<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE PERIOD FROM FEBRUARY 26, 1998 (DATE OF FORMATION) TO
DECEMBER 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER:
AMERICAN CELLULAR CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 22-3043811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1375 EAST WOODFIELD ROAD, SUITE 700
SCHAUMBURG, ILLINOIS 60173
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 995-8770
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this 10-K or any amendment
to this Form 10-K. [X]
The number of shares of Class A Common Stock, par value $.01 per share, and
Class B Common Stock, par value $.01 per share, of the Company outstanding as
of March 31, 1999 is approximately 250,000 and 19,387, respectively. There is
no trading market for the Common Stock of the Company. Accordingly, the
aggregate market value of the Common Stock held by non-affiliates of the
Company is not determinable. See Part II, Item 5 of this Annual Report on Form
10-K.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
American Cellular Corporation (the "Company" or "American Cellular") 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 a total population of approximately 4.9
million (referred to as "Net Pops"). The Company's licenses are grouped in
four main clusters of smaller Metropolitan Statistical Areas ("MSAs") and
strategically located Rural Service Areas ("RSAs") covering approximately
110,000 square miles. The Company markets all of its cellular products and
services under the name CELLULAR ONE(R), 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 network of independent dealers. The Company acquired
all of the operations of PriCellular Corporation, a Delaware corporation
("PriCellular"), for approximately $1.5 billion on June 25, 1998 (the
"Merger").
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 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
2
<PAGE>
the earlier 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 many 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 CELLULAR ONE(R) 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 dealers. 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
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 and billing administration in its
corporate offices, consolidated management responsibility within the market
clusters 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.
3
<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. Upon acquiring an FCC-licensed
cellular telephone system ("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.
<TABLE>
<CAPTION>
Date of
Market Total 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
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
DATE OF
MARKET TOTAL POPS OWNERSHIP NET POPS ACQUISITION
- ------ ---------- --------- --------- -----------
<S> <C> <C> <C> <C>
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
--------- ---------
Total................................ 4,892,000 4,869,085
========= =========
</TABLE>
The Company's Systems principally operate under the CELLULAR ONE(R) brand
name. The Company believes that the diversity of competitors operating under
various names and the Company's use of the CELLULAR ONE(R) 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.
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 Southwestern Joint Venture was consummated
on December 1, 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.
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 December 31, 1998, the Company had approximately
334,500 subscribers, or 6.8% penetration. Through the participation of its
non-wireline Systems in North American Cellular Network ("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 following table sets forth certain
information with respect to the performance of the Company's Systems owned as
of the dates indicated:
5
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Ending subscribers (1)................ 334,500 243,700 139,800 73,000 17,300
Ending penetration (2)................ 6.8% 5.3% 3.6% 2.0% 1.0%
Ending net pops (in millions)............ 4.9 4.6 3.9 3.6 1.8
Churn (3)............................. 1.8% 1.8% 1.6% 2.0% 2.7%
Average monthly revenue per subscriber
(4).................................. $ 65 $ 70 $ 82 $ 107 $ 123
Average marketing cost per net
subscriber addition (5).............. $ 458 $ 399 $ 371 $ 403 $ 497
</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 beginning 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.
Subscribers and System Usage
The Company's cellular subscribers have increased to approximately 334,500
as of December 31, 1998 from approximately 243,700 as of December 31, 1997 and
approximately 139,800 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 CELLULAR ONE(R), 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 CELLULAR ONE(R) 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. 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,
6
<PAGE>
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.
The Company's marketing strategy is designed to generate continued net
subscriber growth, 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 dealers.
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 use of an
internal sales force keeps marketing costs lower than when independent dealers
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 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 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, 1998, 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 upgraded 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. 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
7
<PAGE>
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 regions, 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 regions 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. 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 high traffic 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 CELLULAR ONE(R) 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 seven distinct operators, and in the Kentucky Cluster, the
Company competes against five distinct operators.
8
<PAGE>
The following chart lists the Company's cellular competitors in each of its
clusters and the major adjoining operators.
<TABLE>
<CAPTION>
COMPANY
CLUSTER COMPETITORS ADJOINING SYSTEMS
------- ------------------------------ -------------------------------
<S> <C> <C>
Upper Midwest
Cluster Air Touch Communications, Inc. AT&T
United States Cellular Corp. Western Wireless
CelluLink United States Cellular Corp.
Cellular 2000
CellCom
Century Telephone Enterprises
Rural Cellular Corp.
Mid-Atlantic
Cluster United States Cellular Corp. AT&T
Alltel Airtouch Communications Inc.
Ameritech Vanguard Cellular Systems, Inc.
Bell Atlantic Mobile ("Vanguard")
New York
Cluster Bell Atlantic Mobile Bell Atlantic Mobile
AT&T
Southwestern Bell
Vanguard
Kentucky
Cluster BellSouth Mobility GTE Corp.
Ramcell, Inc. United States Cellular Corp.
Bluegrass Cellular
United States Cellular Corp.
Alltel
</TABLE>
SERVICE MARKS
CELLULAR ONE(R) is a registered service mark with the U.S. Patent and
Trademark Office. The service mark is owned by Cellular One Group, a Delaware
general partnership of Cellular One Marketing, Inc., a subsidiary of
Southwestern Bell Mobile Systems, Inc., together with Cellular One
Development, Inc., a subsidiary of AT&T and Vanguard Cellular Systems, Inc.
The Company uses the CELLULAR ONE(R) 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 DEALERS
As of March 31, 1999, the Company had approximately 830 employees. In
addition, the Company has agreements with independent dealers, 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.
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"
9
<PAGE>
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.
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.
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.
10
<PAGE>
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 Regional Bell
Operating Companies ("RBOCs") are required to provide equal access. The FCC
also proposed requiring all Commercial Mobile Radio Service ("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 Telecommunications Act of 1996 (the "Telecom Act") was the first
legislation enacted in over 60 years attempting 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 stated goal was to
remove statutory, regulatory, and court-ordered barriers that historically
prohibited new entrants into many segments of the telecommunications industry.
Certain provisions of the Telecom Act were declared unconstitutional,
including several provisions relating to restrictions on RBOCs that were
deemed a bill of attainder, by the United States District Court in Wichita
Falls, Texas. That ruling was overturned on appeal, however, by the United
States Court of Appeals for the Fifth Circuit, and the Supreme Court declined
to review the ruling further.
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 CMRS
or landline carrier, or from a cellular carrier to another CMRS or landline
carrier. Implementation of regulations requiring portability of wireless
numbers, however, was recently postponed until November 2002.
In August 1996, the FCC released its decision implementing the
interconnection portions of the Telecom Act. The United States Court of
Appeals for the Eighth Circuit, however, reversed major portions of the FCC's
interconnection rules, by holding that the rules interfered with matters left
to the jurisdiction of the states by the Telecom Act. The Eighth Circuit's
decision was appealed to the United States Supreme Court, which reversed the
Eighth Circuit on most issues. The Supreme Court found that the FCC has
general jurisdiction to implement the Telecom Act's local competition
provisions and upheld much of the FCC's interconnection rules. It remanded to
the Eighth Circuit the issue of whether the FCC's interconnection pricing
rules were substantively rational and remanded to the FCC issues related to
local exchange carrier obligations to make unbundled network elements
available to competitors. The Eighth Circuit and Supreme Court decisions dealt
mainly with issues related to wireline carriers, rather than wireless
carriers. Nevertheless, the recognition by the Supreme Court of broader
federal jurisdiction over intrastate calling issues may have an impact on the
development of wireless policies at the federal and state level. The Company
cannot predict the eventual outcome of further judicial and administrative
review of the FCC's interconnection rules or the effect of the eventual
implementation of interconnection rules by the FCC. Nevertheless, pursuant to
the provisions of the Telecom Act, the Company has taken advantage of
provisions of the Act and renegotiated many of its interconnection agreements
with incumbent local exchange carriers, thereby reducing the cost of
interconnection with the local telephone facilities.
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
11
<PAGE>
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, most of which
have survived judicial challenge.
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
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.
12
<PAGE>
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.
ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any pending legal proceedings that
individually, or in the aggregate, are material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters where submitted to a vote of security holders during the fiscal
quarter ended December 31, 1998.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established trading market for any class of equity securities
of the Company.
ITEM 6. SELECTED FINANCIAL INFORMATION
The following selected historical financial data is not necessarily
indicative of future results of operations. The selected financial data for
American Cellular for the period ended and as of December 31, 1998, is derived
from and qualified by reference to the audited consolidated financial
statements included elsewhere herein. The PriCellular selected financial data
for the six months ended June 30, 1998 and the years ended December 31, 1997
and 1996 and as of June 30, 1998 and December 31, 1997, 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, 1995 and 1994 and as of December 31, 1996, 1995 and
1994 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 26,1998
(DATE OF FORMATION) SIX MONTHS YEAR ENDED DECEMBER 31,
THROUGH ENDED ------------------------------------
DECEMBER 31, 1998 JUNE 30, 1998 1997 1996 1995 1994
------------------- ------------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $137,487 $108,670 $181,000 $112,616 $41,504 $ 5,209
Cost of cellular
service................ 25,995 20,911 48,691 29,571 10,694 1,892
Cost of equipment sold.. 7,271 5,365 12,841 10,073 4,951 814
-------- -------- -------- -------- ------- -------
Gross margin............ 104,221 82,394 119,468 72,972 25,859 2,503
Selling, general and
administrative......... 37,625 30,230 53,485 34,502 16,512 6,005
Depreciation and
amortization........... 45,569 17,553 28,759 19,537 10,337 2,720
Non-recurring charges... 4,355 4,889 -- -- -- --
-------- -------- -------- -------- ------- -------
Operating income
(loss)................. 16,672 29,722 37,224 18,933 (990) (6,222)
Gain (loss) on sale of
investments in cellular
operations............. -- (133) 8,423 (1,401) 11,598 6,819
Interest expense, net... (56,441) (37,385) (62,528) (42,201) (18,839) (1,940)
Other income (expense),
net.................... (100) 1,510 3,250 1,626 520 (97)
-------- -------- -------- -------- ------- -------
Loss before provision
for income taxes....... (39,869) (6,286) (13,631) (23,043) (7,711) (1,440)
Provision for income
taxes.................. (530) -- -- -- -- --
-------- -------- -------- -------- ------- -------
Net loss................ $(40,399) $ (6,286) $(13,631) $(23,043) $(7,711) $(1,440)
======== ======== ======== ======== ======= =======
Ratio of earnings to
combined fixed charges
and preferred stock
dividends (a).......... -- -- -- -- -- --
Deficiency of earnings
to combined fixed
charges and preferred
stock dividends (a).... $(61,244) $ (9,643) $(20,171) $(29,221) $(7,711) $(1,440)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AMERICAN
CELLULAR PRICELLULAR (PREDECESSOR)
--------- --------------------------------
AS OF DECEMBER 31,
------------------------------------------
1998 1997 1996 1995 1994
--------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 32,373 $44,518 $89,749 $116,415 $26,488
Net fixed assets................... 159,792 104,854 73,327 52,041 26,144
Total assets....................... 1,517,600 747,656 735,816 544,766 215,744
Long-term debt..................... 1,195,971 568,323 524,517 315,216 113,683
Total liabilities.................. 1,254,231 613,476 555,897 339,038 137,508
Stockholders' equity............... 263,369 134,180 179,919 205,728 78,236
</TABLE>
- --------
(a) The ratio of earnings to combined fixed charges and preferred stock
dividends is determined by dividing the sum of 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.
ITEM 7. 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 Annual Report on Form 10-K (the
"Report").
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 (the "Merger Agreement") 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 principles.
The results of operations of American Cellular include the operations of
PriCellular from July 1, 1998. The results of operations of American Cellular
do not differ materially than if the actual closing date of the Merger had
been used.
American Cellular accounted for the Merger using purchase 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 results.
Specifically, the results of operations of American Cellular for the period
ended December 31, 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 year ended December 31, 1997.
15
<PAGE>
RESULTS OF OPERATIONS OF AMERICAN CELLULAR
General
The year ended December 31, 1998 reflects the continuing financial growth
of the Company's operations. Net subscriber additions, excluding subscribers
acquired in acquisitions, approximated 79,600 for the year ended December 31,
1998 compared to approximately 82,000 in 1997. The Company ended the current
year with approximately 334,500 subscribers resulting in penetration of 6.8%
compared to approximately 243,700 subscribers and a penetration rate of 5.3%
at December 31, 1997. The Company experienced a churn rate of 1.8% for both
years.
Combined Year Ended December 31, 1998 Compared to the Year Ended December 31,
1997
<TABLE>
<CAPTION>
AMERICAN CELLULAR
PERIOD FROM
FEBRUARY 26, 1998 PRICELLULAR
(DATE OF FORMATION) SIX MONTHS COMBINED YEAR PRICELLULAR YEAR
THROUGH ENDED ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1998 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------- ----------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues................ $137,487 $108,670 $246,157 $181,000
Cost of cellular
service................ 25,995 20,911 46,906 48,691
Cost of equipment sold.. 7,271 5,365 12,636 12,841
Selling, general and
administrative......... 37,625 30,230 67,855 53,485
Depreciation and
amortization........... 45,569 17,553 63,122 28,759
Non-recurring charges... 4,355 4,889 9,244 --
-------- -------- -------- --------
Operating income........ 16,672 29,722 46,394 37,224
Gain (loss) on sale of
investments in cellular
operations............. -- (133) (133) 8,423
Interest expense, net... (56,441) (37,385) (93,826) (62,528)
Other income............ (100) 1,510 1,410 3,250
Provision for income
taxes.................. (530) -- (530) --
-------- -------- -------- --------
Net loss................ $(40,399) $ (6,286) $(46,685) $(13,631)
======== ======== ======== ========
</TABLE>
Revenues increased from $181.0 million in 1997 (consisting of $99.9 million
of subscriber service revenue, $51.0 in roaming revenue, $17.5 million in toll
revenue, $5.4 million of equipment sales and $7.2 million of other) to $246.2
million in 1998 (consisting of $138.6 million of subscriber service, $61.6
million in roaming revenue, $31.5 million in toll revenue, $6.6 million of
equipment sales and $7.9 million of other). The increase represents the
continuing growth in the cellular industry impacting both subscriber and
roaming revenues and the acquisition of the Tennessee 4 RSA which provided an
additional $19.9 million in revenue in 1998.
Total costs and expenses increased from $143.8 million in 1997 (consisting
of $48.7 million for cellular service, $12.8 million for cost of equipment
sold, $53.5 million for selling, general and administrative expense and $28.8
million for depreciation and amortization) to $199.8 million in 1998
(consisting of $46.9 million for cellular service, $12.7 million for cost of
equipment sold, $67.9 million for selling, general and administrative expense,
$63.1 million for depreciation and amortization and $9.2 million for non-
recurring costs). The cost of cellular service for the year ended 1998 totaled
$51.4 million before elimination of intracompany service compared to $48.7
million for 1997. This $2.7 million increase reflects the growth in the
business in 1998. The net cost of cellular service in 1998 totaled $46.9
million and reflects the elimination of $4.5 million of intracompany service.
Comparable intracompany data for periods prior to the Merger is not available.
The decrease in cost of equipment sold represents a 14% reduction in equipment
cost offset by higher sales volumes. The increase in selling, general and
administrative expense reflects the growth in the business noted above.
Depreciation and amortization increased from $28.8 million in 1997 to $63.1
million in 1998, primarily due to amortization of the goodwill established in
the Merger. Non-recurring charges for American Cellular relate to
16
<PAGE>
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.
The increase in interest expense from $62.5 million in 1997 to $93.8
million in 1998 is primarily the result of the acquisition of PriCellular by
American Cellular and the related financing.
The 1997 gain on sale of investments in cellular operations resulted from
the sale in January 1997 of the Florence AL MSA and AL-1B RSA.
Other income decreased to $1.4 million in 1998 from $3.3 million in 1997,
principally due to the amortization of the covenant not to compete that was
fully amortized in 1997.
Income tax expense increased to $.5 million in 1998, reflecting current
state income tax provisions.
Results of Operations of PriCellular
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 cellular service, $12.8 million for cost of equipment sold,
$53.5 million for selling, general and administrative expense 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 10.25% 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.
Liquidity and Capital Resources
Cash Flows
As of December 31, 1998, the Company had approximately $34.0 million of
cash and cash equivalents and approximately $32.4 million of working capital.
Net cash generated by operations was approximately $35.3
17
<PAGE>
million. Cash used in investing activities was approximately $1.5 billion.
Approximately $1.4 billion represents the purchase of PriCellular, net of cash
acquired, $69.7 million represents the net purchase of U.S. Treasury
investments held in escrow, and $24.3 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 ("EBITDA"),
which excludes non-recurring charges and gain (loss) on sale of investments in
cellular operations, amounted to $120.2 million for combined 1998 compared to
$69.2 million for 1997 or an increase of 74%. 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.
The Company borrowed $916 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 (0.625% for
the Revolver and Tranche A, 1.50% for Tranche B and 1.75% for Tranche C) or
LIBOR plus the applicable margin for each tranche (1.625% for the Revolver and
Tranche A, 2.50% for Tranche B and 2.75% for Tranche C), based on the
Company's consolidated leverage ratio. As of December 31, 1998, the interest
rates applicable on the tranches of the Credit Facility ranged from
approximately 7.41% to 8.78%, yielding a weighted average rate of 7.9%. 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.
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 Revolver Loan of the Credit Facility, and restricted
securities. In addition, the first six scheduled interest payments on the
10 1/2% Senior Notes due 2008 (the "Notes") issued in May, 1998, will be met
from the deposit of a portion of the proceeds from the sale of the Notes. At
December 31, 1998, the Company had $84 million available under the Revolver 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 fiscal 1999, the Company intends to fund its interest obligations,
capital expenditures and working capital requirements with cash flows from
operations, borrowings under the Revolver 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.
18
<PAGE>
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 1999 calendar year, American Cellular
anticipates that it will spend an aggregate of approximately $53 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's Year 2000 issue is primarily the result of the Company's
reliance on third party vendors for the major systems integral to its
operations. These systems include all hardware and software directly related
to the Company's cellular networks, interconnect systems which provide for the
delivery of data and voice messaging between the Company's networks and
networks of other carriers, information management systems that provide
customer support and billing functionality, and other administrative systems
that support the operations. The Company is also reliant upon third party
manufacturers that provide cellular telephone equipment and accessories that
are sold to the Company's subscribers. The Company is working with its vendors
to ensure Year 2000 compliance of these systems. However, if required
modifications to these systems are not completed, the Year 2000 issue could
have a material impact on the operations of the Company.
Status of Becoming Year 2000 Compliant
The Company's Year 2000 readiness program involves the following four
phases: system assessment, remediation, testing and implementation. To date,
the Company has substantially completed its assessment of all systems that
could be significantly affected by the Year 2000 issue. The assessment
indicated all of the systems could be affected because of the heavy reliance
on information technology products and services. The assessment also indicated
that hardware and software used in administrative operations are also at risk.
The Company has been gathering information about the Year 2000 compliance
status of its vendors that support these systems. The Company's vendors are at
various stages in their Year 2000 compliance programs, and there is no
assurance that each vendor will achieve its goals. Additionally, the Company
has identified all carriers that provide direct interconnect services for
local or long distance telephone services and requested certification as to
Year 2000 compliance, however, there is no assurance that the Company will be
able to test these systems beyond the representations of these carriers.
While management considers that the assessment phase of the Company's Year
2000 program is substantially completed, the Company will continue to review
all areas of operations to identify any other potential Year 2000 issues. In
addition, any new system that may be implemented during the remainder of the
year will be evaluated for Year 2000 compliance prior to the deployment of the
system.
In the remediation phase, the Company is determining the Year 2000
compliance status of each component of each system identified as a risk during
the assessment phase. This process includes contacting each vendor and
obtaining representations regarding the Year 2000 compliance of that vendor's
products as it impacts the Company's systems. In the event that a product is
determined to be non-compliant, the Company is requesting information as to
the vendor's procedures to bring the product into compliance. The Company's
vendors are at various stages in their Year 2000 compliance programs, and
there is no assurance that each vendor will achieve
19
<PAGE>
its goals. This phase is approximately 50% completed overall and is expected to
be 100% completed by July, 1999.
In the testing phase, the Company is performing its own evaluation of Year
2000 compliance and, to the extent possible, testing each system or component
in a forward date environment to insure compliance of the system. Although the
Company can verify Year 2000 compliance of its systems in this fashion, the
complexity and variability of systems to which the Company interconnects
prohibits the testing of the telecommunications network as a whole. For
example, the failure of a local power grid or local exchange carrier as a
result of a Year 2000 event will adversely affect the performance of the
Company's cellular network. This phase is approximately 27% completed overall
and is expected to be 100% completed by July, 1999.
The implementation phase involves the deployment of Year 2000 compliant
software upgrades and patches into the operating systems, the development of
contingency plans and work around procedures for those systems found to be non-
compliant and the replacement of non-compliant hardware and software used in
administrative support functions. This phase is approximately 27% completed
overall and is expected to be 100% completed by September, 1999.
No systems that are considered to be material to the operations and that are
not expected to be Year 2000 compliant have been identified. Set forth below is
a table of the various systems of the Company and the level of completion of
each of the phases of the Company's Year 2000 readiness program with respect to
such systems.
COMPLIANCE PROGRAM PHASE
<TABLE>
<CAPTION>
SYSTEMS Assessment Remediation Testing Implementation
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cellular 95% Completed 53% Completed 50% Completed 50% Completed
Networks
Expected Expected Expected Expected
Completion Date Completion Date Completion Date Completion Date
April, 1999 May, 1999 July, 1999 September, 1999
- -----------------------------------------------------------------------------------------
Interconnect 100% Completed 38% Completed 0% Completed 23% Completed
Systems
Expected Expected Expected
Completion Date Completion Date Completion Date
July, 1999 Not Applicable September, 1999
- -----------------------------------------------------------------------------------------
Information 100% Completed 58% Completed 24% Completed 24% Completed
Management
Systems Expected Expected Expected
Completion Date Completion Date Completion Date
April, 1999 June, 1999 July, 1999
- -----------------------------------------------------------------------------------------
Other 95% Completed 52% Completed 12% Completed 12% Completed
Administrative
Systems Expected Expected Expected Expected
Completion Date Completion Date Completion Date Completion Date
April, 1999 June, 1999 July, 1999 September, 1999
</TABLE>
20
<PAGE>
Costs Related to Year 2000 Compliance
The Company will utilize internal resources in completing its Year 2000
readiness plan. Company personnel are assigned specific tasks relating to Year
2000 compliance on the basis of technical skill and availability. The Company
does not account for the time spent on Year 2000 compliance as a separate item
as these costs are not incremental to the operations. The Company has budgeted
for software upgrade costs relating to vendor software of approximately
$100,000. The Company also anticipates an additional $100,000 required to
replace administrative hardware and software that are not Year 2000 compliant.
As of March 31, 1999, actual expenditures for these items were insignificant.
Risks Associated with Year 2000 Issues
Management believes that it has an effective program in place to resolve
those Year 2000 issues in which it can exert significant influence. As noted
in the table above, the program is not yet completed. In the event the Company
does not complete the additional phases of the program, the Company would be
unable to provide cellular telephone service, invoice customers or collect
payments. Disruption of cellular service would also negatively impact customer
satisfaction, which may impact future sales and growth of the operations. In
addition, disruptions in the economy generally resulting from Year 2000 issues
could materially adversely affect the Company. The amount of potential
liability or lost revenue to the Company cannot be reasonably estimated at
this time.
Year 2000 Contingency Plans
The Company is in the process of developing contingency plans with its
primary vendors for cellular network operations and information management
services. These plans include detail recovery plans, vendor contacts and work
around procedures upon the occurrence of a Year 2000 event. The Company will
continue to evaluate the necessity and adequacy of its contingency plans as
additional information relating to the Year 2000 readiness of its vendors
becomes available.
Year 2000 Forward-Looking Statements
The foregoing Year 2000 discussions contain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements, including without limitation, anticipated costs and dates by
which the Company expects to complete certain actions, are based on
management's best current estimates, which are derived utilizing numerous
assumptions about future events, including continued availability of certain
resources, representations derived from third parties and other factors.
However, there can be no guarantee that these estimates will be achieved, and
the actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not
limited to, the ability to identify and remediate all relevant information
technology and non-information technology systems, results of Year 2000
testing, adequate resolution of Year 2000 issues by business and other third
parties who are service providers, suppliers or customers of the Company,
unanticipated system costs, the adequacy of and the ability to develop and
implement contingency plans and similar uncertainties. The "forward-looking
statements" made in the foregoing Year 2000 discussion speak only as to the
date such statements are made, and the Company undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. The foregoing information constitutes a Year 2000
readiness disclosure under the Year 2000 Information and Readiness Disclosure
Act.
UNCERTAINTIES ASSOCIATED WITH FORWARD LOOKING STATEMENTS
American Cellular has made in this Report, 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 may include: (i) the
Company's high degree of
21
<PAGE>
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 will be managed by a new team
of senior management; (v) that members of the Company's management have other
commitments; (vi) competition from the other cellular operator in the
Company's clusters or from other technologies; (vii) that new Systems and
Systems recently acquired may not perform as expected; (viii) that the
telecommunications industry is subject to rapid and significant changes in
technology; (ix) that the Company relies upon the registered service mark
CELLULAR ONE(R) to market the services of its non-wireline systems; (x) that
there is potential for adverse regulatory change and the need for renewal of
cellular licenses; (xi) fluctuations in market value of licenses; (xii)
equipment failure or natural disaster; (xiii) concerns about RF emissions;
(xiv) the costs associated with the unauthorized use of the Company's network;
(xv) that the Indenture governing the Notes imposes significant operating and
financial restrictions on the Company; and (xvi) 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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are affected by changes in short-term interest rates
as a result of its borrowings under the Credit Facility. Credit Facility
interest payments are determined by the outstanding indebtedness and the spot
LIBOR rate at the beginning of the period in which interest is computed,
generally at the beginning of each quarter. LIBOR is adjusted for an
applicable margin based on the Company's financial ratios. The Company also
has fixed rate debt under the Senior Notes at 10.5%. As part of its risk
management program, the Company utilizes interest rate swap and collar
agreements to hedge variable rate interest risk on the Credit Facility. The
following table provides information about the Company's long-term debt and
derivative financial instruments that are sensitive to changes in interest
rates (in millions):
<TABLE>
<CAPTION>
Fair
Market
1999 2000 2001 2002 2003 Thereafter Total Value
------ ------ ------ ----- ----- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maturities of long-term
debt
Variable rate........... $ 3.0 $ 4.0 $ 49.0 $49.0 $71.5 $739.5 $916.0 $916.0
Fixed rate.............. -- -- -- -- -- $283.0 $283.0 $276.5
Interest rate derivative
financial instruments
related to debt
Interest rate swap
Notional amounts
outstanding at
beginning of year...... $100.0 $ 93.8 $ 87.5 -- -- -- -- $ (1.8)
The interest rate swap effectively locks the related notional amount of the
Company's Credit Facility borrowings at 5.84%.
Interest rate collars
Notional amounts
outstanding at
beginning of year...... $700.0 $693.8 $687.5 -- -- -- -- $ (9.8)
</TABLE>
The interest rate collars effectively lock $600 million of the Company's
Credit Facility borrowings between 5.6% and 6.0% and the remaining notional
amount is locked between 5.38% and 6.0%.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included in "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 10-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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
---- --- --------
<C> <C> <S>
Brian McTernan.............. 51 President and Director
John Fujii (1).............. 48 Chief Executive Officer and Director
James J. Walter, Jr......... 48 Vice President of Finance, Chief Financial
Officer and Secretary
Janice P. Mercer............ 50 Executive Vice President--Operations
Stephen J. Easley........... 41 Vice President for External Affairs and
General Counsel
Keith E. Mathews............ 39 Vice President, Controller and Assistant
Secretary
Salvatore A. Butindaro...... 52 Vice President and Treasurer
Brion Applegate (1, 3)...... 45 Director
Glenn M. Creamer (1, 3)..... 37 Director
Jeffrey M. Lane (2)......... 43 Director
Michael J. Marocco (3)...... 40 Director
Kevin J. Maroni (2)......... 36 Director
Mark A. Pelson (2).......... 37 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. From 1989 to 1994 he served as an officer for various
subsidiaries of Crowley. From 1994 to 1995, he was the Vice President and
Controller for Mid-South. Mr. Walter 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 13 years. From 1988 to 1992, Ms. Mercer
served as General Manager at Crowley. From January of 1992 to September of
1992, Ms. Mercer served as General Manager at McCaw and from 1992 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 Senior 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. Easley served as Senior Counsel at MCI Communications
Corporation.
24
<PAGE>
Keith E. Mathews. Mr. Mathews served as Senior Tax Manager for Arthur
Andersen & Co. for twelve years prior to joining American Cellular. During his
employment with Arthur Anderson & Co., he served as the tax and business
consultant for the various subsidiaries of Crowley from 1989 to 1994, and the
tax and business consultant for Mid-South from 1994 to 1995.
Salvatore A. Butindaro. Mr. Butindaro has been involved in the
telecommunications industry for the past 16 years. From 1983 to 1988, Mr.
Butindaro served as Director of Customer Services at Metromedia Inc. for its
paging, cellular and long-distance business entities. From 1989 to 1995, Mr.
Butindaro served in various director level positions at Telephone and Data
Services, Inc. in both its United States cellular and aerial operating
entities. Prior to joining American Cellular, he served as Vice President of
Customer Service at Palmer Wireless Communications from 1996 to 1998.
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 Kestrel Solutions, Inc., LiveWire
Systems, L.L.C., Network Access Solutions, Inc., Nassau Broadcasting Partners,
L.P., Apex Site Management, Inc., 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 International S.A., 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 Managing Director of Sandler
Capital Management since 1989. Prior to joining Sandler Capital, he was a Vice
President of Investment Banking at Morgan Stanley Dean Witter specializing in
media and communications companies. He serves as a director for Source Media,
Inc.
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. Mr. Maroni serves as a
director of PathNet, Inc., WNP Communications, Inc., Formus Communications,
Inc. and CTC Communications Corp.
Mark A. Pelson. Mr. Pelson is a Principal 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 serves as a
director of Carrier1 International S.A., Madison River Telephone Company, Inc.
and Wired Ventures, 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
25
<PAGE>
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.
MANAGEMENT INCENTIVE PLAN
Each of Messrs. Fujii (through a family partnership) and McTernan is a
party to the Stock Purchase Agreement, pursuant to which each has purchased
1,250 shares of Class A Common Stock, par value $.01 per share, of the Company
("Class A Common Stock") for $125,000 and 16,250 shares of Series A Preferred
Stock, par value $.01 per share, of the Company ("Series A Preferred Stock")
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, par
value $.01 per share ("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 and Mr. Butindaro each 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.
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
26
<PAGE>
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.
ITEM 11. EXECUTIVE COMPENSATION
1998 COMPENSATION
The following table sets forth the compensation paid by the Company to its
Chief Executive Officer and each of the four other highest paid executive
officers of the Company during the period presented:
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------- -----------------------------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARD(S) SARS (#) PAYOUTS COMPENSATION
- --------------------------- ---- -------- ----- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brian McTernan .......... 1998 $203,125 $ -- $ -- $ -- -- $ -- $ --
President and Director
John Fujii .............. 1998 203,125 -- -- -- -- -- --
Chief Executive Officer
and Director
James J. Walter, Jr...... 1998 78,125 -- -- -- -- -- --
Vice President of
Finance
Janice P. Mercer......... 1998 111,860 -- -- -- -- -- --
Executive Vice President
of Operations
Stephen J. Easley ....... 1998 175,000 -- -- -- -- -- --
Vice President for
External Affairs and
General Counsel
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Class A Common Stock as of March 31,
1999 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.
27
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
NAME AND ADDRESS OWNERSHIP(1) 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 11.5
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 *
Salvatore A. Butindaro (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
(thirteen 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 One
International Plaza, 29th Floor, 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.
(4) Shares in an amount of 28,215 held by five limited partnerships, the
general partner of which is Sandler Investment Partners, L.P., and shares
in an amount of 3,928 held by affiliated co-investors. The address for
Sandler Investment Partners, L.P. and Mr. Marocco is 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.
28
<PAGE>
(10) The address for Messrs. Fujii, McTernan, Walter, Easley, Mathews and
Butindaro and Ms. Mercer is c/o American Cellular Corporation, 1375 East
Woodfield Road, Suite 700, Schaumburg, IL 60173.
(11) As general partners of Spectrum Equity Associates 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 Principal 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 (through the Fujii Family Partnership L.P.) 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, Mr.
Salvatore A. Butindaro and Ms. Janice P. Mercer own 1,000, 250, 600, 600
and 1,500 shares, respectively, of Class B Common Stock. See
"Management--Management Incentive Plan."
Item 13. 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 Steven 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 (the
"Voting 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
contribution of equity (the "Equity Contribution"), certain institutional
investors (the "Equity Investors") and American Cellular entered into a Stock
Purchase Agreement, an Equity Investor Registration Rights Agreement and a
Stockholders Agreement.
29
<PAGE>
On March 5, 1998, American Cellular and the Equity Investors entered into a
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"). 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 bear
interest at an annual rate of 6.0% 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 upon the occurrence of certain events, subject in certain
circumstances to extension upon the satisfaction of certain conditions.
Customer Information Management and Billing Services
The Company obtains customer information management and billing services
from a vendor under the terms of a license agreement. Messrs. Applegate and
Maroni, who are each a director of the Company, have an indirect and
noncontrolling ownership interest in this vendor. Since June 25, 1998,
services provided to the Company pursuant to this license agreement totalled
approximately $4.9 million.
Roaming Arrangements
Mr. Creamer, a director of the Company, is also a director of Wireless One
Network L.P. ("Wireless One"), a cellular provider. The Company and Wireless
One have entered into industry standard roaming agreements which allow
subscribers of the Company and Wireless One to roam in the markets of the
other.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) Documents filed as part of this Report:
1. The following financial statements for the Company and PriCellular
are included as part of this Report:
<TABLE>
<S> <C>
See Index to Financial Statements Page F-1
</TABLE>
2. The following financial statement schedules for the Company and
PriCellular are included as part of this Report:
<TABLE>
<S> <C>
See Index to Financial Statements Page F-1
</TABLE>
30
<PAGE>
All other schedules have been omitted since the required information
is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the
financial statements.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
The exhibits listed in the accompanying index to exhibits are filed as
part of this Report.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AMERICAN CELLULAR CORPORATION
Registrant
Dated: April 2, By: /s/ James J. Walter, Jr.
1999 __________________________________
James J. Walter, Jr.
Vice President of Finance, Chief
Financial Officer and Secretary
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons in the capacity and on the dates
indicated.
SIGNATURE TITLE DATE
/s/ Brian McTernan President and Director April 2, 1999
- --------------------------------- (Principal Executive
Brian McTernan Officer)
/s/ John Fujii Chief Executive Officer April 2, 1999
- --------------------------------- and Director
John Fujii
/s/ James J. Walter, Jr. Vice President of Finance, April 2, 1999
- --------------------------------- Chief Financial Officer
James J. Walter, Jr. and Secretary
/s/ Brion Applegate Director April 2, 1999
- ---------------------------------
Brion Applegate
/s/ Glenn M. Creamer Director April 2, 1999
- ---------------------------------
Glenn M. Creamer
/s/ Jeffrey M. Lane Director April 2, 1999
- ---------------------------------
Jeffrey M. Lane
/s/ Michael J. Marocco Director April 2, 1999
- ---------------------------------
Michael J. Marocco
/s/ Kevin J. Maroni Director April 2, 1999
- ---------------------------------
Kevin J. Maroni
/s/ Mark A. Pelson Director April 2, 1999
- ---------------------------------
Mark A. Pelson
32
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- ------------------------------------------------------------------------------------
<C> <S>
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.(2)
3.2 Amended and Restated By-Laws, dated August 5, 1998.(2)
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.(2)
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.(2)
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.(2)
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.(2)
4.5 Specimen Certificate of 10 1/2% Senior Notes due 2008 (the "Private Notes")
(included in Exhibit 4.1 hereto).(2)
4.6 Specimen Certificate of 10 1/2% Senior Notes due 2008 (the "Exchange Notes")
(included in Exhibit 4.1 hereto).(2)
9.1 Voting Agreement, dated as of March 6, 1998, among American Cellular Corporation,
PriCellular Corporation, and the shareholders 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.(3)
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.(4)
10.3 Stockholders' Agreement, dated as of April 28, 1995, by and among PriCellular
Corporation and the parties named therein.(5)
10.4 Voting Agreement, dated as of December 28, 1995, by and among PriCellular
Corporation and the parties names therein.(6)
10.5 Operating Agreement, dated as of April 28, 1994, by and between PriCellular
Corporation and McCaw.(5)
10.6 Warrant Agreement between PriCellular Corporation and Price Communications
Corporation.(3)
10.7 Spectrum Letter, dated March 6, 1998.(7)
10.8 Consent and Waiver, dated as of March 6, 1998, between PriCellular Corporation and
AT&T Wireless Services, Inc.(7)
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.(2)
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.(2)
10.11 Registration Rights Agreement, dated as of March 5, 1998, by and among the American
Cellular Corporation and each of the parties listed on Exhibit A to such
agreement.(2)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- ------------------------------------------------------------------------------------
<C> <S>
10.12 Executive Agreement between American Cellular Corporation and Brian McTernan, dated
as of June 22, 1998.(2)
10.13 Executive Agreement between American Cellular Corporation and John Fujii, dated as
of June 22, 1998.(2)
10.14 Subscription Agreement between American Cellular Corporation and James J. Walter,
Jr., dated as of June 25, 1998.(2)
10.15 Subscription Agreement between American Cellular Corporation and Janice P. Mercer,
dated as of June 25, 1998.(2)
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.(2)
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.(8)
12.1 Statement of Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends.
21.1 Subsidiaries of American Cellular Corporation.(2)
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated herein by reference to PriCellular Corporation's Schedule
14C, filed on June 3, 1998.
(2) Incorporated herein by reference to American Cellular Corporation's
Registration Statement on Form S-4 (File No. 333-60639).
(3) Incorporated herein by reference to PriCellular Wireless Corporation's
Registration Statement on Form S-1 (File No. 33-95834).
(4) Incorporated herein by reference to PriCellular Corporation's Annual
Report on Form 10-K for the year ended December 31, 1996.
(5) Incorporated herein by reference to PriCellular Corporation's Registration
Statement on Form S-1 (File No. 33-85678).
(6) Incorporated herein by reference to PriCellular Corporation's Annual
Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated herein by reference to PriCellular Corporation's Schedule
13E-3, filed on May 22, 1998.
(8) Incorporated herein by reference to PriCellular Corporation's Amendment
No. 1 to Schedule 13E-3, filed on July 2, 1998.
34
<PAGE>
Index to Financial Statements
American Cellular Corporation and Subsidiaries
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheet--December 31, 1998............................. F-3
Consolidated Statement of Operations--February 26, 1998 to December 31,
1998..................................................................... F-4
Consolidated Statement of Stockholders' Equity--February 26, 1998 to
December 31, 1998........................................................ F-5
Consolidated Statement of Cash Flows--February 26, 1998 to December 31,
1998..................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Financial Statement Schedules
Schedule I--Condensed Financial Information of Registrant............... F-15
Schedule II--Valuation and Qualifying Accounts.......................... F-19
</TABLE>
PriCellular Corporation and Subsidiaries
<TABLE>
<S> <C>
Report of Independent Auditors............................................. F-20
Consolidated Balance Sheets--June 30, 1998 and December 31, 1997........... F-21
Consolidated Statements of Operations--Six Months Ended June 30, 1998 and
Years Ended December 31, 1997 and 1996.................................... F-22
Consolidated Statements of Stockholders' Equity--Six months Ended June 30,
1998 and Years Ended December 31, 1997 and 1996........................... F-23
Consolidated Statements of Cash Flows--Six Months Ended June 30, 1998 and
Years Ended December 31, 1997 and 1996.................................... F-24
Notes to Consolidated Financial Statements................................. F-26
Financial Statement Schedules
Schedule I--Condensed Financial Information of Registrant................ F-37
Schedule II--Valuation and Qualifying Accounts........................... F-41
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Cellular Corporation
We have audited the consolidated balance sheet of American Cellular
Corporation and subsidiaries (the Company) as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period from February 26, 1998 (Date of Formation) to December
31, 1998. Our audit 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of American Cellular Corporation and subsidiaries at December 31, 1998, and
the consolidated results of its operations and its cash flows for the period
from February 26, 1998 (Date of Formation) to December 31, 1998, 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
Chicago, Illinois
March 15, 1999
F-2
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 34,015
Restricted short-term investments............................. 26,550
Accounts receivable, net of allowance for doubtful accounts of
$2,084....................................................... 26,494
Inventories................................................... 2,005
Prepaids and other current assets............................. 1,569
----------
Total current assets............................................ 90,633
Cellular facilities, equipment, and other, net.................. 159,792
Other assets.................................................... 1,267,175
----------
Total assets.................................................... $1,517,600
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................. $ 3,000
Accounts payable.............................................. 6,022
Interest payable.............................................. 22,061
Accrued operating expenses.................................... 14,749
Income and other taxes payable................................ 3,398
Deferred revenue.............................................. 6,170
Other current liabilities..................................... 2,860
----------
Total current liabilities....................................... 58,260
Long-term debt.................................................. 1,195,971
Stockholders' equity:
Series A cumulative redeemable preferred stock, $0.01 par
value, net of $2,000 notes receivable from stockholders;
authorized 500,000 shares; 325,000 shares issued and
outstanding, including $21,375 of accrued dividends.......... 344,375
Common Stock, $0.01 par:
Class A: Authorized 475,000 shares; 250,000 issued and
outstanding................................................ 3
Class B: Authorized 50,000 shares; 19,687 shares issued and
19,387 outstanding --
Additional paid-in capital.................................. 25,191
Accumulated deficit........................................... (106,200)
----------
Total stockholders' equity...................................... 263,369
----------
Total liabilities and stockholders' equity...................... $1,517,600
==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26, 1998
(DATE OF
FORMATION) TO
DECEMBER 31, 1998
-----------------
<S> <C>
REVENUES
Subscriber revenues........................................ $ 74,000
Roaming revenues........................................... 36,542
Toll revenues.............................................. 19,180
Equipment sales............................................ 3,740
Other...................................................... 4,025
--------
Total revenue.............................................. 137,487
COSTS AND EXPENSES
Cost of cellular service................................... 25,995
Cost of equipment sold..................................... 7,271
General and administrative................................. 19,262
Sales and marketing........................................ 18,363
Depreciation and amortization.............................. 45,569
Nonrecurring charges....................................... 4,355
--------
Total costs and expenses................................... 120,815
--------
Operating income........................................... 16,672
OTHER INCOME (EXPENSE)
Interest expense........................................... (61,477)
Interest income............................................ 5,036
Other expense, net......................................... (100)
--------
(56,541)
--------
Loss before provision for income taxes..................... (39,869)
Provision for income taxes................................. (530)
--------
Net loss................................................... $(40,399)
========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM FEBRUARY 26, 1998 (DATE OF FORMATION)
TO DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
---------------- -------------- ------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------- -------- ------- ------ ------ ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capital contributions.. 325,000 $323,000 250,000 $ 3 -- $ -- $24,997 $ --
Capital contributions, net..... -- -- -- -- 19,387 -- 194 --
Excess purchase price
over predecessor basis........ -- -- -- -- -- -- -- (44,426)
Accrued preferred
stock dividends............... -- 21,375 -- -- -- -- -- (21,375)
Net loss for the period from
February 26, 1998
(Date of Formation)
to December 31, 1998.......... -- -- -- -- -- -- (40,399)
---------
Balance December 31, 1998...... 325,000 $344,375 250,000 $ 3 19,387 $ -- $25,191 $(106,200)
======= ======== ======= === ====== ==== ======= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26,
1998 (DATE OF
FORMATION) TO
DECEMBER 31,
1998
-------------
<S> <C>
OPERATING ACTIVITIES
Net loss..................................................... $ (40,399)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization expense...................... 45,569
Amortization of deferred financing costs................... 2,393
Accretion of discount on Senior Notes...................... 137
Amortization of premium on restricted investments.......... 222
Amortization of covenant not to compete.................... (500)
Change in working capital components, net of the effect of
the merger with PriCellular Corporation:
Accounts receivable...................................... 2,666
Inventories.............................................. (1,211)
Prepaids and other current assets........................ 297
Accounts payable......................................... 2,074
Accrued operating expenses............................... (472)
Interest payable......................................... 22,061
Income and other taxes payable........................... (19)
Deferred revenue......................................... 1,537
Other current liabilities................................ 940
----------
Net cash provided by operating activities.................... 35,295
INVESTING ACTIVITIES
Acquisition of cellular operations, net of cash acquired..... (1,418,741)
Purchase of fixed assets..................................... (24,260)
Purchase of restricted investments, net...................... (69,744)
----------
Net cash used in investing activities........................ (1,512,745)
FINANCING ACTIVITIES
Proceeds from sale of preferred and common stock............. 348,194
Proceeds from issuance of Senior Notes....................... 282,834
Borrowings against credit facility........................... 916,000
Deferred financing costs..................................... (35,563)
----------
Net cash provided by financing activities.................... 1,511,465
----------
Increase in cash and cash equivalents........................ 34,015
Cash and cash equivalents at beginning of period............. --
----------
Cash and cash equivalents at end of period................... $ 34,015
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest................................................... $ 36,886
Income taxes............................................... 351
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND BASIS OF PRESENTATION
American Cellular Corporation, a Delaware corporation, was formed on
February 26, 1998 to acquire the operations of PriCellular Corporation (see
Note 3). Accordingly, the accompanying consolidated financial statements
include results of operations from February 26, 1998, the date of formation,
through December 31, 1998. American Cellular Corporation and Subsidiaries,
(the Company), is principally engaged in the ownership and operation of
cellular telephone systems. The Company operates in one business segment
pursuant to Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures About Segments of an Enterprise and Related Information."
The consolidated financial statements include the assets, liabilities, and
results of operations of entities in which the Company has a controlling
interest. All significant intercompany balances and transactions have been
eliminated.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, restricted investments,
accounts receivable and accounts payable approximate fair value. See Note 5
for fair value of long-term debt.
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 fixed assets are recorded at
cost, including labor and capitalized interest associated with construction.
Depreciation is computed using the straight-line method over the estimated
useful lives, typically three to seven years.
INVESTMENTS IN CELLULAR OPERATIONS
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 annual preferential distributions increasing to $5.8
million in 1999. Such preferential distributions are guaranteed by SBC. The
Company also has an option to put its joint venture interest to SBC at prices
escalating to $39.0 million at November 30, 1999. SBC has operating control of
the properties and has certain rights to purchase the Company's interests on
November 30, 1999. The Company's guaranteed preferential distributions from
the joint venture for the period from June 25, 1998, the date of the
PriCellular acquisition, through December 31, 1998 amounted to $2.6 million
and are included in other revenues.
F-7
<PAGE>
American Cellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Assets
Other assets consist of the following (in thousands):
<TABLE>
<S> <C>
Goodwill/cellular licenses....................................... $1,175,479
Investments in cellular operations............................... 35,531
Deferred financing costs......................................... 35,563
Restricted investments........................................... 42,972
Subscriber lists................................................. 11,233
Accumulated amortization......................................... (33,603)
----------
$1,267,175
==========
</TABLE>
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.
Accumulated amortization of goodwill/cellular licenses was approximately $29.3
million as of December 31, 1998. 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 December 31, 1998.
Deferred financing costs primarily represent underwriting 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. Accumulated amortization
of deferred financing costs was approximately $2.4 million as of December 31,
1998.
Approximately $82.4 million of the proceeds from the issuance of the 10.5%
Senior Notes (see Note 5) was used to acquire certain treasury securities
sufficient to pay the first six scheduled interest payments of those notes.
Approximately $12.7 million of securities were sold in 1998 to satisfy the
first interest payment with no realized gain or loss. 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 May 1999
to May 2001, bear interest rates from 5.625% to 6.375%, and are considered as
held to maturity.
The Company amortizes subscriber lists over a three-year period.
Accumulated amortization was approximately $1.9 million as of December 31,
1998.
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.
F-8
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ADVERTISING COSTS
Advertising costs relating to new subscribers are expensed in the period
that they are incurred. Advertising expense amounted to $3.7 million for the
period end December 31, 1998.
COMPREHENSIVE LOSS
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." Net loss for the period ended December 31 1998 is the same as
comprehensive loss defined pursuant to SFAS No. 130.
CONCENTRATIONS OF CREDIT RISK
No single customer is large enough to pose a significant financial risk to
the Company. The Company maintains an allowance for losses based on the
expected collectibility of accounts receivable. Credit losses have been within
management's expectations.
PENDING ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
will be adopted by the Company effective January 1, 2000. The Statement will
require the Company to recognize all derivatives, including interest rate
swaps and collars, on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If the derivative is
a hedge, depending on the nature of the hedge, changes in fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or recognized
in other comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has not yet determined what
the effect of Statement 133 will be on the earnings and financial position of
the Company.
3. ACQUISITION OF PRICELLULAR CORPORATION
On June 25, 1998, the Company 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 consolidated statement of operations beginning
July 1, 1998. The results of operations do not differ materially than if the
closing date had been used.
The allocation of the purchase price to the fair value of net assets acquired
is as follows (in thousands):
<TABLE>
<S> <C>
Cash............................................................ $ 51,460
Accounts receivable............................................. 29,160
Cellular facilities and equipment............................... 149,891
Investment in cellular operations............................... 35,531
Other assets.................................................... 2,660
Goodwill........................................................ 1,175,479
Subscriber lists................................................ 11,233
Excess purchase price over predecessor basis.................... 44,426
Total liabilities assumed....................................... (29,639)
----------
Total merger consideration...................................... 1,470,201
Less:
Cash acquired................................................. 51,460
----------
Total cash paid................................................. $1,418,741
==========
</TABLE>
F-9
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
generally accepted accounting principles.
Nonrecurring charges recorded in the period ended December 31, 1998
represent stay-on bonuses paid by American Cellular Corporation to retain
employees through the completion of the Merger.
4. CELLULAR FACILITIES, EQUIPMENT, AND OTHER
The components of the Company's cellular facilities, equipment and other
include the following (in thousands):
<TABLE>
<S> <C>
Cellular facilities and equipment.................................. $158,381
Furniture and other................................................ 15,770
--------
174,151
Less accumulated depreciation...................................... (14,359)
--------
$159,792
========
</TABLE>
Depreciation expense for the period ending December 31, 1998 was $14.4
million.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
1998 FMV
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under
$1,000,000,000 Credit
Facility:
Revolver Credit Loans... $ 66,000 $ 66,000
Tranche A Term Loans.... 450,000 450,000
Tranche B Term Loans.... 200,000 200,000
Tranche C Term Loans.... 200,000 200,000
10.5% Senior Notes due
2008..................... 282,971 276,450(1)
---------- ----------
1,198,971 $1,192,450
==========
Less current portion...... (3,000)
----------
$1,195,971
==========
</TABLE>
(1) Based on quoted market price.
The bank syndicated Credit Facility provides a subsidiary of 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). Payments under
the Credit Facility are due quarterly, in varying installments beginning June
1999 and maturing December 2007. Additional payments are required for excess
cash flow pursuant to the Credit Facility agreement. Interest is payable
quarterly at the adjusted prime rate plus the applicable margin for each
tranche (0.625% for the Revolver and Tranche A, 1.5% for Tranche B and 1.75%
for Tranche C) or LIBOR plus the applicable margin for each tranche (1.625% or
the Revolver and Tranche A, 2.5% for Tranche B and 2.75% for Tranche C), based
on the subsidiary consolidated leverage ratio. As of December 31, 1998, the
interest rates applicable on the tranches of the Credit Facility ranged from
approximately 7.41% to 8.78%, yielding a weighted-average rate of 7.9%. In
addition, commitment fees of 0.5% on the unutilized portion of the Revolver
are payable
F-10
<PAGE>
American Cellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
quarterly. Substantially all of the subsidiary's assets are pledged as
collateral to the Credit Facility. The Credit Facility contains several
financial covenants related to subsidiary's leverage and debt service ratios
and restrictions on the subsidiary's incurrance of additional debt, payment of
dividends, incurrance of liens, and payments and transfers of net assets from
the subsidiary to the Company. Restricted net assets of the Company
approximated $465.5 million as of December 31, 1998.
On May 13, 1998, the Company issued approximately $285.0 million aggregate
principal amount of 10.5% Senior Notes (the Notes) due 2008. The Notes are
unsecured and subordinated to the Credit Facility. Approximately $82.4 million
of the proceeds were used to purchase treasury securities that were placed in
an escrow account (see Note 2). 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 10.63%. 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.
The Notes are subject to redemption at any time on or after May 15, 2003,
at the option of the Company, in amounts of $1,000 at the following redemption
prices, if redeemed during the 12-month period beginning May 15 of the years
indicated below:
<TABLE>
<CAPTION>
Redemption
Year Prices
---- ----------
<S> <C>
2003.............................................................. 105.25%
2004.............................................................. 103.50
2005.............................................................. 101.75
Thereafter........................................................ 100.00
</TABLE>
The holders of record receive the redemption price plus any accrued and
unpaid interest. In addition, at any time prior to May 15, 2001, the Company
may use the net cash proceeds of one or more equity offerings to redeem up to
an aggregate 35% of the principal amount of Notes originally issued at a
redemption price equal to 110.50%, plus any accrued and unpaid interest.
As part of its interest rate risk management program, the Company utilizes
interest rate swap and collar agreements to hedge variable interest rate risk
under the Credit Facility. Net interest paid or received related to such
agreements is recorded using the accrual method and as an adjustment to
interest expense. At December 31, 1998, the Company had interest rate collars
with an aggregate notional amount of $700 million, effectively fixing the
interest rate between 5.38% and 6.00%, expiring in 2001. At December 31, 1998,
the Company had an interest rate swap with a notional amount of $100 million,
effectively fixing the interest rate to 5.84%, expiring in 2001. The Company
has not incurred any gains or losses on terminations of interest rate
agreements. The fair market value of the Company's interest rate agreements is
$(11.6) million at December 31, 1998, based on current underlying spot rates.
The maturities of the Company's long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1999.............................................................. $ 3,000
2000.............................................................. 4,000
2001.............................................................. 49,000
2002.............................................................. 49,000
2003.............................................................. 71,500
Thereafter........................................................ 1,022,471
----------
$1,198,971
==========
</TABLE>
F-11
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The significant components of the Company's deferred tax liabilities and
assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Deferred tax liabilities:
Cellular facilities, equipment and other...................... $(26,055)
Intangible assets............................................. (5,393)
State and local deferred taxes................................ (5,656)
Investment in Joint Venture................................... (4,312)
Other......................................................... (2,571)
Deferred tax assets:
Net operating loss carryforwards.............................. 76,362
Accruals...................................................... 3,376
Other......................................................... 1,324
--------
Net deferred tax assets......................................... 37,075
Valuation allowance............................................. (37,075)
--------
Net deferred tax liability $ --
========
</TABLE>
At December 31, 1998, the Company had tax net operating loss carryforwards
(NOLs) of approximately $193.6 million, which are available to offset future
taxable income. NOLs begin expiring in the year 2007 through 2018 as follows:
2007-$1.3 million; 2009-$2.7 million; 2010-$1.7 million; 2011-$5.6 million,
2012-$8.8 million and 2018-$173.5 million. To the extent preacquisition NOLs
of approximately $163.9 million are utilized in the future, goodwill
established at the date of the acquisition will be reduced.
The Company established a valuation allowance in accordance with generally
accepted accounting principles. The Company continually reviews the adequacy
of the valuation allowance and recognizes the benefits of deferred tax assets
only as assessment indicates that it is more likely than not that the deferred
tax assets will be realized.
A reconciliation of the income tax provision based upon the federal statutory
rate to the actual income tax provision is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 26, 1998
(DATE OF FORMATION)
TO DECEMBER 31,
1998
-------------------
<S> <C>
Income tax benefit at federal statutory rate............. $(13,954)
Effect of:
State income tax expense, net of federal benefit....... 344
Amortization of goodwill/cellular licenses............. 6,459
Increase in valuation allowance........................ 7,681
--------
Income tax expense....................................... $ 530
========
</TABLE>
Income tax expense is comprised solely of current state taxes payable.
F-12
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company issued 325,000 shares of Series A Preferred Stock for gross
proceeds of $325 million. The preferred stock accrues dividends daily at the
rate of 12% per annum, compounded quarterly. Such dividends shall accrue and
be cumulative on the stated value of $1,000 per share. Dividends shall be
payable quarterly, in arrears, on the last day of each December, March, June,
and September. Dividends shall be paid in cash. If the payment does not occur
on a regular dividend date, dividends shall accrue to the final payment date.
The holders of Series A Preferred Stock have preference and priority over
the holders of shares of any stock of the Company ranking junior to the Series
A Preferred Stock, with respect to the payment of dividends or distribution of
assets, whether upon liquidation, dissolution, winding up, or otherwise
(Junior Stock). No dividend or distribution shall be declared or paid, either
directly or indirectly, nor shall any Junior Stock, or any warrants, rights,
calls or options exercisable or convertible into any Junior Stock be redeemed,
purchased, retired, or otherwise acquired for any consideration, unless as of
such date the Company has paid all dividends accrued and payable to date on
the Series A Preferred Stock.
If the Company shall adopt a plan of liquidation, dissolution, or winding
up, no distribution shall be made to the holders of shares of Junior Stock,
unless the holders of Series A Preferred Stock have received in cash the
stated value, $1,000 per share, plus all accrued but unpaid dividends thereon.
The Company shall have the right to redeem outstanding shares of Series A
Preferred Stock at any time in aggregate amounts of $5 million or more at any
one time. The redemption price shall be $1,000 per share plus the amount of
all accrued and unpaid dividends through the redemption date.
The Series A Preferred Stock have no voting rights, except certain actions
in which each share of Series A Preferred Stock shall have one vote.
CLASS B COMMON STOCK
The Company has reserved 21,739 shares of its Class B Common Stock for
issuance to certain of its employees. As of December 31, 1998, 19,387 shares
are outstanding. The shares vest in equal, annual increments over a four-year
period starting on the date of employment. The shares are convertible into
shares of Class A Common Stock on a one-to-one basis, and automatically
convert when vested. None are vested as of December 31, 1998.
OTHER
Upon termination of employment without cause, certain employees have the
right to put their Class A and B Common Stock and Series A Preferred Stock at
the fair market value, provided the Company will have the right to pay certain
amounts by issuing shares of Series A Preferred Stock.
8. DEFINED-CONTRIBUTION PLAN
Substantially all employees of the Company are covered by a defined-
contribution 401(k) plan. The Company can make discretionary matching
contributions. No matching contributions were made for the period ended
December 31, 1998.
F-13
<PAGE>
American Cellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Lease Commitments
Minimum rental commitments as of December 31, 1998, for all noncancelable
operating leases, consisting principally of leases for office space, real
estate, and tower space, were as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................... $ 4,386
2000............................................................... 3,989
2001............................................................... 3,495
2002............................................................... 3,129
2003............................................................... 2,184
Thereafter......................................................... 2,708
-------
$19,891
=======
</TABLE>
Total rent expense amounted to approximately $2.7 million for the period
ended December 31, 1998.
10. Related Parties
The Company obtains customer information management and billing services
from a vendor in which two of the Company's directors have an indirect and
noncontrolling ownership interest. Since June 25, 1998, services provided to
the Company by this vendor totaled $4.9 million, pursuant to the terms of a
license agreement.
F-14
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 1,385
Restricted short-term investments.............................. 26,550
--------
Total current assets............................................. 27,935
Investment in and advances to subsidiaries....................... 465,466
Other assets..................................................... 57,205
--------
Total assets..................................................... $550,606
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Interest payable............................................... $ 3,916
Accrued expenses............................................... 350
Senior Notes..................................................... 282,971
Stockholders' equity............................................. 263,369
--------
Total liabilities and stockholders' equity....................... $550,606
========
</TABLE>
F-15
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
PERIOD FROM FEBRUARY 26, 1998 (DATE OF FORMATION)
TO DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenue $ --
COST AND EXPENSES
General and administrative....................................... 109
--------
Operating loss................................................... (109)
OTHER EXPENSE
Interest expense, net............................................ (15,579)
--------
Loss before equity in net loss of subsidiaries................... (15,688)
Equity in net loss of subsidiaries............................... (24,711)
--------
Net loss $(40,399)
========
</TABLE>
F-16
<PAGE>
American Cellular Corporation and Subsidiaries
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Period From February 26, 1998 (Date of Formation)
to December 31, 1998
(In Thousands)
<TABLE>
<S> <C>
Operating activities:
Net loss....................................................... $(40,399)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of deferred financing costs..................... 963
Amortization of premium on restricted investments............ 222
Accretion of discount on Senior Notes........................ 137
Equity in net loss of subsidiaries........................... 24,711
Change in operating assets and liabilities....................... 4,266
--------
Net cash used in operating activities............................ (10,100)
Investing activities:
Dividend received from subsidiary.............................. 260,704
Investment in subsidiary....................................... (795,307)
Purchase of restricted investments, net........................ (69,744)
--------
Net cash used in investing activities............................ (604,347)
Financing activities:
Proceeds from sale of preferred and common stock............... 348,194
Proceeds from issuance of Senior Notes......................... 282,834
Payments for deferred financing costs.......................... (15,196)
--------
Net cash provided by financing activities........................ 615,832
--------
Increase in cash and cash equivalents............................ 1,385
Cash and cash equivalents at beginning of period................. --
--------
Cash and cash equivalents at end of period....................... $ 1,385
========
Supplemental schedule of noncash financing activities
Interest paid.................................................... $ 15,129
</TABLE>
F-17
<PAGE>
American Cellular Corporation and Subsidiaries
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation
In the parent company-only financial statement, 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 loss of
its unconsolidated subsidiaries is included in the consolidated net 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 May 13, 1998, the Company issued approximately $285.0 million aggregate
principal amount of 10.5% Senior Notes (the Notes) due 2008. The Notes are
unsecured and subordinated to the Credit Facility. 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 10.63%. 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.
The Notes are subject to redemption at any time on or after May 15, 2003,
at the option of the Company, in amounts of $1,000 at the following redemption
prices, if redeemed during the 12-month period beginning May 15 of the years
indicated below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2003.......................................... 105.25%
2004.......................................... 103.50
2005.......................................... 101.75
Thereafter.................................... 100.00
</TABLE>
The holders of record receive the redemption price plus any accrued and
unpaid interest. In addition, at any time prior to May 15, 2001, the Company
may use the net cash proceeds of one or more equity offerings to redeem up to
an aggregate 35% of the principal amount of Notes originally issued at a
redemption price equal to 110.50% plus any accrued and unpaid interest.
F-18
<PAGE>
AMERICAN CELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COST AND TO OTHER AT END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
PERIOD ENDED DECEMBER
31, 1998
Allowance for doubtful
accounts............... $-- $ 2,262 $ 2,185(A) $(2,363) $ 2,084
==== ======== ======= ======= =======
Valuation allowance for
deferred income taxes.. $-- $ $8,966 $28,109(A) $ -- $37,075
==== ======== ======= ======= =======
</TABLE>
--------
(A)Results from the acquisition of PriCellular.
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
PriCellular Corporation
We have audited the consolidated balance sheets of PriCellular Corporation
and subsidiaries as of June 30, 1998 and December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the six months ended June 30, 1998, and for each of the two 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 June 30, 1998 and December 31,
1997, and the consolidated results of their operations and their cash flows
for the six months ended June 30, 1998, and for each of the two 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
Chicago, Illinois
March 15, 1999
F-20
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
-------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 51,460 $ 61,357
Accounts receivable (less allowance of $2,185 and
$1,686)........................................... 29,160 19,465
Inventory.......................................... 794 2,232
Other current assets............................... 2,269 1,797
-------- --------
Total current assets................................. 83,683 84,851
Fixed assets:
Cellular facilities and equipment.................. 139,677 123,935
Furniture and equipment............................ 14,996 10,221
-------- --------
154,673 134,156
Less accumulated depreciation...................... (39,548) (29,302)
-------- --------
Net fixed assets..................................... 115,125 104,854
Investment in cellular operations.................... 35,531 37,017
Cellular licenses (less accumulated amortization of
$30,426 and $23,119)................................ 559,981 493,315
Deferred financing costs (less accumulated
amortization of $7,496 and $5,191).................. 12,282 13,352
Cash committed for the acquisition of cellular
operations.......................................... -- 13,000
Other assets......................................... 256 1,267
-------- --------
Total assets......................................... $806,858 $747,656
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............. $ 20,416 $ 28,046
Deferred revenue................................... 4,633 4,242
Other current liabilities.......................... 6,944 8,045
-------- --------
Total current liabilities............................ 31,993 40,333
Long-term debt....................................... 642,155 568,323
Deferred taxes....................................... 3,797 3,797
Other long-term liabilities.......................... 1,019 1,023
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 21,987,766 and 21,824,566
shares.......................................... 220 218
Class B: authorized 50,000,000 shares; issued and
outstanding 12,971,075 and 13,134,275 shares.... 129 131
Additional paid-in capital......................... 180,704 180,704
Accumulated deficit................................ (53,160) (46,874)
-------- --------
Total stockholders' equity........................... 127,894 134,180
-------- --------
Total liabilities and stockholders' equity........... $806,858 $747,656
======== ========
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
SIX MONTHS ENDED ----------------------
JUNE 30 1998 1997 1996
---------------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Cellular service................... $ 101,888 $ 168,394 $ 105,188
Equipment sales.................... 2,868 5,364 3,430
Other.............................. 3,914 7,242 3,998
---------- ---------- ----------
108,670 181,000 112,616
COSTS AND EXPENSES
Cost of cellular service........... 20,911 48,691 29,571
Cost of equipment sold............. 5,365 12,841 10,073
Selling, general and
administrative.................... 30,230 53,485 34,502
Depreciation and amortization...... 17,553 28,759 19,537
Nonrecurring charges............... 4,889 -- --
---------- ---------- ----------
78,948 143,776 93,683
---------- ---------- ----------
Operating income................... 29,722 37,224 18,933
OTHER INCOME (EXPENSE)
Gain (loss) on sale of investments
in cellular operations (133) 8,423 (1,401)
Interest expense................... (38,955) (67,392) (47,076)
Interest income.................... 1,570 4,864 4,875
Other income, net.................. 1,510 3,250 1,626
---------- ---------- ----------
(36,008) (50,855) (41,976)
---------- ---------- ----------
Net loss........................... $ (6,286) $ (13,631) $ (23,043)
========== ========== ==========
Net loss after adjustment for
accrued preferred stock dividend.. $ (9,643) $ (20,171) $ (29,221)
========== ========== ==========
Basic and diluted loss per common
share............................. $ (0.28) $ (0.55) $ (0.76)
========== ========== ==========
Weighted-average number of common
shares used in computation of
basic and diluted loss per common
share............................. 34,959,000 36,751,000 38,493,000
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A
PREFERRED CLASS A CLASS B
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,
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
Conversion of Class B
common stock to Class A
common stock........... -- -- 163 2 (163) (2) -- -- --
Net loss for the six
months ended June 30,
1998................... -- -- -- -- -- - - (6,286) (6,286)
--- --- ------ ---- ------ ---- -------- -------- --------
BALANCE--JUNE 30, 1998.. 96 $ 1 21,988 $220 12,971 $129 $180,704 $(53,160) $127,894
=== === ====== ==== ====== ==== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS DECEMBER 31
ENDED JUNE ------------------
30 1998 1997 1998
---------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................ $(6,286) $(13,631) $(23,043)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................. 17,553 28,759 19,537
Interest on Senior Subordinated and
Convertible Discount Notes and amortization
of deferred financing costs.................. 16,137 46,236 43,174
(Gain) loss on sale of investments in cellular
operations 133 (8,423) 1,401
Amortization of covenant not to compete....... (1,625) (3,250) (1,625)
Provision for losses on accounts receivable... 456 (81) (309)
Proceeds from covenant not to compete......... -- 2,000 2,500
Changes in operating assets and liabilities,
net of acquisitions:
Accounts receivable......................... (9,577) (5,131) (6,710)
Inventory................................... 1,526 103 (369)
Other current assets........................ (457) (737) (347)
Accounts payable and accrued expenses....... (8,653) 2,804 4,009
Deferred revenue............................ (37) 600 1,151
Other current liabilities................... 1,547 -- (250)
Other, net.................................. 948 (223) 252
------- -------- --------
Net cash provided by operating activities....... 11,665 49,026 39,371
INVESTING ACTIVITIES
Purchase of fixed assets........................ (20,517) (25,717) (29,470)
Amounts refunded from (deposited in) escrow to
acquire cellular properties (net).............. -- 7,337 (5,000)
Deposit for Personal Communications Service
auction (net).................................. -- -- 1,640
Proceeds from sale of investments in cellular
operations 1,352 23,651 34,313
Acquisition of cellular operations, net of cash
acquired (60,185) (26,032) (110,977)
Investment in cellular operations............... (977) (2,523) (75)
Cash committed for the acquisition of cellular
operations..................................... -- (13,000) (91,400)
------- -------- --------
Net cash used in investing activities........... (80,327) (36,284) (200,969)
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS DECEMBER 31
ENDED JUNE ------------------
30 1998 1997 1996
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Purchase and retirement of common stock......... $ -- $(53,861) $ (1,450)
Proceeds from exercise of stock options......... -- 2,834 48
Repayments of notes payable and due to
stockholders................................... -- -- (23,104)
Payments for deferred financing costs........... (1,235) (516) (5,612)
Proceeds from issuance of long-term debt........ 60,000 -- 170,000
Costs incurred in connection with common and
preferred stock offerings...................... -- (206) (1,364)
------- -------- --------
Net cash provided by (used in) financing
activities..................................... 58,765 (51,749) 138,518
------- -------- --------
Decrease in cash and cash equivalents........... (9,897) (39,007) (23,080)
Cash and cash equivalents at beginning of
period......................................... 61,357 100,364 123,444
------- -------- --------
Cash and cash equivalents at end of period...... $51,460 $ 61,357 $100,364
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest...................................... $22,819 $ 18,275 $ 1,110
Income taxes.................................. 479 424 448
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Common stock (1997) and debt (1996) issued in
connection with the acquisition of cellular
systems........................................ $ -- 19,125 19,429
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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 primarily in rural areas of the Midwestern and Eastern
portions of the United States. The Company operates in one business segment
pursuant to SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information."
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority owned subsidiaries. The assets, liabilities,
and results of operations of entities in which the Company has a controlling
interest have been consolidated. All significant intercompany balances and
transactions have been eliminated.
On June 25, 1998, American Cellular Corporation acquired all of the
operations of the Company pursuant to an agreement and plan of merger. For
further discussion of the merger see Note 8. The accompanying consolidated
financial statements include results of operations of the Company through June
30, 1998, the Company's normal month-end. The results of operations of the
Company do not differ materially from if the actual closing date of the merger
had been used.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
investment in cellular operations and accounts payable in the consolidated
balance sheet approximate fair value. The fair value of long-term debt in the
consolidated balance sheet approximated $733.5 million at June 30, 1998.
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.
FIXED ASSETS
Cellular facilities, equipment, and other fixed assets are recorded at
cost, including labor associated with construction. Depreciation is computed
using the straight-line method over the estimated useful lives, typically
three to seven years. Depreciation expense for the six months ended June 30,
1998, and the years ended December 31, 1997 and 1996, was $10.2 million, $16.1
million, and $10.0 million, respectively.
F-26
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INVESTMENTS IN CELLULAR OPERATIONS
The Company has 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 1996 to $5.8 million in 1999.
Such preferential distributions are guaranteed by SBC. The Company also has an
option to put its joint venture interest to SBC at prices escalating to $39.0
million in 1999. SBC has operating control of the properties and has certain
rights to purchase the Company's interests on November 30, 1999. The Company's
guaranteed preferential distributions from the joint venture for the six
months ended June 30, 1998, and the years ended December 31, 1997 and 1996,
amounted to $2.6 million, $4.3 million, and $3.4 million, respectively, which
are included in other revenues.
CELLULAR LICENSES
Cellular licenses represent the excess of purchase price over the
underlying fair value of assets acquired, and are being amortized on a
straight-line basis over 40 years. Amortization expense for the six months
ended June 30, 1998, and the years ended December 31, 1997 and 1996, was $7.3
million, $12.7 million, and $9.5 million, respectively.
The Company periodically reviews the carrying value of cellular 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 license to the estimated market value of the cellular system in order
to determine whether a reduction to fair value is necessary. The Company has
determined that no such reductions were necessary through June 30, 1998.
DEFERRED FINANCING COSTS
Deferred financing costs primarily represent underwriting 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 the
amortization expense is included in interest expense.
REVENUE RECOGNITION
The Company earns revenue by providing access to its cellular system, for
usage of its cellular system for long-distance calls placed by the Company's
customers and those of other carriers within the Company's service area, and
for providing service to customers from other cellular systems who roam
through the service area. 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.
ADVERTISING COSTS
Marketing costs relating to new subscribers are expensed in the period in
which they are incurred. Advertising expense amounted to $2.5 million, $3.7
million, and $2.3 million for the six months ended June 30, 1998, and the
years ended December 31, 1997 and 1996, respectively.
COMMON STOCK SPLITS
On 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 March 11, 1996 and October 21, 1996, respectively. All footnote
disclosures and applicable per share data have been restated to reflect these
splits.
F-27
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Loss per Share
In computing dilutive loss per share for the six months ended June 30,
1998, and the years ended December 31, 1997 and 1996, 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 10.75% Senior Subordinated
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.
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." Net loss for the six months ended June 30, 1998, and the years ended
December 31, 1997 and 1996, is the same as comprehensive loss defined pursuant
to SFAS No. 130.
Concentrations of Credit Risk
No single customer is large enough to pose a significant financial risk to
the Company. The Company maintains an allowance for losses based on the
expected collectibility of accounts receivable. Credit losses have been within
management's expectations.
Reclassifications
Certain items have been reclassified in the 1997 and 1996 consolidated
financial statements to conform to the current presentation.
F-28
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITIONS AND DIVESTITURES
The following acquisitions were completed in 1998, 1997, and 1996. All
acquisitions were accounted for utilizing the purchase method of accounting.
The results of operations of the acquired entities are included in the
Company's consolidated results of operations from their respective dates of
acquisition.
<TABLE>
<CAPTION>
PURCHASE
ACQUISITION PRICE NET POPS
MARKET DATE (In Thousands) ACQUIRED
------ ----------------- -------------- ---------
<S> <C> <C> <C>
1998
TN-4 RSA January 15, 1998 $ 73,000 264,000
---------
264,000
=========
1997
KY-4, KY-5, KY-6, and KY-8
RSAs January 7, 1997 $115,500(a) 785,000
WI-4 RSA January 7, 1997 6,300 119,000
WI-5 RSA May 29, 1997 10,600 81,000
---------
985,000
=========
1996
WI-2 RSA November 18, 1996 4,300 85,645
---------
85,645
=========
PA-9 RSA February 2, 1996 26,100 188,096
WV-3 RSA July 23, 1996 35,000 269,709
---------
457,805
=========
NY-6 RSA April 23, 1996 19,800(b) 111,373
Poughkeepsie, NY MSA April 23, 1996 38,900(b)(c) 218,890
Orange County, NY MSA October 17, 1996 (c) 327,053
---------
657,316
=========
Various October 17, 1996 (c) 70,740
---------
1,271,506
=========
</TABLE>
- --------
(a) The Company acquired from a subsidiary of Horizon Cellular Telephone
Company, L. P. (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. On February 4,
1997, the Company repurchased and retired the 1,948,052 shares from
Horizon for $15.3 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.
(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-29
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The pro forma unaudited condensed consolidated results of operations
assuming the TN-4 RSA acquisition was consummated as of January 1, 1997, are
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE DECEMBER 31
30 1998 1997
---------- -----------
<S> <C> <C>
Revenues.......................................... $108,670 $196,264
======== ========
Net loss after adjustment for accrued preferred
stock dividend................................... $ (9,643) $(20,497)
======== ========
Basic and diluted loss per common share........... $ (0.28) $ (0.56)
======== ========
</TABLE>
The Company made the following dispositions of cellular properties and
interests (in thousands):
<TABLE>
<CAPTION>
SALES GAIN
DATE DESCRIPTION PRICE (LOSS)
---- ----------------------------------------------- ------- ---------
<S> <C> <C> <C>
1998
June Sale of Minority Pops $ 1,352 $ (133)
=========
1997
January Florence, AL MSA and AL-1B RSA, sale of license $22,396 $ 8,451
April Sale of Minority Pops 1,255 (28)
---------
$ 8,423
=========
1996
July AL-4 RSA, sale of license $25,000 $ (1,640)
September Sale of Minority Pops 2,813 1,817
November MI-2 RSA, sale of license 6,500 (1,578)
---------
$ (1,401)
=========
</TABLE>
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
-------- -----------
<S> <C> <C>
14% Senior Subordinated Discount Notes due 2001..... $165,000 $165,000
10.75% Senior Subordinated Convertible Discount
Notes due 2004..................................... 48,054 45,623
12.25% Senior Subordinated Discount Notes due 2003.. 199,101 187,700
10.75% Senior Notes due 2004........................ 170,000 170,000
Senior Secured Reducing Revolver.................... 60,000 --
-------- --------
$642,155 $568,323
======== ========
</TABLE>
On November 23, 1994, Wireless issued $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% through
November 1997, compounded semiannually, to an aggregate principal amount of
$165.0 million. Interest is currently accruing at the rate of 14% per annum,
payable semiannually in cash.
F-30
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 21, 1995, the Company issued $60.0 million aggregate principal
amount of 10.75% Senior Subordinated Convertible Discount Notes due 2004 (the
10.75% Notes). The 10.75% Notes were issued at a price of 59.345% or $35.6
million. The original issue discount on the 10.75% Notes accretes at a rate of
10.75%, compounded semiannually, to an aggregate principal amount of
approximately $60.0 million by August 15, 2000. Interest will thereafter
accrue at 10.75% per annum, payable semiannually, in cash beginning February
15, 2001. The 10.75% Notes are convertible into the Company's Class A common
stock at a conversion price of $9.94 per share.
On September 27, 1995, Wireless issued $205.0 million aggregate principal
amount of 12.25% Senior Subordinated Discount Notes due 2003 (12.25% 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 12.25% Notes were issued at a price of 69.906% or $143.3 million.
The original issue discount on the 12.25% Notes accretes at a rate of 12.25%
compounded semiannually, to an aggregate principal amount of approximately
$205.0 million by October 1, 1998. Interest will thereafter accrue at 12.25%
per annum payable semiannually in cash beginning April 1, 1999.
On November 6, 1996, Wireless issued $170.0 million principal amount of
10.75% 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.
On January 15, 1998, the Company borrowed $60.0 million under a Senior
Secured Reducing Revolver (the Borrowing). 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 by the Company of certain financial ratios in order to maintain
the permitted indebtedness. The Borrowing is secured by the assets of Kyle
Cellular, a wholly owned subsidiary of the Company.
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 June 30, 1998, approximated $175.6 million.
The maturities of the Company's long-term debt for each of the periods
subsequent to June 30, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
Six months ending December 31, 1998 $ --
Years ending December 31:
1999.......................................... --
2000.......................................... --
2001.......................................... 169,500
2002.......................................... 10,500
2003.......................................... 211,101
Thereafter.................................... 251,054
--------
Total........................................... $642,155
========
</TABLE>
F-31
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INCOME TAXES
The significant components of the Company's deferred tax liabilities and
assets are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
-------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation...................................... $(11,638) $(9,652)
Amortization...................................... (14,799) (11,407)
License basis difference.......................... (3,797) (3,797)
Other............................................. (4,356) (4,385)
Deferred tax assets:
Net operating loss carryforwards.................. 15,630 6,915
Amortization of original issue discount........... 37,373 33,726
State and local deferred taxes.................... 1,058 2,280
Accruals.......................................... 2,020 2,049
Other............................................. 1,462 2,504
-------- -------
Net deferred tax assets............................. 22,953 18,233
Valuation allowance................................. (26,750) (22,030)
-------- -------
Net deferred tax liability.......................... $ (3,797) $(3,797)
======== =======
</TABLE>
At June 30, 1998, the Company had tax net operating loss carryforwards
(NOLs) of approximately $43.3 million, which are available to offset future
taxable income. NOLs begin expiring in the year 2007 through 2018 as follows:
2007-$1.3 million, 2009-$2.7 million, 2010-$1.7 million, 2011-$5.6 million,
2012-$20.8 million and 2018-$11.2 million.
The Company established a valuation allowance in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes." The Company
continually reviews the adequacy of the valuation allowance and recognizes the
benefits of deferred tax assets only as assessment indicates that it is more
likely than not that the deferred tax assets will be realized.
5. STOCKHOLDERS' EQUITY
COMMON STOCK
In January 1996, Price Communications, an affiliate of the Company,
acquired warrants which are convertible directly into 1,820,000 shares of
Class B common stock from former executives of an acquired company. The
effective exercise price is $5.42 per share of Class B common stock at June
30, 1998.
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 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).
F-32
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 at June 30, 1998 and
December 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Options issued to employees....................... 1,477
Options reserved for issuance..................... 401
Warrants.......................................... 1,820
Shares reserved for convertible securities........ 32,856
------
36,554
======
</TABLE>
PREFERRED STOCK
The Company issued 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 cumulative
accrued dividends are $16.1 million at June 30, 1998. 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 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.
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. 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 adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." However, as permitted under SFAS No. 123, the Company continues
to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for its stock option plan. Under APB No.
25, because the number of options is fixed and the option price is market
price at the date of grant, no compensation expense is required. Pro forma
information regarding net loss and basic and diluted loss per common share is
required by SFAS No. 123, and has been determined as if the Company has
accounted for its employee stock options under the fair value method using the
Black-Scholes valuation method.
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 the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's
F-33
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
The fair value for the Company's options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1997: risk free interest rate of 6.25%; dividend
yield of 0%; a volatility factor of .480 for 1996 and .323 for 1997 and a
weighted-average expected life of the options of four years. There were no
option grants in 1998.
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, except per share):
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30 ------------------
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Net loss after adjustment for accrued
preferred stock dividend:
As reported.............................. $(9,643) $(20,171) $(29,221)
Pro forma................................ (10,276) (21,318) (29,996)
Basic and diluted loss per common share:
As reported.............................. (0.28) (0.55) (0.76)
Pro forma................................ (0.29) (0.58) (0.78)
</TABLE>
Because compensation expense associated with option grants is recognized
over the vesting period, the initial impact of applying FAS 123 on pro forma
net loss is not representative of the potential impact on pro forma net 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
OPTIONS PRICE PER SHARE
------------ ----------------
<S> <C> <C>
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 and June 30,
1998....................................... 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-34
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
-------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 3.71 to $
4.67 848,957 6.6 years $ 4.29 848,957 $ 4.29
$ 8.72 to $
8.88 314,899 8.3 years $ 8.83 153,232 $ 8.78
$10.80 to
$11.40 313,125 8.1 years $10.88 160,833 $10.89
</TABLE>
At December 31, 1997, 846,057 options were exercisable.
6. LEASE COMMITMENTS
Minimum rental commitments as of June 30, 1998, for all noncancelable
operating leases, consisting principally of leases for office space, real
estate and tower space, are as follows (in thousands):
<TABLE>
<S> <C>
Six months ending December 31, 1998.............. $ 2,193
Years ending December 31:
1999........................................... 4,386
2000........................................... 3,989
2001........................................... 3,495
2002........................................... 3,129
2003........................................... 2,184
Thereafter....................................... 2,708
-------
$22,084
=======
</TABLE>
Total rent expense amounted to approximately $2.0 million, $3.4 million,
and $2.4 million for the six months ended June 30, 1998, and the years ended
December 31, 1997 and 1996, respectively, of which $47,000 and $137,000 were
paid to an affiliate during 1997 and 1996, respectively.
7. ACCOUNTS PAYABLE, ACCRUED EXPENSES, AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
------- -----------
<S> <C> <C>
Accounts payable....................................... $ 3,948 $ 5,259
Accrued operating expenses............................. 8,917 16,612
Income and other taxes payable......................... 2,951 1,847
Other.................................................. 4,600 4,328
------- -------
$20,416 $28,046
======= =======
Other current liabilities consist of the following (in thousands):
Unearned covenant not to compete....................... $ 500 $ 2,125
Interest payable....................................... 6,444 5,920
------- -------
$ 6,944 $ 8,045
======= =======
</TABLE>
F-35
<PAGE>
PriCellular Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Merger With American Cellular Corporation
On June 25, 1998, American Cellular Corporation acquired all of the
operations of the Company pursuant to an Agreement and Plan of Merger (the
Merger Agreement). At the effective time, as defined in the Merger Agreement,
the holders of each issued and outstanding share of Class A common stock and
Class B common stock received $14 in cash, without interest, and each issued
and outstanding share of Series A Preferred Stock received the product of $14
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.
F-36
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
-------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ -- $ 1,795
Other current assets................................ 1,065 1,088
-------- --------
Total current assets.................................. 1,065 2,883
Investment in and advances to subsidiaries............ 175,621 177,779
Other assets.......................................... 990 1,071
-------- --------
Total assets.......................................... $177,676 $181,733
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses, and other
current liabilities $ 1,728 $ 1,930
Long-term debt...................................... 48,054 45,623
Stockholders' equity................................ 127,894 134,180
-------- --------
Total liabilities and stockholders' equity............ $177,676 $181,733
======== ========
</TABLE>
F-37
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31
JUNE 30 ------------------
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
REVENUE
Other..................................... $ -- $ -- $ 237
COST AND EXPENSES
General and administrative................ 524 558 384
------- -------- --------
Operating loss............................ (524) (558) (147)
OTHER EXPENSE
Interest expense, net..................... (2,479) (3,714) (644)
------- -------- --------
Loss before equity in net loss of
subsidiaries............................. (3,003) (4,272) (791)
Equity in net loss of subsidiaries........ (3,283) (9,359) (22,252)
------- -------- --------
Net loss.................................. $(6,286) $(13,631) $(23,043)
======= ======== ========
</TABLE>
F-38
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS DECEMBER 31
ENDED JUNE ------------------
30 1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities................................. $(1,049) $ 1,434 $ 2,762
Investing activities:
Repayments from and (advances to)
subsidiaries............................. (746) 4,062 (65,380)
Amounts deposited in escrow to bid in PSC
auction, net............................. -- 2,500 1,640
Dividend received from subsidiary......... -- 12,000 --
------- -------- --------
Net cash provided by (used in) investing
activities................................. (746) 18,562 (63,740)
------- -------- --------
Financing activities:
Exercise of employee stock options........ -- 2,834 48
Purchase and retirement of common stock... -- (53,860) (1,450)
Costs of incurred in connection with
common and preferred stock offerings..... -- (207) (1,364)
------- -------- --------
Net cash used in financing activities....... -- (51,233) (2,766)
------- -------- --------
Decrease in cash and cash equivalents....... (1,795) (31,237) (63,744)
Cash and cash equivalents at beginning of
year....................................... 1,795 33,032 96,776
------- -------- --------
Cash and cash equivalents at end of year.... $ -- $ 1,795 $ 33,032
======= ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES
Conversion of Class B common stock to Class
A common stock............................. $ 2 $ 24 $ 17
Shares issued in connection with the
acquisition of cellular systems............ -- 19,125 --
</TABLE>
F-39
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
1. BASIS OF PRESENTATION
In the parent company-only financial statement, 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 loss of
its unconsolidated subsidiaries is included in the consolidated net 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 $60.0 million aggregate principal
amount of 10.75% Senior Subordinated Convertible Discount Notes due entirely
in 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 10.75%, compounded
semiannually, to an aggregate principal amount of approximately $60.0 million
by August 15, 2000. Interest will thereafter accrue at 10.75% per annum,
payable semiannually in cash, beginning February 15, 2001. The notes are
convertible into the Company's Class A common stock at a conversion price of
$9.94 per share.
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- 40
<PAGE>
PRICELLULAR CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COST AND TO OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
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
======= ======= ==== ======= ========
SIX MONTHS ENDED JUNE
30, 1998
Allowance for doubtful
accounts............... $ 1,686 $ 1,735 $-- $(1,236) $ 2,185
======= ======= ==== ======= ========
Valuation allowance for
deferred income taxes.. $22,030 $ 4,720 $-- $ -- $ 26,750
======= ======= ==== ======= ========
</TABLE>
- --------
(A)Results principally from the acquisition of cellular systems.
F-41
<PAGE>
EXHIBIT 12.1
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS (in thousands)
<TABLE>
<CAPTION>
AMERICAN
CELLULAR
--------------------
FOR THE PERIOD
FROM FEBRUARY 26,
1998 (DATE OF
FORMATION) THROUGH
DECEMBER 31, 1998
--------------------
<S> <C>
Interest $ 61,477
Interest portion of
rent expense 905
Preferred stock
dividend requirement 21,375
--------
Fixed Charges $ 83,757
========
Consolidated pretax
loss from continuing
operations $(39,869)
Fixed charges per above 83,757
Preferred stock
dividend requirement (21,375)
--------
Earnings $ 22,513
========
Ratio of Earnings to
Fixed Charges
</TABLE>
<TABLE>
<CAPTION>
PRICELLULAR
-----------------------------------------------------------------
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest $38,955 $ 67,392 $ 47,076 $22,953 $ 2,236
Interest portion of
rent expense 667 1,139 793 292 47
Preferred stock
dividend requirement 3,357 6,540 6,178 -- --
------- -------- -------- ------- -------
Fixed Charges $42,979 $ 75,071 $ 54,047 $23,245 $ 2,283
======= ======== ======== ======= =======
Consolidated pretax
loss from continuing
operations $(6,286) $(13,631) $(23,043) $(7,711) $(1,440)
Fixed charges per above 42,979 75,071 54,047 23,245 2,283
Preferred stock
dividend requirement (3,357) (6,540) (6,178) -- --
------- -------- -------- ------- -------
Earnings $33,336 $ 54,900 $ 24,826 $15,534 $ 843
======= ======== ======== ======= =======
Ratio of Earnings to
Fixed Charges
</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 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, $20,171, $29,221, $7,711, and
$1,440 respectively. For the American Cellular period from February 26, 1998
(date of formation) through December 31, 1998, the deficit of earnings to
combined fixed charges and preferred stock dividends was $61,244.
<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> DEC-31-1998
<CASH> 34,015,437
<SECURITIES> 26,549,982
<RECEIVABLES> 28,577,891
<ALLOWANCES> (2,084,245)
<INVENTORY> 2,005,447
<CURRENT-ASSETS> 90,633,237
<PP&E> 174,151,000
<DEPRECIATION> 14,359,000
<TOTAL-ASSETS> 1,517,600,484
<CURRENT-LIABILITIES> 58,259,604
<BONDS> 0
0
344,375,611
<COMMON> 2,500
<OTHER-SE> (81,008,910)
<TOTAL-LIABILITY-AND-EQUITY> 1,517,600,484
<SALES> 137,487,000
<TOTAL-REVENUES> 137,487,000
<CGS> 33,265,641
<TOTAL-COSTS> 120,814,667
<OTHER-EXPENSES> (99,982)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (61,476,497)
<INCOME-PRETAX> (39,869,130)
<INCOME-TAX> (529,919)
<INCOME-CONTINUING> (40,399,049)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,399,049)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
