equity interest. When, if ever, the Company exercises the purchase
option to the Purchase Agreement, the purchase price will be approximately $2.9
million, the estimated fair market value at the date of the lease agreement.
F-14
54
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has various operating lease arrangements (as lessee) for office
space and communications equipment sites. Rental expenses related to operating
leases were approximately (in thousands) $8,612, $21,675 and $37,362 for the
years ended December 31, 1996, 1997 and 1998, respectively.
Minimum rental payments as of December 31, 1998, required under operating
leases that have initial or remaining noncancelable lease terms in excess of one
year are as follows (in thousands): $37,567 in 1999, $24,657 in 2000, $21,318 in
2001, $16,504 in 2002, $12,073 in 2003 and $51,453 thereafter.
Rent expense for lease agreements between the Company and related parties
for office space, tower sites and transmission systems, excluding consolidated
entities, was approximately (in thousands) $334, $761, and $1,033 for the years
ended December 31, 1996, 1997 and 1998, respectively. The Company leases office
and warehouse space from a company owned by a director of the Company. The
annual rental commitment under these leases is approximately $525,000. The
Company believes the terms of these leases are at least as favorable as those
that could be obtained from a non-affiliated party.
6. CAPITAL STOCK
The authorized capital stock of Metrocall consists of 100,000,000 shares of
Common Stock and 1,000,000 shares of preferred stock, par value $0.01 per share
("Preferred Stock"), of which 810,000 shares have been designated as the Series
A Convertible Preferred Stock (the "Series A Preferred"), 9,000 shares have been
designated as Series B Preferred and 25,000 shares have been designated as the
Series C Preferred.
Common Stock
Because the Company holds licenses from the FCC, no more than 20 percent of
its Common Stock may, in the aggregate, be owned directly, or voted by a foreign
government, a foreign corporation, or resident of a foreign country. The
Company's amended and restated certificate of incorporation permits the
redemption of the Common Stock from stockholders, where necessary, to protect
the Company's regulatory licenses. Such stock may be redeemed at fair market
value or, if the stock was purchased within one year of such redemption, at the
lesser of fair market value or such holder's purchase price.
Series A Preferred
On November 15, 1996, the Company issued 159,600 shares of Series A
Preferred, together with the warrants discussed below, for $250 per share or
$39.9 million. At December 31, 1998, there were 209,203 shares of the Series A
Preferred outstanding, including 26,477 shares issued as dividends during 1998.
Each share of the Series A Preferred has a stated value of $250 per share and
has a liquidation preference over shares of the Company's Common Stock equal to
the stated value. The Series A Preferred carries a dividend of 14% of the stated
value per year, payable semi-annually in cash or in additional shares of the
Series A Preferred, at the Company's option. Upon the occurrence of a triggering
event, as defined in the certificate of designation for the Series A Preferred,
and so long as the triggering event continues, the dividend rate increases to
16% per year. Triggering events include, among other things, (i) the Company
issues or incurs indebtedness or equity securities senior with respect to
payment of dividends or distributions on liquidation or redemption to the Series
A Preferred in violation of limitations set forth in the certificate of
designation, and (ii) default on the payment of indebtedness in an amount of
$5,000,000 or more. At December 31, 1997 and 1998, accrued but unpaid dividends
were approximately $799,000 and $915,000, respectively.
Holders of the Series A Preferred have the right, beginning five years from
the date of issuance, to convert their Series A Preferred (including shares
issued as dividends) into shares of Common Stock based on the market price of
the Common Stock at the time of conversion. The Series A Preferred may, at the
holders' option, be converted sooner upon a change of control of Metrocall, as
defined in the certificate of designation. The Series A Preferred must be
redeemed on November 15, 2008, for an amount equal to the stated value plus
accrued and unpaid dividends.
The Series A Preferred may be redeemed by the Company in whole or in part
(subject to certain minimums) beginning November 15, 1999. Prior to then, the
Series A Preferred may be redeemed by the Company in whole in connection with a
sale of the Company (as described in the Series A Preferred certificate of
designation) unless the holders have exercised their rights to convert to
Metrocall Common Stock in connection with the transaction. The redemption price
prior to November 15, 2001, is equal to the stated value of the shares of the
Series A Preferred, plus accrued and unpaid dividends, and a redemption 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.
F-15
55
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holders of the Series A Preferred have the right to elect two members to
the Company's Board of Directors. If a triggering event has occurred and is
continuing, the holders of the Series A Preferred have the right to elect
additional directors so that directors elected by such holders shall constitute
no less than 40% of the members of the Board of Directors. The Company is
required to obtain the approval of the holders of not less than 75% of the
Series A Preferred before undertaking (i) any changes in Metrocall's
certificate of incorporation and bylaws that adversely affect the rights of
holders of the Series A Preferred, (ii) a liquidation, winding up or
dissolution of the Company or the purchase of shares of capital stock of
Metrocall from holders of over 5% of the issued and outstanding voting
securities, (iii) any payment of dividends on or redemption of Common Stock; or
(iv) issuance of any additional shares of the Series A Preferred (except in
payment of dividends) or any shares of capital stock having preferences on
liquidation or dividends ranking equally to the Series A Preferred. The Company
is also required to obtain approval of holders of not less than a majority of
the issued and outstanding Series A Preferred before undertaking (i) any
acquisition involving consideration having a value equal to or greater than 50%
of the market capitalization of the Company or (ii) any sale of the Company
unless Metrocall redeems the Series A Preferred.
Series B Preferred
On July 1, 1997, the Company issued 1,500 shares of the Series B Preferred
in connection with the Page America transaction (see Note 3). Each share of the
Series B Preferred has a stated value of $10,000 per share and a liquidation
preference, which is junior to the Series A Preferred but senior to the shares
of Metrocall Common Stock, equal to its stated value. The Series B Preferred
carries a dividend of 14% of the stated value per year, payable semi-annually in
cash or in additional shares of the Series B Preferred, at the Company's option.
During 1998, the Company issued 229 additional shares of the Series B Preferred
as dividends. At December 31, 1997 and 1998, accrued but unpaid dividends on the
Series B Preferred were approximately $276,000 and $316,000, respectively.
In January 1999, the Company repurchased and retired all the Series B
Preferred shares outstanding for $16.2 million.
Series C Preferred
On October 2, 1998, the Company issued 9,500 shares of the Series C
Preferred in connection with the AMD acquisition (see Note 3). Each share of the
Series C Preferred has a stated value of $10,000 per share and a liquidation
preference, which is junior to the Series A Preferred and the Series B Preferred
but senior to the shares of Metrocall Common Stock, equal to its stated value.
The Series C Preferred carries a dividend of 8% of the stated value per year,
payable semi-annually in cash or in additional shares of the Series C Preferred,
at the Company's option. During 1998, the Company issued 95 additional shares of
the Series C Preferred as dividends. At December 31, 1998, accrued but unpaid
dividends on the Series C Preferred were approximately $960,000.
Metrocall granted the holder of the Series C Preferred certain registration
rights with respect to the Series C Preferred and the Common Stock into which
the Series C Preferred may be converted. The effect of these registration rights
is to allow the holder or its transferees to freely transfer either the Series C
Preferred or any Common Stock it obtains through conversion. The holder or its
transferees also have a one-time right to require Metrocall to participate in an
underwritten public offering of the Series C Preferred or Common Stock.
Beginning on the fifth anniversary of the initial issuance, the Series C
Preferred holders has the right to convert all, but not part, of the Series C
Preferred shares into that number of shares of Common Stock equal to the
accreted stated value of the shares converted divided by the conversion price.
The conversion price of the Series C Preferred shares is $10.40, subject to
adjustment for any Common Stock dividends, stock splits or reverse stock splits.
The Series C Preferred must be redeemed on the twelfth anniversary of the
initial issuance for an amount equal to the stated value, plus accrued and
unpaid dividends. The Series C Preferred may also be redeemed by the Company in
whole, but not in part, beginning on the third anniversary of the initial
issuance for an amount equal to the stated value, plus accrued and unpaid
dividends, and a redemption premium, as defined.
Warrants
In connection with the issuance of the Series A Preferred, discussed above,
the Company issued on November 15, 1996, warrants to purchase Common Stock. Each
warrant represents the right of the holder to purchase 18.266 shares of Common
Stock or an aggregate of 2,915,254 shares of Common Stock. The exercise price
per share is $7.40. The warrants expire November 15, 2001.
The total value allocated to the warrants for financial reporting purposes,
$7.9 million or $2.70 per share, is being accreted over the term of the Series A
Preferred as preferred dividends.
F-16
56
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EMPLOYEE STOCK OPTION AND OTHER BENEFIT PLANS
1993 Stock Option Plan
In 1993, the Company adopted a Stock Option Plan (the "1993 Plan"). Under
the 1993 Plan, as amended, options to purchase up to an aggregate of 975,000
shares of Common Stock were reserved for grants to key employees of the Company.
The 1993 Plan limits the maximum number of shares that may be granted to any
person eligible under the 1993 Plan to 325,000. All options have been issued
with exercise prices equal to the fair market value at date of grant. All
options granted under the 1993 Plan become fully vested and exercisable on the
second anniversary of the date of grant. Each option granted under the 1993 Plan
will terminate no later than ten years after the date the option was granted.
In 1993, the Company also adopted a Directors Stock Option Plan (the
"Directors Plan"). Under the Directors Plan, options to purchase up to an
aggregate of 25,000 shares of Common Stock are available for grants to directors
of the Company who are neither officers nor employees of the Company ("Eligible
Director"). Options issued under the Directors Plan vest fully on the six-month
anniversary of the date of grant. Each Eligible Director was also granted an
option to purchase 1,000 shares of Common Stock on the first and second
anniversaries of the grant date of the initial option if the director continues
to be an Eligible Director on each of such anniversary dates.
1996 Stock Option Plan
In May 1996, the Company's stockholders approved the Metrocall 1996 Stock
Option Plan (as amended, the "1996 Plan"). Under the 1996 Plan, options to
purchase up to an aggregate of 6 million shares of Common Stock have been
reserved for grant to key employees, officers and nonemployee directors
("Qualified Directors"). The 1996 Plan limits the maximum number of shares that
may be granted to any person eligible under the 1996 Plan to 1 million. If any
option granted under the 1996 Plan expires or terminates prior to exercise in
full, the shares subject to that option shall be available for future grants
under the 1996 Plan. Substantially all employees and Qualified Directors of the
Company are eligible to participate in the 1996 Plan. All options granted under
the 1996 Plan become fully vested and exercisable on the second anniversary of
the date of grant. Each option granted under the 1996 Plan will terminate no
later than ten years from the date the option was granted.
Under the 1996 Plan, both incentive stock options and nonstatutory stock
options are available for grant to employees. For incentive stock options, the
option price shall not be less than the fair market value of a share of Common
Stock on the date the option is granted. For nonstatutory options, the option
price shall not be less than the par value of Common Stock. All options granted
to Qualified Directors shall be nonstatutory options. Upon approval of the 1996
Plan, each Qualified Director was granted an initial option to purchase 10,000
shares of Common Stock. Thereafter, every Qualified Director will be granted an
initial option to purchase 10,000 shares of Common Stock at the time the
Qualified Director commences service on the Board of Directors. Subsequently,
each Qualified Director who received an initial grant of an option shall
receive an additional option to purchase 1,000 shares of Common Stock on each
anniversary of the initial option, provided that the director continues to be a
Qualified Director on each anniversary date. Options granted to Qualified
Directors shall become fully vested six months after the date of grant. The
exercise price for options granted to Qualified Directors shall be the fair
market value of Common Stock on the date the option is granted.
In connection with the mergers of A+ Network, Inc. in 1996 and ProNet in
1997, the Company exchanged options to purchase Metrocall Common Stock with
former option holders of the acquired companies. The Company issued options to
acquire 468,904 and 1,212,539 shares of Common Stock to former A+ Network and
ProNet option holders, respectively, in exchange for their options held. The
options issued by the Company were fully vested and exercisable upon issuance.
In September 1996, the Compensation Committee of the Board of Directors
approved a change in the exercise price for substantially all outstanding Common
Stock options for then current employees and officers. The new exercise price
was $7.94 per share, the fair market value on the date of the change. In
February 1997, the Compensation Committee approved a change in the exercise
price for substantially all outstanding options for then current employees,
officers and directors. The new exercise price was $6.00 per share, the fair
market value on the date of the change. Each repricing established a new
measurement date for the options.
F-17
57
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Stock Purchase Plan
In May 1996, the Company's stockholders approved the Metrocall, Inc.
Employee Stock Purchase Plan (the "Stock Purchase Plan"). Under the Stock
Purchase Plan up to 1 million shares of Common Stock may be purchased by
eligible employees of the Company through payroll deductions of up to 15% of
their eligible compensation. Substantially all full-time employees are eligible
to participate in the Stock Purchase Plan. Participants may elect to purchase
shares of Common Stock at the lesser of 85% of the fair market value on either
the first or last trading day of each payroll deduction period. No employee may
purchase in one calendar year shares of Common Stock having an aggregate fair
market value in excess of $25,000. Employees purchased 11,942 shares, 109,747
shares and 136,885 shares of Common Stock in 1996, 1997, and 1998, respectively,
under the Stock Purchase Plan. At December 31, 1998, 85,752 shares of Common
Stock were due to Stock Purchase Plan participants.
Accounting for Stock-Based Compensation
The Company accounts for its stock option plans under Accounting Principles
Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees." In
accordance with the recognition requirements set forth under this pronouncement,
no compensation expense was recognized for the three years ended December 31,
1998 because the Company had granted options to acquire Common Stock at exercise
prices equal to the fair value of the Common Stock on the dates of grant. In
1996, the Company elected to adopt SFAS No. 123 "Accounting for Stock Based
Compensation" for disclosure purposes only.
For disclosure purposes, the fair value of each stock purchase and option
grant was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions in 1996, 1997, and 1998,
respectively: expected volatility of 60.6%, 64.4% and 69.7%, risk free interest
rate of 6.4%, 5.7% and 4.7%, and expected life of ten years for all option
grants. The weighted-average fair value of stock options granted in 1996, 1997
and 1998 was $5.89, $4.35, and $4.15 respectively. The weighted-average fair
value of stock purchase rights in 1996, 1997 and 1998 was $6.56 per share, $4.67
per share, and $5.23 per share respectively.
Under the above model, the total value of stock options granted in 1996,
1997 and 1998 was $6.7 million, $3.0 million and $7.0 million, respectively,
which would be recognized ratably on a pro forma basis over the two year vesting
period, and the total value of the stock purchase rights granted in 1996, 1997
and 1998 was $307,000, $575,000, and $913,000, respectively. Had compensation
costs for the Company's stock-based compensation and purchase plans been
determined in accordance with SFAS No. 123, the Company's loss and loss per
share information would have been increased to the pro forma amounts indicated
below:
YEAR ENDED DECEMBER 31,
1996 1997 1998
-------- -------- ---------
Pro forma loss before extraordinary item
attributable to common stockholders.............. $(49,589) $(64,802) $(144,015)
Pro forma loss attributable to common
stockholders..................................... (53,264) (64,802) (144,015)
Pro forma loss per share before extraordinary item
attributable to common stockholders.............. (3.05) (2.39) (3.51)
Pro forma loss per share attributable to common
stockholders..................................... (3.28) (2.39) (3.51)
The SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, and, accordingly, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
F-18
58
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, 1995..... 798,958 $1.035-$22.125 $17.75
Options granted.......................... 656,216 5.625-21.25 17.70
Options issued in A+ Network merger...... 468,904 6.04 6.04
Options exercised.......................... (4,739) 1.035 1.04
Options canceled........................... (172,337) 6.044-20.25 18.11
--------- -------------- ------
Options outstanding, December 31, 1996..... 1,747,002 $1.035-$22.125 $ 8.18
Options granted.......................... 685,000 6.00 6.00
Options issued in Pro Net merger......... 1,212,539 6.42 6.42
Options exercised........................ (1,896) 1.04 1.04
Options canceled......................... (171,990) 6.00-20.25 14.16
--------- -------------- ------
Options outstanding, December 31, 1997..... 3,470,655 $1.035-$22.125 $ 6.84
Options granted.......................... 1,679,000 5.125-6.75 5.13
Options exercised........................ -- -- --
Options canceled......................... (144,802) 5.125-6.67 5.90
--------- -------------- ------
Options outstanding, December 31, 1998..... 5,004,853 $1.035-$22.125 $ 5.84
========= ============== ======
Options exercisable, December 31, 1996..... 966,417 $1.035-$22.125 $ 6.64
Options exercisable, December 31, 1997..... 2,362,655 $1.035-$22.125 $ 6.28
Options exercisable, December 31, 1998..... 2,972,353 $1.035-$22.125 $ 6.17
The following table summarizes information about the options outstanding at
December 31, 1998:
OPTIONS EXERCISABLE OPTIONS OUTSTANDING
------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING LIFE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE OUTSTANDING EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
$0.00-$2.00 21,323 5.0 $ 1.04 21,323 $ 1.04
$2.01-$5.00 96,524 8.9 3.95 96,524 3.95
$8.01-$12.99 2,830,182 8.5 6.19 4,862,682 5.85
$13.00-$19.00 12,324 5.4 14.56 12,324 14.56
$19.01-$22.13 12,000 5.3 19.93 12,000 19.93
--------- --- ------ --------- ------
2,972,353 8.5 $ 6.17 5,004,853 5.84
========= === ====== ========= ======
Profit Sharing Plan and Retirement Benefits
The Metrocall, Inc. Savings and Retirement Plan (the "Plan"), a combination
employee savings plan and discretionary profit-sharing plan, covers
substantially all full-time employees. The Plan qualifies under section 401(k)
of the Internal Revenue Code (the "IRC"). Under the Plan, participating
employees may elect to voluntarily contribute on a pretax basis between 1% and
15% of their salary up to the annual maximum established by the IRC. The Company
has agreed to match 50% of the employee's contribution, up to 4% of each
participant's gross salary. Contributions made by the Company vest 20% per year
beginning on the second anniversary of the participant's employment. Other than
the Company's matching obligations, discussed above, profit sharing
contributions are discretionary. The Company's expenses for contributions under
the Plan were $112,000, $372,000 and $150,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
8. CONTINGENCIES
Legal and Regulatory Matters
The Company is subject to certain legal and regulatory matters in the
normal course of business. In the opinion of management, the outcome of such
assertions will not have a material adverse effect on the financial position or
the results of the operations of the Company.
F-19
59
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interconnect Complaint
The Company has filed complaints with the FCC against a number of Regional
Bell Operating Companies ("RBOCs") and the largest independent telephone company
for violations of the FCC's interconnection and local transport rules and the
1996 Act. The complaints allege that these local telephone companies are
unlawfully charging the Company for local transport of the telephone companies'
local traffic. The Company has petitioned the FCC to rule that these local
transport charges are unlawful and to award it a reimbursement or credit for any
past charges assessed by the respective carrier and paid by the Company since
November 1, 1996, the effective date if the FCC's transport rules. The briefing
schedule for these complaint proceedings ended in September 1998. The complaints
remain pending before the FCC. As of December 31, 1997 and 1998, the Company had
recorded credits receivable from certain of the RBOCs and the largest
independent telephone company related to such local transport charges of
approximately $12.1 million and $14.0 million, respectively. These receivables
represent management's estimate, subject to significant revision, of amounts
management believes are fully realizable. These LEC receivables were classified
as prepaid expenses and other current assets in the accompanying consolidated
balance sheets as of December 31, 1997 and 1998 (see Note 4).
9. INCOME TAXES
As of December 31, 1998, the Company had net operating loss and investment
tax credit carryforwards of approximately $251.3 million and $1.2 million,
respectively, which expire in the years 1999 through 2012. The benefits of these
carryforwards may be limited in the future if there are significant changes in
the ownership of the Company. Net operating loss carryforwards may be used to
offset up to 90 percent of the Company's alternative minimum taxable income. The
provision for alternative minimum tax will be allowed as a credit carryover
against regular tax in the future in the event regular tax exceeds alternative
minimum tax expense. To the extent that acquired net operating losses are
utilized in future periods, the benefit will first be recognized to reduce
acquired intangible assets before reducing the provision for income taxes.
The tax effect of the net operating loss and investment tax credit
carryforwards, together with net temporary differences, represents a net
deferred tax asset for which management has reserved 100% due to the uncertainty
of future taxable income. These carryforwards will provide a benefit for
financial reporting purposes when utilized to offset future taxable income.
The components of net deferred tax assets (liabilities) were as follows as
of December 31, 1997 and 1998 (in thousands):
DECEMBER 31,
---------------------
1997 1998
--------- ---------
Deferred tax assets:
Allowance for doubtful accounts........................... $ 1,085 $ 2,611
Management reorganization................................. 1,279 610
Contributions............................................. -- 169
New pagers on hand........................................ 935 1,468
Intangibles............................................... 6,170 13,668
Other..................................................... 2,418 7,688
Investment tax credit carryforward........................ 1,204 1,204
Net operating loss carryforwards.......................... 97,444 100,283
--------- ---------
Total deferred tax assets......................... 110,535 127,701
========= =========
Deferred tax liabilities:
Basis differences attributable to purchase accounting..... (155,930) (209,642)
Depreciation and amortization expense..................... (10,184) (11,677)
Other..................................................... (1,701) (10,517)
--------- ---------
Total deferred tax liabilities.................... (167,815) (231,836)
========= =========
Net deferred tax liability.................................. (57,280) (104,135)
Less: Valuation allowance................................... (98,650) (105,507)
--------- ---------
$(155,930) $(209,642)
========= =========
F-20
60
METROCALL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax benefit for the years ended December 31, 1996, 1997 and
1998, is primarily the result of the amortization of the basis differences
attributable to purchase accounting and is composed of the following (in
thousands):
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
------ ------ -------
Income tax (provision) benefit
Current --
Federal............................................... $ -- $ -- $ --
State................................................. (447) (539) (310)
Deferred --
Federal............................................... 1,277 4,698 41,755
State................................................. 191 702 5,649
------ ------ -------
$1,021 $4,861 $47,094
====== ====== =======
The benefit for income taxes for the years ended December 31, 1996, 1997
and 1998, results in effective rates that differ from the Federal statutory rate
as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
----- ----- ----
Statutory Federal income tax rate.......................... 35.0% 35.0% 35.0%
Effect of graduated rates.................................. (1.0) (1.0) (1.0)
State income taxes, net of Federal tax benefit............. 4.6 5.3 4.6
Net operating losses for which no tax benefit is currently
available................................................ (24.6) (8.1) (7.1)
Permanent differences...................................... (11.8) (22.7) (6.1)
----- ----- ----
2.2% 8.5% 25.4%
===== ===== ====
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The Company made cash payments for interest of $19.1 million, $30.2 million
and $58.0 million for the years ended December 31, 1996, 1997 and 1998,
respectively. The Company made cash payments for income taxes of $264,000,
$539,000 and $690,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
During 1996, 1997, and 1998, the Company issued capital stock to effect
certain acquisitions as described in Note 3.
11. UNAUDITED QUARTERLY FINANCIAL DATA
The following table of quarterly financial data has been prepared from the
financial records of the Company, without audit, and reflects all adjustments
that are, in the opinion of management, necessary for a fair presentation of the
results of operations for the interim periods presented (in thousands, except
per share amounts):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------ ------------------ ------------------ ------------------
1997 1998 1997 1998 1997 1998 1997 1998
------- -------- ------- -------- ------- -------- ------- --------
Revenues...................... $66,753 $103,331 $70,297 $103,254 $75,019 $105,890 $77,295 $152,249
Loss from operations.......... (4,428) (24,138) (5,942) (23,654) (5,204) (23,747) (5,656) (38,440)
Loss attributable to common
stockholders................ (13,308) (30,548) (13,913) (31,157) (16,020) (31,653) (16,970) (44,893)
Loss per share attributable to
common stockholders......... (0.54) (0.75) (0.55) (0.76) (0.55) (0.77) (0.58) (1.08)
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-21
61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metrocall, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Metrocall, Inc., and subsidiaries, and
have issued our report thereon dated February 5, 1999. Our audits were made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule included on page F-23 is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 5, 1999
F-22
62
SCHEDULE II
METROCALL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
ADDITIONS
-------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES ACQUIRED(1) DEDUCTIONS(2) YEAR
----------- ---------- ---------- ------------ ------------- ----------
Year ended December 31, 1996
Allowance for doubtful
accounts....................... $ 968 $ 4,575 $1,927 $ 4,509 $2,961
====== ======= ====== ======= ======
Year ended December 31, 1997
Allowance for doubtful
accounts....................... $2,961 $ 9,963 $4,609 $10,690 $6,843
====== ======= ====== ======= ======
Year ended December 31, 1998
Allowance for doubtful
accounts....................... $6,843 $13,418 $1,377 $15,442 $6,196
====== ======= ====== ======= ======
- ---------------
(1) Allowance for doubtful accounts acquired in 1996 for the Parkway Paging,
Satellite Paging, Message Network and A+ Network, 1997 for Page America and
ProNet and 1998 for AMD (see Note 3 -- Notes to Consolidated Financial
Statements).
(2) Deductions represent write-offs of accounts receivable.
F-23
63
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
3.1 Restated Certificate of Incorporation of Metrocall, Inc.
(Metrocall).*
3.2 Eighth Amended and Restated Bylaws of Metrocall.*
4.1 Indenture for Metrocall 11% Senior Subordinated Notes due
2008, dated as of December 22, 1998. (a)
4.2 Indenture for 9 3/4% Senior Subordinated Notes due 2007
dated October 21, 1997. (b)
4.3 Indenture for Metrocall 10 3/8% Senior Subordinated Notes
due 2007 dated September 27, 1995. (c)
4.4 Indenture for ProNet Inc. (ProNet) 11 7/8% Senior
Subordinated Notes due 2005 ("ProNet Notes") dated June 15,
1995. (d)
4.5 Supplemental Indenture dated May 28, 1996 for ProNet Notes.*
4.6 Second Supplemental Indenture dated December 30, 1997 for
ProNet Notes. (e)
4.7 Indenture for A+ Network, Inc. 11 7/8% Senior Subordinated
Notes due 2005 ("A+ Notes") dated October 24, 1995. (f)
4.8 First Supplemental Indenture dated November 14, 1996, for A+
Notes. (g)
4.9 Second Supplemental Indenture dated November 15, 1996 for A+
Notes. (g)
4.10 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
C Convertible Preferred Stock of Metrocall. (h)
4.11 Certificate of Designation, Number, Powers, Preferences and
Relative, Participating, Optional and Other Rights of Series
A Convertible Preferred Stock of Metrocall. (i)
10.1 Fourth Amended and Restated Loan Agreement by and among
Metrocall, certain lenders and Toronto Dominion (Texas),
Inc. as administrative agent, dated as of December 22, 1998.
(a)
10.2 Stock Purchase Agreement by and among Metrocall and AT&T
Wireless Services, Inc., McCaw Communications Companies,
Inc., and AT&T Two Way Messaging Communications, Inc. dated
June 26, 1998. (k)
10.3 Stockholders Voting Agreement and Proxy between AT&T
Wireless Services, Inc. and certain stockholders of
Metrocall dated June 26, 1998. (l)
10.4 Voting Agreement between AT&T Wireless Services, Inc. and
Page America Group, Inc. dated June 26, 1998. (l)
10.5 Registration Rights Agreement between Metrocall and McCaw
Communications Companies, Inc. dated October 1, 1998. (h)
10.6 Amended and Restated Asset Purchase Agreement by and among
Page America Group, Inc., Page America of New York, Inc.,
Page America of Illinois, Inc., Page America Communications
of Indiana, Inc., Page America of Pennsylvania, Inc.
(collectively "Page America") and Metrocall, Inc. dated as
of January 30, 1997. (m)
10.7 Amendment to Asset Purchase Agreement by and among Page
America and Metrocall dated as of March 28, 1997. (m)
10.8 Registration Rights Agreement dated July 1, 1997 by and
between Page America Group, Inc. and Metrocall. (n)
10.9 Registration Rights Agreement dated July 1, 1997 by and
among Page America and Metrocall. (n)
10.10 Indemnity Escrow Agreement dated July 1, 1997 by and among
Page America, Metrocall and First Union National Bank of
Virginia. (n)
10.11 Agreement and Plan of Merger dated as of August 8, 1997,
between Metrocall and ProNet. (o)
64
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.12 Stockholders Voting Agreement dated as of August 8, 1997,
among ProNet and certain stockholders of Metrocall listed
therein. (o)
10.13 Employment Agreement between Metrocall and William L.
Collins, III. (p)
10.14 Amendment to Employment Agreement between Metrocall and
William L. Collins, III. (r)
10.15 Employment Agreement between Metrocall and Steven D. Jacoby.
(p)
10.16 Amendment to Employment Agreement between Metrocall and
Steven D. Jacoby. (r)
10.17 Second Amendment to Employment Agreement between Metrocall
and Steven D. Jacoby. (s)
10.18 Employment Agreement between Metrocall and Vincent D. Kelly.
(p)
10.19 Amendment to Employment Agreement between Metrocall and
Vincent D. Kelly. (r)
10.20 Second Amendment to Employment Agreement between Metrocall
and Vincent D. Kelly. (s)
10.21 Change of Control Agreement between Metrocall and William L.
Collins, III. (p)
10.22 Change of Control Agreement between Metrocall and Steven D.
Jacoby. (p)
10.23 Change of Control Agreement between Metrocall and Vincent D.
Kelly. (p)
10.24 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and Jackie R. Kimzey. (q)
10.25 Noncompetition Agreement dated as of August 8, 1997, between
Metrocall and David J. Vucina. (m)
10.26 Letter Agreement dated August 8, 1997, between Metrocall and
Jackie R. Kimzey. (q)
10.27 Letter Agreement dated August 8, 1997, between Metrocall and
David J. Vucina. (q)
10.28 Letter Agreement dated August 8, 1997, between Metrocall and
Jan E. Gaulding. (q)
10.29 Letter Agreement dated August 8, 1997, between Metrocall and
Mark A. Solls. (q)
10.30 Letter Agreement dated August 8, 1997, between Metrocall and
Jeffery A. Owens. (q)
10.31 Directors' Stock Option Plan, as amended. (t)
10.32 Metrocall 1996 Stock Option Plan. (u)
10.33 Metrocall 1996 Stock Option Plan, as amended. (t)
10.34 Metrocall Amended Employee Stock Purchase Plan. (v)
10.35 Registration Rights Agreement dated December 22, 1998
between Metrocall and Morgan Stanley & Co. Incorporated,
NationsBanc Montgomery Securities LLC, TD Securities (USA)
Inc., First Union Capital Markets and BancBoston Roberston
Stephens Inc.*
10.36 Deed of Lease between Douglas and Joyce Jemal, as landlord,
and Metrocall, as tenant, dated April 14, 1994. (w)
10.37 Lease Agreement dated December 20, 1983 between Beacon
Communications Associates, Ltd. and a predecessor of
Metrocall. (x)
10.38 Non-disclosure/No Conflict Agreement dated May 16, 1996
between Metrocall and Elliot H. Singer. (y)
10.39 Placement Agreement dated December 17,1998 between Metrocall
and Morgan Stanley & Co. Incorporated, NationsBanc
Montgomery Securities LLC, TD Securities (USA) Inc., First
Union Capital Markets and BancBoston Roberston Stephens
Inc.*
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.*
65
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
27.1 Financial Data Schedule.*
- ---------------
* Filed herewith.
(a) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on January 4, 1999.
(b) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 23, 1997.
(c) Incorporated by reference to Metrocall's Registration Statement on Form
S-1, as amended (File No. 33-96042) filed with the Commission on September
27, 1995.
(d) Incorporated by reference to ProNet's Current Report on Form 8Metrocall's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 filed
with the Commission on May 15, 1998.
(e) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 filed with the Commission on May 15, 1998.
(f) Incorporated by reference to the Registration Statement on Form S-1 of A+
Communications, Inc., as amended (File No. 33-95208) filed with the
Commission on September 18, 1995.
(g) Incorporated by reference to Metrocall's Annual Report on Form 10-K for the
year ended December 31, 1996 filed with the Commission on March 31, 1997.
(h) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on October 16, 1998.
(i) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on November 21, 1996.
(j) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 2, on Form S-4 (File No. 333-36079) filed with the Commission on
November 5, 1997.
(k) Incorporated by reference to Metrocall's Definitive Proxy Statement on
Schedule 14A filed with the Commission on August 31, 1998.
(l) Incorporated by reference to Metrocall's Quarterly Report on Form 8-K filed
July 7, 1998.
(m) Incorporated by reference to Metrocall's Registration Statement on Form S-4,
as amended (File No. 333-21231) initially filed with the Commission on
February 5, 1997.
(n) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on July 14, 1997.
(o) Incorporated by reference to Metrocall's Current Report on Form 8-K filed
with the Commission on August 12, 1997.
(p) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-06919) filed with the Commission on June 27,
1996.
(q) Incorporated by reference to Metrocall's Registration Statement on Form
S-4, as amended (File No. 333-36079) filed with the Commission on September
22, 1997.
(r) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997 filed with the Commission on November
14, 1997.
(s) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 filed with the Commission on August 14,
1998.
(t) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders held on May 7, 1997.
66
(u) Incorporated by reference to Metrocall's Proxy Statement filed for the
Annual Meeting of Stockholders held on May 1, 1996.
(v) Incorporated by reference to Metrocall's Registration Statement, Amendment
No. 1, on Form S-4 (File No. 333-36079) filed with the Commission on
October 27, 1997.
(w) Incorporated by reference to Metrocall's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1994 filed with the Commission on November
14, 1994.
(x) 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.
(y) Incorporated by reference to Metrocall's Tender Offer Statement on Schedule
14D-1, filed with the Commission on May 22, 1996.