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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 333-60639
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AMERICAN CELLULAR CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware 22-3043811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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1375 East Woodfield Road, Suite 700
Schaumburg, Illinois 60173
(Address of principal executive offices)
Registrant's telephone number, including area code: (847) 995-8770
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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. [X] Yes [_] No
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 August 12, 1999 was approximately 250,000 and 21,387, respectively. There
is no trading market for the Common Stock of the Company.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets--June 30, 1999 and
December 31, 1998............................................ 1
Condensed Consolidated Statements of Operations for the Three
Months and the Six Months Ended June 30, 1999................ 2
Condensed Consolidated Statement of Cash Flows for the Six
Months Ended June 30, 1999................................... 3
Notes to Condensed Consolidated Financial Statements.......... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 13
Item 2. Changes in Securities and Use of Proceeds..................... 13
Item 3. Defaults Upon Senior Securities............................... 13
Item 4. Submission of Matters to a Vote of Security Holders........... 13
Item 5. Other Information............................................. 13
Item 6. Exhibits and Reports on Form 8-K.............................. 13
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
American Cellular Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
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June 30
1999 December 31
(Unaudited) 1998
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ASSETS
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Current assets:
Cash and cash equivalents............................. $ 32,367 $ 34,015
Restricted short-term investments..................... 27,365 26,550
Accounts receivable, net of allowance for doubtful
accounts of $1,269 in 1999 and $2,084 in 1998........ 32,695 26,494
Inventories........................................... 2,704 2,005
Prepaids and other current assets..................... 1,641 1,569
---------- ----------
Total current assets.................................... 96,772 90,633
Cellular facilities, equipment, and other, net.......... 177,124 159,792
Other assets............................................ 1,220,093 1,267,175
---------- ----------
Total assets............................................ $1,493,989 $1,517,600
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt..................... $ 4,000 $ 3,000
Accounts payable...................................... 12,598 6,022
Interest payable...................................... 20,758 22,061
Accrued operating expenses............................ 12,890 16,620
Income and other taxes payable........................ 5,253 3,398
Deferred revenue...................................... 6,182 6,170
Other current liabilities............................. 1,201 989
---------- ----------
Total current liabilities............................... 62,882 58,260
Long-term debt.......................................... 1,194,080 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 $42,588 in
1999 and $21,375 in 1998 of accrued dividends........ 365,588 344,375
Common stock, $0.01 par:
Class A: Authorized 475,000 shares; issued and
outstanding 250,000 shares......................... 3 3
Class B: Authorized 50,000 shares; 21,387 shares
issued and outstanding at June 30, 1999 and 19,387
shares issued and outstanding at December 31,
1998............................................... -- --
Additional paid-in capital............................ 25,193 25,191
Accumulated deficit................................... (153,757) (106,200)
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Total stockholders' equity.............................. 237,027 263,369
---------- ----------
Total liabilities and stockholders' equity.............. $1,493,989 $1,517,600
========== ==========
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See notes to condensed consolidated financial statements.
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American Cellular Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands)
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Three months ended Six months ended
June 30 June 30
1999 1999
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Revenues
Subscriber revenues...................... $ 31,217 $ 60,688
Roaming revenues......................... 24,310 41,509
Toll revenues............................ 9,824 16,915
Equipment sales.......................... 2,381 4,362
Other.................................... 1,994 3,890
-------- --------
Total revenues............................. 69,726 127,364
Costs and expenses
Cost of cellular service................. 5,818 11,099
Cost of equipment sold................... 4,360 8,017
General and administrative............... 10,716 21,178
Sales and marketing...................... 7,396 14,340
Depreciation and amortization............ 24,426 47,911
-------- --------
Total costs and expenses................... 52,716 102,545
-------- --------
Operating income........................... 17,010 24,819
Other income (expense)
Interest expense......................... (26,816) (53,499)
Interest income.......................... 1,129 2,333
Other income, net........................ (9) 59
-------- --------
(25,696) (51,107)
-------- --------
Loss before provision for income taxes..... (8,686) (26,288)
Provision for income taxes................. (15) (56)
-------- --------
Net loss................................... $ (8,701) $(26,344)
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See notes to condensed consolidated financial statements.
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American Cellular Corporation and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
Six months ended June 30, 1999
(In thousands)
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Operating activities
Net loss........................................................... $(26,344)
Adjustment to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization expense............................ 47,911
Amortization of deferred financing costs......................... 2,202
Accretion of discount on Senior Notes............................ 108
Amortization of premium on restricted investments................ 165
Change in working capital components:
Accounts receivable............................................ (6,201)
Inventories.................................................... (699)
Prepaids and other current assets.............................. (72)
Accounts payable............................................... 6,576
Interest payable............................................... (1,303)
Accrued operating expenses..................................... (3,730)
Income and other taxes payable................................. 1,855
Deferred revenue............................................... 12
Other current liabilities...................................... 212
---------
Net cash provided by operating activities.......................... 20,692
Investing activities
Purchase of fixed assets........................................... (33,934)
Decrease in restricted investments, net............................ 13,011
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Net cash used in investing activities.............................. (20,923)
Financing activities
Proceeds from sale of Class B common stock......................... 2
Repayment of long term debt........................................ (1,000)
Deferred financing costs........................................... (419)
---------
Net cash used in financing activities.............................. (1,417)
---------
Decrease in cash and cash equivalents.............................. (1,648)
Cash and cash equivalents at beginning of period................... 34,015
---------
Cash and cash equivalents at end of period......................... $ 32,367
=========
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See notes to condensed consolidated financial statements.
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American Cellular Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with rules and regulations of the Securities and
Exchange Commission for interim financial reporting. In the opinion of
management, the accompanying condensed consolidated financial statements
reflect all adjustments, consisting only of normal recurring accruals,
considered necessary for a fair presentation of the results for the interim
period. The results of operations for the interim period are not necessarily
indicative of the results for a full year. These condensed consolidated
financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's 1998 Annual Report on
Form 10-K.
2. Reclassifications
Certain items have been reclassified in the December 31, 1998 consolidated
financial statements to conform to the current presentation.
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Item 2. 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 Corporation ("American
Cellular" or the "Company") and factors affecting the Company's financial
resources. This discussion should be read in conjunction with the Company's
financial statements, including the notes thereto, included in this Quarterly
Report on Form 10-Q (the "Report").
On June 25, 1998, American Cellular acquired PriCellular Corporation
("PriCellular") pursuant to an Agreement and Plan of Merger dated March 6,
1998 (the "Merger Agreement") for approximately $1.5 billion (the "Merger").
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.
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 1999 and
1998 activity, the pre- and post-acquisition financial information has been
compared to provide the reader with an indication of the trend of results.
Specifically, the results of operations of American Cellular for the three
months and the six months ended June 30, 1999 will be compared with the
results of operations of American Cellular and PriCellular on a combined basis
for the three months and the six months ended June 30, 1998.
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Results of Operations of American Cellular
General
The results for the current three month period ending June 30, 1999 reflect
the continuation of the growth of the Company's operations and subscriber
additions. Net subscriber additions from internally generated sales were
approximately 22,400 for the three months and 40,200 for the six months ended
June 30, 1999 compared to 16,700 and 30,700 for the same periods of the prior
year. The Company ended the current period with approximately 374,700
subscribers resulting in penetration of 7.66% compared to 286,000 and
penetration of 5.85% for the same period of the prior year.
Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
which excludes non-recurring charges, amounted to $41.4 million for the second
quarter of 1999 compared to $32.4 million for the same period in 1998. For the
current six month period EBITDA amounted to $72.8 million compared to $53.8
million for the same period in 1996. Although the Company has experienced
positive results when measured by EBITDA, it expects to incur net accounting
losses for the foreseeable future. EBITDA is utilized as a measurement of
performance within the industry, although it should not be regarded as an
alternative to either operating income or net income as an indicator of
operating performance or to cash flows as a measure of liquidity. Further,
EBITDA is not a GAAP-based financial measure, and it should not be considered
as an alternative to GAAP-based measures of financial performance.
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American
Cellular
Period
from
American American American February
Cellular Cellular Combined Cellular 26, 1998 Combined
Three Three PriCellular Three Six (Date of Six
Months Months Three Months Months Formation) PriCellular Months
Ended Ended Months Ended Ended through Six Months Ended
June 30, June 30, Ended June June 30, June 30, June 30, Ended June June 30,
1999 1998 30, 1998 1998 1999 1998 30, 1998 1998
-------- -------- ----------- -------- -------- ---------- ----------- --------
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Revenues................ $ 69,726 $ -- $ 54,896 $ 54,896 $127,364 $ -- $97,530 $ 97,530
Cost of cellular
service................ (5,818) -- (4,739) (4,739) (11,099) -- (9,330) (9,330)
Cost of equipment sold.. (4,360) -- (2,769) (2,769) (8,017) -- (5,399) (5,399)
General and
administrative......... (10,716) -- (9,632) (9,632) (21,178) -- (18,167) (18,167)
Sales and marketing..... (7,396) -- (6,210) (6,210) (14,340) -- (12,454) (12,454)
Depreciation and
amortization........... (24,426) -- (10,513) (10,513) (47,911 ) -- (19,045) (19,045)
Non-recurring charges... -- (4,078) (2,501) (6,579) -- (4,078) (4,890) (8,968)
-------- ------- -------- -------- -------- ------- ------- --------
Operating income........ 17,010 (4,078) 18,532 14,454 24,819 (4,078) 28,245 24,167
Interest income
(expense), net......... (25,687) (1,867) (18,332) (20,199) (51,166) (1,834) (36,186) (38,020)
Gain (loss) on sale of
assets................. -- -- (133) (133) -- -- (133) (133)
Other income............ (9) 1 976 977 59 1 1,788 1,789
Provision for income
taxes.................. (15) 13 -- 13 (56) -- -- --
-------- ------- -------- -------- -------- ------- ------- --------
Net loss................ $ (8,701) $(5,931) $ 1,043 $ (4,888) $(26,344) $(5,911) $(6,286) $(12,197)
======== ======= ======== ======== ======== ======= ======= ========
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Three Months Ended June 30, 1999 Compared with the Combined Three Months
Ended June 30, 1998
Revenues increased from $54.9 million in 1998 (consisting of $27.8 million
for subscriber revenue, $14.9 million for roaming revenue, $7.8 million for
toll revenue, $1.5 million for equipment sales and $2.9 million for other
revenue) to $69.7 million in 1999 (consisting of $31.2 million for subscriber
revenue, $24.3 million for roaming revenue, $9.8 million for toll revenue,
$2.4 million for equipment sales and $2.0 million for other revenue). The
increase represents the continuing growth in the cellular industry impacting
both subscriber and roaming revenues, and the effect of improved coverage in
the Company's markets as a result of the increase in the number of cell sites
in its systems.
Total costs and expenses increased from $40.4 million in 1998 (consisting of
$4.7 million for cost of cellular service, $2.8 million for cost of equipment
sales, $9.6 million for general and administrative expense, $6.2 million for
sales and marketing expense, $10.5 million for depreciation and amortization
expense and $6.6 million for non-recurring charges) to $52.7 million in 1999
(consisting of $5.8 million cost of cellular service, $4.4 million for cost of
equipment sales, $10.7 million for general and administrative expense,
$7.4 million for sales and marketing expense and $24.4 million for
depreciation and amortization expense). The primary factor contributing to the
increase in expenses is the growth in the subscriber base and the increase in
cellular service minutes provided. Cost of cellular service represents 8.9% of
cellular service, roaming and toll revenue in 1999 compared to 9.4% for the
same period in 1998. Operating expenses consisting of the cost of cellular
service, cost of equipment sold, general and administrative expense and sales
and marketing expense decreased as a percent of total revenues from 42.5% for
the three months ended June 30, 1998 to 40.6% for the current three month
period. This reduction represents cost efficiencies the Company has realized
while achieving a 34% increase in growth in net subscriber additions over the
same period in 1998 and leveraging of various fixed costs over increased
revenues. Depreciation and amortization expense reflects the acquisition of
PriCellular by the Company.
The increase in net interest expense from $20.2 million for the three months
ended June 30, 1998 to $25.7 million for the same period in 1999 is primarily
the result of the acquisition of PriCellular by the Company and the related
financing. Other income (expenses) decreased from $977,000 to ($9,000)
principally due to amortization of a covenant not to compete that was fully
amortized in 1998.
The provision for income taxes in 1999 relates to current state income tax
requirements.
Six Months Ended June 30, 1999 Compared with the Combined Six Months Ended
June 30, 1998
Revenues increased from $97.5 million in 1998 (consisting of $52.2 million
for subscriber revenue, $25.1 million for roaming revenue, $12.3 million for
toll revenue, $2.9 million for equipment sales and $5.0 million for other
revenue) to $127.4 million in 1999 (consisting of $60.7 million for subscriber
revenue, $41.5 million for roaming revenue, $16.9 million for toll revenue,
$4.4 million for equipment sales and $3.9 million for other revenue). The
increase represents the continuing growth in the cellular industry impacting
both subscriber and roaming revenues, and the effect of improved coverage in
the Company's markets as a result of the increase in the number of cell sites
in its systems.
Total costs and expenses increased from $73.4 million in 1998 (consisting of
$9.3 million for cost of cellular service, $5.4 million for cost of equipment
sales, $18.2 million for general and administrative expense, $12.5 million for
sales and marketing expense, $19.0 million for depreciation and amortization
expense and $9.0 million for non-recurring charges) to $102.5 million in 1999
(consisting of $11.1 million cost of cellular service, $8.0 million for cost
of equipment sales, $21.2 million for general and administrative expense,
$14.3 million for sales and marketing expense and $47.9 million for
depreciation and amortization expense). The primary factor contributing to the
increase in expenses is the growth in the subscriber base and the increase in
cellular service minutes provided. Cost of cellular service represents 9.3% of
cellular service, roaming and toll revenue in 1999 compared to 10.4% for the
same period in 1998. Operating expenses consisting of the cost of cellular
service, cost of equipment, general and administrative expense and sales and
marketing expense
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decreased as a percent of total revenues from 46.5% for the six months ended
June 30, 1998 to 42.9% for the current six month period. This reduction
represents cost efficiencies the Company has realized while achieving a 31%
increase in growth in net subscriber additions over the same period in 1998
and leveraging of various fixed costs over increased revenues. Depreciation
and amortization expense reflects the acquisition of PriCellular by the
Company.
The increase in net interest expense from $38.0 million for the six months
ended June 30, 1998 to $51.2 million in 1999 is primarily the result of the
acquisition of PriCellular by the Company and the related financing. Other
income decreased from $1.8 million to $0.1 million principally due to
amortization of a covenant not to compete that was fully amortized in 1998.
The provision for income taxes in 1999 relates to current state income tax
requirements.
Liquidity and Capital Resources
Cash Flows
As of June 30, 1999, the Company had approximately $32.4 million of cash and
cash equivalents and approximately $33.9 million of working capital. Net cash
generated by operations was approximately $20.7 million. Cash used in
investing activities was approximately $20.9 million, consisting of fixed
asset additions of $33.9 million less $13.0 million of net proceeds from the
maturity of restricted investments. Cash used in financing activities was
approximately $1.4 million consisting of $1.0 million for scheduled repayment
of debt and $0.4 million of deferred financing costs associated with the
issuance of the 10 1/2% Senior Notes due 2008, that were issued in May, 1998
(the "Notes").
Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
which excludes non-recurring charges, amounted to $41.4 million for the
three months ended June 30, 1999 compared to $32.4 million for 1998 or an
increase of 28%. 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 has $915 million outstanding under a bank syndicated Credit
Facility. The Credit Facility provides the Company up to $1 billion in four
tranches ($450 million on Tranche A, $200 million for each Tranche B and C,
and up to $150 million on the Revolver Loan). Interest is payable quarterly at
the adjusted prime rate plus the applicable margin for each tranche (0.875%
for the Revolver and Tranche A, 1.75% for Tranche B and 2.00% for Tranche C)
or LIBOR plus the applicable margin for each tranche (1.875% for the Revolver
and Tranche A, 2.750% for Tranche B and 3.000% for Tranche C), based on the
Company's consolidated leverage ratio. As of June 30, 1999, the interest rates
applicable on the tranches of the Credit Facility ranged from approximately
6.955% to 8.44%, yielding a weighted average rate of 7.4%. 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 part of its interest rate management program, the Company utilizes
interest swap and collar agreements to hedge variable interest rate risk under
the Credit Facility. At June 30, 1999, the Company had interest rate collars
with an aggregate notional amount of $700 million, effectively fixing the
LIBOR rate between 5.38% and
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6.00%, expiring in 2001. At June 30, 1999, the Company had an interest rate
swap with a notional amount of $100 million, effectively fixing the LIBOR rate
to 5.84%, expiring in 2001. The fair value of the Company's interest rate
agreements is $338,000 at June 30, 1999 based on the current underlying spot
rates.
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. At June 30, 1999, 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.
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
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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 its goals. This phase is
approximately 88% completed overall and is expected to be 100% completed by
September, 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 85% completed overall
and is expected to be 100% completed by September, 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 85% completed
overall and is expected to be 100% completed by September, 1999.
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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
Networks........ 100% Completed 87% Completed 75% Completed 75% Completed
Expected Expected Expected
Completion Date Completion Date Completion Date
September, 1999 September, 1999 September, 1999
Interconnect
Systems......... 100% Completed 85% Completed 0% Completed 85% Completed
Expected Expected Expected
Completion Date Completion Date Completion Date
August, 1999 Not Applicable September, 1999
Information
Management
Systems......... 100% Completed 91% Completed 91% Completed 91% Completed
Expected Expected Expected
Completion Date Completion Date Completion Date
August, 1999 August, 1999 September, 1999
Other
Administrative
Systems......... 100% Completed 89% Completed 89% Completed 89% Completed
Expected Expected Expected
Completion Date Completion Date Completion Date
August, 1999 August, 1999 September, 1999
</TABLE>
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 July 31, 1999, actual expenditures for these items were approximately
$60,000.
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.
11
<PAGE>
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 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
Traditionally, subscriber revenues fluctuate from quarter to quarter and are
influenced by such factors as weather, holiday periods and typical vacation
periods. Additionally, losses are generally higher in the fourth quarter due
to the lower revenues coupled with higher sales and marketing costs incurred
during the holiday sales season.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are included as part of this Report:
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<C> <S>
27 Financial Data Schedule for the six months ended June 30, 1999.
</TABLE>
(b) Reports on Form 8-K:
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements 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
/s/ John Fujii
By: _________________________________
John Fujii
Chief Executive Officer
/s/ James J. Walter, Jr
By: _________________________________
James J. Walter, Jr.
Vice President of Finance, Chief
Financial Officer and Secretary
Dated: August 12, 1999
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 32,367,000
<SECURITIES> 27,365,000
<RECEIVABLES> 33,964,000
<ALLOWANCES> (1,269,000)
<INVENTORY> 2,704,000
<CURRENT-ASSETS> 96,772,000
<PP&E> 208,082,000
<DEPRECIATION> (30,938,000)
<TOTAL-ASSETS> 1,493,989,000
<CURRENT-LIABILITIES> 62,882,000
<BONDS> 1,194,080,000
0
365,588,000
<COMMON> 3,000
<OTHER-SE> (128,564,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,493,989,000
<SALES> 127,364,000
<TOTAL-REVENUES> 127,364,000
<CGS> 19,116,000
<TOTAL-COSTS> 102,545,000
<OTHER-EXPENSES> 59,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,499,000
<INCOME-PRETAX> (26,288,000)
<INCOME-TAX> 56,000
<INCOME-CONTINUING> (26,344,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,344,000)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
