<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(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, 1997 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 333-41227
----------
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC.
--------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3956940
- --------------------------------- --------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
45 Rockefeller Plaza, New York, New York 10020
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 757-5600
--------------
Securities registered pursuant to Section 12(b) or Section 12(g) of the Act:
None
<PAGE>
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 _____ 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. [X]
AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NONAFFILIATES OF THE COMPANY
No shares of the Company's Common Stock were held by nonaffiliates of the
Company on March 31, 1998.
The number of shares outstanding of the Company's Common Stock as of March
31, 1998 was 100.
DOCUMENTS INCORPORATED
BY REFERENCE
None
OMISSION OF CERTAIN INFORMATION BY
CERTAIN WHOLLY-OWNED SUBSIDIARIES
The registrant meets the conditions set forth in General Instruction I 1(a)
and (b) of Form 10-K and is therefore filing this form with a reduced disclosure
format.
<PAGE>
PART I
ITEM 1. BUSINESS
--------
GENERAL
Unless otherwise indicated, all references herein to "Holdings" refer to
Price Communications Cellular Holdings, Inc. and all references herein to the
"Company" refer to Holdings 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 direct subsidiary
of Holdings and a wholly-owned indirect subsidiary of Price Communications
Corporation ("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 the "Guarantor" are to
Price Communications Cellular, Inc., a direct wholly-owned subsidiary of PCC and
the holder of 100% of the outstanding capital stock of Holdings. Holdings'
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 is engaged in the construction, development, management and
operation of cellular telephone systems in the southeastern United States. At
December 31, 1997, the Company provided cellular telephone service to 309,606
subscribers in Georgia, Alabama 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 CELLULAR ONE.
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
seven-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
<PAGE>
the CELLULAR ONE name, the Company also enjoys the benefits of association with
a nationally recognized service mark.
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, 1997, with respect to each service area in which the Company owns a
cellular telephone system, the estimated population, the Company's beneficial
ownership percentage, the Net Pops and the date of initial operation of such
system by Palmer or a predecessor operator.
<TABLE>
<CAPTION>
ESTIMATED DATE SYSTEM
SERVICE AREA (1) POPULATION (2) PERCENTAGE NET POPS OPERATIONAL
- ---------------- -------------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Albany, GA.......... 118,527 86.5% 102,526 4/88
Augusta, GA......... 439,116 100.0 439,116 4/87
Columbus, GA........ 254,150 85.2 216,518 11/88
Macon, GA........... 313,686 99.2 311,234 12/88
Savannah, GA........ 283,978 98.5 279,718 3/88
Georgia-6 RSA....... 199,516 96.3 192,134 4/93
Georgia-7 RSA....... 134,376 100.0 134,376 10/91
Georgia-8 RSA....... 157,451 100.0 157,451 10/91
Georgia-9 RSA....... 119,410 100.0 119,410 9/92
Georgia-10 RSA...... 149,699 100.0 149,699 10/91
Georgia-12 RSA...... 211,799 100.0 211,799 10/91
Georgia-13 RSA...... 147,392 86.5 127,494 10/90
Dothan, AL.......... 136,160 94.6 128,807 2/89
Montgomery, AL...... 318,371 92.8 295,430 8/88
Alabama-8, RSA...... 171,993 100.0 171,993 7/93
--------- ---------
Subtotal......... 3,155,624 3,037,705
--------- ---------
Panama City, FL..... 146,018 78.4 114,493 9/88
--------- ---------
Total............ 3,301,642 3,152,198
========= =========
</TABLE>
(1) Does not include the Alabama-5 RSA and South Carolina-7 RSA where the
Company has Interim Operating Authority ("IOA"). (IOA is granted for an
area to a licensee holder in an adjacent area when there are no license
holders in such area). The Company has no subscribers in the South
Carolina-7 RSA, but instead provides roaming access to its own subscribers
and others when they travel in this service area, utilizing its existing
cell sites. Construction permits were granted to third parties
("Permittees") for the Alabama-5 RSA and South Carolina-7 RSA. The
Permittees are required to complete construction of their respective RSA
within 18 months. After completing construction, a Permittee may give the
Company ten days prior written notice, at which point the Company would be
required to sell all of its subscribers of its other systems who reside
within the boundaries of the markets to the Permittee at cost.
(2) Based on population estimates for 1996 from the DLJ 1997 Fall Book.
2
<PAGE>
GEORGIA/ALABAMA
In 1988, the Company acquired controlling interests in the licenses to
operate cellular telephone systems in the four MSAs (Montgomery and Dothan,
Alabama and Columbus and Albany, Georgia) that make up the core of its
Georgia/Alabama cluster. The Company continued to increase its presence in this
market by acquiring additional cellular service areas in 1989 (Macon, Georgia
MSA), 1992 (Georgia-9 RSA), 1993 (Alabama-8 RSA), 1994 (Georgia-7 RSA, Georgia-8
RSA, Georgia-10 RSA and Georgia-12 RSA), 1995 (Savannah, Georgia MSA and
Augusta, Georgia MSA) and 1996 (Georgia-1 RSA and Georgia-6 RSA). The Augusta,
Georgia MSA includes Aiken County in South Carolina. In 1994, the Company also
received an IOA from the FCC to provide service in two counties within the
southern portion of the Alabama-5 RSA. In 1995, as a result of the GTE
Acquisition (as such term is defined below), the Company received an IOA from
the FCC to provide service to South Carolina-7 RSA and South Carolina-8 RSA. In
the aggregate, these markets (excluding the Alabama-5 RSA, South Carolina-7 RSA
and South Carolina-8 RSA where the Company has only an IOA) 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 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, 1997 the Company
utilized 207 cell sites in this cluster (including three cell sites in Alabama-5
RSA), 23 of which were constructed by the Company in 1995, 42 of which were
placed in service in 1996, and 26 of which were placed in service in 1997.
PANAMA CITY
The Company acquired control of the non-wireline cellular license for the
Panama City, Florida market in 1991. 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,
1997, the Company utilized 12 cell sites in this market.
COMPANY 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
<PAGE>
Aggressive, Direct Marketing. The Company employs a two-tier direct sales
----------------------------
force. A retail sales force handles walk-in traffic at the Company's 34 retail
outlets, and a targeted sales staff solicits certain industries and government
subscribers. The Company's management believes that its internal sales force is
more likely than independent agents to successfully select and screen new
subscribers and select pricing plans that realistically match subscriber means
and needs.
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 ranging from
$0.05 per minute to $0.30 per minute depending on 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 an increase in 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 bill.
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 primarily 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 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 believes this innovation will allow the Company to be the roaming
partner of choice for such PCS operators. The Company has already reached an
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. In addition, subscribers are able to
report cellular telephone service or account problems to the Company's
headquarters 24 hours a day. 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 1997, 1996, 1995, 1993, and 1992; #1 RSA in
1995).
4
<PAGE>
Aggressive Cost Control Efforts. The Company believes that its monthly
-------------------------------
operating costs per subscriber rank among the lowest in the industry. The
Company's management attributes this competitive advantage to a variety of
factors, including the efficiencies associated with its direct sales force,
extensive use of in-house technical and engineering staff, maintenance of
aggressive fraud control procedures and in-house billing capabilities, as well
as general efforts to reduce corporate general and administrative expenses. The
Company has also realized substantial savings on its interconnection charges
from landline carriers by using its own microwave and fiber optic network to
connect cellular switching equipment to cell sites without the use of landline
carriers.
THE ACQUISITION
Prior to the Merger described below, neither Holdings nor the Guarantor had
any assets, liabilities or operations other than the proceeds from the issuance
of the Old Notes (as such term is defined below) and warrants described herein
and liabilities with respect thereto. PCC was incorporated in 1979.
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 direct 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 ("Palmer Existing Indebtedness"), making the
aggregate purchase price for Palmer (including transaction fees and expenses)
approximately $880 million. The Company refinanced all of the Palmer Existing
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.
5
<PAGE>
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 million, of substantially all of the assets of the
non-wireline cellular telephone system serving the Georgia-l-Whitfield Rural
Service Area ("Georgia-1"), 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. The
proceeds from the Georgia Sale were used to retire a portion of the debt used to
fund the acquisition of Palmer.
In order to fund the Acquisition and pay related fees and expenses, PCW
issued $175.0 million aggregate principal amount of 11 3/4% Senior Subordinated
Notes due 2007 (the "Senior Subordinated 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 "New Credit Facility"). On October 6, 1997, PCW borrowed
all term loans available thereunder and approximately $120.0 million of
revolving loans. DLJ Capital Funding, Inc. ("DLJ Capital Funding") provided and
syndicated the New Credit Facility. See "Description of New Credit Facility."
The acquisition of Palmer was funded in part through a $44 million equity
contribution from PCC which was in the form of cash and common stock of Palmer.
An additional amount of approximately $76 million of the purchase price for the
Acquisition was raised out of the proceeds from the issuance and sale for $80
million of units consisting of $153.4 million principal amount of 13 1/2% Senior
Secured Discount Notes due 2007 of Holdings (the "Old Notes") and warrants to
purchase shares of Common Stock of PCC (the "Offering"). In March, 1998, the
Old Notes were exchanged by the holders thereof for 13 1/2% Series B Senior
Secured Discount Notes due 2007 (the "Notes") of Holdings. The terms of the
Notes are identical in all material respects to the Old Notes, except that the
offer of the Notes was registered under the Securities Act of 1933, as amended,
and therefore, the Notes are not subject to certain transfer restrictions,
registration rights and related liquidated damage provisions applicable to the
Old Notes. The Notes are unconditionally guaranteed (the "Guarantee") by the
Guarantor. The Guarantee is secured by a lien and security interest on all of
the issued and outstanding capital stock of Holdings. The Guarantee is a senior
obligation of the Guarantor. The Notes are effectively subordinated to all
liabilities of Holdings' subsidiaries. See "Risk Factors--Guarantee and
Security for the Notes."
RISK FACTORS
In addition to the other matters described herein, holders of the Notes
should carefully consider the following risk factors.
Leverage, Liquidity and Ability to Meet Required Debt Service. On a pro
-------------------------------------------------------------
forma basis, after giving effect to the Offering, the application of the net
proceeds therefrom and the Acquisition and related financings, Holdings'
consolidated ratio of long-term debt to stockholders' equity was 22.2 to 1.00 at
December 31, 1997 and its ratio of EBITDA to interest expense was 1.64 to 1.00
for the year ended December 31, 1997. The Company's high degree of leverage
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.
6
<PAGE>
The Company's only committed source of liquidity is the New Credit
Facility, under which $87 million of revolving loans remains available. The
Company expects to have sufficient availability under the New Credit Facility to
meet its liquidity needs for the next 12 months. The Company intends to use the
availability under the New Credit Facility for general corporate purposes and,
if the Company's tax planning strategy is unsuccessful, to finance the $50.5
million tax payment due with respect to the Fort Myers Sale and Georgia Sale.
See "Notes to Consolidated Financial Statements." Borrowings under the New
Credit Facility are subject to significant conditions, including compliance with
certain financial ratios and the absence of any material adverse change. The
Company's ability to meet its working capital and operational needs and to
provide funds for debt service, capital expenditures and other cash requirements
is dependent upon the availability of financing under the New Credit Facility.
In addition, the Company intends to pursue opportunities to acquire additional
cellular telephone systems which, if successful, will 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 Notes, the Senior Subordinated Notes or the New Credit Facility
will not restrict or prohibit any such debt financing.
The Company's ability to meet its debt service requirements, including
those represented by the Notes, will require significant and sustained growth in
the Company's cash flow. In addition, the Company expects to fund its growth
strategy from cash from operations and borrowings under the New Credit Facility.
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. In addition, if the
Company is unable to avoid the $50.5 million tax payment due with respect to the
Fort Myers Sale and Georgia Sale, the Company may be required to obtain
additional equity or debt financing. There can be no assurances that the
Company would be successful in procuring any such financing. See "Description
of New Credit Facility."
Limitations on Access to Cash Flow of Subsidiaries; Holding Company
-------------------------------------------------------------------
Structure. Holdings is a holding company, and its ability to pay interest on the
- ---------
Notes is dependent upon the receipt of dividends from its direct and indirect
subsidiaries. Holdings does not have, and may not in the future have, any
assets other than the common stock of PCW. PCW entered into the New Credit
Facility and is a party to an indenture related to the Senior Subordinated Notes
(the "Senior Subordinated Note Indenture"), each of which imposes substantial
restrictions on PCW's ability to pay dividends to Holdings. Any payment of
dividends will be subject to the satisfaction of certain financial conditions
set forth in the Senior Subordinated Note Indenture and the New Credit Facility.
The ability of PCW to comply with such conditions in the Senior Subordinated
Note Indenture may be affected by events that are beyond the control of
Holdings. The breach of any such conditions could result in a default under the
Senior Subordinated Note Indenture and/or the New Credit Facility, and in the
event of any such default, the holders of the Senior Subordinated Notes or the
lenders under the New Credit Facility could elect to accelerate the maturity of
all the Senior Subordinated Notes or the loans under such facility. If the
maturity of the Senior Subordinated Notes or the loans under the New Credit
Facility were to be accelerated, all such outstanding debt would be required to
be paid in full before PCW would be permitted to distribute any assets or cash
to Holdings. In certain circumstances, it is possible that holders of Senior
Subordinated Notes and loans under the New Credit Facility would have the right
to require PCW to repurchase the Senior Subordinated Notes and to repay the
loans under the New Credit Facility while holders of the Notes would not have a
similar right to require the Company to repurchase the Notes. There can be no
assurance that the assets of the Company would be sufficient to repay all of
such outstanding debt and to meet its obligations under the Indenture. Future
borrowings by PCW can be expected to contain restrictions or prohibitions on the
payment of dividends by such subsidiaries to Holdings. In addition, under
Delaware law, a subsidiary of a company is permitted to pay dividends on its
capital stock only out of its surplus or, in the event that it has no surplus,
out of its net profits for the year in which a dividend is declared or for the
immediately preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities plus the par value
of its outstanding capital stock. In order to pay dividends in cash, PCW must
have surplus or net profits equal to the full amount of the cash dividend at the
time such dividend is declared. In determining PCW's ability to pay dividends,
Delaware law permits the Board of Directors of PCW to revalue its assets and
liabilities from time to time to their fair market values in order to create
surplus. The Company cannot predict what the value of its subsidiaries' assets
or the amount of their liabilities will be in the future and, accordingly, there
can be no assurance that the Company will be able to pay its debt service
obligations on the Notes.
7
<PAGE>
As a result of the holding company structure of the Company, the holders of
the Notes are structurally junior to all creditors of Holdings' subsidiaries,
except to the extent that Holdings is itself recognized as a creditor of any
such subsidiary, in which case the claims of Holdings would still be subordinate
to any security in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by Holdings. In the event of insolvency,
liquidation, reorganization, dissolution or other winding-up of Holdings'
subsidiaries, Holdings will not receive any funds available to pay to creditors
of the subsidiaries. As of December 31, 1997, Holdings' subsidiaries had
outstanding $693.1 million of indebtedness, including indebtedness under the
Senior Subordinated Notes and the New Credit Agreement and $409.5 million of
other liabilities, including $359.4 million of accrued and deferred income tax
liabilities recorded in connection with the purchase accounting treatment of the
Acquisition and trade payables. See "Description of New Credit Facility."
Possible Inability to Purchase Notes upon a Change of Control or Asset
----------------------------------------------------------------------
Sale; Possible Effect of a Change of Control. Upon a Change of Control (as such
- --------------------------------------------
term is defined in the indenture related to the Notes (the "Discount Notes
Indenture")), each holder of Notes will have the right to require the Company to
repurchase all outstanding Notes. However, there can be no assurance that
sufficient funds will be available at the time of any Change of Control to make
any required repurchases of Notes tendered, especially after giving effect to
provisions of the Credit Agreement and the Senior Subordinated Notes Indenture
which require repayment or repurchase, as the case may be, upon such a Change of
Control. Similarly, there can be no assurance that, upon the occurrence of an
Asset Sale (as such term is defined in the Discount Notes Indenture) which
requires prepayment under the Discount Notes Indenture, the Company will have
sufficient funds available to satisfy such obligation after giving effect to
required prepayments under the New Credit Facility and the Senior Subordinated
Notes Indenture as a result of an Asset Sale. In certain circumstances, it is
possible that holders of Senior Subordinated Notes and loans under the New
Credit Facility would have the right to require PCW to repurchase the Senior
Subordinated Notes and to repay the loans under the New Credit Facility while
holders of the Notes would not have a similar right to require the Company to
repurchase the Notes.
8
<PAGE>
Guarantee and Security for the Notes. As of the closing of the Offering
------------------------------------
(the "Issue Date"), the Company's capital stock was the only significant asset
of the Guarantor and dividends on the Company's capital stock will be the sole
source of funds available to the Guarantor to meet its obligations under the
Guarantee. The payment of dividends on the Company's capital stock, however, is
significantly restricted by certain covenants contained in the Senior
Subordinated Notes Indenture and the New Credit Facility and may be restricted
by other agreements entered into by the Company in the future and by applicable
law. The Guarantee is secured by a lien on and security interest in all of the
issued and outstanding capital stock of the Company. As of December 31, 1997,
the Company had stockholders' equity of $35.2 million. In addition, there is no
existing public market for the Company's capital stock, and even if such capital
stock could be sold, there can be no assurance that the proceeds from the sale
of such capital stock would be sufficient to satisfy the amounts due on the
Notes in the event of a default. Furthermore, the ability of the holders of the
Notes to realize upon the collateral may be subject to certain bankruptcy law
limitations in the event of a bankruptcy. See "--Certain Other Bankruptcy
Considerations." Absent an acceleration of the Notes, the Guarantor will be able
to vote, as it sees fit in its sole discretion, the stock of the Company.
Further, any transfer of the power to vote the capital stock of the Company,
including as a result of foreclosure on pledged capital stock, will require
approval of the Federal Communications Commission (the "FCC"). In the event of
a bankruptcy or liquidation of the Company, the security interest in the
Company's capital stock may be of no value to holders of Notes because holders
of the Company's capital stock would be entitled only to the assets which
remained after all indebtedness of the Company (including the Notes) had been
paid in full.
Limitations on Holders' Claims. Under the Discount Notes Indenture, in the
------------------------------
event of an acceleration of the maturity of the Notes upon the occurrence of an
Event of Default under such Indenture, the holders of the Notes may be entitled
to recover only the amount which may be declared due and payable pursuant to
such Indenture, which will be less than the principal amount at maturity of such
Notes.
If a bankruptcy case is commenced by or against Holdings under Title 11 of
the United States Code (the "Bankruptcy Code") the claim of a holder of Notes
with respect to the principal amount thereof may be limited to an amount equal
to the sum of (i) the issue price of the Notes and (ii) that portion of the
original issue discount (as determined on the basis of such issue price) which
is not deemed to constitute "unmatured interest" for purposes of the Bankruptcy
Code. Accordingly, holders of the Notes under such circumstances may, even if
sufficient funds are available, receive a lesser amount than they would be
entitled to under the express terms of the Discount Notes Indenture. In
addition, there can be no assurance that a bankruptcy court would compute the
accrual of interest under the same rules as those used for the calculation of
original issue discount under federal income tax law and accordingly, a holder
might be required to recognize gain or loss in the event of a distribution
related to such a bankruptcy case.
9
<PAGE>
Net Losses. For the period May 29, 1997 through December 31, 1997, the
-----------
Company incurred net losses of approximately $8.9 million. There can be no
assurance that the Company's future operations will generate sufficient earnings
to pay its obligations. The Company expects to incur net losses for several
years. See "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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 the
other licensee authorized to serve each cellular market in which the Company
operates, as well as from resellers of cellular service. Competition for
subscribers between cellular licensees 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. ESMR is a digital transmission system providing for "cellular-like"
communications service. The Company also faces limited competition from and may
in the future face increased competition from PCS. It is expected that
broadband PCS will involve 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. PCS subscribers could have
dedicated personal telephone numbers and would communicate using small digital
radio handsets that could be carried in a pocket or purse. 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
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. See "--Competition."
10
<PAGE>
The Company also faces competition from "resellers." The FCC requires all
cellular licensees to provide service to resellers. A reseller provides
wireless service to customers but does not hold an FCC license or own
facilities. Instead, the reseller buys blocks of wireless telephone numbers and
capacity from a licensed carrier and resells service through its own
distribution network to the public.
Potential for Regulatory Changes and Need for Regulatory Approvals. The
------------------------------------------------------------------
licensing, construction, operation, acquisition, assignment and transfer of
cellular telephone systems, as well as the number of licensees permitted in each
market, are regulated by the FCC. 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: 1998 (three); 2000 (two); 2001 (four); 2002 (two); 2006 (one);
and 2007 (four). 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 "--Regulation."
Fluctuations in Market Value of Licenses. 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.
Reliance on Use of Third Party Service Mark. The Company currently uses
-------------------------------------------
the registered service mark CELLULAR ONE to market its services. The Company's
use of this service mark is governed by five-year contracts between the Company
and Cellular One Group, the owner of the service mark. See "--Description of
Cellular One Agreements." If these agreements are not renewed upon expiration
and the Company therefore is no longer permitted to use the CELLULAR ONE service
mark, the Company's ability both to attract new subscribers and to retain
existing subscribers could be
11
<PAGE>
materially affected. In addition, if for some reason beyond the Company's
control, the name CELLULAR ONE were to suffer diminished marketing appeal, the
Company's ability both to attract new subscribers and retain existing
subscribers could be materially affected. AT&T Wireless Services, Inc., which
has been the single largest user of the CELLULAR ONE service mark, has
significantly reduced its use of the service mark as a primary service mark.
There can be no assurance that such reduction in use by AT&T Wireless 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. Robert Price, the Director of the Company and of
PCW, and a Director, the President, Chief Executive Officer and Treasurer of
PCC, also serves as a Director and Chairman of PriCellular Corporation
("PriCellular"), another operator of cellular telephone systems. The Company
believes that Mr. Price's positions with the Company and PriCellular complement
one another and benefit both companies because the systems they operate are
similar but do not directly compete with one another. Mr. Price's employment
agreement with PriCellular provides that he may not be an employee of or have an
ownership interest in any company engaged in the operation of cellular telephone
systems in the United States other than PriCellular and that any such other
company may not acquire any additional cellular telephone system within the
United States, in each case, without the unanimous consent of the executive
committee of the Board of Directors of PriCellular. The executive committee of
the Board of Directors of PriCellular has approved the acquisition of Palmer by
PCC. Although the Company and PriCellular historically have not imposed
inconsistent demands on Mr. Price's availability, there can be no assurances
that such conflicts will not arise in the future. In March 1998, PriCellular
entered into an agreement to be sold. Upon consummation of such sale, the
restrictions imposed upon Mr. Price's activities by said employment agreement
would terminate.
The Company entered into employment contracts with William J. Ryan and M.
Wayne Wisehart to remain as officers of the Company and also entered into
employment contracts with other key employees of Palmer prior to the
consummation of the Acquisition. 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. Effective April 1, 1998, Mr. Ryan will
commence to serve as Chairman of the Board and Mr. Wisehart as President and
Chief Executive Officer of the Company.
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.
12
<PAGE>
The Company carries $4.0 million in General Liability insurance and $25
million in umbrella liability coverage. This insurance would cover any
liability suits with respect to human exposure to radio frequency emissions.
The Company believes that this coverage is adequate to cover potential
liabilities.
Fraudulent Conveyance Statutes. Various laws enacted for the protection of
------------------------------
creditors may apply to the Company's incurrence of indebtedness and other
obligations in connection with the Acquisition, including the issuance of the
Notes and the provision of the Guarantee by the Guarantor. If a court were to
find in a lawsuit by an unpaid creditor or representative of creditors of the
Company or the Guarantor that the Company or the Guarantor did not receive fair
consideration or reasonably equivalent value for incurring such indebtedness or
obligation or providing the Guarantee and, at the time of such incurrence, the
Company or the Guarantor (i) was insolvent; (ii) was rendered insolvent by
reason of such incurrence; (iii) was engaged in a business or transaction for
which the assets remaining in the Company or the Guarantor constituted
unreasonably small capital; or (iv) intended to incur or believed it would incur
obligations beyond its ability to pay such obligations as they mature, such
court, subject to applicable statutes of limitation, could determine to
invalidate, in whole or in part, such indebtedness and obligations as fraudulent
conveyances or subordinate such indebtedness and obligations to existing or
future creditors of the Company or the Guarantor.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction which is being applied. Generally, however, the
Company or the Guarantor would be considered insolvent at a particular time if
the sum of its debts was then greater than all of its property at a fair
valuation or if the present fair saleable value of its assets was then less than
the amount that would be required to pay its probable liabilities on its
existing debts as they became absolute and matured. On the basis of its
historical financial information, its recent operating history as discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other factors, the Company's management believes that, after
giving effect to indebtedness incurred in connection with the Acquisition and
the other related financings, the Company will not be rendered insolvent, it
will have sufficient capital for the businesses in which it was not engaged and
it will be able to pay its debts as they mature; however, management has not
obtained any independent opinion regarding such issues. There can be no
assurance as to what standard a court would apply in making such determinations.
In addition, the Guarantee may be subject to review under relevant federal
and state fraudulent conveyance and similar statutes in a bankruptcy or
reorganization case or a lawsuit by or on behalf of creditors of the Guarantor.
In such a case, the analysis set forth above would generally apply, except that
the Guarantee could also be subject to the claim that, since the Guarantee was
incurred for the benefit of the Company (and only indirectly for the benefit of
the Guarantor), the obligations of the Guarantor thereunder were incurred for
less than reasonably equivalent value or fair consideration. A court could
avoid the Guarantor's obligation under the Guarantee, subordinate the Guarantee
to other indebtedness of the Guarantor or take other action detrimental to the
holders of the Notes.
13
<PAGE>
To the extent the Guarantee was avoided as a fraudulent conveyance, limited
as described above, or held unenforceable for any other reason, holders of the
Notes would, to such extent, cease to have a claim in respect of the Guarantee
and, to such extent, would be creditors solely of the Company. In such event,
the claims of the holders of the Notes against the Guarantor would be subject to
the prior payment of all liabilities of the Guarantor. There can be no
assurance that, after providing for all prior claims, there would be sufficient
assets to satisfy the claims of the holders of Notes.
Certain Other Bankruptcy Considerations. The right of the Trustee to
---------------------------------------
repossess and dispose of the Collateral upon the occurrence of an Event of
Default (as each such capitalized term is defined under the Discount Notes
Indenture) is likely to be significantly impaired by applicable bankruptcy law
if a bankruptcy proceeding were to be commenced by or against the Guarantor
prior to the Trustee's having disposed of the Collateral. Under the Bankruptcy
Code, a secured creditor such as the Trustee is prohibited from disposing of a
security repossessed from a debtor in a bankruptcy case without bankruptcy court
approval. Moreover, the Bankruptcy Code prohibits a secured creditor from
disposing of collateral even though the debtor is in default under the
applicable debt instruments if the secured creditor is given "adequate
protection." The meaning of the term "adequate protection" may vary according to
circumstances, but it is intended in general to protect the value of the secured
creditor's interest in the collateral and may include cash payments or the
granting of additional security, if and at such times as the court in its
discretion determines, for any diminution in the value of the collateral as a
result of the stay of disposition during the pendency of the bankruptcy case.
In view of the lack of a precise definition of the term "adequate protection"
and the broad discretionary powers of a bankruptcy court, it is impossible to
predict how long payments under the Notes could be delayed following
commencement of a bankruptcy case, whether or when the Trustee could dispose of
the Collateral, or whether or to what extent holders of the Notes would be
compensated for any delay in payment or loss of value of the Collateral through
the requirement of "adequate protection."
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.
Lack of Public Market. The Notes are new securities for which there
---------------------
currently is no market. The Company does not intend to apply for listing of the
Notes on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System. There can be no
assurance that an active trading market for the Notes will develop. If a
trading market develops for the Notes, future trading prices of such securities
will depend on many factors, including prevailing interest rates, the Company's
results of operations and financial condition and the market for similar
securities.
14
<PAGE>
OPERATIONS
General
The Company has concentrated its efforts on creating an integrated network
of cellular telephone systems in the southeastern United States, principally to
date in Georgia, Alabama and Florida. At December 31, 1997, the Company provided
cellular telephone service to 309,606 subscribers in a total of 16 licensed
service areas composed of eight MSAs and eight RSAs. The Company also
participates in the North American Cellular Network ("NACN"), a nationwide
consortium of nonwireline cellular telephone companies, with the goal of
providing seamless regional and national cellular telephone service to its
subscribers. Participation in the NACN allows seven-digit dialing access to the
Company's subscribers when they travel outside the Company's service areas,
providing them with convenient call delivery throughout large areas of the
United States, Canada, Mexico and Puerto Rico served by other NACN participants.
The following table sets forth information, at the dates indicated after
giving effect to the Acquisition, regarding the Company's subscribers,
penetration rate, cost to add a net subscriber, average monthly churn rate and
average monthly service revenue per subscriber.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Subscribers at end of period (1).... 54,382 99,626 187,870 243,204 309,606
Penetration at end of period (2).... 3.57% 4.54% 6.41% 7.73% 9.40%
Cost to add a net subscriber (3).... $ 198 $ 247 $ 275 $ 436 $ 461
Average monthly churn (4)........... 1.32% 1.54% 1.51% 1.89% 1.88%
Average monthly service revenue
per subscriber (5)............... $ 56.70 $ 56.54 $ 53.80 $ 50.23 $ 46.24
</TABLE>
(1) Each billable telephone number in service represents one subscriber.
Amounts at December 31, 1993 include 2,576 subscribers in the Alabama-7 RSA
where the Company had interim operating authority from June 1991 through
July 1994.
(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 including
fees paid for use of the CELLULAR ONE service mark, by (ii) the net
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.
SUBSCRIBERS AND SYSTEM USAGE
On a pro forma basis, after giving effect to the Acquisition, the Company's
subscribers have increased from 17,148 at January 1, 1992 to 309,606 at December
31, 1997. 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 to 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 1997, cellular telephone service revenues represented 94.6% of the Company's
total revenues, with equipment sales and installation representing the balance.
15
<PAGE>
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 industries 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. For the twelve months ended December 31, 1997, the Company's
cost to add a net subscriber was $461. 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 also maintains an after-sale telemarketing program implemented
through its sales force and a telemarketing service specializing in cellular
customer services. This program not only enhances customer loyalty, but also
increases add-on sales and customer referrals. The telemarketing program allows
the sales staff to check customer satisfaction as well as to offer additional
calling features, such as voicemail, call waiting and call forwarding.
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, 1997,
the Company maintained 34 retail stores and 4 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. In addition, to enhance convenience for its customers, the
Company has begun to open 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.
16
<PAGE>
The Company markets all of its products and services under the name
CELLULAR ONE. 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. In addition, travelers who subscribe to CELLULAR ONE service in other
markets may be more likely to use the Company's service when they travel in the
Company's service areas. Cellular telephones of non-wireline subscribers are
either programmed to select the non-wireline carrier (such as the Company) when
roaming, unless the non-wireline carrier in the roaming area is not yet
operational, or the subscriber dials a special code or has a cellular telephone
equipped with an "A/B" (wireline/non-wireline) switch and selects the wireline
carrier.
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.
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 and 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
which 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. As appropriate, revisions to pricing of
service plans and equipment are made to meet the demands of the local
marketplace.
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.
17
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR (PALMER) COMPANY
------------------------------------------------------------- ---------------
FOR THE PERIOD
FOR THE YEAR ENDED DECEMBER 31, FOR THE NINE OCTOBER 1, 1997
------------------------------------------ MONTHS ENDED THROUGH
SEPTEMBER 30, DECEMBER 31,
1993 1994 1995 1996 1997 1997
------- ------- ------- -------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Service revenue:
Access and usage (1) $20,324 $37,063 $61,607 $105,006 $ 89,339 $31,786
Roaming (2) 3,075 5,844 11,157 13,099 14,447 5,691
Long distance (3) 1,309 2,218 3,634 6,632 5,949 2,014
Other (4) 1,230 2,745 2,585 2,596 2,061 891
------- ------- ------- -------- -------- -------
Total service
revenue 25,938 47,870 78,983 127,333 111,796 40,382
Equipment sales and
installation (5) 5,238 6,381 6,830 7,027 6,242 2,308
------- ------- ------- -------- -------- -------
Total $31,176 $54,251 $85,813 $134,360 $118,038 $42,690
======= ======= ======= ======== ======== =======
</TABLE>
(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. Roamers 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. For 1997, roaming
revenues accounted for 13.2% of the Company's service revenues and 12.5% of the
Company's total revenue. This level of roaming revenue is due in part to the
fact that the Company's market in Panama City, Florida is a regional shopping
and vacation destination and a number of the Company's cellular telephone
systems in the Georgia and Alabama market are located along major interstate
travel corridors.
In order to develop the market for cellular telephone service, the Company
provides retail distribution of cellular telephones and maintains inventories of
cellular telephones. 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, Palmer has historically sold cellular telephones
below cost.
18
<PAGE>
The Company is currently developing several new services which it believes
will provide additional revenue sources. Packet-switching technology will allow
data to be transmitted much more quickly and efficiently than the current
circuit-switching technology. Packet-switching uses the intervals between voice
traffic on cellular channels to send packets of data instead of tying up
dedicated cellular channels. The packets of information, which may be
transmitted using several different channels, are subsequently reassembled and
directed to the correct party at the receiving end. It is expected that the
development of this technology will make it possible for cellular carriers to
offer a broad range of cost-effective wireless data services, including
facsimile and electronic mail transmissions, point-of-sale credit
authorizations, package tracking, remote meter reading, alarm monitoring and
communications between laptop computer units and local area computer networks or
other computer databases. During 1997 Palmer began to implement the use of
microcells. Microcells are low powered transmitters, typically constructed on a
pole or the roof of a building, which provide reduced radius service within a
specific area, such as large office buildings, underground facilities or areas
shielded by topographical obstructions. Microcell service could be used, for
instance, to provide wireless service within an office environment that was also
integrated with wireless service to the home.
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.
In addition, subscribers are able to report cellular telephone service or
account problems to the Company 24 hours a day. Through the use of
sophisticated monitoring equipment, technicians at the Company's headquarters
are able to monitor the technical performance of its 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 CELLULAR ONE service mark.
In 1997, the Company was awarded the #1 MSA in CELLULAR ONE's National Customer
Satisfaction Survey. The Company has held number one rankings in five out of
the last six years. The Company believes it has achieved this first place
ranking through effective implementation of its direct sales and customer
service support strategy.
19
<PAGE>
The Company has implemented a new software package to combat cellular
telephone service fraud. This new software system can detect counterfeit
cellular telephones while they are being operated and enables 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 has been achieved using NTI's internal software
and hardware.
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 Palmer's markets with over
4,600 cities in more than 40 states in the United States, Canada, Mexico and
Puerto Rico.
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.
20
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------------------------------------
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Georgia/Alabama 39 /(1)/ 70 /(2)/ 121 /(3)/ 181 /(4)/ 207/(5)/
Panama City, FL 7 7 9 11 12
-------- -------- --------- --------- --------
Total 46 /(1)/ 77 /(2)/ 130 /(3)/ 192 /(4)/ 219/(5)/
======== ======== ========= ========= ========
</TABLE>
(1) Includes two cell sites in the Alabama-7 RSA where the Company had interim
operating authority from June 1991 through June 1994.
(2) Includes one cell site in the Alabama-5 RSA where the Company had interim
operating authority for two counties of such RSA and 17 existing cell sites
that were purchased in the Georgia Acquisition.
(3) Includes two existing cell sites in the Alabama-5 RSA where the Company has
interim operating authority for two counties of such RSA and 28 existing
cell sites that were purchased in the GTE Acquisition.
(4) Includes three existing cell sites in the Alabama-5 RSA where the Company
has interim operating authority for two counties of such RSA and 17
existing cell sites that were purchased in the Horizon and USCOC
acquisitions. See "--Acquisitions."
(5) Includes three existing cell sites in the Alabama-5 RSA where the Company
has interim operating authority.
The Company estimates that in 1997 the capacity of its existing cellular
telephone systems increased 30%. During 1997, the Company spent $55.3 million
and, based on projected growth in subscriber demand, expects to spend
approximately $16 million in 1998 in order to build out its cellular service
areas, install an additional microwave network and implement certain digital
radio technology. The Company constructed 27 cell sites in 1997 and plans to
construct 30 additional cell sites with respect to its existing cellular systems
during 1998 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
network and further enhance the overall efficiency of the network. The Company
believes that the increased cellular telephone coverage will have a positive
effect on market penetration and subscriber usage.
Microwave networks 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. During 1996, the
Company spent $1.0 million to build additional microwave connections. In
addition, in 1996 the Company spent $2.6 million to build a fiber optic network
between Dothan, Alabama and Panama City, Florida. The installation of this
network resulted in savings to the Company from a reduction in fees paid to
telephone companies for landline charges, as well as giving the Company the
ability to lease out a significant portion of capacity.
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.
21
<PAGE>
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.
Palmer entered the cellular telephone business in 1987, when it constructed
a cellular telephone system for the Fort Myers, Florida MSA. Palmer acquired
control of this system in March 1988 and rapidly expanded its cellular telephone
holdings, acquiring control of the non-wireline cellular licenses for the
Columbus and Albany, Georgia and Dothan and Montgomery, Alabama MSAs in 1988.
22
<PAGE>
In 1991, Palmer acquired control of the non-wireline cellular license for
the Panama City, Florida MSA. In 1992 and 1993, Palmer acquired two nonwireline
cellular licenses for RSAs contiguous to Palmer's MSAs in Georgia and Alabama:
the Georgia-9 RSA in June 1992 and the Alabama-8 RSA in April 1993. The
Georgia-9 RSA acquisition added the geographic territory between the Columbus,
Macon and Albany, Georgia MSAs to Palmer's service area coverage. The Alabama-8
RSA expanded Palmer's service areas around three MSAs served by Palmer, covering
a substantial portion of the geographic territory between the Montgomery,
Alabama, Columbus, Georgia and Dothan, Alabama MSAs and the Georgia-9 RSA. In
1993, Palmer also increased its majority position in its MSAs in Albany, Georgia
and in Dothan and Montgomery, Alabama, through the purchase of certain minority
interests for an aggregate purchase price of $2.9 million.
During 1994, Palmer continued to acquire minority interests in six of its
MSAs for an aggregate purchase price of $3.1 million. Also, on October 31,
1994, Palmer acquired the cellular telephone systems of Southeast Georgia
Cellular Limited Partnership ("SGC") and Georgia 12 Cellular Limited Partnership
("Georgia 12" and together with SGC, the "Georgia Partnerships") for an
aggregate purchase price of $91.7 million (the "Georgia Acquisition"). The
assets acquired by Palmer from SGC included the non-wireline cellular telephone
systems for the Georgia-7 RSA, Georgia-8 RSA and Georgia-10 RSA. The assets
acquired by Palmer from Georgia 12 included the non-wireline cellular telephone
system located in the Georgia-12 RSA. The cellular telephone systems in the
acquired RSAs serve a geographic territory in southeast Georgia that is adjacent
to Palmer's Georgia-9 RSA and Macon, Georgia MSA.
In December 1995, Palmer acquired interests in cellular telephone systems
by purchasing Georgia Metronet, Inc. ("GMI") and Augusta Metronet, Inc. ("AMI"
and together with GMI, the "GTE Companies") for an aggregate purchase price of
$158.4 million (the "GTE Acquisition"). The assets acquired by Palmer in the GTE
Acquisition included the non-wireline cellular telephone system located in the
Savannah MSA and Augusta MSA, respectively. The cellular telephone systems in
the newly-acquired MSAs serve a geographic territory in eastern Georgia and a
portion of South Carolina that is adjacent to Palmer's existing markets in the
Georgia-8 RSA and Georgia-12 RSA. In addition, Palmer also acquired the interim
operating authority to provide cellular service to the southern portions of the
South Carolina-7 RSA and South Carolina-8 RSA, respectively, which serve a
geographic territory that is adjacent to Palmer's existing markets in the
Georgia-8 RSA as well as the Savannah, and Augusta, Georgia MSAs. In addition,
during 1995, Palmer acquired additional minority interests in six of its MSAs
for an aggregate purchase price of $2.0 million.
On June 20, 1996, Palmer acquired the cellular telephone system of USCOC of
Georgia RSA #1, Inc. ("USCOC") for an aggregate purchase price of $31.6 million.
The assets acquired by Palmer from USCOC included the cellular telephone system
in the Georgia-1 RSA. The cellular telephone system in the acquired RSA serves a
geographic territory of northwest Georgia between Chattanooga and Atlanta.
23
<PAGE>
On July 5, 1996, two of Palmer's majority-owned subsidiaries acquired the
cellular telephone system of Horizon Cellular Telephone Company of Spalding,
L.P. ("Horizon") for an aggregate purchase price of $36.0 million. The assets
acquired by Palmer from Horizon include the cellular telephone system in the
Georgia-6 RSA. The cellular telephone system in the acquired RSA serves a
geographic territory of west central Georgia adjacent to Palmer's Macon and
Columbus, Georgia MSAs.
On January 31, 1997, a majority-owned subsidiary of Palmer acquired the
cellular telephone system serving the Georgia-13 RSA from Mobile Communications
Systems L.P. for a total purchase price of $31.5 million. The cellular
telephone system in the acquired RSA serves a geographic territory of southwest
Georgia adjacent to Palmer's Albany, Georgia and Dothan, Alabama MSAs.
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 Intercel (1)
Georgia-7 RSA... Cellular Plus and BellSouth (1)
Georgia-8 RSA... ALLTEL
Georgia-9 RSA... ALLTEL and Public Service Cellular (1)
Georgia-10 RSA.. Cellular Plus and ALLTEL (1)
Georgia-12 RSA.. ALLTEL
Georgia-13 RSA.. ALLTEL
Dothan, AL...... BellSouth
Montgomery, AL.. ALLTEL
24
<PAGE>
MARKET WIRELINE COMPETITOR
Alabama-8 RSA...... ALLTEL
Panama City, FL.... 360 (degrees) Communications Company
(formerly Sprint Cellular)
____________________
(1) The wireline service area has been subdivided into two service areas by the
purchasers of the authorization 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 auction of all broadband PCS frequency blocks.
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, i.e., they 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.
25
<PAGE>
SERVICE MARKS
CELLULAR ONE 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 CELLULAR ONE service mark to identify and promote its cellular telephone
service pursuant to licensing agreements with Cellular One Group. In 1997, the
Company paid $303,000 in licensing and advertising fees under these agreements.
See "Risk Factors--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 "CELLULAR ONE" 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.
In connection with each Cellular One Agreement, the Company has agreed to
pay an annual licensing fee equal to $.02 per person in the Licensed Territory
based on the total population of the market, subject to a minimum payment of
$3,000, and, in certain circumstances, will pay an annual advertising fee not in
excess of $.05 per person in the Licensed Territory.
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.
In addition, Cellular One Group may terminate such Agreements at any time,
subject to delivery of written notice (i) if the Company fails to achieve 85%
customer satisfaction (or such higher percentage established by Cellular One
Group) for a prescribed amount of time, (ii) if the Company fails to achieve 65%
customer satisfaction in any survey other than an initial customer satisfaction
survey by Cellular One, (iii) if any principal stockholder or officer of the
Company is convicted of a felony, fraud or other crime that Cellular One Group
believes is reasonably likely to have an adverse effect on the Mark, (iv) if a
threat or danger to public health or safety results from the operation of the
Company's cellular telephone business, (v) if the Company violates certain
undertakings in the Cellular One Agreement, including limitations on assignment
and confidentiality restrictions, (vi) if the Company knowingly submits false
reports or information to Cellular One Group or any other entity conducting a
customer satisfaction survey or (vii) if the Company contests in any proceeding
the validity or registration of, or Cellular One Group's ownership of, the Mark.
The Company's customer satisfaction ratings have consistently far exceeded the
minimum requirements of such Agreements.
26
<PAGE>
Finally, 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 Palmer, 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.
27
<PAGE>
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: 1998 (three); 2000 (two); 2001
(four); 2002 (two); 2006 (one); and 2007 (four). 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 a renewal expectancy. The Company believes
that the licenses controlled by the Company will 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. A non-renewal of all
licenses that are currently pending would have a material adverse effect on the
Company's result 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 that have been licensed for more
than five years.
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 construction permits, 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. 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, legislation which could potentially affect the Company,
either beneficially or adversely, may be proposed by federal and state
legislators. 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.
28
<PAGE>
The major provisions of the Telecom Act potentially affecting the Company
are as follows:
Interconnection. The Telecom Act requires state public utilities
---------------
commissions and/or 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 Palmer's renegotiation of interconnection agreements
with the incumbent local exchange carrier in each of Palmer's markets. LECs and
state regulators filed appeals of the FCC Order, which have been consolidated in
the US Court of Appeals for the Eighth Circuit. The Court has temporarily
stayed the effective date of the pricing rules until more permanent relief can
be fashioned.
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 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.
29
<PAGE>
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
that the FCC will establish. The FCC implemented this provision of the Telecom
Act in a "Report and Order" released May 8, 1997 in the matter of "Federal-State
Joint Board on Universal Service," which also provides that any cellular carrier
is potentially eligible to receive universal service support.
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 1996 population of an MSA or RSA, as derived from the 1996
Donnelley 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. The term "CTIA" means the Cellular Telecommunications Industry
Association.
EMPLOYEES
At December 31, 1997, the Company had 604 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, 1997, the Company had
approximately 33 leases for retail stores used in conjunction with its
operations and 3 leases for administrative offices. The Company also had
approximately 142 leases to accommodate cell transmitters and antennas as of
December 31, 1997.
30
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
---------------------------
Not Applicable
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
-------------------------------------
a) Market for Common Stock
-----------------------
Not Applicable
b) Holders
-------
All of the issued and outstanding capital stock of Holdings is held
beneficially and of record by the Guarantor.
c) Dividends
---------
Holdings, to date, has paid no cash dividends on its Common Stock. The
Discount Notes Indenture imposes substantial restrictions on Holdings' ability
to pay dividends to the Guarantor, and the New Credit Facility and the Senior
Subordinated Note Indenture impose substantial restrictions on PCW's ability to
pay dividends to Holdings. It is not anticipated that dividends will be paid on
Holdings' capital stock in the forseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
The following table contains certain consolidated financial data with
respect to the Company for the period May 29, 1997 through December 31, 1997 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.
31
<PAGE>
<TABLE>
<CAPTION>
Predecessor Company
----------------------------------------------------------------------- ------------
For the year ended December 31, For the
------------------------------------------------------- period
For the nine May 29, 1997
months ended through
September 30, December 31,
1993 1994(1) 1995(2) 1996(3) 1997 1997
--------- --------- --------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGE AND PER SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Service............................... $ 35,173 $ 61,021 $ 96,686 $ 151,119 $134,123 $ 41,365
Equipment sales and
installation.......................... 6,285 7,958 8,220 8,624 7,613 2,348
-------- --------- --------- --------- -------- ----------
Total revenue...................... 41,458 68,979 104,906 159,743 141,736 43,713
-------- --------- --------- --------- -------- ----------
Engineering, technical and
other direct expenses.................. 7,343 12,776 18,184 28,717 23,301 5,978
Cost of equipment....................... 7,379 11,546 14,146 17,944 16,112 5,259
Selling, general and
administrative expenses................ 13,886 19,757 30,990 46,892 41,014 12,805
Depreciation and amortization........... 10,689 9,817 15,004 25,013 25,498 11,055
-------- --------- --------- --------- -------- ----------
Operating income........................ 2,161 15,083 26,582 41,177 35,811 8,616
-------- --------- --------- --------- -------- ----------
Other income (expense):
Interest, net......................... (9,006) (12,715) (21,213) (31,462) (24,467) (22,198)
Other, net............................ (590) (70) (687) (429) 208 15
-------- --------- --------- --------- -------- ----------
Total other expense................ (9,596) (12,785) ( 21,900) (31,891) (24,259) (22,183)
-------- --------- --------- --------- -------- ----------
Minority interest share of
(income) losses........................ 83 (636) (1,078) (1,880) (1,310) (414)
Income tax benefit (expense)............ 0 0 (2,650) (2,724) (4,153) 5,129
-------- --------- --------- --------- -------- ----------
Net income (loss)....................... $ (7,352) $ 1,662 $ 954 $ 4,682 $ 6,089 $ (8,852)
======== ========= ========= ========= ======== ==========
OTHER DATA:
Capital expenditures.................... $ 13,304 $ 22,541 $ 36,564 $ 41,445 $ 40,757 $ 14,499
Operating income before
depreciation and
amortization ("EBITDA")
(4)................................... $ 12,850 $ 24,900 $ 41,586 $ 66,190 $ 61,309 $ 19,671
EBITDA margin on service
revenue................................ 36.5% 40.8% 43.0% 43.8% 45.7% 47.6%
Net cash provided by (used in):
Operating activities.................. $ 9,108 $ 7,238 $ 27,660 $ 30,130 $ 38,791 $ 11,313
Investing activities.................. (27,362) (116,850) (196,776) (110,610) (73,759) (321,030)
Financing activities.................. 19,481 110,940 169,554 78,742 36,851 337,643
Penetration (5)......................... 3.48% 4.58% 6.41% 7.45% 8.60% 9.40%
Subscribers at end of period (6)........ 65,761 117,224 211,985 279,816 337,345 309,606
Cost to add a net subscriber (7)........ $ 203 $ 247 $ 276 $ 407 $ 514 $ 370
Average monthly service
revenue per subscriber (8)............. $ 62.69 $ 60.02 $ 56.68 $ 52.20 $ 47.52 $ 47.47
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Predecessor Company
----------------------------------------------------------------------- ------------
For the year ended December 31, For the
------------------------------------------------------- period
For the nine May 29, 1997
months ended through
September 30, December 31,
1993 1994(1) 1995(2) 1996(3) 1997 1997
--------- --------- --------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGE AND PER SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C>
Average monthly churn (9)............... 1.37% 1.55% 1.55% 1.84% 1.89% 1.84%
Ratio of earnings to fixed charges (10). N/A 1.17x 1.21x 1.28x 1.45x N/A
CONSOLIDATED BALANCE SHEET DATA:
Cash.................................... $ 1,670 $ 2,998 $ 3,436 $ 1,698 $ 3,581 $ 27,926
Working capital (deficit)............... 799 2,490 (1,435) 296 7,011 3,080
Property and equipment,
net................................... 23,918 51,884 100,936 132,438 161,351 151,141
Licenses and other intangibles,......... 114,955 199,265 332,850 387,067 406,828 937,986
net
Total assets............................ 150,054 273,020 462,871 549,942 599,815 1,144,479
Total debt.............................. 131,361 245,609 350,441 343,662 378,000 693,112
Stockholders' equity.................... 3,244 4,915 74,553 164,930 172,018 35,163
</TABLE>
(1) Includes the Georgia Acquisition (as defined herein), which occurred on
October 31, 1994. For the two months ended December 31, 1994, the Georgia
Acquisition resulted in revenues to Palmer of $1,803 and operating loss of
$645.
(2) Includes the GTE Acquisition (as defined herein), which occurred on
December 1, 1995. For the one month ended December 31, 1995, the GTE
Acquisition resulted in revenues to Palmer of $2,126 and operating income
of $208.
(3) Includes the acquisition of the cellular telephone systems of USCOC (as
defined herein) (Georgia-1 RSA), which occurred on June 20, 1996, and
Horizon (as defined herein) (Georgia-6 RSA), which occurred on July 5,
1996. The acquisitions of USCOC and Horizon resulted in revenues to Palmer
of $1,239 and $2,682, respectively, and operating (loss) income of $(278)
and $743, respectively, during such year.
(4) 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.
(5) Determined by dividing the aggregate number of subscribers by the estimated
population.
(6) Each billable telephone number in service represents one subscriber.
(7) 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.
(8) 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.
(9) 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.
(10) 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
year ended December 31, 1993 the deficit of earnings to fixed charges was
$7,435 and for the period May 29, 1997 through December 31, 1997 such
deficit for the Company was $13,567.
33
<PAGE>
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
related Notes thereto. References to the Company where appropriate also include
its subsidiary, PCW and PCW's predecessor, Palmer.
Results for the Predecessor for the years ended December 31, 1995 and
December 31, 1996 are based solely on the historical operations of the
Predecessor prior to the Merger. The discussion for 1997 is based upon the
results of the Predecessor through September 30, 1997 and the results of the
Company from May 29, 1997 to December 31, 1997.
OVERVIEW
PCW Holdings, a wholly-owned subsidiary of the Guarantor, a wholly-
owned subsidiary of PCC, was incorporated on May 29, 1997 in connection
with the purchase of Palmer.
In May, 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"). In October, 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 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 million. PCW refinanced all of
the Palmer Existing 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"). 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.
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 million, of substantially all
of the assets of the non-wireline cellular telephone system serving the
Georgia-1-Whitfield Rural Service Area ("Georgia-1"), 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 for $24.2 million. The
proceeds from the Georgia Sale were used to retire a portion of the debt
used to fund the acquisition of Palmer. 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. DLJ Capital Funding provided and syndicated the New Credit
Facility.
34
<PAGE>
The acquisition of Palmer was also funded in part through a $44 million
equity contribution from PCC which was in the form of cash and common
stock of Palmer. An additional amount of approximately $76 million of the
purchase price for the Acquisition was raised out of the proceeds from the
issuance and sale for $80 million of units consisting of $153.4 million
principal amount of 13 1/2% Senior Secured Discount Notes due 2007 of
Holdings and warrants to purchase shares of Common Stock of PCC.
The Company is engaged in the construction, development, management and
operation of cellular telephone systems in the southeastern United States.
As of December 31, 1997, the Company provided cellular telephone service
to 309,606 subscribers in Alabama, Florida and Georgia 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 CELLULAR ONE.
MARKET OWNERSHIP
The following is a summary of the Company's ownership interest in the
cellular telephone system in each licensed service area to which the Company
provided service at December 31, 1996 and December 31, 1997.
Cellular Service Area December 31, December 31,
--------------------- 1996 1997
-------- --------
Albany, Georgia............ 82.7% 86.5%
Augusta, Georgia........... 100.0 100.0
Columbus, Georgia.......... 84.9 85.2
Macon, Georgia............. 99.1 99.2
Savannah, Georgia.......... 98.5 98.5
Dothan, Alabama............ 92.3 94.6
Montgomery, Alabama........ 91.9 92.8
Georgia 1-RSA............. 100.0 N/A
Georgia 6-RSA............. 94.8 96.3
Georgia 7-RSA............. 100.0 100.0
Georgia 8-RSA............. 100.0 100.0
Georgia 9-RSA............. 100.0 100.0
Georgia 10-RSA............. 100.0 100.0
Georgia 12-RSA............. 100.0 100.0
Georgia 13-RSA............. N/A 86.5
Alabama 8-RSA............. 100.0 100.0
Fort Myers, Florida........ 99.0 N/A
Panama City, Florida....... 77.9 78.4
On February 1, 1997, one of the Company's majority-owned subsidiaries
acquired the assets of and the license to operate the non-wireline cellular
telephone system serving Georgia Rural Service Area Market No. 383, otherwise
known as Georgia-13 RSA, for a total purchase price of $31.5 million, subject to
certain adjustments.
On October 6, 1997, as part of the Acquisition of Palmer by the
Company, the Fort Myers MSA was sold for approximately $168.0 million.
On December 30, 1997, the Company sold the assets of and license to
operate the non-wireline cellular telephone system serving Georgia Rural Service
Area Market No. 371, otherwise known as Georgia-1 RSA for a total price of $24.2
million, subject to certain adjustments.
35
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the Company, for the periods
indicated, the percentage which certain amounts bear to total revenue.
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------------------- ------------------
For the For the For the
Year Ended December 31, Nine Months Period May 29,1997
------------------------- Ended through
1995 1996 September 30, 1997 December 31, 1997
---- ---- ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUE:
Service 92.2% 94.6% 94.6% 94.6%
Installation 7.8 5.4 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) 7.6 7.9 8.0 7.2
Other direct costs of services (2) 9.7 10.1 8.4 6.5
Cost of equipment (3) 13.5 11.2 11.4 12.0
Selling, general and administrative:
Selling and Marketing (4) 8.7 8.6 8.4 8.9
Customer Service (5) 6.0 5.9 6.3 6.2
General and administrative (6) 14.9 14.9 14.2 14.2
Depreciation and amortization 14.3 15.7 18.0 25.3
---- ---- ---- ----
TOTAL OPERATING EXPENSES 74.7 74.3 74.7 80.3
---- ---- ---- ----
OPERATING INCOME 25.3% 25.7% 25.3% 19.7%
OPERATING INCOME BEFORE DEPRECIATION
AND AMORTIZATION (7) 39.6% 41.4% 43.3% 45.0%
</TABLE>
- ---------------------------------------------------------------
(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 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 is viewed as a relevant supplemental
measure of performance in the cellular telephone industry.
36
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUE. Service revenues totaled $175.5 million for 1997, an
increase of 16.1% over $151.1 million for 1996. This increase was due to a 29.8%
increase in the average number of subscribers to 313,042 for 1997 versus 241,255
for 1996. The increase in subscribers is the result of internal growth, which
the Company attributes primarily to its strong sales and marketing efforts, and
the recent acquisitions. In addition to the subscriber base growth, service
revenues also increased because of a 35.3% increase in outcollect roaming
revenues.
Average monthly revenue per subscriber decreased 10.5% to $46.72 for
1997 from $52.20 for 1996. This 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.
Equipment sales and installation revenue, which consists primarily of
cellular subscriber equipment sales, increased to $10.0 million for 1997 from
$8.6 million for 1996. As a percentage of total cellular revenue, equipment
sales and installation revenue remained flat at 5.4% for both 1997 and 1996,
reflecting the increased recurring revenue base as well as lower cellular
equipment prices charged to customers.
OPERATING EXPENSES. Engineering and technical expenses increased by
16.0% to $14.6 million for 1997 from $12.6 million in 1996, due primarily to the
increase in subscribers and in cell site locations. As a percentage of revenue,
engineering and technical expenses remained flat at 7.9% for both 1997 and 1996.
This reflects the increased fixed costs associated with additional cell sites
constructed. As revenue grows the Company expects engineering and technical
expenses to decrease as a percentage of revenue due to its large component of
fixed costs. There can be no assurance, however, that this forward-looking
statement will not differ materially from actual results due to unforeseen
engineering and technical expenses.
Other direct costs of services declined to $14.7 million for 1997
from $16.1 million in 1996. As a percentage of revenue, other direct costs of
service decreased to 7.9% in 1997 from 10.1% in 1996, reflecting the decrease in
interconnection costs as a result of the Company's renegotiation of
interconnection agreements with the local exchange carriers ("LECs") in most of
the Company's markets, offset somewhat by more competitive roaming rates for
Company's customer roaming in adjacent areas.
The cost of equipment increased 19.1% to $21.4 million for 1997 from
$17.9 million for 1996, due primarily to the increase in gross subscriber
activations. Equipment sales resulted in losses of $11.4 million in 1997 versus
$9.3 million in 1996. The Company sells equipment below its costs in an effort
to address market competition and improve market share. The Company sold more
telephones below cost in 1997 than in 1996.
Selling, general and administrative expenses increased 14.8% to $53.8
million in 1997 from $46.9 million in 1996. 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 15.5% to $15.8 million for 1997
from $13.7 million for 1996. This increase is primarily due to a 13.5% increase
in gross subscriber activations and the costs to acquire them and higher
advertising costs in response to market competition. As a percentage of total
revenue, sales and marketing costs decreased to 8.5% for 1997 compared to 8.6%
for 1996. The Company's cost to add a net subscriber, including loss on
telephone sales, increased to $469 for 1997 from $407 for 1996 due primarily to
increased losses from the Company's sales of cellular telephones and an increase
in commissions
Customer service costs increased 23.6% to $11.7 million for 1997 from
$9.4 million for 1996. As a percentage of revenue, customer service costs
increased to 6.3% for 1997 from 5.9% for 1996. The increase was due primarily to
an increase in license and maintenance costs for the Company's billing systems.
37
<PAGE>
General and administrative expenditures increased 10.8% to $26.3
million for 1997 from $23.8 million for 1996. General and administrative
expenses decreased as a percentage of total revenue to 14.2% in 1997 from 14.9%
in 1996. 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 46.1% to $36.6 million for
1997 from $25.0 million for 1996. 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 the Company, recent
acquisitions and additional capital expenditures. As a percentage of revenue,
depreciation and amortization increased to 19.7% from 15.7% for 1997 compared to
1996.
Operating income increased 7.9% to $44.4 million in 1997, from $41.2
million for 1996. This improvement in operating results is attributable
primarily to increases in revenue which exceeded increases in operating
expenses.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE. Service revenues totaled $151.1 million for 1996, an
increase of $54.4 million or 56.3% over $96.7 million for 1995. This increase
was primarily due to a 69.7% increase in the average number of subscribers to
241,255 in 1996 from 142,147 in 1995. The increase in subscribers is the result
of internal growth, which the Company attributes primarily to its strong sales
and marketing efforts, and recent acquisitions. The GTE Acquisition accounted
for 41,163 subscribers at December 31, 1996. Service revenue attributable to the
cellular telephone systems acquired in the GTE Acquisition totaled $24.6 million
for 1996 as compared to $2.0 million for the one month ended December 31, 1995.
Average monthly revenue per subscriber decreased to $52.20 for 1996
from $56.68 for 1995. This decrease occurred because, on average, new
subscribers use less airtime and generate less revenue per subscriber than
existing subscribers as is customary in the cellular telephone industry.
Therefore, airtime usage and service revenue did not increase in proportion to
the increase in subscribers. In addition, the Company entered into revised
roaming agreements with certain of its neighboring carriers. These agreements
provide for reciprocal lower roaming rates per minute of use, resulting in lower
roaming revenue for the Company, but offset by lower direct costs of services
when the Company's subscribers were roaming on these neighboring systems.
Equipment sales and installation revenue, which consists primarily of
cellular subscriber equipment sales, increased to $8.6 million for 1996 from
$8.2 million for 1995, a 4.9% increase, primarily due to the increase in gross
subscriber activations, partially offset by lower cellular phone prices. While
equipment sales and installation revenue increased slightly for 1996 from 1995,
it decreased as a percentage of total cellular revenue to 5.4% for 1996 from
7.8% for 1995, reflecting the increased recurring annual revenue base as well as
lower cellular equipment prices charged to customers. Equipment sales and
installation revenue attributable to the cellular telephone systems acquired in
the GTE Acquisition totaled $1.0 million for 1996 as compared to $0.1 million
for the one month ended December 31. 1995.
OPERATING EXPENSES. Engineering and technical expenses increased by
57.5% to $12.6 million for 1996 from $8.0 million for 1995, due primarily to the
32.0% increase in the number of subscribers. As a percentage of revenue,
engineering and technical expenses increased to 7.9% 1996 from 7.6% for 1995 due
to additional costs incurred for the recent acquisitions and recurring costs
associated with the Company's system development and expansion. Such development
is done for the purpose of increasing capacity and improving coverage.
Engineering and technical expenses attributable to the cellular telephone
systems acquired in the GTE Acquisition totaled $2.8 million for 1996 as
compared to $0.2 million for the one month ended December 31, 1995.
38
<PAGE>
Other direct costs of services increased 58.3% to $16.1 million for
1996 from $10.2 million for 1995. As a percentage of revenue, other direct costs
of services increased to 10.1% for 1996 from 9.7% for 1995. This increase in
other direct costs of services as a percentage of revenue was due primarily to
the Company subsidizing more roaming costs for competitive reasons. Other direct
costs of service attributable to the cellular telephone systems acquired in the
GTE Acquisition totaled $1.6 million for 1996 as compared to $0.2 million for
the one month ended December 31, 1995.
Cost of equipment increased 26.8% to $17.9 million for 1996 from
$14.1 million for 1995, due primarily to the increase in gross subscriber
activations for the same period. Equipment sales resulted in losses of $9.3
million in 1996 versus $5.9 million in 1995. The Company sells equipment below
its costs in an effort to address market competition and improve market share.
The Company sold more telephones below cost in 1996 than in 1995. The cost of
equipment attributable to the cellular telephone systems acquired in the GTE
Acquisition totaled $3.1 million for 1996 as compared to $0.2 million for the
one month ended December 31, 1995.
Selling, general and administrative expenses increased 51.3% to $46.9
million in 1996 from $31.0 million in 1995. 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 50.2% to $13.7 million for 1996
from $9.1 million for 1995. This increase is primarily due to the 28.1% increase
in gross subscriber activations and the resulting increase in costs to acquire
them. As a percentage of total revenue, sales and marketing costs remained
relatively flat at 8.6% for 1996 and 8.7% for 1995. The Company's cost to add a
net subscriber, including losses on telephone sales, increased to $407 in 1996
from $276 in 1995. This increase in cost to add a net subscriber was caused
primarily by additional advertising and fixed marketing overhead associated with
the systems acquired in the GTE Acquisition, which are not yet generating the
offsetting gains in net subscribers. In addition, there were increased losses
from the Company's sales of cellular telephones. Sales and marketing costs
attributable to the cellular telephone systems acquired in the GTE Acquisition
totaled $2.8 million in 1996 as compared to $0.2 million for the one month ended
December 31, 1995.
Customer service costs increased 49.9% to $9.4 million for 1996 from
$6.3 million for 1995. As a percentage of revenue, customer service costs
remained relatively flat at 5.9% and 6.0% for 1996 and 1995, respectively.
Customer service costs attributable to the cellular telephone systems acquired
in the GTE Acquisition totaled $1.9 million in 1996 as compared to $0.2 million
in for the one month ended December 31, 1995.
General and administrative expenses increased 52.5% to $23.8 million
for 1996 from $15.6 million for 1995 and remained flat as a percentage of
revenue at 14.9% for 1996 and 1995. As the Company continues to add more
subscribers and generate associated revenue, general and administrative expenses
should 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. The general and administrative costs attributable to the cellular
telephone systems acquired in the GTE Acquisition totaled $3.4 million for 1996
as compared to $0.4 million for the one month ended December 31, 1995.
Depreciation and amortization increased 66.7% to $25.0 million for
1996 from $15.0 million for 1995. This increase is primarily due to the
depreciation and amortization associated with recent acquisitions and additional
capital expenditures. Depreciation and amortization attributable to the cellular
telephone systems acquired in the GTE Acquisition totaled $6.2 million for 1996
as compared to $0.5 million for the one month ended December 31, 1995.
Operating income for 1996 increased 54.9% to $41.2 million, an
increase of $14.6 million over operating income for 1995. This improvement in
operating results is attributable primarily to increases in revenue which
exceeded increases in operating expenses. Operating income attributable to the
cellular telephone systems acquired in the GTE Acquisition totaled $3.8 million
for 1996 as compared to $0.2 million for the one month ended December 31, 1995.
39
<PAGE>
Net Interest Expense, Income Taxes, and Net Income
Net interest expense increased 48.3% to $46.7 million for 1997 from
$31.5 million for 1996 primarily due to rate increases and additional borrowings
incurred as a result of the recent Merger. For 1996, net interest expense
increased 48.3% to $31.5 million from $21.2 million for 1995 due primarily to
debt incurred for acquisitions and amortization of deferred financing fees
related to the Predecessor credit agreement.
Income tax benefit was $976,000 in 1997 compared to income tax
expense of $2.7 million in 1996 and 1995. The $2.7 million income tax expense in
1995 was a non-recurring deferred income tax charge related to the difference
between the financial statement and income tax return based on certain assets
and liabilities of Palmer Cellular Partnership. See Note 6 to the Company's
Consolidated Financial Statements.
Net loss for 1997 was $2.8 million compared to net income in 1996 of
$4.7 million. The loss was due to increased interest and amortization incurred
as a result of the Merger. Net income for 1996 was $4.7 million, compared to net
income of $1.0 million for 1995. The increase in net income is primarily
attributable to increases in revenue which exceeded increases in operating
expenses.
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, bank
debt, and, to a lesser extent, operating cash flow.
In 1997 the Company spent approximately $55.3 million for capital
expenditures. Capital expenditures are limited by the Credit Agreement referred
to below to $32 million and $18 million for the years ended December 31, 1998
and 1999, respectively. The Company expects to spend approximately $16 million
and $18 million for capital expenditures for the years ended December 31, 1998
and 1999, respectively. The Company expects to use net cash provided by
operating activities to fund such capital expenditures.
In October 1997, the Company entered into a credit agreement (the
"Credit Agreement") with a syndicate of banks, financial institutions and other
"accredited investors" providing for loans of up to $525 million. The Credit
Agreement includes a $325 million term loan facility and a $200 million
revolving credit facility. The term loan facility is comprised of tranche A term
loans of up to $100 million, which will have a maturity of eight years, and
tranche B term loans of up to $225 million, which will have a maturity of nine
years. The revolving credit facility will terminate eight years after the
closing date of the Credit Agreement. The Credit Agreement bears interest at the
alternate base rate, as defined in the Credit Agreement, or the reserve adjusted
Euro-Dollar rate plus, in each case, applicable margins of (i) in the case of
tranche A term loans and revolving loans (x) 2.5% for Euro-Dollar rate loans and
(y) 1.5% for base rate loans and (ii) in the case of tranche B term loans (x)
2.75% for Euro-Dollar rate loans and (y) 1.75% for base rate loans. The Credit
Agreement contains restrictions on the subsidiary's ability to engage in certain
activities, including limitations on incurring additional indebtedness, capital
expenditures, liens and investments, payment of dividends and the sale of
assets. Holdings is a guarantor of the Credit Agreement. As of December 31, 1997
there was $438.0 million outstanding under the Credit Agreement.
In July 1997, the Company issued $175 million of $11.75% Senior
Subordinated Notes due July 15, 2007 with interest payable semi-annually
commencing January 15, 1998. Such Notes contain covenants that restrict the
payment of dividends, incurrence of debt and sale of assets.
In August 1997, in connection with the acquisition of the Predecessor
(see Note 1 to the Company's Consolidated Financial Statements), Holdings issued
153,400 units, consisting of Holdings' Notes and Warrants of PCC, in exchange
for $80 million. The Notes accrete at a rate of 13.5% compounded semi-annually,
to an aggregate principal amount of approximately $153.4 million by August 1,
2002. Cash interest will not commence to accrue on the Notes prior to August 2,
2002. Commencing on February 1, 2003, cash interest on the Notes will be payable
at a rate of 13.5% per annum, payable semi-annually. The Notes will be
redeemable at the option of Holdings, in whole or in part, at any time after
August 1, 1998 in cash at the redemption price as defined, plus accrued and
unpaid interest, if any, theron to the redemption date; provided that the
trading price of the common stock, par value $0.01 per share of PCC shall equal
of exceed certain levels. The Notes mature on August 1, 2007 and contain
covenants that restrict payment of dividends, incurrence of debt and sale of
assets.
Accounting Policies
For financial reporting purposes, the Company reports 100% of revenues
and expenses for the markets for which its 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 are reflected in the consolidated financial statements
as "minority interest share of (income) losses", 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%). From 1992 through 1997, the Company had controlling interests in each of
its subsidiaries and partnerships.
Year 2000 Impact
The Company has studied the impact of the year 2000 on its operational
and financial systems, and has developed estimates of costs of implementing
changes or upgrades where necessary. Preliminary estimates indicate that these
costs will be less than $2 million. However, the Company is unable to predict
all of the implication of the year 2000 issue as it relates to its suppliers and
other entities. It is anticipated that a substantial portion of the costs will
be incured in the next two years and will be expensed as incurred.
Inflation
The Company believes that inflation affects its business no more than it
generally affects other similar businesses.
40
<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
The New Credit Facility which was entered into by PCW is provided by a
syndicate of banks, financial institutions and other "accredited investors" (as
defined in Regulation D under the Securities Act; each such bank, financial
institution and accredited investor being a "Lender" and, collectively, the
"Lenders"). The New Credit Facility includes a $325.0 million term loan
facility and a $200.0 million revolving credit facility, which provides for
loans and under which letters of credit may be issued and a portion of which
will be made available as a swingline facility. The term loan facility is
comprised of tranche A term loans of up to $100.0 million, which have a maturity
of eight years, and tranche B term loans of up to $225.0 million, which have a
maturity of nine years. The revolving credit facility will terminate eight
years after the closing date of the New Credit Facility (October 6, 1997, the
"Closing Date").
The New Credit Facility bears interest, at PCW's option, at the alternate
base rate or the reserve adjusted Euro-Dollar rate plus, in each case,
applicable margins of (i) in the case of tranche A term loans and revolving
loans (x) 2.50% for Euro-Dollar rate loans and (y) 1.50% for base rate loans and
(ii) in the case of tranche B term loans (x) 2.75% for Euro-Dollar rate loans
and (y) 1.75% for base rate loans. After the occurrence and during the
continuation of an event of default under the Credit Agreement, interest shall
accrue at the rate for loans bearing interest at the rate determined by
reference to the base rate plus an additional 2.00% per annum and shall be
payable on demand.
PCW will pay commitment fees in an amount equal to 0.50% per annum on the
daily average unused portion of the revolving credit facility. Such fees shall
be payable quarterly in arrears and upon the maturity or termination of the
revolving credit facility.
Beginning six months after the Closing Date, the applicable margins for the
tranche A term loans and revolving loans will be determined based on the ratio
of consolidated total debt to consolidated EBITDA of PCW and its subsidiaries
(as defined in the New Credit Facility).
PCW will pay, in respect of each letter of credit, a fee calculated on the
daily amount available to be drawn on the issued letter of credit at a rate per
annum equal to the applicable margin for Euro-Dollar rate loans under the
revolving credit facility, which shall be shared by all Lenders, and the greater
of $500 or an additional 0.25% per annum, which shall be retained by the Lender
issuing the letter of credit, which percentage shall be multiplied by the amount
available from time to time for drawing under such letter of credit.
41
<PAGE>
The New Credit Facility is subject to the following amortization schedule:
<TABLE>
<CAPTION>
REVOLVING
TRANCHE A TRANCHE B CREDIT
YEAR TERM LOANS TERM LOANS FACILITY
- ----------------------- ---------- ----------- ---------
<S> <C> <C> <C>
(%) (%) (%)
1 .................... 0.0 1.0 0.0
2 .................... 0.0 1.0 0.0
3 .................... 10.0 1.0 10.0
4 .................... 12.5 1.0 12.5
5 .................... 15.0 1.0 15.0
6 .................... 17.5 1.0 17.5
7 .................... 20.0 1.0 20.0
8 .................... 25.0 1.0 25.0
9 .................... -- 92.0 --
------- ------- -------
100.0 100.0 100.0
</TABLE>
The New Credit Facility is subject to mandatory prepayment: (i) with the
net after-tax cash proceeds of the sale or other disposition of any property or
assets of PCW or any of its subsidiaries in excess of $5 million per year,
subject to certain exceptions, (ii) with 50% of the net cash proceeds received
from the issuance of equity securities of Holdings or any of its subsidiaries,
(iii) with the net cash proceeds received from certain issuances of debt
securities by Holdings or any of its subsidiaries, (iv) with 50% of excess cash
flow (as defined in the New Credit Facility) for each fiscal year, payable
within 90 days after the end of the applicable fiscal year. All mandatory
prepayment amounts shall be applied first to the prepayment of the term loan
facility and thereafter to the prepayment of the revolving credit facility.
Holdings and all existing or future subsidiaries of PCW are guarantors of
the New Credit Facility. PCW's obligations under the New Credit Facility are
secured by: (i) all existing and after-acquired personal property of PCW and the
subsidiary guarantors, including a pledge of all of the stock of all existing or
future subsidiaries of PCW, (ii) first-priority perfected liens on all existing
and after-acquired real property fee and leasehold interests of PCW and the
subsidiary guarantors, subject to customary permitted liens (as defined in the
New Credit Facility), (iii) a pledge by Holdings of the stock of PCW and (iv) a
negative pledge on all assets of PCW and its subsidiaries, subject to
exceptions.
The New Credit Facility contains customary covenants and restrictions on
PCW's ability to engage in certain activities, including, but not limited to:
(i) limitations on other indebtedness, liens, investments and guarantees, (ii)
restrictions on dividends and redemptions and payments on subordinated debt and
(iii) restrictions on mergers and acquisitions, sales of assets and leases.
The New Credit Facility also contains financial covenants requiring PCW to
maintain a minimum total debt service coverage test, a minimum EBITDA test, a
minimum interest coverage test, a minimum fixed charge coverage test and a
maximum leverage test.
Borrowing under the New Credit Facility is subject to significant
conditions, including compliance with certain financial ratios and the absence
of any material adverse change. See "Risk Factors--Leverage, Liquidity and
Ability to Meet Required Debt Service."
42
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
----------------------
Price Communications Cellular Holdings, Inc. and Subsidiaries Consolidated
Financial Statements are set forth on the following pages of this Part II.
INDEX TO FINANCIAL STATEMENTS
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Auditors' Reports F-1
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for Years ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for Years ended
December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Shareholders' Equity for Years
ended December 31, 1997, 1996 and 1995 F-8
Notes to Consolidated Financial Statements F-9
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
------------------------------
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE COMPANY
-----------------------
Omitted pursuant to Instruction I 1(a) and (b).
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Omitted pursuant to Instruction I 1(a) and (b).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
----------------------------------------
Omitted pursuant to Instruction I 1(a) and (b).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Omitted pursuant to Instruction I 1(a) and (b).
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:
Auditors' Reports
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations for the Years ended December 31,
1997, 1996, and 1995.
Consolidated Statements of Shareholders' Equity for the Years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
I. Supplemental Schedule of Noncash Investing and Financing Activities.
II. Supplemental Disclosure of Cash Flow Information.
(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.
44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Price Communications Cellular Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Price
Communications Cellular Holdings, Inc. (a Delaware corporation,) and
subsidiaries as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the period May 29, 1997
through December 31, 1997 (post acquisition basis). We have also audited the
accompanying consolidated statements of operations, stockholder's equity, and
cash flows of Price Communications Wireless, Inc. (a Delaware Corporation,
formerly Palmer Wireless, Inc.) and subsidiaries for the nine month period ended
September 30, 1997 (pre-acquisition basis). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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
Cellular Holdings, Inc. and subsidiaries as of December 31, 1997 and the results
of their operations and their cash flows for the periods May 29, 1997 to
December 31, 1997 (post-acquisition basis) and the results of operations and
cash flows of Price Communications Wireless, Inc. and subsidiaries for the
period January 1, 1997 to September 30, 1997 (pre-acquisition basis) in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
New York, New York
March 17, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders of
Price Communications Cellular Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Price
Communications Cellular Holdings, Inc. and subsidiaries (a holding company whose
sole investment represents Price Communications Wireless, Inc., formerly Palmer
Wireless, Inc.) as of December 31, 1996, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 1996. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Price
Communications Cellular Holdings, Inc. and subsidiaries as of December 31, 1996
and the results of their operations and their cash flows for each of the years
in the two-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Des Moines, Iowa
January 30, 1997
F-2
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Note 1)
($ in thousands)
<TABLE>
<CAPTION>
Predecessor Company
December 31, December 31,
1996 1997
------------ -----------
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,698 $ 27,926
Trade accounts receivable, net of allowance for doubtful
accounts of $1,791 in 1996 and $818 in 1997 18,784 15,940
Receivable from other cellular carriers 1,706 3,902
Prepaid expenses and deposits 2,313 902
Inventory 5,106 1,280
Deferred income taxes 830 5,402
---------- ----------
Total current assets 30,437 55,352
Property and equipment:
Land and improvements 5,238 6,438
Buildings and improvements 7,685 8,561
Equipment, communication systems, and furnishings 166,735 140,381
---------- ----------
179,658 155,380
Less accumulated depreciation and amortization 47,220 4,239
---------- ----------
Net property and equipment 132,438 151,141
Licenses and goodwill, net of accumulated amortization of
$30,188 in 1996 and $6,016 in 1997 375,808 918,488
Other intangible assets and other assets, at cost less accumulated
amortization of $7,311 in 1996 and $818 in 1997 11,259 19,498
---------- ----------
Total assets $ 549,942 $1,144,479
========== ==========
</TABLE>
F-3
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Cont'd)
($ in thousands)
<TABLE>
<CAPTION>
Predecessor Company
December 31, December 31,
1996 1997
--------------- -------------
Liabilities and Equity
----------------------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt $ 5,296 $ 2,812
Notes payable 1,366 --
Payable to Price Communications Corporation -- 2,328
Accounts payable 10,394 13,059
Accrued interest payable 2,341 11,361
Accrued salaries and employee benefits 2,432 2,324
Other accrued liabilities 3,626 16,031
Deferred revenue 3,929 3,755
Customer deposits 757 602
----------- -----------
Total current liabilities 30,141 52,272
Long-term debt, excluding current installments 337,000 690,300
Accrued income taxes - long term -- 50,491
Deferred income taxes 11,500 308,901
Minority interests 6,371 7,352
Commitments and contingencies -- --
Stockholders' equity
Preferred stock par value $.01 per share; 10,000,000 shares
authorized; none issued -- --
Class A Common Stock par value $.01 per share; 73,000,000
shares authorized in 1996; 11,119,681 shares issued in 1996
including shares in treasury and Class B Common Stock
par value $.01 per share; 18,000,000 shares authorized in 1996;
17,293,578 shares issued in 1996 284 --
Class A Common Stock par value $.01 per share; 3,000 shares
authorized in 1997; 100 shares issued in 1997 -- --
Additional paid-in capital 166,975 44,015
Retained earnings (accumulated deficit) 6,535 (8,852)
----------- -----------
173,794 35,163
Less Class A Common stock in treasury at cost -
600,000 shares in 1996 8,864 --
----------- -----------
Total stockholders' equity 164,930 35,163
----------- -----------
Total liabilities and stockholders' equity $ 549,942 $ 1,144,479
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands)
<TABLE>
<CAPTION>
Predecessor Company
------------------------------------------------ ---------------------
For the year ended For the nine For the period
December 31, months ended May 29, 1997 through
--------------------------
1995 1996 September 30, 1997 December 31, 1997 (a)
-------------- --------------------------------- ---------------------
<S> <C> <C> <C> <C>
Revenue:
Service $ 96,686 $ 151,119 $ 134,123 $ 41,365
Equipment sales and installation 8,220 8,624 7,613 2,348
--------- --------- --------- ---------
Total revenue 104,906 159,743 141,736 43,713
--------- --------- --------- ---------
Operating expenses:
Engineering, technical and other direct 18,184 28,717 23,301 5,978
Cost of equipment 14,146 17,944 16,112 5,259
Selling, general and administrative 30,990 46,892 41,014 12,805
Depreciation and amortization 15,004 25,013 25,498 11,055
--------- --------- --------- ---------
Total operating expenses 78,324 118,566 105,925 35,097
Operating income 26,582 41,177 35,811 8,616
--------- --------- --------- ---------
Other income (expense):
Interest income 211 62 30 2,195
Interest expense (21,424) (31,524) (24,497) (24,393)
--------- --------- --------- ---------
Interest expense, net (21,213) (31,462) (24,467) (22,198)
Other (expense) income, net (687) (429) 208 15
--------- --------- --------- ---------
Total other expense (21,900) (31,891) (24,259) (22,183)
--------- --------- --------- ---------
Income (loss) before minority interest
share of income and income taxes 4,682 9,286 11,552 (13,567)
Minority interest share of income 1,078 1,880 1,310 414
--------- --------- --------- ---------
Income (loss) before
income tax expense (benefit) 3,604 7,406 10,242 (13,981)
Income tax expense (benefit) 2,650 2,724 4,153 (5,129)
--------- --------- --------- ---------
Net income (loss) $ 954 $ 4,682 $ 6,089 $ (8,852)
========= ========= ========= =========
</TABLE>
(a) Includes results of operations only for the period October 1, 1997 through
December 31, 1997 (see Note 1).
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
Predecessor Company
---------------------------------- -------------------
For the nine For the period
For the year months ended May 29, 1997 through
ended September 30, December 31,
December 31, 1997 1997
--------------------- ------------- --------------------
1995 1996
----------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 954 $ 4,682 $ 6,089 $ (8,852)
--------- --------- --------- ----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 15,004 25,013 25,498 11,055
Minority interest share of income 1,078 1,880 1,310 414
Deferred income taxes 2,650 1,855 3,939 (2,454)
Interest deferred and added to long-term debt 607 355 -- 4,400
Payment of deferred interest -- (1,080) (1,514) --
Changes in current assets and liabilities:
(Increase) decrease in trade accounts receivable (2,741) (1,561) 473 124
Decrease (increase) in inventory 4,076 (2,595) 2,800 458
Increase (decrease) in accounts payable 2,623 (841) (1,390) 3,598
(Decrease) increase in accrued interest payable (14) (167) (374) 9,394
Increase (decrease) in accrued salaries and employee benefits 241 165 251 (341)
Increase (decrease) in other accrued liabilities 583 (507) 2,049 (4,529)
Increase (decrease) in deferred revenue 658 912 4 (1,046)
(Decrease) increase in customer deposits (53) 134 (94) 15
(Decrease) increase in accrued income tax-long-term -- -- -- (2,675)
Other 1,994 1,885 (250) 1,752
---------- --------- --------- ---------
Total adjustments 26,706 25,448 32,702 20,165
---------- --------- --------- ---------
Net cash provided by operating activities 27,660 30,130 38,791 11,313
--------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures (36,564) (41,445) (40,757) (14,499)
Increase in other intangible assets and other assets (310) (2,180) (778) --
Proceeds from sales of property and equipment 38 5 201 --
Acquisition of Predecessor net assets -- -- -- (497,856)
Purchase of cellular systems (158,397) (67,588) (31,469) --
Proceeds from sales of cellular systems -- -- -- 193,799
Collection of purchase price adjustment -- 2,452 -- --
Purchases of minority interests (1,543) (1,854) (956) (794)
Distributions to minority interests -- -- -- (1,680)
--------- --------- --------- ---------
Net cash used in investing activities (196,776) (110,610) (73,759) (321,030)
--------- --------- --------- ---------
Cash flows from financing activities:
Advance from Price Communications Corporation -- -- -- 2,328
Payment on advances from Palmer Communications Incorporated (1,650) -- -- --
Increase (decrease) in short term notes payable -- 1,366 (1,366) --
Repayment of long-term debt (65,125) (108,319) (3,782) (385,000)
Proceeds from long-term debt 171,000 100,000 41,000 695,712
Payment of debt issuance costs (4,803) -- -- (19,412)
Public offering proceeds, net 71,144 95,000 -- --
Issuance of common stock -- -- -- 44,015
Proceeds from stock options exercised 285 95 999 --
Payment of deferred offering costs (1,297) (826) -- --
Purchase of treasury stock -- (8,864) -- --
Proceeds from sales under stock purchase plans -- 290 -- --
---------- ---------- ---------- ----------
Net cash provided by financing activities 169,554 78,742 36,851 337,643
---------- ---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents 438 (1,738) 1,883 27,926
Cash and cash equivalents at the beginning of period 2,998 3,436 1,698 --
---------- ---------- ---------- ----------
Cash and cash equivalents at the end of period $ 3,436 $ 1,698 $ 3,581 $ 27,926
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows - (Continued)
($ in thousands)
Supplemental Schedule of Noncash Investing and Financing Activities
During 1995, the Predecessor committed to purchase certain minority interests in
1996. This commitment totaling $451 was accrued in 1995 and paid in 1996.
During 1996, the Predecessor increased the purchase obligations related to the
final purchase price adjustment for the controlling interest in a non-wireline
cellular telephone system purchased in 1991. This increase amounted to $899 and
resulted in an increase in licenses.
Acquisitions of non-wireline cellular telephone systems in 1995, 1996 and 1997:
<TABLE>
<CAPTION>
Predecessor
-------------------------------------------------------
For the year ended For the nine
December 31, months ended
--------------------------------
1995 1996 September 30, 1997
--------------- --------------- ---------------------
<S> <C> <C> <C>
Cash payment $ 158,397 $67,588 $31,469
========= ======= =======
Allocated to:
Fixed assets $ 22,846 $ 5,678 $ 3,197
Licenses and goodwill 136,940 61,433 27,738
Deferred income taxes (6,165) -- --
Current assets and liabilities, net 4,776 477 534
========= ======= =======
$ 158,397 $67,588 $31,469
========= ======= =======
<CAPTION>
Supplemental disclosure of cash flow information
Predecessor Company
--------------------------------------------------- --------------------------
For the year ended
December 31, For the nine For the period
--------------------------- months ended May 29, 1997 through
1995 1996 September 30, 1997 December 31, 1997
---------- --------------- ---------------------- --------------------------
<S> <C> <C> <C> <C>
Income taxes paid (received), net $ -- $ 1,591 $ (736) $ (40)
=========== ======= ======== =======
Interest paid $ 18,435 $29,733 $ 25,102 $ 9,924
=========== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
($ in thousands)
<TABLE>
<CAPTION>
Predecessor
-----------
Common Stock Common Stock Additional
Class A Class B paid-in
------------------------ ------------------------ capital
Shares Amount Shares Amount
------------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994 706,422 $ 7 17,293,578 $ 173 $ 4,902
Partnership loss before
business combination -- -- -- -- (1,066)
Public offering, net of issuance
costs of $8,114 5,369,350 54 -- -- 68,345
Exercise of stock options 20,000 -- -- -- 285
Net income -- -- -- -- --
----------- --------- ----------- -------- ------------
Balances at December 31, 1995 6,095,772 61 17,293,578 173 $ 72,466
Public offering, net of issuance
costs of $5,826 5,000,000 50 -- -- 94,124
Exercise of stock options 6,666 -- -- -- 95
Employee and non-employee director
stock purchase plans 17,243 -- -- -- 290
Treasury shares purchased -- -- -- -- --
Net income -- -- -- -- --
----------- -------- ---------- --------- -----------
Balances at December 31, 1996 11,119,681 111 17,293,578 173 166,975
Exercise of stock options 70,000 1 -- -- 998
Net income -- -- -- -- --
---------- -------- ---------- --------- -----------
Balances at September 30, 1997 11,189,681 $ 112 17,293,578 $ 173 $ 167,973
========== ======== ========== ========= ==========
<CAPTION>
Treasury stock Total
Retained ---------------------- stockholders'
earnings Shares Amount equity
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 $ (167) -- $ -- $ 4,915
Partnership loss before
business combination -- -- -- (1,066)
Public offering, net of issuance
costs of $8,114 -- -- -- 68,399
Exercise of stock options -- -- -- 285
Net income 2,020 -- -- 2,020
--------- ---------- ---------- ----------
Balances at December 31, 1995 1,853 -- -- 74,553
Public offering, net of issuance
costs of $5,826 -- -- -- 94,174
Exercise of stock options -- -- -- 95
Employee and non-employee director
stock purchase plans -- -- -- 290
Treasury shares purchased -- 600,000 (8,864) (8,864)
Net income 4,682 -- -- 4,682
---------- --------- --------- ---------
Balances at December 31, 1996 6,535 600,000 (8,864) 164,930
Exercise of stock options -- -- -- 999
Net income 6,089 -- -- 6,089
---------- --------- --------- ----------
Balances at September 30, 1997 $ 12,624 600,000 $ (8,864) $ 172,018
========== ========= ========= ==========
<CAPTION>
Company
-------------------------
Common Stock Additional Total
Class A paid-in Accumulated stockholders'
-------------------------
Shares Amount capital deficit equity
------------ ----------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balances at May 29, 1997 - $ - $ - $ - $ -
Capital contribution 100 - 44,015 - 44,015
Net loss - - - (8,852) (8,852)
------------ ----------- ------------ ---------------- ----------------
Balances at December 31, 1997 100 $ - $ 44,015 $ (8,852) $ 35,163
============ =========== ============ ================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)
(1) Summary of Significant Accounting Policies
Organization and Acquisition
Price Communications Cellular Holdings, Inc. ("Holdings" or the
"Company"), a wholly-owned subsidiary of Price Communications Cellular,
Inc., a wholly-owned subsidiary of Price Communications Corporation
("PCC"), was incorporated on May 29, 1997 in connection with the purchase
of Palmer Wireless, Inc. and subsidiaries ("Palmer" or the "Predecessor").
In May, 1997, PCC, Price Communications Wireless, Inc. ("PCW"), a wholly
owned subsidiary of Holdings 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"). In October, 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 direct stock purchase plans for an aggregate price of
approximately $486,400. In addition, as a result of the Merger, PCW
assumed all outstanding indebtedness of Palmer of approximately $378,000 .
Therefore, the aggregate purchase price for Palmer (including transaction
fees and expenses) was approximately $880,000. 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 $166,000. 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, 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 of
substantially all of the assets used in the operation of the non-wireline
cellular telephone system serving the Georgia-1-Whitfield Rural Service
Area ("Georgia-1"), 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 for $24,200. In January, 1998 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 $175,000 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 $325,000 and revolving loan borrowings of
$200,000. In October, 1997, PCW borrowed all term loans available
thereunder and approximately $120,000 of revolving loans. DLJ Capital
Funding, Inc. provided and syndicated the New Credit Facility. See Notes 5
(a) and 5(b).
The remaining acquisition price of Palmer was funded through a $44,015
equity contribution of PCC and $75,712 of borrowings of Holdings (See Note
5(c)).
F-9
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(1) Summary of Significant Accounting Policies - (Continued)
Basis of Presentation
For financial reporting purposes, PCW revalued its assets and liabilities
as of October 1, 1997 to reflect the price paid by PCC to acquire 100% of
its Common Stock, a process generally referred to as "push down" the
accounting. The consolidated financial statements as of December 31, 1997
and for the period May 29, 1997 through December 31, 1997 reflect a
preliminary allocation of the purchase price to the assets acquired and
liabilities assumed. Additional purchase liabilities recorded include
approximately $6,464 for severance and related costs and $4,051 for costs
associated with the shutdown of certain acquired facilities. See Note 3,
Other Accrued Liabilities, for amounts outstanding as of December 31,
1997. The preliminary allocation of the purchase price resulted in
licenses of approximately $924,504 on the balance sheet, which are being
amortized on a straight-line basis over a period of 40 years.
The consolidated financial statements through September 30, 1997 reflect
the historical cost of its assets and liabilities and results of
operations and are referred to as the "Predecessor" consolidated financial
statements. Accordingly, the accompanying financial statements of the
Predecessor and the Company are not comparable in all material respects
since those financial statements report financial position, results of
operations, and cash flows of these two separate entities.
Pro Forma Information
The following unaudited pro forma condensed consolidated financial
information was prepared assuming (i) the Predecessor was acquired on
January 1, 1996, (ii) the acquisitions of the licenses had occurred on
January 1, 1996 (See Note 4), and (iii) and the Ft. Myers Sale and Georgia
Sale occurred on January 1, 1996.
Proforma information is presented for comparative purposes only and does
not purport to be indicative of the results which would have been achieved
had this acquisition occurred as of January 1, 1996, nor does it purport
to be indicative of results that may be achieved in the future.
Unaudited
Year Ended December 31
----------------------------------
1996 1997
---- ----
Total Revenue $145,643 $161,468
========= ========
Loss Before Income Taxes $(54,529) $(51,532)
========= =========
Net Loss $(48,895) $(43,911)
========= =========
F-10
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(1) Summary of Significant Accounting Policies - (Continued)
Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries after the elimination of significant
intercompany accounts and transactions.
The Predecessor 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.
On March 21, 1995 and April 18, 1995, the Predecessor issued 5,000,000 and
369,350 shares respectively, of Class A Common Stock in an initial public
offering (the "Offering") for net proceeds of $68,399. In connection with
the Offering, on March 21, 1995, the Predecessor issued 704,755 shares of
Class A Common Stock and 17,288,578 shares of Class B Common Stock in
exchange for 100 percent of the Partnership interests of Palmer Cellular
Partnership (the "Exchange"). The assets and liabilities received in the
Exchange were recorded at their historical cost to Palmer Cellular
Partnership and not revalued at fair value on the date of transfer. Since
the Exchange was between related parties it was accounted for in a manner
similar to a pooling of interests.
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
The Company has majority ownership in corporations and partnerships which
operate the non-wireline cellular telephone systems in eight Metropolitan
Statistical Areas ("MSA") in three states: Florida (one), 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 eight non-wireline cellular telephone systems in
Rural Service Areas in Georgia (seven) and Alabama (one).
The Predecessor had majority ownership in corporations and partnerships
which operated the non-wireline cellular telephone systems in nine MSA's
in three states: Florida (two), Georgia (five) and Alabama (two). The
Predecessor's ownership percentages in these entities ranged from
approximately 78 percent to 100 percent. The Predecessor owned directly
and operated eight non-wireline cellular telephone systems in RSA's in
Georgia (seven) 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.
F-11
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(1) Summary of Significant Accounting Policies - (Continued)
Cash and Cash Equivalents
For purposes of the statements of cash flows the Company and the
Predecessor consider 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. 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 (as determined by independent appraisers or
management). The excess of the total consideration over the amounts
assigned to identifiable assets is record 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, the Company continually
evaluates whether later events and circumstances have occurred that
indicate the remaining estimated useful life of licenses may 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 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.
F-12
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(1) Summary of Significant Accounting Policies - (Continued)
Income Taxes
The Company and the Predecessor account 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-13
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(1) Summary of Significant Accounting Policies - (Continued)
Stock Option Plans
Prior to January 1, 1996, the Predecessor 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, the Predecessor
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. The Predecessor elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS
No. 123.
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, trade accounts receivable, receivable from
other cellular carriers, notes payable, accounts payable and accrued
expenses, the carrying amount approximates the estimated fair value due to
the short-term nature of those instruments.
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 for long-term debt. Note 5 presents the fair value
for long-term debt and the related interest rate cap and swap agreements.
Fair value estimates are made as of a specific point in time, based upon
the relevant market information about the financial instruments. Because
no market exists for a majority of the financial instruments, fair value
estimates are based on judgments regarding current economic 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.
F-14
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(2) Trade Accounts Receivable
The Company and the Predecessor grant 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 the Predecessor's and the Company's allowance for doubtful
accounts for the years ended December 31, 1995, and 1996, the nine months
ended September 30, 1997 and the period from October 1, 1997 through
December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
Allowance at
Balance at Charged dates of Deductions,
beginning to acquisitions net of Balance at
of period expenses (dispositions) recoveries end of period
---------- -------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Predecessor
Year ended December 31, 1995 $ 1,567 $ 2,078 $ 432 $(2,197) $ 1,880
======= ======= ======= ======= =======
Predecessor
Year ended December 31, 1996 $ 1,880 $ 3,946 $ 1,270 $(5,305) $ 1,791
======= ======= ======= ======= =======
Predecessor
Nine months ended
September 30, 1997 $ 1,791 $ 3,614 $ 147 $(4,212) $ 1,340
------- ------- ------- ------- -------
Company
Period from May 29, 1997
through December 31, 1997 $ 1,340 $ 1,202 $ (206) $(1,518) $ 818
======= ======= ======= ======= =======
</TABLE>
(3) Other Accrued Liabilities
Other accrued liabilities at December 31, 1996 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Accrued telecommunications expenses $ 892 $ 2,176
Accrued local taxes 913 888
Accrued severance payments - 6,155
Accrued shutdown costs of certain facilities - 3,818
Miscellaneous accruals 1,821 2,994
------ ---------
$ 3,626 $ 16,031
======== =========
</TABLE>
F-15
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(4) Acquisitions and Purchase of Licenses
On December 1, 1995, the Predecessor 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, the Predecessor 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 the Predecessor'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.
On January 31, 1997, a majority-owned subsidiary of the Predecessor
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, $27,650
of the purchase price was allocated to licenses.
See Note 1 for presentation of pro forma information.
F-16
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(5) Notes Payable and Long-Term Debt
Long-term debt consists of the following:
Predecessor Company
----------- -------
December 31
----------------------------
1996 1997
---- ---
Credit agreement $337,000(d) $438,000(a)
11.75% Senior Subordinated Notes -- 175,000(b)
13.5% Senior Secured Discount Notes -- 80,112(c)
Purchase obligations 5,296(e) --
-------- --------
342,296 693,112
Less current installments 5,296 2,812
-------- --------
Long-term debt, excluding
current installments $337,000 $690,300
======== ========
(a) 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 $525,000. The Credit
Agreement includes a $325,000 term loan facility and a $200,000 revolving
credit facility. The term loan facility is comprised of tranche A loans of
up to $100,000, which will mature on September 30, 2005, and tranche B
term loans of up to $225,000, which will mature on September 30, 2006. The
revolving credit facility will terminate on September 30, 2006. The Credit
Agreement bears interest at the alternate base rate, as defined in the
Credit Agreement, as the reserve adjusted Euro-Dollar rate plus, in each
case, applicable margins of (i) in the case of tranche A term loans and
revolving loans (x) 2.5% for Euro-Dollar rate loans and (y) 1.5% for base
rate loans and (ii) in the case of tranche B term loans (x) 2.75 for
Euro-Dollar rate loans and (y) 1.75% for base rate loans. As of December
31, 1997, the Credit Agreement was bearing interest at 8.5% for the
tranche A loan and revolving credit facility and 8.7% for the tranche B
loan. The Credit Agreement contains restrictions on the subsidiary's
ability to engage in certain activities, including limitations on
incurring additional indebtedness, liens and investments, payment of
dividends and the sale of assets. Holdings is a guarantor of the Credit
Agreement. As of December 31, 1997 $87,000 of the revolving credit
facility was unused and available for borrowings.
(b) In July 1997, PCW issued $175,000 of 11.75% Senior Subordinated Notes
("11.75% Notes") due July 15, 2007 with interest payable semi-annually
commencing January 15, 1998. The 11.75% Notes contain covenants that
restrict the payment of dividends, incurrence of debt and sale of assets.
The carrying value of the 11.75% Notes approximates fair value as of
December 31, 1997.
F-17
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(5) Notes Payable and Long-Term Debt - (Continued)
(c) In August, 1997, Holdings issued 153,400 units, consisting of Notes
and warrants of PCC (the "Warrants"), in exchange for $80,000. The Notes
accrete at a rate of 13.5%, compounded semi-annually, to an aggregate
principal amount of approximately $153.4 million by August 1, 2002. Cash
interest will not commence to accrue on the Notes prior to August 2, 2002.
Commencing on February 1, 2003, cash interest on the Notes will be payable
at a rate of 13.5% per annum, payable semi-annually. The Notes will be
redeemable at the option of Holdings, in whole or in part, at any time
after August 1, 1998 in cash at the redemption price as defined, plus
accrued and unpaid interest, if any, thereon to the redemption date;
provided that the trading price of the common stock of PCC shall equal or
exceed certain levels. The Notes mature on August 1, 2007 and contain
covenants that restrict payments of dividends, incurrence of debt and sale
of assets. The Warrants have been assigned a value of $4,288, which amount
is accounted for as original issue discount, resulting in an effective
interest rate of approximately 14.13% per annum. The fair value of the
Notes was estimated as $80,112 as of December 31, 1997.
(d) On December 1, 1995, the Predecessor entered into an amended and
restated credit agreement with 21 banks which provided for a revolving
line of credit of up to $500,000, subject to certain limitations through
June 30, 2004. Interest was payable at variable rates and under various
interest rate options. The interest rate at December 31, 1996 ranged from
7.42 to 8.88 percent before the affect of the interest rate swap and cap
agreements outlined below. The credit agreement also provided for a
commitment fee of .5 percent per year on any unused amounts of the credit
agreement. Amounts outstanding were secured by the assets of the
Predecessor.
The credit agreement provided for various compliance covenants and
restrictions, including items related to mergers or acquisition
transactions, the declaration or payment of dividends or other payments to
stockholders, capital expenditures and maintenance of certain financial
ratios. At December 31, 1996 the Predecessor was in compliance with all
but one financial ratio covenant. This covenant was based on operating
results for the year ended December 31, 1996. The Predecessor obtained a
waiver of the noncompliance with this 1996 financial ratio covenant. In
connection with the acquisition of the Predecessor (see Note 1), the
Predecessor credit agreement was refinanced.
(e) In connection with the purchase of controlling interest in a
non-wireline cellular telephone system in 1991, the Predecessor incurred
certain purchase obligations. The obligations were retired in July 1996
and January 1997.
F-18
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(5) Notes Payable and Long-Term Debt - (Continued)
PCW has entered into interest rate swap and cap agreements to reduce the
impact of changes in interest rates on its floating rate debt and thus
were entered into for purposes other than trading. At December 31, 1997,
PCW had outstanding seven interest rate swap agreements and one interest
rate cap agreement having a total notional value of $370,000. These
interest rate swap and cap agreements effectively change PCW's interest
rate exposure on a quarterly basis on $370,000 of outstanding debt. The
cap and swap agreements are summarized as follows:
Maximum Notional
Type of agreement Maturity LIBOR Value
----------------- -------- ------ -----
Pay Later Cap (1) Jan. 12, 1998 8.5% $ 20,000
Participating Swap (2) Aug. 10, 1998 5.98% 15,000
Swap Aug. 6, 1999 6.36% 25,000
Swap Oct. 21, 1999 5.92% 185,000
Swap Aug. 7, 2000 6.09% 50,000
Swap Aug. 21, 2000 6.11% 25,000
Swap Oct. 10, 2000 6.10% 25,000
Swap Oct. 11, 2000 5.99% 25,000
--------
$370,000
========
(1) When the three-month LIBOR rate is 8.5 percent or higher PCW receives
a quarterly payment of $98.
(2) When the six-month LIBOR is less than 5.98 percent PCW participates in
45 percent of the difference.
The market value of the swap and cap agreements above, which has not been
reflected in the consolidated financial statements as of December 31,
1997, is a loss of $1,076.
PCW is exposed to interest rate risk in the event of nonperformance by the
other party to the interest rate swap and cap agreements. However, PCW
does not anticipate nonperformance by any of the banks.
The aggregate maturities of long-term debt are as follows:
December 31, Amount
------------ ------
1998 $ 2,812
1999 4,750
2000 12,875
2001 15,375
2002 17,875
Thereafter 639,425
---------
$ 693,112
=========
F-19
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(6) Income Taxes
Components of income tax expense (benefit) consist of the following:
Federal State Total
------- ----- -----
Predecessor:
Year ended December 31,1995:
Current $ -- $ -- $ --
Deferred 2,550 100 2,650
------- ------- -------
$ 2,550 $ 100 $ 2,650
======= ======= =======
Predecessor:
Year ended December 31,1996:
Current $ -- $ 869 $ 869
Deferred 1,795 60 1,855
------- ------- -------
$ 1,795 $ 929 $ 2,724
======= ======= =======
Predecessor:
Period ended September 30, 1997
Current $ -- $ 214 $ 214
Deferred 3,553 386 3,939
------- ------- -------
$ 3,553 $ 600 $ 4,153
======= ======= =======
Company:
Period ended December 31, 1997
Current $(2,244) $ (432) $(2,676)
Deferred (2,116) (337) (2,453)
------- ------- -------
$(4,360) $ (769) $(5,129)
------- ======= =======
The consolidated effective tax rate differs from the statutory United
States federal tax rate for the following reasons and by the following
percentages:
<TABLE>
<CAPTION>
Predecessor Company
--------------------------------------- -----------
Year ended Nine months ended Period ended
December 31, September 30, December 31,
1995 1996 1997 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory United States federal tax rate 34.0% 34.0% 34.0% (34.0)%
Partnership loss prior to corporate status 10.1 -- -- --
License amortization not deductible for tax 7.7 32.5 -- --
Net operating loss carryforwards (59.0) (42.8) -- --
State taxes -- 8.3 6.0 (3.6)
Recognition of deferred taxes related to the difference
between financial statement and income tax bases of certain
assets and liabilities in connection with the Exchange 73.5 -- -- --
Non deductible interest expense -- -- -- 1.1
Other 7.2 4.8 1.0 (0.2)
---- ---- ---- ----
Consolidated effective tax rate 73.5% 36.8% 41.0% (36.7)%
==== ==== ==== ====
</TABLE>
F-20
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(6) INCOME TAXES - (CONTINUED)
In 1997, the Predecessor recorded additional deferred tax
liability and a corresponding increase in licenses for timing differences
attributable to pre-1997 acquisitions. The components of the deferred income tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
Predecessor Company
----------- -------
1996 1997
----------- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 609 $ 327
Inventory reserve -- 144
Deferred revenue -- 400
Nondeductible accruals 221 6.495
Net operating loss carryforwards 4,100 3,560
Valuation allowance -- (3,560)
--------- ---------
Total deferred tax assets $ 4,930 $ $7,336
========= =========
Deferred tax liabilities:
Accumulated depreciation (7,415) (8,559)
Licenses (8,185) (302,306)
--------- ---------
Total deferred tax liabilities (15,600) (310,865)
--------- ---------
Deferred tax liability, net $ (10,670) $(303,499)
========= =========
</TABLE>
The net operating loss carryforwards totaled approximately
$8,900 at December 31, 1997 and expire in amounts ranging from approximately
$300 to $1,100 through 2012. For these carryforwards of approximately $12,350
utilization of these carryforwards is limited to the subsidiary that generated
the carryforwards, unless the Company utilizes alternative tax planning
strategies.
(7) Common Stock and Stock Plans
During 1994, the Predecessor 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 the Predecessor; (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 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.
F-21
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(7) Common Stock and Stock Plans
During 1994, the Predecessor 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 the Predecessor; (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 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.
The Predecessor 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. The
Predecessor 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 the Predecessor. 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.
F-22
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(7) Common Stock and Stock Plans - (Continued)
The Predecessor 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 the Predecessor
determined compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, the Predecessor's net income (loss)
and net income (loss) per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31, 1995 Year ended December 31, 1996 Nine months ended September 30, 1997
---------------------------- ---------------------------- ------------------------------------
<S> <C> <C> <C>
Net income-as reported $ 954 $ 4,682 $ 6,089
Net (loss) income-pro forma $ (777) $ 2,850 $ 4,753
</TABLE>
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:
<TABLE>
<CAPTION>
($'s not in thousands)
Number Weighted Average
Of Shares Exercise Price
--------- -----------------------
<S> <C> <C>
Balance December 31, 1994 -- --
Granted 692,500 $ 14.25
Exercised (20,000) 14.25
-------
Balance December 31, 1995 672,500 14.25
Granted 72,500 17.25
Exercised (6,666) 14.25
-------
Balance December 31, 1996 738,334 14.54
Exercised (70,000) 14.25
-------
Balance September 30, 1997 668,334 14.60
=======
</TABLE>
At December 31, 1996, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $14.25 - $17.25 ($'s
not in thousands) and 8.3 years, respectively.
At December 31, 1996, the number of options exercisable was 250,000, and
the weighted average exercise price of those options was $14.34 ($'s not
in thousands).
In connection with the acquisition of Palmer, the Company retired all of
the options of Palmer that were outstanding.
F-23
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(7) Common Stock and Stock Plans - (Continued)
The Predecessor 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 the Predecessor 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 non-employee
directors of the Predecessor. 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.
(8) Related Party Transactions
On January 1, 1997 the Predecessor 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, the Predecessor 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 $492, $534
and $88 for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1997, respectively, and are include as a reduction of
selling, general and administrative expenses.
Concurrently with the Offering and the Exchange, the Predecessor 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 $84,
$120 and $97 for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1997, respectively, and are 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. The Predecessor participated in this plan and was allocated
401(k) retirement and matching expense of $493, $696 and $544 for the
years ended December 31, 1995, and 1996 and the nine months ended
September 30, 1997, respectively.
F-24
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(9) Commitments and Contingencies
Leases
PCW occupies certain buildings and uses certain tower sites, cell sites
and equipment under noncancelable operating leases which expire through
2013.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1997 are as follows:
Year ending December 31:
1998 $ 2,950
1999 2,535
2000 1,981
2001 1,305
2002 843
Later years through 2013 1,491
---------
Total minimum lease payments $ 11,105
=========
Rental expense for the Predecessor was $2,487, $3,551, and $3,123 for the
years ended December 31, 1995, 1996 and the nine months ended September
30, 1997, respectively of which $269 and $278 was paid to related parties
for 1995 and 1996, respectively. Rental expense for the Company was $806
for the period from May 29, 1997 to December 31, 1997.
Contingencies
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's consolidated financial statements.
F-25
<PAGE>
PRICE COMMUNICATIONS CELLULAR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands)
(10) Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Predecessor
-----------
First Second Third Fourth
Year Ended December 31, 1996 Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Total Revenue $ 36,950(a) $ 40,031(a) $ 41,171(a) $ 41,591 $159,743
======== ======== ======== ======== ========
Operating Income $ 8,514 $ 11,281 $ 11,977 $ 9,405 $ 41,177
======== ======== ======== ======== ========
Net Income (Loss) $ 76 $ 1,684 $ 2,976 $ (54) $ 4,682
======== ======== ======== ======== ========
<CAPTION>
Predecessor Company
----------- -------
For the period
May 29, 1997
First Second Third through December
Year Ended December 31, 1997 Quarter Quarter Quarter 31, 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Total Revenue $ 44,683 $ 48,545 $ 48,508 $ 43,713
======== ======== ======== ========
Operating Income $ 9,805 $ 13,022 $ 12,984 $ 8,616
======== ======== ======== ========
Net Income (Loss) $ 1,177 $ 2,523 $ 2,389 $ (8,852)
======== ======== ======== ========
</TABLE>
(a) Certain reclassifications were made to conform to the fourth quarter
presentation.
(b) The decrease in revenue and operating income in the fourth quarter is
a result of customer acquisition costs, including advertising, commissions
and phone discounts, related to Holiday sales (consistent with prior
years), the Fort Myers Sale, and amortization of the additional license
recorded in the merger. The net loss is due to these reasons as well as
the interest expense on debt incurred to fund the Acquisition (see Note
1).
F-26
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 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 CELLULAR
HOLDINGS, INC.
By: /s/ Robert Price
----------------------------------
ROBERT PRICE
DIRECTOR, PRESIDENT AND TREASURER
Dated: March 31, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Robert Price Director, March 31, 1998
- ------------------ President and Treasurer
ROBERT PRICE (Principal Executive
Officer, Financial Officer
and Accounting Officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- -------- --------------------------------------------------------------------
2.1 The Merger Agreement, incorporated by reference to Registration
Statement on Form S-4 of Price Communications Wireless, Inc. (File
No. 333-36253)
3.1 Certificate of Incorporation of Holdings, as amended, incorporated by
reference to Registration Statement on Form S-4 of the Company (File
No. 333-41227)
3.2 By-laws of Holdings, incorporated by reference to Registration
Statement on Form S-4 of the Company (File No. 333-41227)
4.1 Indenture to 13 1/2% Senior Secured Discount Notes due 2007 between
Holdings, the Guarantor and Bank of Montreal Trust Company, as
Trustee (including form of Note), incorporated by reference to
Registration Statement on Form S-4 of the Company (File No. 333-
41227)
4.2 Guarantee (included in Exhibit 4.1)
10.1 Credit Agreement dated as of September 30, 1997 among Holdings,
PCW, the lenders listed therein, DLJ Capital Funding, Inc., as
syndication agent and Bank of Montreal, Chicago branch, as
administrative agent, incorporated by reference to Registration
Statement on Form S-4 of Price Communications Wireless, Inc. (File
No. 333-36253)
10.2 Fort Myers Sale Agreement, incorporated by reference to Registration
Statement on Form S-4 of Price Communications Wireless, Inc. (File
No. 333-36253)
10.3 Georgia Sale Agreement, incorporated by reference to Registration
Statement on Form S-4 of Price Communications Wireless, Inc. (File
No. 333-36253)
10.4 Ryan Agreement, incorporated by reference to Registration Statement
on Form S-4 of Price Communications Wireless, Inc. (File No. 333-
36253)
10.5 Wisehart Agreement, incorporated by reference to Registration
Statement on Form S-4 of Price Communications Wireless, Inc. (File
No. 333-36253)
E-1
<PAGE>
EXHIBIT
NO. DESCRIPTION
- -------- ----------------------------------------------------------------------
10.6 Meehan Agreement, incorporated by reference to Registration Statement
on Form S-4 of Price Communications Wireless, Inc. (File No. 333-
36253)
E-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAY-29-1997
<PERIOD-END> DEC-31-1997
<CASH> 27,926
<SECURITIES> 0
<RECEIVABLES> 16,758
<ALLOWANCES> (818)
<INVENTORY> 1,280
<CURRENT-ASSETS> 55,352
<PP&E> 155,380
<DEPRECIATION> (4,239)
<TOTAL-ASSETS> 1,144,479
<CURRENT-LIABILITIES> 52,272
<BONDS> 690,300
0
0
<COMMON> 0
<OTHER-SE> 35
<TOTAL-LIABILITY-AND-EQUITY> 1,144,479
<SALES> 2,348
<TOTAL-REVENUES> 43,713
<CGS> 5,259
<TOTAL-COSTS> 11,237
<OTHER-EXPENSES> 23,860
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,393
<INCOME-PRETAX> (13,981)
<INCOME-TAX> (5,129)
<INCOME-CONTINUING> (8,852)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,852)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 7,613
<TOTAL-REVENUES> 141,736
<CGS> 16,112
<TOTAL-COSTS> 39,413
<OTHER-EXPENSES> 66,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,497
<INCOME-PRETAX> 10,242
<INCOME-TAX> 4,153
<INCOME-CONTINUING> 6,089
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,089
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
