<PAGE>
As filed with the Securities and Exchange Commission on February 12, 1999
Registration No. 333-60639
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 4
to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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AMERICAN CELLULAR CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 4812 22-3043811
(State or other jurisdiction
of incorporation or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification Number)
</TABLE>
1375 East Woodfield Road, Suite 700
Schaumburg, Illinois 60173
(847) 995-8770
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
James J. Walter, Jr.
1375 East Woodfield Road, Suite 700
Schaumburg, Illinois 60173
(847) 995-8770
(Name, address, including zip code, telephone number, including area code, of
agent for service)
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Copies to:
Scott R. Haber, Esq.
Gregory K. Miller, Esq.
Latham & Watkins
505 Montgomery Street
Suite 1900
San Francisco, California 94111
(415) 391-0600
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
--------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
PROSPECTUS
$285,000,000
OFFER TO EXCHANGE
10 1/2% Senior Notes due 2008
for all outstanding 10 1/2% Senior Notes due 2008
of
American Cellular Corporation
---------------
The Exchange Offer will expire at 5:00 p.m., New York City time on
, 1998 unless extended.
American Cellular Corporation, a Delaware corporation ("American Cellular"
or the "Company"), hereby offers (the "Exchange Offer"), upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (the "Letter of Transmittal"), to exchange $1,000
principal amount of its 10 1/2% Senior Notes due 2008 (the "Exchange Notes"),
which exchange has been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a registration statement of which
this Prospectus is a part (the "Registration Statement"), for each $1,000
principal amount of its outstanding 10 1/2% Senior Notes due 2008 (the
"Private Notes"), of which $285,000,000 in aggregate principal amount are
outstanding as of the date hereof. The form and terms of the Exchange Notes
are the same as the form and terms of the Private Notes except that (i) the
exchange will have been registered under the Securities Act, and, therefore,
the Exchange Notes will not bear legends restricting the transfer thereof and
(ii) Holders of the Exchange Notes will not be entitled to certain rights of
Holders of the Private Notes under the Registration Rights Agreement (the
"Registration Rights Agreement") dated as of May 13, 1998 between the Company
and the initial purchasers of the Private Notes, which rights will terminate
upon the consummation of the Exchange Offer. The Exchange Notes will evidence
the same indebtedness as the Private Notes (which they replace) and will be
entitled to the benefits of an indenture dated as of May 13, 1998 governing
the Private Notes and the Exchange Notes (the "Indenture"). The Private Notes
and the Exchange Notes are sometimes referred to herein collectively as the
"Notes." See "The Exchange Offer" and "Description of Exchange Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Private Notes. Consequently, the Exchange Notes will bear interest at
the rate of 10 1/2% per annum and the interest thereon will be payable semi-
annually in arrears on May 15 and November 15 of each year, commencing
November 15, 1998. The Exchange Notes will bear interest from and including
the date of issuance of the Private Notes (May 13, 1998). The Exchange Notes
will be redeemable at the option of the Company, in whole or in part, on or
after May 15, 2003, at the redemption prices set forth herein, plus accrued
and unpaid interest thereon, if any, to the date of redemption. Holders whose
Private Notes are accepted for exchange will be deemed to have waived the
right to receive any interest accrued on the Private Notes.
There is no guarantee of the Notes. The Exchange Notes will be unsecured
(except as described), unsubordinated obligations of the Company, ranking
senior to all subordinated Indebtedness (as defined under "Description of
Exchange Notes--Certain Definitions") of the Company and pari passu in right
of payment to all other existing and future Indebtedness of the Company. Since
the business operations of the Company will be conducted through its
subsidiaries, the Exchange Notes will be effectively subordinated to all
existing and future liabilities of the Company's subsidiaries. As of September
30, 1998, the Company (without its subsidiaries) had no Indebtedness
outstanding other than the Private Notes and the Company's guarantee under its
credit facility with Toronto Dominion (Texas) Inc., Merrill Lynch Capital and
certain other financial institutions (the "Credit Facility"). In addition, as
of September 30, 1998, the aggregate principal amount of Indebtedness of the
Company's subsidiaries was approximately $916 million (excluding intercompany
indebtedness).
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on ,
1998, unless the Exchange Offer is extended by the Company in its sole
discretion (the "Expiration Date"). Tenders of Private Notes may be withdrawn
at any time prior to the Expiration Date. Private Notes may be tendered only
in integral multiples of $1,000. The Exchange Offer is subject to certain
customary conditions. See "The Exchange Offer--Conditions."
(Continued on next page)
---------------
See "Risk Factors," beginning on page 17, for a discussion of certain
factors that investors should consider in connection with the Exchange Offer
and an investment in the Exchange Notes.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Prospectus is , 1998.
<PAGE>
(Continued from cover page)
Upon the occurrence of a Change of Control (as defined under "Description of
Exchange Notes--Certain Definitions"), Holders of the Exchange Notes will have
the right to require the Company to repurchase their Exchange Notes, in whole
or in part, at a purchase price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest and Additional Interest (as
defined), if any, thereon to the date of repurchase. See "Description of
Exchange Notes."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a Holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
a person that is an affiliate of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
Prospectus delivery provisions of the Securities Act; provided that the Holder
is acquiring the Exchange Notes in the ordinary course of its business and is
not participating, and had no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private
Notes wishing to accept the Exchange Offer must represent to the Company, as
required by the Registration Rights Agreement, that such conditions have been
met. Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a Prospectus in connection
with any resale of such Exchange Notes. The Company believes that none of the
registered Holders of the Private Notes is an affiliate (as such term is
defined in Rule 405 under the Securities Act) of the Company.
Prior to the Exchange Offer, there has been no public market for the Notes.
The Exchange Notes will not be listed on any securities exchange, but the
Private Notes are eligible for trading in the National Association of
Securities Dealers, Inc.'s Private Offerings, Resales and Trading through
Automatic Linkages (PORTAL) market. There can be no assurance that an active
market for the Notes will develop. To the extent that a market for the Notes
does develop, the market value of the Notes will depend on market conditions
(such as yields on alternative investments), general economic conditions, the
Company's financial condition and the performance of the Company. Such
conditions might cause the Notes, to the extent that they are traded, to trade
at a significant discount from face value. See "Risk Factors--Absence of a
Public Market."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a Prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a Prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where
such Private Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. The Company has indicated its
intention to make this Prospectus (as it may be amended or supplemented)
available to any broker-dealer for use in connection with any such resale for
a period of 180 days after the Expiration Date. See "The Exchange Offer--
Resale of the Exchange Notes" and "Plan of Distribution."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection
with this Exchange Offer. See "The Exchange Offer--Resale of the Exchange
Notes."
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THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
(Continued on next page)
2
<PAGE>
(Continued from previous page)
No person is authorized in connection with the Exchange Offer to give any
information or to make any representation not contained in this Prospectus or
the accompanying Letter of Transmittal, and, if given or made, such
information or representation must not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus or the
accompanying Letter of Transmittal, nor any exchange made hereunder shall
under any circumstances create any implication that the information contained
herein is correct as of any date subsequent to the date hereof.
Until , 1998 (90 days after the date of this Prospectus), all
dealers offering transactions in the Exchange Notes, whether or not
participating in the Exchange Offer, may be required to deliver a Prospectus
in connection therewith. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of one or more fully registered global notes that
will be deposited with, or on behalf of, the Depository Trust Company ("DTC"
or the "Depositary") and registered in its name or in the name of Cede & Co.,
as its nominee Beneficial interests in the global note representing the
Exchange Notes will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary and its participants. After the
initial issuance of such global note, Exchange Notes in certificated form will
be issued in exchange for the global note only in accordance with the terms
and conditions set forth in the Indenture. See "The Exchange Offer--Book-Entry
Transfer" and "Book Entry; Delivery and Form."
3
<PAGE>
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 in this Prospectus, unless otherwise indicated, the term
"Pops" means the estimate of the 1996 population of a Metropolitan Statistical
Area ("MSA") or Rural Service Area ("RSA"), as derived from the 1997 Kagan
Cellular Telephone Atlas population estimates. 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 a FCC-licensed
cellular telephone system. The term "ILEC" means an incumbent local exchange
carrier. The term "NACN" means the North American Cellular Network. The term
"PCS" means personal communications services. For definitions of other
industry terms see "Overview of Cellular Telephone Industry."
4
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by, and should
be read in conjunction with, the more detailed information and financial
statements, including the related notes, appearing elsewhere in this
Prospectus. Unless the context otherwise requires, all references to "American
Cellular" or the "Company" shall mean, collectively, American Cellular
Corporation and its subsidiaries on a consolidated basis and the combined
operations of American Cellular and PriCellular after the Merger, "PriCellular"
refers to PriCellular Corporation and its subsidiaries on a consolidated basis
prior to the Merger. References herein to the "Company" refer to PriCellular
prior to the Merger and American Cellular after the Merger. See "Certain Terms"
for definitions of certain industry terms used herein and see "--Summary
Historical and Pro Forma Financial Information" for the definition of the "pro
forma basis" used herein.
The Company
The Company is one of the largest independent rural cellular telephone system
operators in the United States. It owns and operates non-wireline FCC-licensed
cellular telephone systems primarily in rural areas of the Midwestern and
Eastern portions of the United States with approximately 5.2 million Net Pops.
The Company's licenses are grouped in four main clusters of smaller MSAs and
strategically located RSAs covering over 110,000 square miles. The Company
markets all of its cellular products and services under the name CELLULARONE,
one of the most recognized brand names in the cellular industry. In marketing
its products and services, the Company utilizes its distribution network of
over 90 retail locations, a direct sales force and a group of agents.
The Company has experienced strong growth since 1995 which has been achieved
through both selected acquisitions and internal growth. As of September 30,
1998, the Company provided cellular service to approximately 305,000
subscribers, representing a penetration rate of 6.3%, and had pro forma
revenues, and net loss of $189.9 million and $60.9 million, respectively for
the nine months ended September 30, 1998. Additionally, the Company's
historical revenues and EBITDA have increased at a compound annual growth rate
for the past two calendar years of 109% and 165%, respectively.
Risk Factors
Prospective investors should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus in connection with the Exchange Offer before making an investment in
the Exchange Notes. This information includes: (i) the Company's high degree of
leverage and the requirement for significant and sustained growth in the
Company's cash flow to meet its debt service requirements; (ii) the Company's
limited operating history, the Company's history of net losses and the
expectation of future losses; (iii) the Company's prospects in the event of a
general economic downturn; (iv) that the Company is a holding company and the
Notes will be structurally subordinated to all Indebtedness of the subsidiaries
of the Company; (v) that the Company will be managed by a new team of senior
management; (vi) that the Company's management has other commitments;
(vii) competition from the other cellular operator in the Company's clusters or
from other technologies; (viii) that new Systems recently acquired may not
perform as expected; (ix) that the telecommunications industry is subject to
rapid and significant changes in technology; (x) that the Company relies upon
the registered service mark CELLULARONE to market the services of its non-
wireline systems; (xi) that there is potential for adverse regulatory change
and the need for renewal of cellular licenses; (xii) fluctuations in market
value of licenses; (xiii) equipment failure or natural disaster; (xiv) concerns
about RF emissions; (xv) the lack of a public market for the Notes and there
will be restrictions imposed on the resale of the Notes; (xvi) that the
Indenture will require the Company to offer to purchase all of the Notes issued
and outstanding upon any Change of Control and the Credit Facility contains a
similar provision; (xvii) the costs associated with the unauthorized use of the
Company's network; (xviii) that the Indenture imposes significant operating and
financial restrictions on the Company; (xix) the lack of certainty with respect
to how a court might decide a suit by an unpaid creditor on the basis of
fraudulent conveyance; and (xx) the potential effect of Year 2000 computer
issues.
5
<PAGE>
Systems
Through selective acquisitions and asset swaps, the Company has concentrated
its efforts on creating an integrated network of rural cellular systems in
contiguous service areas. The Company's cellular interests consist principally
of four large operating clusters of cellular systems:
Upper Midwest Cluster--a 1.8 million Net Pop cluster of 15 Systems
covering approximately 78,000 contiguous square miles in Minnesota,
Wisconsin and Michigan.
Mid-Atlantic Cluster--an 862,000 Net Pop cluster of five contiguous
Systems consisting of five RSAs in Ohio, Pennsylvania and West Virginia
covering approximately 10,000 contiguous square miles.
New York Cluster--a 1.1 million Net Pop cluster of two MSAs and two RSAs
covering more than 8,000 contiguous square miles in suburban New York
located between the New York City MSA of AT&T Wireless Services Inc. and
Southwestern Bell's Albany, NY MSA.
Kentucky Cluster--a 1.1 million Net Pop cluster of four RSAs adjacent to
Louisville and Lexington, Kentucky and one RSA in Tennessee which abuts
Knoxville, Tennessee. The 38 counties in Kentucky and the six counties in
Tennessee cover more than 15,000 square miles.
Business Strategy
American Cellular's primary business strategy is to focus on the development
of the Company's existing clusters and the selective acquisition of additional
rural cellular systems. The principal elements of this strategy include:
Develop Rural Market Clusters. American Cellular believes that its focus on
small- and medium-sized markets will provide it with several competitive
advantages. The majority of the Company's operations are in the early stages of
their growth cycle and therefore afford significant opportunities for
improvements in performance.
Market Through Local Promotions. A key element of the Company's market
positioning is its use of local retail stores and a direct sales force. The
Company believes that its approximately 90 retail locations enhance its ability
to provide quality customer service and generate customer loyalty, as well as
to provide convenient distribution locations.
Introduce Flexible and Innovative Pricing and Billing Plans. The Company
currently offers a wide selection of pricing plans tailored to its current high
credit-quality customer base. In order to further expand its customer base and
increase its penetration, American Cellular intends to introduce certain new
pricing packages.
Continue Build Out of Advanced Network. American Cellular intends to continue
to expand and improve coverage, increase capacity and build out its systems.
American Cellular believes that expanding and improving coverage and capacity
in its systems will attract additional subscribers, increase usage by existing
subscribers and increase roaming activity.
Achieve Cost Savings Through Selective Centralization. While maintaining its
local marketing and sales focus, American Cellular intends to reduce overhead
expenses by opportunistically centralizing certain business functions both
regionally and at the Company's headquarters. Since the Merger, the Company has
centralized its roaming administration in its corporate offices and taken steps
to centralize the Company's its financial reporting and treasury functions.
Prepare for Future Competition. American Cellular believes that it is well
positioned to compete against present and future competitive wireless service
providers through its extensive footprint, distribution channels, customer
service capabilities and experienced management team.
6
<PAGE>
Continue Selective Acquisition Strategy. American Cellular's strategy is to
continue to expand its current clusters through the selective acquisition of
small to mid-sized MSAs and strategic RSAs that it believes are undervalued,
underdeveloped or that possess traits indicative of potentially high cellular
usage and superior financial performance.
The Company's management is currently in the process of evaluating the
operational strengths and weaknesses of the business acquired in the Merger.
Until management completes such review, there can be no assurance that the
Company will be able to achieve the foregoing objectives.
The Merger
On June 25, 1998, American Cellular acquired all the operations of
PriCellular Corporation, a Delaware corporation ("PriCellular") pursuant to an
Agreement and Plan of Merger, dated March 6, 1998, by and between PriCellular
and American Cellular, as amended (the "Merger Agreement"). See "The Merger."
New Management. American Cellular's management has extensive experience in
various communications businesses. As a group they have been owners of and
managed two cellular holding companies, managed and operated what was at the
time the largest paging operation in the U.S. and developed paging companies in
South America.
Prior to forming American Cellular, Messrs. Fujii and McTernan were the
founding principals of MLC Industries, Inc. ("MLC"), a management company
responsible for the construction, maintenance, operations and financial control
of ACME Paging L.P. ("ACME"), a large multinational paging operation which they
founded in 1994. Messrs. Fujii and McTernan developed paging companies in
Brazil, Argentina and Colombia.
Equity Investors. A group of institutional investors led by Spectrum Equity
Investors II ("Spectrum") and Providence Equity Partners ("PEP") has invested
$350 million in the Company in the form of equity in connection with the
financing of the Merger (the "Equity Contribution"). Other Equity Investors
include: Sandler Investment Partners, Triumph Partners, Tandem Wireless
Investments, First Union Capital Partners, HarbourVest Partners, Trident
Capital Management, KECALP (an affiliate of Merrill Lynch), Toronto Dominion
Investments (an affiliate of TD Securities (USA) Inc.), SG Capital Partners (an
affiliate of Societe Generale), and Generation Capital Partners.
American Cellular's principal executive offices are at 1375 East Woodfield
Road, Suite 700, Schaumburg, Illinois 60173.
7
<PAGE>
Sources and Uses. The Company will not receive any cash proceeds from the
exchange of the Private Notes for the Exchange Notes pursuant to the Exchange
Offer. The following table sets forth the approximate sources and uses of funds
in connection with the financing of the Merger:
<TABLE>
<CAPTION>
Amount
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(In millions)
<S> <C>
Sources of Funds:
Cash on hand................................................ $ 51.4
Credit Facility:
Revolving Credit Facility (a)............................. 66.0
Term Loans................................................ 850.0
Private Notes (b)........................................... 282.8
Redeemable Preferred Stock.................................. 323.0
Common Stock................................................ 25.1
Interest Income............................................. 2.3
--------
Total Sources of Funds.................................... $1,600.6
========
Uses of Funds:
Cash Merger consideration (c)............................... $ 791.0
Repayment of net existing indebtedness (d).................. 594.1
Debt Tender Offer Payments (e).............................. 71.9
Restricted Escrow Investment (b)............................ 82.4
Fees and expenses........................................... 47.3
Working capital............................................. 9.8
Stay-on bonuses (f)......................................... 4.1
--------
Total Uses of Funds....................................... $1,600.6
========
</TABLE>
- --------
(a) The Revolving Credit Facility provides for total borrowings of up to $150
million. Borrowings under the Credit Facility may be increased by up to
$250 million upon request of American Cellular Wireless LLC ("American
Wireless"), a direct wholly-owned subsidiary of American Cellular, and
consent of a majority of lenders.
(b) Approximately $82.4 million of the proceeds from the Notes were used to
purchase the Pledged Securities to pay the first six scheduled interest
payments on the Notes (unless already paid) at the stated interest rate.
(c) Represents the Merger consideration paid to the PriCellular stockholders
(reflecting that all of PriCellular's 10 3/4% Senior Subordinated
Convertible Discount Notes due 2004 (the "Convertible Notes") were
converted into common stock), reduced by the estimated proceeds from the
exercise of certain warrants and options.
(d) Represents the funds required to repay total existing indebtedness of the
Company. In connection with the Merger, the Company purchased (the "Debt
Tender Offers") the 10 3/4% Senior Notes due 2004 (the "10 3/4% Notes") of
PriCellular Wireless Corporation ("Wireless"), the 12 1/4% Senior
Subordinated Discount Notes due 2003 (the "12 1/4% Notes") of Wireless and
the 14% Senior Subordinated Discount Notes due 2001 (the "14% Notes") of
Wireless (collectively, the "Old Notes"). See "The Merger--Debt Tender
Offers and Solicitations."
(e) Includes amounts for the consent solicitation fees associated with the Debt
Tender Offers.
(f) Stay-on bonuses were amounts paid pursuant to the Merger Agreement by
American Cellular to retained employees subsequent to the Merger to entice
employees to remain with the Company through the completion of the Merger.
8
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer.......... The Company is offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Private Notes that are
properly tendered and accepted. The Company will
issue Exchange Notes on or promptly after the
Expiration Date. There is $285,000,000 aggregate
principal amount of Private Notes outstanding.
See "The Exchange Offer--Purpose of the Exchange
Offer."
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Private Notes may be
offered for resale, resold and otherwise
transferred by a Holder thereof (other than (i) a
broker-dealer who purchases such Exchange Notes
directly from the Company to resell pursuant to
Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an
affiliate of the Company within the meaning of
Rule 405 under the Securities Act), without
compliance with the registration and Prospectus
delivery provisions of the Securities Act;
provided that the Holder is acquiring Exchange
Notes in the ordinary course of its business and
is not participating, and had no arrangement or
understanding with any person to participate, in
the distribution of the Exchange Notes. Each
broker-dealer that receives Exchange Notes for
its own account in exchange for Private Notes,
where such Private Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a Prospectus in
connection with any resale of such Exchange
Notes. See "The Exchange Offer--Resale of the
Exchange Notes."
Registration Rights The Private Notes were sold by the Company on May
Agreement.................. 13, 1998 to Merrill Lynch & Co., TD Securities
and Wasserstein Perella Securities, Inc.
(collectively, the "Initial Purchasers") pursuant
to a Purchase Agreement, dated May 6, 1998, by
and among the Company and the Initial Purchasers
(the "Purchase Agreement"). Pursuant to the
Purchase Agreement, the Company and the Initial
Purchasers entered into the Registration Rights
Agreement, which grants the Holders of the
Private Notes certain exchange and registration
rights. The Exchange Offer is intended to satisfy
such rights, which will terminate upon the
consummation of the Exchange Offer. See "The
Exchange Offer--Termination of Certain Rights."
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1998, unless the
Exchange Offer is extended by the Company in its
sole discretion, in which case the term
"Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. See
"The Exchange Offer--Expiration Date; Extensions;
Amendments."
Accrued Interest on the
Exchange Notes and the
Private Notes.............. The Exchange Notes will bear interest from and
including the date of issuance of the Private
Notes (May 13, 1998). Holders whose
9
<PAGE>
Private Notes are accepted for exchange will be
deemed to have waived the right to receive any
interest accrued on the Private Notes. See "The
Exchange Offer--Interest on the Exchange Notes."
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain
customary conditions that may be waived by the
Company. The Exchange Offer is not conditioned
upon any minimum aggregate principal amount of
Private Notes being tendered for exchange. See
"The Exchange Offer--Conditions."
Procedures for Tendering
Private Notes.............. Each Holder of Private Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Private Notes
and any other required documentation to Chase
Manhattan Bank and Trust Company, National
Association, as exchange agent (the "Exchange
Agent"), at the address set forth herein. By
executing the Letter of Transmittal, the Holder
will represent to and agree with the Company
that, among other things, (i) the Exchange Notes
to be acquired by such Holder of Private Notes in
connection with the Exchange Offer are being
acquired by such Holder in the ordinary course of
its business, (ii) if such Holder is not a
broker-dealer, such Holder is not currently
participating in, does not intend to participate
in, and has no arrangement or understanding with
any person to participate in a distribution of
the Exchange Notes, (iii) if such Holder is a
broker-dealer registered under the Exchange Act
or is participating in the Exchange Offer for the
purposes of distributing the Exchange Notes, such
Holder will comply with the registration and
Prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of
the staff of the Commission set forth in no-
action letters (see "The Exchange Offer--Resale
of Exchange Notes"), (iv) such Holder understands
that a secondary resale transaction described in
clause (iii) above and any resales of Exchange
Notes obtained by such Holder in exchange for
Private Notes acquired by such Holder directly
from the Company should be covered by an
effective registration statement containing the
selling securityholder information required by
Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (v) such
Holder is not an "affiliate," as defined in Rule
405 under the Securities Act, of the Company. If
the Holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange
for Private Notes that were acquired as a result
of market-making activities or other trading
activities, such Holder will be required to
acknowledge in the Letter of Transmittal that
such Holder will deliver a Prospectus in
connection with any resale of such Exchange
Notes; however, by so acknowledging and by
delivering a Prospectus, such Holder will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. See
"The Exchange Offer--Procedures for Tendering."
10
<PAGE>
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Private Notes in
the Exchange Offer should contact such registered
Holder promptly and instruct such registered
Holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender
on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering such owner's Private
Notes, either make appropriate arrangements to
register ownership of the Private Notes in such
owner's name or obtain a properly completed bond
power from the registered Holder. The transfer of
registered ownership may take considerable time
and may not be able to be completed prior to the
Expiration Date. See "The Exchange Offer--
Procedures for Tendering."
Guaranteed Delivery
Procedures................. Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures
set forth under "The Exchange Offer--Guaranteed
Delivery Procedures."
Acceptance of the Private
Notes and Delivery of the
Exchange Notes............. Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company
will accept for exchange any and all Private
Notes that are properly tendered in the Exchange
Offer prior to the Expiration Date. The Exchange
Notes issued pursuant to the Exchange Offer will
be delivered on the earliest practicable date
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Withdrawal Rights........... Tenders of Private Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
Material Federal Income Tax
Considerations............. For a discussion of certain material federal
income tax considerations relating to the
exchange of the Exchange Notes for the Private
Notes, see "Material Federal Income Tax
Considerations."
Exchange Agent.............. Chase Manhattan Bank and Trust Company, National
Association is serving as the Exchange Agent in
connection with the Exchange Offer.
11
<PAGE>
The Exchange Notes
The Exchange Offer applies to $285.0 million aggregate principal amount of
the Private Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Private Notes, except that (i) the exchange will have
been registered under the Securities Act and, therefore, the Exchange Notes
will not bear legends restricting the transfer thereof and (ii) Holders of the
Exchange Notes will not be entitled to certain rights of Holders of the Private
Notes under the Registration Rights Agreement, which rights will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
debt as the Private Notes (which they replace) and will be issued under, and be
entitled to the benefits of, the Indenture. For further information and for
definitions of certain capitalized terms used below, see "Description of
Exchange Notes."
Notes....................... $285.0 million aggregate principal amount of the
Company's 10 1/2% Senior Notes due 2008.
Company..................... American Cellular Corporation.
Maturity Date............... May 15, 2008.
Interest Payment Dates...... The Exchange Notes will bear interest at the rate
of 10 1/2% per annum, and such interest will be
payable semi-annually in arrears of May 15 and
November 15, commencing on November 15, 1998.
Optional Redemption......... The Exchange Notes are redeemable for cash at any
time on or after May 15, 2003, at the option of
the Company, in whole or in part, at the
redemption prices set forth herein, together with
accrued and unpaid interest, if any, to the date
of redemption. In addition, at any time prior to
May 15, 2001, the Company may redeem up to 35% of
the aggregate principal amount of the Notes
originally issued with the net cash proceeds of
one or more Public Equity Offerings or Strategic
Equity Offerings at a redemption price equal to
110.5% of the principal amount thereof, together
with accrued and unpaid interest, if any, to the
date of redemption; provided that not less than
65% of the aggregate principal amount of Notes
originally issued remain outstanding immediately
after such redemption.
Change of Control........... Upon the occurrence of a Change of Control, each
holder of the Exchange Notes may require the
Company to repurchase all or a portion of such
holder's Exchange Notes at a purchase price in
cash equal to 101% of the principal amount
thereof, together with accrued and unpaid
interest, if any, to the date of repurchase.
See "Description of Exchange Notes--Certain
Covenants --Repurchase of Notes at the Option of
the Holder Upon a Change of Control."
Ranking..................... There is no guarantee of the Notes. The Exchange
Notes are unsecured (except as described under
"--Security"), unsubordinated obligations of the
Company ranking senior to all subordinated
Indebtedness of the Company and pari passu in
right of payment to all other existing and future
Indebtedness of the Company. Since the business
operations of the Company will be conducted
through its subsidiaries, the Exchange Notes will
be effectively subordinated to all existing and
future liabilities
12
<PAGE>
(including trade payables) of the Company's
subsidiaries. The Exchange Notes will also be
effectively subordinated to secured Indebtedness
of the Company as to the assets securing such
Indebtedness. As of September 30, 1998, the
Company (without its subsidiaries) had no
Indebtedness outstanding other than the Private
Notes and the Company's guarantee under the
Credit Facility. In addition, as of September 30,
1998, the aggregate principal amount of
Indebtedness of the Company's subsidiaries was
approximately $916 million (excluding
intercompany indebtedness).
Security.................... Pursuant to the pledge and escrow agreement (the
"Pledge and Escrow Agreement"), the Company
purchased and pledged to the Trustee the Pledged
Securities as security for the benefit of the
holders of the Notes in an amount sufficient to
provide for payment in full of the first six
scheduled interest payments (unless already paid)
due on the Notes at the stated interest rate.
Certain Covenants........... The Indenture contains certain restrictive
covenants, including covenants with respect to
the following matters: (i) limitation on
incurrence of additional indebtedness; (ii)
limitation on restricted payments; (iii)
limitation on restricting subsidiary dividends;
(iv) limitation on transactions with related
persons; (v) limitation on issuances of
guarantees of indebtedness; (vi) limitation on
asset sales and sales of subsidiary stock; (vii)
limitation on liens; (viii) limitation on merger,
sale or consolidation; (ix) limitation on lines
of business; and (x) limitation on sale and
issuance of subsidiary stock. See "Description of
Exchange Notes--Certain Covenants."
13
<PAGE>
Summary Historical and Pro Forma Financial Information
The following table sets forth certain summary historical financial data for
the Company. American Cellular was formed on February 26, 1998 to acquire the
stock of PriCellular, which is considered to be the predecessor to American
Cellular. The historical financial data for American Cellular are derived from
the unaudited financial statements for the period ended September 30, 1998. The
historical financial data for PriCellular are derived from the audited
consolidated financial statements for the years ended December 31, 1997, 1996,
1995, 1994 and 1993 and the unaudited financial statements for the periods
ended June 30, 1998 and 1997. The financial data as of June 30, 1998 and
September 30, 1998 and for the periods ended June 30, 1998 and 1997 and
September 30, 1998 are unaudited, but have been prepared on the same basis as
the audited financial data. The results of operations for the periods ended
June 30, 1998 and September 30, 1998 are not necessarily indicative of the
results to be expected for the full fiscal year.
The unaudited pro forma statement of operations and other data gives effect
to (i) the Merger, (ii) the Equity Contribution, the Credit Facility and the
Private Offering and the application of the net proceeds therefrom
(collectively, the "Merger Financings"), (iii) the Debt Tender Offers and the
repayment or conversion of all existing Indebtedness of PriCellular, and (iv)
the purchase of TN-4 RSA by PriCellular, as if each transaction had occurred on
January 1, 1997 ((i) through (iv) collectively, the "Transactions," all of
which comprise the "pro forma basis"). The financial information for TN-4 RSA
as of and for the period ended December 31, 1997 precedes TN-4 RSA's
acquisition by PriCellular and is based on the books and records of TN-4 RSA
and has not been audited.
The following table should be read in conjunction with "--Sources and Uses of
Funds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Unaudited Pro Forma Financial Information" and the
financial statements, including in each case the notes thereto, included
elsewhere in this Prospectus.
14
<PAGE>
<TABLE>
<CAPTION>
American Cellular PriCellular (Predecessor)
---------------------------------------- ---------------------------------------------------------------
Pro Forma (a) Historical Historical
-------------------------- ------------- ---------------------------------------------------------------
Period from
February 26,
1998 (date of
Nine Months formation) Six Months Ended
Ended Year Ended Through June 30, Year Ended
September 30, December 31, September 30, ------------------ -------------------------------------------
1998 1997 1998 1998 1997 1997 1996 1995 1994
------------- ------------ ------------- -------- -------- -------- --------- --------- ---------
(Dollars in thousands, except for per subscriber data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations
Data:
Operating
revenues....... $189,862 $ 196,264 $ 73,680 $116,182 $ 78,738 $181,000 $ 112,616 $ 41,504 $ 5,209
Cost of cellular
service........ 45,920 52,344 17,497 28,423 20,643 48,691 29,571 10,694 1,892
Cost of
equipment
sold........... 8,611 13,875 3,246 5,365 5,642 12,841 10,073 4,951 814
-------- --------- ----------- -------- -------- -------- --------- --------- ---------
Gross margin.... 135,331 130,045 52,937 82,394 52,453 119,468 72,972 25,859 2,503
Selling, general
and
administrative.. 46,614 56,705 16,384 30,230 23,710 53,485 34,502 16,512 6,005
Depreciation and
amortization... 67,704 84,458 22,506 18,751 14,296 28,759 19,537 10,337 2,720
Non-recurring
charges........ 4,889 -- 4,154 4,889 -- -- -- -- --
-------- --------- ----------- -------- -------- -------- --------- --------- ---------
Operating income
(loss)......... 16,124 (11,118) 9,893 28,524 14,447 37,224 18,933 (990) (6,222)
Gain (loss) on
sale of
investments in
cellular
operations..... -- -- -- (133) 8,424 8,423 (1,401) 11,598 6,819
Interest
expense, net... (78,828) (101,078) (30,121) (36,187) (29,511) (62,528) (42,201) (18,839) (1,940)
Other income
(expense),
net............ 1,761 3,250 251 1,510 1,625 3,250 1,626 520 (97)
-------- --------- ----------- -------- -------- -------- --------- --------- ---------
Income (loss)
before income
taxes.......... (60,943) (108,946) (19,977) (6,286) (5,015) (13,631) (23,043) (7,711) (1,440)
Income tax...... -- -- -- -- -- -- -- -- --
-------- --------- ----------- -------- -------- -------- --------- --------- ---------
Net income
(loss)......... $(60,943) $(108,946) $ (19,977) $ (6,286) $ (5,015) $(13,631) $ (23,043) $ (7,711) $ (1,440)
======== ========= =========== ======== ======== ======== ========= ========= =========
Ratio of
earnings to
combined fixed
charges and
preferred stock
dividends (c).. -- -- -- -- -- -- -- -- --
Deficiency of
earnings to
combined fixed
charges and
preferred stock
dividends (c).. $(91,079) $(149,736) $ (31,046) $ (9,643) $ (8,255) $(20,171) $ (29,221) $ (7,711) $ (1,440)
Cash Flow Data:
Net cash
provided by
(used in)
operating
activities..... n/a n/a $ 33,355 $ 13,440 $ 12,166 $ 49,026 $ 39,371 $ 4,110 $ (831)
Net cash used in
investing
activities..... n/a n/a $(1,507,141) $(82,114) $ (6,600) $(36,284) $(200,969) $(204,353) $(130,350)
Net cash
provided by
(used in)
financing
activities..... n/a n/a $ 1,510,828 $ 58,777 $(16,062) $(51,749) $ 138,518 $ 278,276 $ 176,355
Other Operating
Data:
EBITDA which
excludes non-
recurring
charges and
gain (loss) on
sale of
investments in
cellular
operations..... n/a n/a $ 36,804 $ 53,674 $ 30,368 $ 69,233 $ 40,096 $ 9,867 $ (3,599)
EBITDA margin... n/a n/a 50.0% 46.2% 38.6% 38.3% 35.6% 23.8% (69.1)%
Capital
expenditures... $ 28,466 $ 26,483 6,457 $ 22,009 $ 11,165 $ 25,717 $ 29,470 $ 6,794 $ 3,013
Ending
subscribers
(e)............ 305,000 255,000 305,000 286,000 195,000 243,000 150,328 78,227 17,344
Ending
penetration
(f)............ 6.3% 5.3% 6.3% 5.9% 4.3% 5.3% 3.8% 2.2% 0.95%
Ending net pops
(in millions).. 4.8 4.8 4.8 4.8 4.6 4.6 3.9 3.6 1.8
Churn (g)....... 1.6% 1.8% 1.8% 1.4% 1.7% 1.8% 1.6% 2.0% 2.7%
Average monthly
revenue per
subscriber (h).. $ 67 $ 71 $ 75 $ 63 $ 69 $ 70 $ 82 $ 107 $ 123
<CAPTION>
1993
------
<S> <C> <C>
Statement of
Operations
Data:
Operating
revenues....... $ 3,809
Cost of cellular
service........ 835
Cost of
equipment
sold........... 255
-------
Gross margin.... 2,719
Selling, general
and
administrative.. 1,659
Depreciation and
amortization... 1,695
Non-recurring
charges........ --
-------
Operating income
(loss)......... (635)
Gain (loss) on
sale of
investments in
cellular
operations..... 11,986
Interest
expense, net... (271)
Other income
(expense),
net............ (464)(b)
-------
Income (loss)
before income
taxes.......... 10,616
Income tax...... --
-------
Net income
(loss)......... $10,616
=======
Ratio of
earnings to
combined fixed
charges and
preferred stock
dividends (c).. 22.7
Deficiency of
earnings to
combined fixed
charges and
preferred stock
dividends (c).. --
Cash Flow Data:
Net cash
provided by
(used in)
operating
activities..... $(1,848)
Net cash used in
investing
activities..... $15,044
Net cash
provided by
(used in)
financing
activities..... $18,918
Other Operating
Data:
EBITDA which
excludes non-
recurring
charges and
gain (loss) on
sale of
investments in
cellular
operations..... $ 596
EBITDA margin... 15.6%
Capital
expenditures... $ 205
Ending
subscribers
(e)............ 9,886
Ending
penetration
(f)............ 0.53%
Ending net pops
(in millions).. 1.8
Churn (g)....... 3.2%
Average monthly
revenue per
subscriber (h).. $ 156
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
American Cellular
-----------------
September 30,
1998
-----------------
(in thousands)
<S> <C>
Balance Sheet Data:
Working capital ............................................. $ 38,488
Net fixed assets............................................. 151,060
Total assets................................................. 1,541,782
Long-term debt............................................... 1,196,922
Total liabilities............................................ 1,257,999
Common stockholders' deficit................................. (50,286)
</TABLE>
- --------
(a) Pro forma for (i) the Merger, (ii) the Merger Financings, (iii) the Debt
Tender Offers and the repayment or conversion of all other existing
Indebtedness of PriCellular and (iv) the purchase of the TN-4 RSA, as if
each transaction had occurred on January 1, 1997. See "Unaudited Pro Forma
Financial Information."
(b) Extraordinary loss on early extinguishment of debt of $172 is shown as part
of other income (expense), net.
(c) The ratio of earnings to combined fixed charges and preferred stock
dividends is determined by dividing the sum of income (loss) before income
taxes, interest expense, and a portion of rent expense representative of
interest by the sum of interest expense, a portion of the rent expense
representative of interest and the preferred stock dividend requirement.
(d) EBITDA represents net income (loss) before interest expense, interest
income, income taxes, depreciation and amortization, non-recurring charges
and gain (loss) on sale of investments in cellular operations. The Company
has included EBITDA because it understands that EBITDA is commonly used by
certain investors to evaluate a company's performance in the cellular
telephone industry. EBITDA is not intended to be a performance measure and
should not be regarded as an alternative to either operating income or net
income as an indicator of operating performance or to cash flows as a
measure of liquidity. Furthermore, EBITDA is not a GAAP-based financial
measure, and it should not be considered as an alternative to GAAP-based
measures of financial performance such as net income or cash flows. In
addition, EBITDA as determined by the Company may not be comparable to
related or similar measures as reported by other companies and do not
represent funds available for discretionary use.
(e) Each billable telephone number in service represents one subscriber, not
including test, demonstration or other telephone numbers for which payment
is not expected.
(f) Represents the ratio of ending subscribers to the estimated total net
population of owned Systems.
(g) Represents the average of the monthly churn rates during the periods
presented. Churn equals the ratio of disconnected monthly subscribers to
average monthly subscribers.
(h) Represents the ratio of total monthly service revenues to average monthly
subscribers.
16
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider all of the information
contained in this Prospectus and, in particular, should evaluate the following
risk factors. Certain statements in this Prospectus that are not historical
fact constitute "forward-looking statements." Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may
cause the actual results of the Company to be materially different from
results expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors include, but are not limited to, the
following:
Leverage and Debt Service
As a result of the Offering and the Merger, the Company is highly leveraged.
The proceeds of the Merger Financings were used to (i) fund payment of the
cash consideration in the Merger, (ii) repay or repurchase certain
indebtedness of PriCellular and Wireless (including the Old Notes purchased in
the Debt Tender Offers), (iii) pay the fees and expenses incurred in
connection with the Merger, the Merger Financings and any other transactions
contemplated by the Merger Agreement and (iv) purchase the Pledged Securities.
See "Use of Proceeds."
As of September 30, 1998, the Company's consolidated long-term indebtedness
was approximately $1.2 billion, a level substantially greater than the
Company's pre-Merger consolidated long-term indebtedness. Such high leverage
may have important consequences for the Company, including: (i) the Company's
ability to obtain additional financing for future acquisitions (if any),
working capital, capital expenditures or other purposes may be impaired or any
such financing may not be on terms favorable to the Company; (ii) a
substantial portion of the Company's cash flow available from operations after
satisfying certain liabilities arising in the ordinary course of business will
be dedicated to the payment of principal of and interest on its indebtedness,
thereby reducing funds that would otherwise be available to the Company for
future business opportunities and other purposes; (iii) a substantial decrease
in net operating cash flows or an increase in expenses of the Company could
make it difficult for the Company to meet its debt service requirements or
force it to modify its operations; (iv) high leverage may place the Company at
a competitive disadvantage and may make it vulnerable to a downturn in its
business or the economy generally; and (v) certain of the Company's borrowings
will be at variable rates of interest, which could cause the Company to be
vulnerable to increases in such interest rates. See "The Merger" and
"Unaudited Pro Forma Financial Information."
If the Company is unable to comply with all of the covenants under the
Credit Facility, including financial covenants, the Company will be in default
under the Credit Facility, which may require accelerated repayment of amounts
outstanding thereunder and which may constitute an Event of Default under the
Exchange Notes. Any failure by the Company to obtain additional financing on
favorable terms (including through borrowings under the Credit Facility or any
replacement credit facility), when and as needed to successfully implement its
business strategy, could result in the delay or abandonment of some or all of
the Company's plans, which could materially adversely affect the Company's
business, prospects, operating results and ability to service its
indebtedness, including the Exchange Notes. In addition, upon a payment
default or a default under any financial maintenance covenant under the Credit
Facility, the Company's subsidiaries will not be able to pay dividends to the
Company. Such dividends are expected to be the only source of funds for the
payment of interest on the Exchange Notes after the first six interest
payments (which will be satisfied from the Pledged Securities).
Expectation of Future Net Losses
Since its formation, the Company has concentrated on the acquisition,
exchange, construction, initial operation and development of cellular
telephone systems. The Company has operated cellular telephone systems since
1989; however, it has acquired all of its existing Systems between April 1994
and January 1998. On the pro forma basis, the Company would have incurred a
net loss of $60.9 million for the nine months ended September 30, 1998 and
$108.9 million for the year ended December 31, 1997. American Cellular expects
to report net losses for at least the next two years due to interest and non-
cash charges such as depreciation and
17
<PAGE>
amortization. There can be no assurance that in future periods the Company's
operations will generate sufficient earnings to pay its obligations.
Risks Associated with Potential General Economic Downturn
In the past few years the domestic economy has been growing on a consistent
basis. One feature of this growth has been strong demand by consumers for
products and services, including cellular telephone service. To the extent the
general health of the United States economy declines from levels of the past
years, or to the extent consumers fear such a decline is imminent, consumers
may reduce their expenditures for goods and services, including those offered
by the Company. To the extent that the Company's customers use their cellular
phones in connection with business and other travel and such travel is reduced
as a result of a general economic downturn or for other reasons, the Company's
revenues can be expected to be significantly reduced. A substantial decline in
the Company's revenues could have a material adverse impact on the Company's
business, prospects, operating results and ability to service its
indebtedness, including the Notes.
The Company derives a substantial portion of its total revenues from the
roaming revenues of both its and other cellular providers' customers. The
Company believes that, as a provider of cellular service principally to rural
customers, its results of operations are more dependent on roaming revenues
than cellular providers that operate principally within urban or suburban
geographic areas. As compared to urban residents, rural residents travel
greater distances by personal vehicle and have less access to public
telephones along drive routes. The Company believes that these factors produce
roaming revenues that are higher as a percentage of total revenues than would
be the case in more densely populated urban areas. In addition, certain
roaming revenues tend to produce higher margins because roaming calls are
priced, on average, at higher rates than local calls and because there are no
associated sales commission costs.
Holding Company Structure; Structural Subordination
The Exchange Notes will be unsubordinated obligations of the Company ranking
senior to all subordinated Indebtedness of the Company and pari passu in right
of payment to all other existing and future Indebtedness of the Company. Since
the business of the Company will be conducted through its subsidiaries, the
Exchange Notes will be effectively subordinated to all existing and future
liabilities of the Company's subsidiaries. As of June 30, 1998, the Company
(without its subsidiaries) had no Indebtedness outstanding other than the
Private Notes and the Company's guarantee under the Credit Facility. In
addition, as of September 30, 1998, the aggregate amount of Indebtedness of
the Company's subsidiaries was approximately $916 million (excluding
intercompany indebtedness). Because the Exchange Notes are not secured by any
assets (other than the Pledged Securities), in the event of a dissolution,
bankruptcy, liquidation or reorganization of any of the subsidiaries of the
Company, holders of the Exchange Notes may receive less ratably than the
creditors of the subsidiaries. See "Capitalization" and "Unaudited Pro Forma
Financial Information."
The Company is dependent on the cash flow of its subsidiaries to meet its
obligations, including the payment of interest and principal obligations on
the Exchange Notes when due. Accordingly, the Company's ability to make
principal, interest and other payments to holders of the Exchange Notes when
due is dependent on the receipt of sufficient funds from its subsidiaries.
Receipt of such funds will be restricted by the terms of existing and future
indebtedness of its subsidiaries, including the Credit Facility. Under the
Credit Facility, the Company's subsidiaries will be able to pay dividends to
the Company to make interest payments on the Exchange Notes unless a payment
default or any default under any financial maintenance covenant under the
Credit Facility shall have occurred and be continuing or would arise as a
result thereof. Dividends from the Company's subsidiaries are expected to be
the only source of funds for the payment of interest on the Exchange Notes
after the first six interest payments (which will be satisfied from the
Pledged Securities). The terms of any other indebtedness of the Company's
Subsidiaries may also contain similar restrictions. See "Description of Credit
Facility."
18
<PAGE>
Risk Associated With New Management Achieving Objectives in Timely Manner
In connection with the consummation of the Merger, the former President and
Chief Executive Officer of PriCellular resigned and no longer has any material
affiliation with the Company. John Fujii, currently a principal with MLC, was
appointed the Company's Chief Executive Officer, and Brian McTernan, also
currently a principal with MLC, was appointed the Company's President.
Although Messrs. McTernan and Fujii each has more than 15 years of experience
in the telecommunications industry, neither of them has had any experience
managing the operations of the Company. If the Company's executive officers do
not achieve their management objectives in a timely manner, the Company's
business, prospects, operating results and ability to service its
indebtedness, including the Notes, may be materially adversely affected.
Dependence on Key Personnel
The Company continues to expound a decentralized management philosophy,
whereby most day-to-day operating decisions are delegated to the local system
managers. The Company's affairs will therefore continue to be managed by a
small number of corporate management personnel, the loss of any of whom could
have an adverse impact on the Company. The success of the Company's operations
and expansion strategy depends on its ability to retain and to expand its
staff of qualified personnel in the future. The Company does not have any
employment contracts with corporate management personnel.
Other Commitments of Senior Management
In connection with their responsibilities as officers of MLC, certain
members of the Company's senior management, specifically Brian McTernan, John
Fujii and James Walter, have commitments to manage the affairs of ACME Paging
L.P. ("Acme"), a large multinational paging operation which was founded in
1994 and has operations in South America. Acme is not affiliated with the
Company. Acme's day-to-day operations are primarily managed by individuals
headquartered in South America, and MLC employs staff members in the U.S. who
are dedicated exclusively to Acme and who have no responsibilities to the
Company. Since the Merger, Messrs. McTernan, Fujii and Walter have, on
average, collectively spent approximately 15 to 20% of their professional time
providing corporate-level management services for Acme. These individuals
believe, however, that the amount of time they collectively will devote in the
future to managing Acme will vary, and may from time to time increase,
sometimes significantly. The principal factors that may result in an increased
time commitment are recent adverse changes in the economy in South America,
Acme's annual budgeting process, which is typically completed during November
and December, and the possible sale of Acme by its investors. Due to the
uncertainties inherent in these factors and in managing a business like Acme,
Messrs. McTernan, Fujii and Walter are presently unable to make a quantifiable
determination of the amount of their time they will dedicate to managing Acme.
However, Mr. Fujii believes he will continue to devote substantially all of
his professional time to the affairs of the Company, and Messrs. McTernan and
Walter believe they will continue to devote the substantial majority of their
professional time to the affairs of the Company, and that all three of these
members of the Company's senior management team will not turn their attention
to Acme simultaneously. Since the Merger, the Company has hired additional
members of its senior management team whose responsibilities are dedicated
exclusively to the Company. Senior management of the Company believes there
will not be a material adverse impact on the business, prospects or results of
operations of the Company resulting from the responsibilities of Messrs.
McTernan, Fujii and Walter to co-manage Acme. Despite this, there can be no
assurances that any continued or prolonged attention to the affairs of Acme by
Messrs. McTernan, Fujii and Walter will not have a material adverse effect on
the Company.
Competition
Other Cellular Providers
The Company competes with one other cellular licensee in each of its
cellular markets, most of which are larger and have greater financial
resources than the Company, as well as paging companies and landline telephone
service providers. Current policies of the FCC authorize only two licensees to
operate cellular systems
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in each market, and the Company expects there will continue to be competition
from the other licensee authorized to service each cellular market in which
the Company operates. Competition for subscribers between cellular licensees
is based principally upon the services and enhancements offered, the technical
quality of the cellular system, customer service, system coverage and capacity
and price.
PCS Providers
As a result of recent regulatory and legislative initiatives, the Company's
cellular operations are subject to increased competition from entities using
or proposing to use other comparable communications technologies. The FCC
currently is licensing commercial PCS. The FCC identified two categories of
PCS: broadband and narrowband. PCS is not a specific technology, but a variety
of potential technologies that could compete with cellular telephone systems.
For example, the broadband PCS systems licensed to operate in the 2 GHz band
provide wireless two-way telecommunications services for voice, data, graphic
and other transmissions. Equipment used for broadband PCS includes small,
lightweight and wireless telephone handsets, computers that can communicate
over the airwaves wherever they are located, and portable facsimile machines
and other graphic devices. Many PCS systems have commenced operations in the
last two years. When a PCS system employs microcell technology, as is common,
it uses 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. Many PCS
licensees who will compete with the Company have access to substantial capital
resources. In addition, many of these companies, or their predecessors and
affiliates, already operate large cellular telephone systems and thus bring
significant wireless experience to this new marketplace. To date, the Company
has experienced little impact from PCS competition. However, there can be no
assurance of the long-term effect these new PCS may have on the Company.
Other Technology Providers
Enhanced Specialized Mobile Radio ("ESMR") is a two-way wireless
communications service that incorporates characteristics of cellular
technology, including multiple low-power transmitters and interconnection with
the landline telephone network. ESMR service may compete with cellular service
by providing digital communication technology, lower rates, enhanced privacy
and additional features such as electronic mail and built-in paging.
The Company may also face competition from satellite-based services.
Satellite-based services are distance-insensitive and are therefore not
subject to the geographic constraints facing the Company and its terrestrial-
based competitors. There are currently a number of "low-earth-orbit"
satellites in operation, which will also be able to provide voice and data
services to end users in the Company's service areas. In addition, other
companies with financially capable investors have been licensed or are seeking
licenses to provide services by satellite that could also provide competition
to the Company.
The Company is unable to predict whether such competing technologies will be
successful and, if successful, whether any will provide significant
competition for the Company. There can be no assurance, however, that one or
more of the technologies currently used by the Company in its business will
not become inferior or obsolete at some time in the future.
Risks Associated With Acquisitions
In January 1998, the Company acquired from Bachtel Liquidity, L.P., an
affiliate of Bachow & Associates, Inc., the TN-4 RSA which contains
approximately 264,000 Pops for approximately $73 million in cash (subject to
adjustments). This RSA, adjacent to three MSAs, including Knoxville, TN, is
located south of the Company's Kentucky Cluster. The Company will be subject
to risks that new Systems and existing Systems which have been acquired in the
past will not perform as expected and that the returns from such Systems will
not support the indebtedness incurred to acquire, or the capital expenditures
needed to develop, such Systems.
The Company may expand its current clusters through the acquisition of
properties and target for purchase other small to mid-sized MSAs and strategic
RSAs that it believes are undervalued, underdeveloped or that
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possess traits indicative of potentially high cellular usage and superior
financial performance. There can be no assurance, however, that the Company
will seek to acquire or be successful in acquiring any of these Systems.
The Company is subject to risks that the Systems acquired and to be acquired
in any future acquisitions will not perform as expected and that the returns
from such Systems will not support the indebtedness incurred to acquire, or
the capital expenditure needed to develop, the Systems. In addition, expansion
of the Company's operations may place a significant strain on the Company's
management, financial and other resources. The Company's ability to manage
future growth will depend upon its ability to monitor operations, control
costs, maintain effective quality controls and significantly expand the
Company's internal management, technical and accounting systems, all of which
will result in higher operating expenses. A failure to expand these areas or
to implement and improve such systems, procedures and controls in an efficient
manner and at a pace consistent with the growth of the Company's business
could have a material adverse effect on the Company's business, prospects,
operating results and ability to service its indebtedness, including the
Notes. In addition, the integration of acquired Systems with existing
operations will entail considerable expenses in advance of anticipated revenue
and may cause substantial fluctuations in the Company's operating results.
This will involve, among other things, integration of switching, transmission,
technical, sales, marketing, billing, accounting, quality control, management,
personnel, payroll, regulatory compliance and other systems and operating
hardware and software, some of which may be incompatible with the Company's
existing systems. In addition, telecommunications providers generally
experience higher customer and employee turnover rates during and after an
acquisition. There can be no assurance that the Company will be able to
successfully integrate the Systems acquired and to be acquired in any future
acquisitions or any other businesses it may acquire or that any such acquired
business will not experience high employee or customer turnover rates after
such acquisition.
Rapid Technological Changes
The telecommunications industry is subject to rapid and significant changes
in technology, including advancements protected by intellectual property laws.
In particular, the wireless telecommunications industry is experiencing
significant technological change, as evidenced by the increasing pace of
digital upgrades in existing analog wireless systems, evolving industry
standards, the availability of new radio frequency spectrum allocations in
which to develop wireless services, ongoing improvements in the capacity and
quality of digital technology, shorter development cycles for new products and
enhancements, and changes in end-user requirements and preferences. There is
also uncertainty as to the extent of customer demand as well as the extent to
which airtime and monthly access rates may continue to decline. The effect of
technological changes on the business of the Company cannot be predicted, and
there can be no assurance that technological developments will not have a
material adverse effect on the Company.
Reliance on Use of Third-Party Service Mark
The Company currently uses the registered service mark CELLULARONE(R) to
market the services of its non-wireline Systems. The Company's use of this
service is governed by five-year contracts between the Company and Cellular
One Group, the owner of the service mark. Such contracts expire on various
dates and each is renewable at the option of the Company for three additional
five-year terms, subject to the attainment of certain customer satisfaction
ratings. Under these agreements, the Company has agreed to meet a consistent
set of operating and service quality standards for its cellular service areas.
If these agreements were not renewed upon expiration or if the Company were to
fail to meet the applicable operating or service quality standards, and
therefore was no longer permitted to use the CELLULARONE service mark, the
Company's ability both to attract new subscribers and retain existing
subscribers could be materially impaired. 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 impaired.
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Regulatory Considerations
The licensing, construction, operation, sale and acquisition of cellular and
PCS systems are regulated by the FCC. In addition, certain aspects of cellular
operations may be subject to public utility regulation in the state in which
the service is provided. The ongoing operations of the Company may require
permits, licenses and other authorization from regulatory authorities
(including but not limited to the FCC) not now held by the Company. There can
be no assurance that the applicable regulatory authority including, without
limitation, the FCC, will grant such authorizations and approvals in a timely
manner, if at all.
Changes in regulation, such as increased price regulation or deregulation of
interconnection arrangements, could adversely affect the Company's financial
condition and operating results. Under the FCC rules, licenses for cellular
systems are generally issued for ten-year terms. Although a licensee may apply
for renewal and, under certain circumstances, may be entitled to a renewal
expectancy, renewal is not automatic. The Company's renewal applications may
be subject to petitions to deny or competing applications. Therefore, no
assurance can be given that any license will be renewed.
Many aspects of the regulations affecting the Company have recently been
impacted by the enactment of the Telecommunications Act of 1996 (the "Telecom
Act") and are currently the subject of administrative rulemakings that are
significant to the Company. Neither the outcome of these rulemakings nor their
impact upon the cellular telephone industry or the Company can be predicted at
this time. However, certain provisions of the new statute relating to
interconnection, telephone number portability, equal access and resale could
subject the Company to additional costs and increased competition. In
addition, the FCC has initiated a rulemaking proceeding to implement
provisions of the Telecom Act to ensure that wireless handsets and other
technological equipment are accessible to people with disabilities.
From time to time, legislation that potentially could affect the Company,
either beneficially or adversely, is proposed by federal or state legislators.
There can be no assurance that legislation will not be enacted by the federal
or state governments, or that regulations will not be adopted or actions taken
by the FCC or state regulatory authorities that might adversely affect the
business of the Company. Changes such as the allocation by the FCC of radio
spectrum for services that compete with the Company's business could adversely
affect the Company's business, prospects, operating results or ability to
service its indebtedness, including the Notes.
Fluctuations in Market Value of Licenses
A substantial portion of the Company's assets consists of its interests in
cellular licenses. While there currently exists a market for the purchase and
sale of cellular licenses, including those in the Company's markets, such a
market may not exist in the future or the values obtainable may be
significantly lower than at present. The future value of the Company's
interests in its cellular licenses will depend significantly upon the success
of the Company's business. The transfer of interest in such licenses is
subject to prior FCC approval, which may have the effect of reducing the value
of the license. As a consequence, a significant reduction in the market value
of the Company's cellular licenses could result in a loss upon any sale
thereof.
Equipment Failure; Natural Disaster
The Company currently carries "business interruption" insurance and the
Company expects to carry similar insurance; however, 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 material adverse effect on
the Company's business, prospects, operating results or ability to service its
indebtedness, including the Exchange Notes.
Radio Frequency Emission Concerns
Media reports have suggested that certain radio frequency ("RF") emissions
from portable cellular telephones may be linked to cancer and interfere with
heart pacemakers and other medical devices. Concerns over RF emissions and
interference may have the effect of discouraging the use of cellular
telephones, which
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could have an adverse effect upon the Company's business. During the past two
years, the FCC has updated its guidelines and methods for evaluating the
environmental effects of RF emissions. The updated guidelines generally are
more stringent than the previous rules, based on recommendations of federal
health and safety agencies, including the Environmental Protection Agency and
Food and Drug Administration. However, the Company does not believe these
guidelines will have a material impact on the Company's operations. Among the
guidelines are limits for specific absorption rate for evaluation of certain
hand-held devices such as cellular telephones, as well as guidelines for the
evaluation of cellular transmitting facilities. The Company believes that the
cellular telephones currently marketed and generally used, as well as the
Company's transmitting facilities, comply with the new standards. Moreover,
the FCC preempted state and local government regulation of cellular and other
personal wireless services facilities based on RF environmental effects to the
extent that such facilities comply with the FCC's rules concerning such RF
emissions. Potential interference to medical devices involves primarily
digital transmissions rather than analog. Industry, government and medical
experts have been conducting tests and developing methods for reducing or
eliminating such interference.
Change of Control
The Indenture provides that upon the occurrence of any Change of Control the
Company will be required to make an offer to purchase all of the Exchange
Notes then outstanding under the Indenture at a purchase price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the date of purchase. The Credit Facility contains a change of
control provision, and future credit or other borrowing agreements may contain
similar restrictions. The Company's unavailability of sufficient cash may not
allow the Company to honor its repurchase obligation to the holders of
Exchange Notes upon a Change of Control or otherwise prior to their stated
maturity, which would constitute an event of default thereunder. See
"Description of the Exchange Notes--Certain Covenants."
If a Change of Control were to occur, it is unlikely that the Company would
be able to both repurchase all of the Exchange Notes and repay all of its
obligations under other indebtedness that would become payable upon the
occurrence of such Change of Control, unless it could obtain alternate
financing. There can be no assurance that the Company would be able to obtain
any such financing on commercially reasonable terms or at all, and
consequently no assurance can be given that the Company would be able to
purchase any of the Exchange Notes tendered pursuant to a Change of Control
Offer (as defined under "Description of Exchange Notes--Certain Covenants--
Repurchase of Notes at the Option of the Holder Upon a Change of Control").
Operating Costs Due to Anti-Fraud Measures
Like most companies in the cellular industry, the Company incurs costs
associated with unauthorized use of its network. Fraud impacts interconnection
costs, capacity costs, administrative costs, costs incurred for fraud
prevention and payments to other carriers for unbillable fraudulent roaming.
The Company intends to continue to aggressively monitor the Company's exposure
to incidents of cellular fraud. Even so, there can be no assurance that the
Company will not incur substantial costs due to fraud. In addition, while the
costs of the Company's anti-fraud measures have not been significant in the
past, there can be no assurance that these costs will not become substantial
in the future.
Covenant Restrictions
The instruments governing the indebtedness of the Company under the Credit
Facility and the Notes impose significant operating and financial restrictions
on the Company. Such restrictions affect, and in many respects significantly
limit or prohibit, among other things, the ability of the Company to incur
additional indebtedness, pay dividends, repay indebtedness prior to stated
maturities, sell assets, make investments, engage in transactions with
stockholders and affiliates, issue capital stock, create liens, or engage in
mergers or acquisitions. In addition, the Credit Facility requires the Company
to maintain certain financial ratios. These restrictions could also limit the
ability of the Company to effect future financings, make needed capital
expenditures, withstand a future downturn in the Company's business or the
economy in general, or otherwise conduct necessary corporate
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activities. A failure by the Company to comply with these restrictions could
lead to a default under the terms of such indebtedness notwithstanding the
ability of the Company to meet its debt service obligations. In the event of a
default, the holders of such indebtedness could elect to declare all such
indebtedness to be due and payable together with accrued and unpaid interest.
In such event, a significant portion of the Company's other indebtedness
(including the Exchange Notes) may become immediately due and payable and
there can be no assurance that the Company would be able to make such payments
or borrow sufficient funds from alternative sources to make any such payment.
Even if additional financing could be obtained, there can be no assurance that
it would be on terms that are acceptable to the Company.
Security Interest of Lenders Under Credit Facility
The Company has pledged as security the equity interest in American Wireless
to the lenders under the Credit Facility. The pledge of such equity interest
in American Wireless could impair the Company's ability to obtain future
financing on favorable terms, if at all. Further, in the event American
Wireless were to default on its obligations under the Credit Facility and the
Lenders were to foreclose upon such pledged equity interest in American
Wireless, the Company, as the holding company of American Wireless, would
likely be unable to service or repay its indebtedness, including the Exchange
Notes. See "Description of Credit Facility."
Fraudulent Conveyance
Management of the Company believes that the indebtedness represented by the
Notes is being incurred for proper purposes and in good faith, and that, based
on present forecasts, asset valuations and other financial information, after
the consummation of the Merger, the Company will be solvent, will have
sufficient capital for carrying on its business and will be able to pay its
debts as they mature. See "--Leverage and Debt Service." Notwithstanding
management's belief, however, if a court of competent jurisdiction in a suit
by an unpaid creditor or a representative of creditors (such as a trustee in
bankruptcy or a debtor-in-possession) were to find that, at the time of the
incurrence of such indebtedness, the Company was insolvent, was rendered
insolvent by reason of such incurrence, was engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital, intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, or intended to hinder, delay or
defraud its creditors, and that the indebtedness was incurred for less than
reasonably equivalent value, then such court could, among other things, (a)
void all or a portion of the Company's obligations to the holders of the
Notes, the effect of which would be that the holders of the Notes may not be
repaid in full and/or (b) subordinate the Company's obligations to the holders
of the Notes to other existing and future indebtedness of the Company to a
greater extent than would otherwise be the case, the effect of which would be
to entitle such other creditors to be paid in full before any payment could be
made on the Notes.
Year 2000
The Company has reviewed the possible effect of the Year 2000 on the
computer systems currently in use, including the software that is an integral
part of the Company's switches and the related billing information. The
Company does not believe that any significant financial expenditure or
investment is expected to be required to make any modifications that may
become necessary. Additionally, the Company is in the process of reviewing the
status of Year 2000 compliance by its suppliers. At this time the Company is
unable to predict whether its third-party billing provider or its principal
sources of purchased or leased cellular equipment have made sufficient
modifications to address the potential problems of the Year 2000 software
shortcomings on their computer systems. Any additional costs of this nature,
to the extent they are passed on to the Company or affect or delay the
Company's business, bill collection or cellular equipment installation, could
have a material adverse effect upon the Company's business or results of
operations.
Failure to Exchange Private Notes
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly
completed and duly executed Letter of Transmittal and all other required
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documentation. Therefore, Holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of Private Notes for exchange. Private Notes that are not tendered or
are tendered but not accepted will, following consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof. In addition, any Holder of Private Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
will be required to comply with the registration and Prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own accounts in
exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a Prospectus in connection
with any resale of such Exchange Notes. To the extent that Private Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Private Notes could be adversely affected due to
the limited amount, or "float," of the Private Notes that are expected to
remain outstanding following the Exchange Offer. Generally, a lower "float" of
a security could result in less demand to purchase such security and could,
therefore, result in lower prices for such security. For the same reason, to
the extent that a large amount of Private Notes are not tendered or are
tendered and not accepted in the Exchange Offer, the trading market for the
Exchange Notes could be adversely affected. See "Plan of Distribution" and
"The Exchange Offer."
Absence of a Public Market
The Exchange Notes have no established trading market and will not be listed
on any securities exchange. The Initial Purchasers have advised the Company
that they intend to make a market in the Exchange Notes as permitted by
applicable laws and regulations; however, the Initial Purchasers are not
obligated to do so, and may discontinue any such market making activities at
any time without notice. In addition, such market making activity may be
limited during the Exchange Offer. Therefore, there can be no assurance that
an active market for the Exchange Notes will develop. If a trading market
develops for the Exchange Notes future trading prices of such securities will
depend on many factors, including, among other things, prevailing interest
rates, the market for similar securities and the performance of the Company.
In addition, based on such factors, the Notes may trade at a discount from
their initial offering price. See "The Exchange Offer" and "Plan of
Distribution."
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THE EXCHANGE OFFER
Purpose of the Exchange Offer
The Private Notes were sold by the Company on May 13, 1998 (the "Closing
Date") to the Initial Purchasers pursuant to the Purchase Agreement. The
Initial Purchasers subsequently sold the Private Notes to "qualified
institutional buyers" ("QIBs"), as defined in Rule 144A under the Securities
Act ("Rule 144A"), in reliance on Rule 144A. As a condition to the sale of the
Private Notes, the Company and the Initial Purchasers entered into the
Registration Rights Agreement on May 13, 1998. Pursuant to the Registration
Rights Agreement, the Company agreed that, unless the Exchange Offer is not
permitted by applicable law or Commission policy, it would (i) file with the
Commission a Registration Statement under the Securities Act with respect to
the Exchange Notes ("Registration Statement") within 60 days after the closing
of the Merger, (ii) use its best efforts to cause such Registration Statement
to become effective under the Securities Act within 120 days after the closing
of the Merger, (iii) to keep such Registration Statement effective until the
closing of the Exchange Offer, and (iv) to cause the Exchange Offer to be
consummated within 150 days of the closing of the Merger. Promptly after the
Registration Statement has been declared effective, the Company will offer the
Exchange Notes in exchange for surrender of the Private Notes. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement. The Exchange Offer Registration Statement is intended to satisfy
certain of the Company's obligations under the Registration Rights Agreement
and the Purchase Agreement.
Resale of the Exchange Notes
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a Holder (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
any such Holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchanges Private Notes for Exchange
Notes in the ordinary course of business and who is not participating, does
not intend to participate, and has no arrangement with any person to
participate, in a distribution of the Exchange Notes, will be allowed to
resell Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a Prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any Holder acquires Exchange Notes in the Exchange Offer for
the purpose of distributing or participating in the distribution of the
Exchange Notes or is a broker-dealer, such Holder cannot rely on the position
of the staff of the Commission enumerated in certain no-action letters issued
to third parties and must comply with the registration and Prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each broker-
dealer that receives Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a Prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a Prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Private Notes where such Private Notes were acquired by such
broker-dealer as a result of market-making or other trading activities.
Pursuant to the Registration Rights Agreement, the Company has agreed to make
this Prospectus, as it may be amended or supplemented from time to time,
available to broker-dealers for use in connection with any resale for a period
of 180 days after the Expiration Date. See "Plan of Distribution."
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal
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amount of outstanding Private Notes surrendered pursuant to the Exchange
Offer. Private Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) Holders of the Exchange Notes will
not be entitled to any of the rights of Holders of Private Notes under the
Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued
under, and be entitled to the benefits of, the Indenture, which also
authorized the issuance of the Private Notes, such that both series of Notes
will be treated as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $285.0 million in aggregate principal
amount of the Private Notes is outstanding. Only a registered Holder of the
Private Notes (or such Holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered Holders of the Private Notes entitled to participate in the
Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. The Company intends
to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, and (ii) mail to
the registered Holders an announcement thereof which shall include disclosure
of the approximate number of Private Notes deposited to date, each prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
The Company reserves the right, in its reasonable discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such
delay, extension or termination to the Exchange Agent. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the registered Holders. If
the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such
amendment by means of a Prospectus supplement that will be distributed to the
registered Holders,
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and the Company will extend the Exchange Offer for a period of five to ten
business days, depending upon the significance of the amendment and the manner
of disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
Interest on the Exchange Notes
The Exchange Notes will bear interest at a rate equal to 10 1/2% per annum.
Interest on the Exchange Notes will be payable semi-annually in arrears on
each May 15 and November 1, commencing November 15, 1998. Holders of Exchange
Notes will receive interest on November 15, 1998 from the date of initial
issuance of the Private Notes, plus an amount equal to the accrued interest on
the Private Notes from the date of initial delivery to the date of exchange
thereof for Exchange Notes. Holders of Private Notes that are accepted for
exchange will be deemed to have waived the right to receive any interest
accrued on the Private Notes.
Procedures for Tendering
Only a registered Holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a Holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth below under "--
Exchange Agent" for receipt prior to the Expiration Date. In addition, either
(i) certificates for such Private Notes must be received by the Exchange Agent
along with the Letter of Transmittal, (ii) a timely confirmation of a book-
entry transfer (a "Book-Entry Confirmation") of such Private Notes, if such
procedure is available, into the Exchange Agent's account at the Depositary
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the
Holder must comply with the guaranteed delivery procedures described below.
The tender by a Holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such Holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered Holder
promptly and instruct such registered Holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name
or obtain a properly completed bond power from the registered Holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes
tendered pursuant thereto are tendered (i) by a registered Holder who has not
completed the box titled "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be made by a
member firm of a registered national securities
28
<PAGE>
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of
Rule 17d-15 under the Exchange Act which is a member of one of the recognized
signature guarantee programs identified in the Letter of Transmittal (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Private Notes listed therein, such Private Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered Holder as such registered Holder's name appears on such Private
Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Private Notes not properly tendered or any Private Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Private Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Holders of
defects or irregularities with respect to tenders of Private Notes, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Private Notes will not be
deemed to have been made until such defects or irregularities have been cured
or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Private Notes that are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Private Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "--Conditions,"
to terminate the Exchange Offer and, to the extent permitted by applicable
law, purchase Private Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each Holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such Holder of
Private Notes in connection with the Exchange Offer are being acquired by such
Holder in the ordinary course of the respective business of such Holder, (ii)
such Holder has no arrangement or understanding with any person to participate
in the distribution of the Exchange Notes, (iii) if such Holder is a resident
of the State of California, it falls under the self-executing institutional
investor exemption set forth under Section 25102(i) of the Corporate
Securities Law of 1968 and Rules 260.102.10 and 260.105.14 of the California
Blue Sky Regulations, (iv) if such Holder is a resident of the Commonwealth of
Pennsylvania, it falls under the self-executing institutional investor
exemption set forth under Sections 203(c), 102(d) and (k) of the Pennsylvania
Securities Act of 1972, Section 102.111 of the Pennsylvania Blue Sky
Regulations and an interpretive opinion dated November 16, 1985, (v) such
Holder acknowledges and agrees that any person who is a broker-dealer
registered under the Exchange Act or is participating in the Exchange Offer
for the purposes of distributing the Exchange Notes must comply with the
registration and Prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of the staff of the Commission
set forth in certain no-action letters, (vi) such Holder understands that a
secondary resale transaction described in clause (v) above and any resales of
Exchange Notes obtained by such Holder in exchange for Private Notes acquired
by such
29
<PAGE>
Holder directly from the Company should be covered by an effective
registration statement containing the selling securityholder information
required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission and (vii) such Holder is not an "affiliate," as defined in Rule 405
under the Securities Act, of the Company. If the Holder is a broker-dealer
that will receive Exchange Notes for such Holder's own account in exchange for
Private Notes that were acquired as a result of market-making activities or
other trading activities, such Holder will be required to acknowledge in the
Letter of Transmittal that such Holder will deliver a Prospectus in connection
with any resale of such Exchange Notes; however, by so acknowledging and by
delivering a Prospectus, such Holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
Return of Private Notes
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn or are submitted for a greater principal amount than the Holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Private Notes
will be returned without expense to the tendering Holder thereof (or, in the
case of Private Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depositary pursuant to the book-entry transfer
procedures described below, such Private Notes will be credited to an account
maintained with the Depositary) as promptly as practicable.
Book-Entry Transfer
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in
accordance with the Depositary's procedures for transfer. However, although
delivery of Private Notes may be effected through book-entry transfer at the
Depositary, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth
below under "--Exchange Agent" on or prior to the Expiration Date or pursuant
to the guaranteed delivery procedures described below.
Guaranteed Delivery Procedures
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder, the certificate number(s) of such Private Notes and
the principal amount of Private Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof), together with the certificate(s) representing the
Private Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Private Notes in
proper form for transfer and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
30
<PAGE>
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to 5:00 P.M. on the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Private Notes) and (iii) be signed by the Holder in
the same manner as the original signature on the Letter of Transmittal by
which such Private Notes were tendered (including any required signature
guarantees). All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company in its sole
discretion, whose determination shall be final and binding on all parties. Any
Private Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Private Notes so withdrawn are validly retendered.
Properly withdrawn Private Notes may be retendered by following one of the
procedures described above under "The Exchange Offer--Procedures for
Tendering" at any time prior to the Expiration Date.
Conditions
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates
applicable law, rules or regulations or an applicable interpretation of the
staff of the Commission.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering Holders, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of Holders
to withdraw such Private Notes (see "--Withdrawal of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Private Notes that have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a Prospectus supplement that will be
distributed to the registered Holders of the Private Notes, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered Holders, if the Exchange Offer would otherwise expire during
such five to ten business day period.
Termination of Certain Rights
All rights under the Registration Rights Agreement (including registration
rights) of Holders of the Private Notes eligible to participate in the
Exchange Offer will terminate upon consummation of the Exchange Offer except
with respect to the Company's continuing obligations (i) to indemnify such
Holders (including any broker-dealers) and certain parties related to such
Holders against certain liabilities (including liabilities under the
Securities Act), (ii) to provide, upon the request of any Holder of a
transfer-restricted Private Note, the information required by Rule 144A(d)(4)
under the Securities Act in order to permit resales of such Private Notes
pursuant to Rule 144A, (iii) to use its best efforts to keep the Registration
Statement effective to the extent necessary to ensure that it is available for
resales of transfer-restricted Private Notes by broker-dealers for a period of
up to 120 days from the Expiration Date and (iv) to provide copies of the
latest version of the Prospectus to broker-dealers upon their request for a
period of up to 180 days after the Expiration Date.
31
<PAGE>
Additional Interest
In the event of a Registration Default (as defined in the Registration
Rights Agreement), the interest rate borne by the Notes shall be increased by
one-quarter of one percent per annum upon the occurrence of each Registration
Default, which rate (as increased as aforesaid) will increase by one-quarter
of one percent each 90-day period that such additional interest continues to
accrue under any such circumstance, with an aggregate maximum increase in the
interest rate equal to one percent per annum. Following the cure of all
Registration Defaults the accrual of additional interest ("Additional
Interest") will cease and the interest rate will revert to the original rate.
Holders of Transfer Restricted Securities will be required to make certain
representations to the Company in order to participate in the Exchange Offer
and will be required to deliver information to be used in connection with the
Shelf Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights
Agreement in order to have their Transfer Restricted Securities included in
the Shelf Registration Agreement and benefit from the provisions regarding
Additional Interest set forth above.
Exchange Agent
Chase Manhattan Bank and Trust Company, National Association has been
appointed as Exchange Agent of the Exchange Offer. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notice of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand Delivery:
Chase Manhattan Bank and Trust Company, Chase Manhattan Bank and Trust Company,
National Association National Association
c/o Chase Manhattan Bank c/o Chase Manhattan Bank
55 Water Street, Second Floor, Room 234 55 Water Street, Second Floor, Room 234
New York, New York 10041 New York, New York 10041
Attention: Carlos Esteves Attention: Carlos Esteves
By Overnight Delivery: By Facsimile:
Chase Manhattan Bank and Trust Company, (212) 638-7380
National Association
c/o Chase Manhattan Bank Confirm by Telephone:
55 Water Street, Second Floor, Room 234 (212) 638-0828
New York, New York 10041
Attention: Carlos Esteves
</TABLE>
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$150,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
32
<PAGE>
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax
is imposed for any reason other than the exchange of the Private Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other persons) will be
payable by the tendering Holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
Holder.
Consequence of Failures to Exchange
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Private Notes may be resold only (i) to a person whom the seller reasonably
believes is a QIB in a transaction meeting the requirements of Rule 144A, (ii)
in a transaction meeting the requirements of Rule 144 under the Securities
Act, (iii) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act, (iv) in
accordance with another exemption from the registration requirements of the
Securities Act (and based upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
Accounting Treatment
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
33
<PAGE>
THE MERGER
The following is a summary of the structure of the Merger. This summary does
not purport to be complete and is qualified in its entirety by reference to
the Merger Agreement.
Structure of the Merger
Pursuant to the Merger Agreement, American Cellular merged with and into
PriCellular on June 25, 1998 (the "Merger Date") with PriCellular as the
surviving corporation in the Merger. The surviving corporation in the Merger
is operating under the name American Cellular Corporation. At the effective
time of the Merger, by virtue of the Merger, (i) each issued and outstanding
share of (x) Class A Common Stock, par value $0.01 per share of PriCellular
("PriCellular Class A Shares"), and (y) Class B Common Stock, par value $0.01
per share, of PriCellular, was converted into the right to receive $14.00 in
cash, without interest, and (ii) each issued and outstanding share of
PriCellular Series A Preferred Stock was converted into the right to receive
the product of the Merger Consideration and the number of PriCellular Class A
Shares into which each such share of PriCellular Series A Preferred Stock was
convertible. As a result of these transactions, the surviving corporation
succeeded to American Cellular's obligations under the Indenture and is the
primary obligor of the Notes.
Financing of the Merger
A total of approximately $1.5 billion was required to pay the consideration
to PriCellular stockholders in the Merger, repay indebtedness of PriCellular
and Wireless (including the purchase of Old Notes in the Debt Tender Offers),
pay the related fees and expenses, and purchase the Pledged Securities. See
"Summary--The Merger--Sources and Uses of Funds." The sources of funding for
the Merger and the related transactions were the Credit Facility, the Equity
Contribution and the Offering.
In connection with the Merger, a subsidiary of American Cellular borrowed
approximately $900 million under the $1.0 billion Credit Facility, comprised
of an $850 million term loan facility and a $150 million revolving credit
facility. Merrill Lynch Capital and an affiliate of TD Securities (USA), Inc.
provided the Company with the Credit Facility. Approximately $16 million of
accrued Merger Consideration was paid subsequent to June 30, 1998 through
borrowings on the Revolving Credit Facility. See "Description of Credit
Facility."
In addition, American Cellular received the $350 million Equity Contribution
from the Equity Investors pursuant to the Stock Purchase Agreement, as amended
(the "Stock Purchase Agreement"). On the Merger Date, the Company loaned
approximately $1.0 million to each of Messrs. Fujii and McTernan to purchase
a portion of the Series A Preferred Stock. American Cellular has also issued
shares of its Class B Common Stock to certain employees. See "Management--
Management Incentive Plan" and "Certain Relationships and Related
Transactions."
Debt Tender Offers and Solicitations
In connection with the Merger, American Cellular purchased in connection
with the Debt Tender Offers all of the outstanding Old Notes of Wireless to
eliminate the interest expense associated with the Old Notes. Pursuant to
consent solicitations which were made in order to enhance the operating and
financial flexibility of the Company, American Cellular received the required
number of consents from the holders of the Old Notes to eliminate most of the
restrictive covenants contained in the indentures governing the Old Notes and
to amend certain other provisions contained in such indentures. The Company
entered into supplemental indentures effecting such changes.
Convertible Notes
All of the Convertible Notes, which were convertible into PriCellular Class
A Shares at $9.94 per share, were converted into PriCellular Class A Shares
prior to the consummation of the Merger and, therefore, received the Merger
Consideration of $14.00 per share.
34
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the Exchange Offer. The
net proceeds from the Private Offering, which were approximately $272.5
million after deducting discounts, commissions and estimated fees and expenses
incurred in connection therewith, were used to finance the Merger.
The following table sets forth the approximate sources and uses of funds in
connection with the Merger, the Debt Tender Offers and the Merger Financings:
<TABLE>
<CAPTION>
Amount
-------------
(In millions)
<S> <C>
Sources of Funds:
Cash on hand................................................. $ 51.4
Credit Facility:
Revolving Credit Facility (a).............................. 66.0
Term Loans................................................. 850.0
Private Notes (b)............................................ 282.8
Redeemable Preferred Stock................................... 323.0
Common Stock................................................. 25.1
Interest Income.............................................. 2.3
--------
Total Sources of Funds..................................... $1,600.6
========
Uses of Funds:
Cash Merger Consideration (c)................................ $ 791.0
Repayment of net existing indebtedness (d)................... 594.1
Debt Tender Offer Payments (e)............................... 71.9
Restricted Escrow Investment (b)............................. 82.4
Fees and expenses............................................ 47.3
Working capital.............................................. 9.8
Stay-on bonuses (f).......................................... 4.1
--------
Total Uses of Funds........................................ $1,600.6
========
</TABLE>
- --------
(a) The Revolving Credit Facility provides for total borrowings of up to $150
million. Borrowings under the Credit Facility may be increased by up to
$250 million upon request of American Wireless and consent of a majority
of the lenders thereunder.
(b) Approximately $82.4 million of the proceeds from the Notes were used to
purchase the Pledged Securities to pay the first six scheduled interest
payments on the Notes (unless already paid) at the stated interest rate.
(c) Represents the Merger Consideration paid to the PriCellular stockholders
(reflecting that all of PriCellular's 10 3/4% Senior Subordinated
Convertible Discount Notes due 2004 (the "Convertible Notes") were
converted into common stock), reduced by the estimated proceeds from the
exercise of certain warrants and options.
(d) Represents the funds required to repay total existing indebtedness of the
Company. In connection with the Merger, American Cellular purchased (the
"Debt Tender Offers") the 10 3/4% Senior Notes due 2004 (the "10 3/4%
Notes") of Wireless, the 12 1/4% Senior Subordinated Discount Notes due
2003 (the "12 1/4% Notes") of Wireless and the 14% Senior Subordinated
Discount Notes due 2001 (the "14% Notes") of Wireless (collectively, the
"Old Notes"). See "The Merger--Debt Tender Offers and Solicitations."
(e) Includes amounts for the consent solicitation fees associated with the
Debt Tender Offers.
(f) Stay-on bonuses were amounts paid pursuant to the Merger Agreement by
American Cellular to retained employees subsequent to the Merger to entice
employees to remain with the Company through completion of the Merger.
35
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information presented herein gives effect
to (i) the Merger, (ii) the Merger Financings, (iii) the Debt Tender Offers
and the repayment or conversion of all other existing Indebtedness of
PriCellular and (iv) the purchase of the TN-4 RSA by PriCellular in January
1998. The pro forma financial information is based on the historical financial
statements of American Cellular and PriCellular, although the financial
information for TN-4 RSA as of and for the period ended December 31, 1997
precedes the acquisition of the TN-4 RSA by PriCellular and is based upon the
books and records of the TN-4 RSA and has not been audited or reviewed.
The acquisition of PriCellular by American Cellular has been accounted for
using the purchase method of accounting. Accordingly, assets acquired and
liabilities assumed have been recorded at their estimated fair values, which
are subject to further adjustment based upon appraisals and other analyses,
with appropriate recognition given to the effect of the Issuer's borrowing
rates and income tax rates. The Company believes that no material adjustments
from the preliminary estimates to final accounts are expected. As certain of
the PriCellular stockholders remained stockholders of American Cellular, in
accordance with generally accepted accounting principles, the step-up in value
of the assets has been limited.
The unaudited pro forma condensed combined statement of operations for the
nine months ended September 30, 1998 and for the year ended December 31, 1997
give effect to the Transactions as if they had been consummated on January 1,
1997. The unaudited pro forma condensed combined statement of operations for
the nine months ended September 30, 1998 have been derived from the historical
unaudited financial statements of American Cellular for the period ended
September 30, 1998 and the historical unaudited financial statements of
PriCellular for the period ended June 30, 1998.
The pro forma adjustments are based upon available information and
assumptions that the Company believes are reasonable at the time made. The
unaudited pro forma condensed combined financial statements do not purport to
present the results of operations of the Company had the Merger occurred on
the date specified, nor are they necessarily indicative of the results of
operations that may be achieved in the future.
36
<PAGE>
American Cellular Corporation
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Historical
---------------------
American Pro Forma
Cellular PriCellular Adjustments Pro Forma
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues...................... $ 73,680 $116,182 -- $ 189,862
Costs and expenses:
Cost of cellular service.... 17,497 28,423 -- 45,920
Cost of equipment sold...... 3,246 5,365 -- 8,611
Selling, general and
administrative............. 16,384 30,230 -- 46,614
Depreciation and
amortization............... 22,506 18,751 26,447 (a) 67,704
Non-recurring charges....... 4,154 4,889 (4,154)(b) 4,889
-------- -------- -------- ---------
63,787 87,658 22,293 173,738
-------- -------- -------- ---------
Operating income (loss)....... 9,893 28,524 (22,293) 16,124
Other income (expense):
Interest expense net........ (33,865) (37,757) (11,200)(c) (82,822)
Interest income............. 3,744 1,570 (1,320)(d) 3,994
Other income, net........... 251 1,377 133 (f) 1,761
-------- -------- -------- ---------
(29,870) (34,810) (12,387) (77,067)
-------- -------- -------- ---------
Net loss...................... (19,977) (6,286) (34,680) (60,943)
Preferred stock dividends and
accretion.................... 11,069 3,357 15,710 (e) 30,136
-------- -------- -------- ---------
Net loss applicable to common
stock........................ $(31,046) $ (9,643) $(50,390) $ (91,079)
======== ======== ======== =========
</TABLE>
37
<PAGE>
American Cellular Corporation
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
Historical
-------------------- Pro Forma
PriCellular TN-4 RSA Adjustments Pro Forma
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues........................ $181,000 $15,264 -- $ 196,264
Costs and expenses:
Cost of cellular service...... 48,691 3,653 -- 52,344
Cost of equipment sold........ 12,841 1,034 -- 13,875
Selling, general and
administrative............... 53,485 3,220 -- 56,705
Depreciation and
amortization................. 28,759 894 54,805 (a) 84,458
-------- ------- --------- ---------
143,776 8,801 54,805 207,382
-------- ------- --------- ---------
Operating income (loss)......... 37,224 6,463 (54,805) (11,118)
Other income (expense):
Gain on sale of investments in
cellular operations.......... 8,423 -- (8,423)(f) --
Interest expense.............. (67,392) (2,051) (36,446)(c) (105,889)
Interest income............... 4,864 142 (195)(d) 4,811
Other income, net............. 3,250 -- -- 3,250
-------- ------- --------- ---------
(50,855) (1,909) (45,064) (97,828)
-------- ------- --------- ---------
Net income (loss)............... (13,631) 4,554 (99,869) (108,946)
Preferred stock dividends and
accretion...................... 6,540 -- 34,250 (e) 40,790
-------- ------- --------- ---------
Net income (loss) applicable to
common stock................... $(20,171) $ 4,554 $(134,119) $(149,736)
======== ======= ========= =========
</TABLE>
38
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(Dollars in thousands)
For purposes of determining the pro forma effect of the Transactions on
American Cellular's consolidated statements of operations for the nine months
ended September 30, 1998 and the year ended December 31, 1997, the following
pro forma adjustments have been made.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<C> <S> <C> <C>
(a) Increase in depreciation of fixed
assets and amortization of
intangible assets resulting from the
purchase price allocation:
Fixed assets--depreciated over
7 years........................... $ 2,644 $ 5,289
Subscriber list--amortized over
3 years........................... 1,872 3,744
Goodwill--amortized over 20
years............................. 21,931 45,772
-------- --------
$ 26,447 $ 54,805
======== ========
The fixed assets, subscriber list and goodwill adjustments are based on the
increases to historical cost pursuant to purchase accounting divided by the
lives noted above.
(b) Elimination of stay-on bonuses
incurred in connection with the
Merger.............................. $ (4,154) $ --
======== ========
The stay-on bonuses were amounts paid pursuant to the Merger Agreement by
American Cellular to retained employees subsequent to the Merger to entice
employees to remain with the Company during the transition period from the
date of the announcement of the Merger through the closing of the Merger on
June 25, 1998. Accordingly, American Cellular accrued these expenses at June
30, 1998 as the amount became a liability upon consummation of the Merger. As
these costs relate directly to the Merger, they were eliminated.
(c) Interest expense and amortization of
deferred financing costs on the
following:
Private and Exchange Notes........ $(14,963) $(29,925)
Term Loans at 7.375% to 8.5%...... (33,344) (66,688)
Revolving Credit Facility at
7.375%............................ (2,434) (4,868)
Amortization of deferred financing
costs............................. (2,206) (4,408)
Elimination of existing interest
expense........................... 41,747 69,443
-------- --------
$(11,200) $(36,446)
======== ========
(d) Interest earned on treasury
securities placed in escrow, based
on actual interest rates ranging
from 5.50% to 6.375%................ $ 2,406 $ 4,811
Loss of interest income due to zero
cash balance........................ (3,726) (5,006)
-------- --------
$ (1,320) $ (195)
======== ========
(e) Preferred stock dividend on the
Company's redeemable preferred stock
at 12%.............................. $ 19,067 $ 40,790
Elimination of PriCellular preferred
stock dividends..................... (3,357) (6,540)
-------- --------
$ 15,710 $ 34,250
======== ========
(f) Elimination of the (gain) loss on
sale of investments in cellular
operations.......................... $ 133 $ (8,423)
======== ========
</TABLE>
39
<PAGE>
SELECTED FINANCIAL DATA
The Company acquired all of its existing Systems (excluding minority
interests) between April 1994 and January 1998. The following selected
historical financial data is not necessarily indicative of future results of
operations. The selected financial data set forth below for American Cellular
for the period ended September 30, 1998 and for PriCellular for the periods
ended June 30, 1998 and 1997 is unaudited. The PriCellular selected financial
data for the years ended December 31, 1997, 1996 and 1995 and as of
December 31, 1997 and 1996, is derived from, and qualified by reference to,
the audited consolidated financial statements included elsewhere herein. The
PriCellular selected financial data for the years ended December 31, 1994 and
1993 and as of December 31, 1995, 1994 and 1993 are derived from audited
consolidated financial statements not included elsewhere herein. The selected
financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
American Cellular PriCellular (Predecessor)
------------------ ----------------------------------------------------------------
Period from
February 26, Six Months Ended
1998 (date of June 30, Year Ended
formation) through ----------------- ---------------------------------------------
September 30, 1998 1998 1997 1997 1996 1995 1994 1993
------------------ -------- ------- -------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating revenues..... $ 73,680 $116,182 $78,738 $181,000 $112,616 $41,504 $ 5,209 $ 3,809
Cost of cellular
service............... 17,497 28,423 20,643 48,691 29,571 10,694 1,892 835
Cost of equipment
sold.................. 3,246 5,365 5,642 12,841 10,073 4,951 814 255
-------- -------- ------- -------- -------- ------- ------- -------
Gross margin........... 52,937 82,394 52,453 119,468 72,972 25,859 2,503 2,719
Selling, general and
administrative........ 16,384 30,230 23,710 53,485 34,502 16,512 6,005 1,659
Depreciation and
amortization.......... 22,506 18,751 14,296 28,759 19,537 10,337 2,720 1,695
Non-recurring charges.. 4,154 4,889 -- -- -- -- -- --
-------- -------- ------- -------- -------- ------- ------- -------
Operating income
(loss)................ 9,893 28,524 14,447 37,224 18,933 (990) (6,222) (635)
Gain (loss) on sale of
investments in
cellular operations... -- (133) 8,424 8,423 (1,401) 11,598 6,819 11,986
Interest expense, net.. (30,121) (36,187) (29,511) (62,528) (42,201) (18,839) (1,940) (271)
Other income (expense),
net................... 251 1,510 1,625 3,250 1,626 520 (97) (464)(a)
-------- -------- ------- -------- -------- ------- ------- -------
Income (loss) before
income taxes........... (19,977) (6,286) (5,015) (13,631) (23,043) (7,711) (1,440) 10,616
Income tax.............. -- -- -- -- -- -- -- --
-------- -------- ------- -------- -------- ------- ------- -------
Net income (loss)....... $(19,977) $ (6,286) $(5,015) $(13,631) $(23,043) $(7,711) $(1,440) $10,616
======== ======== ======= ======== ======== ======= ======= =======
Ratio of earnings to
combined fixed charges
and preferred stock
dividends (b).......... -- -- -- -- -- -- -- 22.7
Deficiency of earnings
to combined fixed
charges and preferred
stock dividends (b).... $(31,046) $ (9,643) $(8,255) $(20,171) $(29,221) $(7,711) $(1,440) --
</TABLE>
<TABLE>
<CAPTION>
American
Cellular PriCellular (Predecessor)
---------- ------------------------------------------
As of As of December 31,
September ------------------------------------------
30, 1998 1997 1996 1995 1994 1993
---------- -------- -------- -------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital
(deficit)............. $ 38,488 $ 44,518 $ 89,749 $116,415 $ 26,488 $ (139)
Net fixed assets....... 151,060 104,854 73,327 52,041 26,144 389
Total assets........... 1,541,782 747,656 735,816 544,766 215,744 6,755
Long-term debt......... 1,196,922 568,323 524,517 315,216 113,683 4,000
Total liabilities...... 1,257,999 613,476 555,897 339,038 137,508 4,680
Stockholders' equity
(deficit)............. (50,286) 134,180 179,919 205,728 78,236 2,075
</TABLE>
- -------
(a) Extraordinary loss on early extinguishment of debt of $172 is shown as
part of other income (expense), net.
(b) The ratio of earnings to combined fixed charges and preferred stock
dividends is determined by dividing the sum of income (loss) before income
taxes, interest expense, and a portion of rent expense representative of
interest by the sum of interest expense, a portion of the rent expense
representative of interest, and the preferred stock dividend requirement.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The following is a discussion and analysis of the historical results of
operations and financial condition of American Cellular and PriCellular and
factors affecting the Company's financial resources. This discussion should be
read in conjunction with the Company's and PriCellular's financial statements,
including the notes thereto, included in this Registration Statement.
On January 15, 1998, a subsidiary of PriCellular acquired the TN-4 RSA for
approximately $73 million. The acquisition was accounted for under the
purchase method of accounting and is included in the results of operations
from the date of acquisition.
On June 25, 1998, American Cellular acquired PriCellular pursuant to an
Agreement and Plan of Merger dated March 6, 1998 for approximately $1.5
billion. The acquisition was recorded in accordance with the purchase method
of accounting. The cost of the acquisition was allocated to the tangible and
intangible assets and liabilities assumed based on their respective fair
values. PriCellular had been partially owned (6.39%) by a group of investors,
which also own 27.2% of American Cellular (the 6.39% is considered the
continuing ownership interest). The cost to acquire the continuing ownership
interest in the net assets of PriCellular in excess of the predecessor basis
($44.4 million) has been reflected as a reduction of stockholders' equity of
American Cellular pursuant to generally accepted accounting principals.
The results of operations of American Cellular include the operations of
PriCellular from June 30, 1998, the normal month-end closing of PriCellular.
The results of operations of American Cellular do not differ materially than
if the actual closing date of the Merger had been used. Accordingly, the
results of operations of American Cellular include the results of the acquired
operations for only the three months ended September 30, 1998.
American Cellular accounted for the Merger using purchase price accounting.
Accordingly, the PriCellular and American Cellular financial statements
reflect different bases of accounting and capitalization which can
significantly impact depreciation, amortization, interest and related tax
expenses. However, for purposes of the following discussion regarding 1998 and
1997 activity, the pre- and post-acquisition financial information has been
combined to provide the reader with an indication of the trend of the results.
Specifically, the results of operations of American Cellular for the three
months ended September 30, 1998 will be compared to the results of operations
of PriCellular for the three months ended September 30, 1997. Additionally,
the results of operations of American Cellular for the nine months ended
September 30, 1998 will be combined with the results of operations of
PriCellular for the six months ended June 30, 1998 and then compared with the
results of operations of PriCellular for the nine months ended September 30,
1997.
Results of Operations of American Cellular
General
The current three-month period ending September 30, 1998 reflects the
continuing financial growth of the Company's operations. Net subscriber
additions approximated 19,000 for the current quarter compared to 21,000 net
additions in the third quarter of 1997. Net subscriber additions approximated
62,000 for the nine month period ending September 30, 1998 compared to
approximately 55,000 in 1997. The Company ended the current period with
approximately 305,000 subscribers resulting in penetration of 6.3% compared to
approximately 216,000 subscribers and a penetration rate of 4.8% at September
30, 1997. Churn for the Company decreased for the year with a rate of 1.6%
compared to 1.7% for the prior year.
41
<PAGE>
Three months ended September 30, 1998 compared with three months ended
September 30, 1997.
<TABLE>
<CAPTION>
Three Months ended
September 30,
---------------------
1998
American 1997
Cellular PriCellular
-------- -----------
(in thousands)
<S> <C> <C>
Revenues............................................. $ 73,680 $ 52,498
Cost of cellular service............................. 17,497 14,284
Cost of equipment sold............................... 3,246 3,349
Selling, general and administrative.................. 16,384 13,557
Depreciation and amortization........................ 22,506 6,690
Non-recurring charges................................ 77 --
-------- --------
Operating income..................................... 13,970 14,618
Interest expense, net................................ (28,287) (16,427)
Other income......................................... 251 812
-------- --------
Net loss............................................. $(14,066) $ (997)
======== ========
</TABLE>
Revenues for the quarter ended September 30, 1998 increased to $73.7 million
(consisting of subscriber revenues of $37.5 million, roaming revenues of $22.1
million, toll revenues of $10.6 million, equipment sales revenues of $1.7
million and other revenues of $1.8 million) from $52.5 million (consisting of
cellular service revenues of $49.2 million (including subscriber, roaming and
toll revenues), equipment sales revenues of $1.4 million and other revenues of
$1.9 million). The significant increase in the subscriber base which generates
additional monthly revenue and increased air time revenue is the primary
reason for the increase. In addition the Company's commitment to improving
coverage in the markets through capital additions has resulted in increased
roaming revenue.
As noted above, roaming revenues for the three months ended September 30,
1998 totaled $22.1 million or 29.9% of total revenues. Comparable roaming
revenue data for periods before the Merger is not available. However, the
Company has experienced decreasing roaming rates consistent with industry
trends which are expected to continue for the foreseeable future. The Company
believes that the impact of this trend will be mitigated by increased usage
from growth in the number of wireless telecommunications subscribers and
accordingly, such decrease is not expected to have a material adverse effect
on the financial condition, results of operations or liquidity of the Company.
Total operating expenses for the quarter ended September 30, 1998 increased
to $59.7 million (consisting of cost of cellular service of $17.5 million,
cost of equipment sold of $3.2 million, selling, general and administrative
expenses of $16.4 million, depreciation and amortization of $22.5 million, and
non-recurring charges of $0.1 million) from $37.9 million of operating
expenses for the quarter ended September 30, 1997 (consisting of cost of
cellular service of $14.3 million, cost of equipment sold of $3.3 million,
selling, general and administrative expenses of $13.6 million and depreciation
and amortization of $6.7 million). The primary factor contributing to the
increase in expenses is the increase in the volume of revenue due to the
growth of the business. On a percentage basis the cost of cellular service
represents 25% of cellular revenue for the current three month period and 29%
of cellular revenue for the prior three month period. Operating expenses
consisting of the cost of cellular service, the cost of equipment sold and
selling, general and administrative expenses increased by $5.9 million, but as
a percentage of total revenue decreased from 59% for the quarter ending
September 30, 1997 to 50% for the current quarter. The increase in
depreciation and amortization is reflective of the increased bases of fixed
assets and goodwill subsequent to the Merger as accounted for under the
purchase method. Non-recurring charges relate to stay-on bonuses paid pursuant
to the Merger to retained employees remaining with the Company through the
completion of the Merger.
Interest expense, net increased to $28.3 million from $16.4 million due to
the issuance of $285 million of Senior Notes and borrowings of $916 million
against the Company's $1 billion credit facility, in connection with the
Merger.
42
<PAGE>
Combined nine months ended September 30, 1998 compared with nine months ended
September 30, 1997.
<TABLE>
<CAPTION>
American Cellular PriCellular Combined PriCellular
----------------- ----------- ------------- -------------
Nine Months Six Months Nine Months Nine Months
ended ended ended ended
September 30, June 30, September 30, September 30,
1998 1998 1998 1997
----------------- ----------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................ $ 73,680 $116,182 $189,862 $131,236
Cost of cellular serv-
ice.................... 17,497 28,423 45,920 34,927
Cost of equipment sold.. 3,246 5,365 8,611 8,991
Selling, general and ad-
ministrative........... 16,384 30,230 46,614 37,267
Depreciation and amorti-
zation................. 22,506 18,751 41,257 20,986
Non-recurring charges... 4,154 4,889 9,043 --
-------- -------- -------- --------
Operating income........ 9,893 28,524 38,417 29,065
Interest expense, net... (30,121) (36,187) (66,308) (45,938)
Other income............ 251 1,377 1,628 10,861
-------- -------- -------- --------
Net loss................ $(19,977) $ (6,286) $(26,263) $ (6,012)
======== ======== ======== ========
</TABLE>
Revenues for the nine months ended September 30, 1998 increased to $189.9
million (consisting of cellular service revenues of $179.7 million, equipment
sales revenues of $4.6 million and other revenues of $5.6 million) from $131.2
million (consisting of cellular service revenues of $122.2 million, equipment
sales revenues of $3.7 million and other revenues of $5.3 million). The
significant increase in the subscriber base which generates additional monthly
revenue and increased air time revenue is the primary reason for the increase.
In addition the Company's commitment to improving coverage in the markets
through capital additions has resulted in increased roaming revenue.
Total operating expenses for the nine months ended September 30, 1998
increased to $151.4 million (consisting of cost of cellular service of $45.9
million, cost of equipment sold of $8.6 million, selling, general and
administrative expenses of $46.6 million, non-recurring charges of $9.1
million and depreciation and amortization of $41.2 million) from $102.2
million (consisting of cost of cellular service of $34.9 million, cost of
equipment sold of $9.0 million, selling, general and administrative expenses
of $37.3 million and depreciation and amortization of $21.0 million). The
primary factor contributing to the increase in expenses is the increase in the
volume of revenue due to the growth of the business. On a percentage basis the
cost of cellular service represents 26% of cellular revenue for the current
nine month period and 29% of cellular revenue for the prior nine month period.
Operating expenses consisting of the cost of cellular service, the cost of
equipment sold and selling, general and administrative expenses increased by
$20.0 million, but as a percentage of total revenue decreased from 62% for the
nine months ending September 30, 1997 to 53% for the same period in 1998. The
increase in depreciation and amortization is reflective of the increased bases
of fixed assets and goodwill subsequent to the Merger as accounted for under
the purchase method. Non-recurring charges for American Cellular relate to
stay-on bonuses paid pursuant to the Merger to retained employees remaining
with the Company through the completion of the Merger. Non-recurring charges
for PriCellular relate to professional and legal fees associated with the
Merger.
Interest expense, net increased to $66.3 million from $45.9 million due to
the issuance of $285 million of Senior Notes and borrowings of $916 million
against the Company's $1 billion credit facility, in connection with the
Merger. Other income decreased to $1.6 million from $10.9 million primarily
from a gain on the sale of cellular properties of $8.4 million in 1997
resulting from the sale of the Florence AL MSA and AL1-B RSA.
43
<PAGE>
Results of Operations of PriCellular
General
The current three-month period ending June 30, 1998 reflects the continuing
financial growth of the Company's operations. Net subscriber additions
approximated 17,400 for the current quarter compared to 21,500 net additions
in the second quarter of 1997. The Company ended the current period with
approximately 286,000 subscribers resulting in penetration of 5.9% compared to
approximately 195,000 subscribers and a penetration rate of 4.3% at June 30,
1997. Churn for the Company continued its improvement ending the current
quarter at a rate of 1.4% compared to 1.7% for last year's three month period.
Except for the acquisition of the TN-4 RSA in January 1998 and non-recurring
charges relating to the merger of American Cellular into PriCellular, the
financial results of the Company and PriCellular are substantially comparable.
Six months ended June 30, 1998 compared with six months ended June 30, 1997
Revenues for the six months ended June 30, 1998 increased to $116.2
(consisting of cellular service revenues of $109.4 million, equipment sales
revenues of $2.9 million and other revenues of $3.9 million) from $78.7
million (consisting of cellular service revenues of $72.9 million, equipment
sales revenues of $2.3 million and other revenues of $3.5 million).
Total operating expenses for the six months ended June 30, 1998 increased to
$87.7 million (consisting of cellular service of $28.4 million, cost of
equipment sold of $5.4 million, selling, general and administrative expenses
of $30.2 million, depreciation and amortization of $18.8 million and non-
recurring charges of $4.9 million) from $64.3 million (consisting of cost of
cellular service of $20.6 million, cost of equipment sold of $5.7 million,
selling, general and administrative expenses of $23.7 million and depreciation
and amortization of $14.3 million). Selling, general and administrative
expenses include selling and marketing expenses which accounted for 40.4% and
47.2% of the total balance for the six months ended June 30, 1998 and 1997,
respectively. The declining percentage reflects the leveraging of these
expenses against increasing revenues.
Interest expense, net increased to $36.2 million from $29.5 million due to
PriCellular's issuance of $60 million of a Senior Secured Reducing Revolver at
an effective rate of approximately 7.7% in January 1998, a reduction in the
amount of interest earned resulting from the lower cash balances for the
current six months and higher interest expense for the discounted indebtedness
outstanding as their balances approach the face value of the Notes.
The first six months of 1997 included a gain from the sale of cellular
properties of $8.4 million resulting from the sale of the Florence AL MSA and
AL1-B RSA as well as revenue earned directly from covenants not to compete of
$1.6 million in both 1998 and 1997.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Operating revenue increased from $112.6 million in 1996 (consisting of
$105.2 million of cellular service, $3.4 million of equipment sales and $4.0
million of other) to $181.0 million in 1997 (consisting of $168.4 million of
cellular service, $5.4 million of equipment sales and $7.2 million of other).
The primary reason for the increase in cellular service revenue and equipment
sales is the addition of the Kentucky Cluster, the WI-4 RSA and the WI-5 RSA
in 1997 and the fact that Poughkeepsie, NY-6, and WV-3 markets were acquired
over the course of 1996 and therefore generated a full year of revenue in 1997
but were included for only part of the year in 1996.
Total costs and expenses increased from $93.7 million in 1996 (consisting of
$29.6 million for cellular service, $10.1 million for cost of equipment sold,
$34.5 million for selling, general and administrative and $19.5 million for
depreciation and amortization) to $143.8 million in 1997 (consisting of $48.7
million for
44
<PAGE>
cellular service, $12.8 million for cost of equipment sold, $53.5 million for
selling, general and administrative and $28.8 for depreciation and
amortization). The increases are principally a result of the markets added in
1996 and 1997 as stated above. Selling, general and administrative expenses
include selling and marketing expenses which accounted for 47.6% and 48.4% of
the total balance for the years ended December 31, 1997 and 1996,
respectively. The declining percentage reflects the leveraging of these
expenses against increasing revenues.
The increase in interest expense from $47.1 million in 1996 to $67.4 million
in 1997 is a result of a full year's worth of interest on PriCellular's $170.0
million of 10% Notes issued in November 1996, compared to only one and one-
half months in 1996.
The gain on sale of investments in cellular operations resulted from the
sale in January 1997 of the Florence AL MSA and AL-1B RSA ("Florence
License"). In 1996, the net loss resulted from the sale of the AL-4 RSA ($1.6
million loss) and the sale of the MI-2 RSA ($1.6 million loss) offset by the
sale of minority Pops ($1.8 million gain).
Other income increased to $3.3 million in 1997 from $1.6 million in 1996
principally due to the amortization of the covenant not to compete associated
with the sale of the Florence License in January 1997.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Operating revenues increased from $41.5 million in 1996 (consisting of
cellular revenues of $38.8 million, equipment sales of $1.7 million and other
revenues of $1.0 million) to $112.6 million in 1996 (consisting of cellular
revenues of $105.2 million, equipment sales of $3.4 million and other revenues
of $4.0 million). The significant increase in cellular revenues and equipment
sales resulted from properties added in 1996 which were not present in 1995
including the addition of the New York Cluster and significant additions to
the Mid-Atlantic Cluster and Upper Midwest Cluster in the latter half of 1995
for which a full year of revenue was earned in 1996. The increase in other
revenue from $1.0 million in 1995 to $4.0 million in 1996 is principally a
function of the inclusion of the guaranteed preferential distributions from a
joint venture agreement with SBC Corporation for a full year in 1996 ($3.4
million) compared to only one month in 1995 ($275,000) partially offset by the
income recorded in 1995 from the management of the AL-4 RSA ($755,000) which
is not present in 1996.
Total costs and expenses rose from $42.5 million for 1995 to $93.7 million
for 1996. The increase is principally a result of the factors stated above,
new markets in 1996 for which no expenses were incurred in 1995 and the
addition in 1995 toward the latter part of the year of a significant number of
markets which therefore have a full year of expenses for 1996 but less than
six months of expenses for 1995.
The results of these factors is an increase in the cost of cellular service
to $29.6 million in 1996 from $10.7 million in 1995, an increase to $10.1
million in 1996 for the cost of equipment sold from $5.0 million in 1995 and
an increase in selling, general and administrative expenses to $34.5 million
in 1996 from $16.5 million in 1995. The Company's aggressive marketing and
sales promotion efforts are geared towards increasing subscribers. The
addition of retail locations combined with the increase in the number of
markets also contributed to this increase. Selling, general and administrative
expenses include selling and marketing expenses which accounted for 48.4% and
45.2% of the total balance for the years ended December 31, 1996 and 1995,
respectively.
Depreciation and amortization increased to $19.5 million in 1996 from $10.3
million in 1995 because of the additional equipment and cellular licenses
associated with the acquisition of new markets in 1996 and a full year's
depreciation and amortization in 1996 for markets acquired during 1995.
The loss on sale of investments in cellular operations in 1996 of $1.4
million is a result of the loss from the sale of the AL-4 RSA of $1.6 million
and the MI-2 RSA of $1.6 million partially offset by the gain on the sale of
minority Pops of $1.8 million. The gain in 1995 of $11.6 million is due to the
disposition of the Company's interest in the non-wireline system serving the
Abilene, TX MSA.
45
<PAGE>
The increase in interest expense from $23.0 million in 1995 to $47.1 million
in 1996 is a function of a full year of interest for 1996 on PriCellular's 12%
Notes issued in September 1995, compared with only three months in the prior
year, combined with additional interest related to the issuance of a 10% Note
in the amount of $19.0 million for approximately six and one-half months and
the interest for one and one-half months on the 10% Notes, face amount of
$170.0 million issued in November 1996.
Other income for 1996 includes $625,000 related to the two-year covenant not
to compete from the sale of the AL-4 RSA in July 1996, $1.0 million for the
covenant not to compete from the Lubbock/Minnesota exchange in July 1995 for
which one-half year or $500,000 is included for 1995.
The increase in interest income from $4.1 million in 1995 to $4.9 million in
1996 is a result of the increased cash flow for 1996 combined with the cash on
hand resulting from the proceeds of PriCellular $170.0 million of 10% Notes
received in November 1996.
Liquidity and Capital Resources
Cash Flows
As of September 30, 1998, the Company had approximately $37.0 million of
cash and cash equivalents and approximately $38.5 million of working capital.
Net cash generated by operations was approximately $33.4 million. Cash used in
investing activities was approximately $1.5 billion. Approximately $1.4
billion represents the purchase of PriCellular, net of cash acquired, $82.4
million represents the purchase of U.S. Treasury investments held in escrow,
and $6.5 million represents the purchase of fixed assets. Cash provided by
financing activities was approximately $1.5 billion. Approximately $348.2
million represents the proceeds from issuance of the Company's common and
preferred stock and approximately $1.2 billion represents borrowing against
the Credit Facility and net proceeds from the Senior Notes.
Earnings before interest, taxes, depreciation and amortization and non-
recurring charges ("EBITDA") amounted to $36.8 million for the third quarter
of 1998 compared to $22.1 million for the same period in 1997 or an increase
of 67%. EBITDA amounted to $90.3 million for the nine months ended September
30, 1998 compared to $52.5 million for the same period in 1997 or an increase
of 72%. Management believes that EBITDA is an effective measure of operating
performance because it is industry practice to use a multiple of EBITDA as one
method of evaluating cellular properties. EBITDA does not represent cash flow
from operations as defined by GAAP, and is not necessarily indicative of cash
available to fund all cash flow needs and should not be considered as an
alternative to net income. The Company expects to incur net accounting losses
for the foreseeable future due to interest and non-cash charges such as
depreciation and amortization.
Liquidity and Capital Requirements
The Company has long-term debt aggregating approximately $1.2 billion.
Substantially all such indebtedness was incurred to pay the consideration to
the PriCellular stockholders in the Merger, repay the indebtedness of
PriCellular, pay the related fees and expenses and purchase the restricted
securities.
On June 25, 1998, the Company borrowed $900 million under a bank syndicated
Credit Facility. The Credit Facility provides the Company up to $1 billion in
four tranches ($450 million on Tranche A, $200 million for each Tranche B and
C, and up to $150 million on the Revolver Loan). Interest is payable quarterly
at the adjusted prime rate plus the applicable margin for each tranche (0.875%
for the Revolver and Tranche A, 1.75% for Tranche B and 2.0% for Tranche C) or
LIBOR plus the applicable margin for each tranche (1.875% for the Revolver and
Tranche A, 2.75% for Tranche B and 3.0% for Tranche C), based on the Company's
consolidated leverage ratio. As of September 30, 1998, the interest rates
applicable on the tranches of the Credit Facility ranged from approximately
7.66% to 8.78%. The Credit Facility contains several financial covenants
related to Company's leverage and debt service ratios. The Company is in
compliance with the terms of those covenants. Other covenants also contain
restrictions on the incurrence of additional debt, the payment of dividends,
the incurrence of liens, and payments and transfer of net assets. See
"Description of Credit Facility".
46
<PAGE>
On July 1, 1998, the Company borrowed an additional $16.0 million under the
Revolver to fund the payment of accrued Merger consideration.
As a result of the Merger, the Company has significant cash requirements for
debt service and expansion and operation of its cellular systems. To meet its
liquidity needs, the Company will rely on internally generated funds,
borrowings under the Revolving Credit Loan of the Credit Facility and, for the
first six scheduled interest payments of the Notes, the restricted securities.
At September 30, 1998, the Company had $84 million available under the
Revolving Credit Loan of the Credit Facility. A portion of the Company's debt
bears interest floating rates; therefore, its financial condition is and will
continue to be affected by changes in prevailing interest rates.
For the remainder of fiscal 1998, the Company intends to fund its interest
obligations, capital expenditures and working capital requirements with cash
flows from operations, borrowings under the Revolving Credit Loan of the
Credit Facility and the restricted securities. In future periods, the Company
may need to raise additional capital to fund the acquisition and integration
of additional cellular systems. The Company may raise such funds through bank
financings or public or private offerings of its securities. There can be no
assurance that the Company will be able to secure such funding, if necessary,
or on favorable terms. If the Company is not successful in securing such
funding, the Company's ability to pursue its business strategy may be impaired
and results of operations of future periods may be adversely affected.
The Company plans to continue to expand its marketing efforts which will
include, but are not limited to, an increase in funds for advertising,
cellular telephone inventory purchases and other expenditures relating to
subscriber growth. During the 1998 and 1999 calendar years, American Cellular
anticipates that it will spend an aggregate of approximately $65 million in
capital expenditures. However, actual capital requirements may change. The
ability of the Company to meet its debt service obligations and reduce its
total debt will be dependent on the future performance of the Company, which
in turn, will be subject to general economic conditions and to financial,
business and other factors, including factors beyond the Company's control.
Year 2000 Issues
The term "Year 2000 problem" is a general term used to describe the various
problems that may result from the improper processing of dates and time-
sensitive calculations by computers and other machinery as the year 2000 is
reached. These problems generally arise from the fact that most of the world's
computer hardware and software has historically used only two digits to
identify the year component of a date. This will often result in a computer
reading a date of "00" as meaning, 1900, and not 2000. Problems may also arise
from other sources, including the use of special codes and conventions in
software that make use of a date field.
The Company has commenced a review of the possible effect of the Year 2000
problem on the computer and other systems used by the Company, especially the
Company's switches and billing system. As part of this program, the Company is
contacting each of the vendors it uses and requesting that each vendor certify
to the Company that it is Year 2000 compliant, or is taking action to ensure
that its products or services will be Year 2000 compliant before January 1,
2000. The Company expects to complete this vendor review process in the first
quarter of 1999.
To date, the Company has not identified any internal systems that present a
material risk of not being Year 2000 ready, or for which a suitable
alternative cannot be implemented.
Based on the results of its internal and external review to date, the
Company does not believe that any significant financial expenditure or
investment will be required by the Company to conduct its business from
January 1, 2000 forward. This conclusion is based to a large part on the
information received by the third parties who provide billing software and
switching equipment to the Company. If this information proves to be
inaccurate, and third parties who provide products and services that are
critical to the Company's business activities fail to appropriately address
their Year 2000 issues, there could be a material adverse effect on the
Company's financial condition and results of operations.
47
<PAGE>
Uncertainties Associated with Forward Looking Statements
American Cellular has made in this Prospectus, and from time to time may
otherwise make, statements which constitute forward looking statements. These
statements include statements regarding the intent, belief, plans or current
expectations of the Company, its directors or its officers primarily with
respect to the Company's operations and financial performance. Investors are
cautioned that any such forward looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as
a result of various factors. Some of these factors are described under "Risk
Factors" and may include: (i) the Company's high degree of leverage and the
requirement for significant and sustained growth in the Company's cash flow to
meet its debt service requirements; (ii) the Company's limited operating
history, the Company's history of net losses and the expectation of future
losses; (iii) the Company's prospects in the event of a general economic
downturn; (iv) that the Company is a holding company and the Notes will be
structurally subordinated to all Indebtedness of the subsidiaries of the
Company; (v) that the Company will be managed by a new team of senior
management; (vi) that members of the Company's management have other
commitments; (vii) competition from the other cellular operator in the
Company's clusters or from other technologies; (viii) that new Systems and
Systems recently acquired may not perform as expected; (ix) that the
telecommunications industry is subject to rapid and significant changes in
technology; (x) that the Company relies upon the registered service mark
CELLULARONE to market the services of its non-wireline systems; (xi) that
there is potential for adverse regulatory change and the need for renewal of
cellular licenses; (xii) fluctuations in market value of licenses;
(xiii) equipment failure or natural disaster; (xiv) concerns about RF
emissions; (xv) the lack of a public market for the Notes and there will be
restrictions imposed on the resale of the Notes; (xvi) that the Indenture will
require the Company to offer to purchase all of the Notes issued and
outstanding upon any Change of Control and the Credit Facility contains a
similar provision; (xvii) the costs associated with the unauthorized use of
the Company's network; (xviii) that the Indenture imposes significant
operating and financial restrictions on the Company; (xix) the lack of
certainty with respect to how a court might decide a suit by an unpaid
creditor on the basis of fraudulent conveyance; and (xx) the potential effect
of Year 2000 computer issues.
Fluctuations in Quarterly Results
The Company's revenues in the fourth quarter are historically lower than the
third quarter due to the fact that fewer cellular calls are made in the
Company's markets during inclement weather. Losses generally increase in the
fourth quarter due to the lower revenues coupled with higher sales and
marketing costs incurred during the holiday selling season.
48
<PAGE>
BUSINESS
The Company
The Company is one of the largest independent rural cellular telephone
system operators in the United States. It owns and operates non-wireline FCC-
licensed cellular telephone systems primarily in rural areas of the Midwestern
and Eastern portions of the United States with approximately 5.2 million Net
Pops. The Company's licenses are grouped in four main clusters of smaller MSAs
and strategically located RSAs covering over 110,000 square miles. The Company
markets all of its cellular products and services under the name CELLULARONE,
one of the most recognized brand names in the cellular industry. In marketing
its products and services, the Company utilizes its distribution network of
over 90 retail locations, a direct sales force and a group of agents.
The Company has experienced strong growth since 1995 which has been achieved
through both selected acquisitions and internal growth. As of September 30,
1998, the Company provided cellular service to approximately 305,000
subscribers, representing a penetration rate of 6.3%, and had pro forma
revenues and net loss of $189.9 million and $60.9 million, respectively for
the nine months ended September 30, 1998. Additionally, the Company's
historical revenues and EBITDA have increased at a compound annual growth rate
for the past two calendar years of 109% and 165%, respectively.
Systems
American Cellular believes its predominantly rural cellular systems provide
strong growth opportunities due to lower penetration rates, higher subscriber
growth rates and a higher proportion of roaming revenue compared to cellular
systems located in large MSAs. The Company focuses on underdeveloped rural
cellular areas which have a significant number of potential customers with
demand for wireless communication. American Cellular believes these areas have
not yet been as fully developed as large MSAs, which were licensed earlier by
the FCC, and have the potential for increased cellular usage and superior
financial performance. In addition, American Cellular believes that in the
near term rural cellular areas will be subject to less competition from other
wireless providers (such as PCS) as compared to larger MSAs.
Through selective acquisitions and asset swaps, the Company has concentrated
its efforts on creating an integrated network of rural cellular systems in
contiguous service areas. The Company's cellular interests consist principally
of four large operating clusters of cellular systems:
Upper Midwest Cluster--a 1.8 million Net Pop cluster of 15 Systems
covering approximately 78,000 contiguous square miles in Minnesota,
Wisconsin and Michigan.
Mid-Atlantic Cluster--an 862,000 Net Pop cluster of five contiguous
Systems consisting of five RSAs in Ohio, Pennsylvania and West Virginia
covering approximately 10,000 contiguous square miles.
New York Cluster--a 1.1 million Net Pop cluster of two MSAs and two RSAs
covering more than 8,000 contiguous square miles in suburban New York
located between the New York City MSA of AT&T Wireless Services Inc. and
Southwestern Bell's Albany, NY MSA.
Kentucky Cluster--a 1.1 million Net Pop cluster of four RSAs adjacent to
Louisville and Lexington, Kentucky and one RSA in Tennessee which abuts
Knoxville, Tennessee. The 38 counties in Kentucky and the six counties in
Tennessee cover more than 15,000 square miles.
Business Strategy
American Cellular's primary business strategy is to focus on the development
of the Company's existing clusters and the selective acquisition of additional
rural cellular systems. The principal elements of this strategy include:
Develop Rural Market Clusters. American Cellular believes that its focus on
small- and medium-sized markets will provide it with several competitive
advantages. The majority of the Company's operations are in
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<PAGE>
the early stages of their growth cycle and therefore afford significant
opportunities for improvements in performance. The Company's modestly
populated markets exhibit a concentration of small businesses, long commute
times, and well-traveled roadways that have the potential to generate a high
level of cellular use. Additionally, the Company enjoys strong roaming
revenues because many of the Company's markets are contiguous with more
densely populated areas. Finally, because the majority of the Company's
markets consist of a population density that the Company believes is too low
to make PCS services economically attractive, the Company is in position to
benefit from PCS roaming revenues while generally remaining relatively
insulated from direct PCS competition.
Market Through Local Promotions. The Company markets its services to
increase subscriber activations, to minimize churn and to promote its
nationally known CELLULARONE branded products and services. Many of its
marketing programs are tailored for individual markets, stressing its local
retail stores, customer service and commitment to the community. A key element
of the Company's market positioning is its use of local retail stores and a
direct sales force. A retail location complemented by a direct sales force
provides the Company with more control over the sales process than if it were
to rely exclusively on independent agents. The Company believes that its
approximately 90 retail locations enhance its ability to provide quality
customer service and generate customer loyalty, as well as to provide
convenient distribution locations. While American Cellular plans to continue
to develop its direct sales force and to add additional retail locations to
increase subscriber penetration, it also plans to augment its sales network by
taking advantage of cost-effective distribution channels, including
independent dealers and contract sales, to increase further market
penetration.
Introduce Flexible and Innovative Pricing and Billing Plans. The Company
currently offers a wide selection of pricing plans tailored to its current
high credit-quality customer base. In order to further expand its customer
base and increase its penetration, American Cellular intends to introduce
certain new pricing packages. These new packages will include prepaid plans
which decrease bad debt risk and also reduce the cost of subscriber
acquisitions through the elimination or significant reduction of equipment
subsidies to subscribers. Additionally, in order to increase cellular phone
use, American Cellular plans to support ongoing efforts of the industry to
provide "calling party pays" service whereby the cost to the cellular
subscriber is reduced as the initiating caller is charged for a call placed to
the cellular phone.
Continue Build Out of Advanced Network. American Cellular intends to
continue to expand and improve coverage, increase capacity and build out its
systems. American Cellular believes that expanding and improving coverage and
capacity in its systems will attract additional subscribers, increase usage by
existing subscribers and increase roaming activity. Additionally, the Company
continues to build out a digital-ready network, which will allow the Company
the flexibility to offer digital features and analog coverage in the same
cell. American Cellular intends to take advantage of the digital capability of
the network by introducing creative price plans and premium service offerings
(such as caller ID and message waiting indicator), in order to enhance the
average revenues generated per subscriber as well as fortifying the Company's
competitive position.
Achieve Cost Savings Through Selective Centralization. While maintaining its
local marketing and sales focus, American Cellular intends to reduce overhead
expenses by opportunistically centralizing certain business functions both
regionally and at the Company's headquarters. Since the Merger, the Company
has centralized its roaming administration in its corporate offices and taken
steps to centralize the Company's financial reporting and treasury functions.
Prepare for Future Competition. American Cellular believes that it is well
positioned to compete against present and future competitive wireless service
providers through its extensive footprint, distribution channels, customer
service capabilities and experienced management team. The Company is one of
two incumbent cellular providers in its markets. American Cellular believes
that the extensive capital expenditures required to deploy the requisite
infrastructure in order to offer PCS services is more readily justifiable from
an economic standpoint in larger, more densely populated urban markets. As a
result of these capital requirements for PCS operators, American Cellular
believes that certain of its service areas will not support widespread PCS
competition, thus positioning American Cellular to provide roaming services to
PCS customers.
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Continue Selective Acquisition Strategy. American Cellular's strategy is to
continue to expand its current clusters through the selective acquisition of
small to mid-sized MSAs and strategic RSAs that it believes are undervalued,
underdeveloped or that possess traits indicative of potentially high cellular
usage and superior financial performance. Upon acquiring a System, American
Cellular's aim will be to make certain operational and organizational changes
reflective of its operating philosophy in order to increase the number and
quality of subscribers and enhance operating cash flow, while controlling
subscriber acquisition costs and promoting superior customer service.
The Company's management is currently in the process of evaluating the
operational strengths and weaknesses of the business acquired in the Merger.
Until management completes such review, there can be no assurance that the
Company will be able to achieve the foregoing objectives.
Cellular Markets and Systems
The following table summarizes certain information concerning the Company's
markets. All of the Company's licenses are non-wireline licenses with the
exception of the license for the Laredo, TX MSA.
<TABLE>
<CAPTION>
Total Date of
Market Pops Ownership Net Pops Acquisition
- ------ --------- --------- --------- -----------
<S> <C> <C> <C> <C>
Upper Midwest
Duluth.................. 238,000 100.0% 238,000 04/28/94
Eau Claire.............. 145,000 96.0% 139,140 04/28/94
Wausau.................. 124,000 95.9% 118,957 03/28/95
MN 2A RSA............... 39,000 100.0% 39,000 07/07/95
MN 3 RSA................ 61,000 100.0% 61,000 04/28/94
MN 4 RSA................ 15,000 100.0% 15,000 08/10/95
MN 5 RSA................ 209,000 100.0% 209,000 07/07/95
MN 6 RSA4............... 233,000 100.0% 233,000 11/23/94
WI 1 RSA................ 114,000 100.0% 114,000 04/28/94
WI 2 RSA................ 87,000 100.0% 87,000 11/18/96
WI 3 RSA................ 146,000 100.0% 146,000 11/23/94
WI 4 RSA................ 122,000 100.0% 122,000 01/07/97
WI 5 RSA ............... 83,000 100.0% 83,000 05/29/97
WI 6A RSA............... 33,000 100.0% 33,000 11/23/94
MI 1 RSA................ 207,000 100.0% 207,000 03/07/95
--------- ---------
1,856,000 1,845,097
Mid-Atlantic
OH 7 RSA................ 260,000 100.0% 260,000 09/27/95
OH 10A RSA 95........... 64,000 100.0% 64,000 09/29/95
PA 9 RSA................ 187,000 100.0% 187,000 02/02/96
WV 2 RSA................ 79,000 100.0% 79,000 12/20/95
WV 3 RSA................ 272,000 100.0% 272,000 07/23/96
--------- ---------
862,000 862,000
New York
Orange County........... 328,000 100.0% 328,000 10/17/96
Poughkeepsie............ 273,000 95.6% 260,988 04/23/96
NY 5 RSA................ 376,000 100.0% 376,000 12/29/95
NY 6 RSA................ 113,000 100.0% 113,000 04/23/96
--------- ---------
1,090,000 1,077,988
Kentucky
KY 4 RSA................ 259,000 100.0% 259,000 01/07/97
KY 5 RSA................ 161,000 100.0% 161,000 01/07/97
KY 6 RSA................ 270,000 100.0% 270,000 01/07/97
KY 8 RSA................ 120,000 100.0% 120,000 01/07/97
TN 4 RSA................ 274,000 100.0% 274,000 01/15/98
--------- ---------
1,084,000 1,084,000
SBC Joint Venture and
Other Interests
Laredo.................. 192,000 44.5% 85,440 11/30/95
IL 4 RSA................ 218,000 44.5% 97,010 11/30/95
IL 6 RSA................ 203,000 44.5% 90,335 11/30/95
Other Interests......... n/a n/a 46,000 various
--------- ---------
613,000 318,785
--------- ---------
Total................... 5,505,000 5,187,870
========= =========
</TABLE>
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The Company's Systems principally operate under the CELLULARONE brand name.
The Company believes that the diversity of competitors operating under various
names and the Company's use of the CELLULARONE brand name affords the Company
marketing, advertising and other operational advantages relative to those
competitors. These advantages include advertising and marketing the Company's
services as a single brand name on a regional basis, allowing the Company to
set regional roaming rates, being a single cellular service provider to
corporate accounts, allowing calls to be handed-off between cell sites that
cross market borders and reducing the number of dropped calls as subscribers
exit an individual license area.
Upper Midwest Cluster
The Upper Midwest Cluster consists of approximately 1.8 million Net Pops in
15 contiguous Systems and covers over 78,000 square miles. The Upper Midwest
Cluster includes three of the Company's original Systems acquired in April
1994 and has grown steadily to 15 Systems through the acquisition of three
Systems in November 1994, two Systems in March 1995, three Systems in July
1995, one System in August 1995, one System in November 1996, one System in
January 1997 and one System in May 1997.
The Mid-Atlantic Cluster
The Mid-Atlantic Cluster comprises approximately 862,000 Pops and includes
portions of southeastern Ohio as well as adjacent portions of Pennsylvania and
northern West Virginia south of Pittsburgh. The Mid-Atlantic Cluster was
established with the acquisition of two Systems in September 1995 and
currently includes five contiguous RSAs as a result of acquisitions in
December 1995, February 1996 and July 1996. In addition, the Mid-Atlantic
Cluster abuts Columbus, OH and three MSAs owned by AT&T including its
Pittsburgh, PA System, affording the opportunity for joint marketing and
promotions.
The New York Cluster
The Company's New York Cluster consists of approximately 1.1 million Net
Pops and over 8,000 square miles in suburban New York. The New York Cluster is
adjacent to AT&T's New York City MSA and is located between it and
Southwestern Bell's Albany, NY MSA. The New York Cluster was established with
the acquisition of the NY-5 RSA in December 1995 and currently includes two
MSAs and two RSAs as a result of acquisitions in April and October of 1996.
With the addition of the Orange County, NY MSA, the Company's New York Cluster
includes the entire Hudson Valley/Catskill region, thereby creating
significant marketing and promotional synergies and opportunities.
The Orange County, NY MSA is directly north of AT&T's New York City MSA and
abuts Westchester, Putnam and Rockland counties. Serving as a residential
community of metropolitan New York, Orange County includes the cities of
Newburgh, Middletown, Port Jervis and the affluent towns of Tuxedo and
Warwick. Major tourist attractions include The United States Military Academy
at West Point, Storm King State Park and Sterling Forest. The MSA contains
more than 40 miles of the New York State Thruway (I-87), approximately 50
miles of I-84 and 35 miles of Route 17.
The Kentucky Cluster
The Kentucky Cluster consists of four RSAs in Kentucky containing
approximately 910,000 Pops and over 12,000 square miles and one RSA in
Tennessee consisting of approximately 274,000 Pops and over 2,000 square
miles. Three of the Kentucky RSAs (KY-4, 5 and 6) form a contiguous cluster
encompassing all of Kentucky south of Louisville and Lexington and north of
the Nashville, TN MSA and other Tennessee markets. The 120,000 Pop KY-8 RSA
serves the northeastern suburbs of Lexington. The Tennessee RSA (TN-4) is
located south of the Kentucky RSAs and contains some of the most visited areas
in the country, including the towns of Gatlinburg and Pigeon Forge, the
Dollywood tourist attraction and the entrance to the Great Smoky Mountain
National Park.
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The Southwestern Bell Joint Venture
The Company owns 44.5% of a joint venture with Southwestern Bell in which
the Company contributed its System serving the Laredo, TX MSA and Southwestern
Bell contributed its Systems serving the IL-4 RSA and IL-6 RSA (the
"Southwestern Joint Venture"). The Company owns 44.5% of the Systems serving
the combined 613,000 Pops, or 318,785 Net Pops. The Southwestern Joint Venture
was consummated on November 30, 1995.
Pursuant to the Southwestern Joint Venture, the Company receives guaranteed
preferential distributions in the first four years of the Southwestern Joint
Venture increasing from $3.3 million in the first year to $5.8 million in the
final year. The Company has the option to remain in the Southwestern Joint
Venture for four years or "put" its Joint Venture interest in the Southwestern
Joint Venture to Southwestern Bell at any time during the four-year period at
a price beginning at $28.5 million and increasing to approximately $39.0
million at the end of the four-year period. Southwestern Bell had the right to
purchase the Company's interest during the first year at approximately $56.0
million and has the right to purchase the Company's interest on the day prior
to Southwestern Joint Venture's fourth anniversary at 5% above the then "put"
price. Southwestern Bell has operating control of these properties during the
term of the Southwestern Joint Venture.
Acquisitions and Dispositions
During 1995, 1996, 1997 and January 1998, the Company consummated several
strategic acquisitions which expanded its Upper Midwest Cluster and
established the Mid-Atlantic Cluster, the New York Cluster and the Kentucky
Cluster. In addition, during July 1996, November 1996 and January 1997, the
Company disposed of its standalone wireline Systems in Alabama and its MI-2
RSA which were considered by management to be non-strategic.
Expansion of Upper Midwest Cluster
On March 7, 1995, the Company acquired from Buckhead Telephone Company the
assets of the System serving the MI-1 RSA (which represents 203,391 Pops) for
approximately $17.7 million in cash.
On March 28, 1995, the Company acquired a 50.02% general partnership
interest and a 0.58% limited partnership interest in Wausau Cellular Limited
Partnership, a Delaware limited partnership that wholly owns the System
serving the Wausau, WI MSA (115,715 Net Pops), for $5.4 million in cash.
On July 7, 1995, the Company consummated a transaction with Western Wireless
Corporation ("Western Wireless") pursuant to which the Company exchanged the
wireline System serving the Lubbock, TX MSA (229,051 Pops) for approximately
340,000 Net Pops, most of which are now part of the Upper Midwest Cluster. The
Net Pops acquired consist of the System serving the MN-5 RSA, the portion of
the System serving the MN-3 RSA that the Company did not own, a portion of the
MN-2 RSA (Beltrami County), approximately 87.0% of the System serving the
Alton/Granite City, IL MSA, an additional 10.0% of the System serving the Eau
Claire, WI MSA and an additional 14.5% of the System serving the Wausau, WI
MSA. In addition, Western Wireless agreed to pay the Company $3.0 million in
exchange for the Company's agreement not to compete with Western Wireless
within the Lubbock, TX MSA for a period of three years following the exchange.
Western Wireless retained ownership of certain cell sites and other capital
equipment.
On August 10, 1995, the Company acquired from Louise Hart 49.0% of the
System serving the MN-4 RSA (7,461 Net Pops), for approximately $75,000.
On November 18, 1996, the Company acquired from Wisconsin II Venture the
85,645 Pop WI-2 RSA for approximately $4.3 million in cash. Prior thereto, the
Company had interim operating authority for the WI-2 RSA.
In January 1997, the Company entered into two transactions with a subsidiary
of Bell South Corporation. The stand-alone wireline systems serving the
Florence, AL MSA (136,816 Pops) and AL-1B RSA (62,035 Pops)
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<PAGE>
were sold for $24.4 million in cash, of which $2.0 million is attributable to
a two year covenant not to compete. The transactions resulted in a gain of
approximately $8.5 million. In addition, the Company acquired for $6.3 million
the WI-4 RSA (118,993 Pops). The WI-4 RSA abuts the Company's MI-1 RSA to the
northeast, its WI-3 RSA to the northwest and its Wausau, WI MSA to the west.
In May 1997, the Company acquired from United States Cellular Corporation
("USCC") three counties in the WI-5 RSA containing 81,194 Pops for
approximately $10.6 million in cash and the contribution of approximately
18,000 minority Pops. The WI-5 RSA abuts the Company's Eau Claire, WI MSA, its
WI-1 RSA and AT&T's Minneapolis, MN MSA.
The Mid-Atlantic Cluster Acquisitions
On September 27, 1995, the Company acquired from USCC substantially all of
the assets of the System serving the OH-7 RSA (257,290 Pops) for $39.8 million
in cash.
On December 20, 1995, the Company acquired from USCC substantially all of
the assets of the System serving the WV-2 RSA (79,567 Pops) for $7.8 million
in cash.
On February 2, 1996, the Company acquired from USCC substantially all of the
assets of the System serving the PA-9 RSA (188,096 Pops) for $26.1 million in
cash.
On July 23, 1996, the Company acquired substantially all of the assets of
the System serving the WV-3 RSA (269,709 Pops) from a subsidiary of Horizon
Cellular Telephone Company, L.P. ("Horizon") for $35.0 million in cash.
The New York Cluster Acquisitions
On December 29, 1995, the Company acquired from Cellular Upstate New York,
Inc. substantially all of the assets of the System serving the NY-5 RSA
(382,180 Pops) for approximately $65.9 million in cash.
On April 23, 1996, the Company acquired from subsidiaries of USCC the System
serving the NY-6 RSA (111,373 Pops) and 83.0% of the System serving the
Poughkeepsie, NY MSA (218,890 Net Pops). The Company acquired substantially
all of the assets serving the NY-6 RSA for approximately $19.8 million in cash
and 83.0% of the stock of the Dutchess County Cellular Telephone Company
serving the Poughkeepsie, NY MSA for approximately $38.9 million, with one
half paid in cash and the balance in a Promissory note. The Promissory note
was repaid in November 1996.
On October 17, 1996, the Company consummated an exchange transaction with
Vanguard Cellular Systems, Inc. The Company exchanged an aggregate of 520,528
Pops consisting of its OH-9 RSA, a portion of its OH-10 RSA (excluding Perry
and Hocking counties) and the Parkersburg, WV/Marietta, OH MSA for the Orange
County, NY MSA (327,053 Pops), 11.1% of the Company's majority-owned
Poughkeepsie, NY MSA (29,367 Pops), 12.2% of the Janesville, WI MSA (18,296
Pops) and approximately 28,509 additional Pops, including small interests in
the Eau Claire, WI and Wausau, WI MSAs (in each of which the Company currently
has a majority interest). During 1997 the Company acquired an additional 1.3%
of the Poughkeepsie, NY MSA (3,740 Pops) from minority holders.
Kentucky Cluster Acquisition
In January 1997, the Company acquired from a subsidiary of Horizon four RSAs
in Kentucky (approximately 785,000 Net Pops) for $96.4 million in cash and
1,948,052 PriCellular Class A Shares (valued at approximately $19.1 million).
On February 4, 1997 the Company repurchased and retired the 1,948,052
PriCellular Class A Shares from Horizon for $15.3 million.
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<PAGE>
In January 1998, the Company acquired from Bachtel Liquidity, L.P., an
affiliate of Bachow & Associates, Inc., the TN-4 RSA which contains
approximately 264,000 Pops for approximately $73.0 million in cash (subject to
adjustments). The RSA, adjacent to three MSAs, including Knoxville, TN, is
located south of the Company's Kentucky Cluster.
Dispositions
During July 1996, the Company consummated the sale of its AL-4 RSA for $27.5
million in cash ($2.5 million of which is attributable to a two-year covenant
not to compete). In November 1995, the Company had acquired this stand-alone
RSA for total consideration of $20.0 million. During October, 1996 the Company
consummated the sale of its MI-2 RSA for approximately $6.5 million in cash.
Cellular Operations
General
The Company has concentrated its recent efforts on creating an integrated
network of cellular systems in its operating clusters. The Company operates
four clusters of cellular systems as well as certain other markets and
minority interests. As of September 30, 1998, the Company had approximately
305,000 subscribers, or 6.3% penetration. Through the participation of its
non-wireline Systems in NACN and other special networking arrangements between
the Company and other non-wireline operators of cellular systems in the United
States, management believes the Company's subscribers are able to receive
quality coverage throughout the United States.
The Company believes that the majority of its Systems are in the early
stages of their growth cycle and afford significant opportunities for
improvements in performance, particularly with respect to rates of penetration
and churn. There can be no assurances, however, that American Cellular will be
able to maintain such improvements or achieve similar improvements with
respect to its other Systems. The Company believes that prior to the Company's
assumption of ownership many of these Systems had been significantly
undermanaged or underdeveloped. Some of the Systems had minimal signal
coverage, had never been actively marketed and had never developed a
subscriber base. Certain other markets had adequate signal coverage but the
sales and marketing activity had largely been dormant. The following table
sets forth certain information with respect to the performance of the
Company's Systems owned as of the dates indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years ended December 31,
------------------ --------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ending subscribers (1).. 305,000 216,000 243,000 150,328 78,227 17,344 9,886
Ending penetration (2).. 6.3% 4.8% 5.3% 3.8% 2.2% 0.95% 0.53%
Ending net pops (in
millions).............. 4.8 4.6 4.6 3.9 3.6 1.8 1.8
Churn (3)............... 1.6% 1.7% 1.8% 1.6% 2.0% 2.7% 3.2%
Average monthly revenue
per subscriber (4)..... $ 68 $ 71 $ 70 $ 82 $ 107 $ 123 $ 156
Average marketing cost
per net subscriber
addition (5)........... $ 465 $ 421 $ 399 $ 371 $ 403 $ 497 $ 496
</TABLE>
- --------
(1) Each billable telephone number in service represents one subscriber, not
including test, demonstration or other telephone numbers for which payment
is not expected.
(2) Represents the ratio of ending subscribers to the estimated total net
population of owned Systems.
(3) Represents the average monthly churn for the periods presented. Churn
equals the ratio of disconnected monthly subscribers to average monthly
subscribers.
(4) Represents the ratio of total monthly service revenues to average monthly
subscribers.
(5) Determined by dividing the amount of marketing costs by the net
subscribers added. Marketing cost represents all selling expenses and
losses incurred on equipment sales.
55
<PAGE>
Subscribers and System Usage
The Company's cellular subscribers have increased to approximately 305,000
as of September 30, 1998 from approximately 243,000 as of December 31, 1997
and approximately 150,000 as of December 31, 1996. The Company's subscribers
fall into 12 major categories: construction, professional/management, medical,
sales, real estate, agriculture, service industry, transportation, financial,
government, manufacturing and other, which includes low-usage subscribers.
Reductions in the cost of cellular services have led to an increase in
cellular telephone usage by general consumers for non-business purposes. In
addition, American Cellular believes that several categories of its
subscribers will develop requirements for specialized cellular applications,
such as wireless data technology. 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 seek to broaden its subscriber base for
basic cellular 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.
Marketing
The Company markets all of its cellular products and services under the name
CELLULARONE, one of the most recognized brand names in the cellular industry
(see "--Service Marks"). The national advertising campaign conducted by the
Cellular One Group enhances the Company's advertising exposure at a fraction
of the cost 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 of 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 Systems when they travel in the Company's service areas, primarily
due to the technical operation of the cellular telephone. Cellular telephones
of non-wireline subscribers are 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 either dials a special
code or has a cellular telephone equipped with an "A/B" (non-
wireline/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
in other markets, 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 service and call delivery features from
those of some of its competitors. NACN is the largest wireless telephone
network system in the world, linking non-wireline cellular operators
throughout the United States and Canada. NACN connects key areas across North
America so that customers can use their cellular phones to place and receive
calls in these areas as easily as they do in their home areas. Through NACN,
customers receive calls automatically without the use of complicated roaming
codes as they "roam" in more than 7,000 cities, in the United States and
Canada. By dialing subscribers' cellular telephone numbers, a caller can reach
the Company's subscribers without knowing their location or having to dial
additional roaming access numbers. In addition, special services such as call
forwarding and call waiting automatically follow the subscribers as they
travel.
The Company's marketing strategy is designed to generate continued net
subscriber growth by focusing on subscribers who are likely to generate higher
than industry average monthly revenues and lower than industry average churn
rates, while simultaneously maintaining a low cost of adding net subscribers.
The Company principally uses in-house sales and marketing staff and its own
retail outlets.
The Company has implemented its marketing strategy by training and
compensating its sales force in a manner designed to stress the importance of
customer service, high penetration levels and minimum acquisition costs per
subscriber. The Company believes that its internal sales force is better able
to select and screen new subscribers and select pricing plans that
realistically match subscriber means and needs than are independent agents. In
addition, the Company motivates its direct sales force to sell appropriate
rate plans to subscribers, thereby reducing churn, by linking payment of
commissions to subscriber retention. As a result, the Company's
56
<PAGE>
use of an internal sales force keeps marketing costs lower than when
independent agents are used because commissions are lower and subscriber
retention is higher.
The Company believes that it helps minimize its churn rate through an after-
sale telemarketing program implemented through its sales force and customer
service personnel. This program not only enhances customer loyalty, which
reduces churn, 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 its own retail stores in
which the Company offers a full line of cellular products and services. As of
December 31, 1997, the Company maintained approximately 90 retail locations.
Ranging from 250 square feet to 4,000 square feet, each store is fully
equipped to handle customer service and telephone maintenance and
installation. Some of these stores are also authorized warranty repair
centers. The Company's stores provide subscriber-friendly retail environments
(including extended hours, large selection, an expert sales staff and
convenient locations) which make the sales process quick and easy for the
subscriber.
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 transfer. In 1998, the Company intends to upgrade its systems to
provide digital services in some of its markets such as caller I.D., message
waiting indicator, short messaging services and sleep mode for longer battery
life.
Several rate plans are presented to prospective customers so that they may
choose the plan that will best fit their expected calling needs. Unlike some
of its competitors, the Company designs rate plans on a market-by-market
basis. The Company's local general managers generally have the authority to
modify existing rate plans and initiate new rate plans depending upon market
and competitive conditions. These rate plans include a high-volume user plan,
a medium-volume user plan, a basic plan and an economy plan. Most rate plans
combine a fixed monthly access fee, a designated amount of free minutes, per-
minute usage charges and additional charges for custom-calling features in a
package which offers value to the customer 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.
Agreements between the Company and other cellular operators allow their
respective subscribers to place calls, or roam, in most cellular service areas
throughout the country. Roamers, subscribers placing calls outside their home
market, are typically charged a higher per minute rate than would be charged
for home users. Roaming revenues derived from this usage not only have higher
yields than home usage revenues, but have almost no associated marketing or
customer service costs, therefore, achieving higher margins than home service
revenues. The Company's markets, strategically surrounding or between major
metropolitan areas, encompass significant portions of heavily traveled
corridors which results in significant roaming revenues for the Company.
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 evaluation, 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
make repairs.
57
<PAGE>
Through the use of sophisticated monitoring equipment, technicians at the
customer service center are able to monitor the technical performance of its
cellular system.
In addition, the Company's customers are able to report cellular telephone
service or account problems to a local office representative. Management
believes its decentralized philosophy and emphasis on customer service in each
of its markets affords it a competitive advantage over its large competitors
who typically centralize customer service outside of the local market.
System Development and Expansion
The Company develops or builds out its cellular service areas by adding
channels to existing cell sites and by building new cell sites with an
emphasis on improving coverage for hand-held phones in heavily-trafficked
areas. Such development is done for the purpose of increasing capacity and
improving coverage in response to projected subscriber demand and competitive
factors. 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% (percentage of calls that are not connected on first attempt at peak usage
time during the day). After calculating projected subscriber demand, the
Company has historically met such demand through a combination of augmenting
channel capacity in existing cell sites and building new cell sites.
Cell site expansion is expected to enable the Company to continue to add
subscribers, enhance use of the Systems by existing subscribers, increase
roamer traffic due to the larger geographic area covered by the cellular
network and further enhance the overall quality of the network. The Company
believes that the increased cellular coverage will have a positive impact on
market penetration, subscriber usage and roaming revenue.
The Company also continues to evaluate expansion through acquisitions of
other cellular properties that will further enhance its network. In evaluating
acquisition targets, the Company considers, among other things, demographic
factors, including population size and density, traffic patterns, cell site
coverage and required capital expenditures.
Competitors and Adjoining Systems
The Company competes with various competitors in each of its clusters. The
Company believes that its integrated network of contiguous cellular systems
operating as CELLULARONE affords it significant advantages over many of its
cellular competitors. In the Upper Midwest Cluster, the Company competes
against six distinct operators, in the Mid-Atlantic Cluster, the Company
competes against four distinct operators, and in the Kentucky Cluster, the
Company competes against five distinct operators.
The following chart lists the Company's cellular competitors in each of its
clusters and the major adjoining operators.
58
<PAGE>
<TABLE>
<CAPTION>
Company
Cluster Competitors Adjoining Systems
- -------------- ------------------------------ -------------------------------
<S> <C> <C>
Upper Midwest
Cluster Air Touch Communications, Inc. AT&T
United States Cellular Corp. BellSouth
CelluLink Western Wireless
Cellular 2000
CellCom
Century Telephone Enterprises
Mid-Atlantic
Cluster United States Cellular Corp. AT&T
Alltel Airtouch Communications Inc.
Vanguard Cellular Systems, Inc.
Ameritech ("Vanguard")
Bell Atlantic Mobile
New York Clus-
ter Bell Atlantic Mobile Bell Atlantic Mobile
AT&T
Southwestern Bell
Vanguard
Kentucky Clus-
ter BellSouth Mobility GTE Corp.
Ramcell, Inc. United States Cellular Corp.
Bluegrass Cellular
United States Cellular Corp.
Alltel
</TABLE>
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 (the
"Licensor"). Licensing and advertising fees are determined based upon the
population of the licensed areas. The licensing agreements require the Company
to provide high-quality cellular telephone service to its customers and to
maintain a certain minimum overall customer satisfaction rating in surveys
commissioned by the Licensor. The licensing agreements, which the Company has
entered into, are for original five-year terms expiring on various dates.
These agreements may be renewed at the Company's option for three additional
five-year terms.
Employees and Agents
As of September 1, 1998, the Company had approximately 800 employees. In
addition, the Company has agreements with independent sales agents, including
car dealerships, electronics stores, paging services companies and independent
contractors. None of the Company's employees are represented by a labor
organization, and the Company's management considers its employee relations to
be good.
Properties
The Company maintains its corporate headquarters in Schaumburg, Illinois.
The Company leases this space which is approximately 10,000 square feet. In
addition to its corporate headquarters, the Company's cellular operations
lease sales and administrative offices and lease and own locations for cell
site and switching equipment. The Company reviews these leases from time to
time and may, in the future, lease or acquire new facilities as needed. The
Company does not anticipate that it will encounter any material difficulties
in meeting its future needs for any leased space.
Legal Proceedings
The Company is not currently involved in any pending legal proceedings that
individually, or in the aggregate, are material to the Company.
59
<PAGE>
OVERVIEW OF CELLULAR TELEPHONE INDUSTRY
The cellular telephone industry is a regulated duopoly. The FCC has
designated 734 distinct markets in the United States, 306 MSAs and 428 RSAs.
Since it became operational in 1983, the cellular telephone industry has
experienced significant growth. For the year ended December 31, 1996, the
cellular industry reported total revenues of $23.6 billion, versus $19.1
billion and $14.0 billion for the years ended 1995 and 1994, respectively. The
"Dick Tracy" Wireless Communications Industry Report, published by Donaldson,
Lufkin & Jenrette, predicts continued rapid growth for the cellular industry
and forecasts in their fall 1997 issue that the penetration rate of cellular
telephones will be 58.0% of U.S. Pops at year-end 2006.
The following table sets forth information published by the Cellular
Telecommunication Industry Association ("CTIA") with respect to the number of
subscribers served by cellular, PCS and ESMR telephone systems in the United
States and the combined penetration rate of such operators as of the dates
indicated:
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------
1997 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Subscribers (in
thousands)............... 51,500 44,706 33,786 24,134 16,009 11,033
Ending penetration (1).... 18.8% 16.9% 12.8% 9.1% 6.1% 4.1%
</TABLE>
- --------
(1) Determined by dividing the aggregate number of subscribers by estimated
population as determined by the Donnelley Market Information Service 1996
United States population estimates. Rates reflect combined penetration of
both wireline and non-wireline cellular operators.
Cellular telephone technology is based upon the division of a given market
area into a number of smaller geographic areas or "cells." Each cell has "base
stations" or "cell sites," which are physical locations equipped with
transmitter receivers and other equipment that communicate by radio signal
with cellular telephones located within range of the cell. Cells generally
have a high-quality operating range of one to ten miles. Each cell site
transmits to a mobile telephone switching office ("MTSO") which, in turn,
transmits to the local landline telephone network. As cellular telephone
systems are fully interconnected with the landline telephone network and long-
distance networks, subscribers can receive and originate both local and long-
distance calls from their cellular telephones on a worldwide basis.
When a cellular subscriber in a particular cell dials a number, the cellular
telephone sends the call by radio signal to the cell's transmitter-receiver,
which then sends it to the MTSO. The MTSO then completes the call by
connecting it with the landline telephone network or another cellular
telephone unit. Incoming calls are received by the MTSO, which instructs the
appropriate cell to complete the communications link by radio signal between
the cell's transmitter-receiver and the cellular telephone. Each conversation
on a cellular system occurs on a pair of radio talking paths, thus providing
full duplex telephone service. The relatively short-range transmissions
between cell sites and cellular telephones permit the two distinguishing
features of cellular telephone systems: frequency re-use, enabling the
simultaneous use of the same frequency in two or more adequately separated
cells, and call hand-off, occurring when the MTSO routes a mobile user to an
adjacent cell that can provide a higher quality signal without interrupting an
ongoing call.
Frequency re-use allows for the efficient use of the radio frequencies
allocated to each cellular operator. Each cell in a cellular telephone system
is assigned a specific set of frequencies for use between that cell's base
station and cellular telephones within the operations range of the cell, so
that the radio frequencies being used in one cell do not interfere with those
being used in adjacent cells. Due to the relatively low transmission power of
the base stations and cellular telephones, two or more cells which are
sufficiently far apart can use the same frequencies within the same market
without interfering with one another.
A cellular telephone system's capacity can be increased in various ways.
Within certain limitations, increasing demand may be met by simply adding
available frequency capacity to cells as required, or by using directional
antennae to divide a cell into discrete multiple sectors or coverage areas,
thereby reducing the required
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<PAGE>
distance between cells using the same frequency. Furthermore, areas within a
system may be served by more than one cell through procedures which utilize
available channels in adjacent cells. When all possible channels are in use,
further growth can be accomplished through a process called "cell splitting."
Cell splitting entails dividing a single cell into a number of smaller cells
served by lower-power transmitters, thereby increasing the re-use factor and
the number of calls that can be handled in a given area. Although the Company
has generally not experienced any material capacity constraints in its
systems, the Company plans to implement a program of cell splitting to meet
projected capacity demands for the next several years. System capacity can
also be expanded through the implementation of digital cellular technology
described below.
Call hand-off in a cellular telephone system is automatic and virtually
unnoticeable to the user. The MTSO and base stations continuously monitor the
signal strength of the call in progress. The signal strength of the
transmission between the cellular telephone and the base station declines as
the caller moves away from the base station in that cell. When the signal
strength of a call declines to a predetermined threshold level, the MTSO
automatically determines if the signal strength is greater in an adjacent cell
and, if so, hands off the call to that cell. If the cellular telephone user
leaves the service areas of the cellular telephone system, the call can often
be handed off to an adjacent system through intersystem networking
arrangements. The Company currently has several such networking arrangements
and will continue to work towards establishing intersystem networking with all
adjacent Systems.
Digital Cellular Technology
Some cellular operators have upgraded their cellular systems, especially in
the more populated markets, to support both analog and digital technology.
Over the next few years, it is expected that many other cellular systems will
upgrade to support both analog and digital technology. These upgrades are
being undertaken due in part to capacity constraints in many of the largest
cellular markets, such as New York, Los Angeles and Chicago. As carriers reach
limited capacity levels of analog only networks, certain calls may be unable
to be completed, especially during peak hours. The industry-wide migration
from analog to digital technology is expected to be a process that will take a
number of years to complete.
The FCC has not mandated a single national digital standard (as it did with
analog Advanced Mobile Phone System) and, as a result, three distinct
technologies have evolved as standards and are being deployed nationally.
1. CDMA-Code division multiple access is a spread-spectrum technology
that is predominantly being used by Sprint and Bell Atlantic.
2. GSM-Global system mobile is a digital standard that originated in
Europe and is being deployed by several 1.9 GHz license holders such as
Western Wireless and TDS Aerial Communications.
3. TDMA-Time division multiple access is the standard adopted and
certified by CTIA. It is the digital standard being deployed nationally by
AT&T. TDMA is the most widely supported and enhanced digital standard
utilized domestically today, with support from all of the large
infrastructure providers, such as Nortel, Lucent and Ericsson. TDMA encodes
three voice calls on a single 30 KHz channel effectively yielding a
spectral-efficient, three-fold increase in system capacity.
Digital technology increases system capacity while simultaneously providing
an architecture that supports delivery of revenue enhancing features and
services, commonly referred to as PCS (or simply Digital PCS). Digital PCS
features include extended (60+ hours) battery life on hand-held model phones,
improved call security, intelligent system selection/zone billing,
alphanumeric paging, Internet based electronic mail receipt, presentation of
calling party identification, voice mail message waiting information and
enhanced data/facsimile transmission. Management does not believe that its
network will experience capacity constraints in the foreseeable future that
would require converting its network from analog to digital technology.
However, the Company has concluded a successful TDMA digital trial in 1997 and
is planning for a limited-cost, broad-scale TDMA digital infrastructure
upgrade in 1998 so as to position the Company to offer the revenue enhancing
digital PCS feature set to its subscribers.
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<PAGE>
Competition; New Technology
The Company currently competes with one other cellular licensee in each of
its cellular markets. Many of these licensees are larger, and have greater
financial resources, than the Company. In addition, the Company competes in
many of its markets with providers of other CMRS such as PCS, SMR and paging.
The Company also competes with local landline telephone companies for
telephone usage by customers. Although current policies of the FCC authorize
only two cellular system licensees in each market, the Company expects that it
will face competition from not only the other cellular licensee in each
cellular market in which the Company operates, but also from PCS and other
CMRS licensees. Competition for subscribers among CMRS providers is based
principally upon the services and enhancements offered, the technical quality
of the system, sound quality, reliability of connections, customer service,
system coverage, capacity and price.
The FCC requires all cellular system operators to provide service to
"resellers." A reseller provides cellular service to customers but does not
hold an FCC cellular license or own cellular facilities. Instead, the reseller
buys blocks of cellular telephone numbers from a licensed carrier and resells
service to the public through its own distribution methods. Thus, a reseller
may be both a customer of a cellular licensee's services and, also, a
competitor of that licensee. The Company does not know of any significant
resellers currently operating in competition with the Company's Systems.
Cellular telephones have remained the technology of choice for mobile
communications. Potential users of cellular systems may, however, find their
communications needs satisfied by other current and developing technologies,
particularly in the broadband PCS. PCS operators providing digital
communications technology may compete with cellular service with regard to
rates, enhanced privacy, and additional features such as electronic mail and
built-in paging. One-way paging or beeper services that feature voice message
and data display as well as tones, may be adequate for potential subscribers
who do not need to speak to the caller. In the future, cellular service may
also compete more directly with traditional landline telephone service
providers.
There are six potential broadband PCS providers in each PCS service area.
Licensing areas for broadband PCS are divided into 51 Major Trading Areas
("MTAs") and 493 smaller Basic Trading Areas ("BTAs") based on the geographic
divisions in the 1992 Rand McNally Commercial Atlas & Marketing Guide. Three
licensees per market hold 30 MHz of PCS spectrum, two licensed for each MTA
and one licensed for each BTA. The 30 MHz BTA licenses were awarded to small
business and rural telephone entities qualifying for participation in an
"Entrepreneurs' Block." Three 10 MHz frequency blocks were licensed in each
BTA, with one of these 10 MHz blocks per BTA licensed to an Entrepreneurs'
Block entity. The rules permit licensees to offer a broad range of two-way
voice, data and related communications services employing digital micro-
cellular technology. Cellular carriers are subject to a 45 MHz spectrum cap
for their combined cellular and PCS spectrum in areas where they offer both
services. After January 1, 2000, cellular licensees will be permitted to
acquire an additional five MHz for a total of 15 MHz of PCS spectrum in their
cellular service areas.
The FCC has also adopted rules for narrowband PCS services in the 900 MHz
frequency band and awarded national and regional licenses by auction.
Narrowband PCS services typically are advanced paging and messaging services.
In addition, the FCC allocated 30 MHz to unlicensed PCS, which will consist of
new cordless telephones, local area networks in offices and other kinds of
short-range communications. Unlicensed PCS operations are restricted to very
low power.
SMR and other land mobile radio systems, such as those historically used by
taxicabs, tow truck services, and other communications services that have the
technical capability to handle mobile telephone calls (including
interconnection to the landline telephone network), may provide competition to
cellular and PCS services in certain markets. Beginning in February 1991, the
FCC granted waivers of certain of its SMR rules to permit several large
operators of SMR systems to construct and operate Enhanced Specialized Mobile
Radio ("ESMR") systems. These waivers allow SMR operators to use digital
technology to provide a wide-area mobile communications service that
substantially increases the number of customers that can be served. The
ESMR system incorporates characteristics of cellular technology, including
multiple low-power transmitters and
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<PAGE>
interconnection with the landline telephone network. ESMR service may compete
with cellular service by providing digital communication technology, lower
rates, enhanced privacy and additional features such as electronic mail and
built-in paging. The FCC has and will be auctioning SMR licenses in the 800
and 900 MHz frequency bands for the provision of wide area SMR licensing. The
new licenses were designed to promote wide-area systems that would make SMR
more competitive with other wireless services, including cellular.
Continuing technological advances in the telecommunications industry make it
impossible to predict the extent of future competition. A consortium of
telecommunications providers known as American Mobile Satellite Corporation
has been licensed by the FCC to provide mobile satellite service. In addition,
the FCC has issued licenses for low-orbit satellite systems that would provide
voice and data mobile communications to subscribers throughout the world.
Other proposals for additional mobile satellite service and spectrum are
pending before the FCC. The FCC and international and foreign regulatory
authorities are considering additional aspects of mobile satellite systems and
services. The International Maritime Satellite Organization ("Inmarsat") has
been planning for several years an "Inmarsat-P" international global satellite
telephone and data service that is expected to commence service in 1999 or
2000.
Mobile satellite systems could augment or replace communications within land
based cellular systems. Similar technological advances may make available
alternatives to cellular service, creating additional sources of competition.
In addition, the FCC has auctioned off 25 MHz of spectrum for unspecified
fixed and mobile services, collectively known as the General Wireless
Communications Service ("WCS"). The FCC defined WCS as any fixed or mobile
service except broadcasting, radiolocation, and satellite service. Among the
services the FCC anticipates the WCS may be used for are voice, video and data
transmission, private microwave, broadcast auxiliary, and ground-to-air voice
and data. On March 25, 1998, the FCC completed the auction of 986 licenses for
the Local Multipoint Distribution Service ("LMDS") frequencies in the 27.5
through 31.3 GHz frequency bands. The FCC will permit flexible use for these
LMDS licenses. It is anticipated that LMDS licenses will be used to provide
video and data transmission and Internet access, although voice use is also
permitted. Frequencies in the 38 GHz band have also been licensed for similar
uses.
As a result of the above, the Company's cellular operations may face
increased competition from entities providing other communication technologies
and services. The Company cannot predict the success of such competing
technologies or their operational abilities. While some of these technologies
are currently operational, others are operational on only a limited basis or
are not yet operational. Broadband PCS operators will compete directly with
the Company and may have access to substantial capital resources, although
such resources have generally not been available to Entrepreneurs' Block
licensees. There can be no assurance that the Company will be able to provide
or that it will choose to pursue, depending on the economics thereof, such
services and features in addition to those already provided. The Company
believes that traditional tested cellular service is economically proven.
While the Company believes that competition from other technologies will
increase over both the short and long terms, it also believes that the
development of cellular technology and expansion of the Company's cellular
clusters is its best strategy. Nonetheless, there can be no assurance that one
or more of the technologies currently used by the Company will not become
obsolete sometime in the future.
63
<PAGE>
REGULATION
Regulation and Licensing of Cellular Telephone Systems
The FCC regulates the construction, operation and acquisition of cellular
systems in the United States pursuant to the Communications Act. FCC
regulations specify that two cellular radio licenses are available for any
given area within each of the 734 FCC-designated markets in the United States
(306 MSAs and 428 RSAs). Frequency block "B" was initially awarded to
incumbent landline local exchange carriers (the "Wireline" license) and
frequency block "A" was initially awarded to nonincumbents (the "Non-Wireline"
license). Apart from the different frequency blocks, there is no technical
difference between Wireline and Non-Wireline cellular systems and the
operational requirements imposed on Wireline and Non-Wireline licensees are
the same. The regulatory distinction between Wireline and Non-Wireline systems
concerns only an applicant's eligibility to apply for an initial
authorization. After initial authorization, a Non-Wireline company may
purchase interests in a Wireline system, subject to restrictions on common
ownership of Wireline and Non-Wireline systems in the same market and to any
necessary prior approval of the FCC. Likewise, a company affiliated with a
landline telephone service provider may purchase an interest in a Non-Wireline
system, subject to the same restrictions on common ownership and prior FCC
approval where necessary.
FCC licensing of all MSA markets and the FCC's initial lotteries of all of
the RSA markets have been completed. Additional auctions are to be held for
several RSA markets in which the initially selected applicant has been
disqualified.
For Systems below the top 90 MSA markets (including all RSA markets), the
issuance of a construction permit initiates an 18-month period during which
the permittee must construct at least one cell and begin providing service via
those facilities. A permittee that does not complete initial construction
within 18 months is subject to having its permit canceled. A small number of
RSA permittees forfeited their permits on this ground.
Following notice of completion of construction, a cellular operator obtains
an initial license. Cellular licenses are issued generally for a 10-year term
beginning on the date of the grant of the initial operating authority and are
renewable upon application to the FCC for periods of up to 10 years. The FCC
may revoke a license prior to the end of its term in extraordinary
circumstances (such as when serious violations of FCC rules have occurred).
Under FCC rules, the authorized service area of a cellular provider in each
of its markets is referred to as the "Cellular Geographic Service Area"
("CGSA"). The CGSA may be coincident with, or smaller than, the related FCC-
designated MSA or RSA. A cellular licensee has the exclusive right to expand
its CGSA boundaries within the licensee's MSA or RSA for a period of five
years after grant of the licensee's construction permit. At the end of the
five-year period, however, any entity may apply to serve portions of the MSA
or RSA outside the licensee's CGSA. The FCC has granted a number of unserved
area applications for areas within both MSA and RSA markets, some filed by
incumbent operators and others filed by new entrants.
Near the conclusion of the license term (the years 2000 to 2008, in the case
of the Company's current licenses), licensees must file applications for
renewal of licenses to obtain authority to operate for up to an additional 10-
year term. Applications for license renewal may be denied if the FCC
determines that the grant of an application would not serve the public
interest. In addition, at license renewal time, other parties may file
competing applications for the authorization. In the event that qualified
competitors file applications for a licensee's market, the FCC may be required
to hold a hearing to determine whether the incumbent or the competitor will
receive the license. In 1993, the FCC adopted specific standards to apply to
cellular renewals, concluding that it will award a renewal expectancy to a
cellular licensee that meets certain standards of past performance. If the
existing licensee receives a renewal expectancy, it is very likely that the
existing licensee's cellular license will be renewed without a full
comparative hearing. To receive a renewal expectancy, a licensee must show
that it (i) has provided "substantial" service during its past license term;
and (ii) has substantially complied with applicable FCC rules and policies and
the Communications Act. "Substantial" service is defined as service which is
sound, favorable and substantially above a level of mediocre service that
might only minimally warrant renewal.
64
<PAGE>
Cellular radio service providers also must satisfy a variety of FCC
requirements relating to technical and reporting matters. One such requirement
is the coordination of proposed frequency usage with adjacent cellular users,
permittees and licensees in order to avoid interference between adjacent
Systems. In addition, the height and power of base station transmitting
facilities and the type of signals they emit must fall within specified
parameters. The FCC also regulates cellular service resale practices and the
terms under which certain ancillary services may be provided through cellular
facilities. Cellular systems are subject to certain Federal Aviation
Administration regulations respecting the location, lighting and construction
of cellular transmitter towers and antennae and may be subject to regulation
under the National Environmental Policy Act and the environmental regulations
of the FCC. State or local zoning and land use regulations may also apply. The
Company uses common carrier point to point microwave facilities to connect
cell sites and to link them to the main switching office. These facilities are
separately licensed by the FCC and are subject to regulation as to technical
parameters and service.
In July 1994, the FCC issued a notice proposing to require that all cellular
carriers provide interexchange carriers with equal access. Currently, only
AT&T's cellular carriers and the cellular affiliates of the RBOCs are required
to provide equal access. The FCC also proposed requiring all CMRS providers to
provide interconnection to other mobile service providers. In April 1995,
however, the FCC tentatively concluded that it would be premature to adopt
such a requirement, and to date has declined to do so. The FCC may in the
future attempt to impose equal access or other interconnection obligations on
CMRS providers if market conditions warrant.
Congress amended the Communications Act to preempt, as of August 10, 1994,
state or local regulation of the entry of, or the rates charged by, any
commercial mobile radio service, which includes cellular telephone service, or
any private mobile radio service.
Telecommunications Act of 1996; Other Regulatory Developments
The Telecom Act is the first legislation enacted in over 60 years that
attempts comprehensive reform of telecommunications regulation, although the
legislation did not have as a principal focus the cellular industry in
particular or the wireless communications industry in general. The Telecom
Act's goal is to remove statutory, regulatory, and court-ordered barriers that
historically prohibited new entrants into many segments of the
telecommunications industry. Certain of the provisions of the Telecom Act have
been declared unconstitutional, including several provisions relating to
restrictions on Regional Bell Operating Companies ("RBOCs") that were deemed a
bill of attainder by the United States District Court in Wichita Falls, Texas.
That ruling has been appealed. The Company cannot predict the outcome of that
litigation or the eventual impact of the result of that litigation on the
Company.
To facilitate the entry of competitors, the Telecom Act imposes certain
requirements on local exchange carriers, including interconnection, universal
service, equal access, and facilitating local wireline telephone service. The
FCC has adopted regulations implementing these provisions, including rules on
telephone number portability pursuant to which subscribers will be able to
migrate their landline telephone numbers to a cellular carrier or other
Commercial Mobile Radio Service ("CMRS") or landline carrier, or from a
cellular carrier to another CMRS or landline carrier.
In August 1996, the FCC released its decision implementing the
interconnection portions of the Telecom Act. However, major portions of the
FCC's interconnection rules were reversed by the United States Court of
Appeals for the Eighth Circuit, which held that the rules interfered with
matters left to the jurisdiction of the states by the Telecom Act. The Eighth
Circuit's decision has been appealed to the United States Supreme Court, which
has decided to expedite its review of petitions for certiorari with regard to
the Eighth Circuit's decision. The Company cannot predict the eventual outcome
of the judicial review of the FCC's interconnection rules or the effect of the
eventual implementation of interconnection rules by the FCC. However, pursuant
to the provisions of the Telecom Act, the Company has renegotiated many of its
interconnection agreements with incumbent local exchange carriers and thereby
reduced the cost of interconnection with the local telephone facilities.
65
<PAGE>
The FCC's interconnection decision concluded that CMRS providers are
entitled to reciprocal compensation arrangements with incumbent local exchange
carriers and prohibited local exchange carriers from charging CMRS providers
for terminating traffic initiated on the local exchange carrier's network.
While the FCC noted the potential for asserting jurisdiction over certain
aspects of CMRS interconnection with landline local exchange carriers, it has
so far determined to defer primarily to the states in implementing
interconnection policies pursuant to general guidelines established by the
FCC, some of which survive the Eighth Circuit decision.
The FCC declined to require cellular carriers to comply with certain
interconnection provisions of the Telecom Act applicable to local exchange
carriers. Prior to the passage of the Telecom Act, the FCC had proposed to
require CMRS providers to interconnect directly with other mobile service
providers but tentatively concluded that it would be premature to adopt such a
requirement. The FCC has since stated that it would revisit this issue in the
future.
The Telecom Act requires telecommunications carriers providing interstate
service to contribute to a federal Universal Service Support Fund established
by the FCC. The Universal Service Support Fund will support telephone service
in high-cost and low-income areas and support access to telecommunications
facilities by schools and libraries. States will also be implementing
requirements that carriers contribute universal service funding from
intrastate telecommunications revenues. The Company has revised its customer
billing to reflect additional costs related to these universal service fund
requirements. There can be no guarantee that the Company will be able to
continue to pass the costs of the fund requirements on to its customers in the
future.
The FCC has eliminated its PCS-cellular cross-ownership rule, but retained a
spectrum cap on aggregation of CMRS spectrum. A cellular licensee and its
affiliates may not hold an attributable interest in more than 45 MHz of
licensed cellular, broadband PCS, and specialized mobile radio ("SMR")
spectrum in a particular geographic area.
The FCC has revised its rules pertaining to cellular licensees' obligations
to allow resale of cellular service. The FCC requires a cellular carrier (and
certain other wireless carriers) to permit unrestricted resale of its service
(including to other FCC-licensed wireless carriers). This rule contains a
sunset provision that provides that the rule will lapse five years following
the FCC's grant of the last group of initial broadband PCS licenses.
Pursuant to an earlier amendment of the Communications Act of 1934, as
amended (the "Communications Act"), Congress preempted state or local
regulation of entry into, or rates charged by, any CMRS or private mobile
service carrier. States were allowed to petition the FCC for authorization to
continue their authority to regulate rates and entry by August 1994. While
eight states sought such authority, the FCC denied all such requests.
Transfers and Assignments of Cellular Licenses
The Communications Act and FCC rules require the FCC's prior approval of the
assignment or transfer of control of a construction permit or license for a
cellular system. Subject to FCC approval, a license or permit granted to a
non-wireline entity may be transferred or assigned to a wireline entity and
vice versa. In most cases, noncontrolling interests in an entity that holds a
cellular license or cellular system generally may be bought or sold without
prior FCC approval. In the case of a sale proposed to occur before the
expiration of certain holding periods, the FCC may prohibit or impose
limitations on such a sale or require the seller to make certain
representations as a condition precedent to such a sale. For RSAs, the minimum
holding period generally expires upon completion of initial construction. The
FCC has permitted sales prior to completion of initial construction under
certain circumstances. Specifically, the seller must demonstrate that it did
not file its application for the purpose of speculating in cellular licenses.
Any acquisition by the Company of cellular interests may also require the
prior approval of state or local regulatory authorities having jurisdiction
over the cellular telephone industry.
In certain circumstances, the FCC's rules prohibit the alienation of
cellular interests. No ownership interest in an RSA application, or an entity
holding such an application, may be transferred or otherwise alienated prior
66
<PAGE>
to the grant of a construction permit. For cellular unserved areas, no
substantial change in ownership may take place until after the FCC has granted
both a construction permit and a license and the licensee has provided service
to the public for at least one year. These restrictions prevent prospective
purchasers, including the Company, from entering into agreements for
assignment or transfer of unserved areas and RSA acquisitions prior to the
lapse of the applicable transfer restriction periods. These transfer
restrictions should not have a greater effect on the Company than on any other
prospective buyer.
Character and Citizenship Requirements
Applications for FCC authority may be denied and, in extreme cases, licenses
may be revoked if the FCC finds that an entity lacks the requisite "character"
qualifications to be a licensee. In making that determination, the FCC
considers whether an applicant or licensee has been the subject of adverse
findings in a judicial or administrative proceeding involving felonies, the
possession or sale of unlawful drugs, fraud, antitrust violations or unfair
competition, employment discrimination, misrepresentations to the FCC or other
government agencies, or serious violations of the Communications Act or FCC
regulations. The FCC also requires licensees to comply with statutory
restrictions on the direct or indirect ownership or control of radio licenses
by non-U.S. persons or entities. The FCC has found the Company to be qualified
to hold FCC licenses.
Other Restrictions
The Communications Act currently limits the interest of foreign governments
and non-U.S. corporations and citizens in radio licensees, which include
cellular licensees. This limitation has been relaxed with regard to certain
foreign investors pursuant to a World Trade Organization treaty and FCC
actions, implementing the treaty. The cellular industry is also subject to
other rules and policies of the FCC and state commissions.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following sets forth certain biographical information, the present
occupation and business experience for the past five years of each person who
is a director or executive officer of the Company (none of whom were officers
or directors of PriCellular other than Brion Applegate, who was a director of
PriCellular until June 25, 1998, and Stephen Easley, who was an officer of
PriCellular until June 25, 1998). All such persons assumed their respective
positions with American Cellular effective as of June 25, 1998:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Brian McTernan 50 President and Director
John Fujii (1) 48 Chief Executive Officer and Director
James J. Walter, Jr. 47 Vice President of Finance,
Chief Financial Officer and Secretary
Janice P. Mercer 49 Executive Vice President--Operations
Stephen J. Easley 41 Vice President for External Affairs
and General Counsel
Keith E. Mathews 37 Vice President, Controller and
Assistant Secretary
Brion Applegate (1, 3) 44 Director
Glenn M. Creamer (1, 3) 36 Director
Jeffrey M. Lane (2) 42 Director
Michael J. Marocco (3) 39 Director
Kevin J. Maroni (2) 35 Director
Mark A. Pelson (2) 36 Director
</TABLE>
- --------
(1) Member of the Executive Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
(3)Member of the Compensation Committee of the Board of Directors.
Brian McTernan. Mr. McTernan has been a principal of MLC since 1986. From
1988 to 1994 he served as an officer for various subsidiaries of Crowley. From
1994 to 1995 he was the President of Mid-South. Mr. McTernan has served as
President and Chief Operating Officer of ACME Paging, Inc. since 1994.
John Fujii. Mr. Fujii has been a principal of MLC since 1986. From 1988 to
1994 he served as an officer for various subsidiaries of Crowley. From 1994 to
1995 he was the Vice President and Secretary of Mid-South. Mr. Fujii has
served as Vice President and Secretary of ACME Paging, Inc. since 1994.
James J. Walter, Jr. Mr. Walter has served as Vice President and Controller
of MLC since 1989. He has also served as Vice President and Controller of ACME
Paging, Inc. since 1994.
Janice P. Mercer. Ms. Mercer has been involved in the wireless
communications industry for the past 15 years. From 1988 to 1992, Ms. Mercer
served as General Manager at Crowley. From 1992 to 1993, Ms. Mercer served as
General Manager at McCaw and from 1993 to 1994, Ms. Mercer served as
General Manager at Mid-South. From 1995 until the time she joined the Company,
Ms. Mercer served as the Director of Consumer Marketing, Southwest Region, at
AT&T Wireless.
Stephen J. Easley. Mr. Easley served as Vice President for External Affairs
and General Counsel of PriCellular since March 1997. For one year prior to
that, he served as Vice President and General Counsel of Intrinzix
Technologies, Inc. ("Intrinzix"). For the five years prior to his service with
Intrinzix, Mr. Easely served as Senior Counsel at MCI Communications
Corporation.
Keith E. Mathews. Mr. Mathews served as Senior Tax Manager for Arthur
Andersen & Co. for twelve years prior to joining American Cellular.
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<PAGE>
Brion B. Applegate. Mr. Applegate co-founded Spectrum in 1993. Prior to
forming Spectrum, he was a General Partner of Burr, Egan, Deleage & Co. from
1982 to 1993. Mr. Applegate is a director of Nassau Broadcasting Partners,
L.P., Apex Site Management, L.P., and Tut Systems, Inc.
Glenn M. Creamer. Mr. Creamer has been a Managing Director of Providence
Equity Partners since its inception in 1996. Mr. Creamer is also a general
partner of Providence Ventures L.P., which was formed in 1991. Mr. Creamer is
also a Vice President of Narragansett Capital, Inc., which he joined in 1988.
Mr. Creamer is a director of Carrier1 L.L.C., Celpage, Inc., Epoch Networks,
Inc., and Wireless One Network, L.P.
Jeffrey M. Lane. Mr. Lane has been a Managing Director of Triumph Capital
Group, Inc. since 1994. From 1990 to 1994 he was a Managing Director of
Pacific Corporate Group. Mr. Lane serves as a director of S&R Precision
Company LLC.
Michael J. Marocco. Mr. Marocco has been a General Partner of Sandler
Capital Management since 1989. Prior to joining Sandler Capital, he was a Vice
President of Investment Banking at Morgan Stanley specializing in media and
communications companies. He serves as a director for numerous companies
involved in cable television, broadcasting, advertising and interactive
television.
Kevin J. Maroni. Mr. Maroni joined Spectrum at its inception in 1993. Prior
to joining Spectrum, he was Manager of Finance and Development at Time Warner
Telecommunications. Before joining Time Warner, Mr. Maroni was a consultant
and analyst with the Harvard Management Company.
Mark A. Pelson. Mr. Pelson is a Vice President of Providence Equity
Partners. Prior to 1996, Mr. Pelson was a co-founder and director of TeleCorp,
Inc., a wireless telecommunications company, and from 1989 to 1995 he served
in various management positions with AT&T, most recently as a general manager
of strategic planning and mergers and acquisitions. Mr. Pelson is a director
of Carrier1 L.L.C. and Madison River Telephone Company, Inc.
In connection with their responsibilities as officers of MLC, certain
members of the Company's senior management, specifically Brian McTernan, John
Fujii and James Walter, have commitments to manage the affairs of Acme, a
large multinational paging operation which was founded in 1994 and has
operations in South America. Acme is not affiliated with the Company. Acme's
day-to-day operations are primarily managed by individuals headquartered in
South America, and MLC employs staff members in the U.S. who are dedicated
exclusively to Acme and who have no responsibilities to the Company. Since the
Merger, Messrs. McTernan, Fujii and Walter have, on average, collectively
spent approximately 15% to 20% of their professional time providing corporate-
level management services for Acme. These individuals believe, however, that
the amount of time they collectively will devote in the future to managing
Acme will vary, and may from time to time increase, sometimes significantly.
The principal factors that may result in an increased time commitment are
recent adverse changes in the economy in South America, Acme's annual
budgeting process, which is typically completed during November and December,
and the possible sale of Acme by its investors. Due to the uncertainties
inherent in these factors and in managing a business like Acme, Messrs.
McTernan, Fujii and Walter are presently unable to make a quantifiable
determination of the amount of their time they will dedicate to managing Acme.
However, Mr. Fujii believes he will continue to devote substantially all of
his professional time to the affairs of the Company, and Messrs. McTernan and
Walter believe they will continue to devote the substantial majority of their
professional time to the affairs of the Company, and that all three of these
members of the Company's senior management team will not turn their attention
to Acme simultaneously. Since the Merger, the Company has hired additional
members of its senior management team whose responsibilities are dedicated
exclusively to the Company. Senior management of the Company believes there
will not be a material adverse impact on the business, prospects or results of
operations of the Company resulting from the responsibilities of Messrs.
McTernan, Fujii and Walter to co-manage Acme. Despite this, there can be no
assurances that any continued or prolonged attention to the affairs of Acme by
Messrs. McTernan, Fujii and Walter will not have a material adverse effect on
the Company.
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<PAGE>
Management Incentive Plan
Each of Messrs. Fujii and McTernan is a party to the Stock Purchase
Agreement, pursuant to which each has purchased 1,250 shares of Class A Common
Stock of the Company for $125,000 and 16,250 shares of Series A Preferred
Stock of the Company for $1,625,000. See "Certain Relationships and Related
Transactions--Loans to Certain Officers."
The Company has reserved 21,739 shares of its Class B Common Stock for
issuance to certain of its employees. Messrs. Fujii and McTernan each
purchased 6,793.5 shares of such Class B Common Stock and Mr. Walter and Ms.
Mercer purchased 1,000 and 1,500 shares of such Class B Common Stock,
respectively, at a price in the case of each purchaser, of $10 per share. Mr.
Mathews purchased 600 shares of Class B Common Stock and Mr. Easley purchased
250 shares of Class B Common Stock each at a price of $10 per share. If the
Company proposes to sell more than 21,739 Class B Common Stock, Messrs. Fujii
and McTernan have the right to purchase their pro rata share of such Class B
Common Stock. Holders of Class B Common Stock have the same rights as holders
of Class A Common Stock, except that the Class B Common Stock is non-voting.
The Class B Common Stock vests in equal, annual installments over a four-year
period starting on the commencement date of employment. Unvested shares of
Class B Common Stock are subject to forfeiture upon the holder's ceasing to be
an employee of the Company (or, in the case of Messrs. Fujii and McTernan,
ceasing to be an officer or director of the Company). Shares of Class B Common
Stock vest upon a certain events deemed to be a change of control and the
Company must make appropriate provision to have any successor corporation
assume the Company's obligations with respect to the Class B Common Stock. The
shares of Class B Common Stock are convertible into shares of Class A Common
Stock on a one-for-one basis, and automatically convert when vested. Shares of
Class B Common Stock vest and convert into Class A Common Stock upon the
employee's death, disability or incapacitation. Upon termination of employment
without cause or due to death or disability, Messrs. Fujii, McTernan and
Walter each have the right to put their shares of Class A Common Stock, Class
B Common Stock (to the extent vested) and Series A Preferred Stock, if any,
then owned by such terminated employee at the fair market value for such
shares (generally as determined by an outside appraiser), provided that the
Company will have the right to pay certain amounts to such terminated employee
by issuing shares of Series A Preferred Stock.
Compensation of Management
The Company has agreed to pay Messrs. Fujii and McTernan each an annual
salary of $375,000, which may be adjusted upward by the Board of Directors.
Non-Competition
Messrs. Fujii and McTernan have agreed that as long as they are employed by
the Company they will not engage in any wireless communication activities,
other than their existing activities, through the Company and passive
investments, and will not engage in any other business, other than their
existing activities, that would substantially detract from the normal working
hours sufficient to carry out their obligations as officers and directors of
the Company.
Compensation of Directors
The Company plans to reimburse directors for out-of-pocket expenses and may
pay customary fees to non-employee directors for their services as directors.
Committees of the Board of Directors
The Board of Directors has established an Executive Committee comprised of
Messrs. Fujii, Applegate and Creamer. The Board of Directors has established
an Audit Committee comprised of Messrs. Maroni, Pelson and Lane and a
Compensation Committee comprised of Messrs. Applegate, Creamer and Marocco.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Class A Common Stock as of June 30,
1998 by (i) each stockholder who is known by the Company to own beneficially
five percent or more of the Class A Common Stock, (ii) each director of the
Company, (iii) each executive officer, and (iv) all directors and executive
officers as a group. The number of shares beneficially owned by each
stockholder, director or officer is determined according to the rules of the
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares as to which the individual or entity has sole or shared
voting power or investment power. As a consequence, several persons may be
deemed to be the "beneficial owners" of the same shares. This table does not
reflect ownership of Class A Preferred Stock or Class B Common Stock, neither
of which have voting rights.
<TABLE>
<CAPTION>
Amount and Nature of Percent
Name and Address Beneficial Ownership(1) of Class
---------------- ----------------------- --------
<S> <C> <C>
Spectrum Equity Investors II, L.P. (2)....... 35,714 14.3%
Providence Equity Partners, L.P. (3)......... 35,714 14.3
Sandler Investment Partners, L.P. (4)........ 32,143 12.9
Tandem Wireless Investments, L.P. (5)........ 28,751 11.4
Triumph Partnerships (6)..................... 21,429 8.6
First Union Capital Partners, Inc. (7)....... 17,857 7.1
HarbourVest Partners V (8)................... 14,286 5.7
Trident Capital Management (9)............... 14,286 5.7
John Fujii (10, 16).......................... 1,250 *
Brian McTernan (10, 16)...................... 1,250 *
James J. Walter, Jr. (10, 17)................ 0 *
Janice P. Mercer (10, 17).................... 0 *
Stephen J. Easley (10, 17)................... 0 *
Keith E. Mathews (10, 17).................... 0 *
Brion Applegate (2, 11)...................... 35,714 14.3
Glenn M. Creamer (3, 12)..................... 35,714 14.3
Jeffrey M. Lane (6, 13)...................... 0 *
Michael J. Marocco (4, 14)................... 32,143 12.9
Kevin Maroni (2, 11)......................... 35,714 14.3
Mark A. Pelson (3, 15)....................... 0 *
All directors and executive officers as a
group (twelve individuals)(16, 17).......... 127,500 51.0
</TABLE>
- --------
*Less than one percent.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
a "beneficial owner" of a security if he or she has or shares the power
to vote or direct the voting of such security or the power to dispose or
direct the disposition of such security. More than one person may be
deemed to be a beneficial owner of the same securities. The percentage
ownership of each stockholder is calculated based on 250,000 shares of
Class A Common Stock outstanding. Unless otherwise noted in the footnotes
to this table, each of the stockholders named in this table has sole
voting and investment power with respect to the Class A Common Stock
shown as beneficially owned.
(2) The address for Spectrum Equity Investors II, L.P. and Mr. Maroni is 125
High Street, Boston, MA 02110. The address for Mr. Applegate is 245
Lytton Avenue, Suite 175, Palo Alto, CA 94301.
(3) The address for Providence Equity Partners, L.P. and Messrs. Creamer and
Pelson is 50 Kennedy Plaza, 900 Fleet Center, Providence, RI 02903.
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<PAGE>
(4) Shares held by five limited partnerships, the general partner of which is
Sandler Investment Partners, L.P. The address for Sandler Investment
Partners, L.P. and Mr. Marocco is c/o MDM Corp., 767 Fifth Avenue, 45th
Floor, New York, NY 10153.
(5) The address for Tandem Wireless Investments, L.P. is c/o Live Cycles
Holding Co., 29 South Main Street, Suite 216, West Hartford, Connecticut
06107.
(6) Shares held by two limited partnerships, Triumph Partners III, L.P. and
Triumph III Investors, L.P. (the "Triumph Partnerships"). The address for
the Triumph Partnerships and Mr. Lane is 100 California Street, Suite
756, San Francisco, CA 94111.
(7) The address for First Union Capital Partners, Inc. is 301 South College
Street, Charlotte, NC 28288.
(8) The address for HarbourVest Partners V is One Financial Center, 44th
Floor, Boston, MA 09111.
(9) Shares held by five entities affiliated with Trident Capital Management.
The address for Trident Capital Management is 2480 Sand Hill Road, Menlo
Park, CA 94025.
(10) The address for Messrs. Fujii, McTernan, Walter, Easley and Mathews and
Ms. Mercer is c/o American Cellular Corporation, 1375 East Woodfield
Road, Suite 700, Schaumburg, IL 60173.
(11) As a general partner of Spectrum Equity Accounts II, L.P., which is the
sole general partner of Spectrum Equity Investors II, L.P., each of Mr.
Applegate and Mr. Maroni may be deemed to beneficially own shares
beneficially owned by Spectrum Equity Investors II, L.P., but disclaim
any such beneficial ownership.
(12) Mr. Creamer is a member of Providence Equity Partners L.L.C., the general
partner of Providence Equity Partners, L.P., and may be deemed to share
voting and investment power with respect to such shares. Mr. Creamer
disclaims beneficial ownership with respect to the Class A Common Shares
held by Providence Equity Partners, L.P.
(13) Mr. Lane is a limited partner in one of the Triumph Partnerships and a
limited partner in the general partner of the other Triumph Partnership.
Mr. Lane disclaims beneficial ownership of any shares beneficially owned
by the Triumph Partnerships.
(14) As the sole stockholder of a corporation which is a general partner of
Sandler Investment Partners, L.P., Mr. Marocco may be deemed to
beneficially own shares beneficially owned by Sandler Investment
Partners, L.P., but disclaims any such beneficial ownership.
(15) Mr. Pelson is a Vice President of Providence Equity Partners. Mr. Pelson
disclaims beneficial ownership with respect to the Class A Common Shares
held by Providence Equity Partners, L.P.
(16) Messrs. Fujii and McTernan each own 6,793.5 shares of Class B Common
Stock. See "Management--Management Incentive Plan."
(17) Mr. James J. Walter, Mr. Stephen J. Easley, Mr. Keith E. Mathews and Ms.
Janice P. Mercer own 1,000, 250, 600 and 1,500 shares, respectively, of
Class B Common Stock. See "Management--Management Incentive Plan."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Voting Agreement
In connection with the execution of the Merger Agreement, AT&T Wireless
Services, Inc. ("AWS"), The Thomas H. Lee Company (through its affiliates),
and certain members of the Price family entered into a Voting Agreement with
American Cellular in which, among other things, these stockholders agreed to
vote their shares of PriCellular in favor of the Merger Agreement.
Spectrum Letter
In connection with the execution of the Merger Agreement, Spectrum Equity
Investors, L.P. ("Spectrum") delivered a letter to PriCellular whereby
Spectrum agreed to be bound by certain provisions of the Voting Agreement.
AT&T Consent and Waiver
Concurrently with the execution of the Merger Agreement, AWS entered into a
Consent and Waiver agreement with PriCellular. Pursuant to the Consent and
Waiver agreement, AWS agreed to waive certain rights (including veto rights
with respect to any merger between PriCellular and any other corporation)
arising under a stockholders' agreement among PriCellular, AWS and the other
stockholders of PriCellular party thereto in connection with the Merger.
Equity Investor Agreements
In connection with their initial investment in American Cellular and the
Equity Contribution, the Equity Investors and American Cellular entered into
the Stock Purchase Agreement, an Equity Investor Registration Rights Agreement
and the Stockholders Agreement.
On March 5, 1998, American Cellular and the Equity Investors entered into
the Stock Purchase Agreement whereby the Equity Investors purchased an
aggregate of 250,000 shares of Class A Common Stock of American Cellular for
$25 million. The Stock Purchase Agreement provided that, at the request of
American Cellular, the Equity Investors would purchase an aggregate of 325,000
shares of Series A Preferred Stock of American Cellular for $325 million. The
Equity Investors purchased such additional shares as part of the Merger
Financings.
In connection with the Stock Purchase Agreement, on March 5, 1998, American
Cellular and the Equity Investors entered into a registration rights agreement
(the "Equity Investor Registration Rights Agreement"). The Equity Investor
Registration Rights Agreement provides that the Equity Investors may demand
registration under the Securities Act of their Class A Common Stock under
certain circumstances. In addition, the Equity Investor Registration Rights
Agreement provides the Equity Investors with certain piggyback registration
rights. The Equity Investor Registration Rights Agreement has provisions
governing the registration statement filing process and provides that American
Cellular shall bear all expenses, other than underwriting discounts and
commissions, in connection with its obligations under the Equity Investor
Registration Rights Agreement.
Also in connection with the Stock Purchase Agreement, American Cellular and
the Equity Investors entered into a Stockholders Agreement on March 5, 1998
(the "Stockholders Agreement"). The Stockholders Agreement gives the Equity
Investors certain tag-along and drag-along rights in the event that a majority
of Class A Common Stock or Series A Preferred Stock is proposed to be sold to
a third party. All other transfers of stock of American Cellular are
restricted by the Stockholders Agreement. The Stockholders Agreement further
provides for certain individuals to be elected to American Cellular's Board of
Directors and requires the vote of each director designated by the Equity
Investors for the approval of certain actions. Each director of the Company
was elected pursuant to the provisions of the Stockholders Agreement.
Loans to Certain Officers
On the Merger Date, the Company loaned approximately $1,000,000 to each of
Messrs. Fujii and McTernan, which loan proceeds were used by each such
individual to purchase their remaining shares of Series A Preferred Stock as
described under "Management--Management Incentive Plan." These loans
effectively are interest-free to the individuals and are each secured by
15,750 shares of the Series A Preferred Stock owned by such individual. The
loans will become due and payable no later than March 9, 1999, subject in
certain circumstances to extension upon the satisfaction of certain
conditions.
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DESCRIPTION OF CREDIT FACILITY
In connection with the Merger, American Wireless and American Cellular
entered into the Credit Facility with Toronto Dominion (Texas), Inc. ("Toronto
Dominion"), an affiliate of TD Securities (USA) Inc., Merrill Lynch Capital
and certain other financial institutions (collectively, the "Lenders"),
pursuant to which the Lenders will provide credit facilities to American
Wireless.
The following is a summary of the terms and conditions of the Credit
Facility:
The Facilities. The Credit Facility provides for a senior secured reducing
revolving credit facility (the "Revolving Credit Facility"), which will
provide revolving loans (the "Revolving Credit Loans") in an aggregate
principal amount up to the Lenders' revolving credit commitment (the
"Revolving Credit Commitment"), which at closing was $150 million, and senior
secured term loan facilities in three tranches (the "Term Loan Facilities"),
under which term loans (the "Term Loans") in an aggregate principal amount of
$850 million were made at closing.
Use of Credit Facility Proceeds. The proceeds of the Credit Facility were
used together with other proceeds of the Merger Financings, to fund payment of
cash consideration in the Merger, repay PriCellular and Wireless indebtedness
(including the purchase of the Old Notes in the Debt Tender Offers), pay the
related fees and expenses and purchase the Pledged Securities. In addition,
the Revolving Credit Facility is available, subject to the conditions set
forth in the Credit Facility documentation, for general corporate purposes.
The Credit Facility provides that it may be increased by up to $250 million,
subject to the terms and conditions contained in the Credit Facility.
Availability of Loans. The Term Loans were available on the Merger Date and
the business day immediately following the Merger Date, and the Revolving
Credit Loans were available on the Merger Date in a principal amount not
exceeding $75 million and will be available thereafter on a revolving basis
until the maturity thereof. Up to $10 million of the Revolving Credit Facility
is available for the issuance of letters of credit.
Maturity of Loans. The Revolving Credit Commitment will be reduced quarterly
beginning March 31, 2001 and the Revolving Credit Facility will mature
approximately eight and one-half years after the Merger Date. The Term Loans
will consist of three tranches and will amortize over approximately eight and
one-half years for tranche A Term Loans ("Tranche A Loans"), approximately
nine years for tranche B Term Loans (the "Tranche B Loans") and approximately
nine and one-half years for tranche C Term Loans (the "Tranche C Loans").
Prepayments. Borrowings and commitments under the Credit Facility are
subject to mandatory prepayment and reduction in an amount equal to (a) the
net proceeds of certain asset dispositions (including insurance proceeds
resulting from casualty to certain assets), subject to certain exceptions and
to American Wireless' ability to reinvest such proceeds under certain
circumstances, (b) 75% of excess cash flow (reduced to 50% with respect to any
fiscal year if American Wireless' Total Leverage Ratio (defined as the ratio
of total debt on a consolidated basis, including, after the date the Company
no longer has the proceeds of the Pledged Securities available for the payment
of interest on the Notes, debt in respect of the Notes to annualized operating
cash flow) at the end of such fiscal year is less than 8.0:1.0), (c) 100% of
the net proceeds of the issuance or incurrence of debt, subject to certain
exceptions set forth in the Credit Facility, and (d) 50% of the net proceeds
of any issuance of equity securities, subject to certain exceptions set forth
in the Credit Facility. Voluntary prepayment of the loans will be permitted in
whole or in part with prior notice and without premium or penalty (other than
funding losses), subject to limitations as to minimum amounts.
Interest Rates. Borrowings under the Credit Facility will bear interest at a
rate per annum of, at American Wireless' option, either (a) a base rate
(defined as the higher of (i) Toronto Dominion's announced corporate base rate
and (ii) the federal funds rate, plus 0.50%) plus an additional margin amount
which will vary from time to time (the "Applicable Margin") or (b) a LIBOR
rate plus the Applicable Margin. The maximum Applicable Margin for the Tranche
A Loans and the Revolving Credit Loans will be 1.50% for base rate loans and
2.50% for LIBOR loans, for the Tranche B Loans will be 1.75% for base rate
loans and 2.75% for LIBOR
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loans, and for the Tranche C Loans will be 2.00% for base rate loans and 3.00%
for LIBOR loans. Based upon American Wireless' total leverage ratio, the
Applicable Margin for Tranche A Loans and Revolving Credit Loans may be
reduced by up to 1.375%, and for Tranche B Loans and Tranche C Loans may be
reduced by 0.25%. The default rate under the Credit Facility will be 2.00%
above the otherwise applicable rate.
Fees and Expenses. The Credit Facility requires American Wireless to pay (a)
commitment fees to the Lenders in an amount equal to 0.50%, 0.375% or 0.25%
per annum on the unused commitment under the revolving credit facility,
depending upon American Wireless' total leverage ratio, and (b) an annual
administrative agent's fee. Additionally, American Wireless paid various fees
and costs in connection with the Credit Facility, including a commitment fee
and an underwriting fee to Toronto Dominion and Merrill Lynch Capital.
Guarantees. American Cellular and each of its direct and indirect existing
and future subsidiaries (other than "Unrestricted Subsidiaries" (subsidiaries
not subject to the restrictions of the Credit Facility) and American Wireless)
is required to guarantee American Wireless' obligations under the Credit
Facility.
Security. The obligations of American Wireless under the Credit Facility are
secured by substantially all of the assets of American Cellular and its direct
and indirect existing and future subsidiaries (other than Unrestricted
Subsidiaries), including the capital stock of these subsidiaries (including
Unrestricted Subsidiaries). Such obligations are also guaranteed by American
Wireless' direct and indirect existing and future subsidiaries (other than
Unrestricted Subsidiaries).
In addition, American Cellular pledged as security the equity interest in
American Wireless to the Lenders under the Credit Facility. The pledge of such
equity interest in American Wireless could impair the Company's ability to
obtain future financing on favorable terms, if at all. Further, in the event
American Wireless were to default on its obligations under the Credit Facility
and the Lenders were to foreclose upon such pledged equity interest in
American Wireless, the Company, as the holding company of American Wireless,
would likely be unable to service or repay its indebtedness, including the
Notes.
Representations and Warranties. The Credit Facility contains representations
and warranties customarily found in loan agreements for similar financings.
Affirmative Covenants. The Credit Facility contains affirmative covenants
customarily found in loan agreements for similar financings. American Wireless
is required to enter into interest rate hedging agreements with respect to
fifty percent of the total indebtedness of the Company and its Subsidiaries,
for a period of at least three years from the date of such agreements.
Negative Covenants. The Credit Facility contains customary restrictive
covenants, including covenants that limit (subject to certain exceptions) the
ability of American Cellular and its subsidiaries to: (a) incur indebtedness
or contingent obligations, issue guarantees or enter into operating leases;
(b) grant liens or negative pledges; (c) make investments or enter into joint
ventures; (c) make certain restricted payments; (d) make fundamental changes
in their business, corporate structure or capital structure; (e) sell assets
or receivables; (f) make capital expenditures; (g) enter into transactions
with affiliates; (h) amend documents relating to other existing indebtedness
and other material documents; or (i) prepay other indebtedness.
Financial Covenants. The Credit Facility contains financial covenants
relating to: (a) minimum interest coverage ratio (beginning at 1.20 to 1 and
increasing periodically to 2.0 to 1 for periods ending on or after July 1,
2003); (b) minimum fixed charges coverage ratio (beginning at 1.0 to 1 and
increasing to 1.10 to 1 for periods ending on or after July 1, 2002); (c)
maximum ratio of total debt to annualized operating cash flow (beginning at
9.0 to 1 and reducing periodically to 5.0 to 1 for periods ending on or after
April 1, 2003); (d) maximum ratio of senior debt to annualized operating cash
flow (beginning at 5.25 to 1 and reducing periodically to 4.0 to 1 for periods
ending on or after October 1, 2002); and (e) minimum pro forma debt service
coverage ratio (beginning at 1.10 to 1 and increasing periodically to 1.25 to
1 for periods ending on or after July 1, 2002).
Events of Default. The Credit Facility provides that the occurrence of
certain events will constitute, subject in certain cases to notice and grace
periods, an event of default. The events of default in the Credit Facility
includes those customarily found in loan agreements for similar financings.
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DESCRIPTION OF EXCHANGE NOTES
General
The Exchange Notes will be issued under an indenture (the "Indenture") dated
May 13, 1998 by and between the Company as issuer, and Chase Manhattan Bank
and Trust Company, National Association, as trustee (the "Trustee"). As a
result of the consummation of the Merger, the Company assumed by supplemental
indenture all of the obligations of American Cellular under the Indenture and
the Notes. For purposes of this section, the "Company" means American Cellular
Corporation without its subsidiaries.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (the
"Trust Indenture Act"). The Notes are subject to all such terms, and holders
of Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of certain provisions of the
Indenture, the Registration Rights Agreement and the Pledge and Escrow
Agreement does not purport to be complete and is qualified in its entirety by
reference to the Indenture, the Registration Rights Agreement and the Pledge
and Escrow Agreement, including the definitions therein of certain terms used
below. Copies of the proposed forms of Indenture, Registration Rights
Agreement and Pledge and Escrow Agreement are attached hereto as exhibits. The
definitions of certain terms used in the following summary are set forth below
under the caption "--Certain Definitions."
The Notes are unsubordinated obligations of the Company ranking senior to
all subordinated Indebtedness of the Company and pari passu in right of
payment to all other existing and future Indebtedness of the Company. There is
no guarantee of the Notes. As of September 30, the Company had no Senior
Indebtedness outstanding other than the Private Notes and the Company's
guarantee under the Credit Facility, and no subordinated Indebtedness. The
Company is a holding company and, therefore, the Notes are effectively
subordinated to all Indebtedness of the Company's Subsidiaries, which at
September 30, 1998, was approximately $916 million (excluding intercompany
Indebtedness). See "Unaudited Pro Forma Financial Data."
The Exchange Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and integral multiples thereof.
The Indenture does not contain provisions which would afford Holders of the
Notes protection in the event of a decline in the Company's credit quality
resulting from highly leveraged or other similar transactions involving the
Company.
Initially, the Trustee will act as Paying Agent and Registrar for the Notes.
Principal of, premium, if any, and interest on the Notes will be payable, and,
subject to the following provisions, the Notes may be presented for
registration of transfer or exchange, at the office or agency of the Company
maintained for such purpose, which office or agency shall be maintained in the
Borough of Manhattan of The City of New York. At the option of the Company,
payment of interest may be made by check mailed to the Holders of the Notes at
the addresses set forth upon the registry books of the Company. No service
charge will be made for any registration of transfer or exchange of Notes, but
the Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. Until otherwise
designated by the Company, the Company's office or agency will be the
corporate trust office of the Trustee presently located in New York, New York.
The Notes will mature on May 15, 2008. The Notes will bear interest at 10
1/2% per annum from May 13, 1998 or from the most recent Interest Payment Date
to which interest has been paid or provided for, payable semi-annually on May
15 and November 15 of each year (each, an "Interest Payment Date"), commencing
November 15, 1998 to the Persons in whose names such Notes are registered at
the close of business on the May 1 or November 1 preceding such Interest
Payment Date.
All payments of principal of and interest on the Notes will be made by the
Company in same day funds. The Notes will trade in the Same-Day Funds
Settlement System of The Depository Trust Company (the
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"Depositary" or "DTC") until maturity, and secondary market trading activity
for the Notes will therefore settle in same day funds.
When issued, the Notes will be a new issue of securities with no established
trading market. No assurance can be given as to the liquidity of the trading
market for the Notes. See "Risk Factors--Lack of Public Market; Restrictions
on Resale."
Ranking
The Company conducts its operations through its Subsidiaries. Accordingly,
the Company's ability to meet its cash obligations is dependent upon the
ability of its Subsidiaries to make cash distributions to the Company. Under
the Credit Facility, the Company's Subsidiaries will be able to pay dividends
to the Company to make interest payments on the Notes unless a payment default
or any default under any financial maintenance covenant under the Credit
Facility shall have occurred and be continuing or would arise as a result
thereof. Dividends from the Company's Subsidiaries are expected to be the only
source for payment of interest on the Notes after the first six interest
payments (which will be satisfied from the Pledged Securities). Furthermore,
any right of the Company to receive the assets of any of its Subsidiaries upon
any such Subsidiary's liquidation (and the consequent right of the Holders of
the Notes to participate in the distribution of the proceeds of those assets)
effectively will be subordinated by operation of law to the claims of such
Subsidiary's creditors (including trade creditors) and holders of its
preferred stock, if any, except to the extent that the Company is itself
recognized as a creditor or preferred stockholder of such Subsidiary, in which
case the claims of the Company would still be subordinate to any Indebtedness
or preferred stock of such Subsidiary senior in right of payment to that held
by the Company. In the event of the liquidation, bankruptcy, reorganization,
insolvency, receivership or similar proceeding or any assignment for the
benefit of the creditors of the Company or a marshaling of assets or
liabilities of the Company, Holders of the Notes may receive ratably less than
other such creditors or interest holders. See "Description of Credit
Facility."
In addition, the Company pledged as security the equity interest in American
Wireless to the Lenders under the Credit Facility. The pledge of such equity
interest in American Wireless could impair the Company's ability to obtain
future financing on favorable terms, if at all. Further, in the event American
Wireless were to default on its obligations under the Credit Facility and the
Lenders were to foreclose upon such pledged equity interest in American
Wireless, the Company, as the holding company of American Wireless, would
likely be unable to service or repay its indebtedness, including the Notes.
See "Description of Credit Facility."
Optional Redemption by the Company
The Notes are subject to redemption at any time on or after May 15, 2003, at
the option of the Company, in whole or in part, on not less than 30 nor more
than 60 days' prior notice in amounts of $1,000 or an integral multiple
thereof at the following redemption prices (expressed as percentages of the
principal amount), if redeemed during the 12-month period beginning May 15 of
the years indicated below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2003.......................................................... 105.250%
2004.......................................................... 103.500%
2005.......................................................... 101.750%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest, if any, to the redemption date (subject to the
rights of holders of record on relevant record dates to receive interest due
on an interest payment date).
In addition, at any time prior to May 15, 2001, the Company, at its option,
may use the net cash proceeds of one or more Public Equity Offerings or
Strategic Equity Offerings in a single transaction or a series of related
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transactions to redeem up to an aggregate of 35% of the aggregate principal
amount of Notes originally issued under the Indenture at a redemption price
equal to 110.5% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the redemption date; provided that at
least 65% of the initial aggregate principal amount of Notes remains
outstanding immediately after the occurrence of such redemption. In order to
effect the foregoing redemption, the Company must mail a notice of redemption
no later than 30 days after the closing of the related Public Equity Offering
or Strategic Equity Offering and must consummate such redemption within 60
days of the closing of the Public Equity Offering or Strategic Equity
Offering.
Subject to the following, notice of any redemption will be sent, by first-
class mail, at least 30 days and not more than 60 days prior to the date fixed
for redemption to the Holder of each Note to be redeemed to such Holder's last
address as then shown upon the books of the Registrar. Any notice which
relates to a Note to be redeemed in part only must state the portion of the
principal amount to be redeemed and must state that on and after the date
fixed for redemption, upon surrender of such Note, a new Note or Notes in a
principal amount equal to the unredeemed portion thereof will be issued. On
and after the date fixed for redemption, interest will cease to accrue on the
portions of the Notes called for redemption.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis or in such other manner as
it deems appropriate and fair. The Notes may be redeemed in part in multiples
of $1,000 only.
Sinking Fund
The Notes will not have the benefit of a sinking fund.
Security
The Pledge and Escrow Agreement required the Company to place the net
proceeds realized from the sale of the Notes, together with the Additional
Escrow Amount, into the Initial Escrow and Pledge Account held by the Trustee
for the benefit of the holders of Notes and the Trustee (in its capacity as
such) under the Indenture. All amounts held in the Initial Escrow and Pledge
Account other than the amounts to be used to purchase the Pledged Securities
were released to the Company as a portion of financing necessary to consummate
the Merger.
In accordance with the Pledge and Escrow Agreement, upon the closing of the
Merger the Trustee purchased and currently holds in pledge for the benefit of
the Holders of the Notes the Pledged Securities in such amount and with such
maturity as will be sufficient upon receipt of scheduled interest and
principal payments of such securities, based on the report of an
internationally recognized firm of independent public accountants selected by
the Company, to provide for payment in full of the first six scheduled
interest payments (excluding Additional Interest) due on the Notes (unless
already paid). The Pledged Securities are held by the Trustee in the
Subsequent Collateral Investments Account (or other accounts). Pursuant to the
Pledge and Escrow Agreement, immediately prior to an Interest Payment Date on
the Notes, the Company may either deposit with the Trustee, from funds
otherwise available to the Company, cash sufficient to pay the interest
scheduled to be paid on such date, or the Company may direct the Trustee to
release from the Subsequent Collateral Investments Account (or other accounts)
proceeds sufficient to pay interest then due. In the event that the Company
exercises the former option, the Company may thereafter direct the Trustee to
release to the Company proceeds or Pledged Securities from the Subsequent
Collateral Investments Account (or other accounts) in like amount.
Interest earned on the Pledged Securities will be held in a cash collateral
account by the Trustee. In the event that collectively the funds held in the
cash collateral account and the Pledged Securities held in the Subsequent
Collateral Investments Account exceed the amount sufficient, based on the
report of an internationally recognized firm of independent public accountants
selected by the Company, to provide for payment in full of the first six
scheduled interest payments (excluding Additional Interest unless then due and
payable) due on the Notes (or, in the event an interest payment or payments
have been made, an amount sufficient to provide for payment in full or any
interest payments remaining, up to and including the sixth scheduled interest
payment) the Trustee will be permitted to release to the Company at the
Company's request
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any such excess amount. The Notes are secured by a first priority security
interest in the Pledged Securities, in the Subsequent Collateral Investments
Account and the cash collateral account and, accordingly, the Pledged
Securities, the Escrow and Pledge Account and the cash collateral account will
also secure repayment of the principal amount of the Notes to the extent of
such security. The Pledge and Escrow Agreement allows the Company to
substitute Marketable U.S. Securities for the Government Securities originally
pledged as collateral; provided, however, that the Marketable U.S. Securities
so substituted must have a value (measured at the date of substitution), in
the opinion of a nationally recognized firm of independent public accountants
selected by the Company, at least equal to 125.0% of the amount of all of the
first six scheduled interest payments on the Notes that are unpaid (or the pro
rata portion of such interest payments equal to the percentage of such
interest payments to be secured by such Marketable U.S. Securities) as of the
date such Marketable U.S. Securities are proposed to be substituted as
security for the Company's obligation under the Pledge and Escrow Agreement.
Under the Pledge and Escrow Agreement, assuming that the Company makes the
first six scheduled interest payments on the Notes in a timely manner, all of
the Pledged Securities will have been released from the Subsequent Collateral
Investments Account and thereafter the Notes will be unsecured.
Certain Covenants
Repurchase of Notes at the Option of the Holder Upon a Change of
Control. The Indenture provides that, in the event that a Change of Control
has occurred, each Holder will have the right, at such Holder's option,
pursuant to an irrevocable and unconditional offer by the Company (the "Change
of Control Offer"), to require the Company to repurchase all or any part
(equal to $1,000 principal amount or an integral multiple thereof) of such
Holder's Notes, on a date (the "Change of Control Purchase Date") that is no
later than 45 Business Days after the occurrence of such Change of Control at
a cash price (the "Change of Control Purchase Price") equal to 101% of the
aggregate principal amount thereof, together with any accrued and unpaid
interest to the Change of Control Purchase Date. The Change of Control Offer
shall be made within 30 Business Days following a Change of Control and shall
remain open for 20 Business Days following its commencement (the "Change of
Control Offer Period"). Upon expiration of the Change of Control Offer Period,
the Company shall purchase all Notes properly tendered in response to the
Change of Control Offer.
On or before the Change of Control Purchase Date, the Company will (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to
pay the Change of Control Purchase Price (together with accrued and unpaid
interest) of all Notes so tendered and (iii) deliver to the Trustee Notes so
accepted together with an Officers' Certificate listing the Notes or portions
thereof being purchased by the Company. The Paying Agent promptly will deliver
to the Holders of Notes so accepted payment in an amount equal to the Change
of Control Purchase Price (together with any accrued and unpaid interest), and
the Trustee will promptly authenticate and mail or deliver to such Holders a
new Note equal in principal amount to any unpurchased portion of the Note
surrendered. Any Notes not so accepted will be promptly mailed or delivered by
the Company to the Holder thereof. The Company will announce publicly the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Purchase Date.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company or Parent, and, thus, the removal of
incumbent management. The Change of Control purchase feature resulted from
negotiations between the Company and the Initial Purchasers and is not the
result of any intention on the part of the Company or its management to
discourage the acquisition of the Company.
The Credit Facility provides that certain change of control events with
respect to the Company and American Wireless would constitute a default
thereunder. Any future credit agreements or other agreements to which the
Company, American Wireless or any other Subsidiary becomes a party may contain
similar restrictions and provisions. In the event a Change of Control were to
occur at a time when the Company is prohibited from purchasing Notes or
American Wireless is prohibited from making a distribution or paying a
dividend to the Company to permit such purchase, the Company could seek the
consent of its lenders or American Wireless
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could obtain the consent of its lenders to such purchase of Notes or to such
distribution or dividend, respectively, or either company could attempt to
refinance the borrowings that contain such prohibition. If the Company or
American Wireless does not obtain such consents or repay such borrowings, the
Company will not be able to purchase the Notes under a Change of Control
Offer. In such case, the Company's failure to purchase tendered Notes would
constitute an Event of Default under the Indenture.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under
the Exchange Act and the rules thereunder and all other applicable Federal and
state securities laws and the Company may modify a Change of Control Offer to
the extent necessary to effect such compliance.
Limitation on Incurrence of Additional Indebtedness. The Indenture provides
that after the Issue Date the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, issue, create, incur,
assume, guarantee or otherwise directly or indirectly become liable for
(including as a result of an acquisition), or otherwise become responsible
for, contingently or otherwise (individually or collectively, to "Incur" or,
as appropriate, an "Incurrence"), any Indebtedness. Neither the accrual of
interest (including the issuance of "pay in kind" securities or similar
instruments in respect of such accrued interest) pursuant to the terms of
Indebtedness Incurred in compliance with this covenant, nor the accretion of
original issue discount, nor the mere extension of the maturity of any
Indebtedness shall be deemed to be an Incurrence of Indebtedness.
Notwithstanding the foregoing, if there exists no Default or Event of
Default immediately prior and subsequent thereto, the Company may Incur
Indebtedness and any Restricted Subsidiary may Incur Acquired Indebtedness if
the Company's Annualized Operating Cash Flow Ratio, after giving effect to the
Incurrence of such Indebtedness, would have been less than 8.5 to 1.0 at any
time prior to December 31, 2000 and 8.0 to 1.0 thereafter, and the application
of the proceeds therefrom.
In addition, the foregoing limitations will not apply to the Incurrence of
the following; provided that, except in the case of clauses (i), (vii), (viii)
and (xi) below, there exists no Default or Event of Default immediately prior
and subsequent thereto:
(i) Indebtedness of the Company or any of its Restricted Subsidiaries
under a Credit Facility in an aggregate principal amount at any one time
outstanding not to exceed $1.0 billion, reduced by (a) permanent reductions
in commitments in satisfaction of the Net Cash Proceeds application
requirement set forth in the "Limitation on Asset Sales and Sales of
Subsidiary Stock" covenant, (b) permanent reductions in amounts outstanding
pursuant to scheduled amortizations and mandatory prepayments in accordance
with the terms thereof (to the extent actually made), (c) the principal
amount of the Old Notes that at the relevant date of determination is
outstanding after consummation of the Merger and the transactions
consummated substantially contemporaneously therewith (other than Old Notes
which have been properly defeased) and (d) any Indebtedness outstanding
pursuant to clause (xiv);
(ii) Indebtedness of a Restricted Subsidiary under one or more bank
credit facilities provided such Indebtedness could be incurred by the
Company under the Annualized Operating Cash Flow Ratio provision set forth
in the second paragraph of this covenant;
(iii) Indebtedness of the Company evidenced by the Notes;
(iv) Indebtedness represented by the Old Notes or the Convertible Notes
that remain outstanding after consummation of the Merger and the
transactions consummated substantially contemporaneously therewith;
(v) Indebtedness between the Company and any Restricted Subsidiary of the
Company or between Restricted Subsidiaries of the Company, provided that,
in the case of Indebtedness of the Company, such obligations shall be
unsecured and subordinated in all respects to the Holders' rights pursuant
to the Notes and the Company's guarantee under the Credit Facility;
(vi) Capitalized Lease Obligations and Purchase Money Indebtedness in an
aggregate amount or aggregate principal amount, as the case may be,
outstanding at any time not to exceed in the aggregate
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$20,000,000, provided that in the case of Purchase Money Indebtedness, such
Indebtedness shall not constitute more than 100% of the cost (determined in
accordance with GAAP) to the Company or such Restricted Subsidiary of the
property purchased or leased with the proceeds thereof;
(vii) Indebtedness of the Company or any Restricted Subsidiary arising
from agreements providing for indemnification, adjustment of purchase price
or similar obligations, or from guarantees or letters of credit, surety
bonds or performance bonds securing any obligations of the Company or its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred
in connection with the disposition of any business, assets or Restricted
Subsidiary of the Company to the extent none of the foregoing results in
the obligation to repay an obligation for money borrowed by any Person and
are limited in aggregate amount to no greater than 10% of the fair market
value of such business, assets or Restricted Subsidiary so disposed of;
(viii) any guarantee by any Restricted Subsidiary made in accordance with
the provisions of "--Limitation on Issuances of Guarantees of
Indebtedness;"
(ix) Indebtedness Incurred by the Company or any of its Restricted
Subsidiaries in connection with the acquisition of a new Restricted
Subsidiary, the majority of whose revenues for the most recent twelve
months for which audited or unaudited financial statements are available
are from a Related Business, or of property, businesses or assets which, or
Capital Stock of a Person all or substantially all of whose assets, are of
a type generally used in a Related Business; provided that such
Indebtedness was Incurred by the prior owner of such Restricted Subsidiary,
property, business, assets or Capital Stock prior to such acquisition by
the Company or one of its Restricted Subsidiaries and was not Incurred in
connection with, or in contemplation of, such acquisition by the Company or
one of its Restricted Subsidiaries; and provided, further, that the
principal amount (or accreted value, as applicable) of such Indebtedness,
together with any other outstanding Indebtedness Incurred pursuant to this
clause (ix), does not exceed $25.0 million at any one time outstanding;
(x) Indebtedness of the Company or any Restricted Subsidiary under
standby letters of credit or reimbursement obligations with respect thereto
issued in the ordinary course of business and consistent with industry
practices limited in aggregate amount to $5.0 million at any one time
outstanding;
(xi) Interest Rate Protection Obligations relating to (A) Indebtedness of
the Company or any Restricted Subsidiary (which Indebtedness is otherwise
permitted to be Incurred under this covenant) or (B) Indebtedness for which
a lender has provided a commitment in an amount reasonably anticipated to
be Incurred by the Company or any Restricted Subsidiary in the 12 months
after such Interest Rate Protection Obligations has been Incurred;
provided, however, that the notional principal amount of such Interest Rate
Protection Obligation does not exceed the principal amount of the
Indebtedness (including Indebtedness subject to commitments) to which such
Interest Rate Protection Obligations relate;
(xii) Indebtedness of the Company (other than Indebtedness permitted by
clauses (i) through (xi) or (xiv) hereof) not to exceed $75.0 million at
any one time outstanding;
(xiii) Refinancing Indebtedness Incurred to extend, renew, replace or
refund Indebtedness permitted under clauses (iii) or (iv) of this paragraph
(plus any reasonably determined prepayment premium necessary to accomplish
such refinancing and such reasonable fees and expenses incurred in
connection therewith); and
(xiv) Refinancing Indebtedness Incurred by the Company to extend, renew,
replace or refund Indebtedness permitted under clause (i) of this paragraph
(plus any reasonably determined prepayment premium necessary to accomplish
such refinancing and such reasonable fees and expenses incurred in
connection therewith).
Limitation on Restricted Payments. The Indenture provides that after the
Issue Date the Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment, if,
immediately prior or after giving effect thereto (a) a Default or an Event of
Default would exist, (b) the Company would not be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Annualized Operating Cash
Flow Ratio provision set forth in the second paragraph of the "Limitation on
Incurrence of Additional
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Indebtedness" covenant, or (c) the aggregate amount of all Restricted Payments
made by the Company and its Restricted Subsidiaries, including such proposed
Restricted Payment (if not made in cash, then the fair market value of any
property used therefor) from and after the Issue Date and on or prior to the
date of such Restricted Payment, shall exceed the sum of (i) the amount
determined by subtracting (x) 2.0 times the aggregate Consolidated Interest
Expense of the Company for the period (taken as one accounting period) from
the Issue Date to the last day of the last full fiscal quarter prior to the
date of the proposed Restricted Payment (the "Computation Period") from (y)
Operating Cash Flow of the Company for the Computation Period, plus (ii) the
aggregate Net Proceeds received by the Company from the sale (other than to a
Subsidiary of the Company) of its Qualified Capital Stock after the Issue Date
and on or prior to the date of such Restricted Payment (other than any such
Net Proceeds received by the Company in connection with the financing of the
Merger) plus (iii) to the extent not otherwise included in clauses (i) or
(ii), above, an amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from payments of dividends, repayment of
loans or advances, or other transfers of assets, in each case to the Company
or any Wholly Owned Restricted Subsidiary of the Company from Unrestricted
Subsidiaries, or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in the case of any Unrestricted Subsidiary, the
amount of Investments previously made by the Company and any Restricted
Subsidiary in such Unrestricted Subsidiary.
Notwithstanding the foregoing, the provisions set forth in clause (b) or (c)
of the immediately preceding paragraph will not prohibit (and the provision
set forth in clause (a) of the immediately preceding paragraph will not
prohibit the payment described in clause (ii)) (i) the use of an aggregate of
$2.5 million to be used for Restricted Payments not otherwise permitted by
this "Limitation on Restricted Payments" covenant (provided that only $1.0
million of such amount may be used for Restricted Payments prior to one year
after the Issue Date and such $1.0 million amount prior to one year after the
Issue Date may not be used to make (a) dividends or other distributions on
shares of Capital Stock of the Company or any of its Subsidiaries or (b) pay
management or other similar fees to equity investors (or their Affiliates) in
the Company), (ii) the payment of any dividend within 60 days after the date
of its declaration if such dividend could have been made on the date of its
declaration in compliance with the foregoing provisions and (iii) the
redemption, defeasance, repurchase or other acquisition or retirement of any
Indebtedness or Capital Stock of the Company or its Restricted Subsidiaries
either in exchange for or out of the Net Proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of Qualified
Capital Stock (in the case of any redemption, defeasance, repurchase or other
acquisition or retirement of any Junior Indebtedness or Capital Stock of the
Company or its Restricted Subsidiaries) or Junior Indebtedness (in the case of
any redemption, defeasance, repurchase or other acquisition or retirement of
any Indebtedness of the Company or its Restricted Subsidiaries) of the
Company, (iv) the payment of management or other similar fees to equity
investors (or their Affiliates) in the Company in an amount not to exceed $1.0
million in the aggregate in any fiscal year, (v) the purchase, redemption or
other acquisition or retirement for value of Capital Stock of the Company from
employees, former employees, directors, former directors, consultants and
former consultants of the Company or any of its Subsidiaries pursuant to the
terms of the agreements pursuant to which such Capital Stock was acquired in
an amount not to exceed $2.5 million in the aggregate in any calendar year,
(vi) repurchases of Capital Stock of the Company deemed to occur upon exercise
of stock options if such Capital Stock represents a portion of the exercise
price of such options and (vii) acquisitions or repurchases or other payments
in respect of PriCellular Class A Shares, PriCellular Class B Shares,
PriCellular Series A Preferred Stock or the Convertible Notes, in each case of
PriCellular or options or warrants to purchase any of the foregoing pursuant
to the Merger Agreement.
In determining the aggregate amount expended for Restricted Payments in
accordance with clause (c) of the first paragraph of this description of the
"Limitation on Restricted Payments" covenant, 100% of the amounts expended
under clauses (i) through (v) of the immediately preceding paragraph shall be
deducted.
Limitation on Restricting Subsidiary Dividends. The Indenture provides that
the Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, assume or suffer to exist any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary of the
Company to pay dividends or make other distributions on the Capital Stock of
any Restricted Subsidiary of the Company or pay
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or satisfy any obligation to the Company or any of its Restricted Subsidiaries
or otherwise transfer assets or make or pay loans or advances to the Company
or any of its Restricted Subsidiaries, except encumbrances and restrictions
existing under (i) the Indenture and the Notes, (ii) the Credit Facility as in
effect on the Merger Date or thereafter (provided that any such encumbrance or
restriction does not restrict dividends by any Restricted Subsidiary to the
Company or any other Restricted Subsidiary in an amount equal to the interest
payments on the Notes then due, except if a payment default or any default
under any financial maintenance covenant under the Credit Facility shall have
occurred and be continuing or would arise therefrom; and provided, further,
that any such encumbrances or restrictions incurred under a Credit Facility
after the Merger Date shall not result in such encumbrances or restrictions
being less favorable in the aggregate in any material respect to the holders
of the Notes than the encumbrances or restrictions incurred under the Credit
Facility on the Merger Date, as determined in good faith by the Board of
Directors of the Company), (iii) any applicable law or any governmental or
administrative regulation or order, (iv) Refinancing Indebtedness permitted
under the Indenture, provided that the restrictions contained in the
instruments governing such Refinancing Indebtedness are no more restrictive in
the aggregate than those contained in the instruments governing the
Indebtedness being refinanced immediately prior to such refinancing, (v)
restrictions with respect solely to a Restricted Subsidiary of the Company
imposed pursuant to a binding agreement which has been entered into for the
sale or disposition of all or substantially all of the Capital Stock or assets
of such Restricted Subsidiary, provided such restrictions apply solely to the
Capital Stock or assets being sold of such Restricted Subsidiary, (vi)
restrictions contained in any agreement relating to a Person or real or
tangible personal property acquired after the Issue Date which are not
applicable to any Person or property, other than the Person or property so
acquired and which were not put in place in connection with, or in
contemplation of, such acquisition, (vii) any agreement (other than those
referred to in clause (vi)) of a Person acquired by the Company or a
Restricted Subsidiary of the Company, which restrictions existed at the time
of acquisition or (viii) encumbrances or restrictions contained in the
documentation governing a Permitted Joint Venture permitted pursuant to clause
(ix) of the definition of "Permitted Investment." Notwithstanding the
foregoing, neither (a) customary provisions restricting subletting or
assignment of any lease entered into the ordinary course of business,
consistent with past practices nor (b) Liens on assets securing Senior
Indebtedness, shall in and of themselves be considered a restriction on the
ability of the applicable Restricted Subsidiary to transfer such agreement or
assets, as the case may be.
Limitation on Transactions with Related Persons. The Indenture provides
that, after the Issue Date, the Company will not, and will not permit any of
its Restricted Subsidiaries or Unrestricted Subsidiaries to, enter into any
contract, agreement, arrangement or transaction with any Related Person (each
a "Related Person Transaction"), or any series of Related Person Transactions,
except for transactions (a) entered into pursuant to clause (iv) of the
covenant "Limitation on Restricted Payments" and (b) made in good faith, the
terms of which are (i) fair and reasonable to the Company or such Subsidiary,
as the case may be, and (ii) are at least as favorable as the terms which
could be obtained by the Company or such Subsidiary, as the case may be, in a
comparable transaction made on an arm's length basis with Persons who are not
Related Persons.
Without limiting the foregoing, (a) with respect to any Related Person
Transaction or series of Related Person Transactions with an aggregate value
in excess of $1,000,000, the Company delivers an officers' certificate to the
Trustee certifying that such Related Person Transaction or series of Related
Person Transactions satisfies clauses (i) and (ii) in the preceding paragraph,
and (b) any Related Person Transaction or series of Related Person
Transactions with an aggregate value in excess of $5,000,000 must either first
be approved by a majority of the Board of Directors of the Company who are
disinterested in the subject matter of the transaction pursuant to a Board
Resolution or the Company must first obtain a favorable written opinion from
an independent financial advisor of national reputation as to the fairness
from a financial point of view of such transaction to the Company or such
Subsidiary, as the case may be.
Notwithstanding the foregoing, the following shall not constitute Related
Person Transactions: (i) reasonable and customary payments on behalf of
directors, officers or employees of the Company or any of its Restricted
Subsidiaries, or in reimbursement of reasonable and customary payments or
reasonable and customary expenditures made or incurred by such Persons as
directors, officers or employees, (ii) any contract, agreement, arrangement,
or transaction solely between or among the Company and any of its Wholly Owned
Restricted
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Subsidiaries or between or among Wholly Owned Restricted Subsidiaries of the
Company, (iii) any Restricted Payment of the type described by clauses (i) and
(ii) of the definition thereof made to all stockholders on a pro rata basis
and not prohibited by the "Limitation on Restricted Payments" covenant, (iv)
any loan or advance by the Company or a Restricted Subsidiary to employees of
the Company or a Restricted Subsidiary (i) prior to one year from the Issue
Date, in an aggregate amount at any one time outstanding not to exceed
$2,000,000, and (ii) thereafter in the ordinary course of business in an
aggregate amount at any one time outstanding not to exceed $300,000, (v) any
payment pursuant to a tax-sharing agreement between the Company and any other
Person with which the Company is required or permitted to file a consolidated
tax return or with which the Company is or could be part of a consolidated
group for tax purposes, which payments are not in excess of the tax
liabilities attributable solely to the Company and its Restricted Subsidiaries
(as a consolidated group) and (vi) any transaction pursuant to an agreement in
existence on the date of the Indenture or on the Merger Date or any amendment
thereto (so long as any such amendment is not disadvantageous to the Holders
in any material respect).
Limitation on Issuances of Guarantees of Indebtedness. (a) The Company will
not cause or permit any Restricted Subsidiary (which is not a Guarantor),
directly or indirectly, to guarantee, assume or in any other manner become
liable with respect to any Indebtedness of the Company (other than under the
Credit Facility) unless such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for a Guarantee
of the Notes on the same terms as the guarantee of such Indebtedness except
that (A) such guarantee need not be secured unless required pursuant to "--
Limitation on Liens" and (B) if such Indebtedness is by its terms expressly
subordinated in right of payment to the Notes, any such assumption, guarantee
or other liability of such Restricted Subsidiary with respect to such
Indebtedness shall be subordinated to such Restricted Subsidiary's Guarantee
of the Notes at least to the same extent as such Indebtedness is subordinated
to the Notes; provided, however, that the foregoing shall not apply to
Indebtedness of any Restricted Subsidiary that would otherwise be covered
solely by reason of the Company's guarantee of such Indebtedness.
(b) Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary
of the Notes shall provide by its terms that it (and all Liens securing the
same) shall be automatically and unconditionally released and discharged upon
any sale, exchange or transfer, to any Person not an Affiliate of the Company,
of all of the Company's Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary, which transaction is in compliance with
the terms of the Indenture and such Restricted Subsidiary is released from all
guarantees, if any, by it of other Indebtedness of the Company or any
Restricted Subsidiaries and (ii) the release by the holders of the
Indebtedness of the Company described in clause (a) above of their security
interest or their guarantee by such Restricted Subsidiary (including any
deemed release upon payment in full of all obligations under such
Indebtedness), at such time as (A) no other Indebtedness of the Company has
been secured or guaranteed by such Restricted Subsidiary, as the case may be,
or (B) the holders of all such other Indebtedness which is secured or
guaranteed by such Restricted Subsidiary also release their security interest
in or guarantee by such Restricted Subsidiary (including any deemed release
upon payment in full of all obligations under such Indebtedness).
Limitation on Asset Sales and Sales of Subsidiary Stock. The Indenture
provides that after the Issue Date the Company will not, and will not permit
any of its Restricted Subsidiaries to, in one or a series of related
transactions, convey, sell, transfer, assign or otherwise dispose of, directly
or indirectly, any of its property, businesses or assets, including by merger
or consolidation, and including any sale or other transfer or issuance of any
Capital Stock of any Restricted Subsidiary of the Company, whether by the
Company or a Restricted Subsidiary (an "Asset Sale"), unless (1)(a) within one
year after the date of such Asset Sale, an amount equal to the Net Cash
Proceeds therefrom (the "Asset Sale Offer Amount") are applied to the optional
redemption of the Notes in accordance with the terms of the Indenture and
other Indebtedness of the Company ranking on a parity with the Notes from time
to time outstanding with similar provisions requiring the Company to make an
offer to purchase or to redeem such Indebtedness with the proceeds from asset
sales, pro rata in proportion to the respective principal amounts (or accreted
values in the case of Indebtedness issued with an original issue discount) of
the Notes and such other Indebtedness then outstanding or to the repurchase of
the Notes and such other Indebtedness pursuant to an irrevocable,
unconditional offer (the "Asset Sale Offer") to repurchase such Indebtedness
at a purchase price (the "Asset Sale Offer Price") of 100% of the principal
amount thereof in the
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case of the Notes or 100% of the principal amount (or accreted value in the
case of Indebtedness issued with an original issue discount) of such
Indebtedness, plus, in each case, accrued interest to the date of payment,
made within one year of such Asset Sale, or (b) within one year of such Asset
Sale, the Asset Sale Offer Amount is (i) invested (or committed, pursuant to a
binding commitment subject only to reasonable, customary closing conditions,
to be invested, and in fact is so invested, within an additional 90 days) in
tangible assets and property (other than notes, obligations or securities),
which in the good faith reasonable judgment of the Board of Directors of the
Company are of a type used in a Related Business, or Capital Stock of a Person
(which, if such Person becomes a Subsidiary of the Company by virtue of such
Asset Sale, shall initially be designated a Restricted Subsidiary) all or
substantially all of whose assets and property (in the good faith reasonable
judgment of the Board of Directors of the Company) are of a type used in a
Related Business (provided that, with respect to such Capital Stock, all of
the requirements of the last proviso of clause (v) of the following paragraph
shall have been satisfied) or (ii) used to permanently retire Senior
Indebtedness or Indebtedness of any Restricted Subsidiary, (2) with respect to
any transaction or related series of transactions of securities, property or
assets with an aggregate fair market value in excess of $2,500,000, at least
75% of the value of consideration for the assets disposed of in such Asset
Sale (excluding (a) Senior Indebtedness (and any Refinancing Indebtedness
issued to refinance any such Indebtedness) assumed by a transferee which
assumption permanently reduces the amount of Indebtedness outstanding on the
Issue Date and permitted to have been Incurred pursuant to the covenant
"Limitation on Incurrence of Additional Indebtedness" (including that in the
case of a revolver or similar arrangement that makes credit available, such
commitment is permanently reduced by such amount), (b) Purchase Money
Indebtedness secured exclusively by the assets subject to such Asset Sale
which is assumed by a transferee and (c) marketable securities that are
promptly converted into cash or Cash Equivalents) consists of cash or Cash
Equivalents, provided that any cash or Cash Equivalents received within 12
months following any such Asset Sale upon conversion of any property or assets
(other than in the form of cash or Cash Equivalents) received in consideration
of such Asset Sale shall be applied promptly in the manner required of Net
Cash Proceeds of any such Asset Sale as set forth above, (3) no Default or
Event of Default shall occur or be continuing after giving effect to, on a pro
forma basis, such Asset Sale, and (4) the Board of Directors of the Company
determines in good faith that the Company or such Restricted Subsidiary, as
applicable, would receive fair market value in consideration of such Asset
Sale. The Indenture provides that an Asset Sale Offer may be deferred until
the accumulated Net Cash Proceeds from Asset Sales not applied to the uses set
forth in (1)(b) above exceeds $5,000,000 and that each Asset Sale Offer shall
remain open for 20 Business Days following its commencement and no longer,
except as otherwise required by applicable law (the "Asset Sale Offer
Period"). Upon expiration of the Asset Sale Offer Period, the Company shall
apply the Asset Sale Offer Amount, plus an amount equal to accrued interest to
the purchase of all Indebtedness properly tendered (on a pro rata basis as
described above if the Asset Sale Offer Amount is insufficient to purchase all
Indebtedness so tendered) at the Asset Sale Offer Price (together with accrued
interest).
Notwithstanding the foregoing provisions of the prior paragraph:
(i) the Company and its Restricted Subsidiaries may, in the ordinary
course of business, convey, sell, lease, transfer, assign or otherwise
dispose of assets acquired and held for resale in the ordinary course of
business;
(ii) the Company and its Restricted Subsidiaries may convey, sell, lease,
transfer, assign or otherwise dispose of assets pursuant to and in
accordance with the "Limitation on Mergers, Sales or Consolidations;"
(iii) the Company and its Restricted Subsidiaries may sell or dispose of
damaged, worn out or other obsolete property in the ordinary course of
business so long as such property is no longer necessary for the proper
conduct of the business of the Company or such Restricted Subsidiary, as
applicable;
(iv) the Company and its Restricted Subsidiaries may convey, sell, lease,
transfer, assign or otherwise dispose of assets to the Company or any of
its Wholly Owned Restricted Subsidiaries; and
(v) the Company and its Restricted Subsidiaries may, in the ordinary
course of business (or, if otherwise than in the ordinary course of
business, upon receipt of a favorable written opinion by an independent
financial advisor of national reputation as to the fairness from a
financial point of view to the
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Company or such Restricted Subsidiary of the proposed transaction),
exchange all or a portion of its property, businesses or assets for
property, businesses or assets which, or Capital Stock of a Person all or
substantially all of whose assets, are of a type used in a Related Business
(provided that such Person shall initially be designated a Restricted
Subsidiary if such Person becomes a Subsidiary of the Company by virtue of
such Asset Sale), or a combination of any such property, businesses or
assets, or Capital Stock of such a Person and cash or Cash Equivalents;
provided that (i) there shall not exist immediately prior or subsequent
thereto a Default or an Event of Default, (ii) a majority of the
independent directors of the Board of Directors of the Company shall have
approved a resolution of the Board of Directors that such exchange is fair
to the Company or such Restricted Subsidiary, as the case may be, and (iii)
any cash or Cash Equivalents received pursuant to any such exchange shall
be applied in the manner applicable to Net Cash Proceeds from an Asset Sale
as set forth pursuant to the provisions of the immediately preceding
paragraph of this covenant; and provided, further, that any Capital Stock
of a Person received in an Asset Sale pursuant to this clause (v) shall be
owned directly by the Company or a Restricted Subsidiary and, when combined
with the Capital Stock of such Person already owned by the Company and its
Restricted Subsidiaries, shall constitute a majority of the voting power
and Capital Stock of such Person.
Restricted Payments that are made in compliance with, and are counted
against amounts available to be made as Restricted Payments pursuant to clause
(c) of, the "Limitation on Restricted Payments" covenant, without giving
effect to clause (i) of the second paragraph thereof, shall not be deemed to
be Asset Sales.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the
Exchange Act and the rules and regulations thereunder and all other applicable
Federal and state securities laws.
Limitation on Liens. The Indenture provides that the Company will not and
will not permit any Restricted Subsidiary, directly or indirectly, to Incur or
suffer to exist any Lien (other than Permitted Liens) upon any of its property
or assets, whether now owned or hereafter acquired.
Limitation on Merger, Sale or Consolidation. The Indenture provides that the
Company will not consolidate with or merge with or into another Person other
than in connection with the Merger, or sell, lease, convey, transfer or
otherwise dispose of all or substantially all of its assets (computed on a
consolidated basis), whether in a single transaction or a series of related
transactions, to another Person or group of affiliated Persons, unless (i)
either (a) the Company is the continuing entity or (b) the resulting,
surviving or transferee entity is a corporation organized under the laws of
the United States, any state thereof or the District of Columbia and expressly
assumes by supplemental indenture all of the obligations of the Company in
connection with the Notes and the Indenture; (ii) no Default or Event of
Default shall exist or shall occur immediately after giving effect on a pro
forma basis to such transaction; (iii) immediately after giving effect to such
transaction on a pro forma basis, the consolidated resulting surviving or
transferee entity would immediately thereafter be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Annualized Operating Cash
Flow Ratio provision set forth in the second paragraph of the "Limitation on
Incurrence of Additional Indebtedness" covenant; and (iv) the Company shall
have delivered to the Trustee an Officers' Certificate confirming compliance
with the requirements of this covenant.
Upon any consolidation or merger or any transfer (other than a lease) of all
or substantially all of the assets of the Company (other than a transfer that
results in the transfer of assets constituting or accounting for less than 95%
of the consolidated assets (as of the last balance sheet available to the
Company), revenues, or Operating Cash Flow of the Company (as of the last
twelve month period for which financial statements are available to the
Company)) in accordance with the foregoing, the successor corporation formed
by such consolidation or into which the Company is merged or to which such
transfer is made, shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture with the same effect
as if such successor corporation had been named therein as the Company, and
the Company shall be released from the obligations under the Notes and the
Indenture.
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The restriction on merger, consolidation or sale of assets prohibits the
Company from, among other things, selling, assigning, transferring, leasing,
conveying or otherwise disposing of all or substantially all of its properties
or assets in one or more related transactions to another corporation, Person
or entity unless certain requirements are met. Although there is a developing
body of case law interpreting the phrase "substantially all," there is no
precise established definition of the phrase under applicable law.
Accordingly, the ability of the Company to sell less than all of its assets to
another corporation, Person or entity without complying with these
requirements is uncertain. This uncertainty could result in the Company
selling, assigning, transferring, leasing or conveying or otherwise disposing
of a substantial portion but less than all of its assets without the approval
of the holders of Notes and could deprive such holders of the asset base on
which they may have relied. Alternatively, this uncertainty could result in a
loss of opportunity to the Company. Unless case law or other applicable law
develops a precise definition of the phrase "substantially all," the Note
holders have no recourse to resolve this uncertainty other than through
litigation for clarification of such phrase.
Limitation on Lines of Business. The Indenture provides that neither the
Company nor any of its Restricted Subsidiaries shall directly or indirectly
engage in any line or lines of business activity other than that which, in the
reasonable, good faith judgment of the Board of Directors of the Company, is a
Related Business.
Restriction on Sale and Issuance of Subsidiary Stock. The Indenture provides
that the Company will not sell, and will not permit any of its Restricted
Subsidiaries to issue or sell, any shares of Capital Stock of any Restricted
Subsidiary of the Company to any Person other than the Company or a Wholly
Owned Restricted Subsidiary of the Company, except for shares of common stock
with no preferences or special rights or privileges and with no redemption or
prepayment provisions ("Special Rights"); provided that, in the case of a
Restricted Subsidiary that is a partnership or joint venture partnership (a
"Restricted Partnership") the Company or any of its Restricted Subsidiaries
may sell or such Restricted Partnership may issue or sell Capital Stock of
such Restricted Partnership with Special Rights no more favorable than those
held by the Company or such Restricted Subsidiary in such Restricted
Partnership.
Provision of Financial Statements. After the earlier to occur of the
consummation of the Exchange Offer and the 120th calendar day following the
Merger Date, whether or not the Company is subject to Section 13(a) or 15(d)
of the Exchange Act, the Company will, to the extent permitted under the
Exchange Act, file with the Commission the annual reports, quarterly reports
and other documents which the Company would have been required to file with
the Commission pursuant to Section 13(a) or 15(d) if the Company were so
subject, such documents to be filed with the Commission on or prior to the
date (the "Required Filing Date") by which the Company would have been
required so to file such documents if the Company were so subject. The Company
will also in any event (x) within 15 days of each Required Filing Date (i)
transmit by mail to all holders, as their names and addresses appear in the
security register, without cost to such holders and (ii) file with the Trustee
copies of the annual reports, quarterly reports and other documents which the
Company would have been required to file with the Commission pursuant to
Section 13(a) or 15(d) of the Exchange Act if the Company were subject to
either of such Sections and (y) if filing such documents by the Company with
the Commission is not permitted under the Exchange Act, promptly upon written
request and payment of the reasonable cost of duplication and delivery, supply
copies of such documents to any prospective purchaser of Notes at the
Company's cost. The Indenture also provides that, so long as any of the Notes
remain outstanding, the Company will make available to any prospective
purchaser of Notes or beneficial owner of Notes in connection with any sale
thereof the information required by Rule 144A(d)(4) under the Securities Act,
until such time as the Company has either exchanged the Notes for securities
identical in all material respects which have been registered under the
Securities Act or until such time as the holders thereof have disposed of such
Notes pursuant to an effective registration statement under the Securities
Act.
Events of Default and Remedies
The Indenture defines an Event of Default as (i) the failure by the Company
to pay any installment of interest on the Notes as and when the same becomes
due and payable and, (x) with respect to the first six Interest Payment Dates,
the continuance of any such failure for 10 days and (y) with respect to any
installment of interest after the first six Interest Payment Dates, the
continuance of such failure for 30 days, (ii) the failure by the
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Company to pay all or any part of the principal, or premium, if any, on the
Notes when and as the same becomes due and payable at maturity, redemption, by
acceleration or otherwise, including, without limitation, payment of the
Change of Control Purchase Price or the Asset Sale Offer Price, (iii) the
failure by the Company to observe or perform any other covenant or agreement
contained in the Notes or the Indenture and, subject to certain exceptions,
the continuance of such failure for a period of 30 days after written notice
is given to the Company by the Trustee or to the Company and the Trustee by
the Holders of at least 25% in aggregate principal amount of the Notes
outstanding, (iv) certain events of bankruptcy, insolvency or reorganization
in respect of the Company or, after delivery of the notice specified in the
next following paragraph, any of its Significant Restricted Subsidiaries, (v)
one or more defaults in any Indebtedness for money borrowed by the Company or
any of its Restricted Subsidiaries (or the payment of which is guaranteed by
the Company or any of its Restricted Subsidiaries), whether such Indebtedness
or guarantee now exists or is created after the Issue Date, which default
results from the failure to pay Indebtedness at its final maturity date or
results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness which was not paid at
its final maturity date or the maturity of which has been so accelerated,
aggregates $10,000,000 or more, and (vi) final unsatisfied judgments not
covered by insurance aggregating in excess of $10,000,000, at any one time
rendered against the Company or any of its Restricted Subsidiaries and not
stayed, bonded or discharged within 60 days. The Indenture provides that, if a
Default occurs and is continuing, the Trustee must, within 90 days after the
occurrence of such Default, give to the Holders notice of such Default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv) above) relating to the Company or any
Restricted Subsidiary, then in every such case, unless the principal of all of
the Notes shall have already become due and payable, either the Trustee or the
Holders of 25% in aggregate principal amount of the Notes then outstanding, by
notice in writing to the Company (and to the Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal and accrued interest thereon
to be due and payable immediately. If an Event of Default specified in clause
(iv) above relating to the Company occurs, all principal and accrued interest
thereon will be immediately due and payable on all outstanding Notes without
any declaration or other act on the part of Trustee or the Holders. The
Holders of a majority in aggregate principal amount of Notes generally are
authorized to rescind such acceleration if all existing Events of Default,
other than the non-payment of the principal of, premium, if any, and interest
on the Notes which have become due solely by such acceleration, have been
cured or waived.
The Holders of a majority in aggregate principal amount of the Notes at the
time outstanding may waive on behalf of all the Holders any Default, except a
Default in the payment of principal of or interest on any Note not yet cured,
or a Default with respect to any covenant or provision which cannot be
modified or amended without the consent of the Holder of each outstanding Note
affected. Subject to the provisions of the Indenture relating to the duties of
the Trustee, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the Holders, unless such Holders have offered to the Trustee reasonable
security or indemnity. Subject to all provisions of the Indenture and
applicable law, the Holders of a majority in aggregate principal amount of the
Notes at the time outstanding will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee.
Legal Defeasance and Covenant Defeasance
The Indenture provides that the Company may, at its option and at any time,
elect to have its obligations discharged with respect to the outstanding Notes
("Legal Defeasance"). Such Legal Defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented, and
the Indenture shall cease to be of further effect as to all outstanding Notes,
except as to (i) rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on such Notes when such payments
are due from the trust funds; (ii) the Company's obligations with respect to
such Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes, and the maintenance of an office
or agency for payment and money for security payments held in trust; (iii) the
rights, powers, trust, duties, and
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immunities of the Trustee, and the Company's obligations in connection
therewith; and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders, U.S. Legal Tender, non-callable government securities or a
combination thereof, in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on such Notes on the stated date
for payment thereof or on the redemption date of such principal or installment
of principal of, premium, if any, or interest on such Notes, and the holders
of Notes must have a valid, perfected, exclusive security interest in such
trust; (ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by the Internal Revenue Service, a ruling or (B)
since the date of the Indenture, there has been a change in the applicable
Federal income tax law, in each case to the effect that, and based thereon
such opinion of counsel shall confirm that, the holders of such Notes will not
recognize income, gain or loss for Federal income tax purposes as a result of
such Legal Defeasance, and will be subject to Federal income tax in the same
amount, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to such Trustee confirming
that the holders of such Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such Covenant Defeasance had
not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance shall not result in a breach or violation of, or
constitute a default under the Indenture or any other material agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an Officers' Certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders
of such Notes over any other creditors of the Company or with the intent of
defeating, hindering, delaying or defrauding any other creditors of the
Company or others; and (vii) the Company shall have delivered to the Trustee
an Officers' Certificate stating that all conditions precedent provided for or
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
Amendments and Supplements
The Indenture contains provisions permitting the Company and the Trustee to
enter into a supplemental indenture for certain limited purposes without the
consent of the Holders. With the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding,
the Company and the Trustee are permitted to amend or supplement the Indenture
or any supplemental indenture or modify the rights of the Holders; provided
that no such modification may, without the consent of each Holder affected
thereby: (i) change the Stated Maturity of or the Change of Control Purchase
Date or the Asset Sale Offer Period on any Note, or reduce the principal
amount thereof or the rate (or extend the time for payment) of interest
thereon or any premium payable upon the redemption thereof, or change the
place of payment where, or the coin or currency in which, any Note or any
premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption Date), or
reduce the Change of Control Purchase Price or the Asset Sale Offer Price or
alter the redemption provisions or the provisions of the "Repurchase of Notes
at the Option of the Holder Upon
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a Change of Control" covenant in a manner adverse to the Holders, or (ii)
reduce the percentage in principal amount of the outstanding Notes, the
consent of whose Holders is required for any such amendment, supplemental
indenture or waiver provided for in the Indenture, or (iii) modify any of the
waiver provisions, except to increase any required percentage or to provide
that certain other provisions of the Indenture cannot be modified or waived
without the consent of the Holder of each outstanding Note affected thereby.
On June 25, 1998, the Company and the Trustee entered into a Supplemental
Indenture whereby the surviving corporation in the Merger assumed all of the
obligations of American Cellular under the Indenture.
On September 15, 1998, the Company and the Trustee entered into a Second
Supplemental Indenture which modified the definition of the term "Excluded
Group" in the Indenture to clarify that a Change of Control would not result
under the Indenture from an amendment to the Stockholders Agreement that was
in effect on the Issue Date of the Private Notes (by virtue of the definition
of "group" under the Exchange Act), unless such amendment would otherwise
constitute a Change of Control. Through such modification, the Company made
this definition consistent with the similar covenant contained in the Credit
Facility. The Company believes this modification was a clarifying change that
is not adverse to the Holders of the Notes. See "Certain Relationships and
Related Transactions--Equity Investor Agreements" for a description of certain
provisions of the Stockholders Agreement.
No Personal Liability of Partners, Stockholders, Officers, Directors
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company or any
successor entity shall have any personal liability in respect of the
obligations of the Company under the Indenture or the Notes by reason of his
or its status as such stockholder, employee, officer or director.
It is the view of the Commission that a waiver of liabilities similar to the
foregoing provision of the Indenture is against public policy. Any such waiver
or provision may not be sufficient to waive liabilities under the federal
securities laws.
Certain Definitions
Set forth below is a summary of certain defined terms contained in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition, as the case may be.
Acquired Indebtedness shall be deemed to be Incurred on the date of the
related acquisition of assets from any Person or the date the acquired Person
becomes a Restricted Subsidiary, as the case may be.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by, or under direct or
indirect common control with, such specified Person or (ii) any officer,
director, or controlling stockholder of such other Person. For purposes of
this definition, the term "control" means (a) the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by
contract, or otherwise, or (b) without limiting the foregoing, the beneficial
ownership of 10% or more of the voting power of the voting common equity of
such Person (on a fully diluted basis) or of warrants or other rights to
acquire such equity (whether or not presently exercisable).
"Annualized Operating Cash Flow" on any date means, with respect to any
Person, the Operating Cash Flow for the Reference Period multiplied by two.
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"Annualized Operating Cash Flow Ratio" on any date (the "Transaction Date")
means, with respect to any Person and its Subsidiaries, the ratio of (i)
consolidated Indebtedness of such Person and its Subsidiaries on the
Transaction Date (after giving pro forma effect to the Incurrence of such
Indebtedness) (and without duplication of any Indebtedness that may be the
obligation of such Person and/or one or more of its Subsidiaries) divided by
(ii) the aggregate amount of Annualized Operating Cash Flow of such Person
(determined on a pro forma basis after giving effect to all acquisitions or
dispositions of businesses made by such Person and its Subsidiaries from the
beginning of the Reference Period through the Transaction Date as if such
acquisition or disposition had occurred at the beginning of such Reference
Period); provided that, for purposes of such computation, in calculating
Annualized Operating Cash Flow and consolidated Indebtedness, (a) the
transaction giving rise to the need to calculate the Annualized Operating Cash
Flow Ratio will be assumed to have occurred (on a pro forma basis) on the
first day of the Reference Period; (b) the incurrence of any Indebtedness
during the Reference Period or subsequent thereto and on or prior to the
Transaction Date (and the application of the proceeds therefrom to the extent
used to retire Indebtedness or to acquire businesses) will be assumed to have
occurred (on a pro forma basis) on the first day of such Reference Period; (c)
Consolidated Interest Expense attributable to any Indebtedness (whether
existing or being incurred) bearing a floating interest rate shall be computed
as if the rate in effect on the Transaction Date had been the applicable rate
for the entire period; and (d) all members of the consolidated group of such
Person on the Transaction Date that were acquired during the Reference Period
shall be deemed to be members of the consolidated group of such Person for the
entire Reference Period. When the foregoing definition is used in connection
with the Company and its Restricted Subsidiaries, references to a Person and
its Subsidiaries in the foregoing definition shall be deemed to refer to the
Company and its Restricted Subsidiaries.
"Capitalized Lease Obligations" means obligations under a lease that are
required to be capitalized for financial reporting purposes in accordance with
GAAP, and the amount of Indebtedness represented by such obligations shall be
the capitalized amount of such obligations, as determined in accordance with
GAAP.
"Capital Stock" means, with respect to any Person, any capital stock of such
Person and shares, interests, participations or other ownership interests
(however designated) of any Person and any rights (other than debt securities
convertible into capital stock), warrants and options to purchase any of the
foregoing, including (without limitation) each class of common stock and
preferred stock of such Person if such Person is a corporation and each
general and limited partnership interest of such Person if such Person is a
partnership.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) in each case maturing within
one year after the date of acquisition, (ii) time deposits and certificates of
deposit and commercial paper issued by the parent corporation of any domestic
commercial bank of recognized standing having capital and surplus in excess of
$500 million and commercial paper issued by others rated at least A-2 or the
equivalent thereof by Standard & Poor's Corporation or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc. and in each case
maturing within one year after the date of acquisition and (iii) investments
in money market funds substantially all of whose assets comprise securities of
the types described in clauses (i) and (ii) above.
"Change of Control" means (i) any sale, transfer or other conveyance,
whether direct or indirect, of all or substantially all of the assets of the
Company, on a consolidated basis, in one transaction or a series of related
transactions, if, immediately after giving effect to such transaction, any
"person" or "group" (as such terms are used for purposes of Sections 13(d) and
14(d) of the Exchange Act, whether or not applicable), other than an Excluded
Person or Excluded Group, is or becomes the "beneficial owner" (as such term
is used in Rule 13d-3 promulgated pursuant to the Exchange Act), directly or
indirectly, of Voting Stock representing more than 50% of the voting power of
the Voting Stock of the transferee, (ii) any "person" or "group" (as such
terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act,
whether or not applicable), other than an Excluded Person or Excluded Group,
is or becomes the "beneficial owner" (as such term is used in Rule 13d-3
promulgated pursuant to the Exchange Act), directly or indirectly, of Voting
Stock representing more than 50% of the voting power of the Voting Stock of
the Company then outstanding normally entitled to vote in elections
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of directors, or (iii) during any period of 12 consecutive months after the
Issue Date, individuals who at the beginning of any such 12-month period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board or whose nomination for election by the
Excluded Persons or any Excluded Group or the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute at least a majority of the Board of Directors of the Company then
in office.
"Closing Price" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the
Nasdaq National Market or, if such shares are not listed or admitted to
trading on any national securities exchange or quoted on Nasdaq National
Market but the Company is a Foreign Company (as defined in Rule 3b-4(b) under
the Exchange Act) and the principal securities exchange on which such shares
are listed or admitted to trading is a Designated Offshore Securities Market
(as defined in Rule 902(a) under the Securities Act), the average of the
reported closing bid and asked prices regular way on such principal exchange,
or, if such shares are not listed or admitted to trading on any national
securities exchange or quoted on Nasdaq National Market and the Company and
principal securities exchange do not meet such requirements, the average of
the closing bid and asked prices in the over-the-counter market as furnished
by any New York Stock Exchange member firm is selected from time to time by
the Company for that purpose and is reasonably acceptable to the Trustee.
"Consolidated Interest Expense" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in
accordance with GAAP) of (a) interest expensed or capitalized, paid, accrued,
or scheduled to be paid or accrued (including, in accordance with the
following sentence, interest attributable to the Capitalized Lease
Obligations) of such Person and its consolidated Subsidiaries during such
period, including (i) original issue discount and non-cash interest payments
or accruals on any Indebtedness, (ii) the interest portion of all deferred
payment obligations, and (iii) all commissions, discounts and other fees and
charges owed with respect to bankers' acceptances and letters of credit
financings and currency and Interest Swap and Hedging Obligations, in each
case to the extent attributable to such period and (b) the amount of cash
dividends accrued or payable by such Person or any of its consolidated
Restricted Subsidiaries in respect of preferred stock (other than by
Restricted Subsidiaries of such Person to such Person or such Person's Wholly
Owned Subsidiaries). For purposes of this definition, (x) interest on a
Capitalized Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by the Company to be the rate of interest implicit in
such Capitalized Lease Obligation in accordance with GAAP and (y) interest
expense attributable to any Indebtedness represented by the guaranty by such
Person or a Subsidiary of such Person of an obligation of another Person shall
be deemed to be the interest expense attributable to the Indebtedness
guaranteed. When the foregoing definition is used in connection with the
Company and its Restricted Subsidiaries, references to a Person and its
Subsidiaries in the foregoing definition shall be deemed to refer to the
Company and its Restricted Subsidiaries.
"Consolidated Net Income" of any Person for any period means the net income
(or loss) of such Person and its consolidated Subsidiaries for such period,
determined (on a consolidated basis) in accordance with GAAP, adjusted to
exclude (only to the extent included in computing such net income (or loss)
and without duplication) (i) all extraordinary gains or losses and all gains
and losses from the sales or other dispositions of assets out of the ordinary
course of business (net of taxes, fees and expenses relating to the
transaction giving rise thereto) for such period, (ii) the net income, if
positive, of any Person, that is not a Subsidiary in which such Person or any
of its Subsidiaries has an interest, except to the extent of the amount of
dividends or distributions actually paid to such Person or a Subsidiary of
such Person that both (x) are actually paid in cash to such Person or a
Subsidiary of such Person during such period and (y) when taken together with
all other dividends and
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distributions paid during such period in cash to such Person or a Subsidiary
of such Person, are not in excess of such Person's pro rata share of such
other Person's aggregate net income earned during such period, (iii) except as
provided in the definition of "Annualized Operating Cash Flow Ratio," the net
income (or loss) of any Subsidiary acquired in a pooling of interests
transaction for any period prior to the date of such acquisition, (iv) for
purposes of the "Limitation on Restricted Payments" covenant, the net income,
if positive, of any Subsidiary of such Person to the extent that the
declaration or payment of dividends or similar distributions is not at the
time permitted by operation of the terms of its charter or any agreement or
instrument applicable to such Subsidiary, and (v) the cumulative effect of a
change in accounting principles. When the foregoing definition is used in
connection with the Company and its Restricted Subsidiaries, references to a
Person and its Subsidiaries in the foregoing definition shall be deemed to
refer to the Company and its Restricted Subsidiaries.
"Convertible Notes" means the 10% Senior Subordinated Convertible Discount
Notes due 2004 of PriCellular.
"Credit Facility" means, that certain Credit Facility entered into among a
Restricted Subsidiary of the Company, Merrill Lynch Capital Corporation,
Toronto Dominion (Texas), Inc., and the other financial institutions a party
thereto, as such agreement in whole or in part, may be, in one or more
agreements with one or more bank lending groups, amended, renewed, extended,
substituted, refinanced, restructured, replaced, supplemented or otherwise
modified, in whole or in part, from time to time (including, without
limitation, any successive renewals, extensions, substitutions, refinancings,
restructurings, replacements, supplementations or other modifications of the
foregoing) to which the Company or any Restricted Subsidiary is a party
including to increase the commitments thereunder or to add or eliminate
borrowers or guarantors thereunder.
"Default" means any event or condition that is, or after notice or passage
of time or both would be, an Event of Default.
"Disqualified Capital Stock" means, with respect to any Person, Capital
Stock of such Person that, by its terms or by the terms of any security into
which it is convertible, exercisable or exchangeable, is, or upon the
happening of any event or the passage of time would be, required to be
redeemed or repurchased (including at the option of the holder thereof) by
such Person or any of its Subsidiaries, in whole or in part, on or prior to
the Stated Maturity of the Notes; provided that (a) Capital Stock will not be
deemed to be Disqualified Capital Stock if it may only be so redeemed or
repurchased solely in consideration of Qualified Capital Stock of the Company
and (b) any Capital Stock that would not constitute Disqualified Capital Stock
but for provisions thereof giving holders thereof the right to require such
Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the Stated Maturity of
the Notes shall not constitute Disqualified Capital Stock if the "asset sale"
or "change of control" provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than the provisions contained
in "Limitation on Asset Sales and Sales of Subsidiary Stock" and "Repurchase
of Notes at the Option of the Holder upon a Change of Control" covenants and
such Capital Stock specifically provides that such Person will not repurchase
or redeem any such Capital Stock pursuant to such provision prior to the
Company's repurchase of such Notes as are required to be repurchased pursuant
to the "Limitation on Asset Sales and Sales of Subsidiary Stock" and
"Repurchase of Notes at the Option of the Holder Upon a Change of Control"
covenants.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated "A-3" or higher, "A--" or higher or
"A-" or higher according to Moody's Investors Service, Inc., Standard & Poor's
Ratings Group or Duff & Phelps Credit Rating Co. (or such similar equivalent
rating by at least one "nationally recognized statistical rating organization"
(as defined in Rule 436 under the Securities Act)) respectively, at the time
as of which any investment or rollover therein is made.
"Excluded Group" means a "group" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) that includes one or more Excluded Persons;
provided that either the voting power of the Capital Stock of the Company
"beneficially owned" (as such term is used in Rule 13d-3 promulgated under the
Exchange Act) by such Excluded Persons (without attribution to such Excluded
Persons of the ownership by other members of the "group") represents a
majority of the voting power of the Capital Stock "beneficially owned" by such
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group, or, with respect to clause (ii) of the definition of "Change of
Control," such group is deemed to be a "person" (as such term is used in
Section 13(d) of the Exchange Act) solely by virtue of the stockholders
agreement, as in effect on the Issue Date and as the same may be from time to
time amended or supplemented, and no Person or group, other than one or more
of the Excluded Persons, shall have the right to designate or shall have
designated a majority of the board of directors of the Company.
"Excluded Person" means Spectrum Equity Investors, Providence Equity
Partners and MLC Industries, Inc., and any Affiliate of any of the foregoing
that is directly or indirectly controlling or controlled by, or under direct
or indirect common control with, any of the foregoing.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board ("FASB") or, if FASB ceases to exist,
any successor thereto; provided, however, that for purposes of determining
compliance with covenants in the Indenture, "GAAP" means such generally
accepted accounting principles as in effect as of the Issue Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which
obligations or guarantee the full faith and credit of the United States is
pledged and which have a remaining weighted average life to maturity of not
more than one year from the date of Investment therein.
"Guarantee" means the guarantee by a Guarantor of the Company's Indenture
Obligations.
"Guarantor" means any Restricted Subsidiary of the Company which becomes a
guarantor of the Company's Indenture Obligations.
"Holder" means a Person in whose name a Note is registered. The Holder of a
Note will be treated as the owner of such Note for all purposes.
"Indebtedness" of any Person means, without duplication, (a) all liabilities
and obligations, contingent or otherwise, of such Person, (i) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of
the assets of such Person or only to a portion thereof), (ii) evidenced by
bonds, notes, debentures or similar instruments, (iii) representing the
balance deferred and unpaid of the purchase price of any property or services
except (other than accounts payable or other obligations to trade creditors
which have remained unpaid for greater than 90 days past their original due
date or to financial institutions, which obligations are not being contested
in good faith and for which appropriate reserves have been established) those
incurred in the ordinary course of its business that would constitute
ordinarily a trade payable to trade creditors, (iv) evidenced by bankers'
acceptances or similar instruments issued or accepted by banks, (v) for the
payment of money relating to a Capitalized Lease Obligation, or (vi) evidenced
by a letter of credit or a reimbursement obligation of such Person with
respect to any letter of credit; (b) all obligations of such Person under
Interest Rate Protection Agreements; (c) all liabilities of others of the kind
described in the preceding clauses (a) or (b) that such Person has guaranteed
or that is otherwise its legal liability or which are secured by any assets or
property of such Person and all obligations to purchase, redeem or acquire any
Capital Stock; (d) all Disqualified Capital Stock of such Person and all
Preferred Stock of such Person's Restricted Subsidiaries and (e) any and all
deferrals, renewals, extensions, refinancing and refundings (whether direct or
indirect) of, or amendments, modifications or supplements to, any liability of
the kind described in any of the preceding clauses (a), (b), (c) or (d) this
clause (e), whether or not between or among the same parties; provided that
the outstanding principal amount at any date of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such date.
"Initial Escrow and Pledge Account" means an account established with the
Trustee pursuant to the terms of the Pledge and Escrow Agreement for the
deposit of the net proceeds realized from the sale of the Notes, together with
the Additional Escrow Amount; and after the Merger such account holds the
Pledged Securities purchased by the Company with a portion of the net proceeds
from the Offering.
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"Interest Rate Protection Agreements" means, with respect to any Person, the
Obligations of such Person under (a) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (b) other
agreements or arrangements designed to protect such Person against
fluctuations in interest rates. For purposes of the Indenture, the amount of
such obligations shall be the amount determined in respect thereof as of the
end of the then most recently ended fiscal quarter of such Person, based on
the assumption that such obligation had terminated at the end of such fiscal
quarter, and in making such determination, if any agreement relating to such
obligation provides for the netting of amounts payable by and to such Person
thereunder or if any such agreement provides for the simultaneous payment of
amounts by and to such Person, then in each such case, the amount of such
obligations shall be the net amount so determined, plus any premium due upon
default by such Person.
"Investment" by any Person in any other Person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise)
by such Person (whether for cash, property, services, securities or otherwise)
of capital stock, bonds, notes, debentures, partnership or other ownership
interests or other securities of such other Person or any agreement to make
any such acquisition; (b) the making by such Person of any deposit with, or
advance, loan or other extension of credit to, such other Person (including
the purchase of property from another Person subject to an understanding or
agreement, contingent or otherwise, to resell such property to such other
Person) or any commitment to make any such advance, loan or extension; (c) the
entering into by such Person of any guarantee of, or other contingent
obligation with respect to, Indebtedness or other liability of such other
Person; (d) the making of any capital contribution by such Person to such
other Person and (e) the designation by the Board of Directors of the Company
of any Person to be an Unrestricted Subsidiary. For purposes of the
"Limitation on Restricted Payments" covenant, (i) "Investment" shall include
and be valued at the fair market value of the net assets of any Restricted
Subsidiary at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary and shall exclude the fair market value of the net
assets of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary and (ii) the amount of any
Investment shall be the fair market value of such Investment plus the fair
market value of all additional Investments by the Company or any of its
Restricted Subsidiaries at the time any such Investment is made; provided
that, for purposes of this sentence, the fair market value of net assets in
excess of $5,000,000 shall be as determined by an independent appraiser of
national reputation.
"Issue Date" means May 13, 1998.
"Company" means American Cellular Corporation, a corporation incorporated
under the laws of Delaware, until a successor Person shall have become such
pursuant to the applicable provisions of the Indenture, and thereafter
"Company" shall mean such successor Person.
"Junior Indebtedness" means Indebtedness of the Company that (i) requires no
payment of principal prior to or on the date on which all principal of and
interest on the Notes is paid in full and (ii) is subordinate and junior in
right of payment to the Notes in all respects.
"Lien" means any mortgage, lien, pledge, charge, security interest, or other
encumbrance of any kind, whether or not filed, recorded or otherwise perfected
under applicable law (including any conditional sale or other title retention
agreement and any lease deemed to constitute a security interest and any
option or other agreement to give any security interest).
"Marketable U.S. Securities" means: (i) Government Securities; (ii) any time
deposit account, money market deposit and certificate of deposit maturing not
more than 270 days after the date of acquisition issued by, or time deposit
of, an Eligible Institution; (iii) commercial paper maturing not more than 270
days after the date of acquisition issued by a corporation (other than an
Affiliate of the Company) with a rating, at the time as of which any
investment therein is made, of "P-1" or higher according to Moody's Investors
Service, Inc., "A-1" or higher according to Standard & Poor's Ratings Group or
"A-1" or higher according to Duff & Phelps Credit Rating Co. (or such similar
equivalent rating by at least one "nationally recognized statistical rating
organization" (as defined in Rule 436 under the Securities Act)); (iv) any
banker's acceptances or money market
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deposit accounts issued or offered by an Eligible Institution; (v) repurchase
obligations with a term of not more than 7 days for Government Securities
entered into with an Eligible Institution; and (vi) any fund investing
exclusively in investment of the types described in clauses (i) through (v)
above.
"Maturity Date" means, when used with respect to any Note, the date
specified on such Note as the fixed date on which the final installment of
principal of such Note is due and payable (in the absence of any acceleration
thereof pursuant to the provisions of the Indenture regarding acceleration of
Indebtedness or any Change of Control Offer, Proceeds Purchase Offer or Asset
Sale Offer).
"Net Cash Proceeds" means the aggregate amount of cash and Cash Equivalents
received by the Company and its Restricted Subsidiaries in respect of an Asset
Sale (including upon the conversion to cash and Cash Equivalents of (A) any
note or installment receivable at any time, or (B) any other property as and
when any cash and Cash Equivalents are received in respect of any property
received in an Asset Sale but only to the extent such cash and Cash
Equivalents are received within one year after such Asset Sale), less the sum
of (i) all reasonable out-of-pocket fees, commissions and other expenses
incurred in connection with such Asset Sale, including the amount (estimated
in good faith by the Board of Directors of the Company) of income, franchise,
sales and other applicable taxes required to be paid by the Company or any
Restricted Subsidiary of the Company in connection with such Asset Sale and
(ii) the aggregate amount of cash so received which is used to retire any
existing Senior Indebtedness of the Company or Indebtedness of its Restricted
Subsidiaries, as the case may be, which is required to be repaid in connection
with such Asset Sale or is secured by a Lien on the property or assets of the
Company or any of its Restricted Subsidiaries, as the case may be.
"Net Proceeds" means the aggregate net proceeds (including the fair market
value of non-cash proceeds constituting equipment or other assets of a type
generally used in a Related Business an amount reasonably determined by the
Board of Directors of the Company for amounts under $5,000,000 and by a
financial advisor or appraiser of national reputation for equal or greater
amounts) received by a Person from the sale of Qualified Capital Stock (other
than to a Subsidiary of such Person) after payment of out-of-pocket expenses,
commissions and discounts incurred in connection therewith.
"Obligation" means any principal, premium, interest (including interest
accruing subsequent to a bankruptcy or other similar proceeding whether or not
such interest is an allowed claim enforceable against the Company in a
bankruptcy case under federal bankruptcy law), penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable
pursuant to the terms of the documentation governing any Indebtedness.
"Old Notes" means the 10 3/4% Senior Notes due 2004 of PriCellular Wireless
Corporation ("Wireless"), the 12 1/4% Senior Subordinated Notes due 2003 of
Wireless and the 14% Senior Subordinated Discount Notes due 2001 of Wireless.
"Operating Cash Flow" of any Person means (a), with respect to any period,
the Consolidated Net Income of such Person for such period, plus (b) the sum,
without duplication (and only to the extent such amounts are deducted from net
revenues in determining such Consolidated Net Income), of (i) the provisions
for income taxes for such period for such Person and its consolidated
Subsidiaries, (ii) depreciation, amortization and other non-cash charges of
such Person and its consolidated Subsidiaries and (iii) Consolidated Interest
Expense of such Person for such period, determined, in each case, on a
consolidated basis for such Person and its consolidated Subsidiaries in
accordance with GAAP, less (c) the amount of all cash payments made during
such period by such Person and its Subsidiaries to the extent such payments
relate to non-cash charges that were added back in determining Operating Cash
Flow for such period or for any prior period. When the foregoing definition is
used in connection with the Company and its Restricted Subsidiaries,
references to a Person and its Subsidiaries in the foregoing definition shall
be deemed to refer to the Company and its Restricted Subsidiaries.
"Permitted Investment" means (i) Investments in Cash Equivalents; (ii)
Investments in the Company or a Restricted Subsidiary; (iii) Investments in a
Person substantially all of whose assets are of a type generally used in a
Related Business (an "Acquired Person") if, as a result of such Investments,
(A) the Acquired Person
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immediately thereupon becomes a Restricted Subsidiary or (B) the Acquired
Person immediately thereupon either (1) is merged or consolidated with or into
the Company or any of its Restricted Subsidiaries and the surviving Person is
the Company or a Restricted Subsidiary or (2) transfers or conveys all or
substantially all of its assets to, or is liquidated into, the Company or any
of its Restricted Subsidiaries; (iv) Investments in accounts and notes
receivable acquired in the ordinary course of business; (v) any securities
received in connection with an Asset Sale and any investment with the Net Cash
Proceeds from any Asset Sale in Capital Stock of a Person, all or
substantially all of whose assets are of a type used in a Related Business,
that complies with the "Limitation on Asset Sales and Sales of Subsidiary
Stock" covenant; (vi) any guarantee issued by a Restricted Subsidiary incurred
in compliance with the Indenture; (vii) advances and prepayments for asset
purchases in the ordinary course of business in a Related Business of the
Company or a Restricted Subsidiary; (viii) loans made to certain officers upon
the Merger Date, the term of which will not exceed one year and the aggregate
outstanding balance of which will not exceed $2.0 million; (ix) customary
loans or advances made in the ordinary course of business to officers,
directors or employees of the Company or any of its Restricted Subsidiaries
for travel, entertainment, and moving and other relocation expenses; (x)
Investments in Permitted Joint Ventures which in the aggregate at any one time
outstanding do not exceed $15.0 million and (xi) Investments which in the
aggregate at any one time outstanding do not exceed $5.0 million; provided
however, such Investments may be increased to $10.0 million in the aggregate
provided that American Wireless' Annualized Operating Cash Flow Ratio, after
giving effect to such Investments, would have been less than 6.25 to 1.00.
"Permitted Joint Venture" means, as applied to any Person, any other Person
(a) engaged in a Related Business, (b) over which such Person is responsible
(either directly or through a services agreement) for day-to-day operations or
otherwise has operational and managerial control or (c) of which more than
forty percent (40%) of the outstanding Voting Stock (other than directors'
qualifying shares) in the case of a corporation, or more than forty percent
(40%) of the outstanding ownership interests, in the case of an entity other
than a corporation, is at the time owned directly or indirectly by such
Person.
"Permitted Lien" means (a) Liens existing on the Issue Date; (b) Liens
imposed by governmental authorities for taxes, assessments or other charges
not yet subject to penalty or which are being contested in good faith and by
appropriate proceedings, if adequate reserves with respect thereto are
maintained on the books of the Company in accordance with GAAP; (c) statutory
liens of carriers, warehousemen, mechanics, materialmen, landlords, repairmen
or other like Liens arising by operation of law in the ordinary course of
business, provided that (i) the underlying obligations are not overdue for a
period of more than 30 days, and (ii) such Liens are being contested in good
faith and by appropriate proceedings and adequate reserves with respect
thereto are maintained on the books of the Company in accordance with GAAP;
(d) Liens securing the performance of bids, trade contracts (other than
borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business; (e) easements, rights-of-way, zoning, similar
restrictions and other similar encumbrances or title defects which, singly or
in the aggregate, do not in any case materially detract from the value of the
property, subject thereto (as such property is used by the Company or any of
its Restricted Subsidiaries) or interfere with the ordinary conduct of the
business of the Company or any of its Restricted Subsidiaries; (f) Liens
arising by operation of law in connection with judgments, only to the extent,
for an amount and for a period not resulting in an Event of Default with
respect thereto; (g) pledges or deposits made in the ordinary course of
business in connection with worker's compensation, unemployment insurance and
other types of social security legislation; (h) Liens in favor of the Trustee
arising under the Indenture; (i) Liens securing the Credit Facility; (j) Liens
securing Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary or is merged with or into the Company or a Restricted
Subsidiary, provided that such Liens were in existence prior to the date of
such acquisition, merger or consolidation, were not incurred in anticipation
thereof, and do not extend to any other assets; (k) Liens arising from
Purchase Money Indebtedness permitted under the Indenture; (l) Liens securing
Refinancing Indebtedness Incurred to refinance any Indebtedness that was
previously so secured in a manner no more adverse to the Holders of the Notes
than the terms of the Liens securing such refinanced Indebtedness; (m) Liens
securing Indebtedness (including Capitalized Lease Obligations) permitted by
clause (vi) of the second
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paragraph of the "Limitation on Incurrence of Additional Indebtedness"
covenant; and (n) Liens in favor of the Company or a Wholly Owned Restricted
Subsidiary.
"Person" means any corporation, individual, joint stock company, joint
venture, partnership, unincorporated association, governmental regulatory
entity, country, state or political subdivision thereof, trust, municipality
or other entity.
"Pledge and Escrow Agreement" means the Pledge Escrow and Assignment
Agreements, dated as of the date of the Indenture, among the Company, the
Trustee and the collateral agents named therein.
"Pledged Securities" means the securities purchased by the Company with a
portion of the net proceeds from the Offering to be deposited in the Escrow
and Pledge Account.
"Public Equity Offering" means an offer and sale of common stock (which is
Qualified Capital Stock) of the Company, with aggregate proceeds of at least
$50 million pursuant to a registration statement that has been declared
effective by the Commission pursuant to the Securities Act (other than a
registration statement on Form S-8, S-4 or otherwise relating to equity
securities issuable under any employee benefit plan of such corporate entity).
"Purchase Money Indebtedness" means Indebtedness of the Company or its
Restricted Subsidiaries Incurred in connection with the purchase of property
or assets for the business of the Company or its Restricted Subsidiaries,
provided that the recourse of the lenders with respect to such Indebtedness is
limited solely to the property or assets so purchased without further recourse
to either the Company or any of its Restricted Subsidiaries.
"Qualified Capital Stock" means any Capital Stock of a Person that is not
Disqualified Capital Stock.
"Reference Period" with regard to any Person means the last two full fiscal
quarters of such Person for which financial information (which the Company
shall use its best efforts to compile in a timely manner) in respect thereof
is available ended on or immediately preceding any date upon which any
determination is to be made pursuant to the terms of the Notes or the
Indenture.
"Refinancing Indebtedness" means any Indebtedness of the Company or any of
its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or such Restricted Subsidiary (other than
intercompany Indebtedness); provided that: (i) the principal amount (or
accreted value, if applicable) of such Refinancing Indebtedness does not
exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life equal to or greater than the Weighted Average Life of, the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Notes, such Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the Notes
on terms at least as favorable to the holders of Notes as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and (iv) such Indebtedness is
incurred either by the Company or by the Restricted Subsidiary who is the
obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Related Business" means any business related to, or complementary to, the
ownership, development, operation or acquisition of wireless communications
systems as determined by the Board of Directors of the Company.
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"Related Person" means, with respect to any Person, (i) any Affiliate of
such Person or any spouse, immediate family member, or other relative who has
the same principal residence of any Affiliate of such Person and (ii) any
trust in which any Person described in clause (i) above, has a beneficial
interest.
"Restricted Payment" means, with respect to any Person, (i) any dividend or
other distribution on shares of Capital Stock of such Person or any Subsidiary
of such Person, (ii) any payment on account of the purchase, redemption or
other acquisition or retirement for value, or any payment in respect of any
amendment (in anticipation of or in connection with any such retirement,
acquisition or defeasance) in whole or in part, of any shares of Capital Stock
of such Person or any Subsidiary of such Person held by Persons other than
such Person or any of its Restricted Subsidiaries, (iii) any defeasance,
redemption, repurchase or other acquisition or retirement for value, or any
payment in respect of any amendment (in anticipation of or in connection with
any such retirement, acquisition or defeasance) in whole or in part, of any
Indebtedness of the Company (other than the scheduled repayment thereof at
maturity and any mandatory redemption or mandatory repurchase thereof pursuant
to the terms thereof) by such Person or a Subsidiary of such Person that is
subordinate in right of payment to the Notes (other than in exchange for
Refinancing Indebtedness permitted to be Incurred under the Indenture and
except for any such defeasance, redemption, repurchase, other acquisition or
payment in respect of Indebtedness held by any Restricted Subsidiary) and (iv)
any Investment (other than a Permitted Investment); provided, however, that
the term "Restricted Payment" does not include (i) any dividend, distribution
or other payment on shares of Capital Stock of the Company or any Restricted
Subsidiary solely in shares of Qualified Capital Stock, (ii) any dividend,
distribution or other payment to the Company, or any dividend to any of its
Restricted Subsidiaries, by any of its Subsidiaries, (iii) any dividend,
distribution or other payment by any Restricted Subsidiary on shares of its
Capital Stock that is paid pro rata to all holders of such Capital Stock and
(iv) the purchase, redemption or other acquisition or retirement for value of
shares of Capital Stock of any Restricted Subsidiary held by Persons other
than the Company or any of its Restricted Subsidiaries.
"Restricted Subsidiary" means any Subsidiary of the Company which at the
time of determination is not an Unrestricted Subsidiary. The Board of
Directors of the Company may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if, immediately before and after giving effect to
such designation, there would exist no Default or Event of Default and the
Company could incur at least $1.00 of Indebtedness pursuant to the Annualized
Operating Cash Flow Ratio test of the "Limitation on Incurrence of Additional
Indebtedness" covenant, on a pro forma basis taking into account such
designation.
"Senior Indebtedness" means all Indebtedness of the Company (including, with
respect to the Credit Facility, all Obligations thereunder), including
interest thereon, whether outstanding on the Issue Date or thereafter issued,
other than (a) Indebtedness that is expressly subordinated or junior in right
of payment to any Indebtedness of the Company, (b) Indebtedness represented by
Disqualified Capital Stock, (c) any liability for federal, state, local or
other taxes owed or owing by the Company, (d) Indebtedness of the Company to
any Subsidiary of the Company or any Affiliate of the Company, (e) trade
payables and (f) Indebtedness incurred in violation of the Indenture.
"Significant Restricted Subsidiary" means one or more Restricted
Subsidiaries having an aggregate net book value of assets in excess of 5% of
the net book value of the assets of the Company and its Restricted
Subsidiaries on a consolidated basis.
"Stated Maturity" means the date fixed for the payment of any principal or
premium pursuant to the Indenture and the Notes, including the Maturity Date,
upon redemption, acceleration, Asset Sale Offer, Proceeds Purchase Offer,
Change of Control Offer or otherwise.
"Strategic Equity Investor" means any Person which is (or a controlled
Affiliate of any Person which is) engaged in the ownership, development,
operation or acquisition of communications systems and which, as of the last
available annual or quarterly financial statements, has Total Common Equity of
at least $1.0 billion.
"Strategic Equity Offering" means an offer or sale of Common Stock or
Preferred Stock (other than Disqualified Capital Stock) of the Company, with
aggregate proceeds of at least $50.0 million to a Strategic Equity Investor
other than in connection with or after the occurrence of a Change of Control.
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"Subsidiary" with respect to any Person, means (i) a corporation at least
50% of whose Capital Stock with voting power, under ordinary circumstances, to
elect directors is at the time, directly or indirectly, owned by such Person,
by such Person and one or more Subsidiaries of such Person or by one or more
Subsidiaries of such Person, or (ii) a partnership in which such Person or a
Subsidiary of such Person is, at the time, a general partner of such
partnership, or (iii) any Person in which such Person, one or more
Subsidiaries of such Person, or such Person and one or more Subsidiaries of
such Person, directly or indirectly, at the date of determination thereof has
(x) at least a fifty percent ownership interest or (y) the power to elect or
direct the election of the directors or other governing body of such Person.
"Total Common Equity" of any Person means, as of any date of determination,
the product of (i) the aggregate number of outstanding primary shares of
Common Stock of such Person on such day (which shall not include any options
or warrants on, or securities convertible or exchangeable into, shares of
Common Stock of such Person) and (ii) the average Closing Price of such Common
Stock over the 20 consecutive Trading Days immediately preceding such day. If
no such Closing Price exists with respect to shares of any such class, the
value of such shares for purposes of clause (ii) of the preceding sentence
shall be determined by the Board of Directors of the Company in good faith and
evidenced by a resolution of the Board of Directors filed with the Trustee.
"Trading Day," with respect to a securities exchange or automated quotation
system, means a day on which such exchange or system is open for a full day of
trading.
"Unrestricted Subsidiary" means any Subsidiary of the Company that, at the
time of determination, shall be an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below). The Board of
Directors of the Company may designate any Subsidiary of the Company
(including any newly acquired or newly formed Subsidiary at or prior to the
time it is so formed or acquired) to be an Unrestricted Subsidiary if (a) no
Default or Event of Default is existing or will occur as a consequence
thereof, (b) such Subsidiary does not own any Capital Stock of, or own or hold
any Lien on any property or asset of, the Company or any Restricted Subsidiary
that is not a Subsidiary of the Subsidiary to be so designated and (c) such
Subsidiary and each of its Subsidiaries has not at the time of designation,
and does not thereafter, create, incur, issue, assume, guarantee, or otherwise
become directly or indirectly liable with respect to any Indebtedness pursuant
to which the lender has recourse to any property or assets of the Company or
any of its Restricted Subsidiaries (except that such Subsidiary and its
Subsidiaries may guarantee the Notes); provided that either (A) the Subsidiary
to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, that such designation would be
permitted under the "Limitation on Restricted Payments" covenant. Each such
designation shall be evidenced by filing with the Trustee a certified copy of
the resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
"Voting Stock" means Capital Stock of the Company having generally the right
to vote in the election of a majority of the directors of the Company or
having generally the right to vote with respect to the organizational matters
of the Company.
"Weighted Average Life" means, when applied to any Indebtedness at any date,
the number of years obtained by dividing (i) the sum of the products obtained
by multiplying (a) the amount of each then remaining installment, sinking
fund, serial maturity or other required payments of principal, including
payment at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness.
"Wholly Owned" means, with respect to a Subsidiary of the Company, (i) a
Subsidiary that is a corporation, of which not less than 99% of the Capital
Stock (except for directors' qualifying shares or certain minority interests
owned by other Persons solely due to local law requirements that there be more
than one stockholder, but which interest is not in excess of what is required
for such purpose) is owned directly by such Person or through one or more
other Wholly Owned Subsidiaries of such Person, or (ii) any entity other than
a corporation in which such Person, directly or indirectly, owns not less than
99% of the Capital Stock of such entity.
100
<PAGE>
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Latham & Watkins, counsel to the Company, the following
are the material federal tax income consequences expected to result to Holders
whose Private Notes are exchanged for Exchange Notes in the Exchange Offer.
This discussion is based upon current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "Service") will not take a contrary
view, and no ruling from the Service has been or will be sought with respect
to the Exchange Offer. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements
and conclusions set forth herein. Any such changes or interpretations may or
may not be retroactive and could affect the tax consequences to Holders.
Certain Holders (including insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) may be subject to special
rules not discussed below.
EACH HOLDER OF PRIVATE NOTES SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES OF EXCHANGING PRIVATE NOTES FOR EXCHANGE NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS.
The exchange of Private Notes for Exchange Notes will be treated as "non-
event" for federal income tax purposes because the Exchange Notes will not be
considered to differ materially in kind or extent from the Private Notes. As a
result, no material federal income tax consequences will result to Holders
exchanging Private Notes for Exchange Notes.
101
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a Prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resale of Exchange Notes received in exchange for
Private Notes where such Private Notes were acquired as a result of market-
making activities or other trading activities. The Company has agreed that for
a period of up to 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer that
requests such document in the Letter of Transmittal for use in connection with
any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a Prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the Holders of Private Notes (including any broker-dealers), and
certain parties related to such Holders, against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Exchange Notes offered hereby will
be passed upon for the Company by Latham & Watkins, San Francisco, California.
EXPERTS
The consolidated financial statements of PriCellular Corporation and
Subsidiaries at December 31, 1997 and 1996, and for each of the three years in
the period ended December 31, 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of American Cellular Corporation at March 31, 1998,
and for the period February 26, 1998 to March 31, 1998, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
102
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) under the Securities Act with respect
to the Exchange Notes offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus omits certain information,
exhibits and undertakings contained in the Registration Statement. For further
information with respect to the Company and the Exchange Notes offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto and the financial statements, notes and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference.
The Company will become subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "Exchange Act") and, in accordance therewith, will
file reports, proxy statements and other information with the Commission. All
such information may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the following Regional Offices
of the Commission: Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and New York Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material may also
be obtained at prescribed rates from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. The Commission also maintains a web site
electronically with the Commission (http://www.sec.gov).
The Company has agreed to furnish to the Trustee and to registered Holders
of the Notes, without cost to the Trustee or such registered Holders, copies
of all reports and other information that would be required to be filed by the
Company with the Commission under the Exchange Act, whether or not the Company
is then required to file reports with the Commission. As a result of this
Exchange Offer, the Company will become subject to the periodic reporting and
other informational requirements of the Exchange Act. In the event that the
Company ceases to be subject to the informational requirements of the Exchange
Act, the Company has agreed that, so long as any Notes remain outstanding, it
will file with the Commission (but only if the Commission at such time is
accepting such voluntary filings) and distribute to Holders of the Private
Notes or the Exchange Notes, as applicable, copies of the financial
information that would have been contained in such annual reports and
quarterly reports, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations," that would have been required
to be filed with the Commission pursuant to the Exchange Act. The Company will
also furnish such other reports as it may determine or as may be required by
law.
103
<PAGE>
Historical Financial Statements
Index to Financial Statements
<TABLE>
<S> <C>
American Cellular Corporation
Condensed Consolidated Balance Sheet--September 30, 1998 (unaudited)...... F-2
Condensed Consolidated Statements of Operations--Periods Ended September
30, 1998 (unaudited)..................................................... F-3
Condensed Consolidated Statement of Common Stockholders' Deficit--Period
Ended September 30, 1998 (unaudited)..................................... F-4
Condensed Consolidated Statements of Cash Flows--Periods Ended September
30, 1998 (unaudited)..................................................... F-5
Notes to Condensed Consolidated Financial Statements (unaudited).......... F-6
Report of Independent Auditors............................................ F-10
Balance Sheet--March 31, 1998............................................. F-11
Statement of Operations--February 26, 1998 to March 31, 1998.............. F-12
Statement of Common Stockholders' Equity--February 26, 1998 to March 31,
1998..................................................................... F-13
Statement of Cash Flows--February 26, 1998 to March 31, 1998.............. F-14
Notes to Financial Statements............................................. F-15
PriCellular Corporation and Subsidiaries
Condensed Consolidated Balance Sheets--June 30, 1998 (unaudited).......... F-17
Condensed Consolidated Statements of Operations--Three and Six Months
Ended June 30, 1998 and 1997 (unaudited)................................. F-18
Condensed Consolidated Statements of Cash Flows--Six Months Ended June 30,
1998 and 1997 (unaudited)................................................ F-19
Notes to Condensed Consolidated Financial Statements (unaudited).......... F-20
Report of Independent Auditors............................................ F-22
Consolidated Balance Sheets--December 31, 1997 and 1996................... F-23
Consolidated Statements of Operations--Years Ended December 31, 1997, 1996
and 1995................................................................. F-24
Consolidated Statements of Stockholders' Equity--Years Ended December 31,
1997, 1996, 1995 and 1994................................................ F-25
Consolidated Statements of Cash Flows--Years Ended December 31, 1997, 1996
and 1995................................................................. F-26
Notes to Consolidated Financial Statements................................ F-28
Financial Statement Schedules
Schedule I--Condensed Financial Information of Registrant............... F-41
Schedule II--Valuation and Qualifying Accounts.......................... F-45
</TABLE>
F-1
<PAGE>
American Cellular Corporation and Subsidiaries
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 1998
------------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 37,042,079
Restricted short-term investments......................... 25,909,403
Accounts receivable, net of allowance for doubtful
accounts of $2,185,403................................... 32,844,143
Inventories............................................... 1,285,833
Other current assets...................................... 2,483,317
--------------
Total current assets...................................... 99,564,775
Cellular facilities, equipment and other.................... 151,059,848
Other assets................................................ 1,291,157,106
--------------
Total assets................................................ $1,541,781,729
==============
Liabilities and stockholders' deficit
Current liabilities:
Current portion of long term debt......................... $ 2,000,000
Accounts payable and accrued expenses..................... 49,606,739
Deferred revenue.......................................... 5,716,675
Other liabilities......................................... 3,753,488
--------------
Total current liabilities................................. 61,076,902
Long-term debt.............................................. 1,196,921,631
Series A cumulative redeemable preferred stock, $0.01 par
value, net of $2,000,000 notes receivable from
stockholders; authorized 5,000,000 shares; 3,250,000 shares
issued and outstanding, including $11,069,480 of accrued
dividends.................................................. 334,069,480
Common stockholders' deficit:
Common Stock, $0.01 par:
Class A: Authorized 475,000 shares; 250,000 shares
issued and outstanding................................. 2,500
Class B: Authorized 25,000 shares; 18,587 shares issued
and outstanding........................................ 186
Additional paid-in capital................................ 25,183,184
Accumulated deficit....................................... (75,472,154)
--------------
Total common stockholders' deficit.......................... (50,286,284)
--------------
Total liabilities and common stockholders' deficit.......... $1,541,781,729
==============
</TABLE>
See notes to financial statements.
F-2
<PAGE>
American Cellular Corporation and Subsidiaries
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 1998 and the
Period February 26, 1998 (Date of Formation) to September 30, 1998
<TABLE>
<CAPTION>
February 26, 1998
Three Months Ended (date of formation) to
September 30, 1998 September 30, 1998
------------------ ----------------------
<S> <C> <C>
Revenues
Subscriber revenues................. $ 37,495,166 $ 37,495,166
Roaming revenues.................... 22,061,903 22,061,903
Toll revenues....................... 10,600,522 10,600,522
Equipment sales..................... 1,682,071 1,682,071
Other............................... 1,840,275 1,840,275
------------ ------------
Total revenue....................... 73,679,937 73,679,937
Costs and expenses
Cost of cellular service............ 17,497,035 17,497,035
Cost of equipment sold.............. 3,246,097 3,246,097
General and administrative.......... 8,973,940 8,973,940
Sales and marketing................. 7,409,628 7,409,628
Depreciation and amortization....... 22,506,110 22,506,110
Non-recurring charges............... 76,452 4,153,987
------------ ------------
Total costs and expenses............ 59,709,262 63,786,797
------------ ------------
Operating income.................... 13,970,675 9,893,140
Other income (expense)
Interest expense.................... (29,875,143) (33,865,143)
Interest income..................... 1,587,928 3,744,250
Other income, net................... 250,495 250,495
------------ ------------
(28,036,720) (29,870,398)
------------ ------------
Loss before provision for income
taxes.............................. (14,066,045) (19,977,258)
Provision for income taxes.......... -- --
------------ ------------
Net loss............................ $(14,066,045) $(19,977,258)
============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
American Cellular Corporation
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
February 26, 1998 (Date of Formation) to September 30, 1998
<TABLE>
<CAPTION>
Class A Class B
-------------- -------------
Common Stock Common Stock Additional
-------------- ------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit
------- ------ ------ ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Initial capital
contributions.......... 250,000 $2,500 -- $-- $24,997,500 $ --
Capital contributions:
June 22, 1998......... -- -- 13,587 136 135,734 --
June 25, 1998......... -- -- 5,000 50 49,950 --
Excess purchase price
over predecessor
basis.................. -- -- -- -- -- (44,425,416)
Accrued preferred stock
dividend............... -- -- -- -- -- (11,069,480)
Net loss for the period
from February 26, 1998
(Date of Formation) to
September 30, 1998..... -- -- -- -- -- (19,977,258)
------- ------ ------ ---- ----------- ------------
Balance September 30,
1998................... 250,000 $2,500 18,587 $186 $25,183,184 $(75,472,154)
======= ====== ====== ==== =========== ============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
American Cellular Corporation and Subsidiaries
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended September 30, 1998 and the
Period February 26, 1998 (Date of Formation) to September 30, 1998
<TABLE>
<CAPTION>
February 26, 1998
Three Months Ended (date of formation) to
September 30, 1998 September 30, 1998
------------------ ----------------------
<S> <C> <C>
Operating Activities
Net loss............................ $(14,066,045) $ (19,977,258)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization
expense.......................... 22,506,110 22,506,110
Amortization of deferred financing
costs............................ 2,264,106 2,264,106
Amortization of bond discount..... 87,631 87,631
Change in working capital
components, net of the effect of
the merger with PriCellular
Corporation:
Accounts receivable............. (3,642,316) (3,642,316)
Inventories..................... (491,626) (491,626)
Other current assets............ (1,208) (1,208)
Accounts payable and accrued
expenses....................... 26,838,589 30,828,589
Deferred revenue................ 1,083,707 1,083,707
Income tax payable.............. 298,317 298,317
Other liabilities............... 399,230 399,230
------------ ---------------
Net cash provided by operating
activities......................... 35,276,495 33,355,282
Investing activities
Acquisition of cellular operations,
net of cash acquired............... (15,612,031) (1,418,271,900)
Purchase of fixed assets............ (6,456,845) (6,456,845)
Purchase of restricted investments.. -- (82,412,660)
------------ ---------------
Net cash used in investing
activities......................... (22,068,876) (1,507,141,405)
Financing activities
Proceeds from sale of stock......... 50,000 348,185,870
Proceeds from issuance of 10 1/2%
notes.............................. -- 282,834,000
Borrowings against credit facility.. 16,000,000 916,000,000
Deferred financing costs............ (1,170,821) (36,191,668)
------------ ---------------
Net cash provided by financing
activities......................... 14,879,179 1,510,828,202
------------ ---------------
Increase in cash and cash
equivalents........................ 28,086,798 37,042,079
Cash and cash equivalents at
beginning of period................ 8,955,281 --
------------ ---------------
Cash and cash equivalents at end of
period............................. $ 37,042,079 $ 37,042,079
============ ===============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
American Cellular Corporation
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
American Cellular Corporation ("ACC"), a Delaware corporation, and its
wholly owned subsidiaries ("the Company") are principally engaged in the
ownership and operation of cellular telephone systems.
The consolidated financial statements include the accounts of ACC and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
The accompanying consolidated financial statements as of September 30, 1998
and for the three months ended September 30, 1998 and for the period from
February 26, 1998 (date of formation) to September 30, 1998 are unaudited, but
include all adjustments (consisting only of normal, recurring adjustments)
which, in the opinion of management of the Company, are considered necessary
for the fair presentation of the Company's financial position and its
operating results and cash flows. Operating results for the three months ended
September 30, 1998 and for the period from February 26, 1998 (date of
formation) to September 30, 1998 are not indicative of the results expected
for the fiscal year ending December 31, 1998. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles (GAAP) have been
omitted in accordance with the instructions of Article 10 of Regulation S-X.
Management believes that the disclosures made are adequate to make the
information presented not misleading.
2. Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could
differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consist primarily of cellular telephones and accessories.
Cellular Facilities, Equipment and Other
Cellular facilities, equipment and other are recorded at cost. Depreciation
is computed using the straight-line method over the estimated useful life of
the asset of three to seven years.
Other Assets
Other assets consist of the following (in thousands):
<TABLE>
<S> <C>
Goodwill/cellular licenses...................................... $1,169,517
Investments in cellular operations.............................. 35,531
Deferred financing costs........................................ 36,192
Restricted investments.......................................... 56,503
Subscriber lists................................................ 11,233
----------
1,308,976
Accumulated amortization........................................ (17,819)
----------
$1,291,157
==========
</TABLE>
F-6
<PAGE>
American Cellular Corporation
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill/cellular licenses represents the excess of purchase price over the
fair value assigned to the net tangible and identifiable intangible assets of
the business acquired (see Note 3).
The Company uses a 20-year life to amortize goodwill/cellular licenses. The
Company periodically reviews the carrying value of goodwill/cellular licenses
to determine whether such amounts are recoverable based on undiscounted future
cash flows of the Company in order to determine whether a reduction to fair
value is necessary. The Company has determined that no such reductions were
necessary through September 30, 1998.
The Company owns a 44.5% interest in a joint venture with SBC
Communications, Inc. ("SBC"). Under the terms of the joint venture agreement,
the Company receives preferential distributions in the first four years of the
joint venture increasing from $3.3 million in the first year to $5.8 million
in the final year. Such preferential distributions are guaranteed by SBC. The
Company also has an option to put its joint venture interest to SBC at prices
beginning at $28.5 million and escalating to $39.0 million at the end of the
four year period. SBC has operating control of the properties and has certain
rights to purchase the Company's interests on the day prior to the fourth
anniversary.
Deferred financing costs primarily represent underwriting discounts and
related fees incurred in connection with the issuance of the Company's long-
term debt. These costs are amortized using the effective yield method and the
amortization expense is included in interest expense.
A portion of the proceeds from the issue of the 10 1/2% Senior Notes (see
Note 4) was used to acquire certain treasury securities sufficient to pay the
first six scheduled interest payments on those notes. These securities are
held in an escrow account pursuant to a Pledge Escrow and Assignment
Agreement. The restricted investments are classified in the balance sheet
according to their maturities. These treasury securities mature from November
1998 to May 2001, bear interest rates from 5.50% to 6.375% and are considered
as held to maturity.
The Company amortizes subscriber lists over a three-year period.
Revenue Recognition
The Company earns revenue by providing access to its cellular system and for
usage of its cellular system (collectively subscriber revenues), for providing
service to customers from other cellular systems who roam through the service
area (roaming revenues) and for long-distance calls placed by the Company's
customers and those of other carriers within the Company's service area (toll
revenues). Access revenue is billed one month in advance and is recognized
when earned. Airtime, long-distance and roaming revenues are recognized when
the service is rendered. Equipment sales are recognized on delivery of the
equipment to the customer.
Comprehensive Loss
Net loss for the three months ended September 30, 1998 and for the period
from February 25, 1998 to September 30, 1998 is the same as comprehensive loss
defined pursuant to Statement of Financial Accounting Standards No. 130.
3. Acquisition of PriCellular Corporation
On June 25, 1998, ACC acquired PriCellular Corporation ("PCC") pursuant to
an Agreement and Plan of Merger (the "Merger Agreement") dated March 6, 1998
for approximately $1.5 billion. The acquisition was accounted for utilizing
the purchase method of accounting. The results of operations for PCC are
included in the Company's statement of operations beginning July 1, 1998. The
results of operations do not differ materially than if the closing date had
been used.
F-7
<PAGE>
American Cellular Corporation
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The allocation of the purchase price to the fair value of net assets
acquired is as follows (in thousands):
<TABLE>
<S> <C>
Cash............................................................. $ 51,928
Accounts receivable.............................................. 29,202
Cellular facilities and equipment................................ 151,554
Investment in cellular operations................................ 35,531
Other assets..................................................... 3,276
Goodwill/cellular licenses....................................... 1,169,517
Subscriber lists................................................. 11,233
Basis adjustment................................................. 44,425
Total liabilities assumed........................................ (26,466)
----------
Total Merger consideration..................................... 1,470,200
Less:
Cash acquired.................................................. 51,928
----------
Total cash paid.................................................. $1,418,272
==========
</TABLE>
PCC had been partially owned (6.39%) by a group of investors, which also own
approximately 27.2% of the Company (the 6.39% is considered to be the
continuing ownership interest). The cost to acquire the continuing ownership
interest in the net assets of PCC in excess of the predecessor basis has been
reflected as a reduction of stockholders' equity of the Company pursuant to
GAAP.
Non-recurring charges recorded through September 30, 1998 represent stay-on
bonuses paid to retain employees through the completion of the Merger.
4. Long-Term Debt
Long-term debt consists of the following (in thousands):
<TABLE>
<S> <C>
10 1/2% Senior Notes due 2008................................ $ 282,922
Borrowings under $1,000,000,000 Credit Agreement:
Revolver Credit Loans due December 31, 2006................. 66,000
Tranche A Term Loans due December 31, 2006.................. 450,000
Tranche B Term Loans due September 30, 2007................. 200,000
Tranche C Term Loans due December 31, 2007.................. 200,000
----------
1,198,922
Less current portion......................................... (2,000)
----------
Net long-term debt........................................... $1,196,922
==========
</TABLE>
On May 13, 1998, the Company issued approximately $285.0 million aggregate
principal amount of 10 1/2% Senior Notes ("the Notes") due 2008. Approximately
$82.4 million of the proceeds were used to purchase treasury securities that
were placed in an escrow account. The remaining funds were used to finance the
acquisition of PCC. The Notes were issued at a price of 99.24% or $282.8
million. The original issue discount on the Notes accretes, compounded
semiannually, to yield an effective rate of 10.67%. Interest is payable
semiannually on each May 15 and November 15. The first six scheduled interest
payments on the Notes will be funded from the securities held in escrow.
F-8
<PAGE>
AMERICAN CELLULAR CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On June 25, 1998, the Company borrowed $900 million under a bank syndicated
Credit Facility. The Credit Facility provides the Company up to $1 billion in
four tranches ($450 million on Tranche A, $200 million for each Tranche B and
C, and up to $150 million on the Revolver Loan). Interest is payable quarterly
at the adjusted prime rate plus the applicable margin for each tranche (0.875%
for the Revolver and Tranche A, 1.75% for Tranche B and 2.0% for Tranche C) or
LIBOR plus the applicable margin for each tranche (1.875% for the Revolver and
Tranche A, 2.75% for Tranche B and 3.0% for Tranche C), based on the Company's
consolidated leverage ratio. As of September 30, 1998, the interest rates
applicable on the tranches of the Credit Facility ranged from approximately
7.66% to 8.78%. The Credit Facility contains several financial covenants
related to Company's leverage and debt service ratios. Other covenants contain
restrictions on the incurrence of additional debt, the payment of dividends,
the incurrence of liens, and payments and transfer of net assets.
On July 1, 1998, ACC borrowed an additional $16.0 million under the Revolver
Credit Loan. The proceeds were used to fund the payment of the accrued merger
consideration.
The maturities of the Company's long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1998.......................................................... $ --
1999.......................................................... 3,000
2000.......................................................... 4,000
2001.......................................................... 54,000
2002.......................................................... 54,000
Thereafter.................................................... 1,083,922
----------
$1,198,922
==========
</TABLE>
5. INCOME TAXES
At December 31, 1997, PriCellular had net operating loss carryforwards
("NOLs") related to prior tax years of approximately $31.8 million, which are
available to offset future taxable income. NOLs begin expiring in the year 2007
through 2012 as follows: 2007--$2.5 million, 2009--$5.9 million, 2010--$1.7
million, 2011--$.9 million and 2012--$20.8 million.
6. LEASE COMMITMENTS
At September 30, 1998, the Company is committed under the following
noncancellable operating leases (in thousands):
<TABLE>
<S> <C>
1998............................................................. $ 926
1999............................................................. 3,340
2000............................................................. 2,682
2001............................................................. 2,008
2002............................................................. 1,363
Thereafter....................................................... 3,246
-------
$13,565
=======
</TABLE>
7. LEGAL PROCEEDINGS
The Company is not currently involved in any pending legal proceedings that
individually, or in the aggregate, are material to the Company.
F-9
<PAGE>
Report of Independent Auditors
Board of Directors
American Cellular Corporation
We have audited the balance sheet of American Cellular Corporation as of
March 31, 1998, and the related statements of operations, common stockholders'
equity and cash flows for the period February 26, 1998 (Date of Formation) to
March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements 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 audit provides 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 American Cellular
Corporation at March 31, 1998, and the results of its operations and its cash
flows for the period February 26, 1998 (Date of Formation) to March 31, 1998,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
July 28, 1998
F-10
<PAGE>
American Cellular Corporation
BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
1998
-----------
<S> <C>
Assets
Current assets:
Cash and cash equivalents......................................... $25,233,000
-----------
Total current assets................................................ 25,233,000
-----------
Total assets........................................................ $25,233,000
===========
Liabilities and stockholders' equity
Current liabilities:
Income taxes payable.............................................. $ 13,000
Due to stockholder................................................ 200,000
-----------
Total current liabilities........................................... 213,000
Commitments and contingent liabilities
Series A cumulative redeemable preferred stock, $0.01 par value,
plus accreted dividends; authorized 5,000,000 shares; no shares
issued and outstanding............................................. --
Common stockholders' equity:
Common Stock, $0.01 par:
Class A: Authorized 475,000 shares; issued and outstanding
250,000 shares................................................. 3,000
Class B: Authorized 25,000 shares; no shares issued and
outstanding ................................................... --
Additional paid-in capital........................................ 24,997,000
Retained earnings................................................. 20,000
-----------
Total common stockholders' equity................................... 25,020,000
-----------
Total liabilities and stockholders' equity.......................... $25,233,000
===========
</TABLE>
See notes to financial statements.
F-11
<PAGE>
American Cellular Corporation
STATEMENT OF OPERATIONS
February 26, 1998 (Date of Formation) to March 31, 1998
<TABLE>
<S> <C>
Interest income........................................................ $33,000
-------
Income before income taxes............................................. 33,000
Provision for income taxes:
Federal.............................................................. 11,000
State and local...................................................... 2,000
-------
13,000
-------
Net income............................................................. $20,000
=======
</TABLE>
See notes to financial statements.
F-12
<PAGE>
American Cellular Corporation
STATEMENT OF COMMON STOCKHOLDERS' EQUITY
February 26, 1998 (Date of Formation) to March 31, 1998
<TABLE>
<CAPTION>
Class A Class B Additional
-------------- ------------- Paid-in Retained
Common Stock Common Stock Capital Earnings
-------------- ------------- ----------- --------
Shares Amount Shares Amount
------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Initial capital
contributions............... 250,000 $3,000 -- $ -- $24,997,000 $ --
Net income for the period
from February 26, 1998 (Date
of Formation) to
March 31, 1998.............. -- -- -- -- -- 20,000
------- ------ --- ----- ----------- -------
Balance, March 31, 1998...... 250,000 $3,000 -- $ -- $24,997,000 $20,000
======= ====== === ===== =========== =======
</TABLE>
See notes to financial statements.
F-13
<PAGE>
American Cellular Corporation
STATEMENT OF CASH FLOWS
February 26, 1998 (Date of Formation) to March 31, 1998
<TABLE>
<S> <C>
Operating activities
Net income......................................................... $ 20,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Income taxes payable............................................ 13,000
-----------
Net cash provided by operating activities.......................... 33,000
-----------
Investing activities
-----------
Net cash used in investing activities.............................. --
-----------
Financing activities
Proceeds from sale of common stock................................. 25,000,000
Due to stockholder................................................. 200,000
-----------
Net cash provided by financing activities.......................... 25,200,000
-----------
Increase in cash and cash equivalents.............................. 25,233,000
Cash and cash equivalents at beginning of period................... --
-----------
Cash and cash equivalents at end of period......................... $25,233,000
===========
</TABLE>
See notes to financial statements.
F-14
<PAGE>
American Cellular Corporation
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
1. Organization
American Cellular Corporation (the "Company"), was incorporated on February
26, 1998 to acquire the stock of PriCellular Corporation ("PriCellular") and
to engage in the ownership and operation of cellular telephone systems. The
Company's principal activities have been organizing the Company and obtaining
financing.
2. Significant Accounting Policies
Use of Estimates
The preparation of the 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 those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Comprehensive Income
Net income for the period from February 26, 1998 to March 31, 1998 is the
same as comprehensive income defined pursuant to Statement of Financial
Accounting Standards No. 130.
3. Merger
On March 6, 1998, the Company and PriCellular entered into an Agreement and
Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement and
subject to the terms and conditions set forth therein, the Company merged with
and into PriCellular, with the Company as the surviving corporation of the
merger (the "Merger"). The Merger was consumated on June 25, 1998 and each
issued and outstanding share of Class A common stock, par value $0.01 per
share, of PriCellular (the "Class A Shares") and Class B common stock, par
value $0.01 per share, of PriCellular was paid $14.00 in cash, without
interest (the "Merger Consideration"), and each issued and outstanding share
of Series A Preferred Stock of PriCellular was converted into the right to
receive the product of the Merger Consideration and the number of Class A
Shares into which each such share of Series A Preferred Stock was convertible
at such time.
In connection with the Merger, the Company made debt tender offers to
acquire all of the outstanding debt of PriCellular Wireless Corporation. The
amount of the tender offer payments aggregated approximately $69.4 million.
4. Financing
In connection with the Merger, the Company entered into a $1 billion credit
facility (the "Credit Facility") with several financial institutions. The
Credit Facility, provides for a senior secured revolving credit facility (the
"Revolving Credit Facility") of up to $150 million, and senior secured term
loan facilities in three tranches (the "Term Loan Facilities"), which provide
term loans in the aggregate principal amount of $850 million.
F-15
<PAGE>
American Cellular Corporation
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Financing (continued)
The Revolving Credit Facility commitment will be reduced quarterly beginning
in the third year after the closing and the Revolving Credit Facility will
mature eight and one-half years after the closing of the Merger (the "Merger
Date"). The Term Loan Facilities consist of three tranches and will amortize
over eight and one-half years for Tranche A Term Loans, nine years for Tranche
B Term Loans and nine and one-half years for Tranche C Term Loans.
Borrowings and commitments under the Credit Facility are subject to
mandatory prepayment and reduction in an amount equal to (a) the net proceeds
of asset dispositions, (b) 75% of excess cash flow, (c) 100% of the net
proceeds from the issuance or incurrence of debt and (d) 50% of the net
proceeds from the issuance of equity securities.
Borrowings under the Credit Facility bear interest, at the Company's option,
at either (a) a base rate plus an additional margin or (b) LIBOR rate plus an
additional margin. The margin for the Tranche A Loans and the Revolving Credit
Loans can be a maximum of 1.5% for borrowings under the base rate loans and
2.5% for borrowings under the LIBOR loans, 1.75% for borrowings under the base
rate and 2.75% for borrowings under the LIBOR loans for the Tranche B Loans,
and 2% for borrowings under the base rate loans and 3% for borrowings under
LIBOR loans for the Tranche C Loans. Based upon the Company's leverage ratio,
the margin for Tranche A Loans and the Revolving Credit Loans may be reduced
by up to 1.375% and for the Tranche B Loans and Tranche C Loans may be reduced
by .025%.
In May 1998, the Company issued $285 million aggregate principal amount of
10 1/2% Senior Notes due May 15, 2008 (the "10 1/2% Notes") to finance the
acquisition of PriCellular. The 10 1/2% Notes were issued at a price of 99.4%
or $282.8 million. The original issue discount on the 10 1/2% Notes accretes,
compounded semiannually. Interest is payable on May 15th and November 15th of
each year.
The 10 1/2% Notes may be redeemed at the Company's option, in whole or in
part, at anytime on or after May 15, 2003 at 105.25% the first year, 103.5%
the second year, 101.75% the third year and 100% thereafter, plus accrued and
unpaid interest to the date of redemption. The indenture governing the 10 1/2%
Notes contains restrictions relating to, among other things: (i) incurrence of
additional indebtedness; (ii) dividend and other payment restrictions; and
(iii) merger, consolidation and sales of assets.
5. Redeemable Preferred Stock
The Company authorized and issued Series A Preferred Stock (the "Series A
Preferred Stock"). Dividends on the Series A Preferred Stock will accrue at
12% per annum and are payable quarterly in arrears. Dividends, whether or not
earned or declared, will accrue without interest until declared and paid. The
Series A Preferred Stock may be redeemed, at the Company's option, in whole or
in part, until September 30, 2008 at which time the Series A Preferred Stock
is subject to mandatory redemption as follows: (i) on September 30, 2008, one-
third of the outstanding shares of the Series A Preferred Stock; (ii) on
September 30, 2009, one-half of the then outstanding shares of the Series A
Preferred Stock and (iii) on September 30, 2010, all of the remaining shares
of the Series A Preferred Stock.
F-16
<PAGE>
PriCellular Corporation and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30,
1998 December 31,
(Unaudited) 1997
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 51,460 $ 61,357
Accounts receivable (less allowance of $2,185 in
1998 and $1,686 in 1997)........................... 29,160 19,465
Inventory........................................... 794 2,232
Other current assets................................ 2,269 1,797
-------- --------
Total current assets.................................. 83,684 84,851
Fixed assets--at cost:
Cellular facilities, equipment and other............ 156,840 134,156
Less accumulated depreciation....................... (39,548) (29,302)
-------- --------
Net fixed assets...................................... 117,292 104,854
Investment in cellular operations..................... 35,531 37,017
Cellular licenses (less accumulated amortization of
$30,426 in 1998 and $23,119 in 1997)................. 557,815 493,315
Deferred financing costs (net of accumulated
amortization of $7,496 in 1998 and $5,191 in 1997)... 12,282 13,352
Cash committed for the acquisition of cellular
operations........................................... -- 13,000
Other assets.......................................... 256 1,267
-------- --------
Total assets.......................................... $806,860 $747,656
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses............... $ 19,393 33,966
Other current liabilities........................... 12,600 6,367
-------- --------
Total current liabilities............................. 31,993 40,333
Long-term debt........................................ 642,155 568,323
Deferred taxes........................................ 3,797 3,797
Other long-term liabilities........................... 1,009 1,023
-------- --------
Total long-term liabilities........................... 646,961 573,143
Stockholders' equity:
Preferred Stock, $0.01 par:
Series A, cumulative convertible: authorized
10,000,000 shares; issued and outstanding 96,000
shares .......................................... 1 1
Common Stock, $0.01 par:
Class A: Authorized 100,000,000 shares; issued and
outstanding 21,987,847 (1998) and 21,824,566
shares (1997) ................................... 220 218
Class B: Authorized 50,000,000 shares; issued and
outstanding 12,970,994 shares (1998) and
13,134,275 shares (1997)......................... 130 131
Additional paid in capital.......................... 180,716 180,704
Accumulated deficit................................. (53,160) (46,874)
-------- --------
Total stockholders' equity............................ 127,906 134,180
-------- --------
Total liabilities and stockholders' equity............ $806,860 $747,656
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-17
<PAGE>
PriCellular Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Cellular service............... $ 61,722 $ 40,258 $ 109,400 $ 72,937
Equipment sales................ 1,554 1,203 2,868 2,343
Other.......................... 2,232 1,711 3,914 3,458
---------- ---------- ---------- ----------
65,507 43,172 116,182 78,738
Costs and expenses:
Cost of cellular service....... 15,559 11,369 28,423 20,643
Cost of equipment sold......... 2,769 3,175 5,365 5,642
Selling, general and
administrative................ 15,712 12,432 30,230 23,710
Depreciation and amortization.. 10,260 7,572 18,751 14,296
Non-recurring charges.......... 2,501 -- 4,889 --
---------- ---------- ---------- ----------
46,801 34,548 87,658 64,291
---------- ---------- ---------- ----------
Operating income............... 18,707 8,624 28,524 14,447
Other income (expense):
Gain (loss) on sale of
investment in cellular
operations.................... (133) (27) (133) 8,424
Interest expense, net.......... (18,332) (14,815) (36,187) (29,511)
Other income, net.............. 801 813 1,510 1,625
---------- ---------- ---------- ----------
(17,664) (14,029) (34,810) (19,462)
---------- ---------- ---------- ----------
Net income (loss).............. $ 1,043 $ (5,405) $ (6,286) $ (5,015)
========== ========== ========== ==========
Net loss after adjustment for
accrued preferred stock
dividend...................... $ (615) $ (7,046) $ (9,643) (8,255)
Basic and diluted net loss per
common share.................. $ (0.02) $ (0.18) $ (0.28) (0.21)
Weighted average number of
common shares used in
computation of net loss per
common share.................. 34,959,000 38,408,000 34,959,000 38,731,000
</TABLE>
F-18
<PAGE>
PriCellular Corporation and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------
1998 1997
-------- --------
<S> <C> <C>
Net cash provided by operating activities................. $ 13,440 $ 12,166
Investing activities
Purchase of cellular equipment............................ (22,009) (11,165)
Proceeds from sale of investment in cellular operations... 1,485 1,255
Proceeds from sale of cellular operations, net of cash.... -- 24,396
Acquisition of cellular operations, net of cash........... (61,590) (25,033)
Investment in cellular operations......................... -- (3,390)
Refund of escrow to acquire cellular properties........... -- 7,337
-------- --------
Net cash used in investing activities..................... (82,114) (6,600)
Financing activities
Issuance of note payable.................................. 60,000 --
Costs incurred in connection with the issuance of
preferred and common stock............................... -- (207)
Payments for deferred financing costs..................... (1,235) (434)
Proceeds from exercise of common stock option............. 12 19
Purchase and retirement of common stock................... -- (15,440)
-------- --------
Net cash provided by (used in) financing activities....... 58,777 (16,062)
-------- --------
Decrease in cash and cash equivalents..................... (9,897) (10,496)
Cash and cash equivalents at beginning of period.......... 61,357 100,364
-------- --------
Cash and cash equivalents at end of period................ $ 51,460 $ 89,868
======== ========
</TABLE>
F-19
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The condensed consolidated financial statements include the accounts of
PriCellular Corporation and its subsidiaries (the "Company"). All significant
intercompany items and transactions have been eliminated.
The condensed consolidated financial statements have been prepared by the
Company without audit, in accordance with rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
statements reflect all adjustments necessary for a fair presentation of the
results for the interim periods. The results of operations for the interim
periods are not necessarily indicative of the results for a full year. These
condensed consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's 1997
Annual Report on Form 10-K.
2. Net Income (Loss) per Share
All earnings (loss) per share amounts for all periods have been presented
and, where appropriate restated to conform to Financial Accounting Standards
Board Statement No. 128 issued in 1997. For the periods ending June 30, 1998
and 1997, no effect has been given to options outstanding under the Company's
1994 Stock Option Plan, outstanding warrants to purchase Class B common stock,
the 12 3/4% Senior Convertible Discount Notes or the Cumulative Convertible
Preferred Stock, since the exercise of any of these items would have an
antidilutive effect on net loss per share.
3. Sale of the Company
On June 25, 1998, the American Cellular Corporation (ACC) merged into
PriCellular pursuant to an Agreement and Plan of Merger ("Merger Agreement")
dated March 6, 1998. At that time each issued and outstanding share of Class A
and Class B common stock and the outstanding Series A Convertible Preferred
stock was redeemed at $14.00 per share payable in cash.
As a result of this transaction, the Company incurred approximately $4.9
million in fees and expenses which are shown as non-recurring charges on the
Condensed Consolidated Statement of Operations.
4. Acquisition of Cellular Operation
On January 15, 1998, Kyle Cellular, a wholly owned subsidiary of the
Company, acquired the TN-4 RSA with approximately 264,000 Pops from Bachtel
Liquidity, L.P., an affiliate of Bachow & Associates, Inc. for approximately
$73.0 million in cash. The RSA, adjacent to three MSAs including Knoxville TN,
is located south of the Company's Kentucky Cluster and features such tourist
attractions as the towns of Gatlinburg and Pigeon Forge, Dollywood and the
entrance to the Great Smoky Mountains National Park. Of the total purchase
price, $13.0 million was funded through cash committed for the acquisition at
December 31, 1997 with the balance provided by a $60.0 million Senior Secured
Reducing Revolver due in the year 2005.
The above acquisition is accounted for on the purchase method and is
included in the results of operations from the date of acquisition.
F-20
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Acquisition of Cellular Operation (continued)
Pro forma consolidated results of operations for the period ended June 30,
1997, assuming the acquisition was consummated as of January 1, 1997, is as
follows:
<TABLE>
<CAPTION>
June
30,
1997
-------
<S> <C>
Revenues....................................................... $50,417
=======
Net loss....................................................... $(3,480)
=======
Net loss per common share...................................... $ (.09)
=======
</TABLE>
5. Long-Term Debt
In January 1998, the Company, through its wholly owned subsidiary Kyle
Cellular, entered into a $60.0 million Senior Secured Reducing Revolver (the
"Borrowing") with J.P. Morgan Securities Inc. The Borrowing matures eight
years from the closing date with repayment commencing in the year 2001 and
final payment in the year 2005 with payments ranging from 10.0% to 25.0% of
the then outstanding balance. Interest is currently charged at the LIBOR rate
plus a premium ranging from 1.5% to 2.25% depending on the ratio of debt to
cash flow as defined. The Borrowing requires the attainment of certain
financial ratios in order to maintain the permitted level of indebtedness.
Violation of such ratios requires the permanent prepayment of an amount to
cure the deficiency. The Borrowing is secured by the assets of Kyle Cellular.
Pursuant to the agreement the Company has entered into an interest rate swap
which effectively converts a portion of the interest on the outstanding
indebtedness from a variable rate basis to a fixed rate basis. The notional
mount required to be hedged is 50% of the aggregate outstanding principal
amount. For the period commencing January 21, 1998 and ending July 21, 1998
the Company has "locked in" an effective annual rate of 7.64% on the total
outstanding indebtedeness of $60.0 million.
6. Recently Issued Accounting Pronouncements
Net Income (loss) for the three and six months ended June 30, 1998 is the
same as comprehensive income pursuant to Statement of Financial Accounting
Standards No. 130.
7. Legal Proceedings
The Company is not currently involved in any pending legal proceedings that
individually, or in the aggregate, are material to the Company.
F-21
<PAGE>
Report of Independent Auditors
Board of Directors
PriCellular Corporation
We have audited the consolidated balance sheets of PriCellular Corporation
and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedules listed in the Index. These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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 consolidated financial position
of PriCellular Corporation and subsidiaries at December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York
January 22, 1998, except for the third
paragraph of Note 13 as to which
the date is March 10, 1998
F-22
<PAGE>
PriCellular Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 61,357 $100,364
Accounts receivable (less allowance of $1,686 in 1997 and
$1,767 in 1996).......................................... 19,465 13,429
Inventory................................................. 2,232 2,096
Other current assets...................................... 1,797 3,484
-------- --------
Total current assets....................................... 84,851 119,373
Fixed assets--at cost:
Cellular facilities and equipment......................... 123,935 71,813
Furniture and equipment................................... 10,221 5,142
Deposits on cellular equipment............................ -- 10,100
-------- --------
134,156 87,055
Less accumulated depreciation............................. (29,302) (13,728)
-------- --------
Net fixed assets........................................... 104,854 73,327
Investment in cellular operations.......................... 37,017 39,641
Cellular licenses (less accumulated amortization of $23,119
in 1997 and $10,415 in 1996).............................. 493,315 377,808
Cellular license held for sale............................. -- 13,721
Deferred financing costs (less accumulated amortization of
$5,191 in 1997 and $2,761 in 1996)........................ 13,352 15,266
Cash committed for the acquisition of cellular operations.. 13,000 91,400
Other assets............................................... 1,267 5,280
-------- --------
Total assets............................................... $747,656 $735,816
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses..................... $ 33,966 $ 22,317
Deferred revenue.......................................... 4,242 2,531
Other current liabilities................................. 2,125 4,776
-------- --------
Total current liabilities.................................. 40,333 29,624
Long-term debt............................................. 568,323 524,517
Deferred taxes............................................. 3,797 --
Other long-term liabilities................................ 1,023 1,756
Commitments and contingent liabilities
Stockholders' equity:
Preferred Stock, $0.01 par:
Series A, cumulative convertible: authorized 10,000,000
shares; issued and outstanding 96,000 shares............ 1 1
Common Stock, $0.01 par:
Class A: Authorized 100,000,000 shares; issued and
outstanding 21,824,566 shares (1997) and 18,902,101
shares (1996)........................................... 218 189
Class B: Authorized 50,000,000 shares (1997) and
20,000,000 shares (1996); issued and outstanding
13,134,275 shares (1997) and 19,510,736 shares (1996)... 131 195
Additional paid-in capital................................ 180,704 212,777
Accumulated deficit....................................... (46,874) (33,243)
-------- --------
Total stockholders' equity................................. 134,180 179,919
-------- --------
Total liabilities and stockholders' equity................. $747,656 $735,816
======== ========
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE>
PriCellular Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Cellular service........................ $ 168,394 $ 105,188 $ 38,757
Equipment sales......................... 5,364 3,430 1,717
Other................................... 7,242 3,998 1,030
----------- ----------- -----------
181,000 112,616 41,504
Costs and expenses
Cost of cellular service................ 48,691 29,571 10,694
Cost of equipment sold.................. 12,841 10,073 4,951
Selling, general and administrative..... 53,485 34,502 16,512
Depreciation and amortization........... 28,759 19,537 10,337
----------- ----------- -----------
143,776 93,683 42,494
----------- ----------- -----------
Operating income (loss)................. 37,224 18,933 (990)
Other income (expense)
Gain (loss) on sale of investments in
cellular operations.................... 8,423 (1,401) 11,598
Interest expense........................ (67,392) (47,076) (22,953)
Interest income......................... 4,864 4,875 4,114
Other income, net....................... 3,250 1,626 520
----------- ----------- -----------
(50,855) (41,976) (6,721)
----------- ----------- -----------
Net income (loss)....................... $ (13,631) $ (23,043) $ (7,711)
=========== =========== ===========
Net income (loss) after adjustment for
accrued preferred stock dividend....... $ (20,171) $ (29,221) $ (7,711)
=========== =========== ===========
Basic and diluted earnings (loss) per
common share........................... $ (0.55) $ (0.76) $ (0.24)
=========== =========== ===========
Weighted average number of common shares
used in computation of basic and
diluted earnings (loss) per share...... 36,751,000 38,493,000 32,214,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
PriCellular Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Series A Class A Class B
------------- -------------- --------------
Preferred
Stock Common Stock Common Stock Additional
------------- -------------- -------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--December 31,
1994................... 5,000 $ 50 14,626 $146 $ 80,529 $ (2,489) $ 78,236
Additional shares issued
in connection with the
initial public
offering............... 375 4 2,563 2,567
Purchase and retirement
of treasury stock...... (127) (1) (769) (770)
Shares issued in
connection with
exercise of Harvard and
Spectrum options....... 828 8 4,992 5,000
Common stock issued for
cash................... 2,000 20 24,046 24,066
Conversion of Class B
common stock to Class A
common stock........... 810 8 (810) (8) --
Shares issued in
connection with
acquisition of
Parkersburg,
WV/Marietta, OH MSA
cellular system........ 797 8 9,751 9,759
Shares issued in
connection with
acquisition of AL-4 RSA
cellular system........ 1,175 12 14,970 14,982
Preferred stock issued
for cash............... 96 $ 1 79,598 79,599
Net loss for the year
ended December 31,
1995................... (7,711) (7,711)
--- --- ------ ---- ------ ---- -------- -------- --------
Balance--December 31,
1995................... 96 1 10,858 109 13,816 138 215,680 (10,200) 205,728
Purchase and retirement
of common stock........ (150) (1) (1,449) (1,450)
Conversion of Class B
common stock to Class A
common stock........... 1,688 17 (1,688) (17) --
Shares issued as a
result of common stock
splits................. 6,498 64 7,383 74 (138) --
Costs incurred in
connection with common
and preferred stock
offerings.............. (1,364) (1,364)
Exercise of employee
stock options.......... 8 -- 48 48
Net loss for the year
ended December 31,
1996................... (23,043) (23,043)
--- --- ------ ---- ------ ---- -------- -------- --------
Balance--December 31,
1996................... 96 1 18,902 189 19,511 195 212,777 (33,243) 179,919
Purchase and retirement
of common stock........ (2,157) (21) (3,995) (40) (53,800) (53,861)
Conversion of Class B
common stock to Class A
common stock........... 2,382 24 (2,382) (24)
Costs incurred in
connection with common
and preferred stock
offerings.............. (206) (206)
Shares issued in
connection with the
Kentucky Cluster
acquisition............ 1,948 19 19,106 19,125
Exercise of employee
stock options.......... 750 7 2,827 2,834
Net loss for the year
ended December 31,
1997................... (13,631) (13,631)
--- --- ------ ---- ------ ---- -------- -------- --------
Balance--December 31,
1997................... 96 $ 1 21,825 $218 13,134 $131 $180,704 $(46,874) $134,180
=== === ====== ==== ====== ==== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE>
PriCellular Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net income (loss)............................. $(13,631) $ (23,043) $ (7,711)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............... 28,759 19,537 10,337
Interest on Senior Subordinated and
Convertible Discount Notes................. 46,236 43,174 22,212
(Gain) loss on sale of investments in
cellular operations........................ (8,423) 1,401 (11,598)
Loss from equity investments, net of
distributions.............................. -- -- (275)
Amortization of covenant not to compete..... (3,250) (1,625) (500)
Provision for losses on accounts
receivable................................. 2,331 2,079 936
Proceeds from covenant not to compete....... 2,000 2,500 3,000
Changes in operating assets and liabilities:
Accounts receivable....................... (7,543) (9,098) (4,529)
Inventory................................. 103 (369) (891)
Other current assets...................... (737) (347) (193)
Other assets.............................. (410) (210) --
Accounts payable and accrued expenses..... 2,804 4,457 94
Deferred revenue.......................... 600 1,151 600
Income taxes payable...................... -- (448) (2,553)
Other current liabilities................. -- (250) (4,490)
Other long-term liabilities............... 187 410 (388)
Other, net................................ -- 52 59
-------- --------- ---------
Net cash provided by operating activities..... 49,026 39,371 4,110
-------- --------- ---------
Investing activities
Redemption of short-term investments.......... -- -- 991
Purchase of cellular equipment................ (25,717) (29,470) (6,794)
Amounts refunded from (deposited in) escrow to
acquire cellular properties (net)............ 7,337 (5,000) --
Deposit required for Personal Communications
Service auction (net)........................ -- 1,640 (4,140)
Distributions to affiliate.................... -- -- (36)
Proceeds from sale of cellular operations, net
of cash...................................... 22,396 31,500 19,478
Proceeds from sale of investment in cellular
operations................................... 1,255 2,813 --
Acquisition of cellular operations, net of
cash......................................... (26,032) (110,977) (213,686)
Investment in cellular operations............. (2,523) (75) (166)
Cash committed for the acquisition of cellular
operations................................... (13,000) (91,400) --
-------- --------- ---------
Net cash used in investing activities......... (36,284) (200,969) (204,353)
-------- --------- ---------
</TABLE>
F-26
<PAGE>
PriCellular Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Financing activities
Purchase and retirement of common stock........... (53,860) (1,450) (770)
Proceeds from sale of common stock................ -- -- 31,633
Proceeds from exercise of stock options........... 2,834 48 --
Proceeds from sale of preferred stock............. -- -- 79,599
Repayments of notes payable and due to stockhold-
ers.............................................. -- (23,104) (3,499)
Payments for deferred financing costs............. (516) (5,612) (7,601)
Proceeds from issuance of long-term debt.......... -- 170,000 178,914
Costs incurred in connection with common and pre-
ferred stock offerings........................... (207) (1,364) --
------- -------- --------
Net cash provided by (used in) financing activi-
ties............................................. (51,749) 138,518 278,276
------- -------- --------
Increase (decrease) in cash and cash equivalents.. (39,007) (23,080) 78,033
Cash and cash equivalents at beginning of year.... 100,364 123,444 45,411
------- -------- --------
Cash and cash equivalents at end of year.......... $61,357 $100,364 $123,444
======= ======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest......................................... $18,275 $ 1,110 $ 874
Income taxes..................................... 424 448 2,803
Supplemental schedule of noncash investing and
financing activities
Shares (1997) and (1995) and debt (1996) issued in
connection with the acquisition of cellular
systems.......................................... 19,125 19,429 24,741
Conversion of Class B common stock to Class A
common stock..................................... -- -- 8
Contribution of net assets into joint venture..... -- -- 35,516
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. Organization
PriCellular Corporation and Subsidiaries, including its wholly-owned
subsidiary, PriCellular Wireless Corporation ("Wireless") (collectively, the
"Company"), is principally engaged in the ownership and operation of cellular
telephone systems.
2. Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in the consolidated financial statements.
Use of Estimates
The preparation of the 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.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market. Inventory consists primarily of cellular telephones and accessories.
Other Current Assets
In August 1996, the Company filed applications to participate in the auction
for 10 MHz broadband Personal Communications Service ("PCS") licenses
conducted by the Federal Communications Commission (the "FCC") and deposited
$2.5 million with the FCC. In January 1997, $2.3 million of the deposit was
returned with an additional $653,000 being paid to the FCC. For 1996, the
deposit with the FCC is included in other current assets and for 1997 such
amount is included in Cellular licenses.
Investments in Cellular Operations
Investments in cellular operations in which the Company's interest is 20% or
more are accounted for under the equity method. Interest in investments that
are less than 20% are accounted for under the cost method.
On November 30, 1995 the Company entered into a Joint Venture with SBC
Communications, Inc. ("SBC"), formerly Southwestern Bell, in which the Company
contributed its system serving the Laredo, TX MSA (approximately 176,000 Pops)
and SBC contributed cellular properties in the Illinois-4 and -6 RSAs. The
Company owns 44.5% of the combined 594,000 Pops or approximately 264,000 Net
Pops. Under the terms of the Joint Venture agreement, the Company receives
preferential distributions in the first four years of the Joint Venture rising
from $3.3 million in the first year to $5.8 million in the final year. Such
preferential distributions are guaranteed by SBC. The Company also has an
option to put its Joint Venture interest to SBC at prices
F-28
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
beginning at $28.5 million and escalating to $39.0 million at the end of the
four year period. SBC has operating control of the properties and has certain
rights to purchase the Company's interests on the day prior to the fourth
anniversary. The Company's guaranteed preferential distribution from the Joint
Venture for 1997, 1996 and the month of December 1995 amounted to $4.3
million, $3.4 million and $275,000, respectively, which are included in other
revenue.
Cellular Licenses
The Company primarily uses a 40 year life to amortize cellular licenses
acquired. Amortization expense for the years ended December 31, 1997, 1996 and
1995 was $12.7 million, $9.5 million and $4.3 million, respectively.
The Company periodically reviews the carrying value of licenses to determine
whether such amounts are recoverable based on undiscounted future cash flows
of the market to which the license relates, and by comparing the cellular
licenses to the estimated market value of the cellular systems, in order to
determine whether a reduction to fair value is necessary. The Company has
determined that no such reductions were necessary through December 31, 1997.
Income Recognition
Revenues are recognized during the period service is provided or when
equipment is delivered.
Expense Recognition
Marketing costs relating to new subscribers are expensed in the period that
they are incurred. Advertising expense amounted to $3.7 million, $2.3 million
and $1.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
Fixed Assets
Fixed assets are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful life of the asset of three to
seven years.
Deferred Financing Costs
Deferred financing costs primarily represent underwriting discounts and
related fees incurred in connection with the issuance of the Company's long-
term debt. These costs are being amortized over the terms of the related debt
and are included in interest expense.
Common Stock Splits
On July 17, 1995, February 29, 1996 and October 1, 1996, the Company
authorized 5-for-4 stock splits in the form of 25% stock dividends of Class A
and Class B common stock payable August 4, 1995, March 11, 1996 and October
21, 1996, respectively. All footnote disclosures and applicable per share data
have been retroactively restated to reflect these splits.
F-29
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and,
accordingly, as option grants are at fair market value, recognizes no
compensation expense for these grants (see Note 9--Commitments and
Contingencies).
Net Income (Loss) per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. All earnings
(loss) per share amounts for all periods have been presented and, where
appropriate, restated to conform to Statement 128 requirements. In computing
dilutive earnings (loss) per share for the years ended December 31, 1997, 1996
and 1995, no effect has been given to options outstanding under the Company's
1994 Stock Option Plan, outstanding warrants to purchase Class B common stock,
the 12 3/4% Senior Convertible Discount Notes or the Cumulative Convertible
Preferred Stock, since the exercise of any of these items would have an
antidilutive effect on net loss per share.
Reclassification
Certain items have been reclassified in the consolidated balance sheets and
the consolidated statements of cash flows to conform to the current
presentation.
3. Acquisition of Cellular Operations
All acquisitions were accounted for utilizing the purchase method of
accounting. The allocation of purchase price for certain acquisitions
described below is subject to adjustments.
During the year ended December 31, 1997, the Company established its fourth
operating cluster by consummating the acquisition of four RSAs in Kentucky
from a subsidiary of Horizon Cellular Telephone Company, L.P. ("Horizon"). The
785,000 Pop cluster was acquired for approximately $96.4 million in cash and
1,948,052 shares of the Company's Class A common stock. On February 4, 1997,
the Company repurchased and retired the 1,948,052 shares from Horizon for
$15.3 million. In addition, the Company strengthened its Upper Midwest cluster
through the acquisition of the WI-4 RSA, consisting of approximately 119,000
Pops on January 7, 1997 from a subsidiary of BellSouth Corporation for
approximately $6.3 million in cash, and the acquisition of three counties in
the WI-5 RSA consisting of approximately 81,000 Pops on May 29, 1997 from
United States Cellular Corporation for approximately $10.6 million in cash and
the contribution of approximately 18,000 minority Pops.
F-30
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Acquisition of Cellular Operations (continued)
The following acquisitions were completed during 1997 and 1996:
<TABLE>
<CAPTION>
Acquisition Purchase Net Pops
System Market Date Price Acquired
- ------ ------ ----------- -------- ---------
<S> <C> <C> <C> <C>
1997
Kentucky Cluster KY-4, KY-5, KY-6 and
KY-8 RSAs January 7, 1997 $115,500,000(A) 785,000
---------
785,000
Upper Midwest Cluster WI-4 RSA January 7, 1997 6,300,000 119,000
WI-5 RSA May 29, 1997 10,600,000 81,000
---------
200,000
---------
Total for 1997 985,000
=========
1996
Upper Midwest Cluster WI-2 RSA November 18, 1996 4,300,000 85,645
---------
85,645
Mid-Atlantic Cluster PA-9 RSA February 2, 1996 26,100,000 188,096
WV-3 RSA July 23, 1996 35,000,000 269,709
---------
457,805
---------
New York Cluster NY-6 RSA April 23, 1996 19,800,000(B) 111,373
Poughkeepsie, NY MSA April 23, 1996 38,900,000(B)(C) 218,890
Orange County, NY MSA October 17, 1996 (C) 327,053
---------
657,316
---------
Various Various October 17, 1996 (C) 70,740
---------
Total for 1996 1,271,506
=========
</TABLE>
- --------
(A) The Company acquired from a subsidiary of Horizon the system serving four
RSAs in Kentucky for approximately $96.4 million in cash and 1,948,052
shares of the Company's Class A common stock valued at approximately $19.1
million.
(B) The Company acquired from a subsidiary of United States Cellular
Corporation the system serving the NY-6 RSA for approximately $19.8
million and 83% of the stock of the system serving the Poughkeepsie, NY
MSA for approximately $38.9 million, with one-half paid in cash and the
balance in a three-year note (subsequently repaid in November 1996, see
Note 4--Long-Term Debt.)
(C) The Company exchanged with Vanguard Cellular Systems, Inc. its OH-9 RSA,
the majority of its OH-10 RSA and its Parkersburg, WV/Marietta, OH MSA for
the Orange County, NY MSA, an additional 11.1% of the Poughkeepsie, NY
MSA, 12.2% of the Janesville, WI MSA and 28,509 additional Pops, including
small interests in the Eau Claire, WI and Wausau, WI MSAs (in each of
which the Company currently has a majority interest).
F-31
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Acquisition of Cellular Operations (continued)
The pro forma unaudited condensed consolidated results of operations for the
years ended December 31, 1996 and 1995, assuming the transactions were
consummated as of January 1, 1995, are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenue......................................... $135,248,000 $ 82,109,000
============ ============
Net loss........................................ $(32,536,000) $(53,038,000)
============ ============
Basic and diluted loss per common share......... $ (.89) $ (1.65)
============ ============
</TABLE>
No pro forma effect was given for 1997, 1996 and 1995 for the WI-4 or WI-5
acquisitions as their results are not significant nor is the pro forma effect
presented for one week in 1997 for the Kentucky Cluster acquisition as this is
also not significant.
4. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
14% Senior Subordinated Discount Notes due 2001.. $165,000,000 $146,783,000
10 3/4% Senior Subordinated Convertible Discount
Notes due 2004.................................. 45,623,000 41,087,000
12 1/4% Senior Subordinated Discount Notes due
2003............................................ 187,700,000 166,647,000
10 3/4% Senior Notes due 2004.................... 170,000,000 170,000,000
------------ ------------
$568,323,000 $524,517,000
============ ============
</TABLE>
On November 23, 1994, Wireless issued approximately $165.0 million aggregate
principal amount of 14% Senior Subordinated Discount Notes due 2001 (the "14%
Notes") primarily to finance the acquisition of Cellular Information Systems,
Inc. ("CIS"). The 14% Notes were issued at a price of 66.834% or $110.3
million. The original issue discount on the 14% Notes accreted at a rate of
14%, compounded semiannually, to an aggregate principal amount of
approximately $165.0 million. Interest is now accruing at the rate of 14% per
annum, payable semiannually in cash beginning May 15, 1998.
On August 21, 1995, the Company issued approximately $60.0 million aggregate
principal amount of 10 3/4% Senior Subordinated Convertible Discount Notes due
2004 (the "10 3/4% Notes"). The 10 3/4% Notes were issued at a price of
59.345% or $35.6 million. The original issue discount on the 10 3/4% Notes
accretes at a rate of 10 3/4%, compounded semiannually, to an aggregate
principal amount of approximately $60.0 million by August 15, 2000. Interest
will thereafter accrue at 10 3/4% per annum, payable semiannually, in cash
beginning February 15, 2001. The 10 3/4% Notes are convertible into the
Company's Class A common stock at a conversion price of $9.94 per share. The
Company can force conversion of the 10 3/4% Notes under certain circumstances
if the Company's Class A common stock trades at $13.91 per share for ten out
of fifteen consecutive trading days.
On September 27, 1995, Wireless issued approximately $205.0 million
aggregate principal amount of 12 1/4% Senior Subordinated Discount Notes due
2003 (the "12 1/4% Notes") to finance the acquisition of the OH-7 RSA, OH-9
RSA, OH-10 RSA, Parkersburg, WV/Marietta, OH MSA, WV-2 RSA, AL-4 RSA, PA-9 RSA
and NY-5 RSA cellular systems. The 12 1/4% Notes were issued at a price of
69.906% or $143.3 million. The
F-32
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Long-Term Debt (continued)
original issue discount on the 12 1/4% Notes accretes at a rate of 12 1/4%
compounded semiannually to an aggregate principal amount of approximately
$205.0 million by October 1, 1998. Interest will thereafter accrue at 12 1/4%
per annum payable semiannually in cash beginning April 1, 1999.
On November 6, 1996, Wireless issued $170.0 million principal amount of 10
3/4% Senior Notes due 2004, primarily to finance the acquisition in January
1997 of the Kentucky cluster for $115.5 million consisting of approximately
$96.4 million in cash and $19.1 million in the Company's Class A common stock.
Approximately $19.0 million of the proceeds was used to repay the note issued
in connection with the purchase on April 23, 1996 of the Poughkeepsie, NY MSA.
Interest is payable semiannually on each May 1 and November 1.
The Company's long-term debt includes restrictions on Wireless' incurrence
of additional debt, the payment of dividends, the incurrence of liens, and on
payments and transfer of net assets from Wireless to the Company. Restricted
net assets of the Company as of December 31, 1997 approximated $177.8 million.
The maturities of the Company's long-term debt for each of the five years
subsequent to December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................ $ --
1999............................................................ --
2000............................................................ --
2001............................................................ 165,000,000
2002............................................................ --
Thereafter...................................................... 403,323,000
------------
Total........................................................... $568,323,000
============
</TABLE>
5. Income Taxes
The significant components of the Company's deferred tax liabilities and
assets are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation................................... $ (9,652,000) $ (4,340,000)
Amortization................................... (11,407,000) (5,957,000)
License basis difference....................... (3,797,000) --
Other.......................................... (4,385,000) --
Deferred tax assets:
Net operating loss carryforwards............... 6,915,000 3,715,000
Amortization of original issue discount........ 33,726,000 19,745,000
State and local deferred taxes................. 2,280,000 2,017,000
Accruals....................................... 2,049,000 2,658,000
Other.......................................... 2,504,000 1,805,000
------------ ------------
Net deferred tax assets......................... 18,233,000 19,643,000
Valuation allowance............................. (22,030,000) (19,643,000)
------------ ------------
Net deferred tax liability...................... $ (3,797,000) $ --
============ ============
</TABLE>
F-33
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Income Taxes (continued)
At December 31, 1997, the Company had tax net operating loss carryforwards
("NOLs") of approximately $20.3 million, which are available to offset future
taxable income. NOLs begin expiring in the year 2007 through 2012 as follows:
2007--$1.3 million, 2009--$2.9 million, 2010--$1.7 million, 2011--$5.6 million
and 2012--$8.8 million.
As a result of the acquisition of certain markets wherein the book and tax
basis of the Cellular licenses are different, the Company recorded a deferred
tax liability and an increase to the book basis of the licenses related to
these acquisitions.
6. Common Stock
On December 22, 1994, the Company closed on its Initial Public Offering
("IPO") of 7,812,500 shares of Class A common stock resulting in proceeds of
$34.7 million after deducting expenses related to the offering. Concurrent
with the closing of the IPO, certain stockholders converted their Series A and
B Convertible Preferred Stock into an aggregate of 10,157,955 shares of Class
B common stock.
In connection with the overallotment agreement with the underwriters of the
IPO, during January 1995, the Company sold an additional 585,938 shares of
Class A common stock, which resulted in net proceeds of approximately $2.6
million.
During 1995, the Company's Board of Directors authorized the Company to
purchase up to 750,000 shares of its Class A common stock in the open market
or in private transactions from time to time. During 1995, 1996 and 1997, the
Company purchased and retired 127,250 shares, not effected for the 1996
splits, 149,600 shares and 10,000 shares at prices ranging from $5.40 to $8.30
per share, $9.00 to $12.00 per share and $10.37 per share, respectively. To
date, the Company has repurchased and retired approximately 287,000 shares of
its Class A common stock.
On July 14, 1995, Harvard Private Capital Group, Inc. and Spectrum Equity
Investors L.P. exercised an option to purchase a total of 1,293,461 shares of
the Company's Class A common stock. The proceeds to the Company totaled $5.0
million.
During October 1995, the Company filed a $200.0 million shelf registration
with the SEC, to be used for acquisition purposes only. The shelf registration
covers $100.0 million of debt securities (including convertible debt
securities), $75.0 million of preferred stock (including convertible preferred
stock) and $25.0 million of Class A common stock to be issued upon approval of
the Board of Directors.
On November 22, 1995, the Company sold 3,125,000 shares of Class A common
stock to an institutional investor, realizing net proceeds of $24.1 million.
In January 1996, Price Communications, an affiliate of the Company, acquired
warrants which are now convertible directly into 1,820,000 shares of Class B
common stock from former executives of an acquired company. The effective
exercise price is $5.02 per share of Class B common stock and escalates to
$6.32.
On February 4, 1997, the Company purchased and retired, under separate
authorization of its Board of Directors, 1,948,052 shares of its Class A
common stock from Horizon, which Horizon received in connection with the
Kentucky Cluster acquisition.
In July 1997, the Company repurchased and retired 3,994,945 shares of its
Class B common stock from Aeneas Venture Corp., an affiliate of Harvard
Private Capital Group, Inc. ("Harvard") at $9.00 per share, which
F-34
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Common Stock (continued)
was the current market price at the date of the transaction. In addition,
56,275 warrants to purchase Class B common stock, also owned by Harvard, were
redeemed at a net cash expenditure of $3.83 per warrant ($9.00 current market
price less the exercise price of $5.17).
In November 1997, Robert Price, Chairman of the Board of the Company,
exercised options for 742,188 shares of the Company's Class A common stock.
Subsequently, the Company purchased from Robert Price 200,000 of the 742,188
shares issued at market ($11.25 per share), and simultaneously retired the
same shares.
Shares of Class A common stock reserved for issuance are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Options issued to employees............................ 1,477,000 2,048,000
Options reserved for issuance.......................... 401,000 588,000
Warrants............................................... 1,820,000 1,876,000
Shares reserved for convertible securities............. 32,856,000 39,239,000
---------- ----------
36,554,000 43,751,000
========== ==========
</TABLE>
7. Preferred Stock
During December 1995, the Company issued 96,000 shares of Series A
Cumulative Convertible Preferred Stock, par value $.01 per share (the "Series
A Preferred Stock") for gross proceeds of $80.0 million. The preferred stock
accrues dividends at the rate of 6.25% per annum compounded quarterly. Such
dividends will not be paid in cash but will accrue and be calculated on the
face value of $1,000 per share. The number of shares of Class A common stock
into which the Series A Preferred Stock is convertible is equal to the
quotient obtained by dividing the conversion value (initially $83.2 million
and increasing to $96.0 million by the third anniversary of the original date
of issuance or earlier upon the occurrence of certain contingencies, plus, in
each case, accrued dividends through the date of conversion or, upon the
occurrence of certain contingencies, through the fifth anniversary of the date
of issuance) by the conversion price ($8.83 per share subject to adjustment).
The Company can effectively force the conversion of the cumulative convertible
shares at such time as the Company's Class A common stock trades at or above
$14.72 per share for 10 out of 15 trading days. The holder of each share of
Series A Preferred Stock is entitled to the number of votes equal to the
number of shares of Class A common stock the holder would receive upon
conversion.
F-35
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Sale of Cellular Operations
The Company made the following dispositions of cellular properties and
interests:
<TABLE>
<CAPTION>
Date Description Sales Price Gain (Loss)
---- ----------- ----------- -----------
<S> <C> <C> <C>
1997
January Florence, AL MSA and AL-1B RSA, sale of license $22,396,000 $ 8,451,000
April Sale of Minority Pops 1,255,000 (28,000)
-----------
$ 8,423,000
===========
1996
July AL-4 RSA, sale of license $25,000,000 $(1,640,000)
September Sale of Minority Pops 2,813,000 1,817,000
November MI-2 RSA, sale of license 6,500,000 (1,578,000)
-----------
$(1,401,000)
===========
1995
January Abilene, TX MSA, sale of assets $15,928,000 $11,598,000
March MN-6 MSA, sale of a portion of the license
representing 31,000 Pops 3,550,000 --
-----------
$11,598,000
===========
</TABLE>
9. Commitments and Contingencies
Stock Option Plan.
Under the Company's 1994 Stock Option Plan (the "Plan"), the Board of
Directors can grant options to purchase up to 2,636,000 shares of Class A
common stock to certain eligible employees and directors (Class A shares are
entitled to one vote per share). During 1996, the Company registered
approximately 2,636,000 shares of Class A common stock reserved for issuance
under the Plan. The Plan provides that the option price cannot be less than
the fair market value of the stock on the date of grant and, accordingly, no
compensation expense is recognized. All options granted subsequent to January
1, 1995 have a 10 year term and vest and become fully exercisable at the end
of three years of continued employment. The Company has elected to follow APB
25 and related interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided
for under FASB No. 123, Accounting for Stock-Based Compensation, requires use
of option valuation models that were not developed for use in valuing employee
stock options and are highly subjective.
Pro forma information regarding net income (loss) and basic and diluted
earnings (loss) per common share is required by Statement No. 123, and has
been determined as if the Company has accounted for its employee stock options
under the fair value method of that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995, 1996 and 1997 risk free interest rate of 6.25%; dividend
yield 0%; .480 for 1995 and 1996 and .323 for 1997 volatility factors of the
expected market price of the Company's Class A common stock; and a weighted-
average expected life of option of four years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require
F-36
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Commitments and Contingencies (continued)
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Net income (loss):
As reported............................................ $(20,171) $(23,043)
Pro forma.............................................. $(21,318) $(23,818)
Basic and diluted earnings (loss) per common share:
As reported............................................ $ (0.55) $ (0.76)
Pro forma.............................................. $ (0.58) $ (0.78)
</TABLE>
Since compensation expense associated with option grants is recognized over
the vesting period, the initial impact of applying FAS 123 on pro forma net
income (loss) is not representative of the potential impact on pro forma net
income (loss) in future years when the effect of recognition of a portion of
compensation expense from multiple awards would be reflected.
A summary of the Company's stock option activity, and related information is
as follows:
<TABLE>
<CAPTION>
Number of
Shares Under Price Per
Options Share
------------ ----------------
<S> <C> <C>
Balance at December 31, 1994................... 1,040,039 $3.71
Options granted................................ 770,117 $4.54 to $8.72
Options returned for future issuance........... (41,016) $4.54 to $4.67
---------
Balance at December 31, 1995................... 1,769,140 $3.71 to $8.72
Options granted................................ 343,125 $10.80 to $10.90
Options exercised.............................. (8,329) $4.54 to $4.67
Options returned for future issuance........... (55,704) $4.54 to $10.90
---------
Balance at December 31, 1996................... 2,048,232 $3.71 to $10.90
Options granted................................ 217,500 $8.88
Options exercised.............................. (750,649) $3.71 to $8.72
Options returned for future issuance........... (38,102) $4.55 to $10.90
---------
Balance at December 31, 1997................... 1,476,981 $3.71 to $10.90
=========
</TABLE>
The weighted average grant date fair value of options granted in 1997 and
1996 were $3.38 and $4.84, respectively.
F-37
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Commitments and Contingencies (continued)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
----------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1997 Life Price 1997 Price
-------- -------------- ----------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 3.71 to
$ 4.67 848,957 7 years $ 4.29 676,821 $ 4.20
$ 8.72 to
$ 8.88 314,899 8.8 years $ 8.83 64,965 $ 8.72
$10.80 to
$11.40 313,125 8.6 years $10.88 104,271 $10.88
</TABLE>
Lease Commitments
Total rent expense amounted to approximately $3,416,000, $2,378,000 and
$877,000 for the years ended December 31, 1997, 1996 and 1995, respectively,
of which $47,000, $137,000 and $60,000 was paid to an affiliate during 1997,
1996 and 1995, respectively. At December 31, 1997, the Company is committed
under the following noncancellable operating leases:
<TABLE>
<CAPTION>
Year
----
<S> <C>
1998........................................................... $ 3,513,000
1999........................................................... 3,040,000
2000........................................................... 2,382,000
2001........................................................... 1,708,000
2002........................................................... 1,063,000
Thereafter..................................................... 2,946,000
-----------
$14,652,000
===========
</TABLE>
10. Related Party Transactions
The Company and AT&T Wireless Services Inc. are parties to an operating
agreement dated April 28, 1994, which provides for, among other services,
switch sharing agreements with AT&T's adjacent systems, assistance in
obtaining cellular system service and equipment discounts, assistance in
evaluating potential acquisitions and in securing financing.
11. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheets approximate fair value.
Long-term debt: The fair value of the Senior Subordinated Notes and
Senior Subordinated Discount Notes is based on the quoted market price. The
carrying amount of the Senior Convertible Discount Notes approximates their
fair value.
F-38
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Fair Values of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
------------ ------------
<S> <C> <C>
Cash and cash equivalents....................... $ 61,357,000 $ 61,357,000
Long-term debt:
14% Senior Subordinated Discount Notes........ 165,000,000 182,738,000
10 3/4% Senior Convertible Discount Notes..... 45,623,000 45,623,000
12 1/4% Senior Subordinated Discount Notes.... 187,700,000 193,801,000
10 3/4% Senior Notes.......................... 170,000,000 187,000,000
</TABLE>
12. Accounts Payable, Accrued Expenses and Other Current Liabilities
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Accounts payable.................................. $ 9,404,000 $ 4,592,000
Interest payable.................................. 5,920,000 2,792,000
Accrued operating expenses........................ 12,467,000 3,819,000
Income and other taxes payable.................... 1,847,000 2,597,000
Other............................................. 4,328,000 8,517,000
----------- -----------
$33,966,000 $22,317,000
=========== ===========
Other current liabilities consist of the following:
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Amount due for untendered CIS shares.............. $ -- $ 2,523,000
Unearned covenant not to compete.................. 2,125,000 2,250,000
Other............................................. -- 3,000
----------- -----------
$ 2,125,000 $ 4,776,000
=========== ===========
</TABLE>
13. Subsequent Events
Tennessee Acquisition
In January 1998, Kyle Cellular, a wholly owned subsidiary of the Company,
acquired, subject to FCC approval, the TN-4 RSA with approximately 264,000
Pops from Bachtel Liquidity, L.P., an affiliate of Bachow & Associates, Inc.
for approximately $73.0 million in cash. The RSA, adjacent to three MSAs
including Knoxville, TN, is located south of the Company's Kentucky Cluster
and features such tourist attractions as the towns of Gatlinburg and Pigeon
Forge, Dollywood and the entrance to the Great Smoky Mountains National Park.
$13.0 million will be funded through available cash with the balance being
provided by a $60.0 million Senior Secured Reducing Revolver (the "Borrowing")
with J.P. Morgan Securities Inc. The Borrowing matures eight years from the
closing date with repayment commencing in the year 2001 with final payment in
the year 2005 in amounts ranging from 10.0% to 25.0%. Interest will be charged
at the LIBOR rate plus a premium ranging from 1.500% to 2.250% depending on
the ratio of debt to cash flow as defined. The Borrowing requires the
attainment
F-39
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Subsequent Events (continued)
of certain financial ratios in order to maintain the permitted indebtedness.
Violation of such ratios requires the permanent prepayment of an amount to
cure the deficiency. The Borrowing is secured by the assets of Kyle Cellular.
Pursuant to the agreement the Company is required to enter into an interest
rate swap which effectively converts a portion of the interest on the
outstanding indebtedness from a variable rate basis to a fixed rate. The
notional amount required to be hedged is 50% of the aggregate outstanding
principal amount.
Merger Agreement
On June 25, 1998, American Cellular acquired all of the operations of
PriCellular Corporation, a Delaware corporation pursuant to an Agreement and
Plan of Merger (the "Merger Agreement"). At the effective time, as defined in
the Merger Agreement, each issued and outstanding share of Class A common
stock, par value $0.01 per share, of the Company (the "Class A Shares") and
Class B common stock, par value $0.01 per share, of the Company had the right
to receive $14.00 in cash, without interest (the "Merger Consideration"), and
each issued and outstanding share of Series A Preferred Stock of the Company
had the right to receive the product of the Merger Consideration and the
number of Class A Shares into which each such share of Series A Preferred
Stock is convertible at such time in connection with a change of control. The
Merger Agreement permits the Company, under certain circumstances, to respond
to unsolicited third party acquisition proposals and, upon payment of certain
fees to ACC, to terminate the Merger Agreement.
In connection with the execution of the Merger Agreement, the Principal
Stockholders of the Company entered into a Voting Agreement with ACC. Pursuant
to the agreement, the Principal Stockholders, the beneficial owners of
approximately 39% of the outstanding Common Stock and Preferred Stock of the
Company (or 57% of the fully diluted voting power of the Company), agreed to
vote their shares in favor of the approval and adoption of the Merger
Agreement. The Voting Agreement terminates upon termination of the Merger
Agreement. The transaction is subject to, among other things, regulatory
approvals.
F-40
<PAGE>
PriCellular Corporation
Schedule I--Condensed Financial Information of Registrant
Condensed Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1996
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................... $ 1,795 $ 33,032
Other current assets........................................ 1,088 7,650
-------- --------
Total current assets......................................... 2,883 40,682
Investment in and advances to subsidiaries................... 177,779 180,012
Other assets................................................. 1,071 1,235
-------- --------
Total assets................................................. $181,733 $221,929
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable, accrued expenses and other current
liabilities................................................ $ 1,930 $ 923
Long-term debt.............................................. 45,623 41,087
Stockholders' equity........................................ 134,180 179,919
-------- --------
Total liabilities and stockholders' equity................... $181,733 $221,929
======== ========
</TABLE>
See accompanying notes.
F-41
<PAGE>
PriCellular Corporation
Schedule I--Condensed Financial Information of Registrant (continued)
Condensed Statements of Operations
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Revenue
Other............................................ $ -- $ 237 $ --
Costs and expenses
General and administrative....................... 558 384 293
-------- -------- -------
Operating loss................................... (558) (147) (293)
Other income (expense)
Interest expense, net............................ (3,714) (644) (324)
-------- -------- -------
Loss before equity in net income (loss) of
subsidiaries.................................... (4,272) (791) (617)
Equity in net income (loss) of subsidiaries...... (9,359) (22,252) (7,094)
-------- -------- -------
Net income (loss)................................ $(13,631) $(23,043) $(7,711)
======== ======== =======
</TABLE>
See accompanying notes.
F-42
<PAGE>
PriCellular Corporation
Schedule I--Condensed Financial Information of Registrant (continued)
Condensed Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net cash provided by operating activities........ $ 1,434 $ 2,762 $ 721
Investing activities:
Repayments from and (advances to)
subsidiaries.................................. 4,062 (65,380) (31,149)
Amounts deposited in escrow to bid in PCS
auction, net.................................. 2,500 1,640 (4,140)
Dividend received from subsidiary.............. 12,000 -- --
Junior Subordinated Note receivable from
subsidiary.................................... -- -- (20,000)
-------- -------- --------
Net cash provided by (used in) investing
activities...................................... 18,562 (63,740) (55,289)
-------- -------- --------
Financing activities:
Proceeds from sale of common stock............. -- -- 31,633
Proceeds from issuance of Senior Subordinated
Convertible Discount Notes.................... -- -- 35,607
Proceeds from issuance of preferred stock...... -- -- 79,599
Payments for deferred financing costs.......... -- -- (1,455)
Exercise of employee stock options............. 2,834 48 --
Purchase and retirement of common stock........ (53,860) (1,450) (770)
Costs incurred in connection with common and
preferred stock offerings..................... (207) (1,364) --
-------- -------- --------
Net cash (used in) provided by financing
activities...................................... (51,233) (2,766) 144,614
-------- -------- --------
(Decrease) increase in cash and cash
equivalents..................................... (31,237) (63,744) 90,046
Cash and cash equivalents at beginning of year... 33,032 96,776 6,730
-------- -------- --------
Cash and cash equivalents at end of year......... $ 1,795 $ 33,032 $ 96,776
======== ======== ========
Supplemental schedule of noncash financing
activities
Conversion of Class B common stock to Class A
common stock.................................... 24 17 8
Shares issued in connection with the acquisition
of cellular systems............................. 19,125 -- 24,741
</TABLE>
See accompanying notes.
F-43
<PAGE>
PriCellular Corporation
Schedule I--Condensed Financial Information of Registrant--(Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1997
1. Basis of Presentation
In the parent company-only financial statements, the Company's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company's share of net income
or (loss) of its unconsolidated subsidiaries is included in consolidated
income or (loss) using the equity method. The parent company-only financial
statements should be read in conjunction with the Company's consolidated
financial statements.
2. Long-Term Debt
On August 21, 1995, the Company issued approximately $60.0 million aggregate
principal amount of 10 3/4% Senior Subordinated Convertible Discount Notes due
2004. The notes were issued at a price of 59.345% or $35.6 million. The
original issue discount on the notes accretes at a rate of 10%, compounded
semiannually, to an aggregate principal amount of approximately $60.0 million
by August 15, 2000. Interest will thereafter accrue at 10% per annum, payable
semiannually beginning February 15, 2001. The notes are convertible into the
Company's Class A common stock at a conversion price of $9.94. The Company can
force conversion of the notes under certain circumstances if the Company's
Class A common stock trades at $13.91 per share for ten out of fifteen
consecutive trading days.
There are no maturities of long-term debt until 2004 at which time the
entire note becomes due.
3. Other
On September 30, 1996, the Company forgave the Junior Subordinated Note due
from its subsidiary, PriCellular Wireless Corporation, which amounted to $21.6
million.
F-44
<PAGE>
PriCellular Corporation
Schedule II--Valuation and Qualifying Accounts
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to Charged to Balance
Beginning Cost and Other at End
Description of Year Expenses Accounts Deductions of Year
----------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1995
Allowance for doubtful
accounts................ $ 735 $ 936 $1,982(A) $(1,577) $ 2,076
======= ======= ====== ======= =======
Valuation allowance for
deferred income taxes... $ 1,538 $ 7,151 $ -- $ -- $ 8,689
======= ======= ====== ======= =======
Year ended December 31,
1996
Allowance for doubtful
accounts................ $ 2,076 $ 2,079 $ 58(A) $(2,446) $ 1,767
======= ======= ====== ======= =======
Valuation allowance for
deferred income taxes... $ 8,689 $10,954 $ -- $ -- $19,643
======= ======= ====== ======= =======
Year ended December 31,
1997
Allowance for doubtful
accounts................ $ 1,767 $ 2,331 $ 513(A) $(2,925) $ 1,686
======= ======= ====== ======= =======
Valuation allowance for
deferred income taxes... $19,643 $ 2,387 $ -- $ -- $22,030
======= ======= ====== ======= =======
</TABLE>
- --------
(A)Results principally from the acquisition of cellular systems.
F-45
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offering covered by this Prospectus. If given or made,
such information or representations must not be relied upon as having been au-
thorized by the Company or the Initial Purchasers. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, the Notes
in any jurisdiction where, or to any person to whom, it is unlawful to make
such offer or solicitation. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication that
there has not been any change in the facts set forth in this Prospectus or in
the affairs of the Company or Company since the date hereof.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Certain Terms............................................................ 4
Prospectus Summary....................................................... 5
Risk Factors............................................................. 17
The Exchange Offer....................................................... 26
The Merger............................................................... 34
Use of Proceeds.......................................................... 35
Unaudited Pro Forma Financial Information................................ 36
Selected Financial Data.................................................. 40
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 41
Business................................................................. 49
Overview of Cellular Telephone Industry.................................. 60
Regulation............................................................... 64
Management............................................................... 68
Principal Stockholders................................................... 71
Certain Relationships and Related Transactions........................... 73
Description of Credit Facility........................................... 74
Description of Exchange Notes............................................ 76
Material Federal Income Tax Considerations............................... 101
Plan of Distribution..................................................... 102
Legal Matters............................................................ 102
Experts.................................................................. 102
Available Information.................................................... 103
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Offer to Exchange
10 1/2% Senior Notes due 2008
for all outstanding
10 1/2% Senior Notes due 2008
of
American Cellular
Corporation
----------------
PROSPECTUS
----------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Company is a Delaware corporation and its Certificate of Incorporation
provide for indemnification of its directors, officers, employees and agents
to the fullest extent permitted by the Delaware General Corporation Law (the
"DGCL"), as the same exists or may hereafter be amended. Section 145 of the
DGCL provides in relevant part that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that such person is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful.
In addition, Section 145 of the DGCL provides that a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the fact that
such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery
or the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper. Delaware law further provides that nothing in the
above-described provisions shall be deemed exclusive of any other rights to
indemnification or advancement of expenses to which any person may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise.
Section 102(b)(7) of the DGCL eliminates the liability of a corporation's
directors to a corporation or its stockholders, except for liabilities related
to a breach of duty of loyalty, actions not in good faith, and certain other
liabilities.
The Company currently carries liability insurance for its directors and
officers.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Purchase Agreement, dated May 6, 1998, among American Cellular
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, TD
Securities (USA), Inc. and Wasserstein Perella Securities, Inc.
relating to the 10 1/2% Senior Notes of American Cellular Corporation
due 2008.
2.1 Agreement and Plan of Merger, dated as of March 6, 1998, between
PriCellular Corporation and American Cellular Corporation, as amended
by Amendment No. 1 thereto, dated May 27, 1998.(1)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1* Restated Certificate of Incorporation dated August 5, 1998.
3.2* Amended and Restated Bylaws dated August 5, 1998.
4.1* Indenture, dated as of May 13, 1998, between American Cellular
Corporation and Chase Manhattan Bank and Trust Company, National
Association, as trustee, relating to $285,000,000 aggregate principal
amount of 10 1/2% Senior Notes due 2008.
4.2* Supplemental Indenture, dated as of June 25, 1998, by and between
American Cellular Corporation and Chase Manhattan Bank and Trust
Company, National Association.
4.3* Second Supplemental Indenture, dated as of September 15, 1998, by and
between American Cellular Corporation and Chase Manhattan Bank and
Trust Company, National Association.
4.4* Registration Rights Agreement, dated as of May 13, 1998, among
American Cellular Corporation and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, TD Securities (USA), Inc. and Wasserstein Perella
Securities, Inc.
4.5* Specimen Certificate of 10 1/2% Senior Notes due 2008 (the "Private
Notes") (included in Exhibit 4.1 hereto).
4.6* Specimen Certificate of 10 1/2% Senior Notes due 2008 (the "Exchange
Notes") (included in Exhibit 4.1 hereto).
5.1* Opinion of Latham & Watkins regarding the validity of the Exchange
Notes.
8.1* Opinion of Latham & Watkins regarding tax matters.
9.1 Voting Agreement, dated as of March 6, 1998, among American Cellular
Corporation, PriCellular Corporation, and the stockholders named
therein.(1)
10.1 Contribution Agreement by and among Texas/Illinois Cellular Limited
Partnership, a Delaware limited partnership, Southwestern Bell Mobile
Systems, Inc., a Delaware and Virginia corporation, PriCellular
Corporation, Cellular Information Systems of Laredo, Inc., a Texas
corporation, dated as of April 10, 1995.(2)
10.2 Asset Acquisition Agreement dated as of October 15, 1996 among
PriCellular, Cellular Information Systems of Florence, Inc. and
Horizon Cellular Telephone Company of Central Kentucky, L.P.(3)
10.3 Stockholders' Agreement dated as of April 28, 1995 by and among
PriCellular Corporation and the parties named therein.(4)
10.4 Voting Agreement dated as of December 28, 1995 by and among
PriCellular Corporation and the parties names therein.(5)
10.5 Operating Agreement dated as of April 28, 1994 by and between
PriCellular Corporation and McCaw.(4)
10.6 Warrant Agreement between PriCellular Corporation and Price
Communications Corporation.(3)
10.7 Spectrum Letter dated March 6, 1998.(6)
10.8 Consent and Waiver dated as of March 6, 1998 between PriCellular
Corporation and AT&T Wireless Services, Inc.(6)
10.9* Stock Purchase Agreement, dated as of March 5, 1998, by and among
American Cellular Corporation and each of the parties listed on
Exhibit A thereto, as amended as of March 31, 1998.
10.10* Stockholders Agreement, dated as of March 5, 1998, by and among
American Cellular Corporation and each of the parties listed on
Exhibit A thereto.
10.11* Registration Rights Agreement dated as of March 5, 1998 by and among
American Cellular Corporation and each of the parties listed on
Exhibit A to such agreement.
10.12* Executive Agreement between American Cellular Corporation and Brian
McTernan, dated as of June 22, 1998.
10.13* Executive Agreement between American Cellular Corporation and John
Fujii, dated as of June 22, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.14* Subscription Agreement between American Cellular Corporation and James
J. Walter, Jr., dated as of June 25, 1998.
10.15* Subscription Agreement between American Cellular Corporation and
Janice P. Mercer, dated as of June 25, 1998.
10.16* Asset Purchase Agreement dated as of October 31, 1997 by and among
PriCellular Corporation, Kyle Cellular Corporation and Tennessee 04
Partners, L.P., as amended by Amendment No. 1 thereto dated as of
March 27, 1998.
10.17 Credit Agreement dated June 25, 1998, among American Cellular Wireless
LLC, as Borrower, and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, TD Securities (USA), Inc. and the
several other lenders parties thereto.(7)
10.18* Pledge and Escrow Agreement, dated as of May 13, 1998 by and between
American Cellular Corporation and Chase Manhattan Bank and Trust
Company, National Association.
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of American Cellular Corporation.
23.1* Consent of Latham & Watkins (included in their opinion filed as
Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Ernst & Young LLP
24.1* Power of Attorney of American Cellular Corporation.
25.1* Statement of Eligibility and Qualification (Form T-1) under the Trust
Indenture Act of 1939 of Chase Manhattan Bank and Trust Company,
National Association.
27.1 Financial Data Schedule.
99.1* Form of Letter of Transmittal and related documents to be used in
conjunction with the Exchange Offer.
99.2* Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
* Previously filed.
(1) Incorporated herein by reference to PriCellular Corporation's Schedule
14C, filed on June 3, 1998.
(2) Incorporated herein by reference to PriCellular Wireless Corporation's
Registration Statement on Form S-1, No. 33-95834.
(3) Incorporated herein by reference to PriCellular Corporation's Annual
Report on Form 10-K for the year ended December 31, 1996.
(4) Incorporated herein by reference to PriCellular Corporation's Registration
Statement on Form S-1, No. 33-85678.
(5) Incorporated herein by reference to PriCellular Corporation's Annual
Report on Form 10-K for the year ended December 31, 1995.
(6) Incorporated herein by reference to PriCellular Corporation's Schedule
13E-3, filed on May 22, 1998.
(7) Incorporated herein by reference to PriCellular Corporation's Amendment
No. 1 to Schedule 13E-3, filed on July 2, 1998.
(b) Financial Statement Schedules:
None.
II-3
<PAGE>
SCHEDULES OMITTED
Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information required
by such omitted schedules is set forth in the financial statements or the
notes thereto.
Item 22. Undertakings.
(a) The undersigned registrants hereby undertake that insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers and controlling persons of
the Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim of
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or the registrant in the successful defense of
any action, suit paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(b) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into this Prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d)(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement; (i) to include any
Prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the Prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement; (iii) to
include any material information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any material change to
such information in the Registration Statement;
(2) That, for purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 4 to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Schaumburg, Illinois on February 12, 1999.
AMERICAN CELLULAR CORPORATION
/s/ James J. Walter, Jr.
By: _________________________________
James J. Walter, Jr.
Vice President of Finance, Chief
Financial Officer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacity and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President and Director February 12, 1999
____________________________________ (Principal Executive
Brian McTernan Officer)
* Chief Executive Officer and February 12, 1999
____________________________________ Director
John Fujii
/s/ James J. Walter, Jr. Vice President of Finance, February 12, 1999
____________________________________ Chief Financial Officer and
James J. Walter, Jr. Secretary (Principal
Financial Officer and
Principal Accounting
Officer)
* Director February 12, 1999
____________________________________
Brion Applegate
* Director February 12, 1999
____________________________________
Glenn M. Creamer
* Director February 12, 1999
____________________________________
Jeffrey M. Lane
* Director February 12, 1999
____________________________________
Michael J. Marocco
* Director February 12, 1999
____________________________________
Kevin J. Maroni
* Director February 12, 1999
____________________________________
Mark A. Pelson
</TABLE>
- --------
*Signed under Power of Attorney dated August 4, 1998.
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1* Purchase Agreement, dated May 6, 1998, among American Cellular
Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, TD
Securities (USA), Inc. and Wasserstein Perella Securities, Inc.
relating to the 10 1/2% Senior Notes of American Cellular Corporation
due 2008.
2.1 Agreement and Plan of Merger, dated as of March 6, 1998, between
PriCellular Corporation and American Cellular Corporation, as amended
by Amendment No. 1 thereto, dated May 27, 1998.(1)
3.1* Restated Certificate of Incorporation dated August 5, 1998.
3.2* Amended and Restated Bylaws dated August 5, 1998.
4.1* Indenture, dated as of May 13, 1998, between American Cellular
Corporation and Chase Manhattan Bank and Trust Company, National
Association, as trustee, relating to $285,000,000 aggregate principal
amount of 10 1/2% Senior Notes due 2008.
4.2* Supplemental Indenture, dated as of June 25, 1998, by and between
American Cellular Corporation and Chase Manhattan Bank and Trust
Company, National Association.
4.3* Second Supplemental Indenture, dated as of September 15, 1998, by and
between American Cellular Corporation and Chase Manhattan Bank and
Trust Company, National Association.
4.4* Registration Rights Agreement, dated as of May 13, 1998, among
American Cellular Corporation and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, TD Securities (USA), Inc. and Wasserstein Perella
Securities, Inc.
4.5* Specimen Certificate of 10 1/2% Senior Notes due 2008 (the "Private
Notes") (included in Exhibit 4.1 hereto).
4.6* Specimen Certificate of 10 1/2% Senior Notes due 2008 (the "Exchange
Notes") (included in Exhibit 4.1 hereto).
5.1* Opinion of Latham & Watkins regarding the validity of the Exchange
Notes.
8.1* Opinion of Latham & Watkins regarding tax matters.
9.1 Voting Agreement, dated as of March 6, 1998, among American Cellular
Corporation, PriCellular Corporation, and the stockholders named
therein.(1)
10.1 Contribution Agreement by and among Texas/Illinois Cellular Limited
Partnership, a Delaware limited partnership, Southwestern Bell Mobile
Systems, Inc., a Delaware and Virginia corporation, PriCellular
Corporation, Cellular Information Systems of Laredo, Inc., a Texas
corporation, dated as of April 10, 1995.(2)
10.2 Asset Acquisition Agreement dated as of October 15, 1996 among
PriCellular, Cellular Information Systems of Florence, Inc. and
Horizon Cellular Telephone Company of Central Kentucky, L.P.(3)
10.3 Stockholders' Agreement dated as of April 28, 1995 by and among
PriCellular Corporation and the parties named therein.(4)
10.4 Voting Agreement dated as of December 28, 1995 by and among
PriCellular Corporation and the parties names therein.(5)
10.5 Operating Agreement dated as of April 28, 1994 by and between
PriCellular Corporation and McCaw.(4)
10.6 Warrant Agreement between PriCellular Corporation and Price
Communications Corporation.(3)
10.7 Spectrum Letter dated March 6, 1998.(6)
10.8 Consent and Waiver dated as of March 6, 1998 between PriCellular
Corporation and AT&T Wireless Services, Inc.(6)
10.9* Stock Purchase Agreement, dated as of March 5, 1998, by and among
American Cellular Corporation and each of the parties listed on
Exhibit A thereto, as amended as of March 31, 1998.
10.10* Stockholders Agreement, dated as of March 5, 1998, by and among
American Cellular Corporation and each of the parties listed on
Exhibit A thereto.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.11* Registration Rights Agreement dated as of March 5, 1998 by and among
American Cellular Corporation and each of the parties listed on
Exhibit A to such agreement.
10.12* Executive Agreement between American Cellular Corporation and Brian
McTernan, dated as of June 22, 1998.
10.13* Executive Agreement between American Cellular Corporation and John
Fujii, dated as of June 22, 1998.
10.14* Subscription Agreement between American Cellular Corporation and James
J. Walter, Jr., dated as of June 25, 1998.
10.15* Subscription Agreement between American Cellular Corporation and
Janice P. Mercer, dated as of June 25, 1998.
10.16* Asset Purchase Agreement dated as of October 31, 1997 by and among
PriCellular Corporation, Kyle Cellular Corporation and Tennessee 04
Partners, L.P., as amended by Amendment No. 1 thereto dated as of
March 27, 1998.
10.17 Credit Agreement dated June 25, 1998, among American Cellular Wireless
LLC, as Borrower, and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, TD Securities (USA), Inc. and the
several other lenders parties thereto.(7)
10.18* Pledge and Escrow Agreement, dated as of May 13, 1998 by and between
American Cellular Corporation and Chase Manhattan Bank and Trust
Company, National Association.
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of American Cellular Corporation.
23.1* Consent of Latham & Watkins (included in their opinion filed as
Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Ernst & Young LLP
24.1* Power of Attorney of American Cellular Corporation.
25.1* Statement of Eligibility and Qualification (Form T-1) under the Trust
Indenture Act of 1939 of Chase Manhattan Bank and Trust Company,
National Association.
27.1 Financial Data Schedule.
99.1* Form of Letter of Transmittal and related documents to be used in
conjunction with the Exchange Offer.
99.2* Form of Notice of Guaranteed Delivery.
</TABLE>
- --------
(1) Incorporated herein by reference to PriCellular Corporation's Schedule
14C, filed on June 3, 1998.
(2) Incorporated herein by reference to PriCellular Wireless Corporation's
Registration Statement on Form S-1, No. 33-95834.
(3) Incorporated herein by reference to PriCellular Corporation's Annual
Report on Form 10-K for the year ended December 31, 1996.
(4) Incorporated herein by reference to PriCellular Corporation's Registration
Statement on Form S-1, No. 33-85678.
(5) Incorporated herein by reference to PriCellular Corporation's Annual
Report on Form 10-K for the year ended December 31, 1995.
(6) Incorporated herein by reference to PriCellular Corporation's Schedule
13E-3, filed on May 22, 1998.
(7) Incorporated herein by reference to PriCellular Corporation's Amendment
No. 1 to Schedule 13E-3, filed on July 2, 1998.
* Previously Filed.
<PAGE>
EXHIBIT 12.1
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS (in thousands)
<TABLE>
<CAPTION>
AMERICAN
PRO FORMA CELLULAR
------------------------------------- --------------------
FOR THE PERIOD
NINE MONTHS YEAR ENDED FROM FEBRUARY 26,
ENDED DECEMBER 31, 1998 THROUGH
SEPTEMBER 30, 1998 1997 SEPTEMBER 30, 1998
------------------- --------------- --------------------
<S> <C> <C> <C>
Interest $ 82,822 $105,889 $ 33,865
Interest portion of
rent expense 872 1,139 291
Preferred stock
dividend requirement 30,136 40,790 11,069
-------- --------- --------
Fixed Charges $113,830 $ 147,818 $ 45,225
======== ========= ========
Consolidated pretax
loss from continuing
operations $(60,943) $(108,946) $(19,977)
Fixed charges per above 113,830 147,818 45,225
Preferred stock
dividend requirement (30,136) (40,790) (11,069)
-------- --------- --------
Earnings (Loss) $ 22,751 $ (1,918) $ 14,179
======== ========= ========
Ratio of Earnings to
Fixed Charges
</TABLE>
<TABLE>
<CAPTION>
PRICELLULAR
------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
1998 1997 1997 1996 1995 1994 1993
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest $37,757 $32,950 $ 67,392 $ 47,076 $22,953 $ 2,236 $ 458
Interest portion of
rent expense 581 674 1,139 793 292 47 32
Preferred stock
dividend requirement 3,357 3,240 6,540 6,178 -- -- --
------- ------- -------- -------- ------- ------- -------
Fixed Charges $41,695 $36,864 $ 75,071 $ 54,047 $23,245 $ 2,283 $ 490
======= ======= ======== ======== ======= ======= =======
Consolidated pretax
loss from continuing
operations $(6,286) $(5,015) $(13,631) $(23,043) $(7,711) $(1,440) $10,641
Fixed charges per above 41,695 36,864 75,071 54,047 23,245 2,283 490
Preferred stock
dividend requirement (3,357) (3,240) (6,540) (6,178) -- -- --
------- ------- -------- -------- ------- ------- -------
Earnings $32,052 $28,609 $ 54,900 $ 24,826 $15,534 $ 843 $11,131
======= ======= ======== ======== ======= ======= =======
Ratio of Earnings to
Fixed Charges 22.7
=======
</TABLE>
(1) The ratio of earnings to combined fixed charges and preferred stock
dividends is not meaningful for periods that result in a deficit. For the
PriCellular six months ended June 30, 1998 and 1997 and the years ended
December 31, 1997, 1996, 1995, and 1994 the deficit of earnings to combined
fixed charges and preferred stock dividends was $9,643, $8,255, $20,171,
$29,221, $7,711, $1,440 respectively. For the American Cellular period from
February 26, 1998 (date of formation) through September 30, 1998, the
deficit of earnings to combined fixed charges and preferred stock dividends
was $31,046. For the pro forma nine months ended September 30, 1998 and year
ended December 31, 1997, the deficit of earnings to combined fixed charges
and preferred stock dividends was $91,079 and $149,736 respectively.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 4 to the Registration Statement (Form S-4 No. 333-60639) and
related Prospectus of American Cellular Corporation for the registration of its
$285,000,000 10 1/2% Senior Notes due 2008 and to the inclusion therein of our
report dated January 22, 1998 (except for the third paragraph of Note 13 as to
which the date is March 10, 1998) with respect to the consolidated financial
statements and schedules of PriCellular Corporation.
/s/ ERNST & YOUNG LLP
New York, New York
February 11, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 4 to the Registration Statement (Form S-4 No. 333-60639) and
related Prospectus of American Cellular Corporation for the registration of its
$285,000,000 10 1/2% Senior Notes due 2008 and to the inclusion therein of our
report dated July 28, 1998, with respect to the financial statements of American
Cellular Corporation.
/s/ ERNST & YOUNG LLP
New York, New York
February 11, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> FEB-26-1998
<PERIOD-END> SEP-30-1998
<CASH> 37,042,079
<SECURITIES> 25,909,403
<RECEIVABLES> 32,844,143
<ALLOWANCES> 0
<INVENTORY> 1,285,833
<CURRENT-ASSETS> 99,564,775
<PP&E> 151,059,848
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,541,781,729
<CURRENT-LIABILITIES> 61,076,902
<BONDS> 0
0
334,069,480
<COMMON> 2,686
<OTHER-SE> 25,183,184
<TOTAL-LIABILITY-AND-EQUITY> 1,541,781,729
<SALES> 73,679,937
<TOTAL-REVENUES> 73,679,937
<CGS> 20,743,132
<TOTAL-COSTS> 63,786,797
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,865,143
<INCOME-PRETAX> (19,977,258)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,977,258)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
