Back to GetFilings.com
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number ___333-82408___
Verizon Wireless of the East LP
(Exact name of registrant as specified in its charter)
Delaware 48-1262622
(State of Organization) (I.R.S. Employer
Identification No.)
180 Washington Valley Road 07921
Bedminster, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number (908) 306-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __ No [x]
- -------------------------------------------------------------------------------
Table of Contents
Item No.. Page
- ------- ----
Part I. Financial Information
- --------------------------------------------------------------------------------
Overview 1
1. Financial Statements (Unaudited)
Verizon Wireless of the East LP
Balance Sheets
June 30, 2002 and December 31, 2001 2
Statements of Operations and Partners' Capital
For the three and six months ended June 30, 2002 3
Statement of Cash Flows
For the six months ended June 30, 2002 4
Notes to Unaudited Financial Statements 5
Orange County-Poughkeepsie Limited Partnership
Balance Sheets
June 30, 2002 and December 31, 2001 9
Statements of Operations
For the three and six months ended June 30, 2002 and 2001 10
Statement of Changes in Partners' Capital
For the six months ended June 30, 2002 11
Statements of Cash Flows
For the six months ended June 30, 2002 and 2001 12
Notes to Unaudited Financial Statements 13
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
3. Quantitative and Qualitative Disclosures About Market Risk 22
Part II. Other Information
- -------------------------------------------------------------------------------
1. Legal Proceedings 22
2. Changes in Securities and Use of Proceeds 22
6. Exhibits and Reports on Form 8-K 23
- -------------------------------------------------------------------------------
Overview
- -------------------------------------------------------------------------------
The following Form 10-Q presents financial statements, related notes and
management's discussion and analysis of financial condition and results of
operations for Verizon Wireless of the East LP and Orange County-Poughkeepsie
Limited Partnership. Verizon Wireless of the East LP had a very limited amount
of assets and business during the periods presented.
On December 18, 2001, Cellco Partnership (d/b/a Verizon Wireless) and Price
Communications Corp. agreed to combine substantially all the assets of the
business operations of Price Communications Wireless, Inc. ("PCW") and certain
assets of Cellco Partnership, in a transaction valued at $1.7 billion,
including $550 million in net debt that will be assumed or redeemed by the
combined entity. Under the terms of the Transaction Agreement (the
"Agreement"), at the closing, substantially all of the assets of PCW and
certain assets of Cellco Partnership will be contributed to a newly formed
limited partnership, Verizon Wireless of the East LP (the "Partnership"). The
Partnership will be controlled and managed by Cellco Partnership. As of June
30, 2002, the closing had not yet occurred and the Partnership had very limited
business transactions through this date.
On July 23, 2002, the shareholders of Price Communications approved the
transactions contemplated by the Agreement at their annual meeting.
Consummation of the transaction, however, remains subject to satisfaction of
the other conditions specified in the Agreement. Pursuant to the terms of the
Agreement, the following transactions will occur upon the closing of the
transaction:
o PCW will contribute substantially all of its assets and approximately $160
million in cash to the Partnership in exchange for a preferred limited partner
interest in the Partnership.
o Subsidiaries of Cellco Partnership will contribute an aggregate 85%
partnership interest in the Orange County-Poughkeepsie Limited Partnership
("OCP"), certain Federal Communications Commission ("FCC") licenses, a $500
million 6.14% promissory note receivable, payable on demand, and approximately
$235 million in cash to the Partnership in exchange for a managing general
partner interest and a limited partner interest in the Partnership.
o The Partnership will assume certain liabilities of PCW relating to its
business, including such liabilities that arose under PCW's $175 million of 11
3/4% Senior Subordinated Notes due 2007 and $525 million of 9 1/8% Senior
Secured Notes due 2006. The Partnership will obtain a $350 million term loan
facility ("credit facility") from Verizon Communications Inc. to be used in
connection with the covenant defeasance and redemption of the notes referred to
above. The credit facility will be guaranteed by PCW and matures four and
one-half years after the asset contribution (or six months following the
occurrence of certain specified events). At the closing of the asset
contribution, the Partnership will use approximately $160 million in cash
contributed by PCW, $235 million of cash contributed by Cellco and the $350
million proceeds from the credit facility to effect a covenant defeasance with
respect to all of the 11 3/4% Senior Subordinated Notes due 2007 and the 9 1/8%
Senior Secured Notes due 2006. These funds will be used to redeem such notes on
the first business day after the closing.
The Agreement may be terminated at any time prior to the asset contribution by
mutual agreement of Cellco Partnership and Price Communications Corp., or by
either Cellco Partnership or Price Communications Corp., if the asset
contribution has not been consummated on or before August 31, 2002 through no
fault of the party seeking to exercise such termination rights. We expect that
the closing of the transaction will occur on August 15, 2002. However, no
assurances can be given. If the closing occurs as presently contemplated or
otherwise prior to September 30, 2002, the closing transactions will be
reflected in the Partnership's financial statements for the quarter ended
September 30, 2002.
The operations of the Partnership will be closely integrated with Cellco
Partnership's other wireless telecommunications assets. Under Cellco
Partnership's brand name, Verizon Wireless, the Partnership will provide voice
and data services in the acquired PCW markets in Alabama, Georgia, South
Carolina and Florida. In addition, the Partnership will provide wholesale
cellular mobile telephone service to resellers who operate principally in the
Orange County and Poughkeepsie, New York metropolitan areas through an 85%
interest in Orange County-Poughkeepsie Limited Partnership, and also provide
broadband PCS wireless communication services within the Macon, Georgia Basic
Trading Area ("BTA") and within a portion of the Atlanta, Georgia BTA.
1
- -------------------------------------------------------------------------------
Part I - Financial Information
- -------------------------------------------------------------------------------
Item 1. Financial Statements
- -------------------------------------------------------------------------------
Verizon Wireless of the East LP
Balance Sheets
(In whole dollars) (Unaudited) June 30, December 31,
---------- ------------
2002 2001
---------- ------------
Assets
Current Assets
Cash $ 2,518 $2,504
Other current assets 4 -
-------- ------
Total current assets 2,522 2,504
Property, plant and equipment, net 103,375 -
Deferred charges and other 19,773 -
-------- ------
Total assets $125,670 $2,504
======== ======
Liabilities and Partners' Capital
Current liabilities
Accounts payable and accrued liabilities $ 18,615 $ -
Due to general partner 105,448 -
-------- ------
Total current liabilities 124,063 -
Contingencies (see Note 5)
Partners' capital 1,607 2,504
-------- ------
Total liabilities and partners' capital $125,670 $2,504
======== ======
See Notes to Unaudited Financial Statements
2
Verizon Wireless of the East LP
Statements of Operations and Partners' Capital
(In whole dollars) (Unaudited) For The Three Months For The Six Months
Ended June 30, 2002 Ended June 30, 2002
-------------------- -------------------
Operating Costs and Expenses
Operating and support expenses $ (400) $ (400)
-------- ---------
Operating loss (400) (400)
Interest expense, net (500) (497)
-------- ---------
Net loss (900) (897)
Beginning partners' capital 2,507 2,504
-------- ---------
Ending Partners' Capital $ 1,607 $ 1,607
======== =========
See Notes to Unaudited Financial Statements
3
Verizon Wireless of the East LP
Statement of Cash Flows
For The Six Months
(In whole dollars) (Unaudited) Ended June 31, 2002
- ------------------------------ -------------------
Cash Flows From Operating Activities
Net loss $ (897)
Adjustments to reconcile net income to
net cash used in operating activities:
Changes in certain assets and liabilities:
Deferred charges (19,773)
Changes in current assets and liabilities 18,611
------
Net cash used in operating activities (2,059)
------
Cash Flows From Investing Activities
Capital expenditures (103,375)
--------
Net cash used in investing activities (103,375)
--------
Cash Flows From Financing Activities
Net change in due to general partner 105,448
--------
Net cash provided from financing activities 105,448
--------
Increase in cash 14
Cash, beginning of period 2,504
--------
Cash, end of period $ 2,518
==========
See Notes to Unaudited Financial Statements
4
Verizon Wireless of the East LP
Notes to Unaudited Financial Statements
1. Basis of Presentation
- --------------------------------------------------------------------------------
The accompanying unaudited financial statements have been prepared based upon
Securities and Exchange Commission (SEC) rules that permit reduced disclosure
for interim periods. These financial statements reflect all adjustments that
are necessary for a fair presentation of results of operations and financial
condition for the interim periods shown including normal recurring accruals and
other items. The results for the interim periods are not necessarily indicative
of results for the full year. For a more complete discussion of significant
accounting policies and certain other information, you should refer to the
December 31, 2001 financial statements included in the Verizon Wireless of the
East LP and Verizon Communications Inc. Form S-4 filed on May 31, 2002.
2. Formation of Verizon Wireless of the East Limited Partnership and
Description of Business
- --------------------------------------------------------------------------------
Formation of Verizon Wireless of the East Limited Partnership
Verizon Wireless of the East LP (the "Partnership") was formed on December 17,
2001, for the purpose of acquiring the assets that will be contributed by Price
Communications Wireless, Inc. ("PCW"), a subsidiary of Price Communications
Corp., and subsidiaries of Cellco Partnership ("Cellco") pursuant to the
Transaction Agreement (the "Agreement") dated December 18, 2001, as amended.
Consummation of the asset contribution transaction is contingent upon the
approval of the shareholders of Price Communications Corp and the satisfaction
of certain other closing conditions. On July 23, 2002, the shareholders of
Price Communications Corp. approved the transactions contemplated by the
Agreement at their annual meeting and the transaction is presently contemplated
to close on August 15, 2002. Consummation of the transaction, however, remains
subject to satisfaction of the other conditions specified in the Agreement.
Because the transaction had not closed prior to June 30, 2002, the Partnership
had very limited business transactions from its date of inception through the
quarter ended June 30, 2002.
Pursuant to the Agreement, at the closing of the transaction, Verizon Wireless
of Georgia LLC and Verizon Wireless Acquisition South LLC, subsidiaries of
Cellco, and PCW will enter into the limited partnership agreement relating to
the Partnership. Further, in accordance with the Agreement, PCW will contribute
to the Partnership substantially all of its business assets and approximately
$160 million in cash, and Cellco, through its subsidiaries, will contribute to
the Partnership Federal Communications Commission ("FCC") licenses to provide
broadband Personal Communications Services ("PCS") within the Macon, Georgia
Basic Trading Area ("BTA") and a portion of the Atlanta, Georgia BTA, a $500
million 6.14% promissory note receivable, payable on demand, approximately $235
million in cash and its aggregate 85% interest in Orange County-Poughkeepsie
Limited Partnership ("OCP"). The Partnership will assume certain liabilities of
PCW relating to its business, including such liabilities that arise under PCW's
11 3/4% senior subordinated notes due 2007 and 9 1/8% senior secured notes due
2006. Verizon Wireless of Georgia LLC will be the managing general partner and
Verizon Wireless Acquisition South LLC and PCW will be the limited partners of
the Partnership.
Also at the closing, the Partnership will obtain a $350 million term loan
facility ("credit facility") from Verizon Communications Inc.. Interest will be
paid quarterly in arrears. The credit facility will be guaranteed by PCW and
matures four and one-half years after the asset contribution (or six months
following the occurrence of certain specified events). At the closing of the
asset contribution, the Partnership will use approximately $160 million in
cash contributed by PCW, approximately $235 million of cash contributed
by Cellco and the $350 million proceeds from the credit facility to effect a
covenant defeasance with respect to all of the 11 3/4% Senior Subordinated
Notes due 2007 and the 9 1/8% Senior Secured Notes due 2006. These funds will be
used to redeem such notes on the first business day after the closing.
Pursuant to the limited partnership agreement, any profits of the Partnership
will be allocated on a preferred basis to PCW's capital account quarterly up to
an amount equal to a 4% per annum (based on the weighted daily average balance
of PCW's capital account), subject to certain downward adjustments related to
the costs of the credit facility. This percentage return is presently expected
to be approximately 2.9%. The actual rate will not be
5
determined until the closing of the transaction and could vary materially from
this estimate. PCW is not entitled to a share of any profits of the Partnership
in excess of this preferred return.
PCW 's capital account will not be allocated any preferred return after the
earlier to occur of (1) the expiration of the period (if any) within which PCW
is entitled to elect to exchange its preferred interest for Verizon Wireless
common stock or (2) the fourth anniversary of the asset contribution.
The Agreement may be terminated at any time prior to the asset contribution by
mutual agreement of Cellco Partnership and Price Communications Corp. or by
either Cellco Partnership or Price Communications Corp., if the asset
contribution has not been consummated on or before August 31, 2002 through no
fault of the party seeking to exercise such termination rights.
The closing transactions are expected to be reflected in the Partnership's
financial statements for the quarter ended September 30, 2002.
Description of Business
The Partnership will engage in the business of constructing, developing,
managing, operating, marketing and selling cellular telephone systems or
service, wireless service, paging service, PCS and other commercial mobile
radio service, and any business related thereto.
Under Cellco's brand name, Verizon Wireless, the Partnership will provide voice
and data services in the acquired PCW markets in Alabama, Georgia, South
Carolina and Florida. In addition, through its 85% interest in Orange
County-Poughkeepsie Limited Partnership, the Partnership will provide wholesale
cellular mobile telephone service to resellers operating in the Orange County
and Poughkeepsie, New York metropolitan areas and provide broadband PCS
wireless communication services within the Macon, Georgia BTA and within a
portion of the Atlanta, Georgia BTA.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (SFAS) No.141, "Business Combinations,"
No.142, "Goodwill and Other Intangible Assets" and No. 143, "Accounting for
Asset Retirement Obligations."
SFAS No.141 requires the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method is no longer permitted. SFAS No.141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination that is completed after June 30, 2001.
SFAS No.142 requires that goodwill and indefinite-lived intangible assets will
no longer be amortized. Instead, these assets must be reviewed annually (or
more frequently under certain conditions) for impairment in accordance with
this statement. This impairment test uses a fair value approach rather than the
undiscounted cash flows approach previously required by SFAS No.121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." Intangible assets that have finite lives will continue to
be amortized over their useful lives and reviewed for impairment in accordance
with SFAS No.144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." The Partnership is required to adopt SFAS No.142 effective January 1,
2002. As of June 30, 2002, the Partnership has no goodwill or intangible assets
recorded in its financial statements.
In conjunction with the asset contribution transaction to be recorded within
the third quarter of 2002, the Partnership will receive certain cellular
licenses and other intangibles contributed by PCW and subsidiaries of Cellco.
The Partnership has completed a preliminary assessment of the useful lives of
the intangible assets being contributed. The principal intangible asset being
contributed in the asset contribution is cellular licenses. These licenses will
provide the Partnership with the right to utilize certain radio frequency
spectrum. Radio frequency spectrum is a resource that has always existed and
will continue to exist indefinitely. While licenses are issued for only a fixed
time, generally ten years, such licenses are subject to renewal by the Federal
Communications Commission, ("FCC"). Renewals of licenses typically occur
routinely and at nominal cost. Management of the Partnership does not expect
that there are currently any legal, regulatory, contractual, competitive,
economic or other factors that limit the useful life of the contributed
cellular licenses. As a result, the cellular licenses are expected to be
treated as an indefinite life intangible asset under the provisions of SFAS No.
142 and are not expected to be
6
amortized but rather are expected to be tested for impairment annually or
between annual dates if events or circumstances warrant. The Partnership will
reevaluate the useful life determination for cellular licenses each reporting
period to determine whether events and circumstances continue to support an
indefinite useful life.
Following the closing of the transaction, all of the contributed cellular
licenses will be integrated into Cellco's existing nationwide footprint. All of
the licenses in Cellco's nationwide footprint are tested in the aggregate for
impairment under SFAS No. 142. When testing the carrying value of the cellular
licenses for impairment, Cellco determines the fair value of the aggregated
cellular licenses by subtracting from enterprise discounted cash flows the fair
value of all of the other net tangible and intangible assets of Cellco. If the
fair value of the aggregated cellular licenses as determined above is less than
the aggregated carrying amount of the licenses, an impairment will be
recognized by Cellco. Any impairment loss recognized by Cellco will be
allocated to its consolidated subsidiaries based upon a reasonable methodology.
Subsequent to the closing of the transaction, Cellco will perform an updated
impairment test which incorporates the contributed cellular licenses. Future
tests for impairment will be performed by Cellco at least annually and more
often if events or circumstances warrant.
SFAS No.143 requires entities to recognize the fair value of any legal
obligation associated with the retirement of long-lived assets and to
capitalize that amount as a part of the book value of the long-lived asset.
That cost is then depreciated over the remaining life of the underlying
long-lived asset. The Partnership is required to adopt the standard effective
January 1, 2003. The Partnership will evaluate its long-lived assets retirement
obligation in relation to the provisions of SFAS No.143 to determine the
impact, if any, on its future results of operations or financial position.
In August 2001, the FASB issued SFAS No.144,"Accounting for the Impairment or
Disposal of Long-Lived Assets." This standard re-addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. It concludes
that one accounting model be used for long-lived assets to be disposed of by
sale and broadens the presentation of discontinued operations to include more
disposal transactions. The Partnership has adopted the standard effective
January 1, 2002. The adoption of SFAS No.144 had no material effect on the
Partnership's results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This standard rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers," and SFAS No. 64, " Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This standard amends SFAS No. 13, "Accounting for
Leases," to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
such transactions. This standard also amends other existing authoritative
pronouncements to make various technical corrections. The Partnership will
adopt the provision for rescission of SFAS No. 4, 44 & 64 effective January 1,
2003 and will apply the amendments to SFAS No. 13 to all transactions after May
15, 2002. All other provisions of the standard will be applied to financial
statements issued after May 15, 2002. The Partnership does not expect the
impact of the adoption of SFAS No. 145 to have a material effect on the
Partnership's results of operations or financial position.
3. Property, Plant and Equipment
- --------------------------------------------------------------------------------
Property, plant and equipment consists of the following:
(In whole dollars) At June 30, 2002
------------------ ----------------
Construction-in-progress $ 103,375
--------------
Total property, plant and equipment $ 103,375
==============
4. Due to General Partner
- --------------------------------------------------------------------------------
Due to general partner principally represents the Partnership's net cash
position. The general partner manages all cash and financing activities for the
Partnership. As such, the change in due to general partner is reflected as a
financing activity in the statement of cash flows. Additionally, administrative
and operating costs incurred by the general partner on behalf of the
Partnership are charged to the Partnership through this account. Interest
expense is based on the average monthly outstanding balance in this account and
is calculated by applying Cellco's average borrowing
7
rate, which was approximately 4.6% for the six months ended June 30, 2002.
Included in interest expense, net was $515 of interest expense for the six
months ended June 30, 2002 related to the due to general partner.
The Partnership expects to borrow from its general partner to meet its working
capital, capital expenditure and other general partnership liquidity needs. The
general partner is not obligated to provide such financing to the Partnership.
5. Contingencies
- --------------------------------------------------------------------------------
Cellco is subject to various lawsuits and other claims, including class
actions, product liability, patent infringement and partnership disputes, and
claims involving relations with resellers and agents. Various consumer class
actions lawsuits allege that Cellco breached contracts with consumers, violated
certain state consumer protection laws and other statutes and defrauded
customers through concealed or misleading billing practices. Certain of these
lawsuits and other claims may impact the Partnership. These litigation matters
may involve indemnification obligations by third parties and/or affiliated
parties covering all or part of any potential damage awards against Cellco and
the Partnership and/or insurance coverage. All of the above matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
After the closing of the transaction, the Partnership may be allocated a
portion of the damages that may result upon adjudication of these matters if
the claimants prevail in their actions. The potential effect, if any, on the
financial condition and results of operations of the Partnership, in the period
in which these matters are resolved, may be material.
8
Orange County-Poughkeepsie Limited Partnership
Balance Sheets
June 30, December 31,
(Dollars in Thousands) (Unaudited) 2002 2001
- ---------------------------------- -------- ------------
Assets
Current assets
Accounts receivable $ 420 $ 495
Unbilled revenue 1,997 1,545
Due from general partner 28,886 18,072
Prepaid expenses 126 137
------- ---------
Total current assets 31,429 20,249
Property, plant and equipment, net 27,479 26,057
Deferred charges and other assets, net 3 5
------- ---------
Total assets $58,911 $ 46,311
======= =========
Liabilities and Partners' Capital
Current liabilities
Accounts payable and accrued liabilities $ 788 $ 334
Advance billings 253 196
------- ---------
Total current liabilities 1,041 530
Contingencies (see Note 5)
Partners' capital 57,870 45,781
------- ---------
Total liabilities and partners' capital $58,911 $ 46,311
======= =========
See Notes to Unaudited Financial Statements
9
Orange County-Poughkeepsie Limited Partnership
Statements of Operations
(Dollars in Thousands) (Unaudited) For The Three Months Ended June 30, For The Six Months Ended June 30,
2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
Operating Revenue
Cellular service $ 27,285 $ 19,884 $ 51,007 $ 36,615
------------ --------------- ------------- -------------
Total operating revenue 27,285 19,884 51,007 36,615
------------ --------------- ------------- -------------
Operating Costs and Expenses
Cost of service 2,128 2,252 4,519 4,100
General and administrative 1,663 1,507 3,063 2,887
Depreciation and amortization 1,023 869 2,055 1,694
------------ --------------- ------------- -------------
Total operating costs and expenses 4,814 4,628 9,637 8,681
------------ --------------- ------------- -------------
Operating Income 22,471 15,256 41,370 27,934
Interest income, net 406 91 719 794
------------ --------------- ------------- -------------
Net Income $ 22,877 $ 15,347 $ 42,089 $ 28,728
============ =============== ============= =============
See Notes to Unaudited Financial Statements
10
Orange County-Poughkeepsie Limited Partnership
Statement of Changes in Partners' Capital
(Dollars in Thousands) (Unaudited) NYNEX Warwick
Mobile Taconic Valley Total
Limited Telephone Telephone Partners'
Partnership 2 Corporation Company Capital
- -------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 $ 38,915 $ 3,433 $ 3,433 $ 45,781
Net income 35,775 3,157 3,157 42,089
Distribution to partners (25,500) (2,250) (2,250) (30,000)
------------ --------------- ------------- -------------
Balance at June 30, 2002 $ 49,190 $ 4,340 $ 4,340 $ 57,870
============ =============== ============= =============
See Notes to Unaudited Financial Statements
11
Orange County-Poughkeepsie Limited Partnership
Statements of Cash Flows
For The Six Months Ended June 30,
(Dollars in thousand) (Unaudited) 2002 2001
- --------------------------------- ---------------------------------
Cash Flows From Operating Activities
Net income $ 42,089 $ 28,728
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 2,055 1,694
Changes in certain assets and liabilities:
Accounts receivable 75 (1,301)
Unbilled revenue (452) (372)
Prepaid expenses 11 4
Deferred charges and other assets 2 1
Accounts payable and accrued liabilities 454 1,431
Advance billings 57 3
--------- ---------
Net cash provided by operating activities 44,291 30,188
--------- ---------
Cash Flows From Investing Activities
Capital expenditures (3,477) (1,722)
--------- ---------
Net cash used in investing activities (3,477) (1,722)
--------- ---------
Cash Flows From Financing Activities
Distribution to partners (30,000) (40,000)
(Increase) decrease in due from general partner, net (10,814) 11,534
--------- ---------
Net cash used in financing activities $ (40,814) $ (28,466)
--------- ---------
Change in cash - -
Cash, beginning of period - -
--------- ---------
Cash, end of period $ - $ -
========= =========
See Notes to Unaudited Financial Statements
12
Orange County-Poughkeepsie Limited Partnership
Notes to Unaudited Financial Statements
1. Basis of Presentation
- --------------------------------------------------------------------------------
The accompanying unaudited financial statements have been prepared based upon
Securities and Exchange Commission (SEC) rules that permit reduced disclosure
for interim periods. These financial statements reflect all adjustments that
are necessary for a fair presentation of results of operations and financial
condition for the interim periods shown including normal recurring accruals and
other items. The results for the interim periods are not necessarily indicative
of results for the full year. For a more complete discussion of significant
accounting policies and certain other information, you should refer to the
December 31, 2001 financial statements included in the Verizon Wireless of the
East LP and Verizon Communications Inc. Form S-4 filed on May 31, 2002.
Certain reclassifications have been made to the 2001 financial statements to
conform to the current year presentation.
2. Background and Description of Business
- --------------------------------------------------------------------------------
The Orange County-Poughkeepsie Limited Partnership ("OCP") operates as a
limited partnership between NYNEX Mobile Limited Partnership 2 ("NYNEX Mobile
LP 2"), Taconic Telephone Corporation, and Warwick Valley Telephone Company.
NYNEX Mobile LP 2 is a partnership 100% beneficially owned by Cellco
Partnership ("Cellco") among Cellco, the Utica-Rome Cellular Partnership and
Bell Atlantic Mobile Systems of Allentown, Inc. ("BAMS of Allentown"), with
ownership interests of 54%, 45% and 1%, respectively. NYNEX Mobile LP 2 holds
an 85% partnership interest in OCP. Taconic and Warwick each hold limited
partnership interests of 7.5%.
OCP provides cellular mobile telephone service to resellers who operate in the
Orange County and Poughkeepsie, New York metropolitan areas. The Orange
County-Poughkeepsie cellular system became operational in 1987. The partners
make capital contributions, share in the operating results and receive
distributions from OCP in accordance with their respective ownership
percentages.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." This standard requires entities to recognize the
fair value of any legal obligation associated with the retirement of long-lived
assets and to capitalize that amount as a part of the book value of the
long-lived asset. That cost is then depreciated over the remaining life of the
underlying long-lived asset. OCP is required to adopt the standard effective
January 1, 2003 with early adoption allowed. OCP is currently evaluating its
long-lived assets retirement obligation in relation to the provisions of SFAS
No. 143 to determine the impact, if any, on its future results of operations or
financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long- Lived Assets." This standard re-addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
It concludes that one accounting model be used for long-lived assets to be
disposed of by sale and broadens the presentation of discontinued operations to
include more disposal transactions. OCP has adopted the standard effective
January 1, 2002. The adoption of SFAS No. 144 had no material effect on OCP's
results of operations or financial position.
13
3. Property, Plant and Equipment
- -------------------------------------------------------------------------------
Property, plant and equipment consists of the following:
(Dollars in Thousands) (Unaudited) June 30, December 31,
2002 2001
- -------------------------------------------------------------------------------
Buildings (10-40 years) $ 10,092 $ 9,451
Cellular plant equipment (4-15 years) 36,640 33,803
Furniture, fixtures and equipment (2-7 years) 329 381
-------- -----------
47,061 43,635
Accumulated depreciation (19,582) (17,578)
-------- -----------
Property, plant and equipment, net $ 27,479 $ 26,057
======== ===========
Property, plant and equipment includes the following:
Network engineering costs of $193 and $112 were capitalized during the six
months ended June 30, 2002 and the year ended December 31, 2001, respectively.
Construction-in-progress included in certain of the classifications shown
above, principally cellular plant equipment, amounted to $2,369 and $1,598 at
June 30, 2002 and December 31, 2001, respectively.
Depreciation expense for the six months ended June 30, 2002 and 2001 was $2,055
and $1,694, respectively.
4. Due From General Partner
- -------------------------------------------------------------------------------
Due from general partner principally represents OCP's cash position. The
general partner manages all cash and financing activities for OCP. As such, the
change in due from general partner is reflected as a financing activity in the
statements of cash flows. Additionally, administrative and operating costs
incurred by the general partner on behalf of OCP are charged to OCP through
this account. Interest income is based on the average monthly outstanding
balance in this account and is calculated by applying Cellco's average
borrowing rate, which was approximately 4.6% and 6.0% for the six months ended
June 30, 2002 and 2001, respectively. Included in interest income, net was $719
and $794 for the six months ended June 30, 2002 and 2001, respectively related
to the due from general partner.
5. Contingencies
- -------------------------------------------------------------------------------
Cellco is subject to various lawsuits and other claims, including class
actions, product liability, patent infringement and partnership disputes, and
claims involving relations with resellers and agents. Various consumer class
actions lawsuits allege that Cellco breached contracts with consumers, violated
certain state consumer protection laws and other statutes and defrauded
customers through concealed or misleading billing practices. Certain of these
lawsuits and other claims may impact OCP. These litigation matters may involve
indemnification obligations by third parties and/or affiliated parties covering
all or part of any potential damage awards against Cellco and OCP and/or
insurance coverage. All of the above matters are subject to many uncertainties,
and outcomes are not predictable with assurance.
OCP may be allocated a portion of the damages that may result upon adjudication
of these matters if the claimants prevail in their actions. Consequently, the
ultimate liability with respect to these matters at June 30, 2002 cannot be
ascertained. The potential effect, if any, on the financial condition and
results of operations of OCP, in the period in which these matters are
resolved, may be material.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
In this Management's Discussion and Analysis of Financial Condition and Results
of Operations, "we", "our", "us" and "the Partnership" refer to Verizon
Wireless of the East LP.
Overview
- -------------------------------------------------------------------------------
The Partnership was formed on December 17, 2001 for the purpose of acquiring
the assets that will be contributed by PCW and subsidiaries of Cellco
Partnership pursuant to the Transaction Agreement (the "Agreement") dated
December 18, 2001, as amended. The consummation of the asset contribution
transaction is contingent upon the approval of the shareholders of Price
Communications Corp. and the satisfaction of certain other closing conditions.
On July 23, 2002 the shareholders of Price Communications Corp. approved the
transactions contemplated by the Agreement at their annual meeting. Closing of
the transaction, however, remains subject to the satisfaction of the other
conditions specified in the Agreement. Upon consummation of the asset
contribution, OCP will be our "predecessor" for financial reporting purposes.
Following the closing, our business will consist of the ownership and operation
of all of the assets to be contributed to the Partnership by PCW and Cellco
Partnership and its subsidiaries pursuant to the Agreement. The closing of the
transaction is scheduled to occur on August 15, 2002, but no assurances can be
given.
Following the closing of the transaction, our operations will be closely
integrated with Cellco Partnership's other wireless telecommunications assets.
Under Cellco Partnership's brand name, Verizon Wireless, we will provide voice
and data services in the acquired PCW markets in Alabama, Georgia, South
Carolina and Florida. In addition, we will provide wholesale cellular mobile
telephone service to resellers who operate principally in the Orange County and
Poughkeepsie, New York metropolitan areas through an 85% interest in Orange
County-Poughkeepsie Limited Partnership, and also provide broadband PCS
wireless communication services within the Macon, Georgia BTA and within a
portion of the Atlanta, Georgia BTA. Cellco Partnership intends to provide or
arrange for provision of certain services to us in connection with its
business. These services may include (1) administrative, accounting, billing,
credit, collection, insurance, legal, purchasing, clerical and such other
general services as may be necessary to administer the Partnership; (2) design,
engineering, optimization, implementation, surveillance, maintenance, repair
and such other technical services as may be necessary to operate our wireless
network; and (3) assistance in the preparation of filings with regulatory
authorities and in the negotiations of transactions with respect to the FCC
licenses owned by us. Cellco will charge us for these services at rates that
are at least as favorable as the rates it charges other partnerships managed by
Cellco.
We will engage in the business of constructing, developing, managing,
operating, marketing and selling cellular telephone systems or service,
wireless service, paging service, Personal Communications Service ("PCS") and
other commercial mobile radio service, and any business related thereto. We
will not have any employees. The employees of Cellco Partnership will manage
and operate our business, on our behalf.
Results of Operations
- -------------------------------------------------------------------------------
Verizon Wireless of the East LP
- -------------------------------
Other than initial capitalization and expenses of $400, we have no operating
activities for the six months ended June 30, 2002. Interest expense for the
period is associated with the borrowings from our general partner to fund
capital expenditures and expenses. Our operating revenue and expenses,
depreciation and amortization charges, minority interest expense and interest
income will increase substantially in future periods.
For illustrative purposes, OCP's and PCW's three months ended March 31, 2002
and year-end December 31, 2001 results of operations have been consolidated and
are shown on a pro forma basis in the Verizon Wireless of the East LP and
Verizon Communications Inc. Form S-4 filed on May 31, 2002. If the closing
occurs on or prior to September 30, 2002, the September 30, 2002 quarterly
financial statements will reflect the results of operations of the combined
entity from the date of the asset contribution transaction.
15
Orange County-Poughkeepsie Limited Partnership
- ----------------------------------------------
OCP provides wholesale cellular service to the Orange County and Poughkeepsie
metropolitan areas to resellers who operate in that geographic area. The Orange
County-Poughkeepsie cellular system became operational in 1987.
NYNEX Mobile Limited Partnership 2, a partnership beneficially owned by Cellco
Partnership, currently holds a 70% general partnership interest and a 15%
limited partnership interest in OCP. Taconic Telephone Corporation and Warwick
Valley Telephone Company each hold limited partnership interests of 7.5%.
Pursuant to the transaction agreement, Cellco Partnership and its subsidiaries
will contribute NYNEX Mobile Limited Partnership 's 70% general partner
interest and 15% limited partner interest in OCP to Verizon Wireless of the
East.
Presentation of Financial Information
As a wholesale provider, OCP owns and operates a cellular telecommunications
network and sells lines of service to reseller companies, which in turn sell to
individual retail subscribers.
Operating Revenues. OCP earns revenue by providing access to the cellular
network (access revenue) and for usage of the cellular network (airtime/usage
revenue), which includes roaming and long distance revenue. Long distance
represents calls placed by OCP 's reseller customers and those of other
carriers within OCP's service area.
Access revenue is billed one month in advance and is recognized when earned.
Airtime/usage revenue, roaming revenue and long distance revenue are recognized
when service is rendered and included in unbilled revenue until billed.
Operating Costs and Expenses. Operating expenses include all direct costs
related to OCP, OCP 's share of all indirect distribution costs in the service
area and charges of administrative and operating costs from the managing
general partner.
Employees of Cellco Partnership provide services performed on behalf of OCP.
These employees are not employees of OCP; therefore, operating expenses include
direct and indirect charges of salary and employee benefit costs for the
services provided to OCP.
Operating expenses consist of the following:
o Cost of service: primarily includes direct telecom charges, which are
costs to handle calls over OCP's network, including landline charges,
trunk lines and other costs to maintain the network;
o General and administrative expenses: includes all operating expenses
not included in the other operating cost and expense categories,
including indirect charges, and
o Depreciation and amortization: includes depreciation of network and
other assets.
Due from General Partner. Due from general partner principally represents OCP's
cash position. The general partner manages all cash and financing activities of
OCP. As such, the due from general partner is reflected as a financing activity
in the Statements of Cash Flows. Additionally, administrative and operating
costs incurred by the general partner on behalf of OCP are charged to OCP
through this account. Interest income is calculated by applying Cellco
Partnership's average borrowing rate to the average monthly outstanding balance
in this account and is included in interest income, net on the statement of
operations.
16
Results of Operations
The following financial data and discussions are based solely on the historical
operations of OCP prior to the asset contribution.
For The Three Months
Ended June 30,
----------------------
2002 2001 Change % Change
- -------------------------------------------------------------------------------------------------------
Operating Data: (Dollars in Thousands) (Unaudited)
Operating revenue $ 27,285 $ 19,884 $ 7,401 37.2%
Cost of service 2,128 2,252 (124) (5.5%)
General and administrative 1,663 1,507 156 10.4%
Depreciation and amortization 1,023 869 154 17.7%
Interest Income, net 406 91 315 346.2%
Other Operating Data:
Subscribers (in thousands) 114.6 101.5 13.1 12.9%
Average revenue per unit $80.83 $67.72 $13.11 19.4%
Subscribers
As of June 30, 2002, OCP had approximately 114.6 thousand subscribers on its
network through reseller arrangements, an increase of 12.9% compared to June
30, 2001.
Operating revenue
Total operating revenue for the three months ended June 30, 2002 was $27.3
million, an increase of $7.4 million, or 37.2%, compared to the three months
ended June 30, 2001. The increase was primarily attributed to an increase in
the number of average subscribers as well as an increase in average monthly
usage per subscriber.
Average revenue per unit for the three months ended June 30, 2002 was $80.83,
an increase of $13.11, or 19.4%, compared to the three months ended June 30,
2001. The increase is primarily due to a 31% increase in average monthly usage
per subscriber for the three months ended June 30, 2002 compared to the three
months ended June 30, 2001. To the extent subscribers and monthly usage per
subscriber continue to increase, we expect the trend of increasing revenue per
unit to continue.
Operating costs and expenses
Cost of service. Cost of service for the three months ended June 30, 2002 was
$2.1 million, a decrease of $124 thousand, or 5.5%, compared to the three
months ended June 30, 2001. The decrease is due primarily to a reduction in
direct telecom charges offset by a 51% increase in minutes of use on OCP's
network.
General and administrative expenses. General and administrative expenses for
the three months ended June 30, 2002 were $1.7 million, an increase of $156
thousand, or 10.4%, compared to the three months ended June 30, 2001. This
increase is primarily due to an increase in administrative and support costs.
Depreciation and amortization. Depreciation and amortization for the three
months ended June 30, 2002 was $1.0 million, an increase of $154 thousand, or
17.7%, compared to the three months ended June 30, 2001. This increase is due
to the build-out of OCP's digital network and the related capital expenditures.
We expect to continue to build-out and upgrade OCP's network.
Interest income, net
Interest income, net for the three months ended June 30, 2002 was $406
thousand, an increase of $315 thousand, or 346.2%, compared to the three months
ended June 30, 2001. The increase was primarily due to the increase in the
average balance in the due from general partner offset by a decrease in
Cellco's average borrowing rate for the three months ended June 30, 2002
compared to the three months ended June 30, 2001.
For The Six Months Ended
June 30,
2002 2001 Change % Change
- -------------------------------------------------------------------------------------------------------------
Operating Data: (Dollars in Thousands)
(Unaudited)
Operating revenue $ 51,007 $36,615 $14,392 39.3%
Cost of service 4,519 4,100 419 10.2%
General and administrative 3,063 2,887 176 6.1%
Depreciation and amortization 2,055 1,694 361 21.3%
Interest Income, net 719 794 (75) (9.4%)
Other Operating Data:
Subscribers (in thousands) 114.6 101.5 13.1 12.9%
Average revenue per unit $ 76.58 $ 63.46 $ 13.12 20.7%
Subscribers
As of June 30, 2002, OCP had approximately 114.6 thousand subscribers on its
network through reseller arrangements, an increase of 12.9% compared to June
30, 2001.
Operating revenue
Total operating revenue for the six months ended June 30, 2002 was $51.0
million, an increase of $14.4 million, or 39.3%, compared to the six months
ended June 30, 2001. The increase was primarily attributed to an increase in
the number of average subscribers as well as an increase in average monthly
usage per subscriber.
Average revenue per unit for the six months ended June 30, 2002 was $76.58, an
increase of $13.12, or 20.7%, compared to the six months ended June 30, 2001.
The increase is primarily due to a 31% increase in average monthly usage per
subscriber for the six months ended June 30, 2002 compared to the six months
ended June 30, 2001. To the extent subscribers and monthly usage per subscriber
continue to increase, we expect the trend of increasing revenue per unit to
continue.
Operating costs and expenses
Cost of service. Cost of service for the six months ended June 30, 2002 was
$4.5 million, an increase of $419 thousand, or 10.2%, compared to the six
months ended June 30, 2001. The increase is due primarily to a 51.2% increase
in minutes of use on OCP's network.
General and administrative expenses. General and administrative expenses for
the six months ended June 30, 2002 were $3.1 million, an increase of $176
thousand, or 6.1%, compared to the six months ended June 30, 2001. This
increase is primarily due to an increase in administrative and support costs.
Depreciation and amortization. Depreciation and amortization for the six months
ended June 30, 2002 was $2.1 million, an increase of $361 thousand, or 21.3%,
compared to the six months ended June 30, 2001. This increase is due to the
build-out of OCP's digital network and the related capital expenditures. We
expect to continue to build-out and upgrade OCP's network.
Interest income, net
Interest income, net for the six months ended June 30, 2002 was $719 thousand,
a decrease of $75 thousand, or 9.4%, compared to the six months ended June 30,
2001. The decrease was primarily due to the decrease in Cellco's average
borrowing rate offset by an increase in the average balance in the due from
general partner for the six months ended June 30, 2002 compared to the six
months ended June 30, 2001.
17
Financial Condition
June 30, December 31,
----------------------
2002 2001 Change % Change
- -------------------------------------------------------------------------------------------------------
Financial Condition: (Dollars in Thousands) (Unaudited)
Total assets $ 58,911 $ 46,311 $ 12,600 27.2%
Total liabilities 1,041 530 511 96.4%
Partners Capital 57,870 45,781 12,089 26.4%
Total assets at June 30, 2002 were $58.9 million, an increase of $12.6 million,
or 27.2%, compared to December 31, 2001. The increase was primarily due to an
increase in OCP's cash position, which is reflected in the due from general
partner balance, as well as an increase in property, plant and equipment.
Total liabilities at June 30, 2002 were $1.0 million, an increase of $511
thousand, or 96.4%, compared to December 31, 2001. The increase was primarily
due to an increase in accounts payable and accrued liabilities as a result of
increased New York state gross receipts taxes payable.
Total partners' capital was $57.9 million at June 30, 2002, an increase of
$12.1 million, or 26.4%, compared to December 31, 2001. The increase was due to
net income of OCP offset by the distribution to partners of $30 million.
Liquidity and Capital Resources
- -------------------------------------------------------------------------------
Verizon Wireless of the East LP
- -------------------------------
Six Months Ended
(In whole dollars) (Unaudited) June 30, 2002
------------------------------------------------------- -----------------
Cash Flows Provided By (Used In)
Operating activities $ (2,059)
Investing activities (103,375)
Financing activities 105,448
--------------
Increase in Cash $ 14
==============
We expect that the closing of the transaction will occur on August 15, 2002.
However, no assurances can be given. If the closing does not occur, then we do
not anticipate any significant cash needs, as we will continue to have very
limited business operations.
If the transaction closes, we will have significant cash needs over the next
two years, as described below. To meet these funding requirements, we will rely
on a combination of internally generated funds and borrowings from affiliates
to fund distributions, capital expenditures and debt service needs. Financing
from affiliates will generally consist of borrowings and advances from our
general partner who in turn will be dependent upon borrowings and advances from
Cellco Partnership. We will therefore be dependent upon Cellco Partnership's
access to capital in order to provide us with financing. Cellco Partnership
receives its funding from its own cash flow from operations and borrowings from
its affiliates, including Verizon Communications Inc. and its subsidiaries, and
from unrelated entities. As a result, we are dependent upon Verizon
Communications Inc.'s access to capital.
Cash Flows Used in Operating Activities
- ---------------------------------------
As previously stated, our primary source of funds will be a combination of cash
generated from operations and borrowings from affiliates. The net cash outlays
for the six months ended June 30, 2002 were due to the payment of various
filing fees and capitalized network expenditures that were funded through
borrowings from the general partner.
Due to general partner principally represents our net cash position. The
general partner manages all of our cash and financing activities. As such, the
change in due to general partner is reflected as a financing activity in the
statement of cash flows. Additionally, administrative and operating costs
incurred by the general partner on our behalf are charged to us through this
account. Interest expense is based on the average monthly outstanding balance
in this account and is calculated by applying Cellco's average borrowing rate,
which was approximately 4.6% for the six months ended June 30, 2002. Included
in interest expense, net was $515 of interest expense for the six months ended
June 30, 2002 related to the due to general partner balance.
18
Cash Flows Used in Investing Activities
- ---------------------------------------
Substantial capital outlays will be required to convert PCW's network
infrastructure from Time Division Multiple Access ("TDMA") to Code Division
Multiple Access ("CDMA") technology. We estimate that the capital expenditures,
including cost for the conversion of the former PCW markets to CDMA, will total
approximately $231 million through the end of 2003. The conversion of the
network will also require additional costs to be treated as operating expenses
relating to the change-out of handsets and billing system conversion costs.
These costs will be approximately $51 million through the end of 2003. The
conversion of the network to CDMA, the change-out of handsets and billing
system conversion costs will be funded through loans from Cellco Partnership.
Currently, we have invested approximately $103 thousand for network design
costs in the second quarter of 2002 in anticipation of the conversion of PCW's
network and communication stores.
Cash Flows Provided by Financing Activities
- -------------------------------------------
The capital spending of $103 thousand was funded through borrowings from Cellco
Partnership.
We will obtain a $350 million term loan facility ("credit facility") from
Verizon Communications Inc. The credit facility will be guaranteed by PCW and
matures four and one-half years after the asset contribution (or six months
after the occurrence of certain specified events). The interest rate for the
credit facility is expected to be approximately 9% per year. At the closing of
the asset contribution, we will use approximately $160 million in cash
contributed by PCW, approximately $235 million of cash contributed by
Cellco and the $350 million proceeds from the credit facility to effect a
covenant defeasance with respect to all of the 11 3/4% Senior Subordinated
Notes due 2007 and the 9 1/8% Senior Secured Notes due 2006 which funds will be
used to redeem such notes on the first business day after the closing. The cost
of redemption is estimated to be approximately $35 million. The credit facility
will not obligate us to repay the loan at any time prior to four and one-half
years after the asset contribution.
In addition, subsidiaries of Cellco Partnership will contribute a $500 million
6.14% promissory note receivable issued by Cellco Partnership to us, and
payable upon demand.
After the closing of the asset contribution, we are required to make cash
distributions to PCW on a quarterly basis equal to 50% of PCW's adjusted
preferred return. Partner distributions and capital expenditures will be a
significant use of capital resources.
Increase (Decrease) in Cash
- ---------------------------
Our cash as of June 30, 2002 totaled $2,518 dollars, a $14 dollar increase over
December 31, 2001. This increase was due to interest earned on the cash
balance.
Orange County-Poughkeepsie Limited Partnership
- ----------------------------------------------
(Dollars in thousands) (Unaudited) Six Months Ended June 30,
2002 2001 $ Change
- --------------------------------------------------------------------------------
Cash Flows Provided By (Used In)
Operating activities $ 44,291 $ 30,188 $ 14,103
Investing activities (3,477) (1,722) (1,755)
Financing activities (40,814) (28,466) (12,348)
---------- ---------- ----------
Change in Cash $ - $ - $ -
========== ========== ==========
Cash Flows Provided by Operating Activities
- -------------------------------------------
OCP has funded its operations through internally generated funds and will rely
on those internally generated funds to fund its continued network expansion and
distributions. The increase in cash from operations for the six months ended
June 30, 2002 compared to the six months ended June 30, 2001 primarily reflects
an increase in net income from operations.
19
Cash Flows Used in Investing Activities
- ---------------------------------------
Capital expenditures continue to be OCP's primary use of capital resources. The
increase in investing activities is due to increased spending for the build-out
and upgrade of its network. OCP currently estimates that capital expenditures
will be approximately $9.9 million in 2002. The expansion of the network will
continue to require outlays of funds to address increased customer usage,
customer demand for new services, subscriber growth and additional capacity for
data services.
Cash Flows Used in Financing Activities
- ---------------------------------------
The increase in cash used in financing activities during the six months ended
June 30, 2002 was due primarily to a $22 million increase in the due from
general partner, offset by a $10 million decrease in distributions compared
to the six months ended June 30, 2001. The increase in due from general partner
is attributable to the increase in net income. Cash distributions to partners
are a significant use of capital resources. The general partner of OCP
determines the appropriateness of the level of OCP's distributions on a
periodic basis by considering such factors as long-term growth opportunities,
capital expenditures and internal cash requirements. In the first half of 2002,
OCP paid a $30 million distribution to its partners. OCP intends to make
additional distributions of approximately $55 million in the second half of
2002.
Market Risk
- -----------
Our primary market risk will relate to changes in interest rates, which could
impact the results of operations. The intercompany loans from our general
partner bear interest at rates that vary with Verizon Communications' cost of
funding; because a portion of its debt is fixed-rate, and because its funding
may be affected by events related solely to it, the interest rates on
intercompany loans may not adjust in accordance with market rates.
Recent Accounting Pronouncements
- --------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (SFAS) No.141, "Business Combinations,"
No.142, "Goodwill and Other Intangible Assets" and No. 143, "Accounting for
Asset Retirement Obligations."
SFAS No.141 requires the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method is no longer permitted. SFAS No.141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination that is completed after June 30, 2001.
SFAS No.142 requires that goodwill and indefinite-lived intangible assets will
no longer be amortized. Instead, these assets must be reviewed annually (or
more frequently under certain conditions) for impairment in accordance with
this statement. This impairment test uses a fair value approach rather than the
undiscounted cash flows approach previously required by SFAS No.121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." Intangible assets that have finite lives will continue to
be amortized over their useful lives and reviewed for impairment in accordance
with SFAS No.144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." We are required to adopt SFAS No.142 effective January 1, 2002. As of
June 30, 2002, we have no goodwill or intangible assets recorded in its
financial statements.
In conjunction with the asset contribution transaction to be recorded within
the third quarter of 2002, we will receive certain cellular licenses and other
intangibles contributed by PCW and subsidiaries of Cellco. We have completed a
preliminary assessment of the useful lives of the intangible assets being
contributed. The principal intangible asset being contributed in the asset
contribution is cellular licenses. These licenses will provide us with
20
the right to utilize certain radio frequency spectrum. Radio frequency spectrum
is a resource that has always existed and will continue to exist indefinitely.
While licenses are issued for only a fixed time, generally ten years, such
licenses are subject to renewal by the Federal Communications Commission,
("FCC"). Renewals of licenses typically occur routinely and at nominal cost. We
do not expect that there are currently any legal, regulatory, contractual,
competitive, economic or other factors that limit the useful life of the
contributed cellular licenses. As a result, the cellular licenses are expected
to be treated as an indefinite life intangible asset under the provisions of
SFAS No. 142 and are not expected to be amortized but rather are expected to be
tested for impairment annually or between annual dates if events or
circumstances warrant. We will reevaluate the useful life determination for
cellular licenses each reporting period to determine whether events and
circumstances continue to support an indefinite useful life.
Following the closing of the transaction, all of the contributed cellular
licenses will be integrated into Cellco's existing nationwide footprint. All of
the licenses in Cellco's nationwide footprint are tested in the aggregate for
impairment under SFAS No. 142. When testing the carrying value of the cellular
licenses for impairment, Cellco determines the fair value of the aggregated
cellular licenses by subtracting from enterprise discounted cash flows the fair
value of all of the other net tangible and intangible assets of Cellco. If the
fair value of the aggregated cellular licenses as determined above is less than
the aggregated carrying amount of the licenses, an impairment will be
recognized by Cellco. Any impairment loss recognized by Cellco will be
allocated to its consolidated subsidiaries based upon a reasonable methodology.
Subsequent to the closing of the transaction, Cellco will perform an updated
impairment test which incorporates the contributed cellular licenses. Future
tests for impairment will be performed by Cellco at least annually and more
often if events or circumstances warrant.
SFAS No.143 requires entities to recognize the fair value of any legal
obligation associated with the retirement of long-lived assets and to
capitalize that amount as a part of the book value of the long-lived asset.
That cost is then depreciated over the remaining life of the underlying
long-lived asset. We are required to adopt the standard effective January 1,
2003. We will evaluate its long-lived assets retirement obligation in relation
to the provisions of SFAS No.143 to determine the impact, if any, on its future
results of operations or financial position.
In August 2001, the FASB issued SFAS No.144,"Accounting for the Impairment or
Disposal of Long-Lived Assets." This standard re-addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. It concludes
that one accounting model be used for long-lived assets to be disposed of by
sale and broadens the presentation of discontinued operations to include more
disposal transactions. We have adopted the standard effective January 1, 2002.
The adoption of SFAS No.144 had no material effect on our results of operations
or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This standard rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers," and SFAS No. 64, " Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This standard amends SFAS No. 13, "Accounting for
Leases," to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
such transactions. This standard also amends other existing authoritative
pronouncements to make various technical corrections. We will adopt the
provision for rescission of SFAS No. 4, 44 & 64 effective January 1, 2003 and
will apply the amendments to SFAS No. 13 to all transactions after May 15,
2002. All other provisions of the standard will be applied to financial
statements issued after May 15, 2002. We do not expect the impact of the
adoption of SFAS No. 145 to have a material effect on our results of operations
or financial position.
Cautionary Statement Concerning Forward-Looking Statements
In this Management's Discussion and Analysis of Financial Condition and Results
of Operations, and elsewhere in this Quarterly Report, we have made
forward-looking statements. These statements are based on our estimates and
assumptions and are subject to risks and uncertainties. Forward-looking
statements include the information concerning our possible or assumed future
results of operations. Forward-looking statements also include those preceded
or followed by the words "anticipates," "believes," "estimates," "hopes,"
"plans," "may," "will," "would," "could," "should," or similar expressions. For
those statements, we intend to rely upon the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
The following important factors, along with those discussed elsewhere in this
Quarterly Report, could affect future results and could cause those results to
differ materially from those expressed in the forward-looking statements:
21
o whether the transaction closes based on the terms described or at all;
o the duration and extent of the current economic downturn;
o materially adverse changes in economic conditions in the markets
served by us which would impact our ability to achieve market
penetration and sufficient average subscriber revenue levels to fund
its operations;
o the availability of adequate quantities of handset equipment and
components to meet service and customer demand;
o material changes in available technology;
o the timely delivery and successful conversion of the PCW markets from
the TDMA digital standard to the CDMA digital standard. We cannot
assure that possible disruptions of service resulting from the
conversion will not adversely impact our results of operations;
o the ability to satisfactorily address any issues related to the
network;
o an adverse change in the ratings afforded our debt securities by
nationally accredited ratings organizations;
o our ability to achieve revenue enhancements and cost savings, and
obtain sufficient spectrum resources; and
o changes in our accounting assumptions that regulatory agencies,
including the SEC, may require or that result from changes in the
accounting rules or their application, which could result in an
impact on earnings.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Information relating to market risk is included in Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations, in
the Consolidated Financial Condition section under the caption "Market Risk."
Part II - Other Information
- ---------------------------
Item 1. Legal Proceedings
- --------------------------
After the closing of the asset contribution, the Partnership may be allocated a
portion of the damages that may result upon the adjudication of certain
lawsuits and other actions brought against Cellco Partnership if the claimants
prevail in their actions.
In addition to the patent infringement lawsuit filed by Freedom Wireless, Inc.
against Cellco Partnership previously disclosed in the registrant's
registration statement on Form S-4, filed on May 31, 2002 (No. 333-82408 and
333-82408-01), Cellco Partnership is defending two further lawsuits alleging
patent infringement. Cellco is defending a suit in U.S. District Court in
Pennsylvania filed by plaintiff Katz Technology Licensing, LP, alleging that
Cellco infringed 13 patents involving interactive voice response technology. In
another suit filed in U.S. District Court in Illinois by plaintiff Philip
Jackson, Cellco is defending claims that it infringed a patent relating to the
use or sale of automated interactive telephone systems. Plaintiffs in these two
suits seek unspecified monetary damages as well as injunctive relief. These
cases are both in preliminary stages and Cellco Partnership is not currently
able to assess the impact, if any, of these actions on Verizon Wireless of the
East's financial position or results of operations. In each of these actions,
Cellco Partnership intends to assert or already has asserted, the right to be
indemnified by its vendors for any losses arising out of the claims of
infringement asserted against it. These matters are also covered, in part, by
the indemnification provisions in the Alliance Agreement between Verizon
Communications Inc. and Vodafone Group Plc. However, the indemnification claims
are unlikely to cover the full cost of defense and potential liability.
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
In a letter agreement dated August 9, 2002, amending the Agreement, the parties
agreed that the Partnership will make cash distributions to PCW on a quarterly
basis equal to 50% of PCW's adjusted preferred return commencing immediately
following the closing of the asset contribution rather than commencing two
years following the closing.
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Transaction Agreement dated December 18, 2001 among Price
Communications Corporation, Price Communications Cellular Inc., Price
Communications Cellular Holdings, Inc., Price Communications
Wireless, Inc., Cellco Partnership and Verizon Wireless of the East
LP (previously filed as an exhibit to the Registrant's Registration
Statement on Form S-4 filed on May 31, 2002 (No. 333-82408 and
333-82408-1) and incorporated by reference herein)
2.2 Amendment No. 1 to the Transaction Agreement dated April 15, 2002
among Price Communications Corporation, Price Communications Cellular
Inc., Price Communications Cellular Holdings, Inc., Price
Communications Wireless, Inc. Cellco Partnership and Verizon Wireless
of the East LP (previously filed as an exhibit to the Registrant's
Registration Statement on Form S-4 filed on May 31, 2002 (No.
333-82408 and 333-82408-1) and incorporated by reference herein)
2.3 Letter Agreement dated July 16, 2002 among Price Communications
Corporation, Price Communications Cellular Inc., Price Communications
Cellular Holdings, Inc., Price Communications Wireless, Inc. Cellco
Partnership and Verizon Wireless of the East LP, amending the
Transaction Agreement.
2.4 Letter Agreement dated August 9, 2002 among Price Communications
Corporation, Price Communications Cellular Inc., Price Communications
Cellular Holdings, Inc., Price Communications Wireless, Inc., Verizon
Communications Inc., Verizon Wireless Inc., Cellco Partnership and
Verizon Wireless of the East LP and Verizon Communications Inc.,
amending the Transaction Agreement and the Exchange Agreement.
4 Form of Agreement of Limited Partnership for Verizon Wireless of the
East LP among Verizon Wireless of Georgia LLC, Verizon Wireless
Acquisition South LLC to be identified and Price Communications
Wireless, Inc. (previously filed as an exhibit to the Registrant's
Registration Statement on Form S-4 filed on May 31, 2002 (No.
333-82408 and 333-82408-01) and incorporated by reference herein)
10.1 Exchange Agreement dated December 18, 2001 among Price Communications
Corporation, Price Communications Cellular Inc., Price Communications
Cellular Holdings, Inc., Price Communications Wireless, Inc., Verizon
Communications Inc., Verizon Wireless Inc., Cellco Partnership and
Verizon Wireless of the East LP (previously filed as an exhibit to
the Registrant's Registration Statement on Form S-4 filed on May 31,
2002 (No. 333-82408 and 333-82408-1) and incorporated by reference
herein)
(b) Reports on Form 8-K filed during the quarter ended June 30, 2002:
None
23
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VERIZON WIRELESS OF THE LP
By: Verizon Wireless of
Georgia LLC, as general partner
By Cellco Partnership,
as sole member
Date: August 14, 2002 By /s/ ANDREW N. HALFORD
----------------------------
Name: Andrew N. Halford
Title: Vice President and Chief
Financial Officer
UNLESS OTHERWISE INDICATED, ALL INFORMATION IS AS OF August 13, 2002.
24