-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ie4/ILozB0EPEBnVv2lJOUdbKfWDGmpa/GgoyQOfNIFrMchbu5BJqeOqjf/mwQob WoQNh57tI+o64HWh0H2gTg== 0000950133-99-002372.txt : 19990705 0000950133-99-002372.hdr.sgml : 19990705 ACCESSION NUMBER: 0000950133-99-002372 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990702 FILER: COMPANY DATA: COMPANY CONFORMED NAME: METROCALL INC CENTRAL INDEX KEY: 0000906525 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 541215634 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-21924 FILM NUMBER: 99658956 BUSINESS ADDRESS: STREET 1: 6677 RICHMOND HWY CITY: ALEXANDRIA STATE: VA ZIP: 22306 BUSINESS PHONE: 7036606677 MAIL ADDRESS: STREET 1: 6910 RICHMOND HWY CITY: ALEXANDRIA STATE: VA ZIP: 22306 10-K/A 1 FORM 10-K/A FOR FISCAL YEAR ENDED 12/31/1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A [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, VIRGINIA 22306 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 660-6677 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NOT APPLICABLE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: TITLE OF CLASS ----------- 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 was filed with the Commission within 120 days after the close of the fiscal year and are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE The registrant amends its Annual Report on Form 10-K for the fiscal year ended December 31, 1998 as follows: (1) Part I, Item I, Business, the section titled "Metrocall's Paging and Wireless Messaging Operations -- Services and Subscribers"; (2) Part I, Item 6, Selected Financial Data; (3) Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations; (4) Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk; (5) Part II, Item 8, Financial Statements and Supplementary Data; and (6) Part IV, Item 14, Exhibits, Financial Statement Schedule and Reports on Form 8-K. The specific changes are incorporated into the text, as amended, below. No other changes were made. The Financial Statements have been restated as described in Note 2 to the Financial Statements. 1 3 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 2 4 before interest, taxes, depreciation and amortization). The principal elements of this strategy include the following: 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. 3 5 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. Since July 1996, we have acquired the following companies, which have added approximately 3.6 million subscribers:
NO. OF ACQUIRED COMPANY ACQUISITION DATE 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 --------- 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; 4 6 - 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 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; 5 7 - 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; 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. 6 8 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. - 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. 7 9 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 ========= ========= =========
- --------------- (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: 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 ========= ===== ========= ===== ========= =====
- --------------- (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. 8 10 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. 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 9 11 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 is a communications technology that uses a portion of the radio spectrum to transmit and receive text messages and other data. Narrowband PCS provides advanced paging and messaging capabilities, such as guaranteed and response messaging. Guaranteed messaging ensures that if a subscriber travels outside the area covered by our network or turns off the pager unit, the subscriber will receive the message when he or she returns to the coverage area or turns on the unit. Response messaging permits a subscriber to respond back to the sender of a message by either selecting from a custom set of multiple choice responses sent with the message or sending a response chosen from a set of predefined responses stored in the unit. Broadband PCS uses a larger portion of the radio spectrum than does narrowband PCS and thereby permits more data to be transmitted and received. Broadband PCS provides two-way messaging capability, which permits not only the sender but also the recipient to communicate by voice or other messaging means. New types of communications devices using broadband PCS 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 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 10 12 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. 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 11 13 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. 12 14 The 1996 Act also requires the FCC to appoint an impartial entity to administer telecommunications numbering and to make numbers available on an equitable basis. In addition, the 1996 Act requires that state and local zoning regulations shall not unreasonably discriminate among providers of "functionally equivalent" wireless services, and shall not have the effect of prohibiting the provision of personal wireless services. The 1996 Act provides for expedited judicial review of state and local zoning decisions. Additionally, state and local governments may not regulate the placement, construction and modification of personal wireless service facilities on the basis of the environmental effects of radio frequency emissions, if the facilities comply with the FCC's requirements. Other provisions of the 1996 Act, however, may increase competition, such as the provisions which allow the FCC to forbear from applying regulations and provisions of the Communications Act to any class of carriers, not only to CMRS, and the provisions allowing public utilities to provide telecommunications services directly. These provisions may impose additional regulatory costs (for example, provisions requiring contributions to universal service by providers of interstate telecommunications). Some of these FCC rules are subject to pending petitions for reconsideration and Court appeals. 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. 13 15 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). 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. 14 16 ITEM 6. SELECTED FINANCIAL DATA The consolidated statements of operations data for fiscal years 1994, 1996, 1997 and 1998 presented below include the results of operations of acquired companies from their respective acquisition dates. In May 1997, we sold the assets of our telemessaging operations, which were acquired through merger on November 15, 1996. Therefore, the 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 Inc., because this merger was completed on December 30, 1997. Units in service at December 31, 1997 include approximately 1.3 million units acquired in the ProNet merger.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1994 1995 1996 1997 1998 ------- -------- ------------- ------------- ------------- (AS RESTATED) (AS RESTATED) (AS RESTATED) (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 29,696 69,254 115,432 Selling and marketing..................... 7,313 15,546 24,101 53,802 73,546 General and administrative(a)............. 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) (26,574) (29,092) (112,637) Interest and other income (expense)(b).... 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) (47,605) (65,184) (176,236) Income tax provision benefit.............. 152 595 1,021 4,861 47,094 ------- -------- -------- -------- --------- Loss before extraordinary item............ (1,090) (17,407) (46,584) (60,323) (129,142) Extraordinary item(b)..................... (1,309) (2,695) (3,675) -- -- ------- -------- -------- -------- --------- Net loss.............................. (2,399) (20,102) (50,259) (60,323) (129,142) Preferred dividends....................... -- -- (780) (7,750) (11,767) ------- -------- -------- -------- --------- Loss attributable to common stockholders........................ $(2,399) $(20,102) $(51,039) $(68,073) $(140,909) ======= ======== ======== ======== ========= Loss per share attributable to common stockholders: Loss per share before extraordinary item attributable to common stockholders..... $ (0.14) $ (1.49) $ (2.91) $ (2.51) $ (3.43) Extraordinary item, net of income tax benefit............................. (0.16) (0.23) (0.23) -- -- ------- -------- -------- -------- --------- Loss per share attributable to common stockholders........................ $ (0.30) $ (1.72) $ (3.14) $ (2.51) $ (3.43) ------- -------- -------- -------- ---------
- --------------- (a) Includes the impact of one-time, non-recurring amounts for severance and other compensation costs incurred as part of a management reorganization of approximately $2.0 million in fiscal year 1995. (b) In fiscal years 1994 and 1995, 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). 15 17 You should find the definitions below useful in understanding Metrocall's operating and other data: - - EBITDA means earnings before interest, taxes, depreciation and amortization, and certain one-time charges. While not a measure under generally accepted accounting principles, EBITDA is a standard measure of financial performance in the paging industry. Metrocall believes EBITDA can be used to measure its ability to service debt, fund capital expenditures and expand its business. EBITDA as defined by Metrocall is used in its credit facility and indentures as part of the tests to determine its ability to incur debt and make restricted payments. EBITDA as defined by Metrocall may not be comparable to similarly titled measures reported by other companies since all companies do not calculate EBITDA in the same manner. EBITDA should not be considered in isolation or as an alternative to net income (loss), income (loss) from operations, cash flows from operating activities, or any other measure of performance under GAAP. Cash expenditures for various long-term assets, interest expense and income taxes have been, and will be, incurred which are not reflected in the EBITDA presentations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition, Liquidity and Capital Resources" included in our Annual Report on Form 10-K for the year ended December 31, 1998. In 1995, EBITDA excludes non-recurring amounts of approximately $2.0 million incurred as part of a management reorganization. - - EBITDA margin is calculated by dividing EBITDA by the amount of total revenues less the net book value of products sold. - - ARPU is average monthly paging revenue per unit. ARPU is calculated by dividing (a) service, rent and maintenance revenues for the period by (b) the average number of units in service for the period. The ARPU calculation excludes revenues derived from non-paging services such as telemessaging, long distance and cellular telephone. - - 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 amounts for severance and other compensation costs incurred as part of a management reorganization of approximately $2.0 million in 1995.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1994(a) 1995 1996 1997 1998(a) -------- -------- ------------- ------------- ------------- (AS RESTATED) (AS RESTATED) (AS RESTATED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE, UNIT, AND PER UNIT DATA) 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 31,622 62,607 122,311 EBITDA margin(d)(e)...................... 31.7% 29.1% 24.6% 24.1% 28.3% ARPU(f).................................. 10.53 9.15 8.01 8.25 7.57 Average monthly operating expense per unit(g)................................ 7.36 6.71 6.35 6.74 5.71 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 $ (8,396) $ (36,747) $ (41,828) Cash and cash equivalents...................... 2,773 123,574 10,917 24,896 8,436 Total assets................................... 200,580 340,614 645,488 1,078,023 1,251,038 Total long-term debt, net of current portion... 101,346 153,803 327,092 598,989 742,563 Total stockholders' equity..................... 68,136 155,238 165,169 170,505 33,780
16 18 PART II 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.
ACQUIRED COMPANY ACQUISITION 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 17 19 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 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, it expects to realize synergies as a combined company. 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. Metrocall expects to realize approximately $8.5 million in annual cost savings by increasing utilization of our network and from the elimination of duplicative AMD functions like executive staffing, finance and other positions. 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 to which it leases pagers. 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 $80.0 million, primarily for paging equipment paging, and transmission equipment and information systems enhancements. Metrocall expects that its capital expenditures for the year ending December 31, 1999 will be financed through a combination of operating cash flow and borrowings under its credit facility. 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. 18 20 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 subscribers 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 which primarily includes sales of pagers increased approximately $8.9 million from $39.5 million in 1997 to $48.4 million in 1998 and decreased as a percentage of net revenues from 15.2% in 1997 to 11.2% in 1998. Net book value of products sold increased approximately $1.8 million from $29.9 million in 1997 to $31.8 million in 1998 and decreased as a percentage of net revenues from 11.5% in 1997 to 7.3% in 1998. The increase in product sales revenues was directly attributable to higher unit sales and greater geographic penetration related to the ProNet merger and the AMD acquisition. The following tables set forth the amounts of operating expenses and related percentages of net revenues represented by certain items in Metrocall's Consolidated Statements of Operations and certain other information for fiscal years 1997 and 1998.
% OF % OF OPERATING EXPENSES 1997 REVENUES 1998 REVENUES INCREASE - ------------------ -------- -------- -------- -------- -------- Service, rent and maintenance.......... $ 69,254 26.7 $115,432 26.7 $ 46,178 Selling and marketing.................. 53,802 20.7 73,546 17.0 19,744 General and administrative............. 73,753 28.5 121,644 28.1 47,891 Depreciation and amortization.......... 91,699 35.3 234,948 54.3 143,249 -------- ----- -------- ----- -------- $288,508 111.2 $545,570 126.1 $257,062 ======== ===== ======== ===== ========
19 21
OPERATING EXPENSES PER UNIT IN SERVICE 1997 1998 $ DECREASE - -------------------------------------- ----- ----- ---------- Monthly service, rent and maintenance....................... $2.37 $2.12 $(0.25) Monthly selling and marketing............................... 1.84 1.35 (0.49) Monthly general and administrative.......................... 2.53 2.24 (0.29) ----- ----- ------ Average monthly operating costs............................. $6.74 $5.71 $(1.03) ===== ===== ======
Overall in 1998, Metrocall experienced an $1.03 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 $46.2 million from $69.3 million in 1997 to $115.4 million 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. 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 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 20 22 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. The following table indicates the recorded balances of certain intangible assets, by acquisition, held by Metrocall at December 31, 1997, immediately before the change in the amortization period for these assets:
(DOLLARS IN THOUSANDS) ACQUISITION ACQUISITION DATE GOODWILL FCC LICENSES SUBSCRIBER BASE ----------- ---------------- -------- ------------ --------------- Parkway July 16, 1996 $ 12,966 $ 18,364 $ 1,957 Satellite August 30, 1996 2,334 19,412 2,141 A+ Network November 15, 1996 117,905 110,697 19,876 Page America July 1, 1997 0 30,364 29,533 ProNet December 30, 1997 20,706 71,475 205,582 Other acquisitions 39,942 62,561 5,400 -------- -------- -------- $193,853 $312,873 $264,489 ======== ======== ========
Metrocall reduced the period of amortization for amounts allocated to goodwill from 15 to 25 years to 10 years for each of its acquisitions because of the effects of technological and competitive pressures that had impacted the industry and that were expected to continue. For instance, during late 1997 and early 1998, technological developments occurred with respect to advanced messaging devices and products which would compete against the traditional paging businesses that Metrocall had acquired in 1996 and 1997. Accordingly, Metrocall believed that the estimated useful life of the underlying goodwill recorded from its acquisitions was shortened due to these technological developments and the risks of increased competition and marketing pressures on its traditional paging business. Metrocall also reduced the number of years it amortized the balances of its subscriber bases acquired with each acquisition because of the continued and heightened competitive pressures that it had experienced and that were evident in the one-way paging industry and the technological developments in the industry that it believed would create new products and services, which would compete with Metrocall's paging services. Metrocall believes the revision in its estimated lives was necessary to ensure that the recorded balances of these intangible assets and the change to a ten year amortization period for goodwill and three year amortization period for its subscriber bases appropriately match the value and future benefits of these assets. Metrocall also reduced the period that it amortized amounts paid for FCC licenses from 25 years to 10 years as a result of the new FCC auction rules and other regulatory changes that occurred during 1997 and early 1998. The revised amortization period now matches the 10 year FCC holding period on most licenses. Metrocall believed that it was necessary to conform and limit its amortization period to the FCC initial holding period for these licenses because of the effects of the increased competition in the license auction process, the site build-out requirements imposed on newly awarded licenses and the trade-in provisions for wide-area licenses all of which could limit the period of time that Metrocall holds a specific license. 21 23
$ OTHER 1997 1998 INCREASE - ----- -------- --------- -------- Interest and other income, net............................. $ 156 $ 849 $ 693 Interest expense........................................... (36,248) (64,448) 28,200 Income tax benefit......................................... 4,861 47,094 42,233 Net loss................................................... (60,323) (129,142) 68,819 Preferred dividends........................................ (7,750) (11,767) 4,017 EBITDA..................................................... 62,607 122,311 59,704
Interest expense. The increase in interest expense in 1998 of approximately $28.2 million was the result of higher average debt balances outstanding during the fiscal year primarily associated with the additional debt assumed with the ProNet merger and financing requirements of the AMD acquisition. During 1998, total debt increased by $143.4 million to $743.3 million. 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 $68.8 million from $60.3 million in 1997 to $129.1 million in 1998. The increase in net loss was primarily the result of increased depreciation and amortization and other operating expenses associated with the ProNet merger and the Page America and AMD acquisitions offset by increases in net revenues related to an increase in the 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 $59.7 million was primarily the result of the increase in revenues in 1998 offset to a lesser extent by the increase in operating expenses. Metrocall's EBITDA margin improved from 24.1% in 1997 to 28.3% in 1998. 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 22 24 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.......... $ 29,696 23.1 $ 69,254 26.7 $ 39,558 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 -------- ----- -------- ----- -------- $154,898 120.7 $288,508 111.2 $133,610 ======== ===== ======== ===== ========
INCREASE OPERATING EXPENSES PER UNIT IN SERVICE 1996 1997 OR (DECREASE) - -------------------------------------- ----- ----- ------------- Monthly service, rent and maintenance....................... $1.95 $2.37 $ 0.42 Monthly selling and marketing............................... 1.58 1.84 0.26 Monthly general and administrative.......................... 2.82 2.53 (0.29) ----- ----- ------ Average monthly operating expense........................... $6.35 $6.74 $ 0.39
Overall in 1997, Metrocall experienced a $0.39 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 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 $39.6 million from $29.7 million in 1996 to $69.3 million in 1997 and increased as a percentage of net revenues from 23.1% in 1996 to 26.7% 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). The monthly service, rent and maintenance expense per unit increased by $0.42 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 23 25 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................................................... (50,259) (60,323) 10,064 Preferred dividends........................................ (780) (7,750) 6,970 EBITDA..................................................... 31,622 62,607 30,985
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. Net loss. Metrocall's net loss increased approximately $10.0 million from $50.3 million in 1996 to $60.3 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 $31.0 million from $31.6 million in 1996 to $62.6 million in 1997. EBITDA margin decreased from 24.6% in 1996 to 24.1% 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 24 26 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 $41.8 million and $36.7 million in 1998 and 1997, respectively. In 1998, current assets increased by approximately $0.6 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:
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 25 27 $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 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 26 28 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. 27 29 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 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 28 30 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 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. 29 31 RISK FACTORS RISKS TO THE BUSINESS -- METROCALL'S BUSINESS MIGHT BE ADVERSELY AFFECTED BY FACTORS BEYOND ITS CONTROL. Metrocall believes that its future operating results and funds generated from operations and available under its credit facility will be sufficient to meet general corporate requirements and planned capital expenditures for the foreseeable future. Metrocall however cannot identify nor can it control all circumstances that could occur in the future that may adversely affect its business and results of operations. Some of the circumstances that may occur and may impair Metrocall's business are described below. If any of the following circumstances were to occur, Metrocall's business, financial conditions or results of operations could be materially adversely affected. OPERATING LOSSES -- METROCALL HAS A HISTORY OF OPERATING LOSSES AND EXPECTS TO CONTINUE TO INCUR OPERATING LOSSES IN THE FUTURE. AS A RESULT, WE MAY NOT BE ABLE TO MEET OUR CASH NEEDS FROM OPERATIONS OR PAY OUR DEBT OBLIGATIONS. Metrocall historically has had operating losses and expects these losses to continue. These losses make it more difficult for us to meet our cash and other working capital needs, to support our business operations and to pay our debt obligations as they become due because we must rely on our ability to obtain financing or we must try to generate additional revenue. The losses have resulted because Metrocall has focused mainly on its consolidation and growth strategies and its capital expenditure requirements, instead of focusing mainly on current earnings. Metrocall has sustained net losses of $50.3 million, $60.3 million and $129.1 million for fiscal years 1996, 1997 and 1998. At December 31, 1998, Metrocall's accumulated deficit was approximately $306.9 million and its working capital deficit was $41.8 million. Metrocall expects to continue to incur losses from operations in the future because its business requires substantial funds for capital expenditures and acquisitions, both of which cause significant depreciation and amortization expenses. In addition, we have substantial levels of borrowing, which causes significant interest expense, expected to be outstanding in the foreseeable future. We cannot assure you that we can reverse operating losses and achieve profitability in the future. We cannot assure you that we will be able to meet all of our cash and other working capital needs from operations in the future. ABILITY TO COVER FIXED CHARGES -- METROCALL'S EARNINGS HAVE HISTORICALLY BEEN INSUFFICIENT TO COVER FIXED CHARGES AND AS A RESULT METROCALL MIGHT NEED TO BORROW ADDITIONAL AMOUNTS IN THE FUTURE. In previous fiscal years, Metrocall's earnings have been insufficient to cover its fixed charges. Fixed charges, as well as capital expenditure requirements and other interest expense obligations, may cause Metrocall to borrow additional amounts in the future. Fixed charges primarily include interest expenses related to its long-term debt. The insufficient amount of earnings is primarily attributable to Metrocall's history of significant net losses. The chart below shows the extent to which fixed charges exceed earnings.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1994 1995 1996 1997 1998 ------- -------- -------- -------- --------- (DOLLARS IN THOUSANDS) Amount of fixed charges................ $ 4,605 $ 14,171 $ 23,206 $ 43,213 $ 76,454 Deficiency of earnings to fixed charges.............................. (1,242) (18,002) (47,605) (65,184) (176,236)
In addition to the amount required to cover its fixed charges, Metrocall's business requires substantial funds for capital expenditures for paging and other wireless messaging equipment and for payment of significant interest expenses associated with its substantial levels of borrowings. The substantial amount of funds associated with Metrocall's business may require it to incur additional borrowings from time to time. For 1999, Metrocall believes it will need to borrowing additional amounts under its credit facility but does not expect that amount to exceed approximately $40.0 million to $45.0 million. 30 32 SUBSTANTIAL AMOUNT OF INDEBTEDNESS -- OUR SUBSTANTIAL AMOUNT OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR BUSINESS OPERATIONS, LIMIT OUR ABILITY TO USE DEBT TO FUND FUTURE CAPITAL NEEDS AND PREVENT US FROM MEETING OUR OBLIGATIONS UNDER OUR DEBT INSTRUMENTS. Metrocall has a substantial amount of indebtedness. The following chart sets forth important credit information:
AT DECEMBER 31, 1998 -------------------- Total indebtedness........................................ $743.3 million Stockholders' equity...................................... 33.8 million Debt to equity ratio...................................... 22.0x
Our substantial indebtedness, along with the net operating losses and working capital deficits we have sustained in recent periods, could adversely affect our business. For example, it may: - make it more difficult for us to satisfy our debt; - require Metrocall to dedicate a substantial portion of our operating cash flows from operations to pay interest expense; - limit our ability to react to changes in market conditions, changes in our 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 our ability to borrow additional funds; and - cause Metrocall to be vulnerable to increases in interest rates because its indebtedness under the credit facility bears interest at floating rates, only a portion of which is hedged. Our senior loan agreement and other debt allow us to incur more debt. At March 31, 1999, our senior loan covenants would permit us to borrow an additional $63.0 million. Further borrowings could increase these risks. OPERATING AND FINANCIAL RESTRICTIONS -- METROCALL'S DEBT AGREEMENTS IMPOSE OPERATING AND FINANCIAL RESTRICTIONS. IF METROCALL FAILS TO COMPLY WITH THESE RESTRICTIONS, THE HOLDERS OF THE DEBT COULD DEMAND THAT METROCALL PAY THEM IMMEDIATELY. Metrocall's debt agreements impose significant operating and financial restrictions. If we fail to comply with these restrictions, we would be in default under the debt agreements and holders of the debt could demand that we pay them immediately. If the debt holders were to demand immediate payment, we cannot assure you that we would be able to pay or refinance the debt on acceptable terms to us. In addition, if we fail to comply with a restriction in our credit facility, the lenders under that credit facility could proceed against the assets of Metrocall, which we pledged to the lenders as collateral for the payment of the debt. The restrictions in the debt agreements significantly limit or prohibit, among other things: - our ability to incur additional debt and particular types of debt, - pay cash dividends, - repurchase or redeem our capital stock, - make investments or other payments, - create security interests, - engage in transactions with stockholders or affiliates, - sell assets, - issue or sell stock of subsidiaries, - merger or consolidate with other companies. 31 33 In addition, we must comply with the financial ratios in our credit facility and the restrictions imposed by our preferred stock. We cannot assure you that we will be able to meet these financial ratios and restrictions in the future. INTANGIBLE ASSETS -- MOST OF METROCALL'S ASSETS ARE INTANGIBLE ASSETS WHOSE VALUE MAY DECREASE FROM FACTORS BEYOND METROCALL'S CONTROL. IF THE VALUE OF THOSE ASSETS WERE TO DECREASE AND METROCALL WERE REQUIRED TO SATISFY ITS DEBT OBLIGATIONS BASED ON ITS ASSETS' VALUE, METROCALL MIGHT NOT BE ABLE TO SATISFY THOSE DEBT OBLIGATIONS. Most of Metrocall's assets are intangible assets. primarily FCC licenses and certificates, goodwill, subscriber lists and deferred financing costs. At December 31, 1998, our total assets were approximately $1,251.0 million, of which net intangible assets were approximately $894.7 million. If we were required to satisfy our obligations under our credit facility because, for example, we defaulted under our debt agreements, became insolvent or were liquidated, and our lenders under our credit facility proceeded against our assets to satisfy those obligations, the value of our assets might not be sufficient to satisfy those obligations. The reason the value of our assets might be insufficient is because the value of intangible assets could be impaired by factors beyond our control, such as changes in technology, regulation, available financing or competitive pressures. We cannot assure you that the value of our assets is or will be sufficient to repay our debt obligations under our credit facility. ADDITIONAL COMPETITION DUE TO TECHNOLOGICAL DEVELOPMENTS -- TECHNOLOGICAL DEVELOPMENTS COULD LEAD TO INCREASED COMPETITION TO METROCALL. Future technological developments in the wireless communications industry, such as narrowband PCS and broadband PCS, could create new services or products that compete with our paging and wireless messaging services. See "Competition" in Part I, Item 1 for a discussion of these developments. That increased competition might result in loss of existing or future subscribers, loss of revenues and increase in expenses to stay competitive. Developments in narrowband PCS, which provides advanced messaging capabilities, could lead to increased competition. Some of our largest competitors in the conventional paging market have narrowband PCS licenses, which permit them to provide advanced messaging services on a nationwide basis. We expect other companies to offer advanced messaging services and, as a result, our growth in terms of subscriber base might be impaired. We intend to offer advanced messaging services through our PageMart alliance in early 1999, but the success of our offering of these services depends on several factors. Those factors include market acceptance, cost of equipment and other capital requirements, technological changes in wireless messaging services, competitors' marketing and sales strategies, regulatory developments and general economic conditions. These factors are beyond our control. We cannot assure you that our offering of advanced messaging services will be beneficial to our business operations or financial condition. Development of broadband PCS could also lead to increased competition. Many companies now provide wireless telephone service using broadband PCS technology and either have begun or will begin providing paging services. As a result, we might experience loss in subscribers, loss in revenues and increase in costs to stay competitive. Other changes in technology could lower the cost of competing services and products to a level at which our services and products would become too costly to offer or produce or would require us to reduce our prices. We cannot assure you that we will be able to develop or introduce new services and products on a timely basis and at competitive prices, if at all, nor can we assure you that our profit margins, inventory costs and cash flows will not be adversely affected by technological developments. SATELLITE FAILURES -- METROCALL'S ABILITY TO DELIVER PAGING AND MESSAGING SERVICES COULD BE INTERRUPTED IF SATELLITE FAILURES OCCUR. Metrocall relies on satellite facilities operated by other companies to control many of the transmitters on our nationwide and wide-area networks. Any interruptions in satellite transmissions might result in loss of 32 34 subscribers, loss of revenues and increased costs to find alternative ways to respond to the interruptions. Metrocall has no control over the operation and maintenance of those satellite facilities. Metrocall also uses land-based communications facilities such as microwave stations and landline telephone facilities to connect and control the paging base station transmitters in its networks. The failure or disruption of transmissions by these satellite and other facilities could disrupt our paging and messaging services and impair our results of operations. Metrocall recently initiated paging and messaging service through a satellite facility in California. Metrocall transmits a majority of its paging traffic through this facility. Any interruptions in satellite transmissions from this facility could adversely affect Metrocall's ability to gain more subscribers and increase its revenues. SUBSCRIBER TURNOVER -- WHEN SUBSCRIBERS CANCEL OR SWITCH THEIR SERVICE, THE COST TO ATTRACT NEW SUBSCRIBERS IS HIGHER THAN THE COST TO PROVIDE SERVICE TO EXISTING SUBSCRIBERS AND AS A RESULT ADVERSELY AFFECTS METROCALL'S RESULTS OF OPERATIONS. Subscriber turnover adversely affects our results of operations because it increases our fixed costs. When subscribers cancel their paging or other messaging services or switch their service to another carrier, we attempt to attract new subscribers to replace the disconnected subscribers. The sales and marketing costs associated with attracting new subscribers exceed the costs to continue servicing existing subscribers and increase our high fixed costs. For the twelve months ended December 31, 1996, 1997 and 1998, our subscriber turnover rates were 2.1%, 2.5% and 1.7%, respectively. REGULATORY CHANGES AND COMPLIANCE -- CHANGES IN THE REGULATIONS THAT GOVERN METROCALL'S BUSINESS MIGHT MAKE IT MORE DIFFICULT OR COSTLY TO OPERATE ITS BUSINESS OR TO COMPLY WITH ITS CHANGES. The FCC and to a lesser extent state regulatory agencies regulate Metrocall's paging and messaging operations. Those agencies might take actions, such as changing licensing requirements or the allocation of radio spectrum that would make it more difficult or costly for Metrocall to operate its business. For example, the FCC has adopted rules under which it will issue licenses that would permit companies increase operating expenses to offer paging services on a wide-area basis through competitive bidding. Metrocall believes these rules may simplify its regulatory compliance burdens, particularly regarding adding or relocating transmitter sites; however, those rules may also increase its costs of obtaining paging licenses in the future. In addition, we cannot assure you that we will be able to comply with all changes implemented by the agencies regulating our business, such as changes in licensing or build-out requirements. CHALLENGES OF ACQUISITIONS -- METROCALL MIGHT NOT BE ABLE TO IDENTIFY OR FINANCE BUSINESSES TO ACQUIRE. METROCALL MAY NOT BE ABLE TO INTEGRATE SUCCESSFULLY BUSINESSES IT HAS ALREADY ACQUIRED OR MANAGE ITS EXISTING BUSINESSES OPERATIONS AS IT ACQUIRES AND INTEGRATES BUSINESS. Metrocall might not be able to execute its growth strategy in the future if it is unable to identify attractive businesses to acquire, to finance potential acquisitions and to integrate acquired businesses. Even if Metrocall can pursue an acquisition, it would encounter many obstacles before the acquisition could be successful and increase its revenues or decrease its costs. The challenges of acquisitions include: - potential strain on management; - unanticipated liabilities or contingencies from the acquired company; - reduced earnings due to increased 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 suffer because of the diversion of management's attention away from existing operations and the increase in costs. Metrocall is currently in 33 35 the process of integrating the recent acquisition of the Advanced Messaging Division of AT&T Wireless. 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 Advanced Messaging Division into its organizations; Metrocall may face difficulties in integrating Advanced Messaging Division's communications networks with its own networks and coordinating its and Advanced Messaging Division's sales efforts. Metrocall also must reassure Advanced Messaging Division's customers that their paging services will continue uninterrupted. DEPENDENCE ON KEY MANAGEMENT PERSONNEL -- IF METROCALL IS UNABLE TO RETAIN KEY MANAGEMENT PERSONNEL, IT MIGHT NOT BE ABLE TO FIND SUITABLE REPLACEMENTS ON A TIMELY BASIS AND ITS BUSINESS OPERATIONS MIGHT BE ADVERSELY AFFECTED. Metrocall's existing operations and continued future development are dependent to a significant extent upon the efforts and abilities of certain key individuals, including William L. Collins III, its chief executive officer, Steven D. Jacoby, its chief operating officer, and Vincent D. Kelly, its chief financial officer. These individuals have substantial expertise and experience in the paging and messaging industry, know the intricacies of Metrocall's business operations and have insights into the future developments and goals of the business. If Metrocall is unable to retain these individuals, it is unlikely Metrocall could find individuals to replace them that would have the same degree of expertise, experience, knowledge and insight into the industry and the business operations. Even if Metrocall could find replacements, its business would be impaired from the disruption associated with changes in management. For example, Metrocall is largely dependent on these individuals in pursuing its growth and consolidation strategies and in integrating successfully acquired businesses such as Advanced Messaging Division. As a result, Metrocall's business operations could be adversely affected. Metrocall has employment contracts with the named individuals but does not have non-competition contracts with or "key man"' life insurance for any of them. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Metrocall is exposed to risks associated with interest rate changes. We do not foresee any significant changes on our exposure to fluctuations in interest rates in the near future. At December 31, 1998, our total outstanding debt consisted of five issues of fixed rate, senior subordinated notes and our credit facility, which has a variable interest rate: FIXED RATE DEBT:
EFFECTIVE INTEREST PAYMENTS PRINCIPAL BALANCE FAIR VALUE INTEREST RATE MATURITY DUE - ----------------- -------------- ------------- -------- ----------------- $100.0 million $104.0 million 11.88% 2005 Semi-Annually $ 0.3 million $ 0.3 million 11.88% 2005 Semi-Annually $150.0 million $147.0 million 10.66% 2007 Semi-Annually $200.0 million $190.0 million 10.05% 2007 Semi-Annually $250.0 million $253.8 million 11.35% 2008 Semi-Annually
No principal repayments are due under these notes until maturity. If at maturity we refinanced these notes at interest rates that are a 1/8 percentage point higher than shown above, our per annum interest costs would increase by $0.9 million. Based on the outstanding balances at December 31, 1998, a hypothetical immediate 1/8 percentage point change in interest rates would change the fair value of our fixed rate debt obligations by approximately $4.4 million. VARIABLE RATE DEBT:
WEIGHTED AVERAGE PRINCIPAL BALANCE FAIR VALUE INTEREST RATE MATURITY INTEREST PAYMENTS DUE - ----------------- ------------- ---------------- -------- --------------------- $40.0 million $40.0 million 7.62% 2004 Quarterly
34 36 Our credit facility bears interest at floating rates and has a maturity of 2004. As of December 31, 1998, $40.0 million was outstanding under the credit facility and approximately $160.0 million was available. Based on weighted average borrowings outstanding under the credit facility during fiscal year 1998, a 1/8 percentage point change in our weighted average interest rate would have caused interest expense to increase or decrease by approximately $0.2 million. Repayments under the credit facility may be made at anytime without penalty. Metrocall currently has an interest rate cap agreement in place that caps its interest rate on its floating rate debt at 8 1/2% on up to $50.0 million of outstanding borrowings. This agreement expires April 2, 2000. 35 37 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-27 Schedule II Valuation and Qualifying Accounts............. F-28
36 38 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-27 Schedule II Valuation and Qualifying Accounts............. F-28
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) 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)
37 39
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 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.(w) 10.36 Deed of Lease between Douglas and Joyce Jemal, as landlord, and Metrocall, as tenant, dated April 14, 1994.(x)
38 40
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 10.37 Lease Agreement dated December 20, 1983 between Beacon Communications Associates, Ltd. and a predecessor of Metrocall.(y) 10.38 Non-disclosure/No Conflict Agreement dated May 16, 1996 between Metrocall and Elliot H. Singer.(z) 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.(w) 11.1 Statement re computation of per share earnings.* 21.1 Subsidiaries of Metrocall, Inc.(w) 23.2 Consent of Arthur Andersen LLP, as independent public accountants for Metrocall.* 27.1 December 31, 1998 Financial Data Schedule.* 27.2 December 31, 1997 Financial Data Schedule.* 27.3 December 31, 1996 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. 39 41 (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 5, 1999. (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 Annual Report on Form 10-K for the year ended December 31, 1998 filed with the Commission on March 31, 1999. (x) 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. (y) 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. (z) Incorporated by reference to Metrocall's Tender Offer Statement on Schedule 14D-1, filed with the Commission on May 22, 1996. 40 42 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized on this 2nd day of July, 1999. METROCALL, INC. By: /s/ VINCENT D. KELLY ------------------------------------ Vincent D. Kelly Chief Financial Officer, Executive Vice President and Treasurer 41 43 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-27 Schedule II Valuation and Qualifying Accounts............. F-28
F-1 44 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Metrocall, Inc.: We have audited the accompanying consolidated balance sheets (as restated -- see Note 2) of Metrocall, Inc., and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows (all as restated -- see Note 2) 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. June 23, 1999 F-2 45 METROCALL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AS RESTATED) (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)........ 6,256 8,843 ---------- ---------- Total current assets............................... 61,360 61,973 ---------- ---------- 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.................................... 790,128 894,707 OTHER ASSETS................................................ 1,947 2,595 ---------- ---------- TOTAL ASSETS....................................... $1,078,023 $1,251,038 ========== ========== 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 C 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....................................... (165,976) (306,885) ---------- ---------- 170,505 33,780 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $1,078,023 $1,251,038 ========== ==========
The accompanying notes are an integral part of these consolidated balance sheets. F-3 46 METROCALL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AS RESTATED) (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..................... 29,696 69,254 115,432 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 ----------- ----------- ----------- 154,898 288,508 545,570 ----------- ----------- ----------- Loss from operations...................... (26,574) (29,092) (112,637) INTEREST AND OTHER INCOME (expense)................. (607) 156 849 INTEREST EXPENSE.................................... (20,424) (36,248) (64,448) ----------- ----------- ----------- LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM.............................................. (47,605) (65,184) (176,236) INCOME TAX BENEFIT.................................. 1,021 4,861 47,094 ----------- ----------- ----------- LOSS BEFORE EXTRAORDINARY ITEM...................... (46,584) (60,323) (129,142) EXTRAORDINARY ITEM (Note 5)......................... (3,675) -- -- ----------- ----------- ----------- Net loss.................................. (50,259) (60,323) (129,142) PREFERRED DIVIDENDS (Note 6)........................ (780) (7,750) (11,767) ----------- ----------- ----------- Loss attributable to common stockholders....... $ (51,039) $ (68,073) $ (140,909) =========== =========== =========== BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS: Basic and diluted loss per share before extraordinary item attributable to common stockholders................................... $ (2.91) $ (2.51) $ (3.43) Basic and diluted extraordinary item, net of income tax benefit............................. (0.23) -- -- ----------- ----------- ----------- Basic and diluted loss per share attributable to common stockholders............................ $ (3.14) $ (2.51) $ (3.43) =========== =========== =========== 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 47 METROCALL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AS RESTATED) (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................................ -- -- -- (50,259) (50,259) ---------- ---- -------- --------- -------- BALANCE, December 31, 1996................ 24,521,135 245 262,827 (97,903) 165,169 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................................ -- -- -- (60,323) (60,323) ---------- ---- -------- --------- -------- BALANCE, December 31, 1997................ 40,548,414 405 336,076 (165,976) 170,505 Issuance of shares in employee stock purchase plan and other (Note 7)..... 134,989 2 573 -- 575 Shares issued in settlement of litigation related to the ProNet Merger (Note 3)...................... 900,000 9 3,600 -- 3,609 Preferred dividends (Note 6)............ -- -- -- (11,767) (11,767) Net loss................................ -- -- -- (129,142) (129,142) ---------- ---- -------- --------- -------- BALANCE, December 31, 1998................ 41,583,403 $416 $340,249 $(306,885) $ 33,780 ========== ==== ======== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 48 METROCALL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AS RESTATED) (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1997 1998 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.............................................. $ (50,259) $ (60,323) $(129,142) 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.......... (450) 2,531 (1,693) 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 49 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 $50.3 million, $60.3 million and $129.1 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 $112.6 million. In addition, at December 31, 1998, the Company had an accumulated deficit of approximately $306.9 million and a deficit in working capital of $41.8 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 Restatement of Financial Statements During 1996 and 1997, the Company was billed for local transport charges by certain Regional Bell Operating Companies ("RBOCs") and the largest independent telephone company. The Company disputes these billings under the Telecommunications Act of 1996 (the "1996 Act") (see Note 8). The Company initially expensed amounts as incurred for these disputed charges. Subsequently, when identified as local transport charges, the Company reversed the expense and recorded payments made for these disputed billings as receivables. In June 1999, after discussions with the staff of the SEC in connection with its review of registration statements filed by the Company, the Company restated its financial statements to reflect amounts paid in 1996 and 1997 as an expense in the period incurred and not as a receivable. Collection of amounts are contingent on a successful FCC ruling (see Note 8). If amounts are collected from these RBOCs and the largest independent telephone company for reimbursement of amounts paid by the Company, the Company will recognize the collections as a reduction of service, rent and maintenance expense in the statement of operations in the period received. F-7 50 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The impact of this restatement increased the Company's loss before extraordinary item, net loss and net loss per basic and diluted share attributable to common stockholders as follows:
1996 1997 1998 -------- -------- --------- Loss before extraordinary item -- previously reported....... $(46,476) $(57,322) $(173,578) Loss before extraordinary item -- as restated............... (47,605) (65,184) (176,236) Net loss -- previously reported............................. $(49,130) $(52,461) $(126,484) Net loss -- as restated..................................... (50,259) (60,323) (129,142) Basic and diluted loss per share before extraordinary item attributable to common stockholders -- previously reported.................................................. $ (2.84) $ (2.22) $ (3.37) Basic and diluted loss per share before extraordinary item attributable to common stockholders -- as restated........ (2.91) (2.51) (3.43) Basic and diluted loss per share attributable to common stockholders -- previously reported....................... $ (3.07) $ (2.22) $ (3.37) Basic and diluted loss per share attributable to common stockholders -- as restated............................... (3.14) (2.51) (3.43)
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. 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. F-8 51 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Cash and Cash Equivalents Cash equivalents consist primarily of repurchase agreements, all having maturities of ninety days or less when purchased. The carrying amount reported in the accompanying balance sheets for cash equivalents approximates fair value due to the short-term maturity of these instruments. Property and Equipment Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the following estimated useful lives.
YEARS ----- Buildings and leasehold improvements................. 10-31 Furniture and office equipment....................... 5-10 Vehicles............................................. 3-5 Subscriber paging equipment.......................... 3 Transmission and plant equipment..................... 5-12
All new pagers are depreciated using the half-year convention upon acquisition. Pagers sold are recorded in the consolidated statement of operations at their net book value at the date of sale. Betterments to acquired pagers and the net book value of lost pagers are charged to depreciation expense. Pagers leased to customers under operating leases continue to be depreciated over their remaining useful lives. As of December 31, 1997 and 1998 the balance of subscriber equipment was $64.1 million and $101.8 million, respectively, net of accumulated depreciation of $63.0 million and $87.8 million, respectively. 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.................................. 194,675 198,692 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 -------- -------- $790,128 $894,707 ======== ========
Debt financing costs represent fees and other costs incurred in connection with the issuance of long-term debt. These costs are amortized as interest expense over the term of the related debt using the effective interest rate method. F-9 52 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Long-Lived Assets Long-lived assets and identifiable intangibles, including goodwill allocated thereto, to be held and used are reviewed for impairment on a periodic basis and whenever events or changes in circumstances indicate that the carrying amount should be reviewed. Impairment is measured by comparing the book value to the estimated undiscounted future cash flows expected to result from use of the assets and their eventual disposition. 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. The Company annually evaluates enterprise level goodwill for impairment by comparing estimated future undiscounted cash flows over the remaining life of the goodwill to the carrying value of the goodwill. If an impairment exists, entity level goodwill is written down to its fair value based on estimated future cash flows of the Company discounted at risk adjusted interest rates. 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) F-10 53 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 $5.5 million for a total purchase price of $58.8 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) for a total price of $55.1 million. 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 total purchase price was $205 million. The cash portion of the purchase price, including fees and expenses, was funded through borrowings under the Company's credit facility. 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 13,007 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........................................... -- 50,516 -- Liabilities assumed................................ (3,467) (226,417) (30,531) Direct acquisition costs........................... (456) (6,277) -- Deferred income tax liability...................... -- (113,199) (73,103) ------- --------- -------- Total purchase price allocation $58,825 $ 55,068 $205,000 ======= ========= ======== Cash paid.......................................... $25,000 $ 55,068 $110,000 Capital stock issued............................... 33,825 -- 95,000 ------- --------- -------- $58,825 $ 55,068 $205,000 ======= ========= ========
F-11 54 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 of AMD 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.................... $(213,288) $(165,680) Loss per share attributable to common stockholders.......... $ (5.26) $ (4.04)
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. 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: Tax refunds............................................... $ -- $ 2,000 Inventory................................................. 2,663 2,406 Prepaid advertising....................................... 1,603 1,101
F-12 55 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ------------------ 1997 1998 ------- ------- Deposits.................................................. 1,151 1,258 Other..................................................... 839 2,078 ------- ------- TOTAL............................................. $ 6,256 $ 8,843 ======= ======= 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. F-13 56 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 ======== ======== ======== ========
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. The Credit Agreement also includes a material adverse effect clause under which the credit facility could be in default if there is any material adverse effect upon the business, assets, liabilities, financial condition, results of operations, properties or business of the Company. The Company believes that the declaration of a material adverse effect default by its lenders is remote. 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. F-14 57 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. F-15 58 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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
F-16 59 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. F-17 60 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 F-18 61 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) premium, as defined. After November 15, 2001, the Series A Preferred Stock may be redeemed for the stated value of $250 per share, without a premium. Holders of 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 F-19 62 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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. F-20 63 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 F-21 64 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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............. $(50,718) $(72,664) $(146,673) Pro forma loss attributable to common stockholders.................................... (54,393) (72,664) (146,673) Pro forma loss per share before extraordinary item attributable to common stockholders............. (3.12) (2.68) (3.57) Pro forma loss per share attributable to common stockholders.................................... (3.35) (2.68) (3.57)
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. 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
F-22 65 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. Interconnect Complaint The Company has filed complaints with the FCC against a number of 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 of 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 believes it is owed refunds from certain of the RBOCs and the largest independent telephone company related to such local transport charges paid during 1996 and 1997 of approximately $11.6 million and $10.7 million, respectively. These amounts represent management's estimate; however, as these LEC refunds are contingent upon a successful ruling on the Company's complaint, they have not been recorded in the accompanying financial statements as of December 31, 1997 and 1998. Upon receipt, the Company will recognize collections as a reduction of service, rent and maintenance expense in the statement of operations. The Company stopped paying and expensing local transport charges in 1998. Certain of the RBOCs have stopped assessing the F-23 66 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company such charges and have refunded the Company amounts due, however, certain of the RBOCs have continued to bill the Company for local transport charges pending resolution of the Company's FCC complaints. Amounts billed to the Company in 1998 by these RBOCs, which it has not paid or expensed were approximately $7.0 million at December 31, 1998. The Company has not recorded such amounts as an expense because it believes it is unlikely it will be obligated under the 1996 Act to pay such amounts. 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.......................... 106,435 111,932 --------- --------- Total deferred tax assets......................... 119,526 139,350 ========= ========= 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................................... (107,641) (117,156) --------- --------- $(155,930) $(209,642) ========= =========
F-24 67 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................................................. (24.7) (9.1) (8.4) Permanent differences....................................... (11.8) (22.7) (6.1) ----- ----- ---- 2.1% 7.5% 26.7% ===== ===== ====
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. F-25 68 METROCALL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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...... (4,932) (26,262) (6,698) (23,654) (6,272) (25,865) (11,190) (36,856) Loss attributable to common stockholders..... (13,812) (32,672) (14,669) (31,157) (17,088) (33,771) (22,504) (43,309) Loss per share attributable to common stockholders............ (0.56) (0.80) (0.59) (0.76) (0.59) (0.83) (0.77) (1.04)
The above unaudited quarterly financial data has been restated as described in Note 2. The impact of this restatement by quarter is shown below (in thousands, except per share amounts):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------------- ------------ --------------- ---------------- 1997 1998 1997 1998 1997 1998 1997 1998 ----- ------ ----- ---- ------ ------ ------ ------- Revenues..................................... $ -- $ -- $ -- $-- $ -- $ -- $ -- $ -- Increase (decrease) in loss from operations................................. 504 2,124 756 -- 1,068 2,118 5,534 (1,584) Increase (decrease) in loss attributable to common stockholders........................ 504 2,124 756 -- 1,068 2,118 5,534 (1,584) Increase (decrease) in loss per share attributable to common stockholders........ 0.02 0.05 0.04 -- 0.04 0.06 0.19 (0.04)
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-26 69 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 June 23, 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-28 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. June 23, 1999 F-27 70 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 BEGINNING COSTS AND AT END DESCRIPTION OF YEAR EXPENSES ACQUIRED(1) DEDUCTIONS(2) OF 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-28 71 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 3.1 Restated Certificate of Incorporation of Metrocall, Inc. (Metrocall).(w) 3.2 Eighth Amended and Restated Bylaws of Metrocall.(w) 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.(w) 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) 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)
72
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 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.(w) 10.36 Deed of Lease between Douglas and Joyce Jemal, as landlord, and Metrocall, as tenant, dated April 14, 1994.(x) 10.37 Lease Agreement dated December 20, 1983 between Beacon Communications Associates, Ltd. and a predecessor of Metrocall.(y) 10.38 Non-disclosure/No Conflict Agreement dated May 16, 1996 between Metrocall and Elliot H. Singer.(z) 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.(w) 11.1 Statement re computation of per share earnings.* 21.1 Subsidiaries of Metrocall, Inc.(w) 23.2 Consent of Arthur Andersen LLP, as independent public accountants for Metrocall.* 27.1 December 31, 1998 Financial Data Schedule.* 27.2 December 31, 1997 Financial Data Schedule.* 27.3 December 31, 1996 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 Metrocall'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.
73 (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 5, 1999. (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 Annual Report on Form 10-K for the year ended December 31, 1998 filed with the Commission on March 31, 1999. (x) 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. (y) 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. (z) Incorporated by reference to Metrocall's Tender Offer Statement on Schedule 14D-1, filed with the Commission on May 22, 1996.
EX-11.1 2 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11.1 METROCALL, INC. STATEMENT RE COMPUTATION OF EARNINGS PER SHARE (AS RESTATED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 1996 1997 1998 ---------- --------- ---------- Net loss $ (46,584) $ (60,323) $ (129,142) Preferred dividends (780) (7,750) (11,767) ---------- --------- ---------- Net loss before extraordinary item attributable to common stock holders (47,364) (68,073) (140,909) Extraordinary item (3,675) ---------- --------- ---------- Net loss attributable to common stockholders $ (51,039) $ (68,073) $ (140,909) ========== ========= ========== Weighted-average shares outstanding: Shares outstanding, beginning of period 14,626 24,521 40,548 Shares issued in acquisitions 1,619 2,492 Share issued for exercise of stock options 2 1 Shares issued in settlement of litigation 390 Shares issued in employee stock purchase plan 6 73 91 --------- --------- ---------- Weighted-average shares outstanding 16,253 27,087 41,030 ========= ========= ========== Net loss before extraordinary item attributable to common stockholders $ (2.91) $ (2.51) $ (3.43) Extraordinary item (0.23) ---------- ---------- ---------- Loss per share attributable to common stockholders $ (3.14) $ (2.51) $ (3.43) ========== ========= ========== EX-23.2 3 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K/A into the Company's previously filed Registration Statements on Form S-3, File No. 33-81606; Form S-3, File No. 33-92520; Form S-3, File No. 333-13123; Form S-3, File No. 333-19139; Form S-3, File No. 333-24607; Form S-3, File No. 333-31719; Form S-8, File No. 33-83452; Form S-8, File No. 33-99556; Form S-8, File No. 333-29595; Form S-8, File No. 333-72279 and Form S-8, File No. 333-71239. Arthur Andersen LLP Washington, D. C. July 1, 1999 EX-27.1 4 FINANCIAL DATA SCHEDULE DATED 12/31/98
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 8,436 0 50,890 6,196 2,406 61,973 459,830 168,067 1,251,038 103,801 743,334 160,742 0 416 33,364 1,251,038 48,372 464,724 31,791 545,570 (849) 13,418 64,448 (176,236) (47,094) (129,142) 0 0 0 (140,909) (3.43) (3.43)
EX-27.2 5 FINANCIAL DATA SCHEDULE DATED 12/31/97
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 24,896 0 37,051 6,843 2,663 61,360 339,945 (115,357) 1,078,023 98,107 599,941 53,982 0 405 170,100 1,078,023 39,464 289,364 29,948 288,508 (156) 9,963 36,248 (65,184) (4,861) (60,323) 0 0 0 (68,073) (2.51) (2.51)
EX-27.3 6 FINANCIAL DATA SCHEDULE DATED 12/31/1996
5 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 10,917 0 23,866 2,961 0 36,374 230,672 (77,260) 645,448 44,770 594,838 31,231 0 245 164,924 645,448 25,928 149,957 21,633 154,898 607 4,575 20,424 (47,605) (1,021) (46,584) 0 (3,675) 0 (51,039) (3.14) (3.14)
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