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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-21924
METROCALL, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 54-1215634
(State of incorporation) (I.R.S. Employer Identification No.)
6677 RICHMOND HIGHWAY, ALEXANDRIA, 22306
VIRGINIA (Zip Code)
(Address of Principal Executive
Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 660-6677
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
COMMON STOCK ($.01 PAR VALUE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the Registrant was approximately $139.1 million based on the closing sales price
on March 1, 1999.
COMMON STOCK, PAR VALUE $0.01 -- 41,639,878 SHARES OUTSTANDING ON MARCH 1, 1999
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of the Registrant to
be held May 5, 1999 will be filed with the Commission within 120 days after the
close of the fiscal year and are incorporated by reference into Part III.
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1: Business.................................................... 3
ITEM 2: Properties.................................................. 14
ITEM 3: Legal Proceedings........................................... 14
ITEM 4: Submission of Matters to a Vote of Security Holders......... 14
PART II
ITEM 5: Market for Metrocall's Common Stock and Related Stockholder
Matters................................................... 15
ITEM 6: Selected Financial Data..................................... 17
ITEM 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
ITEM 7A: Quantitative and Qualitative Disclosures About Market
Risk...................................................... 32
ITEM 8: Financial Statements and Supplementary Data................. 32
ITEM 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 32
PART III
ITEM 10: Directors and Executive Officers of the Registrant.......... 32
ITEM 11: Executive Compensation...................................... 32
ITEM 12: Security Ownership of Certain Beneficial Owners and
Management................................................ 32
ITEM 13: Certain Relationships and Related Transactions.............. 32
PART IV
ITEM 14: Exhibits, Financial Statement Schedule and Reports on Form
8-K....................................................... 33
Signatures.................................................................. 37
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes or incorporates forward-looking
statements. We have based these forward-looking statements on our current
expectations and projections about future events. These forward-looking
statements are subject to risks, uncertainties and assumptions including, among
other things those discussed under "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations". These uncertainties
include:
- our high leverage and need for substantial capital;
- our ability to service debt;
- our history of net operating losses;
- the restrictive covenants governing our indebtedness;
- the amortization of our intangible assets;
- our ability to integrate the AMD acquisition;
- our ability to implement our business strategies;
- the impact of competition and technological developments;
- satellite transmission failures;
- subscriber turnover;
- our ability to implement our Year 2000 readiness plan;
- litigation;
- regulatory changes; and
- dependence on key suppliers.
Other matters set forth in this Annual Report on Form 10-K may also cause
actual results to differ materially from those described in the forward-looking
statements. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Annual Report on Form 10-K might not occur.
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PART I
ITEM 1. BUSINESS
GENERAL
We are a leading provider of local, regional and national paging and other
wireless messaging services. Through our nationwide wireless network we provide
messaging services to over 1,000 U.S. cities, including the top 100 Standard
Metropolitan Statistical Areas (SMSAs). Since 1993, our subscriber base has
increased from less than 250,000 to more than 5.6 million. We have achieved this
growth through a combination of internal growth and a program of mergers and
acquisitions. As of December 31, 1998, we were the second largest messaging
company in the United States based on the number of subscribers.
PAGING AND WIRELESS MESSAGING INDUSTRY OVERVIEW
We believe that paging and wireless messaging is the most cost-effective
and reliable means of conveying a variety of information rapidly over a wide
geographic area either directly to a person traveling or to various fixed
locations. Conventional paging, as a one-way communications tool, is a
lower-cost way to communicate than existing two-way communication methods. For
example, the pagers and air time required to transmit a typical message cost
less than the equipment and air time for cellular and personal communications
services (PCS) telephones. Furthermore, pagers operate for longer periods due to
superior battery life, often exceeding one month on a single battery. Paging
subscribers generally pay a flat monthly service fee, which covers a certain
number of messages sent to the subscriber. In addition, pagers are unobtrusive
and portable and historically have withstood substantial technological advances
in the communications industry. Many mobile telephone customers use pagers in
conjunction with their telephones to screen incoming calls and minimize battery
wear and usage charges.
Although the U.S. paging industry has over 500 licensed paging companies,
we estimate that the ten largest paging companies, including us, currently serve
approximately 75% of the total paging subscribers in the United States. These
paging companies are facilities-based, Commercial Mobile Radio Service (CMRS)
providers, previously classified as either Radio Common Carrier (RCC) or Private
Carrier Paging (PCP) operators, servicing over 100,000 subscribers each in
multiple markets and regions.
We believe that the future of the paging and wireless communications
industry will include technological improvements that permit increased service
and applications, and consolidation of smaller, single-market operators and
larger, multi-market paging companies.
Recent technological advances include new paging services such as
"confirmation" or "response" paging that send a message back to the paging
system confirming that a paging message has been received, digitized voice
paging, two-way paging and notebook and sub-notebook computer wireless data
applications. Narrowband PCS offers the ability to provide some of these
services on an expanded basis. Narrowband PCS utilizes a two-way spectrum, which
offers advantages to the traditional one-way spectrum that some paging networks
use. The two-way spectrum enables a paging device to emit a signal that notifies
the network of the paging device's location and permits the network to send the
message to transmitters closest to the paging device. In contrast, a one-way
spectrum requires the message to be sent to all transmitters within a geographic
area and not necessarily to those transmitters closest to the paging device.
Therefore, a two-way spectrum utilizes less air time of the paging network and
creates more air time capacity particularly in the areas farthest from the
paging device. While these narrowband PCS services have been proven
technologically feasible, their economic viability has not been fully tested
based on the cost of licenses, infrastructure and capital requirements;
increased operating costs; and competitive, similarly priced two-way broadband
PCS and cellular services.
OUR BUSINESS STRATEGY
Our business strategy is to increase shareholder value by expanding our
subscriber base and increasing revenues, cost efficiencies, and operating cash
flow. Operating cash flow is defined as EBITDA (earnings before interest,
taxes, depreciation and amortization). The principal elements of this strategy
include the following:
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Manage Capital Requirements and Increase Free Cash Flow. Our key financial
objective is to manage capital requirements and increase free cash flow. We
define free cash flow as operating cash flow less capital expenditures and
interest expense. To achieve this objective, we focus on the following:
- focusing on selling, rather than leasing, paging units in order to reduce
capital expenditure requirements per subscriber;
- increasing revenues and cash flow through sales of value-added advanced
messaging and information services which generate higher average monthly
revenue per unit (ARPU) than standard messaging or paging services; and
- increasing the utilization of our fully developed nationwide network to
serve more customers per frequency and enter new markets with minimal
capital outlay.
Maximize Internal Growth Potential. We have grown internally by broadening
our distribution network and expanding our target market to capitalize on the
growing appeal of messaging and other wireless products and services. Since
December 31, 1994, we have added approximately 1.4 million new subscribers
through internal growth. We have expanded our direct and indirect distribution
channels to gain access to different market segments. As part of this strategy,
we have formed strategic alliances with:
- local, long-distance, cellular and PCS providers, such as AT&T Wireless
Services Inc. (AT&T Wireless), Bell Atlantic, Qwest, Vanguard Cellular and
ALLTEL;
- cable television companies, such as Adelphia Cable Communications and
Suburban Cable; and
- retail outlets, such as Circle K Stores, AutoZone, Ritz Camera and
Walgreens.
We have also developed strategic marketing relationships with America
Online and Washington Gas and Light Company, which are designed to further
enhance our market presence. We have also entered into a broadband PCS alliance
with AT&T Wireless, which will enable us to further diversify our product mix by
distributing AT&T's digital PCS wireless products and AT&T's Digital One Rate
(SM) service plans via our direct distribution channels. In 1999, we will
continue to expand our multi-tiered distribution network and marketing
relationships. We believe that these initiatives will continue to increase our
sales and broaden the range and diversity of products that we currently offer to
consumers.
Expand Market Presence through Consolidation. We have expanded our
subscriber base and geographic coverage through consolidation. On October 2,
1998, we acquired the Advanced Messaging Division (AMD) of AT&T Wireless, the
paging operations of AT&T. The AMD acquisition increased the size of our
subscriber base by adding 1.2 million subscribers to our existing customer base.
As part of the acquisition, we also acquired a 50KHz/50KHz narrowband personal
communications service license (NPCS license). We expect to realize the
following benefits from the AMD acquisition:
- Greater Scale and Scope. The AMD acquisition increases our geographic
presence to include Alaska, Arkansas, Colorado, Kansas, Minnesota,
Missouri, Oklahoma, Oregon, Utah and Washington. In addition, it adds to
our existing presence in the Northeast, Southeast, Midwest, Mid-Atlantic
and Southwest and West.
- Premium, High Revenue Customer Base. The AMD acquisition adds premium,
high revenue subscribers to our existing customer base. AMD's ARPU has
historically been higher than the paging industry average. AMD provided
its paging and messaging services to large business customers, which
typically generate higher ARPU than individual customers. Approximately
23% of AMD's subscribers were high-ARPU alphanumeric customers, one of the
highest percentages in the industry.
- Synergies. As we integrate AMD's operations with our own paging
operations, we expect to realize significant synergies. For example, AMD
provided nationwide paging services without the benefit of a nationwide
network. As a result, AMD spent $29.3 million in 1997 reselling other
carriers' services, which adversely affected its margins. Over time, we
expect to switch a portion of AMD's customers to our nationwide network,
which will reduce third-party costs and increase the utilization of our
network. In addition, we expect to realize significant annual cost
savings from elimination of duplicative AMD functions. We expect to
complete the integration of AMD by the fourth quarter of 1999.
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Since July 1996, we have acquired the following companies, which have added
approximately 3.6 million subscribers:
ACQUIRED COMPANY ACQUISITION DATE NO. OF SUBSCRIBERS
---------------- ---------------------- ------------------
Parkway Paging, Inc. (Parkway)............... July 16, 1996 140,000
Satellite Paging and Messaging Network
(collectively, Satellite).................. August 30, 1996 100,000
A+ Network, Inc. (A+ Network)................ November 15, 1996 660,000
Page America Group, Inc. (Page America)...... July 1, 1997 198,000
ProNet Inc. (ProNet)......................... December 30, 1997 1,286,000
AMD.......................................... October 2, 1998 1,215,000
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Total.............................. 3,599,000
=========
We believe that our enhanced nationwide coverage will give us a competitive
advantage in gaining additional subscribers in the future. We may continue to
expand our geographic penetration and subscriber base through future
acquisitions, but only if we identify potential candidates that satisfy certain
criteria. These criteria include valuation, geographic coverage, regulatory
licenses, type of consideration, availability of financing and accretive and
de-leveraging benefits.
Pursue Cost-Efficient Technological Advances. We have pursued
technological advances that are proven, cost-efficient and consistent with our
strategy to increase free cash flow. For instance, we have historically
concentrated our capital spending on developing our local, regional and
nationwide one-way paging networks. We have also recently taken steps to enter
the two-way paging business now that the technology has been proven and gained
initial market acceptance. As part of the AMD acquisition, we acquired the NPCS
license in October 1998. Also, in October 1998, we entered into a five-year
strategic alliance with PageMart Wireless, Inc, a leading provider of paging and
messaging services to develop and offer narrowband PCS. Our alliance consists of
two phases: a switch-based resale phase and a shared network build-out phase. In
the first phase, we will provide narrowband PCS using PageMart's advanced
messaging transmit and receive network. We began offering guaranteed-delivery
messaging in the first quarter of 1999. We expect the first phase to permit us
to begin offering two-way messaging by the middle of 1999. In the second phase,
we will install and operate our own outbound narrowband PCS frequency on our
nationwide network and PageMart will provide turnkey installation and operation
of a receiver network. We believe this alliance will enable us to comply with
the FCC's mandated narrowband PCS build-out requirements. Under the alliance, we
will share certain capital expenditures and operating expenses. We believe that
the PageMart alliance will enable us to provide narrowband PCS in a faster and
more cost-effective manner than if we developed the network ourselves. The
development of the NPCS license acquired in the AMD acquisition and the PageMart
alliance will allow us to increase capacity and reduce our long-term cost of
message delivery through frequency reuse. It will also permit us to enter the
market for advanced messaging services, including two-way paging and data
intensive messaging. We are also pursuing other strategic marketing and
development efforts to deliver advanced messaging services, such as e-mail
notification and user-specific data services, to our paging subscribers through
the Internet.
Optimize Customer Relationships. We seek to maintain a close relationship
with our existing customers and to develop stronger relationships with the
subscribers of newly acquired companies by maintaining decentralized sales,
marketing and customer service operations and providing value-added services
tailored to customers' needs. The value-added services we provide are billed as
enhancements to our basic service and generally result in higher ARPU. Our
specific value-added services include:
- Direct View, which permits organizations to use our wireless network to
broadcast news, sports, stock data and general and customized information
to LED display signs;
- Pager ID, which identifies the name of the person placing the call to the
pager;
- customized wireless messaging applications for specific segments of the
public, such as the medical community; and
- an enterprise-wide messaging management software and database system
Maintain Low Cost Operations and Improve Margins. A key component of our
business strategy is to make investments that improve our operating efficiencies
thereby leading to margin improvement. In 1998, our operating efficiencies
improved because we
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continued to invest in high quality, large capacity infrastructure and systems
updates and to centralize administrative and back-office functions. During
1998, we implemented a new financial accounting management information system,
completed a number of billing system upgrades, added a new inventory management
system and began using an Internet based tower site management application. We
also integrated the administrative functions of newly acquired companies which
enabled us to reduce our general and administrative expenses per subscriber.
We also believe that as use of our strategic alliances and other indirect
distribution channels increase, our operating costs will decrease as
participants in these channels typically bear a portion of our sales and
customer service expenses. Similarly, we believe our focus on maximizing monthly
recurring revenues and promoting value-added services will improve operating
margins. We also recently entered into a strategic long-term arrangement with
Motorola to optimize supply chain logistics. As part of this arrangement,
Motorola will ship pager units directly to our strategic retail partners. In
addition, we and Motorola will work to develop an electronic data interchange to
enhance Motorola's ability to supply page units to our customers. We expect this
distribution arrangement to reduce handling costs, inventory levels and cycle
times.
METROCALL'S PAGING AND WIRELESS MESSAGING OPERATIONS
Services and Subscribers
We currently provide four basic paging and wireless messaging services:
- digital display pagers, which permit a subscriber to receive a telephone
number or other numeric coded information and to store several such
numeric messages that the customer can recall when desired;
- alphanumeric display pagers, which allow the subscriber to receive and
store text messages from a variety of sources including the Internet;
- digital broadband and PCS phones and other products of AT&T under a
distribution agreement with AT&T Wireless, which allows users to place and
receive calls under AT&T's Digital One Rate(SM) service plans;
- advanced messaging devices, which provide guaranteed delivery of
messages.
We provide digital display and alphanumeric display in all of our markets.
Approximately 86% of our pagers in service at December 31, 1998 were digital
display. Alphanumeric display service, which was introduced in the mid-1980s,
has grown at increasing rates as users and dispatch centers overcome technical
and operational obstacles to sending messages. Currently, we market, under the
service mark "Notesender," a computer program designed for use in transmitting
alphanumeric messages from personal computers to pagers. In addition,
alphanumeric paging access is available via our Internet website,
www.metrocall.com, where any Internet user can access our on-line alphanumeric
paging software. Approximately 14% of our pagers in service at December 31,
1998 were alphanumeric display.
We also provide enhancements and ancillary services such as:
- personalized automated answering services, which allow a subscriber to
record a message that greets callers who reach the subscriber's voice
mailbox;
- message protection, which allows a subscriber to retrieve any calls that
come in during the period when the subscriber was beyond the reach of our
radio transmitters;
- annual loss protection, which allows subscribers of leased pagers to
limit their cost of replacement upon loss or destruction of the pager; and
- maintenance services, which are offered to subscribers who own their own
pagers.
Subscribers who use paging and wireless messaging services have
traditionally included small business operators and employees, professionals,
medical personnel, sales and service providers, construction and tradespeople,
and real estate brokers and developers;
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however, the appeal of paging to the residential user is growing, with service
increasingly being adopted by individuals for private, nonbusiness uses such as
communicating with family members and friends.
Our subscribers either buy or lease their pagers for local, regional,
multi-regional or nationwide service. We receive additional revenue for enhanced
services such as voice mail, personalized greetings and One Touch(TM) service,
which is an advanced messaging service. Volume discounts on lease payments and
service fees are typically offered to large volume subscribers. In some
instances, our subscribers are resellers that purchase services at substantially
discounted rates, but are responsible for marketing, billing, collection and
related costs with respect to their customers.
Sales and Marketing
Our sales and marketing strategy incorporates a multi-tiered distribution
system designed to maximize internal growth and geographic presence. At December
31, 1998, the Company, through more than 250 sales and administrative offices
and retail outlets, employed a sales force of 1,505 sales representatives,
including our direct sales staff, telemarketing professionals and sales
representatives who call on retailers and resellers. Our major distribution
channels are described briefly below.
Direct Distribution Channels
- Direct Sales. Our direct sales personnel sell our messaging services and
products primarily to businesses, placing special emphasis on key accounts
of strategic importance to us. Our direct sales personnel generally target
businesses that have multiple work locations or have highly mobile
employees. Our sales compensation plans are designed to motivate direct
sales personnel to focus on selling rather than leasing pagers, which
reduces capital requirements, and to increase sales of higher revenue
product enhancements, such as nationwide coverage, alphanumeric service,
voice mail and One Touch(TM).
- Database Telemarketing. Our internal, professionally trained staff
generates sales by utilizing computerized lead management and
telemarketing techniques combined with our proprietary lead screening and
development protocol. Using acquired lists to focus their efforts, our
internal staff targets groups of consumers and small businesses who have a
propensity to use paging and messaging services but are either in a region
where we do not have a direct sales effort or have not been reached by
other distribution channels. In our marketing efforts, we use only
commercially available public information to analyze and target new
customers and do not use "Customer Proprietary Network Information" in a
way that would conflict with the Communications Act of 1934, as amended
(the "Communications Act"), or the Federal Communications Commission (FCC)
rules.
- Company-Owned Retail Stores. At December 31, 1998, we had over 100
Company-owned retail outlets. Our retail outlets are designed to sell
higher ARPU services to the consumer market segment directly while
providing us with a point of presence to enhance our brand recognition.
These retail outlets take a variety of forms, such as mall stores, kiosks,
mall carts, retail merchandising units and mall center locations. Products
sold to consumers at these locations include paging, messaging, cellular,
long distance and PCS services and related accessories. Many of these
locations function as customer service and payment centers in addition to
offices for direct sales representatives.
Indirect Distribution Channels
- Resellers. We sell resellers bulk paging services for resale to their
own business clients and individual customers. We issue one monthly bill
to each reseller who is responsible for marketing, billing and collection,
and equipment maintenance. Through this channel, we achieve high network
utilization at low incremental cost, but realize much lower ARPU than
through other distribution channels.
- Retail Outlets. We sell pagers on a wholesale basis to retail outlets,
such as office supply, electronics and general merchandise chains, for
resale to their customers. We select these outlets based on factors such
as the number of stores in a region and the extent of their advertising.
These outlets then sell the pager itself and provide limited customer
service to the consumer. We provide sales incentives and advertising
support, and train sales personnel to enhance a retail outlet's
effectiveness and to ensure that the customer is well educated regarding
the product.
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- Dealer Network. We contract with independent dealers, representatives
and agents, including such outlets as small cellular phone dealers and
independent specialty electronics stores. We typically use these dealers
to reach specific consumer niches (e.g., ethnic or non-English speaking
communities) and small businesses that are more efficiently accessed
through this channel than through our other distribution channels. In
addition to selling the pagers, independent dealers assist the subscriber
in choosing a service plan and collect the initial payments. We pay
independent dealers a commission when they place customers with us.
- Strategic Partners. We have entered into contractual agreements with
several selected national distribution partners who market our paging
services to their existing and future customers. We supply many of these
partners with custom branded turnkey solutions for network services,
products, customer services, billing, collections and fulfillment. Our
strategy is to provide these value-added services to enhance the business
relationship and margin opportunities for both parties. We have entered
into alliances with companies in the long distance, local exchange,
cable, Internet, retail, direct response and multi-level marketing
businesses and believe that these programs will help deliver paging
services to market segments that our other distribution channels may not
reach cost-effectively.
As part of the AMD acquisition, we signed an exclusive five-year national
distribution agreement with AT&T Wireless. Under the distribution
agreement, AT&T Wireless' retail stores exclusively offer our messaging
products. In addition, we are the exclusive supplier of messaging products
for AT&T and its affiliated companies that wish to sell paging and
advanced messaging services.
- Affiliates. Through the A+ Network merger in 1996, we acquired a network
of paging carriers or affiliates that resell services on the 152.480 MHz
private carrier paging frequency. These affiliates are independent owners
of paging systems in various markets throughout the nation who sell
expanded coverage to their customers. Utilizing our infrastructure, these
independent networks provide wide area and nationwide paging on a single
channel. We provide expanded coverage options for approximately 85,000
subscribers through our affiliate network at December 31, 1998.
Subscribers by Geographic Region. We set forth below the number of pagers
we have in service by geographic region.
NUMBER OF PAGERS IN SERVICE
DECEMBER 31,
---------------------------------
1996(1) 1997(2) 1998(3)
--------- --------- ---------
Northeast.......................................... 227,022 714,363 772,463
Mid-Atlantic....................................... 558,318 623,077 693,631
Southeast.......................................... 693,837 1,094,313 1,179,548
Midwest............................................ -- 232,105 400,150
Southwest.......................................... 248,846 756,459 1,356,218
West............................................... 414,328 610,519 768,829
Northwest.......................................... -- -- 488,711
--------- --------- ---------
Total.................................... 2,142,351 4,030,836 5,659,550
========= ========= =========
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(1) Includes approximately 0.9 million pagers in service we acquired from our
1996 merger and acquisitions.
(2) Includes approximately 1.5 million pagers in service we acquired from our
1997 merger and acquisition.
(3) Includes approximately 1.2 million pagers in service we acquired in the AMD
acquisition.
Subscribers by Distribution Channel. We set forth below the respective
numbers and percentages of pagers that we service through our distribution
channels:
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OWNERSHIP OF PAGERS IN SERVICE
DECEMBER 31,
------------------------------------------------------------------------
1996(1) 1997(2) 1998(3)
---------------------- ---------------------- ----------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
--------- ---------- --------- ---------- --------- ----------
DIRECT CHANNELS:
Company-owned and
leased to
subscribers..... 690,382 32% 1,184,193 29% 1,980,297 35%
Subscriber-owned
(COAM).......... 271,837 13 430,582 11 629,352 11
Company-owned
retail stores... 114,192 5 223,510 6 207,493 4
INDIRECT CHANNELS:
Resellers.......... 865,221 41 1,965,354 49 2,369,686 42
Strategic Partners
and
affiliates...... 130,142 6 140,625 3 274,844 5
Retail............. 70,577 3 86,572 2 197,878 3
--------- ----- --------- ----- --------- -----
Total...... 2,142,351 100.0 4,030,836 100.0 5,659,550 100.0
========= ===== ========= ===== ========= =====
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(1) Includes approximately 0.9 million pagers in service we acquired from our
1996 merger and acquisitions.
(2) Includes approximately 1.5 million pagers in service we acquired from our
1997 merger and acquisition.
(3) Includes approximately 1.2 million pagers in service we acquired in the AMD
acquisition.
Network and Equipment
We have developed a state-of-the-art paging system deploying current
technology, which achieves optimal building penetration, wide-area coverage and
the ability to deliver new and enhanced paging services. This existing paging
transmission equipment has significant capacity to support future growth.
Our paging services are initiated when telephone calls are placed to our
Company-maintained paging terminals. These state-of-the-art terminals have a
modular design that allows significant future expansion by adding or replacing
modules rather than replacing the entire terminal. Our paging terminals direct
pages to our primary satellite, which signals terrestrial network transmitters
providing coverage throughout the service area.
We have three exclusive nationwide licenses issued by the FCC and are
operating in each of the largest 100 SMSAs. We began operating the nationwide
network on one of those three channels in November 1993. We are also capable of
providing local paging in many markets served by the nationwide network by using
nationwide transmitters to carry local messages. Services provided through the
nationwide network are marketed to subscribers directly through our sales force
and indirectly through retailers and resellers. We also operate a series of
regional operating systems or networks consisting of primary networks serving
Arizona, California and Nevada, and the area from Boston to the Virginia/North
Carolina border.
In addition, we have initiated paging service through our "Global Messaging
Gateway," which is a satellite uplink facility located in Stockton, California.
We transmit a majority of our traffic through this facility. The facility
operates 24 hours per day, seven days per week. The use of this facility will
permit us to save costs as we phase out operating agreements with three
commercially owned satellite uplink facilities and will increase our control
over our paging system.
We do not manufacture any of the pagers or infrastructure equipment used in
our operations. While the equipment used in our paging operations is available
for purchase from multiple sources, we have historically limited the number of
suppliers to achieve volume cost savings and, therefore, depend on such
manufacturers to obtain sufficient inventory. We anticipate that equipment and
pagers will continue to be available to us in the foreseeable future, consistent
with normal manufacturing and delivery lead times but cannot assure you that we
will not experience unexpected delays in obtaining paging and infrastructure
equipment in the future. Such delays could have an adverse effect on our
operations and network development plans. We continually evaluate new
developments in paging technology in connection with the design and enhancement
of our paging systems and selection of products to be offered to subscribers.
As discussed above, we achieve cost savings by purchasing pagers at volume
discounts from a limited number of companies, including Motorola, Inc., from
which we currently purchase most of our pagers, and NEC America. We purchase our
transmitters and paging terminals from Motorola and Glenayre Electronics,
Incorporated.
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Management Systems and Billing
We centralize certain operating functions and utilize common and
distributed billing and subscriber management systems. This permits us to reduce
costs, increase operating efficiencies, obtain synergies from acquisitions, and
focus regional management on sales and distribution.
The functions we have centralized into our national operations center in
Alexandria, Virginia include accounting, management information systems, and
inventory and order fulfillment. We have integrated the information systems of
the companies we have acquired into our structure, with the exception of AMD's
systems for which integration efforts will be progressing throughout 1999.
We also maintain three national call centers which are critical factors in
marketing and servicing the nationwide network to all markets in the United
States. Our centers handle customer inquiries from existing and potential
customers and support our distribution channels initiatives. Our three centers
are staffed with approximately 385 employees. Each center offers a toll-free
access number. One of our centers is open seven days per week, 24 hours per day.
Our other two centers are open six days a week and provide emergency service
seven days a week, 24 hours a day. We attempt to satisfy customers upon initial
inquiry to avoid repeat calls, thereby increasing customer satisfaction and
decreasing costs. We employ state-of-the-art call management equipment (such as
an automated call distribution system and interactive voice response
capabilities) to provide quality customer service and to track both the
productivity and the quality of the performance of our customer service
representatives.
COMPETITION
The wireless communications industry is very competitive. We compete mainly
with other regional and national paging providers. Certain long-distance
carriers and local exchange carriers (LECs) have also begun, or have announced
their intention to begin, marketing paging services jointly with other
telecommunications services. We also compete with other companies that offer
wireless communications technology such as cellular telephone, specialized
mobile radio services and PCS. Some of our competitors have greater financial
resources than we do. We compete on the basis of price, coverage area, enhanced
services, transmission quality, systems reliability and customer service. We
believe we compare favorably with our competitors on these bases. However, to
respond to price competition, we may need to adjust our prices from time to
time, which may adversely affect our revenues and operating results.
Since 1988, we have competed with Paging Network, Inc. ("PageNet"), the
largest provider of paging services in the United States, in all of our major
markets. With our nationwide network, our principal competitors for national
accounts include, in addition to PageNet, Arch Communications Group, Inc.,
MobileMedia Communications, Inc. (using the trade name MobileComm), PageMart and
SkyTel Corporation. We are also aware of other paging companies that offer, or
intend to offer, nationwide paging services to their subscribers. In August
1998, Arch announced its intention to acquire the operations of MobileMedia,
which has been operating in bankruptcy since January 1997. Arch has stated that,
if this acquisition is consummated, the combined company would be the second
largest paging company based on number of subscribers.
In 1994, the FCC began auctioning licenses for new PCS spectrums. There are
two types of PCS, narrowband and broadband. Narrowband PCS provides enhanced or
advanced paging and messaging capabilities, such as "confirmation" or "response"
paging. Broadband PCS provides new types of communications devices that include
multi-functional portable phones and imaging devices. PCS providers compete
directly and indirectly with the Company. Many narrowband and broadband PCS
systems are now providing commercial service. We recently entered into the
PageMart alliance to develop and offer advanced messaging services on a
narrowband PCS platform and a distribution agreement with AT&T Wireless to offer
digital broadband PCS telephones.
Developments in the wireless telecommunications industry, such as broadband
PCS, and enhancements of current technology have created new products and
services that compete with the paging services we currently offer. There can be
no assurance that we will not be adversely affected by such technological change
or future technological changes.
GOVERNMENT REGULATION
From time to time, federal and state legislators propose legislation that
could affect our business, either beneficially or adversely, such as by
increasing competition or affecting the cost of our operations. We cannot
predict the impact of such legislative actions on our operations. Additionally,
the FCC and, to a lesser extent, state regulatory bodies, may adopt rules,
regulations or policies that may
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affect our business. The following description of certain regulatory factors
does not purport to be a complete summary of all present and proposed
legislation and regulations pertaining to our operations.
Federal. Our paging operations are subject to extensive regulation by the
FCC under the Communications Act. Under the Communications Act, we are required
to obtain FCC licenses for the use of radio frequencies to conduct our paging
operations within specified geographic areas. These licenses set forth the
technical parameters, such as maximum power and tower height, under which we may
use such frequencies. We have historically provided paging services as both a
RCC operator and a PCP operator. Traditionally, RCC frequencies were assigned on
an exclusive basis to a single licensee in a service area; RCCs were subject to
regulation by the states as well as by the FCC and were required to provide
service to anyone requesting such service. PCP frequencies were assigned on a
shared basis (i.e., multiple parties in the same area could apply for and obtain
a license to use the same frequency); there were restrictions on eligibility of
PCP customers; and the states were preempted from regulating PCP entry, rates,
operation, terms of service, etc.
In 1993, the FCC adopted new rules to provide "channel exclusivity" to PCP
operators operating on certain 929 MHz frequencies, provided the licensee meets
certain qualifications. We have obtained nationwide exclusivity on two of our
929 MHz frequencies and one 931 MHz frequency (one 929 MHz frequency is used for
the nationwide network; the other 929 MHz frequency was obtained in the
FirstPAGE USA, Inc. merger in 1994; the 931 MHz frequency was obtained in the
ProNet merger). Under the FCC's current rules, no other entity may apply
anywhere in the United States to operate on these frequencies. However, any
incumbent PCP licensees, other than us, on our two nationwide 929 MHz
frequencies may continue to operate on these frequencies, but those other
licensees are not allowed to expand their paging services beyond their existing
coverage areas. Additionally, on our other 929 MHz frequencies, we have local
exclusivity in the Chicago, Illinois area, and regional exclusivity in the
Northeast, Mid-Atlantic, and Southeast regions of the United States.
PCP channels below 900 MHz are still allocated on a shared basis. We
acquired a 152.480 MHz shared frequency network through our A+ Network merger.
Applications for those frequencies are first processed through a frequency
coordinator, who attempts to minimize overcrowding on a given frequency. The
coordinator then files the applications with the FCC, which processes them on a
first-come, first-served basis. So long as a given PCP frequency is not
congested with multiple licensees, the subscriber would not perceive any
differences between shared PCP services and exclusive paging services. In most
areas of the country where we hold shared PCP licenses, we are the only paging
operator, or one of only a few operators, licensed on that particular frequency
in that area.
The FCC also requires paging licensees to construct their stations and
begin service to the public within a specified period of time (under the
site-specific rules, one year), and failure to do so results in termination of
the authorization. Under the traditional site-specific approach to paging
licensing, a licensee received a construction permit for facilities at a
specific site, and that permit automatically terminated if the facilities were
not timely constructed (RCC paging licensees were also required to notify the
FCC upon commencement of service) and the licensee failed to request an
extension prior to the deadline. The failure to construct some facilities did
not, however, affect other facilities in a licensee's system that had been
timely constructed and placed into operation. However, certain services that we
plan to offer in the future are subject to harsher penalties for failure to
construct. For example, the NPCS license that we acquired in the AMD acquisition
is subject to the condition that we build sufficient stations to cover 750,000
square kilometers, or 37.5% of the U.S. population, by the fifth anniversary of
the initial license grant; by the tenth anniversary of the grant, we must build
sufficient stations to cover 1,500,000 square kilometers, or 75% of the U.S.
population. As a result of the PageMart alliance, we expect to meet the FCC's
build out requirements for both of these anniversaries.
In August 1993, as part of its Omnibus Budget Reconciliation Act (the "1993
Budget Act"), Congress amended the Communications Act to, among other things,
replace the prior RCC and PCP definitions with two newly defined categories of
mobile radio services: CMRS and Private Mobile Radio Service (PMRS). The CMRS
definition essentially supplants the prior RCC definition. The FCC has
determined that PCP and RCC paging services are classified as CMRS. The FCC has
adopted technical, operational and licensing rules for CMRS, which became
effective for us in August 1996.
Pursuant to authority granted by the 1993 Budget Act, the FCC has
"forborne" from enforcing against all CMRS licensees the following common
carrier regulations under Title II of the Communications Act: any interstate
tariff requirements, including regulation of CMRS rates and practices; the
collection of intercarrier contracts; certification concerning interlocking
directorates; and FCC approval relating to market entry and exit. Additionally,
the 1993 Budget Act preempted state authority over CMRS entry and rate
regulation.
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Paging licenses are issued by the FCC for terms of 10 years. Our current
licenses have expiration dates ranging from 1999 to 2009. Renewal applications
must be approved by the FCC. In the past, our FCC renewal applications have been
routinely granted. We are also required to obtain prior FCC approval for our
acquisition of radio licenses held by other companies, as well as transfers of
controlling interests of any entities that hold radio licenses. Although there
can be no assurance that any future renewal or transfer applications we file
will be approved or acted upon in a timely manner by the FCC, based on our
experience to date, we know of no reason to believe such applications would not
be approved or granted.
The Communications Act also places limitations on foreign ownership of CMRS
licenses. These foreign ownership restrictions limit the percentage of our stock
that may be owned or voted, directly or indirectly, by aliens or their
representatives, foreign governments or their representatives, or foreign
corporations. The Company's certificate of incorporation permits the redemption
of our common stock from stockholders where necessary to protect our compliance
with these requirements.
The FCC has authority to restrict the operation of licensed radio
facilities or to revoke or modify such licenses. The FCC may adopt changes to
its radio licensing rules at any time, and may impose fines for violations of
its rules. Some of our license applications were deemed "mutually exclusive"
with those of other paging companies. In the past, the FCC would have selected
among the mutually exclusive applicants by lottery; however, the FCC recently
dismissed all pending mutually exclusive paging applications, including ours, to
facilitate its transition to wide area licensing and auctions for paging
frequencies.
Paging licenses have traditionally been issued on a site-specific basis. In
February 1997, the FCC adopted rules to issue most paging licenses for large,
FCC-defined service areas. Although the rules are subject to a pending appeal
and petitions for reconsideration, if they become "final", the following changes
will occur. Licenses for 929 MHz PCP and 931 MHz RCC frequencies will be issued
for Rand McNally's "MTA" geographic areas; licenses for RCC frequencies in lower
frequency bands will be licensed in "Economic Areas" or "Eas." Shared PCP
frequencies will continue to be allocated on a shared basis and licensed in
accordance with existing, site-specific procedures; however, the FCC is
considering changes to the application and licensing rules for these
frequencies. Mutually exclusive geographic area applications for all RCC
frequencies and exclusive 929 MHz PCP frequencies will be awarded through an
auction process. The FCC has recently dismissed all pending mutually exclusive
applications for these frequencies, as well as all applications filed after July
31, 1996 regardless of mutual exclusivity. A filing "freeze" is in effect for
the non-nationwide, exclusive paging frequencies pending commencement of the
auctions. The FCC has not yet announced when paging auctions will begin, or the
order in which it will make the various frequencies and geographic areas
available for bidding. Incumbent licensees will be able to trade in their
existing licenses for a single "wide-area" license based upon their current
coverage; incumbents will be entitled to interference protection from the
auction winners and will be able to modify their facilities within that area,
but they will not be permitted to expand their existing coverage.
Because auctions are new to the paging industry, we cannot predict their
impact on our business. At least initially, competitive bidding may increase our
costs of obtaining licenses. The FCC's wide-area licensing and auction rules may
also serve as entry barriers to new participants in the industry. In any service
area where we are the successful bidder, or where we trade in our licenses for
"wide-area" licenses, we will save on the application costs associated with
modifying and adding facilities within our service areas, and no other entity
will be able to apply for our frequencies within those areas. Conversely, in
geographic areas where we are not the high bidder, our ability to expand our
service territories in those geographic areas will be curtailed. Our three
nationwide frequencies will not be subject to competitive bidding; although, the
FCC is considering imposing additional "build-out" requirements on nationwide
licensees.
The Telecommunications Act of 1996 (the "1996 Act") also amended the
Communications Act. The 1996 Act imposes a duty on all telecommunications
carriers to provide interconnection to other carriers, and requires LECs to,
among other things, establish reciprocal compensation arrangements for the
transport and termination of calls and provide other telecommunications carriers
access to the network elements on an unbundled basis on reasonable and
non-discriminatory rates, terms and conditions. The LECs are now prohibited from
charging paging carriers for the "transport and termination" of LEC-originated
local calls. This prohibition could lead to substantial cost savings for us.
Moreover, under the 1996 Act and the FCC's rules, paging carriers are entitled
to compensation from any local telecommunications carrier for local calls that
terminate on a paging network. This could lead to additional revenues for us.
The 1996 Act also requires the FCC to appoint an impartial entity to
administer telecommunications numbering and to make numbers available on an
equitable basis. In addition, the 1996 Act requires that state and local zoning
regulations shall not unreasonably
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discriminate among providers of "functionally equivalent" wireless services,
and shall not have the effect of prohibiting the provision of personal wireless
services. The 1996 Act provides for expedited judicial review of state and
local zoning decisions. Additionally, state and local governments may not
regulate the placement, construction and modification of personal wireless
service facilities on the basis of the environmental effects of radio frequency
emissions, if the facilities comply with the FCC's requirements. Other
provisions of the 1996 Act, however, may increase competition, such as the
provisions which allow the FCC to forbear from applying regulations and
provisions of the Communications Act to any class of carriers, not only to
CMRS, and the provisions allowing public utilities to provide
telecommunications services directly. These provisions may impose additional
regulatory costs (for example, provisions requiring contributions to universal
service by providers of interstate telecommunications). Some of these FCC rules
are subject to pending petitions for reconsideration and Court appeals. We
cannot predict the final outcome of any FCC proceeding or the possible impact
of future FCC proceedings.
State. The 1993 Budget Act preempts all state and local rate and entry
regulation of all CMRS operators. Entry regulations typically refer to the
process whereby an CMRS operator must apply to the state to obtain a certificate
to provide service in that state. Rate regulation typically refers to the
requirement that CMRS operators file a tariff describing our billing rates,
terms and conditions by which we provide paging services. Apart from rate and
entry regulations, some states may continue to regulate other aspects of our
business in the form of zoning regulations (subject to the 1996 Act's
prohibition on discrimination against or among wireless telecommunications
carriers), or "health and safety" measures. The 1993 Budget Act does not preempt
state authority to regulate such matters. Although there can be no assurances
given with respect to future state regulatory approvals, based on our experience
to date, we know of no reason to believe such approvals would not be granted.
In 1997, the FCC held that the Budget Act does not prohibit states from
imposing requirements of CMRS carriers to contribute to funding "universal"
telephone service within the states. Approximately 25 states now impose such
"universal service fund" obligations. The FCC's determination that the states
may impose those obligations is currently on appeal; if that determination is
upheld, we may incur additional costs in contributing to state universal service
funds, which we typically pass through to our subscribers.
Litigation. Metrocall has filed complaints with the FCC against a number
of Regional Bell Operating Companies (RBOCs) and the largest independent
telephone company for violations of the FCC's interconnection and local
transport rules and the 1996 Act. The complaints allege that these local
telephone companies are unlawfully charging the Company for local transport of
the telephone companies' local traffic. The Company has petitioned the FCC to
rule that these local transport charges are unlawful and to award the Company a
reimbursement or credit for any past charges assessed by the respective carriers
since November 1, 1996, the effective date of the FCC's transport rules. The
briefing schedule for these complaint proceedings ended in September 1998. The
complaints remain pending before the FCC. On January 25, 1999, the U.S. Supreme
Court concluded that the FCC had the authority under the Communications Act to
adopt rules necessary to carry out Sections 251 and 252 of the 1996 Act.
Metrocall believes the Supreme Court's ruling appears to validate the FCC's
"proxy" pricing rules for LEC/CMRS interconnection. In addition, the Supreme
Court also ruled that the FCC had the authority to preempt any state or local
tariffs or interconnection agreements contrary to those rules, which we believe
may support our complaints filed with the FCC. At December 31, 1998, Metrocall
had approximately $14 million of credits receivable included in prepaid expenses
and other current assets related to past charges assessed by the LECs for which
the Company is seeking reimbursement.
SEASONALITY
Generally, our operating results are not significantly affected by seasonal
factors.
TRADEMARKS AND SERVICE MARKS
We use the following trademarks and service marks:
- "Metrocall" -- a registered trademark with the U.S. Patent and Trademark
Office;
- "Datacall," "Metronet," "Metromessage" and "In-Touch" -- service marks
under which we market our paging services.
- "Metrotext" -- a computer program designed for use in transmitting
alphanumeric messages from personal computers to pagers (copyright
registration has been granted).
- "Metrofax" and "The Power in Paging" -- service marks.
- "One Touch", "EZ Pack Paging" and "Notesender" -- service marks
(applications with the U.S. Patent and Trademark Office are pending).
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EMPLOYEES
As of December 31, 1998, we employed approximately 3,800 full and part-time
people none of whom is represented by a labor union. We believe that our
relationship with our employees is good.
ITEM 2. PROPERTIES
We do not hold title to any significant real property; although, we and our
affiliates own interests in certain properties. At December 31, 1998, we leased
commercial office and retail space at more than 250 locations used in
conjunction with our operations. These office leases provide for monthly
payments ranging from approximately $250 to $107,000 and expire, subject to
renewal options, on various dates through July 2012.
In April 1994, we entered into a 10-year lease for additional office space
near our headquarters. The lease may be renewed for two additional five-year
periods. The lease, as amended, provides for annual rents of approximately
$814,000, with annual escalation of 3%. In connection with this lease, we have
exercised an option to acquire a 51% interest in the property for approximately
$2.9 million and expect to close this purchase in mid-1999.
We also lease numerous sites under long-term leases for our transmitters on
commercial broadcast towers, buildings and other fixed structures. At December
31, 1998, we leased these transmitter sites for monthly rentals ranging from
approximately $80 to $14,400 that expire, subject to renewal options, on various
dates through June 2029.
ITEM 3. LEGAL PROCEEDINGS
Information regarding contingencies and legal proceedings is included in
Note 8 of the Notes to the Consolidated Financial Statements for the year ended
December 31, 1998, which is included under Item 8 of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
STOCK TRADING
Our common stock is traded on the Nasdaq National Market under the symbol
"MCLL."
COMMON STOCK PRICE RANGES
1997 1998
------------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -----
Quarter ended March 31.............................. $7 1/2 $4 1/8 $7 1/2 $4 5/8
Quarter ended June 30............................... 5 5/8 3 3/4 7 5/8 5 3/8
Quarter ended September 30.......................... 7 9/16 4 13/16 7 7/16 4 1/2
Quarter ended December 31........................... 7 3/8 4 1/8 6 1/16 2 11/16
On March 1, 1999, the last reported sales price of our common stock on the
Nasdaq National Market was $3 7/8 per share and, there were 1,347 stockholders
of record.
DIVIDEND POLICY
We have not declared or paid any cash dividends or distributions on our
common stock since our initial public offering of common stock in July 1993. We
do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Future cash dividends, if any, will be determined by our
Board of Directors. Certain covenants in our credit facility, our indentures and
the terms of the Series A Convertible Preferred Stock (the "Series A Preferred")
restrict or prohibit the payment of cash dividends on our common stock. In
addition, if we pay or set aside for payment any dividend or distribution on our
common stock (other than dividends or distributions paid solely in shares of
common stock or rights, options or warrants to purchase common stock) before
October 2, 2003, holders of the Series C Convertible Preferred Stock (the
"Series C Preferred") also will be entitled to receive a certain amount of those
payments.
As discussed below, we have issued shares of each of our series of
preferred stock to the respective holders of those series of preferred stock in
lieu of cash dividends. In addition, we paid the holder of the Series C
Preferred approximately $7,000 of cash dividends in lieu of fractional shares of
the Series C Preferred, and received the consent of the holders of the Series A
Preferred for such cash payment.
UNREGISTERED SECURITIES:
Series A Preferred. On November 15, 1996, we issued 159,600 shares of the
Series A Preferred and 159,600 warrants representing the right to purchase an
aggregate of 2.915 million shares of common stock. The aggregate purchase price
for the Series A Preferred and the Warrants was $39.9 million. The purchasers of
these securities were John Hancock Mutual Life Insurance Company, SunAmerica,
Inc. and UBS Capital, LLC. Because the securities were sold to qualified
institutional buyers in a transaction not involving a public offering, the sale
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, as amended.
Each share of the Series A Preferred has a stated value of $250 per share,
a liquidation preference and redemption value equal to its stated value, certain
redemption rights and the right to elect directors of the Company. The Series A
Preferred carries a dividend of 14% (subject to increase upon the occurrence of
certain events), payable semi-annually in cash or in additional shares of the
Series A Preferred, at the Company's option. In addition, beginning November 15,
2001, holders of the Series A Preferred have the right to convert their Series A
Preferred (including shares issued as dividends) into shares of common stock
based upon the market price of common stock at the time of conversion. The
Series A Preferred may, at the option of holders, be converted sooner upon
certain change of control events of the Company, as defined in the Certificate
of Designation for the Series A Preferred. During 1997 and 1998, we issued
23,126 and 26,477 additional shares of the Series A Preferred as dividends to
the holders of the Series A Preferred.
Each Warrant represents the right of the holder to purchase 18.266 shares
of common stock, or an aggregate of 2.915 million shares. The exercise price per
share is $7.40. The Warrants contain certain provisions for adjustment in the
exercise price in the event we sell common stock or rights to purchase common
stock in private transactions for less than 125% of the then current market
price and
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other customary anti-dilution provisions. The Warrants expire November 15,
2001. We have registered the resale of shares that may be obtained upon
exercise of the Warrants under the Securities Act.
Series B Preferred. On July 1, 1997, we issued 1,500 shares of the Series
B Junior Convertible Preferred Stock (the "Series B Preferred") in connection
with our acquisition of Page America. Each share of the Series B Preferred has a
stated value of $10,000 per share and a liquidation preference, which is junior
to the Series A Preferred but senior to the shares of common stock, equal to its
stated value. The Series B Preferred carries a dividend of 14% of the stated
value per year, payable semi-annually in cash or in additional shares of Series
B Preferred, at the Company's option. We registered the Series B Preferred under
the Securities Act. During 1997 and 1998, we issued to Page America 79 and 229
additional shares of Series B Preferred as dividends, which shares were not
registered.
The holders of the Series B Preferred have the right to convert up to 25%
of the number of the Series B Preferred initially issued (plus shares of the
Series B Preferred issued as dividends on such shares, and as dividends on such
dividends) into shares of common stock at the current market value of the common
stock, as defined, on September 1, 1997, December 1, 1997, March 1, 1998 and
June 1, 1998. As of December 31, 1998, no shares of Series B Preferred had been
converted. We registered up to 3,500,000 shares of common stock issuable upon
the conversion of the Series B Preferred.
On January 7, 1999, we repurchased and retired all of the outstanding
shares of the Series B Preferred for $16.2 million using borrowings from our
credit facility.
Series C Preferred. On October 2, 1998, we issued 9,500 shares of the
Series C Preferred in connection with the AMD acquisition. Each share of the
Series C Preferred has a stated value of $10,000 per share and a liquidation
preference, which is junior to the Series A Preferred and the Series B Preferred
but senior to the shares of common stock, equal to its stated value. The Series
C Preferred carries a dividend of 8% of the stated value per year, payable
semiannually in cash or in additional shares of the Series C Preferred, at the
Company's option. We did not register the Series C Preferred under the
Securities Act. In December 1998, we issued the holder of the Series C Preferred
95 additional shares of Series C Preferred and $7,000 cash in lieu of fractional
shares as dividends. We did not register these shares.
Metrocall granted the holder of the Series C Preferred certain registration
rights with respect to the Series C Preferred and the common stock into which
the Series C Preferred may be converted. The effect of these registration rights
is to allow the holder or its transferees to freely transfer either the Series C
Preferred or any common stock it obtains through conversion. The holder or its
transferees also have a one-time right to require Metrocall to participate in an
underwritten public offering of the Series C Preferred or common stock.
The holder of the Series C Preferred may not sell or transfer its shares
for a period of 18 months from their date of issuance. The holder of the Series
C Preferred may convert its Series C Preferred shares into common stock
beginning on October 2, 2003 at a conversion price of $10.40 per Series C
Preferred share, subject to adjustment.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1994(a) 1995 1996(a) 1997(a) 1998(a)
---------- ---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE, UNIT, AND PER UNIT DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Service, rent and maintenance revenues............ $ 49,716 $ 92,160 $ 124,029 $ 249,900 $ 416,352
Product sales..................................... 8,139 18,699 25,928 39,464 48,372
--------- --------- ----------- ----------- -----------
Total revenues.............................. 57,855 110,859 149,957 289,364 464,724
Net book value of products sold................... (6,962) (15,527) (21,633) (29,948) (31,791)
--------- --------- ----------- ----------- -----------
50,893 95,332 128,324 259,416 432,933
Operating expenses:
Service, rent and maintenance..................... 10,632 20,080 28,567 61,392 112,774
Selling and marketing............................. 7,313 15,546 24,101 53,802 73,546
General and administrative(b)..................... 16,796 33,985 42,905 73,753 121,644
Depreciation and amortization..................... 13,829 31,504 58,196 91,699 234,948
--------- --------- ----------- ----------- -----------
Loss from operations.............................. (2,323) (5,783) (25,445) (21,230) (109,979)
Interest and other income (expense)(c)............ 161 314 (607) 156 849
Interest expense.................................. (3,726) (12,533) (20,424) (36,248) (64,448)
--------- --------- ----------- ----------- -----------
Loss before income tax benefit and extraordinary
item............................................ (1,242) (18,002) (46,476) (57,322) (173,578)
Income tax provision benefit...................... 152 595 1,021 4,861 47,094
--------- --------- ----------- ----------- -----------
Loss before extraordinary item.................... (1,090) (17,407) (45,455) (52,461) (126,484)
Extraordinary item(c)............................. (1,309) (2,695) (3,675) -- --
--------- --------- ----------- ----------- -----------
Net loss........................................ (2,399) (20,102) (49,130) (52,461) (126,484)
Preferred dividends............................... -- -- (780) (7,750) (11,767)
--------- --------- ----------- ----------- -----------
Loss attributable to common stockholders........ $ (2,399) $ (20,102) $ (49,910) $ (60,211) $ (138,251)
========= ========= =========== =========== ===========
Loss per share attributable to common
stockholders:
Loss per share before extraordinary item
attributable to common stockholders........... $ (0.14) $ (1.49) $ (2.84) $ (2.22) $ (3.37)
Extraordinary item, net of income tax benefit... (0.16) (0.23) (0.23) -- --
--------- --------- ----------- ----------- -----------
Loss per share attributable to common
stockholders.................................. $ (0.30) $ (1.72) $ (3.07) $ (2.22) $ (3.37)
--------- --------- ----------- ----------- -----------
OPERATING AND OTHER DATA:
Net cash provided by operating activities......... $ 11,796 $ 14,000 $ 15,608 $ 27,166 $ 41,154
Net cash used in investing activities............. (19,227) (44,528) (327,904) (176,429) (191,747)
Net cash provided by financing activities......... 9,190 151,329 199,639 163,242 134,133
EBITDA(d)......................................... 16,152 27,771 32,751 70,469 124,969
EBITDA margin(d)(e)............................... 31.7% 29.1% 25.5% 27.2% 28.9%
ARPU(f)........................................... 10.53 9.15 8.01 8.25 7.57
Average monthly operating expense per unit(g)..... 7.36 6.71 6.28 6.47 5.66
Units in service (end of period)(a)............... 755,546 944,013 2,142,351 4,030,836 5,659,550
Units in service per employee (end of period)..... 1,007 1,047 1,086 1,366 1,512
Capital expenditures.............................. 19,091 44,058 62,110 69,935 78,658
--------- --------- ----------- ----------- -----------
1994 1995 1996 1997 1998
-------- -------- --------- ---------- ----------
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)............................... $ (5,277) $116,009 $ (7,267) $ (24,631) $ (27,876)
Cash and cash equivalents............................... 2,773 123,574 10,917 24,896 8,436
Total assets............................................ 200,580 340,614 646,577 1,087,014 1,262,687
Total long-term debt, net of current portion............ 101,346 153,803 327,092 598,989 742,563
Total stockholders' equity.............................. 68,136 155,238 166,298 179,496 45,429
17
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- ---------------
(a) Consolidated statements of operations data for fiscal years 1994, 1996, 1997
and 1998 include the results of operations of acquired companies from their
respective acquisition dates. In May 1997, we sold the assets of our
telemessaging operations (acquired through merger on November 15, 1996);
therefore, results of operations for the year ended December 31, 1997
include telemessaging operations through the date of sale only. Consolidated
statements of operations data for fiscal year 1997 exclude the operations of
ProNet because the merger was completed on December 30, 1997. Units in
service at December 31, 1997, include approximately 1.3 million units
acquired in the ProNet merger.
(b) Includes the impact of one-time, non-recurring charges for severance and
other compensation costs incurred as part of a management reorganization of
approximately $2.0 million in fiscal year 1995.
(c) In fiscal years 1994 and 1995, we refinanced balances outstanding under our
then existing credit facilities and recorded extraordinary items of $1.3
million and $2.7 million, respectively, representing charges to expense
unamortized deferred financing costs and other costs, net of any income tax
benefits, related to those credit facilities. In 1996, we recorded an
extraordinary item for costs of approximately $3.7 million paid to purchase
the A+ Network 11 7/8% senior subordinated notes outstanding. In 1995, we
incurred breakage fees of approximately $1.7 million associated with the
termination of two interest rate swap agreements, which have been included
in interest and other income (expense).
(d) EBITDA (earnings before interest, taxes, depreciation and amortization, and
certain one-time charges), while not a measure under generally accepted
accounting principles (GAAP), is a standard measure of financial performance
in the paging industry; EBITDA should not be considered in isolation or as
an alternative to net income (loss), income (loss) from operations, cash
flows from operating activities, or any other measure of performance under
GAAP. EBITDA is, however, an approximation of the primary financial measure
by which our covenants are calculated under our indentures and our credit
facility. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Financial Condition, Liquidity and Capital
Resources" for discussion of significant capital requirements and
commitments. In 1995, EBITDA excludes non-recurring charges of approximately
$2.0 million incurred as part of a management reorganization.
(e) EBITDA margin is calculated by dividing (a) EBITDA by (b) the amount of
total revenues less the net book value of products sold.
(f) ARPU (average monthly paging revenue per unit) is calculated by dividing (a)
service, rent and maintenance revenues for the period by (b) the average
number of units in service for the period. The ARPU calculation excludes
revenues derived from non-paging services such as telemessaging, long
distance and cellular telephone.
(g) Average monthly operating expense per unit is calculated by dividing (a)
total recurring operating expenses before depreciation and amortization for
the period by (b) the average number of units in service for the period. For
this calculation, operating expenses exclude non-recurring charges for
severance and other compensation costs incurred as part of a management
reorganization of approximately $2.0 million in 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of the financial
condition and results of operations of the Company together with the
Consolidated Financial Statements and the notes to the Consolidated Financial
Statements included elsewhere in this Annual Report and the description of
Metrocall's business in "Business."
OVERVIEW
Metrocall is a leading provider of local, regional and national paging and
other wireless messaging services. Through its nationwide wireless network, the
Company provides messaging services to over 1,000 U.S. cities, including the top
100 SMSAs. Since 1993, Metrocall's subscriber base has increased from less than
250,000 to more than 5.6 million. Metrocall has achieved this growth through a
combination of internal growth and a program of mergers and acquisitions. As of
December 31, 1998, the Company was the second largest messaging company in the
United States based on the number of subscribers.
Metrocall derives a majority of its revenues from fixed, periodic (usually
monthly) fees, generally not dependent on usage, charged to subscribers for
paging services. While a subscriber continues to use the Company's services,
operating results benefit from this recurring stream with minimal requirements
for incremental selling expenses or fixed costs.
Metrocall has grown internally by broadening its distribution network and
expanding its target market to capitalize on the growing appeal of messaging and
other wireless products and services, to gain access to different market
segments and to increase the penetration and utilization of its nationwide
network. Since December 31, 1993, the Company has added approximately 1.4
million new subscribers through internal growth. Over the past three years,
Metrocall has emphasized a number of distribution channels that are
characterized by lower ARPU, such as resellers, and correspondingly lower
operating costs. To offset declines in ARPU and to capitalize on the growth of
paging and other wireless messaging services, the Company has expanded its
channels of distribution to include, among others, Company-owned and-operated
retail outlets, strategic partnerships and alliances, Internet sales, with each
distribution channel focusing on the sale rather than the lease of pagers. Some
of these channels tend to have higher ARPU's than the Company's strategic
partners and typical resellers, who purchase service in quantity at wholesale
rates. Furthermore, Metrocall has been successful in marketing enhanced
services, such as nationwide paging services, voice mail and other ancillary
services for its strategic partners and other alliances.
The Company has also grown significantly through mergers and acquisitions.
Since July 1996, Metrocall has acquired the following companies, adding
approximately 3.6 million subscribers to its subscriber base.
ACQUISITION
ACQUIRED COMPANY DATE NUMBER OF SUBSCRIBERS
---------------- ----------------- ---------------------
Parkway............................................ July 16, 1996 140,000
Satellite.......................................... August 30, 1996 100,000
A+ Network......................................... November 15, 1996 660,000
Page America....................................... July 1, 1997 198,000
ProNet............................................. December 30, 1997 1,286,000
AMD................................................ October 2, 1998 1,215,000
---------
Total.................................... 3,599,000
=========
On October 2, 1998, Metrocall continued its consolidation efforts by
acquiring AMD, the paging operations of AT&T, which increased its customer base
by adding approximately 1.2 million subscribers. As part of the acquisition,
Metrocall also acquired the NPCS license. Metrocall expects to realize the
following benefits from the AMD acquisition:
- Greater Scale and Scope. The AMD acquisition increases the Company's
geographic presence to include Alaska, Arkansas, Colorado, Kansas,
Minnesota, Missouri, Oklahoma, Oregon, Utah and Washington. In addition,
it adds to the Company's existing presence in the Northeast, Southeast,
Midwest, Mid-Atlantic and Southwest and West.
- Premium, High Revenue Customer Base. The AMD acquisition adds premium,
high revenue subscribers to the Company's existing customer base. AMD's
ARPU has historically been higher than the paging industry average. AMD
provided its
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21
paging and messaging services to large business customers, which
typically generated a higher ARPU than individual customers.
Approximately 23% of AMD's subscribers were high-ARPU alphanumeric
customers, one of the highest percentages in the paging industry.
Synergies. As Metrocall continues to integrate AMD's paging operations
with its own paging operations, Metrocall expects to realize significant
synergies. For example, AMD provided nationwide paging services without the
benefit of a nationwide network. As a result, AMD spent $29.3 million in 1997
reselling other carriers' services, which adversely affected its margins. Over
time, the Company expects to switch a portion of AMD's customers to its
nationwide network, which will reduce third-party costs and increase the
utilization of its network. In addition, Metrocall expects to realize
significant annual cost savings from elimination of duplicative AMD functions.
The Company expects to complete the integration of AMD by the fourth quarter of
1999. Metrocall cannot assure you that it will be able to integrate AMD
successfully or achieve the expected synergies.
Metrocall's growth, whether internal or through consolidation, requires
significant capital investment for paging equipment and technical
infrastructure. The Company also purchases pagers for that portion of its
subscriber base that it leases pagers to. During the year ended December 31,
1998, capital expenditures totaled $78.7 million, which included approximately
$51.4 million for pagers, representing increases in pagers on hand and net
increases and maintenance to the pager base. Metrocall estimates that capital
expenditures for the year ending December 31, 1999 will approximate $95.0
million.
RESULTS OF OPERATIONS
The definitions below will be helpful in understanding the discussion of
Metrocall's results of operations.
- Service, rent and maintenance revenues: include primarily monthly,
quarterly, semi-annually and annually billed recurring revenue, not
generally dependent on usage, charged to subscribers for paging and
related services such as voice mail and pager repair and replacement.
Service, rent and maintenance revenues also include revenues derived from
cellular and long distance services.
- Net revenues: include service, rent and maintenance revenues and sales
of customer owned and maintained (COAM) pagers less net book value of
products sold.
- Service, rent and maintenance expenses: include costs related to the
management, operation and maintenance of the Company's network systems
and customer support centers.
- Selling and marketing expenses: include salaries, commissions and
administrative costs of the Company's sales force and related marketing
and advertising expenses.
- General and administrative expenses: include costs related to executive
management, accounting, office telephone, repairs and maintenance,
management information systems, rent and employee benefits.
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22
Year Ended December 31, 1998 Compared With December 31, 1997
The following table sets forth the amounts of revenues and the percentages
of net revenues (defined as total revenues less the net book value of products
sold) represented by certain items in Metrocall's Consolidated Statements of
Operations and certain other information for fiscal years 1997 and 1998.
% OF % OF INCREASE
REVENUES 1997 REVENUES 1998 REVENUES OR (DECREASE)
-------- ---------- -------- ---------- -------- -------------
Service, rent and maintenance........... $ 249,900 96.3 $ 416,352 96.2 $ 166,452
Product sales........................... 39,464 15.2 48,372 11.1 8,908
---------- ----- ---------- ----- ----------
Total revenues................ 289,364 111.5 464,724 107.3 175,360
Net book value of products sold......... (29,948) (11.5) (31,791) (7.3) 1,843
---------- ----- ---------- ----- ----------
Net revenues.................. $ 259,416 100.0 $ 432,933 100.0 $ 173,517
ARPU.................................... $ 8.25 $ 7.57 $ (0.68)
Number of subscribers................... 4,030,836 5,659,550 1,628,714
Service, rent and maintenance revenues. Service, rent and maintenance
revenues increased approximately $166.5 million from $249.9 million in 1997 to
$416.4 million in 1998. The increase in revenues was primarily due to the 40.4%
growth in the Company's subscriber base. In 1998, Metrocall added approximately
414,000 subscribers or 10.3% through internal growth and added approximately 1.2
million subscribers or 30.1% through the AMD acquisition. Also in 1998 service,
rent and maintenance revenues included those revenues generated from the 1.3
million subscriber base acquired in the December 30, 1997 ProNet merger for
which no revenues were recognized during 1997 and the 1.2 million subscribers
Metrocall acquired from the AMD acquisition on October 2, 1998. The decline in
monthly ARPU of $0.68 per unit from 1997 to 1998 was attributable to the
Company's subscriber distribution mix and the related increase in its lower ARPU
indirect reseller distribution channel. The decline in ARPU was partially offset
by the increase in the Company's rental base due to the AMD acquisition, as AMD
had higher revenue rental subscribers. Factors affecting ARPU in future periods
include, among other things, distribution mix of new subscribers, competition
and new technologies. Metrocall cannot assure that ARPU will not decline in
future periods.
Product sales revenues. Product sales revenues increased approximately
$8.9 million from $39.5 million in 1997 to $48.4 million in 1998 and decreased
as a percentage of net revenues from 15.2% in 1997 to 11.2% in 1998. Net book
value of products sold increased approximately $1.8 million from $29.9 million
in 1997 to $31.8 million in 1998 and decreased as a percentage of net revenues
from 11.5% in 1997 to 7.3% in 1998. The increase in product sales revenues was
directly attributable to higher unit sales and greater geographic penetration
related to the ProNet merger and the AMD acquisition. Metrocall's gross margin
on product sales increased from 24.1% in 1997 to 34.3% in 1998 as a result of
increased depreciation taken on units sold that resulted in a lower book value
and higher margin at the sales date. Pagers are classified as property and
depreciated from the date of acquisition.
The following tables set forth the amounts of operating expenses and
related percentages of net revenues represented by certain items in Metrocall's
Consolidated Statements of Operations and certain other information for fiscal
years 1997 and 1998.
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23
% OF % OF
OPERATING EXPENSES 1997 REVENUES 1998 REVENUES INCREASE
------------------ -------- -------- -------- -------- --------
Service, rent and maintenance.............. $ 61,392 23.7 $112,774 26.0 $ 51,382
Selling and marketing...................... 53,802 20.7 73,546 17.0 19,744
General and administrative................. 73,753 28.5 121,644 28.1 47,891
Depreciation and amortization.............. 91,699 35.3 234,948 54.3 143,249
-------- ----- -------- ----- --------
$280,646 108.2 $542,912 125.4 $262,266
======== ===== ======== ===== ========
OPERATING EXPENSES PER UNIT IN SERVICE 1997 1998 $ DECREASE
-------------------------------------- ----- ----- ----------
Monthly service, rent and maintenance....................... $2.10 $2.07 $(0.03)
Monthly selling and marketing............................... 1.84 1.35 (0.49)
Monthly general and administrative.......................... 2.53 2.24 (0.29)
----- ----- ------
Average monthly operating costs............................. $6.47 $5.46 $(0.81)
===== ===== ======
Overall in 1998, Metrocall experienced an $0.81 reduction in average
monthly operating expense per unit. As discussed below, the Company's operating
results in 1998 included the operating expenses of Page America and ProNet for a
full fiscal year. In addition, the Company's 1998 operating results include the
operating expenses of AMD from the October 2, 1998 acquisition date. Each
operating expense is discussed separately below.
Service, rent and maintenance expenses. Service, rent and maintenance
expenses increased approximately $51.4 million from $61.4 million in 1997 to
$112.8 million in 1998 and increased as a percentage of net revenues from 23.7%
in 1997 to 26.0% in 1998. Metrocall's service, rent and maintenance expenses
increased in 1998 because they included the service, rent and maintenance
expenses of Page America and ProNet for a complete fiscal year ($37.7 million)
and the expenses of AMD for the fourth quarter of 1998 ($15.2 million).
Exclusive of the impact of the ProNet merger and the Page America and AMD
acquisitions, service, rent and maintenance expenses in 1998 remained relatively
flat compared to 1997 expenses with increases in tower rents and network repairs
and maintenance expenses being partially offset by a decrease in expenses due to
the divesture of Metrocall's telemessaging operations during 1997 for which no
expenses were recognized in 1998. In 1998, Metrocall also continued to withhold
payment and expense recognition of LEC charges in its various service areas for
any facilities used by those LECs to transport local calls to the Company's
local paging networks as provided under the 1996 Act and the FCC's rules
regarding local transport. At December 31, 1998, Metrocall had approximately $14
million of credits receivable included in prepaid expenses and other current
assets related to past charges assessed by the LECs for which the Company is
seeking reimbursement. The increase in service, rent and maintenance expenses as
a percentage of net revenues in 1998 was the result of the recent mergers and
acquisitions. Average monthly service, rent and maintenance expense per unit
slightly declined in 1998 as a result of the higher average subscriber base
throughout 1998. As Metrocall continues to expand its networks in order to serve
more subscribers and offer advanced messaging capabilities, these expenses may
increase.
Selling and marketing expenses. Selling and marketing expenses increased
approximately $19.7 million from $53.8 million in 1997 to $73.5 million in 1998
and decreased as a percentage of net revenues from 20.7% in 1997 to 17.0% in
1998. Selling and marketing expenses increased in 1998 because they included the
selling and marketing expenses of Page America and ProNet for a complete fiscal
year ($16.5 million) and the expenses of AMD for the fourth quarter of 1998
($5.3 million). The decrease in selling and marketing expenses as a percentage
of revenues in 1998 was primarily from the impact of the Company's recent
merger and acquisitions and the related higher revenues base. Metrocall expects
that selling and marketing expenses may increase as a percentage of revenues in
the future as it expands its presence in existing and new markets. Average
monthly selling and marketing expense per unit declined in 1998 as a result of
the higher average subscriber base throughout 1998.
General and administrative expenses. General and administrative expenses
increased approximately $47.9 million from $73.8 million in 1997 to $121.6
million in 1998 and decreased as a percentage of net revenues from 28.5% in 1997
to 28.1% in 1998. General and administrative expenses increased in 1998 because
they included the general and administrative expenses of Page America and ProNet
for a complete fiscal year ($30.4 million) and the expenses of AMD for the
fourth quarter of 1998 ($10.6 million). Exclusive of the impact of the merger
and acquisitions, general and administrative expenses increased for a variety of
professional services ($3.9 million) and additional operating personnel ($3.0
million). The decrease in general and administrative expenses as a percentage of
net
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24
revenues in 1998 was primarily from the benefit of economies of scale related
to the Company's recent merger and acquisitions and the related increase in the
revenue base. Metrocall expects general and administrative expenses per unit to
continue to decrease in 1999 as it gains additional synergies from the AMD
acquisition.
Depreciation and amortization expenses. Depreciation and amortization
expense increased approximately $143.2 million from $91.7 million in 1997 to
$234.9 million in 1998. The increase in total depreciation expense in 1998 was
approximately $20 million and resulted primarily from depreciation on additional
subscriber paging equipment and other plant and equipment acquired mainly in the
ProNet merger and Page America and AMD acquisitions. The increase in total
amortization expense in 1998 was approximately $123 million and resulted
primarily from amortization expenses on intangibles acquired in Metrocall's
recent merger and acquisitions and the reduction in estimated useful lives of
certain intangibles described below. Metrocall expects depreciation and
amortization expenses in 1999 to increase as a result of a full year's impact of
the AMD acquisition. Effective January 1, 1998, the Company reduced the
estimated useful lives of certain intangibles, including goodwill, regulatory
licenses issued by the FCC and subscriber bases recorded in conjunction with
acquisitions from 15 years to 10 years for goodwill, from 25 years to 10 years
for FCC licenses and from 5-6 years for subscriber bases to 3 years. The impact
of these changes was to increase amortization expense in 1998 by approximately
$26 million.
$
OTHER 1997 1998 INCREASE
----- -------- --------- ---------
Interest and other income, net.............................. $ 156 $ 849 $ 693
Interest expense............................................ (36,248) (64,448) 28,200
Income tax benefit.......................................... 4,861 47,094 42,233
Net loss.................................................... (52,461) (126,484) 74,023
Preferred dividends......................................... (7,750) (11,767) 4,017
EBITDA...................................................... $ 70,469 $ 124,969 $54,500
Interest expense. The increase in interest expense in 1998 of
approximately $28.2 million was the result of higher average debt balances
outstanding during the fiscal year primarily associated with the additional debt
assumed with the ProNet merger and financing requirements of the AMD
acquisition. During 1998, total debt increased by $143.4 million to $743.3
million. Metrocall expects interest expense in 1999 to increase from 1998 due to
expected higher average debt balances during 1999.
Income tax benefit. The increase in the income tax benefit in 1998 of
approximately $42.2 million was the result of the tax benefit recorded on the
amortization of non-goodwill related intangible assets primarily generated from
the ProNet merger which occurred on December 30, 1997 for which no tax benefits
were generated in 1997 and the AMD acquisition which occurred on October 2,
1998.
Net loss. Metrocall's net loss increased approximately $74.0 million from
$52.4 million in 1997 to $126.5 million in 1998. The increase in net loss was
primarily the result of increased depreciation and amortization and other
operating expenses associated with the ProNet merger and the Page America and
AMD acquisitions offset by increases in net revenues related to an increase in
the Company's subscriber base as a result of internal growth and its recent
merger and acquisitions.
Preferred dividends. The increase in preferred dividends in 1998 of
approximately $4.0 million was the result of higher dividends paid to the
holders of the Series A Preferred and the Series B Preferred in 1998 and
dividends paid in the fourth quarter of 1998 to the holder of the Series C
Preferred. Dividends recognized on the Series A Preferred and the Series B
Preferred increased by $0.8 million and $1.3 million, respectively due to their
cumulative nature. On October 2, 1998, Metrocall issued 9,500 shares of the
Series C Preferred in connection with the AMD acquisition. Dividends recognized
on the Series C Preferred were approximately $1.9 million.
EBITDA. The increase in EBITDA in 1998 of approximately $54.5 million was
primarily the result of the increase in revenues in 1998 offset to a lesser
extent by the increase in operating expenses. Metrocall's EBITDA margin improved
from 27.2% in 1997 to 28.9% in 1998.
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25
Year Ended December 31, 1997 Compared With December 31, 1996
The following table sets forth the amounts of revenues and the percentages
of net revenues (defined as total revenues less the net book value of products
sold) represented by certain items in Metrocall's Consolidated Statements of
Operations and certain other information for fiscal years 1996 and 1997.
% OF % OF
REVENUES 1996 REVENUES 1997 REVENUES INCREASE
-------- ---------- -------- ---------- -------- ----------
Service, rent and maintenance........... $ 124,029 96.7 $ 249,900 96.3 $ 125,871
Product sales........................... 25,928 20.2 39,464 15.2 13,536
---------- ----- ---------- ----- ----------
Total revenues................ 149,957 116.9 289,364 111.5 139,407
Net book value of products sold......... (21,633) (16.9) (29,948) (11.5) 8,315
---------- ----- ---------- ----- ----------
Net revenues.................. $ 128,324 100.0 $ 259,416 100.0 $ 131,092
ARPU.................................... $ 8.01 $ 8.25 $ 0.24
Number of Subscribers................... 2,142,351 4,030,836 1,888,485
Service, rent and maintenance revenues. Service, rent and maintenance
revenues increased approximately $125.9 million from $124.0 million in 1996 to
$249.9 million in 1997. Growth in the Company's subscriber base was the primary
reason for the revenues increase. During 1997, Metrocall's subscriber base grew
by approximately 1.9 million, which included approximately 1.3 million
subscribers acquired in the ProNet merger. Monthly ARPU for paging services
increased by $0.24 due to subscriber revenue mix acquired in the Company's
merger with A+ Network in November 1996, general service rate increases, the
shift in the sales mix from primarily direct distribution channels, especially
the direct sales force, to indirect channels and Company-owned retail stores,
and the sale of enhanced paging services.
Product sales revenues. Product sales revenues increased approximately
$13.5 million from $25.9 million in 1996 to $39.5 million in 1997 and decreased
as a percentage of net revenues from 20.2% in 1996 to 15.2% in 1997. Net book
value of products sold increased approximately $8.3 million from $21.6 million
in 1996 to $29.9 million in 1997 principally because of the increase in product
sales, partially offset by increased depreciation expense. Metrocall's gross
margin on products sold increased from 16.6% in 1996 to 24.1% in 1997.
The following tables set forth the amounts of operating expenses and
related percentages of net revenues represented by certain items in Metrocall's
Consolidated Statements of Operations and certain other information for fiscal
years 1996 and 1997.
% OF % OF
OPERATING EXPENSES 1996 REVENUES 1997 REVENUES INCREASE
------------------ -------- -------- -------- -------- --------
Service, rent and maintenance................ $ 28,567 22.3 $ 61,392 23.7 $ 32,825
Selling and marketing........................ 24,101 18.8 53,802 20.7 29,701
General and administrative................... 42,905 33.4 73,753 28.5 30,848
Depreciation and amortization................ 58,196 45.4 91,699 35.3 33,503
-------- ----- -------- ----- --------
$153,769 119.8 $280,646 108.2 $128,677
======== ===== ======== ===== ========
INCREASE
OPERATING EXPENSES PER UNIT IN SERVICE 1996 1997 OR (DECREASE)
-------------------------------------- ----- ----- -------------
Monthly service, rent and maintenance....................... $1.88 $2.10 $0.22
Monthly selling and marketing............................... 1.58 1.84 0.26
Monthly general and administrative.......................... 2.82 2.53 (0.29)
----- ----- -----
Average monthly operating expense........................... $6.28 $6.47 $0.19
Overall in 1997, Metrocall experienced a $0.19 increase in average monthly
operating expense per unit. As discussed below, the Company's operating results
in 1997 included the operating expenses of the 1996 acquisitions of Parkway,
Satellite, and A+ Network
24
26
for a full fiscal year. In addition, the operating results include the
operating expenses of Page America from the July 1, 1997 acquisition date.
Service, rent and maintenance expenses. Service, rent and maintenance
expenses increased approximately $32.8 million from $28.6 million in 1996 to
$61.4 million in 1997 and increased as a percentage of net revenues from 22.3%
in 1996 to 23.7% in 1997. In 1997, the overall increases in service, rent and
maintenance expenses and as a percentage of revenues were attributable to the
acquisitions of Parkway ($1.1 million), Satellite ($1.3 million), A+ Network
($22.7 million) and Page America ($2.6 million) completed during 1996 and 1997.
Additional increases were primarily due to increased site rental costs ($3.1
million) and increased personnel costs ($1.7 million) partially offset by
reductions in third party carrier costs ($1.9 million). In 1997, the Company
ceased paying LECs in its various service areas for any facilities used by those
LECs to transport local calls to Metrocall's local paging networks as provided
under the 1996 Act and the FCC's rules regarding local transport, which had
reduced third party carriers costs by approximately $8.2 million. The monthly
service, rent and maintenance expense per unit increased by $0.22 per unit as a
result of the above items.
Selling and marketing expenses. Selling and marketing expenses increased
approximately $29.7 million from $24.1 million in 1996 to $53.8 million in 1997
and increased as a percentage of net revenues from 18.8% in 1996 to 20.7% in
1997. The increase in selling and marketing expenses and the increase as a
percentage of net revenues were primarily associated with the 1996 and 1997
acquisitions, which added new sales offices and retail locations. Selling and
marketing expenses attributed to the acquired companies were Parkway ($1.0
million), Satellite ($0.8 million), A+ Network ($24.5 million) and Page America
($1.3 million). Additional increases were associated with the increased sales
staff and related costs ($1.5 million) and increased advertising and promotional
costs ($0.1 million). Monthly selling and marketing expense per unit increased
in 1997 by $0.26 per unit due primarily to increases in the Company's sales
force as a result of acquisitions in new geographic areas.
General and administrative expenses. General and administrative expenses
increased approximately $30.8 million from $42.9 million in 1996 to $73.8
million in 1997 and decreased as a percentage of net revenues from 33.4% in 1996
to 28.5% in 1997. The general and administrative expenses increase was primarily
the result of the acquired companies including the operating results of Parkway
($0.7 million), Satellite ($1.9 million), A+ Network ($21.3 million) and Page
America ($1.4 million). General and administrative expenses also increased
primarily due to increased expenses for billing, credit and collection
activities ($3.4 million) and additional operational and administrative
personnel ($3.7 million). The decrease in general and administrative expenses
as a percentage of net revenues was attributable to economies of scale
recognized from the 1996 and 1997 acquisitions and the related increase in the
Company's subscriber base.
Depreciation and amortization expenses. Depreciation and amortization
expenses increased approximately $33.5 million from $58.2 million in 1996 to
$91.7 million in 1997. The increase in depreciation expense resulted primarily
from depreciation on increased levels of subscriber paging equipment and other
plant and operating equipment. Amortization expenses increased substantially
during 1997 due to the amortization expense of goodwill and other intangibles
related to the 1996 and 1997 acquisitions. Effective July 1, 1996, the Company
changed the estimated useful lives of certain intangibles acquired in 1994,
including goodwill and regulatory licenses issued by the FCC from 40 years to 15
years for goodwill and from 40 years to 25 years for FCC licenses. The impact of
these changes was to increase amortization expense for 1997 by approximately
$2.6 million.
INCREASE OR
OTHER 1996 1997 (DECREASE)
----- -------- -------- -----------
Interest and other income (expense)......................... $ (607) $ 156 $ 763
Interest expense............................................ (20,424) (36,248) 15,824
Income tax benefit.......................................... 1,021 4,861 3,840
Extraordinary item.......................................... (3,675) -- (3,675)
Net loss.................................................... (49,130) (52,461) 3,331
Preferred dividends......................................... (780) (7,750) 6,970
EBITDA...................................................... $ 32,751 $ 70,469 $ 37,718
Interest expense. The increase in interest expense of approximately $15.8
million in 1997 was due to a higher average level of debt outstanding during
1997 primarily associated with the financing of the 1996 and 1997 acquisitions.
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Net loss. Metrocall's net loss increased approximately $3.3 million from
$49.1 million in 1996 to $52.5 million in 1997. The increase in net loss was
primarily the result of increased depreciation and amortization and other
operating expenses associated with the Parkway, Satellite and A+ Network and
Page America acquisitions offset by increases in net revenues related to an
increase in the Company's subscriber base as a result of internal growth and the
1996 and 1997 mergers and acquisitions.
Preferred dividends. The increase in preferred dividends in 1997 of
approximately $7.0 million was the result of an increase in dividends paid to
the holders of the Series A Preferred ($6 million) and dividends paid to the
holders of the Series B Preferred ($1 million).
EBITDA. EBITDA increased approximately $37.7 million from $32.8 million in
1996 to $70.5 million in 1997. EBITDA margin increased from 25.5% in 1996 to
27.2% in 1997.
INFLATION
Inflation is presently not a material factor affecting Metrocall's
business. Traditional one-way paging system equipment and operating costs have
not increased and one-way pager costs have declined significantly in recent
years. General operating expenses such as salaries, employee benefits and
occupancy costs are, however, subject to inflationary pressures.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During the three years ended December 31, 1998, Metrocall's operations have
required significant funding, primarily to support mergers and acquisitions and
capital expenditures for paging infrastructure and equipment requirements.
Metrocall has met its funding requirements with cash generated from operating
activities, borrowings under its credit facilities and proceeds from its senior
subordinated notes offerings.
Cash Flows
For 1998, the Company's cash provided by operating activities increased
approximately $14.0 million or 51.5% from $27.2 million in 1997 to $41.2 million
in 1998. The increase in cash provided by operating activities was primarily
attributable to the effects