<PAGE>
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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, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3956940
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
45 ROCKEFELLER PLAZA, NEW YORK, NEW 10020
YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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
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.
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<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
References herein to the "Guarantor" are to Price Communications Cellular,
Inc., a direct wholly-owned subsidiary of Price Communications Corporation
("PCC") and the holder of 100% of the outstanding capital stock of Price
Communications Cellular Holdings, Inc. 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 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. The Guarantor's 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 CELLULARONE.
The Company has developed its business through the acquisition and
integration of cellular telephone systems, clustering multiple systems in
order to provide broad areas of uninterrupted service and achieve certain
economies of scale, including centralized marketing and administrative
functions as well as multi-system capital expenditures. The Company devotes
considerable attention to engineering, maintenance and improvement of its
cellular telephone systems in an effort to deliver high-quality service to its
subscribers and to implement new technologies as soon as economically
practicable. Through its participation in the North American Cellular Network
("NACN"), the Company is able to offer 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 the CELLULARONE name, the Company
also enjoys the benefits of association with a nationally recognized service
mark.
<PAGE>
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>
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(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.
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
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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
the 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:
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 industry 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
3
<PAGE>
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).
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, the Company did not have 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.
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
4
<PAGE>
("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.
The Company's only committed source of liquidity is the New Credit Facility,
under which $87 million of revolving loans remain 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 which may be 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.
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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 which may be 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.
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."
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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.
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.
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
7
<PAGE>
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."
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
8
<PAGE>
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 CELLULARONE 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 CELLULARONE
service mark, the Company's ability both to attract new subscribers and to
retain existing subscribers could be materially affected. In addition, if for
some reason beyond the Company's control, the name CELLULARONE were to suffer
diminished marketing appeal, the Company's ability both to attract new
subscribers and retain existing subscribers could be materially affected. AT&T
Wireless Services, Inc., which has been the single largest user of the
CELLULARONE service mark, has significantly reduced its use of the service
mark as a primary service mark. 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 commenced
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.
9
<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.
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
10
<PAGE>
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.
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.
11
<PAGE>
(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 CELLULARONE 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.
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.
12
<PAGE>
The Company markets all of its products and services under the name
CELLULARONE. The national advertising campaign conducted by Cellular One Group
enhances the Company's advertising exposure at a fraction of what could be
achieved by the Company alone. The Company also obtains substantial marketing
benefits from the name recognition associated with this widely used service
mark, both with existing subscribers traveling outside the Company's service
areas and with potential new subscribers moving into the Company's service
areas. In addition, travelers who subscribe to CELLULARONE 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.
13
<PAGE>
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.
<TABLE>
<CAPTION>
PRO FORMA
PREDECESSOR (PALMER) COMPANY
---------------------------------------------- ---------------
FOR THE PERIOD
FOR THE NINE OCTOBER 1, 1997
FOR THE YEAR ENDED DECEMBER 31, 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.
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
14
<PAGE>
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's
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.
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
15
<PAGE>
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.
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Georgia/Alabama............................. 39(1) 70(2) 121(3) 173(4) 207(5)
Panama City, FL............................. 7 7 9 11 12
--- --- --- --- ---
Total..................................... 46(1) 77(2) 130(3) 184(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.
16
<PAGE>
DIGITAL CELLULAR TECHNOLOGY
Over the next decade, it is expected that cellular telephones will gradually
convert from analog to digital technology. This conversion is due in part to
capacity constraints in many of the largest cellular markets, such as Los
Angeles, New York and Chicago. As carriers reach limited capacity levels,
certain calls may be unable to be completed, especially during peak hours.
Digital technology increases system capacity and offers other advantages over
analog technology, including improved overall average signal quality, improved
call security, potentially lower incremental costs for additional subscribers
and the ability to provide data transmission services. The conversion from
analog to digital technology is expected to be an industry-wide process that
will take a number of years. The exact timing and overall costs of such
conversion are not yet known.
The Company began offering Time Division Multiple Access ("TDMA") standard
digital service, one of three standards for digital service, during 1997. This
digital network allows the Company to offer advanced cellular features and
services such as caller-ID, short message paging and extended battery life.
Where cell sites are not yet at their maximum capacity of radio channels, the
Company is adding digital channels to the network incrementally based on the
relative demand for digital and analog channels. Where cell sites are at full
capacity, analog channels are being removed and redeployed to expand capacity
elsewhere within the network and replaced in such cell sites by digital
channels. The implementation of digital cellular technology over a period of
several years will involve modest incremental expenditures for switch software
and possible significant cost reductions as a result of reduced purchases of
radio channels and a reduced requirement to split existing cells. However, as
indicated above, the extent of any implementation of digital radio channels
and the amount of any cost savings ultimately to be derived therefrom will
depend primarily on subscriber demand. In the ordinary course of business,
equipment upgrades at the cell sites have involved purchasing dual mode radios
capable of using both analog and digital technology.
The benefits of digital radio channels can only be achieved if subscribers
purchase cellular telephones that are capable of transmitting and receiving
digital signals. Currently, such telephones are more costly than analog
telephones. The widespread use of digital cellular telephones is likely to
occur only over a substantial period of time and there can be no assurance
that this technology will replace analog cellular telephones. In addition,
since most of the Company's existing subscribers currently have cellular
telephones that exclusively utilize analog technology, it will be necessary to
continue to support, and if necessary increase, the number of analog radio
channels within the network for many years.
ACQUISITIONS
The Company will continue to evaluate expansion through acquisitions of both
(i) contiguous cellular properties and other strategically located RSAs and
small to mid-sized MSAs and (ii) minority interests in its existing cellular
properties. In evaluating acquisition targets, the Company considers, among
other things, demographic factors, including population size and density,
geographic proximity to existing service areas, traffic patterns, cell site
coverage and required capital expenditures.
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.
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.
17
<PAGE>
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.
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.
18
<PAGE>
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:
<TABLE>
<CAPTION>
MARKET WIRELINE COMPETITOR
------ -------------------
<S> <C>
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
Alabama-8 RSA........... ALLTEL
Panama City, FL......... 360 (degrees) Communications Company (formerly Sprint Cellular)
</TABLE>
- --------
(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
19
<PAGE>
increase their cellular phone usage without seeing large corresponding
increases in their cellular bill. These factors translate into more satisfied
customers, greater customer usage and lower churn among existing subscribers.
The perceived greater value also increases the number of potential customers
in the marketplace. The Company believes that this strategy will enable it to
increase its share of the wireless market.
SERVICE MARKS
CELLULARONE is a registered service mark with the U.S. Patent and Trademark
Office. The service mark is owned by Cellular One Group, a Delaware general
partnership of Cellular One Marketing, Inc., a subsidiary of Southwestern Bell
Mobile Systems, Inc., together with Cellular One Development, Inc., a
subsidiary of AT&T and Vanguard Cellular Systems, Inc. The Company uses the
CELLULARONE service mark to identify and promote its cellular telephone
service pursuant to licensing agreements with Cellular One Group. In 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 "CELLULARONE" mark (the "Mark") in its FCC-licensed
territory (the "Licensed Territory") to promote its cellular telephone
service. Cellular One Group has agreed not to license such mark to any other
cellular telephone service provider in such territory during the term of the
agreement.
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.
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
20
<PAGE>
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.
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,
21
<PAGE>
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.
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
22
<PAGE>
to establish procedures whereby federal agencies will make available their
properties, rights of ways and other easements at a fair and reasonable price
for service dependent upon federal spectrum.
Environmental effect of radio frequency emissions. The Telecom Act provides
-------------------------------------------------
that state and local authorities cannot regulate personal wireless facilities
based on the environmental effects of radio frequency emissions if those
facilities comply with the federal standard.
Universal service. The Telecom Act also provides that all communications
-----------------
carriers providing interstate communications services, including cellular
carriers, must contribute to the federal universal service support mechanisms
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 approximately 600 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.
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
23
<PAGE>
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 the Guarantor is held
beneficially and of record by PCC.
c) Dividends
Neither the Guarantor nor Holdings has to date paid 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 the Guarantor's or 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 Guarantor 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.
24
<PAGE>
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.
<TABLE>
<CAPTION>
PREDECESSOR Guarantor
-------------------------------------------------------- ------------
FOR THE
PERIOD
FOR THE NINE MAY 29, 1997
FOR THE YEAR ENDED DECEMBER 31, 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
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, net....... 114,955 199,265 332,850 387,067 406,828 937,986
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.
25
<PAGE>
(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.
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
combination of results of the Predecessor through September 30, 1997 and the
results of the Company from May 29, 1997 to December 31, 1997. As a result, the
combined information has not been prepared in accordance with generally accepted
accounting principles.
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.
26
<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-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.
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
CELLULARONE.
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.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
CELLULAR SERVICE AREA 1996 1997
--------------------- ------------ ------------
<S> <C> <C>
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
</TABLE>
27
<PAGE>
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.
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
YEAR ENDED FOR THE FOR THE
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.
28
<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.
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
29
<PAGE>
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.
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
30
<PAGE>
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.
31
<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
32
<PAGE>
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.
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.
33
<PAGE>
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.
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.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
----------------------
Price Communications Cellular Inc. and Subsidiaries Consolidated
Financial Statements are set forth on the following pages of this Part II.
INDEX TO FINANCIAL STATEMENTS
PRICE COMMUNICATIONS CELLULAR 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-4
Consolidated Statements of Cash Flows for Years ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Shareholders' Equity for Years
ended December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-8
35
<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.
36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Price Communications Cellular, Inc.:
We have audited the accompanying consolidated balance sheet of Price
Communications Cellular, 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, stockholders' 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,
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,
Inc.:
We have audited the accompanying consolidated balance sheet of Price
Communications Cellular, Inc. and subsidiaries (a holding company whose sole
investment represents Price Communications Cellular Holdings, Inc., 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, 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, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
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 amortiza-
tion 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
========= ===========
LIABILITIES AND EQUITY
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-3
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
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(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-4
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------- --------------------
FOR THE YEAR
ENDED FOR THE NINE FOR THE PERIOD
DECEMBER 31, MONTHS ENDED MAY 29, 1997 THROUGH
-------------------- SEPTEMBER 30, DECEMBER 31,
1995 1996 1997 1997
--------- --------- ------------- --------------------
<S> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income (loss)...... $ 954 $ 4,682 $ 6,089 $ (8,852)
--------- --------- -------- ---------
Adjustments to recon-
cile net income (loss)
to net cash provided
by operating activi-
ties:
Depreciation and amor-
tization.............. 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 as-
sets and liabilities:
(Increase) decrease in
trade accounts re-
ceivable.............. (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 pay-
able.................. (14) (167) (374) 9,394
Increase (decrease) in
accrued salaries and
employee benefits..... 241 165 251 (341)
Increase (decrease) in
other accrued liabil-
ities................. 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 activi-
ties................ 27,660 30,130 38,791 11,313
--------- --------- -------- ---------
Cash flows from invest-
ing activities:
Capital expenditures... (36,564) (41,445) (40,757) (14,499)
Increase in other in-
tangible assets and
other assets.......... (310) (2,180) (778) --
Proceeds from sales of
property and equip-
ment.................. 38 5 201 --
Acquisition of Prede-
cessor 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 mi-
nority interests...... -- -- -- (1,680)
--------- --------- -------- ---------
Net cash used in in-
vesting activities.. (196,776) (110,610) (73,759) (321,030)
--------- --------- -------- ---------
Cash flows from financ-
ing activities:
Advance from Price
Communications Corpo-
ration................ -- -- -- 2,328
Payment on advances
from Palmer
Communications
Incorporated.......... (1,650) -- -- --
Increase (decrease) in
short term notes pay-
able.................. -- 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 issu-
ance costs............ (4,803) -- -- (19,412)
Public offering pro-
ceeds, 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 activi-
ties................ 169,554 78,742 36,851 337,643
--------- --------- -------- ---------
Net (decrease) in-
crease in cash and
cash equivalents.... 438 (1,738) 1,883 27,926
Cash and cash equiva-
lents at the beginning
of period.............. 2,998 3,436 1,698 --
--------- --------- -------- ---------
Cash and cash equiva-
lents at the end of pe-
riod................... $ 3,436 $ 1,698 $ 3,581 $ 27,926
========= ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PRICE COMMUNICATIONS CELLULAR, 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
DECEMBER 31, FOR THE NINE
-------------------- 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
========= ======== =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
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 $9,924
========= ========= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------------------
ADDITIONAL
COMMON STOCK COMMON STOCK PAID-IN
CLASS A CLASS B 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
========== ==== ========== ==== ========
</TABLE>
<TABLE>
<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
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
COMPANY
-------------
COMMON STOCK
CLASS A ADDITIONAL TOTAL
------------- 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) $35,163
=== ===== ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Acquisition
Price Communications Cellular, Inc. (the "Guarantor"), a wholly-owned
subsidiary of Price Communications Corporation ("PCC"), was incorporated on May
26, 1988. Price Communications Cellular Holdings, Inc. ("Holdings" or the
"Company"), a wholly-owned subsidiary of the Guarantor, 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 director 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 existing indebtedness of Palmer 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 $75,712 of borrowings of Holdings (See Note
5(c)).
Basis of Presentation
For financial reporting purposes, PCW revalued its assets and liabilities as
of October 1, 1997 to reflect the price paid by PCC to acquire 100% of its
Common Stock, a process generally referred to as "push down" the accounting.
The consolidated financial statements as of December 31, 1997 and for the
period May 29, 1997
F-8
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
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.
<TABLE>
<CAPTION>
UNAUDITED
YEAR ENDED DECEMBER 31
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Total Revenue........................................ $ 145,643 $ 161,468
----------- -----------
Loss Before Income Taxes............................. $ (54,529) $ (51,532)
----------- -----------
Net Loss............................................. $ (48,895) $ (43,911)
----------- -----------
</TABLE>
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 $68,399. In connection with the
Offering, on March 21, 1995, the Predecessor issued 704,755 shares of Class A
Common Stock and 17,288,578 shares of Class B Common Stock in exchange for 100
percent of the Partnership interests of Palmer Cellular Partnership (the
"Exchange"). The assets and liabilities received in the Exchange were recorded
at their historical cost to Palmer Cellular Partnership and not revalued at
fair value on the date of transfer. Since the Exchange was between related
parties it was accounted for in a manner similar to a pooling of interests.
F-9
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
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.
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
F-10
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
undiscounted cash flows over the remaining life of the licenses and sales of
comparable businesses to evaluate the recorded value of licenses. The
assessment of the recoverability of the remaining balance of the license
rights will be impacted if projected cash flows are not achieved.
Other Intangible Assets
Other intangibles consist principally of deferred financing costs and other
items. These costs are being amortized by the interest or straight-line method
over their respective useful lives, which range from 5 to 10 years.
Income Taxes
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.
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
F-11
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
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.
(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 Sep-
tember 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>
F-12
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
(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>
(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, $27,650 of the purchase price was allocated
to licenses.
See Note 1 for presentation of pro forma information.
F-13
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
(5) NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------- --------
DECEMBER 31
----------------------
1996 1997
----------- --------
<S> <C> <C>
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
======== ========
</TABLE>
- --------
(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.
(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 $80,112 as of December 31, 1997.
F-14
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
(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.
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:
<TABLE>
<CAPTION>
MAXIMUM NOTIONAL
TYPE OF AGREEMENT MATURITY LIBOR VALUE
----------------- ------------- ------- --------
<S> <C> <C> <C>
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
========
</TABLE>
- --------
(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 $1,076.
PCW is exposed to interest rate risk in the event of nonperformance by the
other party to the interest rate swap and cap agreements. However, PCW does
not anticipate nonperformance by any of the banks.
F-15
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
------------ --------
<S> <C>
1998.............................................................. $ 2,812
1999.............................................................. 4,750
2000.............................................................. 12,875
2001.............................................................. 15,375
2002.............................................................. 17,875
Thereafter........................................................ 639,425
--------
$693,112
========
</TABLE>
(6) INCOME TAXES
Components of income tax expense (benefit) consist of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ------ -------
<S> <C> <C> <C>
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) $(5,129)
======= ====== =======
</TABLE>
F-16
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
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
DECEMBER 31, ENDED PERIOD ENDED
-------------- 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>
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 $ $7,366
--------- ---------
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 $12,350
utilization of these carryforwards is limited to the subsidiary that generated
the carryforwards, unless the Company utilizes alternative tax planning
strategies.
F-17
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ 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.
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 YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 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. The fair value of the
option grants in 1995 and 1996 were $11.04 and $13.36 per share, respectively.
F-18
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
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.
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 $6,243. These assets were previously leased from PCI.
Concurrently with the Offering and the Exchange, the Predecessor and PCI
entered into both a transitional management and administrative services
agreement and a computer services agreement that extended each
F-19
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
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.
(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:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
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
=======
</TABLE>
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 $806 for the period
from May 29, 1997 to December 31, 1997.
Contingencies
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial statements.
F-20
<PAGE>
PRICE COMMUNICATIONS CELLULAR, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
($ IN THOUSANDS)
(10) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996
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
======= ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------- -----------------
FOR THE PERIOD
MAY 29, 1997
FIRST SECOND THIRD THROUGH
QUARTER QUARTER QUARTER DECEMBER 31, 1997
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
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-21
<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, Inc.
/s/ Robert Price
By: _________________________________
ROBERT PRICE
DIRECTOR, PRESIDENT AND TREASURER
Dated: April , 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, President April , 1998
- ------------------------------------- and Treasurer
ROBERT PRICE (Principal
Executive Officer,
Financial Officer
and Accounting
Officer)
F-22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
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)
10.6 Meehan Agreement, incorporated by reference to Registration Statement
on Form S-4 of Price Communications Wireless, Inc. (File No. 333-
36253)
</TABLE>
<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>
