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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
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(Mark One)
|x| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] For the fiscal year ended December 31, 1999 or
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission file number 1-8309.
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Price Communications Corporation
(Exact name of registrant as specified in its charter)
New York 13-2991700
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
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45 Rockefeller Plaza, 10020
New York, New York (Zip code)
(Address of principal executive offices)
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Registrant's telephone number, including area code (212) 757-5600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $.01 per share New York Stock Exchange
Boston Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 the
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to the Form 10-K. |_|
AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NONAFFILIATES OF THE COMPANY
Aggregate market value of the Common Stock held by non-affiliates of the
Company, based on the last sale price on the New York Stock Exchange ("NYSE") on
February 29, 2000 ($23.88 as reported in the Wall Street Journal): approximately
$1.188 billion.
The number of shares outstanding of the Company's common stock as of February
29, 2000 was 56,420,045.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-K incorporates certain information contained in
the registrant's definitive proxy statement to be filed by the registrant in
connection with its 2000 Meeting of Shareholders.
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PART I
Item 1. Business
General
Unless otherwise indicated, all references herein to "PCC" refer to Price
Communications Corporation and all references herein to the "Company" refer to
PCC and its subsidiaries and their respective predecessors. References herein to
the "Acquisition" refer to the acquisition by Price Communications Wireless,
Inc. ("PCW"), a wholly-owned indirect subsidiary of PCC, of Palmer Wireless,
Inc. ("Palmer") and the related sales of the Fort Myers and Georgia-1 systems of
Palmer, as described below under "The Acquisition." As used herein, the terms
"PCW" and "Palmer" include their respective subsidiaries and predecessors.
References to Holdings are to Price Communications Cellular Holdings, Inc., an
indirect wholly-owned subsidiary of PCC and the holder of 100% of the
outstanding capital stock of PCW. PCC was organized in New York in 1979 and
began active operations in 1981. Its principal executive offices are located at
45 Rockefeller Plaza, New York, New York 10020, and its telephone number is
(212) 757-5600. Except for historical financial information and unless otherwise
indicated, all information presented below relating to the Company and PCW,
including Pops, Net Pops and the systems, gives effect to the consummation of
the Acquisition (including the sales of the Fort Myers and Georgia-1 systems).
See "Certain Terms" for definitions of certain terms used herein.
The Company has historically been a nationwide communications company
owning and then disposing of a number of television, radio, newspaper, cellular
telephone and other communications and related properties. The Company's
business strategy is to acquire communications properties at prices it considers
attractive, finance such properties on terms satisfactory to it, manage such
properties in accordance with its operating strategy and dispose of them if and
when the Company determines such dispositions to be in its best interests. Prior
to 1995 the Company owned a number of television, radio, newspaper and other
media and related properties which were disposed of pursuant to the Company's
long-standing policy of buying and selling media properties at times deemed
advantageous by the Company's Board of Directors. On October 6, 1997, PCW
acquired Palmer in the acquisition described below.
The Company is currently engaged through PCW in the construction,
development, management and operation of cellular telephone systems in the
southeastern United States. At December 31, 1999, the Company provided cellular
telephone service to 453,984 subscribers in Georgia, Alabama, South Carolina and
Florida in a total of 16 licensed service areas composed of eight Metropolitan
Statistical Areas ("MSAs") and eight Rural Service Areas ("RSAs"), with an
aggregate estimated population of 3.3 million. The Company sells its cellular
telephone service as well as a full line of cellular products and accessories
principally through its network of retail stores. The Company markets all of its
products and services under the nationally recognized service mark CELLULARONE.
The Company has developed its business through the acquisition and
integration of cellular telephone systems, clustering multiple systems in order
to provide broad areas of uninterrupted service and achieve certain economies of
scale, including centralized marketing and administrative functions as well as
multi-system capital expenditures. The Company devotes considerable attention to
engineering, maintenance and improvement of its cellular telephone systems in an
effort to deliver high-quality service to its subscribers and to implement new
technologies as soon as economically practicable. Through its participation in
the North American Cellular Network ("NACN"), the Company is able to offer
ten-digit dialing access to its subscribers when they travel outside the
Company's service areas, providing them with convenient roaming access
throughout large areas of the United States, Canada, Mexico and Puerto Rico
served by other NACN participants. By marketing its products and services under
the CELLULARONE name, the Company also enjoys the benefits of association with a
nationally recognized service mark.
2
Markets and Systems
The Company's cellular telephone systems serve contiguous licensed service
areas in Georgia, Alabama and South Carolina. The Company also has a cellular
service area in Panama City, Florida. The following table sets forth as of
December 31, 1999, with respect to each service area in which the Company owns a
cellular telephone system, the estimated population, the Company's beneficial
ownership percentage and the Net Pops as of December 31, 1999.
MSA Estimated
Service Area Rank Population(1) Percentage Net Pops
- ------------ ---- ------------- ---------- --------
Albany, GA.................... 270 117,984 100.0% 117,984
Augusta, GA................... 105 440,864 100.0 440,864
Columbus, GA.................. 165 250,845 99.1 248,587
Macon, GA..................... 139 318,227 99.6 316,954
Savannah, GA.................. 152 288,736 98.5 284,405
Georgia-6 RSA................. --- 203,899 99.5 202,880
Georgia-7 RSA................. --- 135,121 100.0 135,121
Georgia-8 RSA................. --- 157,912 100.0 157,912
Georgia-9 RSA................. --- 118,111 100.0 118,111
Georgia-10 RSA................ --- 151,827 100.0 151,827
Georgia-12 RSA................ --- 215,935 100.0 215,935
Georgia-13 RSA................ --- 148,361 100.0 148,361
Dothan, AL.................... 252 133,618 95.0 126,937
Montgomery, AL................ 138 320,687 94.6 303,370
Alabama-8, RSA................ --- 173,677 100.0 173,677
--------- ---------
Subtotal................. 3,175,804 3,142,925
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Panama City, FL............... 230 149,953 92.0 137,957
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Total.................... 3,325,757 3,280,882
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(1) Based on population estimates for 1999 from the DLJ 1999 Summer Book
Georgia/Alabama
Seven MSAs, Montgomery and Dothan, Alabama and Macon, Columbus, Albany,
Augusta and Savannah, Georgia make up the core of the Company's Georgia/Alabama
cluster. The Company owns additional cellular service areas in this region
including the Georgia-9 RSA, Alabama-8 RSA, Georgia-7 RSA, Georgia-8 RSA,
Georgia-10 RSA, Georgia-12 RSA, Georgia-13 RSA and the Georgia-6 RSA. The
Augusta, Georgia MSA includes Aiken County in South Carolina. In the aggregate,
these markets now cover a contiguous service area of approximately 38,000 square
miles that includes Montgomery, the state capital of Alabama, prominent resort
destinations in Jekyll Island, St. Simons Island and Sea Island, Georgia, and
over 710 miles of interstate highway, including most of I-95 from Savannah,
Georgia to Jacksonville, Florida. The Company collects substantial roaming
revenue from cellular telephone subscribers from other systems' subscribers
traveling in these markets from nearby population centers such as Atlanta and
Birmingham, as well as from vacation and business traffic in the southeastern
United States. Due in part to the favorable labor environment, moderate weather
and relatively low cost of land during the last several years, there has been an
influx of new manufacturing plants in this market. As of December 31, 1999 the
Company utilized 257 cell sites in this cluster.
Panama City
The Company owns the non-wireline cellular license for the Panama City,
Florida market. The Company collects substantial roaming revenue in this market
from subscribers from other systems who visit Panama City, a popular spring and
summer vacation destination. As of December 31, 1999, the Company utilized 15
cell sites in this market.
Strategy
The Company's four strategic objectives are to: (1) expand its revenue
base by increasing penetration in existing service areas and encouraging greater
usage among its existing customers, (2) provide high-quality customer service to
create and maintain customer loyalty, (3) enhance performance by aggressively
pursuing opportunities to increase operating efficiencies and (4) expand its
regional wireless communications presence by selectively acquiring additional
interests in cellular telephone systems (including minority interests).
Specifically, the Company strives to achieve these objectives through
implementation of the following:
3
Aggressive, Direct Marketing. The Company employs a two-tier direct sales
force. A retail sales force handles walk-in traffic at the Company's 41 retail
outlets and a targeted sales staff solicits certain industry and government
subscribers. The Company's management believes that its internal sales force is
the best way to successfully select and screen new subscribers and select
pricing plans that realistically match subscriber means and needs. The Company
tries to minimize its use of independent agents.
Flexible, Value-Oriented Pricing Plans. The Company provides a range of
pricing plans, each of which includes a monthly access fee and a bundle of
"free" minutes. Additional home rate minutes are charged at rates dependent on
the customer's usage plan and time of day. In addition, the Company offers wide
area home rate roaming in the Company's systems and low flat rate roaming in a
six state region in the Southeastern United States.
The Company believes that its bundled minute offerings will encourage
greater customer usage. By increasing the number of minutes a customer can use
for one flat rate, subscribers perceive greater value in their cellular service
and become less usage sensitive, i.e.; they can increase their cellular phone
usage without seeing large corresponding increases in their cellular bills.
Continually Adopting State of the Art System Design. The Company's network
allows the delivery of full personal communication services ("PCS")
functionality to its digital cellular customers, including caller ID, short
message paging and extended battery life. The Company's network provides for
"seamless handoff" between digital cellular and PCS operators that, like the
Company, employ TDMA (Time Division Multiple Access) technology, one of three
industry standards and the one employed by AT&T, SBC and others; i.e. the
Company's customers may leave the Company's service area and enter an area
serviced by a PCS provider using TDMA technology without noticing the difference
and vice versa. The Company has a favorable agreement with AT&T with respect to
PCS roaming and expects that other PCS operators may choose, like AT&T, to
concentrate PCS buildout in urban centers rather than the more rural areas in
which the Company concentrates.
Focusing on Customer Service. Customer service is an essential element of
the Company's marketing and operating philosophy. The Company is committed to
attracting new subscribers and retaining existing subscribers by providing
consistently high-quality customer service. In each of its cellular service
areas, the Company maintains a local staff, including a market manager, customer
service representatives, technical and engineering staff, sales representatives
and installation and repair facilities. Each cellular service area handles its
own customer-related functions such as credit evaluations, customer evaluations,
account adjustments and rate plan changes. To ensure high-quality service,
Cellular One Group authorizes a third-party marketing research firm to perform
customer satisfaction surveys of each of its licensees. Licensees must achieve a
minimum satisfaction level in order to continue using the Cellular One service
mark. The Company has repeatedly ranked number one in customer satisfaction
among all Cellular One operators (#1 MSA in its category in 1998,1997, 1996,
1995, 1993, and 1992; #1 RSA in its category in 1995) or has received service
excellence awards (in 1999 two of its RSA's won awards).
The Acquisition
On May 23, 1997, PCC, PCW and Palmer entered into an Agreement and Plan of
Merger (the "Merger Agreement"). The Merger Agreement provided, among other
things, for the merger of PCW with and into Palmer with Palmer as the surviving
corporation (the "Merger"). On October 6, 1997, the Merger was consummated and
Palmer changed its name to "Price Communications Wireless, Inc." Pursuant to the
Merger Agreement, PCC acquired each issued and outstanding share of common stock
of Palmer for a purchase price of $17.50 per share in cash and purchased
outstanding options and rights under employee and director stock purchase plans
for an aggregate price of $486.4 million. In addition, as a result of the
Merger, the Company assumed all outstanding indebtedness of Palmer of
approximately $378.0 million making the aggregate purchase price for Palmer
(including transaction fees and expenses) approximately $880.0 million. PCW
refinanced all of the Company's indebtedness concurrently with the consummation
of the Merger.
PCW entered into an agreement (the "Fort Myers Sale Agreement") to sell
Palmer's Fort Myers, Florida MSA covering approximately 382,000 Pops for $168.0
million (the "Fort Myers Sale"). On October 6, 1997, the Fort Myers Sale was
consummated and generated proceeds to the Company of approximately $166.0
million. The proceeds of the Fort Myers Sale were used to fund a portion of the
acquisition of Palmer.
On October 21, 1997, PCC and PCW entered into an Asset Purchase Agreement
with MJ Cellular Company, L.L.C. (the "Georgia Sale Agreement") which provided
for the sale by PCW, for $25.0 million, of substantially all of the assets of
the non-wireline cellular telephone system serving the Georgia-1 Rural Service
Area, including the FCC licenses to operate Georgia-1 (the "Georgia Sale"). The
sale of the assets of Georgia-1 was consummated on December 30, 1997 and
generated proceeds to the Company of $24.2 million. A portion of the proceeds
from the Georgia Sale was used to retire a portion of the debt used to fund the
acquisition of Palmer. The Merger, the Fort Myers Sale, and the GA-1 Sale are
collectively referred to as the "Acquisition."
4
In order to fund the Acquisition and pay related fees and expenses in
July, PCW issued $175.0 million aggregate principal amount of 11 3/4% Senior
Subordinated Notes due 2007 (the "11 3/4% PCW Notes") and entered into a
syndicated senior loan facility providing for term loan borrowings in the
aggregate principal amount of approximately $325.0 million and revolving loan
borrowings of $200.0 million (the "Credit Facility"). On October 6, 1997, PCW
borrowed all term loans available thereunder and approximately $120.0 million of
revolving loans.
The Acquisition was also funded in part through a $44.0 million equity
contribution from the Company (the "PCC Equity Contribution") which was in the
form of cash and common stock of the Company. An additional amount of the
purchase price for the Acquisition was raised out of the proceeds from the
issuance and sale for $80.0 million of units consisting of $153.4 million
principal amount of 13 1/2% Senior Secured Discount Notes due 2007 of Holdings
(the "13 1/2% Holdings Notes") and warrants (the "Warrants") to purchase shares
of Common Stock of the Company, par value $.01 per share (the "PCC Shares").
Refinancing
In June 1998, PCW issued $525.0 million of 9 1/8% Senior Secured Notes
(the "9 1/8% Notes") due December 15, 2006 with interest payable semi-annually
commencing December 15, 1998. The 9 1/8% Notes contain covenants that restrict
the payment of dividends, incurrence of debt and sale of assets. The proceeds of
these notes were used principally to replace the then existing Credit Facility.
In August 1998, Holdings redeemed all of the outstanding 13 1/2% Holdings
Notes. The notes were redeemed at the redemption price per $1000 aggregate
principal amount of $711.61. The accreted value of the notes approximated $91.0
million. The redemption was financed out of the proceeds of a new $200.0 million
Holdings offering of 11 1/4% Senior Exchangeable Payable-in-Kind notes due 2008
("Exchangeable Notes"). The notes were exchangeable, at the Exchange Price, in
the event the daily high price of the Company's shares equaled or exceeded 115%
of the Exchange Price for 10 out of 15 consecutive trading days.
In June 1999, the Company allowed the conversion of the outstanding
Exchangeable Notes as the terms of the indenture were met, and the Company
issued 18.1 million shares of its common stock in exchange for $220.7 million of
Holdings' indebtedness, including $20.7 million of accrued interest to the date
of conversion.
Certain Considerations
In addition to the other matters described herein, holders of PCC's Common
Stock should carefully consider the following risk factors.
Leverage and Liquidity. The Company is highly leveraged which could limit
significantly its ability to make acquisitions, withstand competitive pressures
or adverse economic conditions, obtain necessary financing or take advantage of
business opportunities that may arise.
The Company at year-end had approximately $194.2 million in cash or cash
equivalents. Its ability to borrow additional funds is limited by the covenants
contained in the two outstanding debt instruments. The Company's cash interest
requirement is approximately $68.5 million for the next several years until the
$525.0 million 9 1/8% notes are repaid in 2006. The Company expects to generate
sufficient operating cash flow to meet its liquidity needs for the next 12
months. The Company intends to use working capital for general corporate
purposes and funding of capital expenditures. In addition, the Company intends
to pursue opportunities to acquire additional cellular telephone systems which,
if successful, will possibly require the Company to obtain additional equity or
debt financing to fund such acquisitions. There can be no assurances as to the
availability or terms of any such financing or that the terms of the Senior
Subordinated Notes or the Senior Secured Notes will not restrict or prohibit any
such debt financing.
The Company's ability to meet its debt service requirements will require
significant and sustained growth in the Company's cash flow. In addition, the
Company expects to fund its growth strategy with cash from operations. There can
be no assurance that the Company will be successful in improving its cash flow
by a sufficient magnitude or in a timely manner or in raising additional equity
or debt financing to enable the Company to meet its debt service requirements or
to sustain its growth strategy.
Limitations on Access to Cash Flow of Subsidiaries. The Company does not
have, and may not in the future have, any significant assets other than the
common stock of its subsidiaries and cash which approximated $51.0 million at
December 31, 1999. The current indentures of the Company's subsidiaries impose
substantial restrictions on the ability of the Company's subsidiaries to pay
dividends to the Company. Any payment of dividends to the Company is subject to
the satisfaction of certain financial conditions set forth in the indentures as
well as restrictions under applicable state corporation law. Under these
financing
5
documents, the Company's subsidiaries are prohibited for the foreseeable future
from dividending an aggregate of more than $15.0 million to the Company. The
Company has not in the past paid any cash dividends to its common shareholders
and does not expect to pay any cash dividends to common shareholders in the
foreseeable future. The ability of the Company and its subsidiaries to comply
with the conditions of its financial obligations may be affected by events that
are beyond the control of the Company. The breach of any such conditions could
result in a default under the financing agreements and in the event of any such
default, the lenders could elect to accelerate the maturity of the loans under
such indebtedness. In the event of such acceleration, all outstanding debt would
be required to be paid in full before any cash could be distributed to the
Company. There can be no assurance that the assets of the Company and its
subsidiaries would be sufficient to repay all outstanding indebtedness or meet
other financial obligations.
Competition. Although current policies of the FCC authorize only two
licensees to operate cellular telephone systems in each cellular market, there
is, and the Company expects there will continue to be, competition from various
wireless technology licensees authorized to serve each market in which the
Company operates, as well as from resellers of cellular service. Competition for
subscribers between the two cellular licensees in each market is based
principally upon the services and enhancements offered, the technical quality of
the cellular telephone system, customer service, system coverage and capacity
and price. The Company competes with a wireline licensee in each of its cellular
markets, some of which are larger and have access to more substantial capital
resources than the Company.
The Company also faces competition from other existing communications
technologies such as conventional mobile telephone service, specialized mobile
radio ("SMR") and enhanced specialized mobile radio ("ESMR") systems and paging
services and to a limited extent, satellite systems for mobile communications.
The Company also faces competition from and may in the future face increased
competition from PCS. Broadband PCS involves a network of small, low-powered
transceivers placed throughout a neighborhood, business complex, community or
metropolitan area to provide customers with mobile and portable voice and data
communications. PCS may be capable of offering, and PCS operators claim they
will offer, additional services not offered by cellular providers. There can be
no assurances that the Company will be able to provide nor that it will choose
to pursue, depending on the economics thereof, such services and features. The
FCC has also completed or announced plans for auctions in wireless services such
as narrowband PCS, local multipoint multichannel distribution service ("LMDS"),
interactive video distribution service ("IVDS"), wireless communication service
("WCS") and general wireless communication service ("GWCS") spectrum. Some of
this spectrum might be used for services competitive in some manner with
cellular service. The Company cannot predict the effect of these proceedings and
auctions on the Company's business. However, the Company currently believes that
traditional tested cellular is economically proven unlike many of these other
technologies and therefore does not intend to pursue such other technologies.
Although the Company believes that the technology, financing and
engineering of these other technologies is not as advanced as their publicity
would suggest. There can be no assurance that one or more of the technologies
currently utilized by the Company in its business will not become obsolete at
some time in the future.
Potential for Regulatory Changes and Need for Regulatory Approvals. The
FCC regulates the licensing, construction, operation, acquisition, assignment
and transfer of cellular telephone systems, as well as the number of licensees
permitted in each market. Changes in the regulation of cellular activities could
have a material adverse effect on the Company's operations. In addition, all
cellular licenses in the United States are granted for an initial term of up to
10 years and are subject to renewal. The Company's cellular licenses expire in
the following years with respect to the following number of service areas: 2000
(two); 2001 (four); 2002 (two); 2006 (one); 2007 (four) and 2008 (three). While
the Company believes that each of these licenses will be renewed based upon FCC
rules establishing a renewal expectancy in favor of licensees that have complied
with their regulatory obligations during the relevant license period, there can
be no assurance that all of the Company's licenses will be renewed in due
course. In the event that a license is not renewed, the Company would no longer
have the right to operate in the relevant service area. The non-renewal of
licenses could have a material adverse effect on the Company's results of
operations. See "Business of the Company--Regulation."
Fluctuations in Market Value of License. A substantial portion of the
Company's assets consists of its interests in cellular licenses. The assignment
of interests in such licenses is subject to prior FCC approval and may also be
subject to contractual restrictions, future competition and the relative supply
and demand for radio spectrum. The future value of the Company's interests in
its cellular licenses will depend significantly upon the success of the
Company's business. While there is a current market for the Company's licenses,
such market may not exist in the future or the values obtainable may be
significantly lower than at present. As a consequence, in the event of the
liquidation or sale of the Company's assets, there can be no assurance that the
proceeds would be sufficient to pay the Company's obligations and a significant
reduction in the value of the licenses could require a charge to the Company's
results of operations.
6
Reliance on Use of Third Party Service Mark. The Company currently uses
the registered service mark CELLULARONE to market its services. The Company's
use of this is and has historically been governed by five-year contracts between
the Company and Cellular One Group, the owner of the service mark, for each of
the markets in which the Company operates. See "--Description of Cellular One
Agreements." Such contracts currently in effect are expiring at different times
through December 1, 2001. If for some reason beyond the Company's control, the
name CELLULARONE were to suffer diminished marketing appeal, the Company's
ability both to attract new subscribers and to retain existing subscribers could
be materially affected. AT&T Wireless Services, Inc., which has been the single
largest user of the CELLULARONE service mark, has significantly reduced its use
of the service mark as a primary service mark as has Centennial Cellular. There
can be no assurance that such reduction in use by any of such parties will not
have an adverse effect on the marketing appeal of the brand name.
Dependence on Key Personnel. The Company's affairs are managed by a small
number of key management and operating personnel, the loss of whom could have an
adverse impact on the Company. The success of the Company's operations and
expansion strategy depends on its ability to retain and to expand its staff of
qualified personnel in the future.
Radio Frequency Emission Concerns. Media reports have suggested that
certain radio frequency ("RF") emissions from portable cellular telephones may
be linked to certain types of cancer. In addition, recently a limited number of
lawsuits have been brought, not involving the Company, alleging a connection
between cellular telephone use and certain types of cancer. Concerns over RF
emissions and interference may have the effect of discouraging the use of
cellular telephones, which could have an adverse effect upon the Company's
business. As required by the Telecom Act, in August 1996, the FCC adopted new
guidelines and methods for evaluating RF emissions from radio equipment,
including cellular telephones. While the new guidelines impose more restrictive
standards on RF emissions from low power devices such as portable cellular
telephones, the Company believes that all cellular telephones currently marketed
and in use comply with the new standards.
The Company carries $2.0 million in General Liability insurance and $25.0
million in umbrella liability coverage. This insurance would cover (subject to
coverage limits) any liability suits with respect to human exposure to radio
frequency emissions.
Equipment Failure, Natural Disaster. Although the Company carries
"business interruption" insurance, a major equipment failure or a natural
disaster affecting any one of the Company's central switching offices or certain
of its cell sites could have a significant adverse effect on the Company's
operations.
Operations
General
The Company is currently engaged in the construction, development,
management and operation of cellular telephone systems in the southeastern
United States. At December 31, 1999, the Company provided cellular telephone
service to 453,984 subscribers in Georgia, Alabama, Florida and South Carolina
in a total of 16 licensed service areas composed of eight MSAs and eight RSAs
with an aggregate estimated population of 3.3 million. The Company sells its
cellular telephone service as well as a full line of cellular products and
accessories, including pagers, principally through its network of retail stores.
The Company markets all of its products and services under the nationally
recognized service mark CELLULARONE. The Company has developed its business
through the acquisition and integration of cellular telephone systems,
clustering multiple systems in order to provide broad areas of uninterrupted
service and achieve certain economies of scale, including centralized marketing
and administrative functions as well as multi-system capital expenditures. The
Company devotes considerable attention to engineering, maintenance and
improvement of its cellular telephone systems in an effort to deliver
high-quality service to its subscribers. Through its participation in NACN, the
Company is able to offer ten-digit dialing access to its subscribers when they
travel outside the Company's service areas, providing them with convenient
roaming access throughout large areas of the United States, Canada, Mexico and
Puerto Rico. By marketing its products and services under the CELLULARONE name,
the Company also enjoys the benefits of association with a nationally recognized
service mark.
The following table sets forth information, at the dates indicated after
giving effect to the Acquisition, regarding subscribers, penetration rate, cost
to add a net subscriber, average monthly churn rate and average monthly service
revenue per subscriber for the Company and its predecessor.
Company Predecessor
------------------------------------ -----------------------
Year ended December 31,
-----------------------
1999 1998 1997(6) 1996 1995
--------- --------- --------- --------- ---------
Subscribers at end of period (1) ................. 453,984 381,977 309,606 243,204 187,870
Penetration at end of period (2) ................. 13.65% 11.57% 9.40% 7.73% 6.61%
Cost to add a gross subscriber (3) ............... $ 199 $ 214 $ 220 $ 216 $ 183
Average monthly churn (4) ........................ 1.95% 1.91% 1.88% 1.89% 1.51%
Average monthly service revenue per subscriber (5) $ 56.21 $ 52.04 $ 52.06 $ 52.20 $ 56.68
7
- ----------
(1) Each billable telephone number in service represents one subscriber.
(2) Determined by dividing the aggregate number of subscribers by the
estimated population.
(3) Determined for the periods by dividing (i) all costs of sales and
marketing, including salaries, commissions and employee benefits and all
expenses incurred by sales and marketing personnel, agent commissions,
credit reference expenses, losses on cellular telephone sales, rental
expenses allocated to retail operations, net installation expenses and
other miscellaneous sales and marketing charges for such period by (ii)
the gross subscribers added during such period.
(4) Determined for the periods by dividing total subscribers discontinuing
service by the average number of subscribers for such period, and divided
by the number of months in the relevant period.
(5) Determined for the periods by dividing the (i) sum of the access, airtime,
roaming, long distance, features, connection, disconnection and other
revenues for such period by (ii) the average number of subscribers for
such period, divided by the number of months in the relevant period.
(6) Combines operating information of the Company for the period October 6,
1997 to December 31, 1997 and its predecessor for the period January 1,
1997, to October 6, 1997.
Subscribers and System Usage
The Company's subscribers have increased to 453,984 at December 31, 1999.
Reductions in the cost of cellular telephone services and equipment at the
retail level have led to an increase in cellular telephone usage by general
consumers for non-business purposes. As a result, the Company believes that
there is an opportunity for significant growth in each of its existing service
areas. The Company will continue to broaden its subscriber base for basic
cellular telephone services as well as increase its offering of customized
services. The sale of custom calling features typically results in increased
usage of cellular telephones by subscribers thereby further enhancing revenues.
In 1999, cellular telephone service revenues represented 92.6% of the Company's
total revenues with equipment sales and installation representing the balance.
Marketing
The Company's marketing strategy is designed to generate continued net
subscriber growth by focusing on subscribers who are likely to generate lower
than average deactivations and delinquent accounts, while simultaneously
maintaining a low cost of adding net subscribers. Management has implemented its
marketing strategy by training and compensating its sales force in a manner
designed to stress the importance of high penetration levels and minimum costs
per net subscriber addition. The Company's sales staff has a two-tier structure.
A retail sales force handles walk-in traffic, and a targeted sales staff
solicits certain industry and government subscribers.
The Company believes its use of an internal sales force keeps marketing
costs low, both because commissions are lower and because subscriber retention
is higher than if it used independent agents. The Company believes its cost to
add a net subscriber will continue to be among the lowest in the cellular
telephone industry, principally because of its in-house direct sales and
marketing staff.
The Company's sales force works principally out of retail stores in which
the Company offers its cellular products and services. As of December 31, 1999,
the Company maintained 41 retail stores and 3 offices. Retail stores, which
range in size up to 11,000 square feet, are fully equipped to handle customer
service and the sale of cellular services, telephones and accessories. Eight of
the newer and larger stores are promoted by the Company as "Superstores," seven
of which are located in the Company's Georgia/Alabama service areas and one in
the Panama City, Florida service area. Each Superstore has an authorized
warranty repair center and provides cellular telephone installation and
maintenance services. Most of the Company's larger markets currently have at
least one Superstore. To enhance convenience for its customers, the Company has
opened some smaller stores in locations such as shopping malls. The Company's
stores provide subscriber-friendly retail environments-extended hours, a large
selection of phones and accessories, an expert sales staff, and convenient
locations-which make the sales process quick and easy for the subscriber.
The Company markets all of its products and services under the name
CELLULARONE. The national advertising campaign conducted by Cellular One Group
enhances the Company's advertising exposure at a fraction of what could be
achieved by the Company alone. The Company also obtains substantial marketing
benefits from the name recognition associated with this widely used service
mark, both with existing subscribers traveling outside the Company's service
areas and with potential new subscribers moving into the Company's service
areas.
8
Through its membership in NACN and other special networking arrangements,
the Company provides extended regional and national service to its subscribers,
thereby allowing them to make and receive calls while in other cellular service
areas without dialing special access codes. This service distinguishes the
Company's call delivery features from those of many of its competitors.
9
Products and Services
In addition to providing high-quality cellular telephone service in each
of its markets, the Company also offers various custom-calling features such as
voicemail, call forwarding, call waiting, three-way conference calling, no
answer and busy transfer. Several rate plans are presented to prospective
subscribers so that they may choose the plan that will best fit their expected
calling needs. Generally, these rate plans include a high user plan, a medium
user plan, a basic plan and an economy plan. Most rate plans combine a fixed
monthly access fee, per minute usage charges and additional charges for
custom-calling features in a package that offers value to the subscriber while
enhancing airtime use and revenues for the Company. In general, rate plans that
include a higher monthly access fee typically include a lower usage rate per
minute. An ongoing review of equipment and service pricing is maintained to
ensure the Company's competitiveness and appropriate revisions to pricing of
service plans and equipment are made to meet the demands of the local
marketplace. The Company offers paging as an accessory to its cellular
customers.
The following table sets forth a breakdown of the Company's revenues after
giving effect to the Fort Myers and Georgia Sales from the sale of its services
and equipment for the periods indicated.
Company Predecessor (Palmer)
-------------------------------------------- ------------------------------------
For the Period For the
October 1, 1997 Nine
For the Year Ended Through Month Ended For the Year Ended
December 31, December 31, September 30, December 31,
------------ ------------ ------------- ------------
1999 1998 1997 1997 1996 1995
---- ---- ---- ---- ---- ----
Service Revenue:
Access and usage (1)................ $166,030 $140,024 $31,786 $ 89,339 $105,006 $61,607
Roaming (2)......................... 39,665 27,029 5,691 14,447 13,099 11,157
Long distance (3)................... 22,188 13,045 2,014 5,949 6,632 3,634
Other (4)........................... 5,692 4,554 891 2,061 2,596 2,585
-------- -------- ------- -------- -------- -------
Total service revenue............... 233,575 184,652 40,382 111,796 127,333 78,983
Equipment sales and installation (5) 18,777 12,677 2,308 6,242 7,027 6,830
-------- -------- ------- -------- -------- -------
Total............................. $252,352 $197,329 $42,690 $118,038 $134,360 $85,813
======== ======== ======= ======== ======== =======
(1) Access and usage revenues include monthly access fees for providing
service and usage fees based on per minute usage rates.
(2) Roaming revenues are fees charged for providing services to subscribers of
other systems when such subscribers or "roamers" place or receive a
telephone call within one of the Company's service areas.
(3) Long distance revenue is derived from long distance telephone calls placed
by the Company's subscribers.
(4) Other revenue includes, among other things, connect fees charged to
subscribers for initial activation on the cellular telephone system and
fees for feature services such as voicemail, call forwarding and call
waiting.
(5) Equipment sales and installation revenue includes revenue derived from the
sale of cellular telephones and fees for the installation of such
telephones.
Reciprocal roaming agreements between each of the Company's cellular
telephone systems and the cellular telephone systems of other operators allow
their respective subscribers to place calls in most cellular service areas
throughout the country. The roamers home systems are charged usage fees, which
are generally higher than a given cellular telephone system's regular usage
fees, thereby resulting in a higher profit margin on roaming revenue. Roaming
revenue is a substantial source of incremental revenue for the Company. In 1999,
roaming revenues accounted for 17.0% of the Company's service revenues and 15.7%
of the Company's total revenue. This level of roaming revenue is due in part to
the fact that the Company's markets include several vacation destinations and a
number of its systems are located along major interstate travel corridors.
In order to develop the market for cellular telephone service, the Company
provides retail distribution and maintains inventories of cellular telephones
and accessories. The Company negotiates volume discounts for the purchase of
cellular telephones and, in many cases, passes such discounts on to its
customers. The Company believes that earning an operating profit on the sale of
cellular telephones is of secondary importance to offering cellular telephones
at competitive prices to potential subscribers. To respond to competition and to
enhance subscriber growth, the Company has historically sold cellular telephones
below cost. However, the Company generally tries to earn a profit on the sales
of accessories.
The Company is currently developing several new services, which it
believes will provide additional revenue sources. Using the TDMA IS-136 standard
for the Company's digital services, the Company will offer Enhanced Short
Messaging Services (SMS) including text messaging and e-mail addresses.
Subscribers will also be able to order content from internet sources such as
10
weather reports, horoscopes, stock quotes and various other data at their
discretion, on a subscription basis. The Company has engaged a third party
provider to customize this service for its subscribers. Additionally, the
Company will deploy Wireless Application Protocol (WAP) to allow customers to
browse the internet with new handsets that are expected to be introduced in 2000
by certain manufacturers. This service will provide customers the means to be
totally interactive by selecting what information they desire real time via
wireless handsets.
Customer Service
The Company is committed to attracting new subscribers and retaining
existing subscribers by providing consistently high-quality customer service. In
each of its cellular service areas, the Company maintains a local staff,
including a store manager, customer service representatives, technical and
engineering staff, sales representatives and installation and repair facilities.
Each cellular service area handles its own customer-related functions such as
customer activations, account adjustments and rate plan changes. Local offices
and installation and repair facilities enable the Company to better service
customers, schedule installations and repairs and monitor the technical quality
of the cellular service areas.
To ensure high-quality customer service, the Cellular One Group authorizes
a third-party marketing research firm to perform customer satisfaction surveys
of each of its licensees. Licensees must achieve a minimum customer satisfaction
level in order to be permitted to continue using the CELLULARONE service mark.
In 1999, the Company received service excellence awards for two of its RSA's. In
1998, the Company was awarded the #1 MSA in CELLULARONE's National Customer
Satisfaction Survey. The Company has held number one ranking in its category in
six out of the last seven years. The Company believes it has achieved this first
place ranking through effective implementation of its direct sales and customer
service support strategy.
The Company has implemented a software package to combat cellular
telephone service fraud. This software system can detect counterfeit cellular
telephones while they are being operated and enable the Company to terminate
service to the fraudulent user of the counterfeit cellular telephone. The
Company also helps protect itself from fraud with pre-call customer validation
and subscriber profiles specifically designed to combat the fraudulent use of
subscriber accounts.
Networks
The Company strives to provide its subscribers with virtually seamless
coverage throughout its cellular service market areas, thereby permitting
subscribers to travel freely within this region and have their calls and custom
calling features, such as voicemail, call waiting and call forwarding, follow
them automatically without having to notify callers of their location or to rely
on special access codes. The Company has been able to offer virtually seamless
coverage by implementing a switch interconnection plan to mobile telephone
switching offices ("MTSO") located in adjoining markets. The Company's equipment
is built by NORTEL, formerly Northern Telecom, Inc. ("NTI"), and interconnection
between MTSOs is achieved by using the IS-41, Rev.C, standard protocol.
Through its participation in NACN since 1992 and other special networking
arrangements, the Company has pursued its goal of offering seamless regional and
national cellular service to its subscribers. NACN is the largest wireless
telephone network system in the world-linking non-wireline cellular operators
throughout the United States and Canada. Membership in NACN has aided the
Company in integrating its cellular telephone systems within its region and has
permitted the Company to offer cellular telephone service to its subscribers
throughout a large portion of the United States, Canada, Mexico and Puerto Rico.
NACN has provided the Company with a number of distinct advantages: (i) lower
costs for roaming verification, (ii) increased roaming revenue, (iii) more
efficient roaming service and (iv) integration of the Company's markets with
over 7,500 cities worldwide.
System Development and Expansion
The Company develops its service areas by adding channels to existing cell
sites and by building new cell sites. Such development is done for the purpose
of increasing capacity and improving coverage in direct response to projected
subscriber demand. Projected subscriber demand is calculated for each cellular
service area on a cell by cell basis. These projections involve a traffic
analysis of usage by existing subscribers and an estimation of the number of
additional subscribers in each such area. In calculating projected subscriber
demand, the Company builds into its design assumptions a maximum call "blockage"
rate of 2.0% (percentage of calls that are not connected on first attempt at
peak usage time during the day).
The following table sets forth, by market, at the dates indicated, the
number of the Company's operational cell sites.
At December 31
--------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Georgia/Alabama............. 257 223 207 181 121
11
Panama City, FL............. 15 13 12 11 0
---- ---- ---- ---- ----
Total.................. 272 236 219 192 130
==== ==== ==== ==== ====
The Company constructed 36 cell sites in 1999 and plans to construct in
excess of 70 additional cell sites with respect to its existing cellular systems
during 2000 to meet projected subscriber demand and improve the quality of
service. Cell site expansion is expected to enable the Company to continue to
add subscribers, enhance use of its cellular telephone systems by existing
subscribers, increase services used by subscribers of other cellular telephone
systems due to the larger geographic area covered by the cellular telephone
networks and further enhance the overall efficiency of the network and decrease
churn. The Company believes that the increased cellular telephone coverage will
have a positive effect on market penetration and subscriber usage.
Microwave networks, previously built by the Company, enable the Company to
connect switching equipment and cell sites without making use of local landline
telephone carriers, thereby reducing or eliminating fees paid to landline
carriers. The Company also owned a fiber optic network which carries calls
between its Dothan, Alabama market and Panama City, Florida market. During 1999,
the Company sold the fiber optic network but retained the right to use such
network until October 31, 2001 at no additional charge, another means of
reducing fees paid to landline carriers.
Digital Cellular Technology
Over the next decade, it is expected that cellular telephones will
gradually convert from analog to digital technology. This conversion is due in
part to capacity constraints in many of the largest cellular markets, such as
Los Angeles, New York and Chicago. As carriers reach limited capacity levels,
certain calls may be unable to be completed, especially during peak hours.
Digital technology increases system capacity and offers other advantages over
analog technology, including improved overall average signal quality, improved
call security, potentially lower incremental costs for additional subscribers
and the ability to provide data transmission services. The conversion from
analog to digital technology is expected to be an industry-wide process that
will take a number of years. The exact timing and overall costs of such
conversion are not yet known.
The Company began offering Time Division Multiple Access ("TDMA") standard
digital service, one of three standards for digital service, during 1997. This
digital network allows the Company to offer advanced cellular features and
services such as caller-ID, short message paging and extended battery life.
Where cell sites are not yet at their maximum capacity of radio channels, the
Company is adding digital channels to the network incrementally based on the
relative demand for digital and analog channels. Where cell sites are at full
capacity, analog channels are being removed and redeployed to expand capacity
elsewhere within the network and replaced in such cell sites by digital
channels. The implementation of digital cellular technology over a period of
several years will involve modest incremental expenditures for switch software
and possible significant cost reductions as a result of reduced purchases of
radio channels and a reduced requirement to split existing cells. However, as
indicated above, the extent of any implementation of digital radio channels and
the amount of any cost savings ultimately to be derived therefrom will depend
primarily on subscriber demand. In the ordinary course of business, equipment
upgrades at the cell sites have involved purchasing dual mode radios capable of
using both analog and digital technology.
The benefits of digital radio channels can only be achieved if subscribers
purchase cellular telephones that are capable of transmitting and receiving
digital signals. Currently, such telephones are more costly than analog
telephones. The widespread use of digital cellular telephones is likely to occur
only over a substantial period of time and there can be no assurance that this
technology will replace analog cellular telephones. In addition, since most of
the Company's existing subscribers currently have cellular telephones that
exclusively utilize analog technology, it will be necessary to continue to
support and if necessary, increase the number of analog radio channels within
the network for many years.
Acquisitions
The Company will continue to evaluate expansion through acquisitions of
both (i) contiguous cellular properties and other strategically located RSAs and
small to mid-sized MSAs and (ii) minority interests in its existing cellular
properties. In evaluating acquisition targets, the Company considers, among
other things, demographic factors, including population size and density,
geographic proximity to existing service areas, traffic patterns, cell site
coverage and required capital expenditures.
12
Competition
The cellular telephone service industry in the United States is highly
competitive. Cellular telephone systems compete principally on the basis of
services and enhancements offered, the technical quality of the cellular system,
customer service, coverage capacity and price of service and equipment.
Currently, the Company's primary competition in each of its service areas is the
other cellular licensee-the wireline carrier. The table below lists the wireline
competitor in each of the Company's existing service areas:
Market Wireline Competitor
------- -------------------
Albany, GA..................... ALLTEL
Augusta, GA.................... ALLTEL
Columbus, GA................... Public Service Cellular
Macon, GA...................... BellSouth
Savannah, GA................... ALLTEL
Georgia-6 RSA.................. BellSouth and Public Service Cellular
Georgia-7 RSA.................. ALLTEL and BellSouth(1)
Georgia-8 RSA.................. ALLTEL
Georgia-9 RSA.................. ALLTEL and Public Service Cellular(1)
Georgia-10 RSA................. ALLTEL
Georgia-12 RSA................. ALLTEL
Georgia-13 RSA................. ALLTEL
Dothan, AL..................... ALLTEL
Montgomery, AL................. ALLTEL
Alabama-8 RSA.................. Public Service Cellular and ALLTEL
Panama City, FL................ ALLTEL
- ----------
(1) The purchasers of the authorization have subdivided the wireline service
area into two service areas for the RSA.
The Company also faces limited competition from and may in the future face
increased competition from broadband PCS. Broadband PCS involves a network of
small, low-powered transceivers placed throughout a neighborhood, business
complex, community or metropolitan area to provide customers with mobile and
portable voice and data communications. PCS subscribers communicate using
digital radio handsets.
The FCC allocated 120 MHz of spectrum for licensed broadband PCS. The
allocations for licensed PCS services are split into six blocks of
frequencies--blocks "A" and "B" being two 30 MHz allocations for each of the 51
Major Trading Areas ("MTAs") throughout the United States; block "C" being one
30 MHz allocation in each of 493 Basic Trading Areas ("BTAs") in the United
States; and blocks "D," "E" and "F" being three 10 MHz allocations in each of
the BTAs. The FCC has concluded the initial auction of all broadband PCS
frequency blocks, although a limited number of PCS licenses are from time to
time reauctioned due to a failure of the initial auction winner to complete the
required payments for the licenses.
The Company also faces competition from other existing communications
technologies such as conventional mobile telephone service, SMR, and ESMR
systems and paging services.
In addition, the FCC has licensed operators to provide mobile satellite
service in which transmissions from mobile units to satellites would augment or
replace transmissions to land-based stations. Although such a system is designed
primarily to serve remote areas and is subject to transmission delays inherent
in satellite communications, a mobile satellite system could augment or replace
communications with segments of land-based cellular systems. Based on current
technologies, however, satellite transmission services are not expected to be
competitively priced with cellular telephone services.
In order to grow and compete effectively in the wireless market, the
Company plans to follow a strategy of increasing its bundled minute offerings.
By increasing the number of minutes a customer can use for one flat rate,
subscribers perceive greater value in their cellular service and become less
usage sensitive. For example, customers can increase their cellular phone usage
without seeing large corresponding increases in their cellular bill. These
factors translate into more satisfied customers, greater customer usage and
lower churn among existing subscribers. The perceived greater value also
increases the number of potential customers in the marketplace. The Company
believes that this strategy will enable it to increase its share of the wireless
market.
Service Marks
13
CELLULARONE is a registered service mark with the U.S. Patent and
Trademark Office. The service mark is owned by Cellular One Group, a Delaware
general partnership of Cellular One Marketing, Inc., a subsidiary of
Southwestern Bell Mobile Systems, Inc., together with Cellular One Development,
Inc., a subsidiary of AT&T and Vanguard Cellular Systems, Inc. The Company uses
the CELLULARONE service mark to identify and promote its cellular telephone
service pursuant to licensing agreements with Cellular One Group. In 1999, the
Company paid $316,000 in licensing and advertising fees under these agreements.
See "Certain Considerations--Reliance on Use of Third Party Service Mark."
Description of Cellular One Agreements
The Company is currently party to sixteen license agreements with Cellular
One Group, which cover separate cellular telephone system areas. The terms of
each agreement (each, a "Cellular One Agreement") are substantially identical.
Pursuant to each Cellular One Agreement, Cellular One Group has granted a
license to use the "CELLULARONE" mark (the "Mark") in its FCC-licensed territory
(the "Licensed Territory") to promote its cellular telephone service. Cellular
One Group has agreed not to license such mark to any other cellular telephone
service provider in such territory during the term of the agreement.
Each Cellular One Agreement has a term of five years and is renewable,
subject to the conditions described herein, at the option of the Company for
three additional five-year terms subject to provision of advanced written notice
by the Company. In connection with any renewal, the Company must execute
Cellular One Group's then-current form of license renewal agreement, which form
may contain provisions materially different than those in the Cellular One
Agreement.
Cellular One Group may terminate the Cellular One Agreements at any time
without written notice to the Company upon certain events, including bankruptcy,
insolvency and dissolution of the Company.
Cellular One Group may terminate the Cellular One Agreements if the
Company (i) fails to pay any amounts thereunder when due or fails to submit
information required to be provided pursuant to the Cellular One Agreement when
due or makes a false statement in connection therewith, (ii) fails to operate
its business in conformity with FCC directives, technical industry standards and
other standards specified from time to time by Cellular One Group, (iii)
misuses, makes unauthorized use of or materially impairs the goodwill of the
Mark, (iv) engages in any business under a name that is confusingly similar to
the Mark, or (v) permits a continued violation of any law or regulation
applicable to it, in each case subject to a thirty-day cure period.
The Cellular One Agreements are terminable by the Company at any time
subject to 120 days' written notice.
The Company has agreed to indemnify Cellular One Group and its employees
and affiliates, including its constituent partners, against all claims arising
from the operation of its cellular phone business and the costs, including
attorneys fees, of defending against them.
Regulation
As a provider of cellular telephone services, the Company is subject to
extensive regulation by the federal government.
The licensing, construction, operation, acquisition and transfer of
cellular telephone systems in the United States are regulated by the FCC
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The FCC has promulgated rules governing the construction and operation of
cellular telephone systems and licensing and technical standards for the
provision of cellular telephone service ("FCC Rules"). For cellular licensing
purposes, the United States is divided into MSAs and RSAs. In each market, the
frequencies allocated for cellular telephone use are divided into two equal
blocks designated as Block A and Block B. Block A licenses were initially
reserved for non-wireline companies, such as PCW, while Block B licenses were
initially reserved for entities affiliated with a local wireline telephone
company. Under current FCC Rules, a Block A or Block B license may be
transferred with FCC approval without restriction as to wireline affiliation,
but generally, no entity may own any substantial interest in both systems in any
one MSA or RSA. The FCC may prohibit or impose conditions on sales or transfers
of licenses.
Initial operating licenses are generally granted for terms of up to 10
years, renewable upon application to the FCC. Licenses may be revoked and
license renewal applications denied for cause after appropriate notice and
hearing. The Company's cellular licenses expire in the following years with
respect to the following number of service areas: 2000 (two); 2001 (four); 2002
(two); 2006 (one); 2007 (four) and 2008 (three). The FCC has issued a decision
confirming that current licensees will be granted a renewal expectancy if they
have complied with their obligations under the Communications Act during their
license terms and provided substantial public service. A potential challenger
will bear a heavy burden to demonstrate that a license should not be renewed if
the licensee's performance merits renewal expectancy. The Company believes that
the licenses it controls will
14
continue to be renewed in a timely manner. However, in the event that a license
is not renewed, the Company would no longer have the right to operate in the
relevant service area which would have an adverse effect on the Company's
results of operations.
Under FCC rules, each cellular licensee was given the exclusive right to
construct one of two cellular telephone systems within the licensee's MSA or RSA
during the initial five-year period of its authorization. At the end of such
five-year period, other persons are permitted to apply to serve areas within the
licensed market that are not served by the licensee and current FCC Rules
provide that competing applications for these "unserved areas" are to be
resolved through the auction process. The Company has no material unserved areas
in any of its cellular telephone systems.
The Company also regularly applies for FCC authority to use additional
frequencies, to modify the technical parameters of existing licenses, to expand
its service territory and to provide new services. The Communications Act
requires prior FCC approval for acquisitions by the Company of other cellular
telephone systems licensed by the FCC and transfers by the Company of a
controlling interest in any of its licenses or any rights thereunder. Although
there can be no assurance that any future requests for approval or applications
filed by the Company will be approved or acted upon in a timely manner by the
FCC, based upon its experience to date, the Company has no reason to believe
such requests or applications would not be approved or granted in due course.
The Communications Act prohibits the holding of a common carrier license
(such as the Company's cellular licenses) by a corporation of which more than
20% of the capital stock is owned directly or beneficially by aliens. Where a
corporation such as the Company controls another entity that holds an FCC
license, such corporation may not have more than 25% of its capital stock owned
directly or beneficially by aliens, in each case, if the FCC finds that the
public interest would be served by such prohibitions. These limitations have
been relaxed with regard to certain foreign investors pursuant to a World Trade
Organization treaty and FCC actions implementing the treaty. Failure to comply
with these requirements may result in the FCC issuing an order to the Company
requiring divestiture of alien ownership to bring the Company into compliance
with the Communications Act. In addition, fines or a denial of renewal, or
revocation of the license are possible.
From time to time, federal and state legislators may propose legislation,
which could potentially affect the Company, either beneficially or adversely. On
February 8, 1996, the Telecommunications Act of 1996 (the "Telecom Act") was
signed into law, revising the Communications Act to eliminate unnecessary
regulation and to increase competition among providers of communications
services. The Company cannot predict the future impact of this or other
legislation on its operations.
The major provisions of the Telecom Act potentially affecting the Company
are as follows:
Interconnection. The Telecom Act required state public utilities
commissions and the FCC to implement policies that mandate cost-based reciprocal
compensation between cellular carriers and local exchange carriers ("LEC") for
interconnection services.
On August 8, 1996, the FCC released its First Report and Order in the
matter of Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996 ("FCC Order") establishing the rules for the
costing and provisioning of interconnection services and the offering of
unbundled network elements by incumbent local exchange carriers. The FCC Order
established procedures for the Company's renegotiations of interconnection
agreements with the incumbent local exchange carrier in each of the Company's
markets. LECs and state regulators filed appeals of the FCC Order, which were
consolidated in the US Court of Appeals for the Eighth Circuit. The Court
rejected most of the rules promulgated in the FCC Order. However, on further
appeal, the United States Supreme Court reversed most of the Court's actions and
remanded the case to the Court and the FCC for further consideration. Pending
further court action, much of the FCC Order will take effect.
The Company has renegotiated certain interconnection agreements with LECs
in most of the Company's markets. These negotiations have resulted in a
substantial decrease in interconnection expenses incurred by the Company.
Facilities siting for personal wireless services. The siting and
construction of cellular transmitter towers, antennas and equipment shelters are
often subject to state or local zoning, land use and other regulation. Such
regulation may require zoning, environmental and building permit approvals or
other state or local certification.
The Telecom Act provides that state and local authority over the
placement, construction and modification of personal wireless services
(including cellular and other commercial mobile radio services and unlicensed
wireless services) shall not prohibit or have the effect of prohibiting personal
wireless services or unreasonably discriminate among providers of functionally
equivalent services. In addition, local authorities must act on requests made
for siting in a reasonable period of time and any decision to deny must be in
writing and supported by substantial evidence. Appeals of zoning decisions that
fail to comply with the provisions of the Telecom Act can be made on an
expedited basis to a court of competent jurisdiction, which can be either
15
federal district or state court. The Company anticipates that, as a result of
the Telecom Act, it will more readily receive local zoning approval for proposed
cellular base stations. In addition, the Telecom Act codified the Presidential
memorandum on the use of federal lands for siting wireless facilities by
requiring the President or his designee to establish procedures whereby federal
agencies will make available their properties, rights of ways and other
easements at a fair and reasonable price for service dependent upon federal
spectrum.
Environmental effect of radio frequency emissions. The Telecom Act
provides that state and local authorities cannot regulate personal wireless
facilities based on the environmental effects of radio frequency emissions if
those facilities comply with the federal standard.
Universal service. The Telecom Act also provides that all communications
carriers providing interstate communications services, including cellular
carriers, must contribute to the federal universal service support mechanisms
established by the FCC. The FCC also provided that any cellular carrier is
potentially eligible to receive universal service support. The universal service
support fund will support telephone service in high-cost and low-income areas
and support access to telecommunications facilities by schools, libraries and
rural health care facilities. States will also be implementing requirements that
carriers contribute universal service funding from intrastate telecommunications
revenues. The Company has revised its customer billing to reflect additional
costs related to these universal service fund requirements. There can be no
guarantee that the Company will be able to continue to pass the costs of the
fund requirements on to its subscribers in the future.
The FCC has eliminated its cellular-PCS cross ownership rule, but retained
a spectrum cap on aggregation of CMRS spectrum. A cellular licensee and its
affiliates may not hold an attributable interest in more than 45 MHz of licensed
cellular, broadband PCS and SMR spectrum in a particular geographic area,
although the FCC recently relaxed its cellular PCS cross ownership rule to
permit ownership of 55 MHz of licensed cellular, broadband PCS and SMR spectrum
in RSA markets.
The Communications Act preempts state and local regulation of the entry
of, or the rates charged by, any provider of cellular service.
Certain Terms
Interests in cellular markets that are licensed by the FCC are commonly
measured on the basis of the population of the market served with each person in
the market area referred to as a "Pop." The number of Pops or Net Pops owned is
not necessarily indicative of the number of subscribers or potential
subscribers. As used herein, unless otherwise indicated, the term "Pops" means
the estimate of the 1999 population of an MSA or RSA, as derived from the 1999
Donaldson, Lufkin & Jenrette Market Information Service. The term "Net Pops"
means the estimated population with respect to a given service area multiplied
by the percentage interest that the Company owns in the entity licensed in such
service area. MSAs and RSAs are also referred to as "markets." The term
"wireline" license refers to the license for any market initially awarded to a
company or group that was affiliated with a local landline telephone carrier in
the market, and the term "non-wireline" license refers to the license for any
market that was initially awarded to a company, individual or group not
affiliated with any landline carrier. The term "System" means an FCC-licensed
cellular telephone system.
Employees
At December 31, 1999, the Company had approximately 675 full-time
employees, none of whom is represented by a labor organization. Management
considers its relations with employees to be good.
Item 2. Properties
For each market served by the Company's operations, the Company maintains
at least one sales or administrative office and operates a number of cell
transmitter and antenna sites. As of December 31, 1999, the Company had
approximately 41 leases for retail stores used in conjunction with its
operations and 3 leases for administrative offices. The Company also had
approximately 181 leases to accommodate cell transmitters and antennas as of
December 31, 1999.
The Company leases space for its headquarters in New York City. (See Note
13 of the Notes to Consolidated Financial Statements for information on minimum
lease payments by the Company and its subsidiaries for the next five years.)
Item 3. Legal Proceedings
The Company is not currently involved in any pending legal proceedings
likely to have a material adverse impact on the Company.
16
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
17
PART II
Item 5. Market for Company's Common Stock and related Stockholder Matters
(a) Market for Common Stock
Effective February 17, 2000, the Company became listed on the New York
Stock Exchange ("NYSE") under the ticker symbol "PR". The range of high and low
last sale prices for the Company's Common Stock on the NYSE and prior to
February 17, 2000 on the American Stock Exchange as adjusted to reflect its
April 1998 (2 in April), January 1999 and May 1999 5 for 4 stock splits, the
August 1998 2 for 1 stock split and the August 1999 5% stock dividend for each
of the four quarters of 1999 and 1998, as reported by the NYSE was:
2000 1999 1998
---- ---- ----
Quarter High Low High Low High Low
------- ---- --- ---- --- ---- ---
First (through February 29, 2000)...... $26.56 $21.00 $10.32 $7.80 $3.21 $1.58
Second................................. 15.25 9.10 4.80 3.15
Third.................................. 25.06 14.25 6.10 4.27
Fourth................................. 28.38 19.50 7.89 3.73
The Company's Common Stock has been afforded unlisted trading privileges
on the Pacific Stock Exchange under the ticker symbol "PR.P", on the Chicago
Stock Exchange under the ticker symbol "PR.M" and on the Boston Stock Exchange
under the ticker symbol "PR.B" and trades in Euros on the Frankfurt and Munich
Stock Exchanges.
(b) Holders
On February 29, 2000, there were approximately 400 holders of record of
the Company's Common Stock. The Company estimates that brokerage firms hold
Common Stock in street name for approximately 8,000 persons.
(c) Dividends
The Company, to date, has paid no cash dividends on its Common Stock. The
Board of Directors will determine future dividend policy based on the Company's
earnings, financial condition, capital requirements and other circumstances.
18
Item 6. Selected Consolidated Financial Data
The following tables contain certain consolidated financial data with
respect to the Company and for Palmer ("Predecessor") for the periods and dates
set forth below. This information has been derived from the audited consolidated
financial statements of the Company and Palmer.
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto, included elsewhere
herein.
Consolidated Operating Statement Items
Company
Year ended December 31,
-----------------------
1999 1998 1997(9) 1996(9) 1995(9)
---- ---- ------- ------- -------
Service Revenue .................................. $ 233,575 $ 184,652 $ 41,365 $ -- $ --
Equipment Sales and Installation ................. 18,777 12,677 2,348 -- --
Media Revenue .................................... -- -- -- 2,962 29,155
--------- --------- --------- --------- ---------
Revenue .......................................... $ 252,352 $ 197,329 $ 43,713 $ 2,962 $ 29,155
Engineering, Technical and Other Direct Expenses . 29,666 28,122 5,978 -- --
Cost of Equipment ................................ 31,879 23,710 5,259 -- --
Media Operating Expenses ......................... -- -- -- 2,233 16,685
Selling, General and Administrative Expenses ..... 65,150 61,093 16,750 2,373 2,687
Non-cash Compensation ............................ 1,973 -- -- -- --
Depreciation and Amortization .................... 45,157 43,625 11,107 467 3,919
--------- --------- --------- --------- ---------
Operating Income (Loss) .......................... 78,527 40,779 4,619 (2,111) 5,864
Other Income (Expense):
Interest, net ................................. (72,892) (76,926) (20,063) 4,367 (2,099)
Other, net .................................... 12,251 15,279 1,400 92,995 7,114
--------- --------- --------- --------- ---------
Total Other Income (Expense) ................ (60,641) (61,647) (18,663) 97,362 5,015
Minority Interest ................................ (1,664) (2,178) (414) -- --
Extraordinary Item-Loss on Early Extinguishment of
Debt (net of tax benefit of $15,893) .......... -- (27,061) -- -- --
Income Tax (Expense) Benefit ..................... (6,002) 8,523 5,509 (24,584) 247
--------- --------- --------- --------- ---------
Net Income (Loss) ................................ $ 10,220 $ (41,584) $ (8,949) $ 70,667 $ 11,126
========= ========= ========= ========= =========
Per Share Amounts (1):
Basic Earnings (Loss) Per Share .................. $ .22 $ (1.13) $ (.22) $ 1.18 $ .17
Diluted Earnings (Loss) Per Share ................ $ .22 $ (1.13) $ (.22) $ 1.16 $ .17
Other Data:
Capital Expenditures ............................. $ 24,575 $ 14,725 $ 14,515 $ 137 $ 1,469
Operating Income Before Depreciation and
Amortization ("EBITDA") (2) ................... $ 130,150 $ 88,595 $ 19,671 $ (1,644) $ 9,783
EBITDA Margin on Service Revenue ................. 55.7% 48.0% 47.6% N/A 33.6%
Net Cash Provided By (used in):
Operating Activities .......................... $ 74,592 $ 12,366 $ 6,451 $ (24,148) (7,207)
Investing Activities .......................... (27,746) (21,361) (312,577) 138,999 (2,021)
Financing Activities .......................... (57,613) 141,821 252,220 (32,701) (5,115)
Penetration (3) .................................. 13.65% 11.60% 9.40% N/A N/A
Subscribers at the End of Period (4) ............. 453,984 381,977 309,606 N/A N/A
Cost to Add a Net Subscriber (5) ................. $ 471 $ 448 $ 370 N/A N/A
Average Monthly Service Revenue per
Subscriber (6) ................................ $ 56.21 $ 52.04 $ 50.59 N/A N/A
Average Monthly Churn (7) ........................ 1.95% 1.91% 1.84% N/A N/A
Ratio of Earnings to Fixed Charges (8) ........... 1.13x N/A N/A 1.28x 1.21x
(1) Per share amounts have been retroactively adjusted to reflect 5 for 4
stock splits in May 1999, January 1999, April 1998 (2), December 1997 and
April 1995, the 2 for 1 stock split in August 1998 and the 5% stock
dividend in August 1999. All per share amounts prior to 1997 have been
restated to comply with Statement of Financial Accounting Standards No.
128, "Earnings per Share." See notes to consolidated financial statements.
19
(2) EBITDA represents operating income before Depreciation and Amortization,
non-cash compensation, and overhead of the parent company for 1999 ($4.5
million), 1998 ($4.2 million) and 1997 ($3.9 million). EBITDA should not
be considered in isolation or as an alternative to net income (loss),
operating income (loss) or any other measure of performance under GAAP.
The Company believes that EBITDA is viewed as a relevant supplemental
measure of performance in the cellular telephone industry.
(3) Determined by dividing the aggregate number of subscribers by the
estimated population.
(4) Each billable telephone number in service represents one subscriber.
(5) Determined for a period by dividing (i) costs of sales and marketing,
including salaries, commissions and employee benefits and all expenses
incurred by sales and marketing personnel, agent commissions, credit
reference expenses, losses on cellular telephone sales, rental expenses
allocated to retail operations, net installation expenses and other
miscellaneous sales and marketing charges for such period, by (ii) the net
subscribers added during such period.
(6) Determined for a period by dividing (i) the sum of the access, airtime,
roaming, long distance, features, connection, disconnection and other
revenues for such period by (ii) the average number of subscribers for
such period divided by the number of months in such period.
(7) Determined for a period by dividing total subscribers discontinuing
service by the average number of subscribers for such period, and dividing
that result by the number of months in such period.
(8) The ratio of earnings to fixed charges is determined by dividing the sum
of earnings before interest expense, taxes and a portion of rent expense
representative of interest by the sum of interest expense and a portion of
rent expense representative of interest. The ratio of earnings to fixed
charges is not meaningful for periods that result in a deficit. For the
years ended December 31, 1998 and 1997, the deficit of earnings to fixed
charges was $41,584 and $8,949, respectively.
(9) Operating information for PCC in 1997 includes the cellular operating
results of PCW for the period subsequent to the acquisition of Palmer. The
results of PCC's operations do not include any cellular operating results
in 1996 or 1995.
Consolidated Balance Sheet Items
As of December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Total Current Assets ........ $ 229,600 $ 237,859 $ 79,949 $ 114,809 $ 10,047
Total Assets ................ 1,258,994 1,286,269 1,173,608 115,888 95,985
Total Current Liabilities (a) 51,440 47,099 55,603 7,109 36,309
Long-Term Debt .............. 700,000 909,432 690,300 -- --
Shareholders' Equity ........ 173,190 4,379 60,926 108,779 40,876
- ----------
(a) Includes in 1995 $28.0 million of a note payable to Bank of Montreal which
was repaid upon the sale of three television stations on February 2, 1996.
20
Predecessor
----------------------------------------------
For The
Nine Months For The Years Ended
Ended September 30, December 31,
1997 1996(c) 1995(b)
---- ------- -------
Consolidated statement of operations data:
Revenue:
Cellular Service .................................... $ 134,123 $ 151,119 $ 96,686
Equipment Sales and Installation ................. 7,613 8,624 8,220
--------- --------- ---------
Total Revenue .................................. 141,736 159,743 104,906
--------- --------- ---------
Engineering, Technical and Other Direct Expenses . 23,301 28,717 18,184
Cost of Equipment ................................ 16,112 17,944 14,146
Selling, General and Administrative Expenses ..... 41,014 46,892 30,990
Depreciation and Amortization .................... 25,498 25,013 15,004
--------- --------- ---------
Operating Income ................................. 35,811 41,177 26,582
--------- --------- ---------
Other Income (Expense):
Interest, net .................................. (24,467) (31,462) (21,213)
Other, net ..................................... 208 (429) (687)
--------- --------- ---------
Total Other Expenses ......................... (24,259) (31,891) (21,900)
--------- --------- ---------
Minority Interest ................................ (1,310) (1,880) (1,078)
Income Tax Expense ............................. (4,153) (2,724) (2,650)
--------- --------- ---------
Net Income ..................................... $ 6,089 $ 4,682 $ 954
========= ========= =========
Other Data:
Capital Expenditures ................................ $ 40,757 $ 41,445 $ 36,564
Operating Income Before Depreciation and
Amortization ("EBITDA") (2) ...................... $ 61,309 $ 66,190 $ 41,586
EBITDA Margin on Service Revenue .................... 45.7% 43.8% 43.0%
Net Cash Provided By (used in):
Operating Activities ............................. $ 38,791 $ 30,130 $ 27,660
Investing Activities ............................. (73,759) (110,610) (196,610)
Financing Activities ............................. 36,851 78,742 169,554
Penetration (3) ..................................... 8.60% 7.45% 6.41%
Subscribers at the End of Period (4) ................ 337,345 279,816 211,985
Cost to Add a Net Subscriber (5) .................... $ 514 $ 407 $ 276
Average Monthly Service Revenue per
Subscriber (6) ................................... $ 53.99 $ 52.20 $ 56.68
Average Monthly Churn (7) ........................... 1.89% 1.84% 1.55%
Ratio of Earnings to Fixed Charges (8) .............. 1.45x 1.28x 1.21x
- ----------
(b) Includes the Savannah and Augusta MSA's which were acquired on
December 1, 1995 and resulted in revenues to the Predecessor of
$2,162 and operating income of $208 for the year ended December 31,
1995.
(c) Includes the acquisition of the Georgia-1 RSA, which occurred on
June 20, 1996, and the Georgia-6 RSA, which occurred on July 5,
1996. The acquisitions of the GA-1 and GA-6 RSA resulted in revenues
to the Predecessor of $1,239 and $2,682, respectively, and operating
(loss) income of $(278) and $743, respectively, during such year.
21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to facilitate an understanding and
assessment of significant changes and trends related to the financial condition
and results of operations of the Company. This discussion should be read in
conjunction with the Company's Consolidated Financial Statements and the related
Notes thereto. (References to the Company also include its predecessor, Palmer.)
The comparison for the year ended December 31, 1998 versus December 31,
1997 is for the full twelve-month periods and combines the results of the
predecessor with the results for the Company in 1997. The audited financial
statements of the company do not include such combined financial statements, as
this would not be in conformity with GAAP.
The discussion contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are made regarding the intent, belief or current
expectations of the Company and its directors or officers primarily with respect
to the future operating performance of the Company. Readers are cautioned that
any such forward-looking statements are not guarantees of future performance and
may involve risks and uncertainties, and that actual results may differ from
those in the forward-looking statements as a result of factors, many of which
are outside the control of the Company.
Overview
PCW, a wholly-owned subsidiary of Holdings, a wholly-owned subsidiary of
Price Communications Cellular, Inc., a wholly-owned subsidiary of PCC, was
incorporated on May 29, 1997 in connection with the purchase of Palmer.
On May 23, 1997, PCC, PCW and Palmer entered into an Agreement and Plan of
Merger (the "Merger Agreement"). The Merger Agreement provided, among other
things, for the merger of PCW with and into Palmer with Palmer as the surviving
corporation (the "Merger"). On October 6, 1997, the Merger was consummated and
Palmer changed its name to "Price Communications Wireless, Inc." Pursuant to the
Merger Agreement, PCC acquired each issued and outstanding share of common stock
of Palmer and purchased outstanding options and rights under employee and direct
stock purchase plans for an aggregate price of $486.4 million. In addition, as a
result of the Merger, PCW assumed all outstanding indebtedness of Palmer of
approximately $378.0 million. As a result, the aggregate purchase price for
Palmer (including transaction fees and expenses) was approximately $880.0
million. PCW refinanced all of the indebtedness concurrently with the
consummation of the Merger.
PCW entered into an agreement to sell Palmer's Fort Myers, Florida MSA
covering approximately 382,000 Pops for $168.0 million (the "Fort Myers Sale").
On October 6, 1997, the Fort Myers Sale was consummated and generated proceeds
to the Company of approximately $166.0 million. The proceeds of the Fort Myers
Sale were used to fund a portion of the acquisition of Palmer. Accordingly, no
gain or loss was recognized on the Fort Myers Sale.
On October 21, 1997, PCC and PCW entered into an Asset Purchase Agreement
with MJ Cellular Company, L.L.C. which provided for the sale by PCW for $25.0
million of substantially all of the assets of the non-wireline cellular
telephone system serving the Georgia-1 Rural Service Area (the "Georgia Sale").
The sale of the assets of Georgia-1 was consummated on December 30, 1997 for
$24.2 million. A portion of the proceeds from the Georgia Sale were used to
retire a portion of the debt used to fund the acquisition of the Predecessor.
Accordingly, no gain or loss was recognized on the Georgia Sale.
In order to fund the Acquisition and pay related fees and expenses, in
July 1997, PCW issued $175.0 million aggregate principal amount of 11 3/4%
Senior Subordinated Notes due 2007 and entered into a syndicated senior loan
facility providing for term loan borrowings in the aggregate principal amount of
approximately $325.0 million and revolving loan borrowings of $200.0 million. In
October 1997, PCW borrowed all term loans available thereunder and approximately
$120.0 million of revolving loans.
The Acquisition was also funded in part through a $44.0 million equity
contribution from the Company (the "PCC Equity Contribution") which was in the
form of cash and common stock of the Company. An additional amount of the
purchase price for the Acquisition was raised out of the proceeds from the
issuance and sale for $80.0 million of units consisting of $153.4 million
principal amount of 13 1/2% Senior Secured Discount Notes due 2007 of Holdings
(the "13 1/2% Holdings Notes") and warrants (the "Warrants") to purchase shares
of Common Stock of the Company, par value $.01 per share (the "PCC Shares").
In June 1998, PCW issued $525.0 million of 9 1/8% Senior Secured Notes
(the "9 1/8% Notes") due December 15, 2006 with interest payable semi-annually
commencing December 15, 1998. The 9 1/8% Notes contain covenants that restrict
the
22
payment of dividends, incurrence of debt and sale of assets. The proceeds of
these notes were used principally to replace the then existing Credit Facility.
In August 1998, Holdings redeemed all of the outstanding 13 1/2% Holdings
Notes. The notes were redeemed at the redemption price per $1000 aggregate
principal amount of $711.61. The accreted value of the notes approximated $91.0
million. The redemption was financed out of the proceeds of a new $200.0 million
Holdings offering of 11 1/4% Senior Exchangeable Payable-in-Kind notes due 2008
("Exchangeable Notes"). The notes were exchangeable, at the Exchange Price, in
the event the daily high price of the Company's shares equals or exceeds 115% of
the Exchange Price for 10 out of 15 consecutive trading days.
In June 1999, the Company allowed the conversion of the outstanding
Exchangeable Notes as the terms of the indenture were met, and the Company
issued 18.1 million shares of its common stock in exchange for $220.7 million of
Holdings' indebtedness, including $20.7 million of accrued interest to the date
of conversion.
The Company is engaged in the construction, development, management and
operation of cellular telephone systems in the southeastern United States. As of
December 31, 1999, the Company provided cellular telephone service to 453,984
subscribers in Georgia, Alabama, South Carolina and Florida in a total of 16
licensed service areas, composed of eight MSA's and eight RSA's, with an
aggregate estimated population of 3.3 million. The Company sells its cellular
telephone service as well as a full line of cellular products and accessories
principally through its network of retail stores. The Company markets all of its
products and services under the nationally recognized service mark CELLULARONE.
As stated above, the Fort Myers and GA-1 markets were sold during the
latter part of 1997 thereby making operating results for PCW for the year ended
December 31, 1998 versus the year ended December 31, 1997 not comparable.
Results of Operations
The following table sets forth the Company and the Predecessor, for the
periods indicated, the percentage which certain amounts bear to total revenue.
Company Predecessor
----------------------------------------- -------------
For the Period For the
For the For the May 29, 1997 Nine Months
Year Ended Year Ended Through Ended
December 31, December 31, December 31, September 30,
1999 1998 1997 1997
------ ------ ------ ------
Revenue:
Service ................................ 92.6% 93.6% 94.6% 94.6%
Equipment sales and installation ....... 7.4 6.4 5.4 5.4
------ ------ ------ ------
Total Revenue ................................ 100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating Expenses:
Engineering, technical and other direct:
Engineering and technical (1) ....... 5.4 6.3 7.2 8.0
Other direct costs of services (2) .. 6.4 8.0 6.5 8.4
Cost of equipment (3) .................. 12.6 12.0 12.0 11.4
Selling, general and administrative:
Selling and marketing (4) ........... 8.5 10.9 8.9 8.4
Customer service (5) ................ 6.5 6.3 6.2 6.3
General and administrative (6) ...... 10.8 13.7 23.2 14.2
Non-cash compensation ............... .8 -- -- --
Depreciation and amortization .......... 17.9 22.1 25.4 18.0
------ ------ ------ ------
Total Operating Expenses ..................... 68.9 79.3 89.4 74.7
------ ------ ------ ------
Operating Income ............................. 31.1% 20.7% 10.6% 25.3%
Operating Income Before Depreciation and
Amortization and Non-Cash Compensation (7) 49.8% 42.8% 36.0% 43.3%
23
(1) Consists of costs of cellular telephone network, including inter-trunk
costs, span-line costs, cell site repairs and maintenance, cell site
utilities, cell site rent, engineers' salaries and benefits and other
operational costs.
(2) Consists of net costs of roaming, costs of long distance, costs of
interconnection with wireline telephone companies and other costs of
services.
(3) Consists primarily of the costs of the cellular telephones and accessories
sold, sales and marketing personnel, employee and agent commissions.
(4) Consists primarily of salaries and benefits of advertising and promotional
expenses.
(5) Consists primarily of salaries and benefits of customer service personnel
and costs of printing and mailing billings generated in-house.
(6) Includes salaries and benefits of general and administrative personnel and
other overhead expenses.
(7) Operating income before depreciation and amortization and non-cash
compensation should not be considered in isolation or as an alternative to
net income, operating income or any other measure of performance under
generally accepted accounting principles. The Company believes that
operating income before depreciation and amortization and non-cash
compensation is viewed as a relevant supplemental measure of performance
in the cellular telephone industry.
Year ended December 31, 1999 compared to Year ended December 31, 1998
Operating results for the year ended December 31,1999 reflect the
continued improvement in operating cash flow, subscriber growth and the related
increase in penetration, maintenance of a strong Average Revenue Per Subscriber
("ARPU") and strong cost controls which translate to a low average cost per
subscriber.
Revenue. Service revenues totaled approximately $233.6 million for the
current year compared to approximately $184.7 million for 1998 or an increase of
26.5%. The increase is a result of greater local cellular revenue due to an
increase in the average number of cellular subscribers and increased air time
revenue as a result of the increase from .8 billion minutes of use for 1998 (188
minutes per average subscriber) to 1.2 billion minutes of use in 1999 (250
minutes per average subscriber). Despite the increasing competition for
additional cellular subscribers, the Company was able to maintain its local
revenue per cellular subscriber which in fact rose from $38.20 in 1998 to $40.24
in 1999. In addition, the Company's outcollect roaming revenue, which is revenue
that the Company derives from other cellular companies' subscribers roaming in
our markets, increased as a result of an increase in usage from 51.5 million
minutes in 1998 to 105.8 million minutes in 1999. In the future, the Company may
realize a decrease in the rate of growth from roaming revenue as a result of new
roaming rates negotiated with some of the Company's roaming partners.
Equipment revenue amounted to $18.8 million for the current year compared
to $12.7 million in 1998. The significant increase in equipment revenue of 48%
is a combination of a greater portion of the cost being recovered from
subscribers, an increase in the average revenue per gross addition (from $84 to
$108), and a greater emphasis on accessory sales to new subscribers.
Operating Expenses. Operating expenses increased $17.2 million from $156.6
million in 1998 to $173.8 million in 1999. As a percentage of total revenue,
operating expenses decreased from 79.3% of total revenue in 1998 to 68.9% of
total revenue in 1999. After excluding non-cash compensation and depreciation
and amortization, operating expenses amount to 50.2% of total revenue for 1999
compared to 57.2% of total revenue for 1998. Total operating costs per cellular
subscriber excluding PCC overhead and all non-cash charges amounted to $21.94 in
1999 and $23.48 in 1998.
Engineering, technical and other direct expenses increased from $28.1
million in 1998 to $29.7 million in 1999. There are three major components in
this category. The net cost of incollect, which represents the difference
between the amount paid to other cellular carriers for the Company's subscribers
roaming in other carriers' markets and the amount charged to these subscribers,
variable network costs such as inter trunk, long distance and directory
assistance costs, and engineering costs which consist principally of salaries
and fixed span line costs and tower rentals.
As a result of negotiations with other cellular carriers, the Company was
able to reduce the amount it reimburses those carriers for incollect roaming
resulting in a recovery of 90% of cost for 1999 compared to a 78% recovery for
1998 or a decrease of $4.4 million of net expense. Offsetting these savings were
increases in long distance, directory assistance and interconnect costs related
to the increased utilization of the system which is evidenced by a 53% increase
in minutes of use.
Decreases in engineering salaries and related expenses were offset by
increases in fixed span line costs and additional cell site rents as the Company
continued to build out its system by adding new cell sites and increasing the
number of radios in the existing cell sites.
The increase in gross subscriber additions combined with the increase in
cellular phone upgrades as well as the higher cost of digital phones, resulted
in an increase of the cost of equipment from $23.7 million in 1998 to $31.9
million in 1999. In addition,
24
increases in the sale of accessories contributed to the increase in equipment
cost. The Company recovered 58.9% of the cost of equipment in 1999 compared to a
recovery of 53.5% in 1998.
Selling, general and administrative ("SG&A") increased to $65.2 million
for the current year compared to $61.1 million in 1998. As a percentage of total
revenue, SG&A decreased from 31.0% of total revenue in 1998 to 25.8% in 1999.
Sales and marketing costs which include installation costs (included as
engineering in 1998), salaries, commissions and advertising, amount to $21.5
million for both 1999 and 1998. Decreases in salaries and related benefits were
offset by increases in commissions and advertising expenditures. The cost to add
a gross cellular subscriber, which consists of the net loss on equipment sales
and sales and marketing expenditures, decreased from $214.30 in 1998 to $198.68
in 1999.
Customer service costs, which consist principally of billing costs and
payroll and related benefits, increased to $16.4 million in 1999 from $12.5
million in 1998. Increases in personnel and billing costs are a direct function
of the increases in the number of subscribers. Additional subscribers require an
increase in the number of cellular bills mailed out, as well as an increase in
the number of customer service representatives to handle the additional
subscriber inquiries.
General and administrative expenses remained almost constant amounting to
$27.3 million in 1999 and $27.1 million in 1998. Significant savings in payroll
and related benefits were offset by the increase in the provision for bad debts.
Included in operating expenses for 1999 is a charge of $2.0 million
representing the non-cash compensation charges related to the conversion by an
officer of the Corporation of the Company's Preferred stock into common stock
(see Notes to Consolidated Financial Statements). Such charges are being
expensed over the vesting period of the common stock. The conversions occurred
during 1998 and 1999. Had there been a full year of expense, the total non-cash
compensation would have amounted to $3.6 million for 1999.
Depreciation and amortization increased from $43.6 million in 1998 to
$45.2 million in 1999. Decreases in the amortization of intangibles related to
the finalization in 1998 of the value of the cellular licenses from the
acquisition, were more than offset by increases in depreciation expense due to
fixed asset additions in 1999.
Operating income improved significantly from $40.8 million achieved in
1998 to $78.5 million in 1999. Earnings before non-cash compensation and
depreciation and amortization ("EBITDA") amounted to $125.7 million for 1999 or
49.8% of total revenue compared to $84.4 million or 42.8% of total revenue for
1998. The improvement is a function of management's ability to control costs
while still maintaining significant subscriber growth and maintaining and
growing ARPU in the face of a declining trend in the cellular industry. The
increase in EBITDA from 1998 to 1999 represents a growth of 49%.
Net Interest Expense, Other Income, Income Taxes, Extraordinary Item and
Net Income. Net interest expense decreased to $72.9 in 1999 from $76.9 million
in 1998. During 1998, long term debt consisted of at various times the revolving
loan and credit facility at variable interest rates, $80 million of 13 1/2%
Senior Secured Discount Notes, $175 million of 11 3/4% Senior Subordinated
Notes, $525 million of 9 1/8% Senior Secured Notes and $200 million of 11 1/4%
Senior Exchangeable Payable-in-Kind Notes. In June 1999, the Company allowed the
conversion of the $200 million 11 1/4% Payable-in-Kind Notes and therefore
incurred only six months of non-cash interest expense. The $175 million 11 3/4%
Notes and the $525 million 9 1/8% Notes were outstanding for the full year. The
effect of the different borrowings resulted in interest savings of $500,000. The
additional cash on hand as a result of the new borrowings in 1998 resulted in
additional interest income of $3.6 million. The current debt outstanding pays
cash interest and would result in interest expense of $68.5 million for a full
year.
Other income for 1998 resulted largely from the gain from the sale of
PriCellular Corporation warrants and stock. Other income for 1999 resulted
primarily from the liquidation of a long-standing investment by the Company
($8.5 million) and from net gains realized in capital markets by the Parent
Company.
The income tax provision for 1999 of $6.0 million compared to the income
tax benefit of $8.5 million in 1998 is a result of taxable income in 1999 at an
effective rate of approximately 37% compared to a taxable loss at a benefit of
approximately 37%.
The net income of $10.2 million for 1999 compared to a net loss of $41.6
million for 1998 is a function of the items discussed above. In addition, 1998
includes $27.1 million net of tax benefit of deferred finance charges written
off, the premium associated with the early extinguishment of debt and interest
paid for the early liquidation of the interest rate swap contracts.
Year ended December 31, 1998 compared to Year ended December 31, 1997
The results of operations for the Company for the year ended December 31,
1998 are not comparable to the results of the prior year principally due to the
fact that 1998 includes a full year of operations for the Acquisition, a full
year of interest to fund
25
the Acquisition and certain extraordinary items net of tax benefits, resulting
from the refinancing in the current year. Included in other income for the
current year are the gains realized from the sale of common stock and warrants
of PriCellular Corporation (the total of which amounted to $ 15.2 million). For
the year ended December 31, 1998 the Company recorded a net loss of $41.6
million principally because of the extraordinary item of $27.1 million related
to the early extinguishment of debt and the additional interest expense for the
full year. Basic and diluted earnings per share for 1998 were a loss of $1.49
compared to a loss of $0.29 for 1997.
26
Results of Operations of Price Communications Wireless, Inc. and Subsidiaries
compared to Palmer Wireless, Inc. and Subsidiaries (Predecessor)
The following discussion is intended to facilitate an understanding and
assessment of significant changes and trends related to the financial condition
and results of operations of the Company's indirectly wholly-owned subsidiary.
This discussion should be read in conjunction with Price Communications
Wireless, Inc.'s 1998 Consolidated Financial Statements and the related Notes
thereto and the Consolidated Financial Statements and Notes thereto of Palmer
Wireless, Inc. and Subsidiaries (the "Predecessor") included as a supplement to
this report. References to the Company where appropriate also include its
subsidiaries, PCW, Holdings and the Predecessor.
The discussion for 1997 is based on the combination of results of the
Predecessor through September 30, 1997 and the results of PCW for the period May
29, 1997 through December 31, 1997. As a result, the combined information has
not been prepared in accordance with generally accepted accounting principles.
The comparison of 1998 and 1997 results below does not include operations at the
parent company level of PCC.
Price Communications Wireless and Predecessor; Year Ended December 31, 1998
compared to December 31, 1997
Revenue. Service revenues totaled $184.7 million during 1998, an increase
of 5.2% from $175.5 million in 1997. The increase is primarily attributable to a
24.5% increase in the average number of subscribers to 345,490 for 1998 versus
277,487 in 1997 after adjusting for the sale of the Fort Myers and GA-1 markets.
Substantially offsetting this increase is the loss of service revenue of the
cellular telephone systems resulting from the sale of Fort Myers and GA-1, which
approximated $21.1 million. The increase in subscribers is the result of
internal growth, which the Company attributes primarily to its strong sales and
marketing efforts. In addition to the subscriber base growth, service revenues
also increased because of a significant increase in the minutes of use for the
Company's subscribers.
Average monthly revenue per subscriber decreased 2.5% to $44.54 during
1998 from $45.70 in 1997, which excluded incollect revenue. This decrease is due
to a common trend in the cellular telephone industry, where on average, new
customers use less airtime than existing subscribers. Therefore, service
revenues generally do not increase proportionately with the increase in
subscribers. In addition, the decline reflects more competitive rate plans
introduced into the Company's markets. The decrease, however, is below the
industry average.
Equipment sales and installation revenue, which consists primarily of
cellular subscriber equipment sales, increased to $12.7 million during 1998 from
$10.0 million in 1997. As a percentage of total cellular revenue, equipment
sales and installation revenue increased to 6.4% of service revenue from 5.4%
for 1997, reflecting the increased recurring revenue base as well as the ability
to obtain increased prices for cellular equipment sold to customers.
Operating Expenses. Engineering and technical expenses decreased slightly
by 2.1% to $14.3 million in 1998 from $14.6 million in 1997. As a percentage of
revenue, engineering and technical expenses decreased to 7.3% of total revenue
from 7.9% for 1997. This reflects the increased costs associated with increased
minutes of usage by our subscribers offset by the expenses associated with the
markets sold which approximated $1.3 million.
Other direct costs of services increased to $15.7 million in 1998 from
$14.7 million in 1997. As a percentage of revenue, other direct costs of service
was basically flat increasing from 7.9% in 1997 to 8.0% in 1998, reflecting the
increase in minutes of usage by our customers as they roam in other markets.
Other direct costs of service related to the Fort Myers and GA-1 markets
approximated $3.0 million.
The cost of equipment increased 10.7% to $23.7 million during 1998 from
$21.4 million in 1997, due primarily to the increase in gross subscriber
activations. Equipment sales resulted in losses of $11.0 million in 1998 versus
$11.4 million in 1997. The Company sells equipment below its costs in an effort
to address market competition and improve market share. The Company was able to
reduce its losses by obtaining better prices from its customers as well as
obtaining better prices from our suppliers.
Selling, general and administrative expenses increased a modest 2.2% to
$55.0 million in 1998 from $53.8 million in 1997. These expenses are comprised
of (i) sales and marketing costs, (ii) customer service costs and (iii) general
and administrative expenses.
Sales and marketing costs increased 23.4% to $19.5 million for 1998 from
$15.8 million for 1997. This increase is primarily due to an 8.0% increase in
gross subscriber activations (excluding prepaids) and the costs to acquire them
and higher advertising
27
costs in response to market competition. As the level of penetration increases,
the sales and marketing costs associated with acquiring additional subscribers
increases. As a percentage of total revenue, sales and marketing costs increased
to 9.9% during 1998 compared to 8.5% in 1997. The Company's cost to add a net
subscriber, including loss on telephone sales, decreased to $448 for 1998 from
$469 for 1997. Sales and marketing expenses associated with the Fort Myers and
GA-1 markets approximated $1.2 million.
Customer service costs increased 6.8% to $12.5 million for 1998 from $11.7
million in 1997. As a percentage of revenue, customer service costs amounted to
6.3% for 1998 and for 1997. The increase in actual dollars was due primarily to
an increase in license and maintenance costs for the Company's billing systems
due to the increase in the number of subscribers that receive invoices on a
monthly basis, and was partially offset by the expenses incurred for the Fort
Myers and GA-1 markets which approximated $1.1 million in 1997.
General and administrative expenditures decreased 12.5% to $23.0 million
during 1998 from $26.3 million in 1997. General and administrative expenses
decreased as a percentage of total revenue to 11.7% in 1998 from 14.2% in 1997.
Payroll and its related fringe benefits were the largest line items that
reflected a decrease. General and administrative expenses attributable to the
cellular telephone systems sold in Fort Myers and GA-1 amounted to $1.8 million
in 1997. As the Company continues to add more subscribers, and generates
associated revenue, general and administrative expenses should continue to
decrease as a percentage of total revenues. There can be no assurance, however,
that this forward-looking statement will not differ materially from actual
results due to unforeseen general and administrative expenses and other factors.
Depreciation and amortization increased 19.1% to $43.6 million during 1998
from $36.6 million in 1997. This increase was primarily due to the depreciation
and amortization associated with the new carrying value of assets as a result of
the "push down" of the purchase price to PCW in October 1997. As a percentage of
revenue, depreciation and amortization increased to 22.1% during 1998 from 19.7%
in 1997.
Operating income increased 1.4% to $45.0 million in 1998, from $44.4
million for 1997. This improvement in operating results is primarily due to
increases in revenue and in cost containment. The actual improvement in
operating income was negatively effected by the increase in the non-cash charges
for depreciation and amortization, which exceeded the 1997 amount, by
approximately $7.0 million.
Net interest expense increased to $77.5 million in 1998 from $46.7 million
in 1997 primarily because of the additional borrowings incurred as a result of
the acquisition and the inclusion of interest for the debt associated with
Holdings.
The income tax benefit for 1998 amounted to $12.8 million representing the
reduction of the accrued tax liability associated with the sale of the Ft. Myers
and GA-1 properties, which was established as the result of purchase accounting.
The income tax benefit for 1997 was approximately $1.0 million based on the loss
for the year.
The net loss for the year ended December 31, 1998 was $47.2 million
compared to $2.8 million for the year ended December 31, 1997. The increased net
loss is a result of the additional interest expense, increased depreciation and
amortization expense and 25.3 million of extraordinary items (net of tax
benefit). These items are comprised of the write-off of deferred finance charges
and the premium associated with the early retirement of the Holdings notes and
interest paid for the early termination of the interest rate swap contracts.
Liquidity and Capital Resources
The Company's long-term capital requirements consist of funds for capital
expenditures, acquisitions and debt service. Historically, the Company has met
its capital requirements primarily through equity contributions, long-term debt,
and to a lesser extent, operating cash flow. Net cash provided by operating
activities amounted to $74.6 million for the year ended December 31, 1999. The
current level of operating cash flow is sufficient to fund the current
anticipated level of capital expenditures and cash interest, which interest
amounts to approximately $68.5 million.
In 1999, the Company spent approximately $24.6 million for capital
expenditures. The Company expects to spend approximately $20 million for the
year ended December 31, 2000. The Company expects to use net cash provided by
operating activities to fund such capital expenditures.
As part of the acquisition in 1997, PCW issued $175 million 11 3/4% Senior
Subordinated Notes due July 15, 2007. Interest on the notes are due each January
15 and July 15. The notes contain covenants that restrict the payment dividends,
incurrence of debt and the sale of assets.
28
In June 1998, PCW issued $525 million of 9.125% Senior Secured Notes due
December 15, 2006 with interest payable semi-annually commencing December 15,
1998. These notes contain covenants that restrict the payment of dividends,
incurrence of debt and the sale of assets. These notes replaced the previously
existing credit facility.
In June 1999, the Company allowed the conversion of the outstanding
indebtedness of Holdings' $200 million 11 1/4% Senior Exchangeable
Payable-in-Kind Notes due 2008. The Company issued 18.1 million shares of its
common stock in exchange for PCH's Notes including $20.7 million of accrued
interest to the date of conversion.
Accounting Policies
For financial reporting purposes, the Company reports 100% of revenues and
expenses for the markets for which it provides cellular telephone service.
However, in several of its markets, the Company holds less than 100% of the
equity ownership. The minority stockholders' and partners' share of income or
losses in those markets is reflected in the consolidated financial statements as
"minority interest" except for losses in excess of their capital accounts and
cash call provisions which are not eliminated in consolidation. For financial
reporting purposes, the Company consolidates each subsidiary and partnership in
which it has a controlling interest (greater than 50%) in each.
Year 2000 Impact
The Company, with guidance from it's current billing vendor and MIS
outsource provider (EDS), completed all testing and upgrades of preparation for
the Year 2000 during the fourth quarter as scheduled. The Company performed
extensive systems monitoring and defect detection procedures following the Year
2000 rollover and found no significant errors. As of January 31, 2000, the
Company is not aware of any Year 2000 related problems with internal systems or
those of key suppliers.
Total costs of Year 2000 testing and upgrading of internal systems was
approximately $2.0 million. All expenditures were incurred during 1999 and were
expensed as incurred.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company utilizes fixed debt to fund its acquisitions. Management
believes that the use of fixed rate debt minimizes the Company's exposure to
market conditions and the ensuing increases and decreases that could arise with
variable rate financing. See notes to consolidated financial statements for
description and terms of long term debt.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Statements on page 31.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
The information called for by Items 10, 11, 12 and 13 is incorporated
herein by reference from the following portions of the definitive proxy
statement to be filed by the Company in connection with its 2000 Meeting of
Shareholders.
Item Incorporated from
---- -----------------
Item 10. Directors and Executive Officers of the "Directors and Executive Officers"
Company
Item 11. Executive Compensation "Executive Compensation" and "Related
Transactions"
Item 12. Security Ownership of Certain Beneficial "Principal Shareholders" and "Security
Owners and Management Ownership of Management"
Item 13. Certain Relationships and Related Transactions "Executive Compensation" and "Related
Transactions"
29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-k
(a) (1) and (2) List of financial statements and financial statement
schedules:
See Index to Financial Statements on page 31.
(Schedules other than those listed are omitted for the reason that
they are not required or are not applicable or the required
information is shown in the financial statements or notes thereto.)
(3) Exhibits
See Exhibit Index at page E-1, which is incorporated herein by
reference.
(b) Reports on Form 8-K.
None.
30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Auditor's Report.......................................................... F-1
Consolidated Balance Sheets at December 31, 1999 and 1998................. F-2
Consolidated Statements of Operations and Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997........................... F-3
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997....................................... F-5
Notes to Consolidated Financial Statements................................ F-6
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
CONSOLIDATED FINANCIAL STATEMENTS
Auditor's Report.......................................................... F-18
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1997..................................................... F-19
Consolidated Statements of Stockholders' Equity for the Nine Months
Ended September 30, 1997............................................... F-20
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997..................................................... F-21
Notes to Consolidated Financial Statements................................ F-23
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS SCHEDULE
Schedule No.
I. Condensed Financial Information of Registrant......................... F-30
II. Valuation and Qualifying Accounts..................................... F-34
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Price Communications Corporation:
We have audited the accompanying consolidated balance sheets of Price
Communications Corporation (a New York Corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations and comprehensive income, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. These
consolidated financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Price Communications
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
consolidated financial statements are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
New York, New York
January 31, 2000
F-1
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
($ in thousands except share data)
1999 1998
---- ----
Current assets:
Cash and cash equivalents ........................................... $ 194,231 $ 204,999
Accounts receivable, net of allowance for doubtful accounts of $2,003
in 1999 and $1,596 in 1998 ......................................... 25,056 20,509
Receivables from other cellular carriers ............................ 2,505 2,282
Available for sale securities ....................................... 2,056 5,608
Inventory ........................................................... 5,205 3,940
Deferred income taxes ............................................... 409 --
Prepaid expenses and other current assets ........................... 138 521
----------- -----------
Total current assets .............................................. 229,600 237,859
----------- -----------
Property and equipment:
Land and improvements ............................................... 6,989 6,767
Buildings and improvements .......................................... 9,770 8,831
Equipment, communication systems and furnishings .................... 173,450 153,673
----------- -----------
190,209 169,271
Less accumulated depreciation ....................................... 45,896 24,376
----------- -----------
Net property and equipment ........................................ 144,313 144,895
Equity investment in other cellular properties ........................ 11,810 --
Licenses, net of accumulated amortization of $51,848 in 1999 and
$29,117 in 1998 ..................................................... 854,799 876,952
Other intangible and other assets, net of accumulated amortization
of $4,097 in 1999 and $1,671 in 1998 ................................ 18,472 26,563
----------- -----------
Total assets ...................................................... $ 1,258,994 $ 1,286,269
=========== ===========
Current liabilities:
Accounts payable and accrued expenses ............................... $ 15,895 $ 13,168
Accrued interest payable ............................................ 11,942 11,779
Accrued salaries and employee benefits .............................. 1,642 3,256
Deferred revenue .................................................... 5,525 5,535
Customer deposits ................................................... 1,222 921
Deferred income taxes ............................................... -- 272
Other current liabilities ........................................... 15,214 12,168
----------- -----------
Total current liabilities ......................................... 51,440 47,099
Long-term debt, excluding current installments ........................ 700,000 909,432
Accrued income taxes long-term ........................................ 37,934 25,434
Deferred income taxes (net) ........................................... 292,482 290,370
Commitments and contingencies .........................................
Minority interests in cellular licenses ............................... 3,948 9,530
Redeemable preferred stock, Series A, par value $.01 per share;
728,133 shares authorized and outstanding ........................... -- 25
Shareholders' equity:
Preferred stock, par value $.01 per share; authorized 18,907,801
shares; no shares outstanding ..................................... -- --
Common stock, par value $.01; authorized 120,000,000 shares in
1999 and 60,000,000 shares in 1998; -- --
Outstanding 56,649,277 shares in 1999 and 21,695,383 shares
in 1998 ......................................................... 567 218
Additional paid-in-capital .......................................... 219,896 (5,869)
Unearned compensation ............................................... (65,978) --
Unrealized gain on marketable equity securities, net of tax effect .. 1,291 2,836
Retained earnings ................................................... 17,414 7,194
----------- -----------
Total shareholders' equity ........................................ 173,190 4,379
----------- -----------
Total liabilities and shareholders' equity ........................ $ 1,258,994 $ 1,286,269
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
($ in thousands, except per share data)
1999 1998 1997
---- ---- ----
Revenue:
Cellular operations:
Service .................................................... $ 233,575 $ 184,652 $ 41,365
Equipment sales and installation ........................... 18,777 12,677 2,348
------------ ------------ ------------
Total revenue ............................................ 252,352 197,329 43,713
------------ ------------ ------------
Operating expenses:
Engineering, technical and other direct ...................... 29,666 28,122 5,978
Cost of equipment ............................................ 31,879 23,710 5,259
Selling, general and administrative .......................... 65,150 61,093 16,750
Non-cash compensation ........................................ 1,973 -- --
Depreciation and amortization ................................ 45,157 43,625 11,107
------------ ------------ ------------
Total operating expenses ................................. 173,825 156,550 39,094
------------ ------------ ------------
Operating income (loss) ......................................... 78,527 40,779 4,619
Interest income ................................................. 9,758 6,194 4,378
Interest expense ................................................ (82,650) (83,120) (24,441)
Other income .................................................... 12,251 15,279 1,400
Minority interest ............................................... (1,664) (2,178) (414)
------------ ------------ ------------
Income (loss) before income taxes ............................... 16,222 (23,046) (14,458)
Income tax (expense) benefit .................................... (6,002) 8,523 5,509
------------ ------------ ------------
Income (loss) before extraordinary item ......................... 10,220 (14,523) (8,949)
Extraordinary item - loss on early extinguishment of debt (net of
income tax benefit of $15,893) ............................... -- (27,061) --
------------ ------------ ------------
Net income (loss) ............................................... $ 10,220 $ (41,584) $ (8,949)
------------ ------------ ------------
Other comprehensive income, net of tax
Unrealized gains (losses) on available for sale securities ... 1,291 2,836 211
Reclassification adjustment .................................. (2,832) (2,148) --
------------ ------------ ------------
Comprehensive income (loss) ..................................... $ 8,679 $ (40,896) $ (8,738)
============ ============ ============
Per share data:
Basic (loss) earnings per share .............................. $ .22 $ (1.13) $ (.22)
Weighted average shares outstanding .......................... 46,334,000 36,688,000 40,248,000
Diluted (loss) earnings per share ............................ $ .22 $ (1.13) $ (.22)
Weighted average shares outstanding .......................... 47,495,000 36,688,000 40,248,000
See accompanying notes to consolidated financial statements.
F-3
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
($ in thousands)
1999 1998 1997
---- ---- ----
Cash Flows From Operating Activities:
Net income (loss) ......................................................... $ 10,220 $ (41,584) $ (8,949)
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization ........................................ 45,157 43,625 11,107
Amortization of deferred finance costs ............................... 2,523 2,205 --
Minority interest share of income .................................... 1,664 2,178 414
Deferred income taxes ................................................ (3,648) (8,945) (2,505)
Interest deferred and added to long-term debt ........................ -- 9,432 4,400
Accrued interest satisfied by issuance of PCC stock .................. 11,309 -- --
(Gain) loss on available for sale securities ......................... (12,607) (15,659) 791
Extraordinary item ................................................... -- 42,954 --
Non-cash compensation ................................................ 1,973 -- --
Increase in accounts receivable ...................................... (4,547) (4,558) (70)
(Increase) decrease in other current assets .......................... (1,488) (1,040) 936
Increase (decrease) in accounts payable and accrued expenses ......... 2,727 (1,309) 1,602
Increase in accrued interest payable ................................. 163 418 9,394
Increase (decrease) in other current liabilities ..................... 2,350 (2,217) (8,153)
(Decrease) increase in deferred revenue .............................. (10) 1,780 (1,046)
Increase (decrease) in accrued income tax long-term .................. 18,340 (15,843) (2,675)
Other ................................................................ 465 929 1,205
--------- --------- ---------
Total adjustments .................................................. 64,371 53,950 15,400
--------- --------- ---------
Net cash provided by operating activities .......................... 74,591 12,366 6,451
--------- --------- ---------
Cash Flows From Investing Activities:
Capital expenditures ...................................................... (24,575) (14,725) (14,515)
Acquisition of Palmer Wireless Inc. ....................................... -- 2,000 (497,856)
Proceeds from sales of businesses and equipment ........................... 2,654 -- 193,799
Purchase of available-for-sale securities ................................. (7,718) (10,401) (2,010)
Proceeds from sale of available-for-sale securities ....................... 21,435 44,487 8,097
Purchase of additional minority interests in majority owned Company systems (7,732) -- --
Purchase of minority equity interests in other cellular properties ........ (11,810) -- --
Other ..................................................................... -- -- (92)
--------- --------- ---------
Net cash (used in) provided by investing activities ............... (27,746) 21,361 (312,577)
--------- --------- ---------
Cash Flows From Financing Activities:
Repayment of long-term debt ............................................... -- (518,112) (385,000)
Proceeds from long-term debt .............................................. -- 725,000 695,712
Costs associated with early extinguishment of debt ........................ -- (28,080) --
Payment of debt issuance costs ............................................ (788) (20,185) (19,412)
Paid in kind preferred stock dividends .................................... -- -- (1,176)
Issuance of warrants ...................................................... -- -- 4,288
Issuance of preferred stock ............................................... -- -- 35
Issuance of common stock .................................................. -- -- 6,047
Repurchase of paid in kind preferred stock ................................ -- -- (28,225)
Repurchase of Company common stock ........................................ (57,055) (17,412) (20,241)
Exercise of employee stock options and warrants ........................... 230 610 192
--------- --------- ---------
Net cash (used in) provided by financing activities ................ (57,613) 141,821 252,220
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ............... (10,768) 175,548 (53,906)
Cash and Cash Equivalents, beginning of year .............................. 204,999 29,451 83,357
--------- --------- ---------
Cash and Cash Equivalents, end of year .................................... $ 194,231 $ 204,999 $ 29,451
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
($ and share amounts in thousands)
Common Stock
Preferred Stock Class A Additional
--------------- ------- paid-in Unrealized
Shares Value Shares Value capital gain
------ ----- ------ ----- ------- ----
Balance, December 31, 1996 ......................... -- -- 9,039 $ 90 $ 12,240 $ 1,937
Net (loss) ...................................... -- -- -- -- -- --
Change in unrealized gain on marketable equity
securities, net of tax effect ................... -- -- -- -- -- 211
Purchase and retirement of common stock ............ -- -- (2,468) (25) (6,674) --
Exchange of preferred stock for common stock ....... 1,129 $ 28,225 (2,292) (23) (6,140) --
Purchase of common stock ........................... (1,129) (28,225) -- -- -- --
Dividends on preferred stock ....................... -- -- -- -- -- --
Stock options exercised ............................ -- -- 456 5 192 --
Issuance of common stock ........................... -- -- 750 8 6,039 --
Issuance of warrants ............................... -- -- -- -- 4,288 --
Exercise of warrants ............................... -- -- 78 1 (1) --
Five-for-four stock split .......................... -- -- 1,431 14 (14) --
------ --------- ------ ------ --------- ---------
Balance, December 31, 1997 ......................... -- -- 6,994 $ 70 $ 9,930 $ 2,148
Net (loss) ...................................... -- -- -- -- -- --
Change in unrealized gain on marketable equity
securities, net of tax effect ................... -- -- -- -- -- 688
Purchase and retirement of common stock ............ -- -- (2,249) (22) (17,390) --
Exchange of preferred stock for common stock ....... -- -- 411 4 6 --
Stock options exercised ............................ -- -- 189 2 608 --
Tax benefit of exercise of stock options ........... -- -- -- -- 641 --
Issuance of common stock for payment of bonus ...... -- -- 62 1 499 --
Issuance of warrants ............................... -- -- 626 6 (6) --
Stock splits ....................................... -- -- 15,662 157 (157) --
------ --------- ------ ------ --------- ---------
Balance, December 31, 1998 ......................... -- -- 21,695 $ 218 $ (5,869) $ 2,836
Stock splits and stock dividend .................... -- -- 14,663 147 (147) --
Issue of warrants from $105M debt redeemed in 1998 . -- -- 2,347 23 (23) --
Change in unrealized gain on marketable equity
securities, net of tax effect ................... -- -- -- -- -- (1,545)
Purchase and retirement of treasury stock .......... -- -- (3,544) (35) (56,976) --
Exercise of stock options and warrants ............. -- -- 462 5 226 --
Other .............................................. -- -- 56 -- 642 --
Conversion of Class A and Class B preferred stock to
common stock .................................... -- -- 3,725 37 67,938 --
Deferred compensation expense associated with the
conversion of preferred stock to common stock ... -- -- -- -- -- --
Conversion of PIK notes, net ....................... -- -- 17,245 172 211,319 --
Tax benefit from the exercise of stock options ..... -- -- -- -- 2,786 --
Net income ......................................... -- -- -- -- -- --
------ --------- ------ ------ --------- ---------
Balance, December 31, 1999 ......................... -- $ -- 56,649 $ 567 $ 219,896 $ 1,291
====== ========= ====== ====== ========= =========
Total
Share-
Retained Deferred holders'
earnings compensation equity
-------- ------------ ------
Balance, December 31, 1996 ......................... $ 94,512 -- $ 108,779
Net (loss) ...................................... (8,949) -- (8,949)
Change in unrealized gain on marketable equity
securities, net of tax effect ................... -- -- 211
Purchase and retirement of common stock ............ (13,542) -- (20,241)
Exchange of preferred stock for common stock ....... (22,062) -- (1,129)
Purchase of common stock ........................... -- -- (27,096)
Dividends on preferred stock ....................... (1,176) -- (1,176)
Stock options exercised ............................ (5) -- 192
Issuance of common stock ........................... -- -- 6,047
Issuance of warrants ............................... -- -- 4,288
Exercise of warrants ............................... -- -- --
Five-for-four stock split .......................... -- -- --
--------- --------- ---------
Balance, December 31, 1997 ......................... $ 48,778 -- $ 60,926
Net (loss) ...................................... (41,584) -- (41,584)
Change in unrealized gain on marketable equity
securities, net of tax effect ................... -- -- 688
Purchase and retirement of common stock ............ -- -- (17,412)
Exchange of preferred stock for common stock ....... -- -- 10
Stock options exercised ............................ -- -- 610
Tax benefit of exercise of stock options ........... -- -- 641
Issuance of common stock for payment of bonus ...... -- -- 500
Issuance of warrants ............................... -- -- --
Stock splits ....................................... -- -- --
--------- --------- ---------
Balance, December 31, 1998 ......................... $ 7,194 $ -- $ 4,379
Stock splits and stock dividend .................... -- -- --
Issue of warrants from $105M debt redeemed in 1998 . -- -- --
Change in unrealized gain on marketable equity
securities, net of tax effect ................... -- -- (1,545)
Purchase and retirement of treasury stock .......... -- -- (57,011)
Exercise of stock options and warrants ............. -- -- 231
Other .............................................. -- -- 642
Conversion of Class A and Class B preferred stock to
common stock .................................... -- (67,951) 24
Deferred compensation expense associated with the
conversion of preferred stock to common stock ... -- 1,973 1,973
Conversion of PIK notes, net ....................... -- -- 211,491
Tax benefit from the exercise of stock options ..... -- -- 2,786
Net income ......................................... 10,220 -- 10,220
--------- --------- ---------
Balance, December 31, 1999 ......................... $ 17,414 $ (65,978) $ 173,190
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Acquisition
Price Communications Corporation ("Price" or the "Company") owns 100% of
Price Communications Cellular, Inc., which owns 100% of Price Communications
Cellular Holdings, Inc. ("Holdings"), which owns 100% of Price Communications
Wireless, Inc. ("PCW"). In May 1997, Price and PCW entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Palmer Wireless, Inc. ("Palmer").
The Merger Agreement provided, among other things, for the merger of PCW with
and into Palmer, with Palmer as the surviving corporation (the "Merger"). In
October 1997, the Merger was consummated and Palmer changed its name to "Price
Communications, Wireless, Inc." Pursuant to the Merger Agreement, Price acquired
each issued and outstanding share of common stock of Palmer for a purchase price
of $17.50 per share in cash and purchased outstanding options and rights under
employee and director stock purchase plans for an aggregate price of
approximately $486.4 million. In addition, as a result of the Merger, PCW
assumed all outstanding indebtedness of Palmer of approximately $378.0 million.
The aggregate purchase price for Palmer (including transaction fees and
expenses) was approximately $880.0 million. PCW refinanced all of the Palmer
existing indebtedness concurrently with the consummation of the Merger.
In June 1997, PCW entered into an agreement to sell Palmer's Fort Myers,
Florida MSA as part of the financing of the Merger (the "Fort Myers Sale"). In
October 1997, the Fort Myers Sale was consummated, and generated proceeds to the
Company of approximately $166.0 million. The proceeds of the Fort Myers Sale
were used to fund a portion of the acquisition of Palmer. Accordingly, no gain
or loss was recognized on the Fort Myers Sale.
Also in connection with the Merger, on October 21, 1997, Price and PCW
entered into an Asset Purchase Agreement which provided for the sale by PCW of
substantially all of the assets used in the operation of the non-wireline
cellular telephone system serving the Georgia Rural Service Area ("Georgia-1"),
including the FCC licenses to operate Georgia-1 (the "Georgia Sale"). The
Georgia Sale was consummated on December 30, 1997 for $24.2 million. In January
1998, a portion of the proceeds from the Georgia Sale were used to retire a
portion of the debt used to fund the Palmer acquisition. Accordingly, no gain or
loss was recognized on the Georgia Sale.
In order to fund the Merger and pay related fees and expenses, in July
1997, PCW issued $175.0 million aggregate principal amount of 11 3/4% Senior
Subordinated Notes due 2007 and entered into a syndicated senior loan facility
providing for term loan borrowings in the aggregate principal amount of
approximately $325.0 million and revolving borrowings of $200.0 million. In
October 1997, PCW borrowed all term loans available thereunder and approximately
$120.0 million of revolving loans.
The Acquisition was also funded in part through a $44.0 million
contribution from the Company (the "PCC Equity Contribution") which was in the
form of cash and common stock of the Company. An additional amount of the
purchase price for the Acquisition was raised out of the proceeds from the
issuance and sale for $80.0 million of units consisting of $153.4 million
principal amount of 13 1/2% Senior Secured Discount Notes due 2007 of Holdings
(the "13 1/2% Holdings Notes") and warrants (the "Warrants") to purchase shares
of Common Stock of the Company, par value $.01 per share (the "PCC Shares").
The acquisition of Palmer was accounted for under the purchase method of
accounting. Accordingly, the results of operations of PCW are included in the
consolidated financial statements since the date of acquisition. The
consolidated financial statements as of December 31, 1997 and from the
acquisition date through December 31, 1997 reflected a preliminary allocation of
the purchase price to the assets acquired and liabilities assumed. Additional
purchase liabilities recorded include approximately $6.5 million for severance
and related costs and $6.0 million for costs associated with the shutdown of
certain acquired facilities. The preliminary allocation of the purchase price
resulted in licenses of approximately $924.5 million on the balance sheet, as of
December 31, 1997, which are being amortized on a straight-line basis over a
period of 40 years. During 1998, the purchase price allocation was finalized and
approximately $2.3 million of unused purchase accounting reserves accrued in
1997 were reversed against the licenses. In addition, $2.0 million was received
in 1998 from an escrow deposit made in 1997, which further reduced the value of
the licenses in 1998.
As stated above, the Fort Myers and GA-1 markets were sold during the
latter part of 1997. Had the transactions occurred on January 1, 1997, on a
proforma basis, total revenue, loss before income taxes, net loss and basic and
diluted loss per share would have been $161.5 million, $(52.0) million, $(44.0)
million and $(1.43), respectively, for the year ended December 31, 1998.
F-6
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Operations
The Company has majority ownership in corporations and partnerships which
operate the non-wireline cellular telephone systems in eight Metropolitan
Statistical Areas ("MSA") in four states: Florida (one), Georgia (five), Alabama
(two), and South Carolina (one). The Company's ownership percentages in these
entities range from approximately 92 percent to 100 percent. The Company owns
directly and operates eight non-wireline cellular telephone systems in Rural
Service Areas ("RSA") in Georgia (seven) and Alabama (one).
3. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Price and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in the consolidated financial statements.
Certain prior year amounts have been reclassified to conform to current
year presentation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments, including
treasury bills, purchased with original maturities of three months or less to be
cash equivalents.
Available for Sale Securities
At December 31, 1999 and 1998, substantially all of the Company's
investment securities were marketable equity securities classified as
"Available-for-Sale Securities".
Unrealized holding gains and losses for Available-for-Sale Securities are
excluded from earnings and reported, net of taxes, as a separate component of
shareholders' equity.
Inventory
Inventory consisting primarily of cellular telephones and telephone
accessories is stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. The cost of additions and
improvements are capitalized while maintenance and repairs are charged to
expense when incurred. Depreciation is provided principally by the straight-line
method over the estimated useful lives, ranging from 5 to 20 years for buildings
and improvements and 5 to 10 years for equipment, communications systems and
furnishings.
Acquisitions and Licenses
The cost of acquired companies is allocated first to the identifiable
assets, including licenses, based on the fair market value of such assets at the
date of acquisition. The excess of the total consideration over the amounts
assigned to identifiable assets is recorded as goodwill. Licenses are amortized
on a straight-line basis over a 40-year period.
F-7
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subsequent to the acquisition of the licenses, the Company continually
evaluates whether later events and circumstances have occurred that indicate the
remaining estimated useful life of licenses might warrant revision or that the
remaining balance of the license rights may not be recoverable. The Company
utilizes projected undiscounted cash flows over the remaining life of the
licenses and sales of comparable businesses to evaluate the recorded value of
licenses. The assessment of the recoverability of the remaining balance of the
license rights will be impacted if projected cash flows are not achieved.
Other Intangible Assets
Other intangible assets consist principally of deferred financing costs.
These costs are being amortized by the straight-line method over the lives of
the related debt agreements, which range from 8 to 10 years.
Revenue Recognition
Service revenue from cellular operations includes local subscriber revenue
and outcollect roaming revenue.
Local subscriber revenue is earned by providing access to the cellular
network ("access revenue") or, as applicable, for usage of the cellular network
("airtime revenue"). Access revenue is billed one month in advance and is
recognized when earned. Airtime revenue is recognized when the service is
rendered.
Outcollect roaming revenue represents revenue earned for usage of its
cellular network by subscribers of other cellular carriers. Outcollect roaming
revenue is recognized when the services are rendered.
Equipment sales and installation revenues are recognized upon delivery to
the customer or installation of the equipment.
Operating Expenses - Engineering, Technical and Other Direct
Engineering, technical and other direct operating expenses represent
certain costs of providing cellular telephone services to customers. These costs
include incollect roaming expense. Incollect roaming expense is the result of
the Company's subscribers using cellular networks of other cellular carriers.
Incollect roaming revenue, collected from the Company's subscribers, is netted
against the incollect roaming expense to determine net incollect roaming
expense.
Comprehensive Income
Comprehensive income is the total of net income (loss) and all other
nonowner changes in a given period. Reclassification of prior year's financial
statements is required. Other comprehensive income for the Company consists
exclusively of unrealized gains of available for sale securities.
Per Share Data
Basic earnings per share exclude the dilutive effects of options, warrants
and convertible securities. Diluted earnings per share gives effect to all
dilutive securities that were outstanding during the period. All earnings per
share amounts have been presented or restated to conform to the SFAS No. 128
requirements. The only difference between basic and diluted earnings per share
of the Company is the effect of dilutive stock options and warrants.
Fair Market Value of Stock Options
Current accounting principals permit a Company to either (1) record, as
compensation expense, the fair market value, as defined, of stock options issued
to employees or (2) if the Company elects to not record the fair market value of
stock options granted as compensation expense, to disclose the pro forma impact
on net income and earnings per share as if such compensation expense was
recorded. The Company has elected to adopt the disclosure requirements.
F-8
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes
The Company accounts for income taxes under the asset and liability method
of SFAS 109. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Fair Value of Financial Instruments
Fair value estimates, methods and assumptions used to estimate the fair
value of financial instruments are set forth below:
For cash and cash equivalents, accounts receivable, receivables from other
cellular carriers, accounts payable and accrued expenses, and virtually all
current liabilities the carrying value approximates fair value due to the
short-term nature of those instruments. Investment securities are recorded at
fair value.
Rates currently available for long-term debt with similar terms and
remaining maturities are used to discount the future cash flows to estimate the
fair value of long-term debt.
Fair value estimates are made as of a specific point in time, based upon
the relevant market information about the financial instruments. For financial
instruments where no market exists for fair value, estimates are based on
judgments regarding current conditions and other factors. These estimates are
subjective in nature and involve uncertainties and matters of judgment and,
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Impact of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("Accounting for Derivative Instruments
and Hedging Activities"). This statement establishes accounting and reporting
standards requiring that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded on the balance
sheet as an asset or a liability and measured at its fair value. This statement
requires that changes in the derivatives fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. This statement is
effective for fiscal years beginning after June 15, 2000, as amended by
Statement of Financial Accounting Standards No. 137 but can be adopted earlier.
Management has not yet determined the timing of or method to be used in adopting
this statement. Management does not believe at this time that such adoption
would have a material impact on its consolidated financial statements.
4. Investment in Partially Owned Companies
On December 21, 1995, the Company acquired warrants for $8.4 million to
purchase approximately 1.8 million shares of PriCellular Corporation's
("PriCellular") Class B Common Stock. During 1996, the Company purchased
1,726,250 shares of PriCellular Class A Common Stock for approximately $13.1
million. During 1997, the Company sold 640,500 of these shares for approximately
$5.5 million and recognized a gain of approximately $409,000. During 1998,
PriCellular was sold to American Cellular Corporation. The Company's warrants
and remaining Class A Common Stock were redeemed at $14.00 per share and in the
case of the Warrants net of the exercise price of $5.42 per warrant. The gains
on these transactions ($15.2 million) are included in Other income (expense) in
the Consolidated Statements of Operations and Comprehensive Income.
The President of the Company was a director and Chairman of PriCellular.
F-9
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Other Current Liabilities
Other current liabilities consist of:
December 31,
($ in thousands)
----------------
1999 1998
---- ----
Accrued telecommunications expenses.............. $ 3,206 $ 1,861
Accrued local taxes .............................. 2,231 1,368
Miscellaneous accruals ........................... 9,777 8,939
------- -------
$15,214 $12,168
======= =======
6. Long-Term Debt
Long-term debt consists of the following:
December 31,
($ in thousands)
----------------
1999 1998
---- ----
11 3/4% Senior Subordinated Notes.................... $175,000(a) $175,000(a)
9 1/8% Senior Secured Notes ......................... 525,000(b) 525,000(b)
11 1/4% Senior Exchangeable Payable-in-Kind Notes ... -- 209,432(c)
-------- --------
Long-term debt....................................... $700,000 $909,432
======== ========
(a) In July 1997, PCW issued $175.0 million of 11 3/4% Senior
Subordinated Notes ("11 3/4% Notes") due July 15, 2007 with interest
payable semi-annually commencing January 15, 1998. The 11 3/4% Notes
contain covenants that restrict the payment of dividends, incurrence
of debt and sale of assets. The fair market value of these notes
approximated $192.9 million as of December 31, 1999.
(b) In October 1997, PCW entered into a credit agreement ("Credit
Agreement") with a syndicate of banks, financial institutions and
other "accredited investors" providing for loans of up to $525.0
million. The Credit Agreement included a $325.0 million term loan
facility and a $200.0 million revolving credit facility. The
proceeds from the issuance of Wireless' $525.0 million 9.125% Senior
Secured Notes were used to repay the term loan.
In August 1997, Holdings issued 153,400 units, consisting of notes
and warrants to purchase approximately 2.6 million shares of the
Company's $.01 par common stock (the "Warrants"), in exchange for
$80.0 million. In August 1998, the notes were redeemed (see "c"
below).
The Company entered into interest rate swap and cap agreements to
reduce the impact of changes in interest rates on its floating rate
debt. All interest rate swap contracts were liquidated as of
December 31, 1998. Included in the extraordinary item is
approximately $3.7 million (net of taxes) of additional interest
relating to the liquidation of these contracts.
In June 1998, the PCW issued $525.0 million of 9.125% Senior Secured
Notes due December 15, 2006 with interest payable semi-annually
commencing December 15, 1998. The 9.125% notes contain covenants
that restrict the payment of dividends, incurrence of debt and the
sale of assets. The net proceeds of the notes were used to retire
the outstanding indebtedness under the credit facility. In addition,
the unamortized deferred finance costs relating to the credit
agreement were written off and accordingly, approximately $6.2
million is included as an extraordinary item in the Consolidated
Statements of Operations and Comprehensive Income. The fair market
value of these notes approximated $532.9 million as of December 31,
1999.
(c) In August 1998, the Company redeemed all of Holdings outstanding 13
1/2% Senior Secured Discount Notes due 2007 (the "13 1/2% Notes").
The 13 1/2% Notes were redeemed at the redemption price per $1000
aggregate principal amount of $711.61. The accreted value of the 13
1/2% Notes approximated $91.0 million. In addition, the Company was
required to pay a premium of 20% of the outstanding balance or
approximately $18.2 million. Included as an extraordinary item in
the Consolidated Statements of Operations and Comprehensive Income
is the premium, the write off of unamortized finance costs and
additional interest relating to the carve out for accounting
purposes of the value of the warrant. The total of these items
approximated $24.5 million ($15.4 million after tax benefit).
F-10
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company financed the redemption out of the proceeds of a new $200.0
million Holdings offering of 11 1/4% Senior Exchangeable Payable-in-Kind Notes
("the Payable-in-Kind Notes") due 2008. In the event the daily high price of the
Company's shares equals or exceeds 115.0% of the Exchange Price for 10 out of 15
consecutive trading days, each outstanding note will be mandatorily exchanged on
the fifth trading day immediately succeeding such 10th trading day (unless the
Company elects on or prior to the second trading day immediately succeeding such
10th trading day to permanently terminate this mandatory provision) for shares
of the Company's par value $.01 common stock. In June 1999, the Company allowed
the conversion of the outstanding indebtedness including accrued interest. The
Company issued 18.1 million shares of its common stock in exchange for PCH's
Notes which included $20.7 million of accrued interest to the date of
conversion.
The aggregate maturities of long-term debt are as follows:
December 31,
2000 to 2004................................ $ --
Thereafter.................................. 700,000
---------
$ 700,000
=========
7. Extraordinary Item
In June and August 1998, the Company and Holdings retired the outstanding
indebtedness under its credit facility and the 13 1/2% Notes. The additional
costs incurred to retire the credit facility and the 13 1/2% Notes, as well as
the write off of deferred financing costs associated with these financings
resulted in an extraordinary loss of $27.1 million net of a tax benefit of $14.9
million.
8. Income Taxes
Provision (benefit) for income taxes consists of the following:
Year Ended December 31,
($ in thousands)
----------------
1999 1998 1997
---- ---- ----
Current:
Federal ....................... $ 8,868 $ 364 $(2,406)
State and local ............... 782 58 (432)
------- ------- -------
9,650 422 (2,838)
------- ------- -------
Deferred:
Federal ....................... (3,352) (7,713) (2,090)
State and local ............... (296) (1,232) (415)
------- ------- -------
(3,648) (8,945) (2,505)
Adjustment to valuation reserve ... -- -- (166)
------- ------- -------
Tax provision (benefit) ........... $ 6,002 $(8,523) $(5,509)
======= ======= =======
For the years ended December 31, 1999, 1998 and 1997, the provision for
income taxes differs from the amount computed by applying the federal income tax
rate (34%) because of the following items:
F-11
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended December 31,
($ in thousands)
1999 1998 1997
---- ---- ----
Tax at federal income tax rates ................ $ 5,678 $(7,836) $(4,916)
State taxes, net of federal income tax benefit . 324 (648) (551)
Non deductible interest expense ................ 234 155
Reversal of valuation reserve .................. -- (166)
Other .......................................... -- (273) (31)
------- ------- -------
$ 6,002 $ 8,523) $(5,509)
======= ======= =======
Deferred tax assets and liabilities and the principal temporary
differences from which they arise are as follows:
December 31,
($ in thousands)
1999 1998
---- ----
Deferred tax assets:
Allowance for doubtful accounts .................... $ 741 $ 591
Inventory reserve .................................. 133 133
Non-deductible accruals ............................ 107 4,149
Reserve on long-term investments ................... 185 --
-------- --------
Total deferred tax assets ........................ 1,166 4,873
-------- --------
Deferred tax liabilities:
Accumulated depreciation ............................... 15,827 12,808
Licenses ............................................... 276,654 281,052
Unrealized gain on marketable equity securities ........ 758 1,655
-------- --------
Total deferred tax liabilities ................... 293,239 295,515
-------- --------
Net deferred tax liabilities ........................... $292,073 $290,642
======== ========
The net operating loss carryforwards applicable to the operations of the
Company and its subsidiaries totaled approximately $49.4 million at December 31,
1999 and expire in amounts ranging from approximately $711,000 to $35.6 million
through 2018. For these carryforwards, utilization is limited to the subsidiary
that generated the carryforwards, unless the Company utilizes alternative tax
planning strategies.
9. Other Income (Expense)
Other income (expense) consists of the following:
Year Ended December 31,
($ in thousands)
1999 1998 1997
---- ---- ----
Loss on write-down of long-term investments and
notes receivable ........................... $ -- $ -- $(1,400)
Realized gain on marketable securities, net .... 12,651 15,767 609
Other, net ..................................... (400) (488) 2,191
------- ------- -------
$12,251 $15,279 $ 1,400
======= ======= =======
F-12
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Shareholders' Equity
In October 1994, the Company declared a dividend distribution of one
Common Share Purchase Right (a "Right") for each outstanding share of the
Company's common stock. Until exercisable, the Rights will not be transferable
apart from the common stock. When exercisable, each Right will entitle its
holder to buy one share of the Company's common stock at an exercise price of
$3.51 until October 17, 2004. The Rights will become exercisable only if a
person or group acquires 20 percent of more of the Company's common stock. In
the event the Company is acquired in a merger, each Right entitles the holder to
purchase common stock of the surviving company having a market value of twice
the exercise price of the Rights. The Rights may be redeemed by the Company at a
nominal price prior to the acquisition of 20 percent of the outstanding shares
of the Company's common stock.
The following represents the various stock splits authorized by the
Company's Board of Directors including the approximate number of shares issued.
In each case, the stated par value per share of $.01 was not changed.
Holders of Number
Date Authorized Record Date Type of Shares
- --------------- ----------- ---- ---------
December 4, 1997 December 10, 1997 5 for 4 1,400,000
April 1, 1998 March 19, 1998 5 for 4 1,815,000
April 30, 1998 April 17, 1998 5 for 4 2,279,000
August 31, 1998 August 17, 1998 2 for 1 11,561,000
January 4, 1999 January 12, 1999 5 for 4 5,421,000
April 14, 1999 April 21, 1999 5 for 4 6,688,000
August 5, 1999 August 12, 1999 5% stock dividend 2,560,000
In March 1995, the Company's Board of Directors authorized the repurchase
by the Company of up to 1.3 million shares of its common stock. In February
1997, an additional 24 million shares were authorized for repurchase. The
Company is authorized to make such purchases from time to time in the market or
in privately negotiated transactions when it is legally permissible to do so or
believed to be in the best interests of its shareholders. Approximately 2.5
million shares were purchased and retired in 1997. During 1998 the Company's
Board of Directors authorized the repurchase of an additional 3.3 million shares
of its common stock. During 1998, approximately 2.1 million shares were
repurchased at an average cost of $8.48 per share. During 1999, an additional
3.5 million shares were repurchased at an average cost of $16.10 per share.
In June 1997, the Company entered into a transaction with NatWest Capital
Markets Limited ("NatWest"), whereby the Company issued to NatWest 1,129 units
(the "PIK Units") of PIK Preferred Stock and warrants ("PIK Warrants") in
exchange for 2.3 million shares of common stock held by NatWest. On October 6,
1997, the Company repurchased the PIK Units.
In August 1997, in connection with the issuance, by a subsidiary of the
Company, of the 13 1/2% Senior Secured Discount Notes, the Company issued
Warrants to purchase approximately 2.6 million shares of its common stock at an
exercise price of less than $0.01 per share. The Warrants expire on August 1,
2007. As of December 31, 1999, approximately 37,500 warrants remain unexercised
which are convertible into approximately 241,000 shares of the Company's common
stock.
F-13
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All current and prior year earnings (loss) per common share as well as all
other share data have been adjusted to reflect all stock splits and the stock
dividend.
In June 1999, the Company allowed the conversion of the outstanding
indebtedness of its wholly-owned subsidiary Price Communications Cellular
Holding, Inc. ("PCH"). According to the indenture, in the event the daily high
price of the Company's common stock equaled or exceeded 115% of the Exchange
Price for 10 out of 15 consecutive trading days, the Company could convert PCH's
$200 million plus accrued interest, 11 1/4% Senior Exchangeable Payable-in-Kind
Notes. The terms of the indenture were met and the Company issued 18.1 million
shares of its common stock in exchange for PCH's Notes which included $20.7
million of accrued interest to the date of conversion.
11. Redeemable Preferred Stock
During 1997, the Board of Directors authorized the issuance of
approximately 728,000 shares of the Company's Series A Preferred Stock, and
364,000 shares of the Company's Series B Preferred Stock to the Company's Chief
Executive Officer, Mr. Price. In June 1998, Mr. Price notified the Company that
he was considering the exercise of his right to have the Series B Preferred
Stock redeemed by the Company. Mr. Price, pursuant to the terms of the Series B
Preferred Stock, would have received a cash payment of $5.0 million in respect
of the redemption. In order to avoid a significant cash payment to Mr. Price at
a time when the Company had substantial indebtedness, Mr. Price and the Board
agreed that in place of such cash payment, the Company would issue 1.3 million
shares of its $.01 par value common stock to Mr. Price in exchange for his
shares of Series B Preferred Stock. The value of the Company's common stock
received by Mr. Price on the date of conversion approximated $5.0 million. The
common stock vests over a ten-year period or immediately upon a change of
control or other events. Accordingly, included in the Consolidated Statements of
Operations for the year ended December 31, 1999 is a charge for $625,000
representing such non-cash compensation expense.
In June and August 1999, Mr. Price notified the Company that he was
considering the exercise of his right to have the Series A Preferred Stock
redeemed by the Company. Mr. Price, pursuant to the terms of the Series A
Preferred Stock, would have received cash payments totaling $63.0 million in
respect of such redemptions. In order to avoid a significant cash payment to Mr.
Price at a time when the Company had substantial indebtedness, Mr. Price and the
Board agreed that in place of such cash payment, the Company would issue
approximately 3.7 million shares of its $.01 par value common stock to Mr. Price
in exchange for approximately 728,000 shares of Series A Preferred Stock. The
value of the Company's common stock received by Mr. Price on the two respective
dates of conversion approximated $63.0 million. The common stock vests over a
twenty year period or immediately upon a change of control or other events.
Accordingly, included in the Consolidated Statement of Operations for the year
ended December 31, 1999 is $1.3 million representing seven month's compensation
expense for the first redemption and four month's compensation expense for the
second redemption.
Included as an offset to shareholders' equity is the remaining unamortized
unearned compensation related to the conversions of the Class B and Class A
Preferred Stock.
As of December 31, 1998, the Series A Preferred Stock was shown outside of
the Shareholders' Equity as the redemption of this issue was outside the control
of the Company.
F-14
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Stock Option Plan
The Company has a long-term incentive plan (the "1992 Long-Term Incentive
Plan"), which provides for granting incentive stock options, as defined under
current law, and other stock-based incentives to key employees and officers. The
maximum number of shares of the Company that are subject to awards granted under
the 1992 Long-Term Incentive Plan is 8,010,864. The exercise of such options
will be at a price not less than the fair market value on the date of grant, for
a period up to ten years.
In accordance with SFAS 123, the fair value of option grants is estimated
on the date of grant using the Black Scholes option pricing model for proforma
footnote purposes with the following assumptions used for grants; dividend yield
of 0% in all years; risk free interest rate of 6.5% and 5.7%, in 1999, 5.7% in
1998, and 5.85% in 1997, respectively; and an expected life of 7 years for all
years. Expected volatility was assumed to be 49.0%, 67.4%, and 56.8% in 1999,
1998 and 1997, respectively.
A summary of plan transactions is presented in the table below:
Weighted Weighted
Number of Average Average
Shares Exercise Price Fair Value
Outstanding at December 31, 1996 .... 4,516,526 $ 0.77
Granted ......................... 5,101,319 $ 1.55 $ 0.77
Exercised ....................... (4,234,544) $ 0.49
----------
Outstanding at December 31, 1997 .... 5,383,301 $ 1.51
Granted ......................... 88,594 $ 3.96 $ 2.76
Exercised ....................... (488,140) $ 1.25
Canceled ........................ (3,306,882) $ 1.52
----------
Outstanding at December 31, 1998 .... 1,676,874 $ 1.68
Granted ......................... 249,115 $10.34 $ 6.15
Exercised ....................... (784,542) $ 1.62
Canceled ........................ (500,971) $ 2.13
----------
Outstanding at December 31, 1999 .... 640,476 $ 4.96
The following table summarizes information about stock options outstanding
at December 31, 1999:
Weighted Weighted
Number Average Number Average
Outstanding Remaining Exercisable Exercise
Exercise Price at 12/31/99 Life at 12/31/99 Price
-------------- ----------- ---- ----------- -----
$ 1.64......................................... 333,086 8 years 333,086 $ 1.64
$ 3.96......................................... 88,594 8 years 88,594 $ 3.96
$ 8.02......................................... 98,439 8 years -- $ 8.02
$ 9.05......................................... 42,657 9 years -- $ 9.05
$ 13.90......................................... 56,700 9 years -- $ 13.90
$ 15.20......................................... 21,000 9 years 21,000 $ 15.20
F-15
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As permitted by FAS 123, the Company has chosen to continue accounting for
stock options at their intrinsic value. Accordingly, no compensation expense has
been recognized. Had the fair value method of accounting been applied, the
tax-effected impact would be as follows:
($ in thousands)
1999 1998 1997
---- ---- ----
Net income (loss), as reported ............... $10,220 $(41,584) $(8,949)
Estimated fair value of the Year's net
option grants, net of forfeitures and taxes 861 (12) 372
Proforma net (loss) income ................... $ 9,359 $(41,572) $(9,321)
Porforma basic (loss) earnings per share ..... $ .20 $ (1.14) $ (.23)
Porforma diluted (loss) earnings per share ... $ .20 $ (1.14) $ (.23)
13. Commitments and Contingencies
The Company is involved in various claims and litigation in the ordinary
course of business. In the opinion of legal counsel and management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial statements.
The Company has an employment agreement with its President covering base
salary and incentive compensation. The agreement has a term of three years
expiring in October 2000, at a base salary of $300,000 subject to adjustment,
and can be extended for periods of three years at the Company's option. Cash
performance bonuses and stock option awards are determined solely at the
discretion of the Board of Directors and the Stock Option Committee,
respectively.
The Company and its subsidiaries lease a variety of assets used in their
operations, including office space. Renewal options are available in the
majority of leases. The following is a schedule of the Company's minimum rental
commitment for operating leases of real and personal property for each of the
five years subsequent to 1999 and in the aggregate.
Year ending December 31,: ($ in thousands)
2000 .......................................... $3,880
2001 .......................................... 3,244
2002 .......................................... 2,726
2003 .......................................... 2,002
2004 .......................................... 834
Thereafter .................................... 1,150
Rental expense, net of sublease income, for operating leases was
approximately $3.5 million, $3.2 million and $4.2 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
14. Supplemental Cash Flow Information
The following is supplemental disclosure cash flow information for the
years ended December 31, 1999, 1998 and 1997.
($ in thousands)
1999 1998 1997
---- ---- ----
Cash paid for:
Income taxes ............. $ 280 $ 780 $ 136
Interest ................. $68,469 $81,379 $25,150
F-16
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Selected Quarterly Financial Data (Unaudited):
($ in thousands Except Per Share Amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
Year Ended December 31, 1998
Total revenue .............. $ 43,275 $ 48,918 $ 51,920 $ 53,216 $ 197,329
Operating income ........... 6,670 10,825 11,151 12,133 40,779
Net income (loss) .......... (6,845) (7,164) (18,858) (8,076) (40,943)
Net income (loss) per share:
Basic and diluted ..... (0.25) (0.26) (0.66) (0.29) (1.47)
Year Ended December 31, 1999
Total revenue .............. $ 56,591 $ 64,609 $ 65,142 $ 66,010 $ 252,352
Operating income ........... 16,041 22,102 20,963 19,421 78,527
Net income (loss) .......... (3,307) 734 3,798 8,995 10,220
Net income (loss) per share:
Basic ................. (0.10) 0.02 0.07 0.16 0.22
Net income (loss) per share:
Diluted ............... (0.10) 0.02 0.07 0.16 0.22
F-17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Palmer Wireless Inc.:
We have audited the accompanying consolidated statement of operations,
stockholder's equity and cash flows of Palmer Wireless Inc. (a Delaware
Corporation) and subsidiaries for the nine-month period ended September 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements referred to above is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements
referred to above. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents
fairly, in all material respects, the results of operations and cash flows of
Palmer Wireless Inc. and subsidiaries for the nine month period ended September
30, 1997 in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
New York, New York
March 17, 1998
F-18
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands)
For the nine
months ended
September 30, 1997
Revenue:
Service ................................................. $ 134,123
Equipment sales and installation ........................ 7,613
------------
Total revenue ...................................... 141,736
Operating expenses:
Engineering, technical and other direct ................. 23,301
Cost of equipment ....................................... 16,112
Selling, general and administrative ..................... 41,014
Depreciation and amortization ........................... 25,498
------------
Total operating expenses ........................... 105,925
------------
Operating income ................................... 35,811
------------
Other income (expense):
Interest income ......................................... 30
Interest expense ........................................ (24,497)
------------
Interest expense, net .............................. (24,467)
Other (expense) income, net ............................. 208
------------
Total other expense ................................ (24,259)
------------
Income before minority interest share of income and
Income taxes ......................................... 11,552
Minority interest share of income ............................ 1,310
------------
Income before income tax expense ........................ 10,242
Income tax expense ........................................... 4,153
------------
Net income ................................................... $ 6,089
============
Earnings per share:
Basic earnings per share ................................ $ 0.22
============
Weighted average # shares outstanding ................... 27,826,000
============
Diluted earnings per share .............................. $ 0.22
============
Weighted average # shares outstanding ................... 27,826,000
============
See accompanying notes to consolidated financial statements.
F-19
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ in thousands)
Common Stock Common Stock Additional
Class A Class B Paid-in Retained
Shares Amount Shares Amount Capital Earnings
------ ------ ------ ------ ------- --------
Balances at December 31, 1996 11,119,681 111 17,293,578 173 166,975 6,535
Exercise of stock options .... 70,000 1 -- -- 998 --
Net income ................... -- -- -- -- -- 6,089
Balances at September 30, 1997 11,189,681 $ 112 17,293,578 $ 173 $ 167,973 $ 12,624
========== ========== ========== ========== ========== ==========
Treasury Stock Total
--------------
Stockholders'
Shares Amount Equity
------ ------ ------
Balances at December 31, 1996 ....... 600,000 (8,864) 164,930
Exercise of stock options ........... -- -- 999
Net income .......................... -- -- 6,089
-------- -------- --------
Balances at September 30, 1997 ...... 600,000 $ (8,864) $172,018
See accompanying notes to consolidated financial statements.
F-20
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For the nine
months ended
September 30, 1997
Cash flows from operating activities:
Net income .................................................. $ 6,089
--------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................ 25,498
Minority interest share of income ........................ 1,310
Deferred income taxes .................................... 3,939
Payment of deferred interest ............................. (1,514)
Changes in current assets and liabilities:
Decrease in trade accounts receivable .................... 473
Decrease in inventory .................................... 2,800
Decrease in accounts payable ............................. (1,390)
Decrease in accrued interest payable ..................... (374)
Increase in accrued salaries and employee benefits ....... 251
Increase in other accrued liabilities .................... 2,049
Increase in deferred revenue ............................. 4
Decrease in customer deposits ............................ (94)
Other .................................................... (250)
--------
Total adjustments ...................................... 32,702
--------
Net cash provided by operating activities ......... 38,791
--------
Cash flows from investing activities:
Capital expenditures ........................................ (40,757)
Increase in other intangible assets and other assets ........ (778)
Proceeds from sales of property and equipment ............... 201
Purchase of cellular systems ................................ (31,469)
Purchases of minority interests ............................. (956)
--------
Net cash used in investing activities ............. (73,759)
--------
Cash flows from financing activities:
Decrease in short term notes payable ........................ (1,366)
Repayment of long-term debt ................................. (3,782)
Proceeds from long-term debt ................................ 41,000
Proceeds from stock options exercised ....................... 999
--------
Net cash provided by financing activities ......... 36,851
--------
Net increase (decrease) in cash and cash
equivalents .................................... 1,883
Cash and cash equivalents at the beginning of period ............. 1,698
--------
Cash and cash equivalents at the end of period ................... $ 3,581
========
See accompanying notes to consolidated financial statements.
F-21
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Supplemental Schedule of Noncash Investing and Financing Activities
Acquisitions of non-wireline cellular telephone systems in 1997:
For the nine
months ended
September 30, 1997
------------------
Cash payment ......................................... $31,469
=======
Allocated to:
Fixed assets .................................... $ 3,197
Licenses and goodwill ........................... 27,738
Current assets and liabilities, net ............. 534
-------
$31,469
-------
Supplemental disclosure of cash flow information
For the nine
months ended
September 30, 1997
------------------
Income taxes paid (received), net .................... $ (736)
========
Interest paid ........................................ $ 25,102
========
See accompanying notes to consolidated financial statements.
F-22
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)
(1) Summary of Significant Accounting Policies
Organization and Acquisition
Basis of Presentation
The consolidated financial statements reflect the historical cost of
assets and liabilities and results of operations of Palmer Wireless, Inc. and
Subsidiaries ("Palmer"). On October 6, 1997, Palmer was merged into Price
Communications Wireless, Inc., an indirect wholly-owned subsidiary of Price
Communications Corporation ("PCC").
Consolidation
The accompanying consolidated financial statements include the accounts of
Palmer after the elimination of significant intercompany accounts and
transactions.
Palmer was a Delaware corporation and was incorporated on December 15,
1993 to effect an initial public offering of its Class A Common Stock. At
December 31, 1996, Palmer Communications Incorporated ("PCI") owned 61 percent
of the Predecessor's outstanding stock and had 75 percent of its voting rights
and therefore the Predecessor was a subsidiary of PCI.
Losses in subsidiaries, attributable to minority stockholders and
partners, in excess of their capital accounts and cash capital call provisions
are not eliminated in consolidation.
Operations
Palmer has majority ownership in corporations and partnerships which
operate the non-wireline cellular telephone systems in nine Metropolitan
Statistical Areas ("MSA") in three states: Florida (two), Georgia (five) and
Alabama (two). The Company's ownership percentages in these entities range from
approximately 78 percent to 100 percent. The Company owns directly and operates
nine non-wireline cellular telephone systems in Rural Service Areas in Georgia
(eight) and Alabama (one).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, Palmer considers cash and
repurchase agreements with a maturity of three months or less to be cash
equivalents.
Inventory
Inventory consisting primarily of cellular telephones and telephone parts
is stated at the lower of cost or market. Cost is determined using the first-in,
first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
principally by the straight-line method over the estimated useful lives, ranging
from 5 to 20 years for buildings and improvements and 5 to 10 years for
equipment, communications systems and furnishings.
F-23
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
Acquisitions and Licenses
The cost of acquired companies is allocated first to the identifiable
assets, including licenses, based on the fair market value of such assets at the
date of acquisition (as determined by independent appraisers or management). The
excess of the total consideration over the amounts assigned to identifiable
assets is recorded as goodwill. Licenses and goodwill are being amortized on a
straight-line basis over a 40-year period.
Subsequent to the acquisition of the licenses, Palmer continually
evaluates whether later events and circumstances have occurred that indicate the
remaining estimated useful life of licenses might warrant revision or that the
remaining balance of the license rights may not be recoverable. Palmer utilizes
projected undiscounted cash flows over the remaining life of the licenses and
sales of comparable businesses to evaluate the recorded value of licenses. The
assessment of the recoverability of the remaining balance of the license rights
will be impacted if projected cash flows are not achieved.
Other Intangible Assets
Other intangibles consist principally of deferred financing costs and
other items. These costs are being amortized by the interest or straight-line
method over their respective useful lives, which range from 5 to 10 years.
Income Taxes
Palmer accounts for income taxes under the asset and liability method of
accounting for deferred income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Interest Rate Swap Agreements
The differential to be paid or received in connection with interest rate
swap agreements is accrued as interest rates change and is recognized over the
life of the agreements.
Revenue Recognition
Service revenue includes local subscriber revenue and outcollect roaming
revenue.
Local subscriber revenue is earned by providing access to the cellular
network ("access revenue") or, as applicable, for usage of the cellular network
("airtime revenue"). Access revenue is billed one month in advance and is
recognized when earned. Airtime revenue is recognized when the service is
rendered.
Outcollect roaming revenue represents revenue earned for usage of its
cellular network by subscribers of other cellular carriers. Outcollect roaming
revenue is recognized when the services are rendered.
Equipment sales and installation revenues are recognized upon delivery to
the customer or installation of the equipment.
Operating Expenses--Engineering, Technical and Other Direct
Engineering, technical and other direct operating expenses represent
certain costs of providing cellular telephone service to customers. These costs
include incollect roaming expense. Incollect roaming expense is the result of
subscribers using cellular networks of other cellular carriers. Incollect
roaming revenue is netted against the incollect roaming expense to determine net
incollect roaming expense.
F-24
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
Per Share Data
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share". SFAS No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share exclude the dilutive effects of options, warrants and
convertible securities. Diluted earnings per share give effect to all dilutive
securities that were outstanding during the period. All earnings per share
amounts have been presented or restated to conform to SFAS No. 128 requirements.
The only difference between basic and diluted earnings per share of Palmer is
the effect of dilutive stock options.
Stock Option Plans
Prior to January 1, 1996, Palmer accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, Palmer adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. Palmer elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(2) Trade Accounts Receivable
Palmer granted credit to its customers. Substantially all of the customers
are residents of the local areas served. Generally, service is discontinued to
customers whose accounts are 60 days past due.
The activity in Palmer's allowance for doubtful accounts for the nine
months ended September 30, 1997 consisted of the following:
Balance at Charged Allowance at Deductions,
beginning to dates of net of Balance at
of period expenses acquisitions recoveries end of period
--------- -------- ------------ ---------- -------------
Nine months ended September 30, 1997 ......... $ 1,791 $ 3,614 $ 147 $(4,212) $ 1,340
======= ======= ======= ======= =======
(3) Acquisitions and Purchase of Licenses
On December 1, 1995, Palmer purchased all of the outstanding stock of
Augusta Metronet, Inc. and Georgia Metronet, Inc., which own either directly (or
in the case of Georgia Metronet, Inc., through its 97.9 percent interest in the
Savannah Cellular Limited Partnership) the licenses to operate the non-wireline
cellular telephone systems in the Savannah and Augusta, Georgia MSAs,
respectively, for an aggregate purchase price of $158,397. The acquisition was
accounted for by the purchase method of accounting. In connection with this
acquisition, $136,940 of the purchase price was allocated to licenses and
goodwill.
On June 20, 1996, Palmer acquired the assets of and the license to operate
the non-wireline cellular telephone system serving the Georgia-1 RSA for an
aggregate purchase price of $31,616. The acquisition was accounted for by the
purchase method of accounting. In connection with the acquisition, $27,942 of
the purchase price was allocated to licenses.
On July 5, 1996, two of Palmer's majority-owned subsidiaries acquired the
assets of and the license to operate the non-wireline cellular telephone system
serving the Georgia-6 RSA for an aggregate purchase price of $35,972. The
acquisition was accounted for by the purchase method of accounting. In
connection with the acquisition, $33,491 of the purchase price was allocated to
licenses.
F-25
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
On January 31, 1997, a majority-owned subsidiary of Palmer acquired the
assets of and the license to operate the non-wireline cellular telephone system
serving the Georgia-13 RSA for an aggregate purchase price of $31,486. The
acquisition was accounted for by the purchase method of accounting. In
connection with the acquisition, $27,650 of the purchase price was allocated to
licenses.
(4) Income Taxes
Components of income tax expense consist of the following:
Period ended September 30, 1997: Federal State Total
------- ----- -----
Current.................................... $ -- $ 214 $ 214
Deferred................................... 3,553 386 3,939
------- ----- -------
$ 3,553 $ 600 $ 4,153
======= ===== =======
The consolidated effective tax rate differs from the statutory United
States federal tax rate for the following reasons and by the following
percentages:
Nine Months
Ended
September 30, 1997
Statutory United States federal tax rate .............. 34.0%
State taxes ........................................... 6.0
Other ................................................. 1.0
Consolidated effective tax rate ....................... 41.0%
====
In 1997, Palmer recorded additional deferred tax liability and a
corresponding increase in licenses for timing differences attributable to
pre-1997 acquisitions.
(5) Common Stock and Stock Plans
During 1994, Palmer amended its certificate of incorporation to increase
the number of authorized shares of common stock from 60,000,000 to 91,000,000
and to provide for Class A Common and Class B Common Stock. The Class A Common
Stock has one vote per share. The Class B Common Stock, which may be owned only
by PCI or certain successors of PCI and of which no shares may be issued
subsequent to the Offering, has five votes per share, provided, however, that,
so long as any Class A Common Stock is issued and outstanding, at no time will
the total outstanding Class B Common Stock have the right to cast votes having
more than 75 percent of the total voting power of the common stock in the
aggregate. Shares of Class B Common Stock shall be converted into Class A Common
Stock on a share-for share basis: (i) at any time at the option of the holder;
(ii) immediately upon the transfer of shares of Class B Common Stock to any
holder other than a successor of PCI; (iii) immediately if the shares of Class B
Common Stock held by PCI or its successors constitute 33 percent or less of the
outstanding shares of Palmer; (iv) at the end of 20 years from original issuance
of those shares of Class B Common Stock or (v) if more than 50 percent of the
equity interests in PCI become beneficially owned by persons other than: (i)
beneficial owners of PCI as of
F-26
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
December 29, 1994 ("Current PCI Beneficial Owners"); (ii) affiliates of Current
PCI Beneficial Owners; (iii) heirs or devisees of any individual Current PCI
Beneficial Owners, successors of any corporation or partnership which is a
Current PCI Beneficial Owner and beneficiaries of any trust which is a Current
PCI Beneficial Owner and (iv) any relative, spouse or relative of a spouse of
any Current PCI Beneficial Owner.
Palmer adopted a Stock Option Plan in connection with the Offering, under
which options for an aggregate of 1,600,000 shares of Class A Common Stock are
available for grants to key employees. Palmer also adopted a Director's Stock
Option Plan in connection with the Offering, under which options for an
aggregate of 300,000 shares of Class A Common Stock are available for grants to
directors who are not officers or employees of Palmer. Stock options under both
plans are granted with an exercise price equal to the stock's fair value at the
date of grant. The stock options granted under the Stock Option Plan have
10-year terms and vest and become exercisable ratably over three years from the
date of grant. The stock options granted under the Director's Stock Option Plan
are vested and become fully exercisable upon the date of the grant. At December
31, 1996, there were options with respect to 693,334 and 45,000 shares of Class
A Common Stock outstanding under the Stock Option Plan and the Director's Stock
Option Plan, respectively. At December 31, 1996, there were 880,000 and 255,000
additional shares available for grant under the Stock Option Plan and the
Director's Stock Option Plan, respectively.
Palmer applies APB Opinion No. 25 in accounting for its Stock Option Plan
and Director's Stock Option Plan ("the Plans") and accordingly, no compensation
cost has been recognized for its stock options in the consolidated financial
statements. Had Palmer determined compensation cost based on the net income
(loss) per share would have been reduced to the pro forma amounts indicated
below:
Nine Months
September 30, 1997
------------------
Net income-as reported ......................... $ 6,089
Net (loss) income-pro forma .................... $ 4,753
Basic Earnings Per Share ....................... $ .17
Diluted Earnings Per Share ..................... $ .17
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the weighted-average
assumptions as follows: dividend yield of 0.0%; expected volatility of 101%;
risk-free interest rate of 5.5%; and expected lives of five years.
Stock option activity during the periods indicated is as follows:
($'s not in thousands)
Number Weighted Average
Of Shares Exercise Price
--------- --------------
Balance December 31, 1996 ............ 738,334 14.54
Exercised ....................... (70,000) 14.25
-------
Balance September 30, 1997 ........... 668,334 14.60
=======
Palmer adopted a stock purchase plan for employees (the "Employee Stock
Purchase Plan") and a stock purchase plan for non-employee directors (the
"Non-Employee Director Stock Purchase Plan"). Under the Employee Stock Purchase
Plan, 160,000 shares of Class A Common Stock are available for purchase by
eligible employees of Palmer or any of its subsidiaries. Under the Non-Employee
Director Stock Purchase Plan, 25,000 shares of Class A Common Stock are
available for purchase by
F-27
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
non-employee directors of Palmer. The purchase price of each share of Class A
Common Stock purchased under the Employee Stock Purchase Plan or the
Non-Employee Director Stock Purchase Plan will be the lesser of 90 percent of
the fair market value of the Class A Common Stock on the first trading day of
the plan year or on the last day of such plan year; provided, however, that in
no event shall the purchase price be less than the par value of the stock. Both
plans will terminate in 2005, unless terminated at an earlier date by the board
of directors. During the year ended December 31, 1996, 15,541 shares were issued
under the Employee Stock Purchase Plan and 1,702 shares were issued under the
Non-Employee Director Stock Purchase Plan at a purchase price of $16.85 ($'s not
in thousands). Compensation cost computed under the provisions of SFAS No. 123
related to the shares issued under the Employee Stock Purchase Plan and the
Non-Employee Director Stock Purchase Plan is immaterial to the consolidated
financial statements.
(6) Related Party Transactions
On January 1, 1997 Palmer purchased a building and certain towers from PCI
for $6,243. These assets were previously leased from PCI.
Concurrently with the Offering and the Exchange, Palmer and PCI entered
into both a transitional management and administrative services agreement and a
computer services agreement that extended each December 31 for additional
one-year periods unless and until either party notified the other. The fees from
these arrangements amounted to a total of $88 for the nine months ended
September 30, 1997, and is included as a reduction of selling, general and
administrative expenses.
Concurrently with the Offering and the Exchange, Palmer and PCI entered
into a tax consulting agreement that extended each December 31 for additional
one-year periods unless and until either party notified the other. The fees for
tax consulting services amounted to a total of $97 for the nine months ended
September 30, 1997, and is included in selling, general and administrative
expenses.
PCI has a 401(k) plan with a noncontributory retirement feature and a
matching provision for employees who meet length of service and other
requirements. Palmer participated in this plan and was allocated 401(k)
retirement and matching expense of $544 for the nine months ended September 30,
1997.
(7) Commitments and Contingencies
Leases
Palmer occupies certain buildings and uses certain tower sites, cell sites
and equipment under noncancelable operating leases which expire through 2013.
The operating leases for a building and certain tower sites and cell sites
are with related parties.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1996 are as follows:
Related parties Others
--------------- ------
1997 ................................. $ 285 $ 3,429
1998 ................................. 285 2,899
1999 ................................. 52 2,507
2000 ................................. 14 2,011
2001 ................................. -- 1,348
Later years through 2014 ............. -- 4,522
------- -------
$ 636 $16,716
======= =======
Rental expense was $3,123 for the nine months ended September 30, 1997.
F-28
PALMER WIRELESS, INC. AND SUBSIDIARIES (PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
Contingencies
Palmer is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on Palmer's
consolidated financial statements.
(8) Selected Quarterly Financial Data (Unaudited)
First Second Third
Nine Months Ended September 30, 1997 Quarter Quarter Quarter
------------------------------------ ------- ------- -------
Total Revenue ............................... $44,683 $48,545 $48,508
======= ======= =======
Operating Income ............................ $ 9,805 $13,022 $12,984
======= ======= =======
Net Income .................................. $ 1,177 $ 2,523 $ 2,389
======= ======= =======
F-29
PRICE COMMUNICATIONS CORPORATION
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
December 31, 1999 and 1998
($ in thousands)
1999 1998
---- ----
ASSETS:
Cash and cash equivalents ........................... $ 51,004 $ 16,781
Available for sale securities ....................... 2,056 5,608
Prepaid expenses and other current assets ........... 12 219
-------- --------
Total current assets ........................... 53,072 22,608
Investments in and receivables from subsidiaries* ... 123,596 (10,880)
Property and equipment .............................. 11 67
Other Assets ........................................ 12,485 1,243
-------- --------
$189,164 $ 13,038
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses ............... $ 827 $ 600
Other current liabilities ........................... 15,147 8,034
-------- --------
Total current liabilities ...................... 15,974 8,634
Redeemable preferred stock .......................... -- 25
Shareholders' equity ................................ 173,190 4,379
-------- --------
$189,164 $ 13,038
======== ========
*Eliminated in consolidation
See accompanying notes to condensed financial statements
F-30
PRICE COMMUNICATIONS CORPORATION
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
($ in thousands)
Year Ended December 31,
1999 1998 1997
---- ---- ----
Corporate expenses ............................................ $ (4,493) $ (4,191) $ (3,946)
Non-cash compensation ......................................... (1,973) -- --
Other income (expense) ........................................ (494) (361) 908
Interest income ............................................... 1,563 759 2,183
Interest expense .............................................. (19) (175) (48)
Depreciation and amortization ................................. (56) (56) (52)
Realized gain on marketable securities ........................ 12,651 15,659 478
Income (loss) of unconsolidated subsidiaries .................. 5,697 (47,194) (8,852)
-------- -------- --------
Income (loss) before income taxes ........................ 12,876 (35,559) (9,329)
Income tax (expense) benefit .................................. (2,656) (6,025) 380
-------- -------- --------
Net income (loss) ........................................ 10,220 (41,584) (8,949)
-------- -------- --------
Other comprehensive income, net of tax:
Unrealized gains (losses) on available for sale securities 1,291 2,836 211
Reclassification adjustment .............................. (2,832) (2,148) --
-------- -------- --------
Comprehensive income (loss) ................................... $ 8,679 $(40,896) $ (8,738)
======== ======== ========
Per share data:
Basic earnings (loss) per share .......................... $ .22 $ (1.49) $ (.29)
Diluted earnings (loss) per share ........................ $ .22 $ (1.49) $ (.29)
See accompanying notes to condensed financial statements
F-31
PRICE COMMUNICATIONS CORPORATION
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
($ in thousands)
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) .......................................... $ 10,220 $(41,584) $ (8,949)
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization .............................. 56 56 52
(Income) loss of unconsolidated subsidiaries ............... (5,697) 47,194 8,852
Non-cash compensation ...................................... 1,973 -- --
Decrease (increase) in prepaid expenses and other assets ... 207 3,169 (3,281)
Increase (decrease) in accounts payable and accrued expenses 327 4,600 (1,338)
Increase (decrease) in other liabilities ................... 7,940 2,659 (790)
(Gain) loss on sale of securities, net ..................... (12,651) (15,659) 791
Recovery on note receivable ................................ -- -- 250
-------- -------- --------
Total adjustments ...................................... (7,845) 42,019 4,536
-------- -------- --------
Net cash provided by (used in) operating activities .... 2,375 435 (4,413)
-------- -------- --------
Cash flows from investing activities:
Purchase of Palmer Wireless ................................ -- (44,015)
Sale of available for sale securities ...................... 21,435 44,487 8,097
Purchase of available for sale securities .................. (7,718) (10,401) (2,010)
Purchase of investment in other cellular operations ........ (11,810) -- --
Capital expenditures and other ............................. -- (387)
Advances to subsidiaries ................................... 178 (2,463) (25)
-------- -------- --------
Net cash provided by (used in) investing activities .... 2,085 31,623 (38,340)
-------- -------- --------
Cash flows from financing activities:
Issuance of preferred stock ................................ -- 35
Payment of PIK Preferred Stock dividend .................... -- (1,176)
Issuance and exercise of warrants .......................... -- 4,288
Issuance of common stock ................................... -- 6,047
Cash transferred from PCH including cash used by PCC during
the year ............................................... 86,589
Repurchase of paid in kind preferred stock ................. -- (28,225)
Purchase of common stock ................................... (57,056) (17,412) (20,241)
Proceeds from exercise of stock options and warrants ....... 230 610 193
-------- -------- --------
Net cash used in financing activities .................. 29,763 (16,802) (39,079)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ............ 34,223 15,256 (81,832)
Cash and cash equivalents at beginning of year .................. 16,781 1,525 83,357
======== ======== ========
Cash and cash equivalents at end of year ........................ $ 51,004 $ 16,781 $ 1,525
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes, net of refunds ........................... $ -- $ -- $ 872
======== ======== ========
Interest ............................................... $ -- $ -- $ 48
======== ======== ========
See accompanying notes to condensed financial statements
F-32
PRICE COMMUNICATIONS CORPORATION
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
In the parent company-only financial statements, the Company's investment
in subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The parent company-only financial
statements should be read in conjunction with the Company's consolidated
financial statements.
2. Acquisition
In May 1997, the Company, through a wholly-owned indirect subsidiary,
entered into an agreement to acquire Palmer Wireless, Inc. The transaction was
consummated on October 6, 1997. See Note 1 of Notes to Consolidated Financial
Statements.
F-33
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
($ in thousands)
Allowance
Balance at Additions at Dates Balance
Description Beginning Charged to of Acquisitions Deductions at End
of Period Expenses (Dispositions) Net of Recoveries of Period
--------- -------- -------------- ----------------- ---------
For the year ended December 31, 1999:
Allowance for doubtful accounts ................ $ 1,596 $ 6,303 -- $(5,896) $ 2,003
For the year ended December 31, 1998:
Allowance for doubtful accounts ................ $ 818 $ 7,159 -- $(6,381) $ 1,596
For the year ended December 31, 1997:
Allowance for doubtful accounts ................ $ 474 $ 1,202 $ 1,134 $(1,992) $ 818
F-34
SIGNATURES
Pursuant to the requirements of Sections 13 and 15(d) of the Securities
and Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PRICE COMMUNICATIONS CORPORATION
By: /s/ ROBERT PRICE
-----------------------------
Robert Price,
President
Dated: March 6, 2000
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated. Each person whose
signature appears below hereby authorizes and appoints Robert Price as his
attorney-in-fact to sign and file in his behalf individually and in each
capacity stated below any and all amendments to this Annual Report.
Signature Title Date
--------- ----- ----
BY: /s/ ROBERT PRICE Director and President March 6, 2000
----------------------------- (Principal Executive Officer)
Robert Price
By: /s/ GEORGE H. CADGENE Director March 6, 2000
----------------------------
George H. Cadgene
BY: /s/ ROBERT F. ELLSWORTH Director March 6, 2000
-----------------------------
Robert F. Ellsworth
BY: /s/ KIM I. PRESSMAN Executive Vice President March 6, 2000
----------------------------- And Principal Financial
Kim I. Pressman and Accounting Officer
II-1
EXHIBIT INDEX
Exhibit Description
No.
- ---
2.1 Agreement and Plan of Merger with Palmer Wireless, Inc.,
incorporated by reference to Registration Statement on Form S-4 of
Price Communications Wireless, Inc. ("Wireless") (File No.
333-36253)
3.1 Restated Certificate of Incorporation of the Registrant as filed
with the Secretary of State of the State of New York on December 29,
1992, incorporated by reference to Exhibit 3(a) to Registrant's Form
10-K for the year ended December 31, 1992
3.2 Certificate of Amendment of the Certificate of Incorporation of the
Registrant as filed with the Secretary of State of New York on March
17, 1995, incorporated by reference to Exhibit 3(a)(2) to
Registrant's Form 10-K for the year ended December 31, 1996
3.3 Certificate of Amendment of the Certificate of Incorporation of the
Registrant as filed with the Secretary of State of New York on
January 2, 1996, incorporated by reference to Exhibit 3(a)(2) to
Registrant's Form 10-K for the year ended December 31, 1996
3.4 Certificate of Amendment of the Certificate of Incorporation of the
Registrant as filed with the Secretary of State of New York on
October 29, 1997
3.5 Certificate of Amendment of the Certificate of Incorporation of the
Registrant as filed with the Secretary of State of New York on
January 12, 1998
3.6 Restated By-laws of the Registrant, incorporated by reference to
Exhibit 3(a)(2) to Registrant's Form 10-K for the year ended
December 31, 1996
3.7 Certificate of Amendment of the Certificate of Incorporation of the
Registrant as filed with the Secretary of the State of New York on
July 26, 1999
4.1 Indenture to 11 3/4% Senior Subordinated Notes due 2007 between
Wireless and Bank of Montreal Trust Company, as Trustee (including
form of Note), incorporated by reference to Registration Statement
on Form S-4 of Wireless (File No. 333-36254)
4.2 Indenture to 9 1/8% Senior Secured Notes due 2006 among Wireless,
each of the guarantors party thereto and Bank of Montreal Trust
Company, as trustee (including form of Note, form of Guarantee and
form of Security Agreement) incorporated by reference to
Registration Statement on Form S-4 of Wireless (333-64773)
10.1 The Registrant's 1992 Long Term Incentive Plan, incorporated by
reference to Exhibit 10(a) to Registrant's Form 10-K for the year
ended December 31, 1992
10.2 Indenture to 9 1/8% Senior Secured Notes due 2006 among Wireless,
each of the guarantors party thereto and Bank of Montreal Trust
Company, as trustee (including form on Note and Guarantee)
incorporated by reference to registration Statement on Form S-4 of
Wireless (333-64773)
10.3 Indenture to 11 3/4% Senior Subordinated Notes due 2007 between
Wireless and Bank of Montreal Trust Company, as Trustee (including
form of Note), incorporated by reference to Registration Statement
on Form S-4 of Wireless (File No. 333-36254)
10.4 Rights Agreement dated as of October 6, 1994 between the Registrant
and Harris Trust Company of New York, incorporated by reference to
Exhibit 4 to Registrant's Form 8-K filed to report an event on
October 6, 1994
10.5 Amendment dated January 12, 1995 to Rights Agreement dated as of
October 6, 1994 between the Registrant and Harris Trust Bank of New
York, incorporated by referenced to Exhibit 4 to Registrant's Form
8-K filed to report an event on January 12, 1995
E-1
EXHIBIT INDEX
Exhibit Description
No.
- ---
10.6 Amendment dated April 7, 1995 to Rights Agreement dated as of
October 6, 1994 between the Registrant and Harris Trust Bank of New
York
10.7 Amendment dated June 19, 1997 to Rights Agreement dated as of
October 6, 1994 between the Registrant and Harris Trust Bank of New
York
10.8 Amendment dated June 11, 1998 to Rights Agreement dated as of
October 6, 1994 between the Registrant and Harris Trust Bank of New
York
23.1 Consent of Public Accountants
E-2