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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
Or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM___TO___ , 19__.
Commission File Number: 0-23102
-------------------------
POWERTEL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-1944750
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1233 O.G. SKINNER DRIVE, WEST POINT, GEORGIA 31833
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (706) 645-2000
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 11, 1998
Common Stock, $0.01 par value 27,205,857
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POWERTEL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements................................................ 3
Condensed Consolidated Balance Sheets as of
September 30, 1998 (Unaudited) and December 31, 1997................ 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months ended
September 30, 1998 and 1997 (Unaudited)............................. 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1998 and 1997 (Unaudited)........... 5
Condensed Notes to Consolidated Financial Statements
(Unaudited)......................................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 7
Item 3. Quantitative and Qualitative Disclosure About
Market Risks........................................................ 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................... 19
Item 5. Other Information................................................... 19
Item 6. Exhibits and Reports on Form 8-K.................................... 19
</TABLE>
SIGNATURES
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POWERTEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- -----------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 286,399 $ 326,954
Restricted cash for payment of interest.......................... 33,375 33,375
Accounts receivable, net of allowance for doubtful accounts...... 28,159 34,549
Inventories...................................................... 16,543 3,975
Prepaid expenses and other....................................... 9,473 6,631
---------------- ----------------
373,949 405,484
----------------
----------------
PROPERTY AND EQUIPMENT, AT COST.................................... 666,567 541,449
Less: accumulated depreciation.................................. (90,678) (49,699)
---------------- ----------------
575,889 491,750
---------------- ----------------
OTHER ASSETS:
Licenses, net.................................................... 410,594 416,252
Restricted cash for payment of interest.......................... 30,224 43,710
Deferred charges and other, net.................................. 19,629 21,396
---------------- ----------------
460,447 481,358
---------------- ----------------
Total assets................................................ $ 1,410,285 $ 1,378,592
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade......................................... $ 6,853 46,133
Accrued construction costs....................................... 4,143 23,092
Accrued interest................................................. 11,125 2,781
Accrued taxes other than income.................................. 8,842 6,056
Accrued other.................................................... 15,106 11,015
Advance billings and customer deposits........................... 5,062 2,429
Current portion of long-term obligations......................... 338 256
---------------- ----------------
51,469 91,762
---------------- ----------------
LONG-TERM OBLIGATIONS:
12% Senior Discount Notes due February 2006...................... 266,994 244,014
12% Senior Discount Notes due May 2006........................... 266,475 244,344
11.125% Senior Notes due June 2007............................... 300,000 300,000
Credit facility.................................................. 236,233 179,961
Other............................................................ 675 695
---------------- ----------------
1,070,377 969,014
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
CUMULATIVE CONVERTIBLE, REDEEMABLE 152,354 --
PREFERRED STOCK.................................................. ---------------- ----------------
STOCKHOLDERS' EQUITY:
Series A-D convertible preferred stock........................... 4 4
Common Stock..................................................... 270 270
Paid-in capital.................................................. 477,309 477,109
Accumulated deficit.............................................. (340,264) (157,934)
Deferred compensation............................................ (889) (1,288)
Treasury stock, at cost.......................................... (345) (345)
---------------- ----------------
136,085 317,816
---------------- ----------------
Total liabilities and stockholders' equity.................. $ 1,410,285 $ 1,378,592
================ ================
</TABLE>
The accompanying condensed notes to financial statements are an
integral part of these statements.
3
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POWERTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Monthly access revenue................................ $ 23,018 $ 8,639 $ 59,285 $ 25,470
Airtime revenue....................................... 10,383 2,483 26,788 6,744
Roaming revenue....................................... 1,868 1,067 5,393 3,537
Toll revenue.......................................... 3,418 1,610 9,679 4,408
Installation and connection revenue................... 32 673 1,622 1,644
Other revenue......................................... 1,573 366 3,419 1,391
----------- ----------- ------------ -----------
Total service revenues.............................. 40,292 14,838 106,186 43,194
Equipment sales....................................... 4,346 3,629 15,954 11,011
----------- ----------- ------------ -----------
Total revenues and sales.......................... 44,638 18,467 122,140 54,205
----------- ----------- ------------ -----------
OPERATING EXPENSES:
Cost of services...................................... 11,539 7,267 31,460 20,391
Cost of equipment sold................................ 19,674 9,898 49,684 26,632
Operations............................................ 13,793 5,453 38,219 12,812
Selling and marketing................................. 14,920 9,066 40,185 23,345
General and administrative............................ 9,068 5,467 25,860 18,384
Depreciation.......................................... 14,447 12,025 40,979 28,928
Amortization.......................................... 2,389 1,968 7,170 4,215
----------- ----------- ------------ -----------
Total operating expenses.......................... 85,830 51,144 233,557 134,707
----------- ----------- ------------ -----------
OPERATING LOSS........................................... (41,192) (32,677) (111,417) (80,502)
----------- ----------- ------------ -----------
OTHER EXPENSE (INCOME):
Interest expense, net................................. 22,893 13,263 68,385 24,901
Gain on sale of subsidiary............................ -- -- -- (41,912)
Miscellaneous expense (income), net................... 174 (44) (45) (166)
----------- ----------- ------------ -----------
Total other expense (income)...................... 23,067 13,219 68,340 (17,177)
----------- ----------- ------------ -----------
LOSS BEFORE INCOME TAXES................................. (64,259) (45,896) (179,757) (63,325)
INCOME TAX (BENEFIT) PROVISION........................... -- -- -- --
----------- ----------- ------------ -----------
NET LOSS................................................. (64,259) (45,896) (179,757) (63,325)
DIVIDENDS ON CUMULATIVE CONVERTIBLE, (2,438) -- (2,573) --
REDEEMABLE PREFERRED STOCK............................ ----------- ----------- ------------ -----------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS................ $ (66,697) $ (45,896) $ (182,330) $ (63,325)
=========== =========== ============ ===========
PER SHARE DATA:
BASIC LOSS PER COMMON SHARE........................... $ (2.47) $ (1.71) $ (6.76) $ (2.36)
=========== =========== ============ ===========
DILUTED LOSS PER COMMON SHARE......................... $ (2.47) $ (1.71) $ (6.76) $ (2.36)
=========== =========== ============ ===========
</TABLE>
The accompanying condensed notes to financial statements are an
integral part of these statements.
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POWERTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss......................................................................... $ (179,757) $ (63,325)
Adjustments to reconcile net loss to net cash used in
operating activities -
Gain on sale of subsidiary, net.............................................. -- (41,912)
Depreciation and amortization................................................ 48,149 33,143
Bond accretion............................................................... 43,065 22,132
Amortization of deferred offering costs...................................... 1,840 1,428
Other........................................................................ 399 63
Changes in assets and liabilities:
Decrease (increase) in accounts receivable................................ 6,390 (11,786)
Increase in inventories................................................... (12,568) (1,391)
(Increase) decrease in other assets....................................... (2,842) 7,687
(Decrease) increase in accounts payable and accrued expenses.............. (24,059) 14,748
Increase in advance billings and customer deposits........................ 2,633 931
------------ -------------
Net cash used in operating activities................................. (116,750) (38,282)
------------ -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures............................................................ (124,034) (184,856)
(Decrease) increase in accrued construction costs............................... (18,949) 7,299
Purchase of FCC licenses........................................................ -- (31,251)
Liquidation of short-term investments........................................... 13,486 36,879
Purchase of long-term investments............................................... -- (58,155)
Microwave relocation costs...................................................... (550) (5,709)
Proceeds from sale of subsidiary................................................ -- 77,204
------------ -------------
Net cash used in investing activities................................. (130,047) (158,589)
------------ -------------
CASH FLOWS PROVIDED FROM FINANCING ACTIVITIES:
Proceeds from sale of cumulative convertible, redeemable preferred stock, net.... 149,708 --
Proceeds from sale of preferred stock, net....................................... -- 44,898
Proceeds from sale of common stock, net.......................................... 200 599
Proceeds from issuance of senior notes, net...................................... -- 291,284
Borrowings under credit facility................................................. 56,272 49,567
Other............................................................................ 62 461
------------ -------------
Net cash provided from financing activities........................... 206,242 386,809
------------ -------------
NET (DECREASE) INCREASE IN CASH...................................................... (40,555) 189,938
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................................... 326,954 185,525
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 286,399 $ 375,463
============ =============
</TABLE>
The accompanying condensed notes to financial statements are an integral
part of these statements.
5
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POWERTEL, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to Article
10 of Regulation S-X of the Securities and Exchange Commission. The
accompanying unaudited condensed consolidated financial statements
reflect, in the opinion of management, all adjustments necessary to
achieve a fair statement of financial position and results for the
interim periods presented. All such adjustments are of a normal recurring
nature. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and notes
thereto included in the Annual Report of Powertel, Inc. ("Powertel" or
the "Company") on Form 10-K for the year ended December 31, 1997.
2. Certain prior year amounts have been reclassified to conform to the
current period presentation.
3. On June 22, 1998, pursuant to a Stock Purchase Agreement between the
Company and SCANA Communications, Inc., a wholly-owned subsidiary of
SCANA Corporation ("SCANA"), the Company issued to SCANA 50,000 shares of
nonvoting Series E 6.5% Cumulative Convertible, Redeemable Preferred
Stock in a private placement for an aggregate purchase price of $75
million. Also, on June 22, 1998, pursuant to a Stock Purchase Agreement
between the Company and ITC Wireless, Inc., a wholly-owned subsidiary of
ITC Holding Company, Inc. ("ITC Wireless"), the Company issued to ITC
Wireless 50,000 shares of nonvoting Series F 6.5% Cumulative Convertible,
Redeemable Preferred Stock in a private placement for an aggregate
purchase price of $75 million.
For the three months ended September 30, 1998, the Company recorded
accrued dividends on the Cumulative Convertible, Redeemable Preferred
Stock as an increase in the Net Loss Available to Common Stockholders.
4. Effective with the quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"), which requires the restatement of all prior periods
earnings per common share ("EPS") amounts. The components of EPS and
their derivation as required under SFAS 128 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net loss...................................... $ (64,259) $ (45,896) $ (179,757) $ (63,325)
Cumulative convertible, redeemable preferred (2,438) -- (2,573) --
stock dividends........................... ============= ============= ============= ============
Net loss available to common stockholders..... $ (66,697) $ (45,896) $ (182,330) $ (63,325)
============= ============= ============= ============
Average common shares outstanding............. 26,984 26,846 26,981 26,824
============= ============= ============= ============
Basic and diluted earnings per share.......... $ (2.47) $ (1.71) $ (6.76) $ (2.36)
============= ============= ============= ============
</TABLE>
Basic EPS was computed by dividing net loss by the weighted average
number of shares of Common Stock outstanding during the quarter. Diluted
EPS is the same as basic EPS for all periods presented due to the fact
that all Common Stock equivalents would have an antidilutive effect.
5. The Company is subject to litigation related to matters arising in the
course of its business, including service, billing and collection
matters. While the Company does not expect such litigation to have a
material adverse effect on the Company, no assurance can be given that
the resolution of any or all of such litigation will not have a material
adverse effect on the Company's business, financial condition or results
of operations.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Powertel, Inc. (the "Company" or "Powertel") provides personal
communications services ("PCS") in the southeastern United States under the
name "Powertel" and cellular telephone service in contiguous portions of
eastern Alabama and western Georgia under the name "InterCel." The Company
formerly provided cellular telephone service in the State of Maine under the
name "Unicel." On May 1, 1997, the Company sold substantially all the assets of
Unicel for approximately $77.2 million (the "Maine Disposition"). The Common
Stock of the Company, par value of $0.01 per share (the "Common Stock"), is
traded on the Nasdaq Stock Market under the symbol "PTEL."
Powertel's PCS licenses encompass a territory of approximately 246,000
contiguous square miles with a population of approximately 24.6 million people
in the Major Trading Areas ("MTAs") of Atlanta, Georgia; Jacksonville, Florida;
Memphis, Tennessee/Jackson, Mississippi; and Birmingham, Alabama (the "Current
PCS Markets") and in 13 Basic Trading Areas ("BTAs") in Kentucky and Tennessee
(the "Kentucky/Tennessee BTAs"). The Company first introduced its PCS services
in October 1996 in Jacksonville, Florida and Montgomery, Alabama and, to date,
has launched its PCS services in a total of 28 markets in the Southeast.
Powertel intends to continue to rapidly build out its PCS network and to launch
its PCS services. As of September 30, 1998, the Company had approximately
228,000 PCS subscribers.
Average revenues per subscriber in the wireless industry have declined
during recent quarters and are expected to continue to gradually decline in the
future. The Company believes this downward trend is the result of the addition
of lower usage customers who utilize wireless service for personal convenience,
security or as backup for their traditional landline telephones. In addition,
the Company expects that revenue per minute will continue to decline as
competition within the wireless industry intensifies. The Company believes the
effect of this trend on the Company's earnings will be mitigated by
corresponding increases in the number of wireless subscribers and the use of
enhanced services that are offered to PCS subscribers.
As a result of: (i) the significant costs required to build out and
maintain the PCS system, hire and manage the required personnel to operate the
PCS business and market its services; (ii) the subsidization of PCS handsets to
customers; and (iii) the depreciation of PCS equipment and amortization of the
PCS licenses, the Company incurred a net loss of $179.8 million for the nine
months ended September 30, 1998. The Company expects to continue incurring
significant operating losses during the remainder of 1998 and thereafter as it
continues to build out its PCS system, develop its PCS customer base and
subsidize the cost of PCS handsets to its customers.
Minimizing customer attrition, or "churn," becomes a greater challenge
as the subscriber base grows and the wireless marketplace becomes more
competitive. The Company generated an average monthly churn rate of 2.1% and
4.5% for its cellular and PCS businesses, respectively, for the three months
ended September 30, 1998. The Company remains focused on reducing its PCS churn
rate in the future through more focused collections efforts, stricter credit
evaluation policies, implementation of fraud prevention tools, a proactive
customer retention program and alternative methods of payment. The Company also
introduced an intelligent network-based prepaid service alternative for
credit-challenged customers during September 1998. However, the Company expects
that ongoing PCS churn rates could be higher than historical churn rates for
cellular carriers as more competitors and competitive services continue to
enter the marketplace. Additionally, the ability of PCS subscribers to activate
service via the phone ("over the air activation") without any face-to-face
contact with Company representatives increases the Company's susceptibility to
subscription fraud, which ultimately results in churn.
The Company is a member of the North American GSM Alliance (the
"Alliance"), a consortium of thirteen PCS carriers which offer PCS service
through the Global System for Mobile Communication ("GSM") throughout North
America. All members of the Alliance have executed roaming agreements with each
other, thereby allowing GSM customers to roam throughout many major
metropolitan areas in the United States and
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Canada. Additionally, the Company has signed several international roaming
agreements and expects to sign numerous others with international GSM carriers
to facilitate international roaming.
Unless otherwise indicated, all population data set forth herein is
based on the 1998 Paul Kagan Associates, Inc. Cellular/PCS Pop Book.
8
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RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
The following table reflects the composition of the Company's cellular
and PCS service revenue and equipment sales, and related gross margins, as well
as overall operating and other costs and margins. Due to the start-up costs
associated with the Company's PCS business, historical results of operations
will not be comparable with future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997
-------------------------------- -------------------------------
COMBINED COMBINED
CELLULAR CELLULAR
AND AND
CELLULAR PCS PCS CELLULAR PCS PCS
-------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SERVICE REVENUE & COST ANALYSIS:
Service revenue
Local customers--
Access revenue....................... $ 2,026 $ 20,992 $ 23,018 $ 1,978 $ 6,661 $ 8,639
Airtime revenue...................... 754 9,629 10,383 868 1,615 2,483
Toll revenue......................... 64 2,719 2,783 55 1,199 1,254
------- -------- -------- ------- -------- --------
2,844 33,340 36,184 2,901 9,475 12,376
------- -------- -------- ------- -------- --------
Roamers--
Access & airtime revenue............. 1,256 612 1,868 1,067 -- 1,067
Toll revenue......................... 440 195 635 356 -- 356
------- -------- -------- ------- -------- --------
1,696 807 2,503 1,423 -- 1,423
------- -------- -------- ------- -------- --------
Other--
Installation and connection.......... 32 -- 32 19 654 673
Other................................ 118 1,455 1,573 246 120 366
------- -------- -------- ------- -------- --------
150 1,455 1,605 265 774 1,039
------- -------- -------- ------- -------- --------
Total service revenue.............. 4,690 35,602 40,292 4,589 10,249 14,838
Cost of services.......................... 476 11,063 11,539 477 6,790 7,267
------- -------- -------- ------- -------- --------
Gross margin.............................. $ 4,214 $ 24,539 $ 28,753 $ 4,112 $ 3,459 $ 7,571
======= ======== ======== ======= ======== ========
EQUIPMENT SALES & COST ANALYSIS:
Equipment sales........................... $ 200 $ 4,146 $ 4,346 $ 140 $ 3,489 $ 3,629
Cost of equipment sales................... 372 19,302 19,674 329 9,569 9,898
------- -------- -------- ------- -------- --------
Gross margin.............................. $ (172) $(15,156) $(15,328) $ (189) $ (6,080) $ (6,269)
======= ======== ======== ======= ======== ========
OPERATING MARGIN ANALYSIS:
Total revenues............................ $ 4,890 $ 39,748 $ 44,638 $ 4,729 $ 13,738 $ 18,467
------- -------- -------- ------- -------- --------
Operating expenses--
Cost of services and equipment sales.. 848 30,365 31,213 806 16,359 17,165
Operations............................ 485 13,308 13,793 666 4,787 5,453
Selling and marketing................. 551 14,369 14,920 569 8,497 9,066
General and administrative............ 450 8,618 9,068 592 4,875 5,467
Depreciation.......................... 457 13,990 14,447 484 11,541 12,025
Amortization.......................... -- 2,389 2,389 15 1,953 1,968
------- -------- -------- ------- -------- --------
Total operating expenses............ 2,791 83,039 85,830 3,132 48,012 51,144
------- -------- -------- ------- -------- --------
Operating income (loss)................... $ 2,099 $(43,291) (41,192) $ 1,597 $(34,274) (32,677)
======= ======== ======= ========
Interest expense, net..................... 22,893 13,263
Miscellaneous expense (income)............ 174 (44)
-------- --------
Loss before income taxes.................. (64,259) (45,896)
Income tax (benefit) provision............ -- --
-------- --------
Net loss............................ $(64,259) $(45,896)
======== ========
Other Supplemental Data:
Subscribers at end of period........... 28,037 228,654 256,691 24,895 66,066 90,961
Capital expenditures................... $ 487 $ 49,345 $ 49,832 $ 377 $ 73,803 $ 74,180
</TABLE>
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<PAGE> 10
The following discussion reflects the Company's results of operations
for its PCS and cellular lines of business. All general corporate costs have
been allocated to the PCS line of business.
Service revenue from local customers increased $23.8 million, or 192%,
for the three months ended September 30, 1998, as compared to the same period
of 1997. PCS service revenue from local customers increased $23.9 million, or
252%, primarily as a result of the continued increase in subscribers (to
approximately 228,000 at September 30, 1998, from approximately 66,000 at
September 30, 1997), which is attributable mainly to the launch of seven new
PCS markets, including Atlanta, Georgia, since September 30, 1997. Cellular
service revenue from local customers remained relatively consistent with the
same period of 1997, decreasing $.1 million, or 2%. Although the Company has
experienced an increase in cellular subscribers (to approximately 28,000 at
September 30, 1998, from approximately 25,000 at September 30, 1997), it has
experienced a decrease in cellular service revenue from local customers due to
increased price competition from other wireless carriers, which has resulted in
cellular rate plans with more bundled airtime minutes.
The average monthly service revenue ("RPU") per local PCS subscriber
was $54.15 for the three months ended September 30, 1998, as compared to $58.05
for the same period of 1997. This decrease is attributable primarily to changes
in the Company's rate plan offerings from 1997 to 1998. At September 30, 1997, a
substantial portion of the Company's PCS subscribers were participants in a
promotional plan under which they received unlimited monthly airtime for local
calling for a fixed monthly fee of $50. In 1998, the Company has been offering
multiple rate plans with fixed monthly access charges ranging from $20 to $90.
These rate plans have contributed to an overall reduction in RPU per local PCS
subscriber as customers gravitate toward lower fixed-rate plans, a trend
consistent with a general trend in the wireless industry of declining RPU. The
Company anticipates some decline in its RPU per local PCS subscriber in future
periods due primarily to lower minute usage by new wireless subscribers and
increased price competition among wireless carriers.
The RPU per local cellular subscriber decreased to $34.96 for the
three months ended September 30, 1998, as compared to $39.30 for the same
period of 1997. As previously noted, this reduction in RPU per local cellular
subscriber reflects increased price competition among wireless carriers, which
has prompted the Company to offer rate plans with more bundled airtime minutes.
The Company generated $.8 million in PCS roaming revenue during the
three months ended September 30, 1998, as compared to none for the same period
of 1997. This increase reflects the success of the previously mentioned roaming
agreements with Alliance partners that became effective during the last few
months of 1997. Cellular roaming revenue increased $.3 million, or 19%, for the
three months ended September 30, 1998, as compared to the same period of 1997.
This increase is due primarily to an increase in the number of roamers and the
increased usage per roamer.
Other service revenue, which includes activation and installation
fees, co-location revenue and interconnection fees billed to local exchange
carriers ("LECs") for connections to the Company's PCS and cellular networks,
increased $.6 million, or 54%, for the three months ended September 30, 1998,
as compared to the same period of 1997. This increase is due primarily to the
Company's concentrated efforts to secure tenants for co-location on its towers
and to the increase in interconnection fees as a result of increased
utilization of the Company's PCS and cellular networks by LECs. The Company
waived all activation fees for new PCS subscribers in the third quarter.
Cost of services includes the cost of: (i) interconnection with LEC
facilities; (ii) direct cell site costs (e.g., property taxes and insurance,
site lease costs and electric utilities); (iii) PCS and cellular roaming
validation (provided by third-party clearinghouses); (iv) long distance toll
costs; and (v) supplementary services (such as voice mail). PCS cost of
services increased $4.3 million, or 63%, for the three months ended September
30, 1998, as compared to the same period of 1997. This increase primarily
reflects costs related to the approximately 500 additional cell sites that have
been placed in service since September 30, 1997, as well as increased
interconnection and toll costs related to increased traffic on the Company's
expanding PCS network.
The Company generated a negative PCS equipment margin of 366% on $4.1
million of sales during the three months ended September 30, 1998, as compared
to a negative margin of 174% on $3.5 million of sales for
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<PAGE> 11
the same period of 1997. The increase in negative PCS equipment margins in 1998
is attributable primarily to special promotional prices offered on several
handsets during the third quarter. The Company generated a negative cellular
equipment margin of 86% on $.2 million of sales during the three months ended
September 30, 1998, as compared to a negative margin of 135% on $.1 million of
sales for the same period of 1997. The Company expects to continue subsidizing
the cost of PCS and cellular handsets to consumers for the foreseeable future.
Operations costs, which include the costs of maintaining the cellular
and PCS systems, customer service, credit and collections (including bad debt)
and inventory management, increased $8.3 million, or 153%, for the three months
ended September 30, 1998, as compared to the same period of 1997. Substantially
all of this increase is attributable to costs incurred to provide customer
service to the growing PCS customer base and to maintain the expanding PCS
network and a significant increase in the bad debt provision resulting from the
disconnection of non-paying PCS customers.
Selling and marketing costs totaled $14.9 million for the three months
ended September 30, 1998, an increase of $5.9 million, or 65%, from the same
period of 1997. Substantially all of this increase is attributable to continued
increases in PCS advertising and marketing costs and the expansion of the
Company's various sales distribution channels.
General and administrative costs ("G&A") were $9.1 million for the
three months ended September 30, 1998, an increase of $3.6 million, or 66%,
from the same period of 1997. PCS G&A costs, which totaled $8.6 million for the
three months ended September 30, 1998, increased 77% from the same period of
1997, primarily as a result of increased headcount and the related increase in
facilities costs at the Company's corporate and regional administrative offices
and information technology center.
Depreciation and amortization totaled $16.8 million for the three
months ended September 30, 1998, an increase of $2.8 million, or 20%, from the
same period of 1997, and consists principally of the depreciation of the
cellular and PCS network and the amortization of PCS licenses. Substantially
all of this increase is attributable to the depreciation associated with the
approximately 500 additional PCS cell sites placed in service since September
30, 1997 and the amortization costs associated with the Atlanta MTA license
which was placed in service during August of 1997.
Net consolidated interest expense totaled $22.9 million for the three
months ended September 30, 1998, as compared to $13.3 million for the same
period of 1997. This increase of $9.6 million, or 73%, reflects: (i) the
additional interest costs associated with increased funding provided under the
Credit Facility; (ii) increased accretion of the original issue discount on the
February and April Notes; and (iii) a significant reduction in capitalized
interest ($1.1 million for the three months ended September 30, 1998, as
compared to $4.4 million for the same period of 1997), which is attributable to
the completion and placing in service of the majority of the Company's PCS
system.
The effective income tax rate for both the three months ended
September 30, 1998 and 1997 was 0%. The Company generated a $64.3 million net
loss during the three months ended September 30, 1998 and expects to continue
to incur significant operating losses throughout the remainder of 1998 and
beyond. The tax benefit of these operating losses will not be recognized until
management determines that it is more likely than not that such benefit is
realizable.
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<PAGE> 12
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
The following table reflects the composition of the Company's cellular
and PCS service revenue and equipment sales, and related gross margins, as well
as overall operating and other costs and margins. The Company's historical
results of operations, particularly in view of the Maine Disposition and the
start-up costs associated with the Company's PCS business, will not be
comparable with future periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -----------------------------
1998 1997
-------------------------------- -----------------------------
COMBINED COMBINED
CELLULAR CELLULAR
AND AND
CELLULAR PCS PCS CELLULAR PCS PCS
-------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SERVICE REVENUE & COST ANALYSIS:
Service revenue
Local customers--
Access revenue........................ $ 6,037 $ 53,248 $ 59,285 $ 8,653 $ 16,817 $ 25,470
Airtime revenue....................... 2,341 24,447 26,788 3,789 2,955 6,744
Toll revenue.......................... 176 7,588 7,764 372 2,853 3,225
------- --------- --------- ------- -------- --------
8,554 85,283 93,837 12,814 22,625 35,439
------- --------- --------- ------- -------- --------
Roamers--
Access & airtime revenue.............. 3,551 1,842 5,393 3,537 -- 3,537
Toll revenue.......................... 1,264 651 1,915 1,183 -- 1,183
------- --------- --------- ------- -------- --------
4,815 2,493 7,308 4,720 -- 4,720
------- --------- --------- ------- -------- --------
Other--
Installation and connection........... 84 1,538 1,622 89 1,555 1,644
Other................................. 433 2,986 3,419 815 576 1,391
------- --------- --------- ------- -------- --------
517 4,524 5,041 904 2,131 3,035
------- --------- --------- ------- -------- --------
Total service revenue............... 13,886 92,300 106,186 18,438 24,756 43,194
Cost of services........................... 1,420 30,040 31,460 2,631 17,760 20,391
------- --------- --------- ------- -------- --------
Gross margin............................... $12,466 $ 62,260 $ 74,726 $15,807 $ 6,996 $ 22,803
======= ========= ========= ======= ======== ========
EQUIPMENT SALES & COST ANALYSIS:
Equipment sales............................ $ 594 $ 15,360 $ 15,954 $ 736 $ 10,275 $ 11,011
Cost of equipment sales.................... 1,249 48,435 49,684 1,941 24,691 26,632
------- --------- --------- ------- -------- --------
Gross margin............................... $ (655) $ (33,075) $ (33,730) $(1,205) $(14,416) $(15,621)
======= ========= ========= ======= ======== ========
OPERATING MARGIN ANALYSIS:
Total revenues............................. $14,480 $ 107,660 $ 122,140 $19,174 $ 35,031 $ 54,205
------- --------- --------- ------- -------- --------
Operating expenses--
Cost of services and equipment sales... 2,669 78,475 81,144 4,572 42,451 47,023
Operations............................. 1,413 36,806 38,219 2,439 10,373 12,812
Selling and marketing.................. 1,668 38,517 40,185 2,754 20,591 23,345
General and administrative............. 1,366 24,494 25,860 2,175 16,209 18,384
Depreciation........................... 1,426 39,553 40,979 2,037 26,891 28,928
Amortization........................... -- 7,170 7,170 261 3,954 4,215
------- --------- --------- ------- -------- --------
Total operating expenses............. 8,542 225,015 233,557 14,238 120,469 134,707
------- --------- --------- ------- -------- --------
Operating income (loss).................... $ 5,938 $(117,355) (111,417) $ 4,936 $(85,438) (80,502)
======= ========= ======= ========
Gain on sale of subsidiary................. -- (41,912)
Interest expense, net...................... 68,385 24,901
Miscellaneous income....................... (45) (166)
--------- --------
Loss before income taxes................... (179,757) (63,325)
Income tax (benefit) provision............. -- --
--------
=========
Net loss............................. $(179,757) $(63,325)
========= ========
Other Supplemental Data:
Subscribers at end of period............ 28,037 228,654 256,691 24,895 66,066 90,961
Capital expenditures.................... $ 1,373 $ 122,661 $ 124,034 $ 1,615 $183,241 $184,856
</TABLE>
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<PAGE> 13
The following discussion reflects the Company's results of operations
for its PCS and cellular lines of business. All general corporate costs have
been allocated to the PCS line of business.
Service revenue from local customers increased $58.4 million, or 165%,
for the nine months ended September 30, 1998, as compared to the same period of
1997. PCS service revenue from local customers increased $62.7 million, or
277%, as a result of the continued increase in subscribers (to approximately
228,000 at September 30, 1998, from approximately 66,000 at September 30,
1997), which is attributable to the launch of seven new PCS markets, including
Atlanta, Georgia, since September 30, 1997. Cellular service revenue from local
customers decreased $4.3 million, or 33%, primarily as a result of the Maine
Disposition, which occurred during the second quarter of 1997, and the
corresponding disposition of approximately 27,000 customers.
The average monthly service revenue ("RPU") per local PCS subscriber
was $55.51 for the nine months ended September 30, 1998, as compared to $61.41
for the same period of 1997. This decrease is attributable primarily to changes
in the Company's rate plan offerings from 1997 to 1998. At September 30, 1997,
a substantial portion of the Company's PCS subscribers were participants in a
promotional plan under which they received unlimited monthly airtime for local
calling for a fixed monthly fee of $50. In 1998, the Company has been offering
multiple rate plans with fixed monthly access charges ranging from $20 to $90.
These rate plans have contributed to an overall reduction in RPU per local PCS
subscriber as customers gravitate toward lower fixed-rate plans, a trend
consistent with a general trend in the wireless industry of declining RPU. The
Company anticipates some decline in its RPU per local PCS subscriber in
future periods due primarily to lower minute usage by new wireless subscribers
and increased price competition among wireless carriers.
The RPU per local cellular subscriber decreased to $36.11 for the nine
months ended September 30, 1998, as compared to $38.73 for the same period of
1997. As previously noted, this reduction in RPU per local cellular subscriber
reflects increased price competition among wireless carriers, which has
prompted the Company to offer rate plans with more bundled airtime minutes.
The Company generated $2.5 million in PCS roaming revenue during the
nine months ended September 30, 1998, as compared to none for the same period
of 1997. This increase reflects the success of the previously mentioned roaming
agreements with Alliance partners that became effective during the last few
months of 1997. Cellular roaming revenue remained relatively consistent with
the same period of 1997, increasing $.1 million, or 2%. Although the Company
anticipated a reduction in roaming revenue due to the Maine Disposition, this
reduction was offset by a continued increase in the number of roamers and
minutes of usage per roamer for the Company's cellular division.
Other service revenue, which includes activation and installation
fees, co-location revenue and interconnection fees billed to LECs for
connections to the Company's PCS and cellular networks, increased $2.0 million,
or 66%, for the nine months ended September 30, 1998, as compared to the same
period of 1997. This increase is due primarily to the Company's concentrated
efforts to secure tenants for co-location on its towers and to the increase in
interconnection fees as a result of increased utilization of the Company's PCS
and cellular networks by LECs.
Cost of services includes the cost of: (i) interconnection with LEC
facilities; (ii) direct cell site costs (e.g., property taxes and insurance,
site lease costs and electric utilities); (iii) PCS and cellular roaming
validation (provided by third-party clearinghouses); (iv) long distance toll
costs; and (v) supplementary services (such as voice mail). PCS cost of
services increased $12.3 million, or 69%, for the nine months ended September
30, 1998, as compared to the same period in 1997. This increase primarily
reflects costs related to the approximately 500 additional cell sites that have
been placed in service since September 30, 1997, as well as increased
interconnection and toll costs related to increased traffic on the Company's
expanding PCS network. Cellular cost of services decreased $1.2 million, or
46%, for the nine months ended September 30, 1998, as compared to the same
period of 1997, as a result of the Maine Disposition and a significant decrease
in costs associated with cloning and subscription fraud in the Company's
cellular division during 1998.
The Company generated a negative PCS equipment margin of 215% on $15.4
million of sales for the nine months ended September 30, 1998, as compared to a
negative margin of 140% on $10.3 million of sales for
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<PAGE> 14
the same period of 1997. The increase in negative PCS equipment margins in 1998
is attributable primarily to special promotional prices offered on several
handsets during the second and third quarters. The Company generated a negative
cellular equipment margin of 110% on $.6 million of sales for the nine months
ended September 30, 1998, as compared to a negative margin of 164% on $.7
million of sales for the same period of 1997. The Company expects to continue
subsidizing the cost of PCS and cellular handsets to consumers for the
foreseeable future.
Operations costs, which include the costs of maintaining the cellular
and PCS systems, customer service, credit and collections (including bad debt)
and inventory management, increased $25.4 million, or 198%, for the nine months
ended September 30, 1998, as compared to the same period of 1997. Substantially
all of this increase is attributable to costs incurred to provide customer
service to the growing PCS customer base and to maintain the expanding PCS
network and a significant increase in the bad debt provision resulting from the
disconnection of non-paying PCS customers. Cellular operations costs decreased
$1 million, or 42%, primarily as a result of the Maine Disposition.
Selling and marketing costs totaled $40.2 million for the nine months
ended September 30, 1998, an increase of $16.8 million, or 72%, from the same
period of 1997. Substantially all of this increase is attributable to continued
increases in PCS advertising and marketing costs and the expansion of the
Company's various PCS sales distribution channels. Cellular selling and
marketing costs decreased $1.1 million, or 39%, primarily as a result of the
Maine Disposition.
G&A costs were $25.9 million for the nine months ended September 30,
1998, an increase of $7.5 million, or 41%, from the same period of 1997. PCS
G&A costs, which totaled $24.5 million for the nine months ended September 30,
1998, increased 51% from the same period of 1997, primarily as a result of
increased headcount and the related increase in facilities costs at the
Company's corporate and regional administrative offices and information
technology center. Cellular G&A decreased $.8 million, or 37%, primarily as a
result of the Maine Disposition.
Depreciation and amortization totaled $48.1 million for the nine
months ended September 30, 1998, an increase of $15 million, or 45%, from the
same period of 1997, and consists principally of the depreciation of the
cellular and PCS network and the amortization of PCS licenses. Substantially
all of this increase is attributable to the depreciation associated with the
approximately 500 additional PCS cell sites that have been placed in service
since September 30, 1997 and the amortization costs associated with the Atlanta
MTA license which was placed into service during August of 1997.
Net consolidated interest expense totaled $68.4 million for the nine
months ended September 30, 1998, as compared to $24.9 million for the same
period of 1997. This increase of $43.5 million, or 175%, reflects: (i) the
additional interest costs associated with both the $300 million 11.125% Senior
Notes due June 2007, which were issued in June, 1997 and increased funding
provided under the Credit Facility; (ii) the lower availability of funds for
investment due to the buildout of the PCS network and; (iii) a substantial
reduction in capitalized interest ($2 million for the nine months ended
September 30, 1998, as compared to $18.1 million for the same period of 1997),
which is attributable to the completion and placing in service of the majority
of the Company's PCS system.
The effective income tax rate for both the nine months ended September
30, 1998 and 1997 was 0%. The Company generated a $179.8 million net loss
during the nine months ended September 30, 1998 and expects to continue to
incur significant operating losses throughout the remainder of 1998 and beyond.
The tax benefit of these operating losses will not be recognized until
management determines that it is more likely than not that such benefit is
realizable.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires significant amounts of capital for funding the
operations and expansion of its PCS business. Total capital expenditures,
including capital expenditures for information technology and other support of
the PCS business, totaled approximately $124 million for the first nine months
of 1998. Costs associated with
14
<PAGE> 15
the PCS system buildout include tower sites, leasehold improvements, base
station and switch equipment and labor expenses related to construction of
sites. The Company currently estimates that capital expenditures will total
approximately $109 million for the remainder of 1998 relating to the initial
buildout of the PCS systems in the Kentucky/Tennessee BTAs and the continued
expansion of its other PCS markets and the cellular system. By the end of 1998,
the Company expects to be able to offer PCS services in markets containing
approximately 60% of the population within its PCS markets. Wireless coverage
is expected to extend across most metropolitan areas, certain secondary cities
and major connecting highway corridors within the Company's PCS markets.
Thereafter, based on customer demand and competitive factors, the Company
intends to continue to build out its PCS system to enhance and expand its
coverage. The Company anticipates that it will need to raise additional
financing in the event it decides to make acquisitions of additional licenses
or businesses or expand and enhance the existing PCS coverage in existing PCS
markets.
On June 22, 1998, pursuant to a Stock Purchase Agreement between the
Company and SCANA Communications, Inc., a wholly-owned subsidiary of SCANA
Corporation ("SCANA"), the Company issued to SCANA 50,000 shares of non-voting
Series E 6.5% Cumulative Convertible, Redeemable Preferred Stock (the "Series E
Preferred") in a private placement for an aggregate purchase price of $75
million. Also, on June 22, 1998, pursuant to a Stock Purchase Agreement between
the Company and ITC Wireless, Inc., a wholly-owned subsidiary of ITC Holding
Company, Inc. ("ITC Wireless"), the Company issued to ITC Wireless 50,000
shares of nonvoting Series F 6.5% Cumulative Convertible, Redeemable Preferred
Stock (the "Series F Preferred") in a private placement for an aggregate
purchase price of $75 million. The Series E Preferred and Series F Preferred
become convertible on June 22, 2003, at the option of the holder, into Common
Stock at an initial conversion price of $22.01, subject to adjustment. The
Series E Preferred and Series F Preferred are redeemable at the option of the
Company anytime subsequent to June 22, 2003, but no later than June 1, 2010. The
Series E Preferred and Series F Preferred have a liquidation preference over
the Common Stock of $1,500 per share, subject to adjustment, plus accrued and
unpaid dividends in the event of a liquidation, dissolution or winding up of
the Company. The 6.5% annual dividend on each of the Series E Preferred and
Series F Preferred is payable quarterly in Common Stock or, under certain
circumstances, cash. The Company intends to pay such quarterly dividends in
Common Stock for the foreseeable future.
In May 1997, the Company sold its cellular operations in the State of
Maine to a subsidiary of Rural Cellular Corporation ("Rural Cellular"). On the
closing date, Rural Cellular paid the Company $71.8 million in cash and paid
$5.4 million into escrow. On November 3, 1997, the $5.4 million was released
from escrow to the Company. In addition, Rural Cellular reimbursed the Company
approximately $250,000 for capital expenditures made on its behalf prior to the
closing of the transaction.
On June 10, 1997, the Company issued $300 million principal amount of
11.125% Senior Notes due June 2007 (the "1997 Notes" and together with the
previously issued Senior Discount Notes due February 2006 and the Senior
Discount Notes due May 2006, the "Notes") in a private offering. In September
1997, the Company exchanged substantially all of the private 1997 Notes for
substantially identical notes, except that the new notes were registered under
the Securities Act of 1933, as amended (the "Securities Act"). The Company used
$89.6 million of the proceeds from the 1997 Notes to purchase and pledge, for
the benefit of the holders of the 1997 Notes, certain U.S. government
securities to provide for the payment of the first six scheduled interest
payments on the 1997 Notes.
On June 5, 1997, pursuant to a Stock Purchase Agreement, between the
Company and The Huff Alternative Income Fund, L.P. ("Huff"), the Company issued
to Huff 50,000 shares of nonvoting Series C Convertible Preferred Stock (the
"Series C Preferred") for an aggregate purchase price of $22.5 million. Also,
on June 5, 1997, pursuant to a Stock Purchase Agreement, between the Company
and SCANA, the Company issued to SCANA 50,000 shares of nonvoting Series D
Convertible Preferred Stock (the "Series D Preferred"), for an aggregate
purchase price of $22.5 million. The Series C Preferred and Series D Preferred
are convertible, at the option of the holder, into Common Stock at a conversion
price subject to periodic adjustment. The Series C Preferred is convertible any
time subsequent to December 5, 1998 and the Series D Preferred is convertible
any time subsequent to March 14, 2002. The Series C Preferred and Series D
Preferred are redeemable at the option of the Company, in whole or in part, on
a pro rata basis, at a redemption price of $450 per share plus declared and
unpaid dividends, anytime subsequent to June 5, 2002. The Series C Preferred
and Series D Preferred have a
15
<PAGE> 16
liquidation preference over the Common Stock of $450 per share plus declared
and unpaid dividends in the event of a liquidation, dissolution or winding up
of the Company.
On March 4, 1996, the Company entered into a $125 million credit
agreement (the "Credit Facility") with Ericsson Inc. ("Ericsson") regarding the
purchase of and vendor financing for PCS equipment and services. On October 31,
1996, March 31, 1997, June 26, 1997, and November 18, 1997, Powertel and
Ericsson entered into amendments to the Credit Facility, which increased the
equipment financing commitment to $165 million and amended certain other
provisions of the Credit Facility. During the fourth quarter of 1997, the $165
million commitment under the Credit Facility was syndicated to a group of
lenders. On December 23, 1997, the Credit Facility was amended to increase the
financing commitment to $265 million. On February 6, 1998, Powertel and
Ericsson entered into an amended and restated Credit Facility to incorporate
the terms and conditions of the original agreement and the subsequent
amendments.
Although the Company is currently unable to predict with certainty the
amount of expenditures that may be made beyond 1998, the Company expects that
it will require additional capital. Sources of additional capital may include
vendor financing, cash flow from operations, public and private equity and debt
financing and asset dispositions by the Company. The Company may also require
additional financing in the event it decides to make acquisitions of additional
licenses or businesses. The extent of additional financing required will
partially depend on the success of the Company's businesses. The Company
currently has no other sources of income or cash flows other than its cellular
and PCS operations and the interest income earned from investing its cash and
the proceeds of the public and private debt and equity offerings. There can be
no assurance that additional financing will be available to the Company or, if
available, that it can be obtained on terms acceptable to the Company and
within the limitations contained in the indentures to the Notes, the Credit
Facility or any future financing arrangements. The restrictions on additional
indebtedness under the indentures to the Notes require the Company to satisfy
specified leverage ratios in order to incur indebtedness; however, they permit
the Company and its subsidiaries to incur an unlimited amount of additional
indebtedness to finance the acquisition of inventory or equipment.
The Company expects to incur significant operating losses and to
generate significant negative cash flow from operating activities in the
future, while it develops and constructs its PCS system and builds a PCS
customer base. Cash interest will not be payable on the Company's Senior
Discount Notes prior to 2001. Management believes that cash flow from
operations may be insufficient to repay the Notes or any additional financing
that the Company may obtain in full at maturity and that they may need to be
refinanced. There can be no assurance that any such refinancing could be
effected successfully or on terms acceptable to the Company.
During the nine months ended September 30, 1998, the Company used net
cash of $116.8 million for operating activities, as compared to $38.3 million
for the same period in 1997. Operating activities for the nine months ended
September 30, 1998 consisted primarily of $179.8 million of net loss and $30.4
million of changes in operating assets and liabilities, which were partially
offset by $48.1 million of depreciation and amortization and $43.1 million of
bond accretion on the Senior Discount Notes.
Cash used in investing activities was $130 million for the nine months
ended September 30, 1998, as compared to $158.6 million for the same period in
1997. Investing activities for the nine months ended September 30, 1998
consisted primarily of capital expenditures totaling $124 million and a
decrease in accrued construction costs of $18.9 million (both primarily related
to the buildout of the PCS system and support systems). These activities were
partially offset by the liquidation of $13.5 million of short-term investments
which was used for the payment of interest related to the 1997 Notes.
Cash provided from financing activities was $206.2 million for the
nine months ended September 30, 1998, as compared to $386.8 million for the
same period in 1997. Financing activities for the nine months ended September
30, 1998 consisted primarily of net proceeds of $149.7 million from the sale of
the Series E Preferred and Series F Preferred and borrowings of $56.3 million
under the Credit Facility.
16
<PAGE> 17
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 131 ("FAS 131"),
"Disclosures About Segments of an Enterprise and Related Information", which is
effective for fiscal years beginning after December 15, 1997. FAS 131
establishes reporting standards for public companies concerning operating
segments and related disclosures about products and services, geographic areas
and major customers. FAS 131 is not anticipated to have a material impact on
the Company's financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities", which is effective for fiscal years beginning after
December 15, 1998. SOP 98-5 requires entities to expense certain start-up costs
and organization costs as they are incurred. The Company does not anticipate
this statement will have an impact on its financial statements.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and
Hedging Activities", which is effective for fiscal years beginning after June
15, 1999. Early adoption is encouraged. FAS 133 establishes accounting and
reporting standards for derivative instruments and transactions involving hedge
accounting. The Company does not anticipate this statement will have a material
impact on its financial statements.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use or store dates
representing the year as just two digits (e.g., "97" for 1997). On January 1,
2000, any clock or date recording mechanism, including date sensitive software,
which uses only two digits to represent the year may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices or
engage in similar activities.
In 1998, the Company established a Year 2000 Task Force (the "Task
Force") consisting of representatives from its network operations, information
technology, finance and legal departments to address internal and external Year
2000 issues. The Task Force reports regularly to an executive-level Steering
Committee. To assist the Task Force in its functions, the Company has engaged
an outside consulting firm with expertise in Year 2000 issues relative to the
telecommunications industry. The Company, with the support of this outside
consulting firm, is presently conducting Phase 1 of its Year 2000 compliance
program, which consists of assessing hardware and software used by the Company
and its business units for Year 2000 readiness as well as the state of
readiness of outside third parties with which the Company has significant
relationships (e.g. vendors and suppliers). Phase 1 also includes the
development of a Year 2000 testing and remediation plan based on the results of
the assessment studies. Once Phase 1 is completed and the testing and
remediation plan is in place, the Company should be able to estimate the costs
of Year 2000 remediation.
The Company's assessment of internal systems includes its IT systems
as well as non-IT systems (which systems contain embedded technology, such as
network equipment, HVAC systems and security systems containing microprocessors
or other similar circuitry). Throughout Phase 1, the Company is also requesting
assurances from its major suppliers, including suppliers of network hardware
and software and of PCS and cellular telephones, that they are addressing the
Year 2000 issue and that the suppliers' products will function properly in the
year 2000. The Company plans to test certain of such third-party products, but
cannot be sure that its tests will be adequate or that, if problems are
identified, they will be addressed by the supplier in a timely and satisfactory
manner. In many cases, the Company is relying on such assurances that new and
upgraded software and hardware will be Year 2000 compliant. The Company is also
contacting PCS and cellular roaming partners and LECs that carry and terminate
calls on the Company's PCS and cellular networks to determine the extent to
which their interfaces with the Company's networks are vulnerable to Year 2000
issues. These actions are intended to help identify and mitigate the possible
external impact of the Year 2000 problem. However, it is impossible to fully
assess the potential external consequences on the Company's operations in the
event service interruptions occur from suppliers, roaming partners, LECs and
other third parties. The Company may also be at
17
<PAGE> 18
risk if certain critical infrastructure services providers, such as
electricity, water or telephone service providers, experience difficulties that
result in disruption of service to the Company.
The Company plans to complete Phase 1 of its Year 2000 compliance
program no later than December 31, 1998. Phase 2 of the Year 2000 compliance
program includes implementation of the testing and remediation plans developed
in Phase 1. Once Phase 2 is underway, the Company should be able to predict the
potential impacts of Year 2000 noncompliance with respect to its internal
systems as well as external third parties with which it has significant
relationships (e.g. vendors and suppliers). Phase 2 of the program is
anticipated to be complete in mid-1999.
The Company does not expect that the amount of remediation work
required to address Year 2000 problems will be extensive. Many of the Company's
financial and network systems have been implemented in the last few years, and
management believes that this newer equipment and software are generally Year
2000 compliant. However, the Company expects that it will be required to
conduct limited Year 2000 readiness testing and modify some of its existing
hardware and software in order for its systems to function properly in the year
2000 and thereafter. At this time, the Company has not calculated the total
estimated cost of addressing Year 2000 issues. Management believes, however,
that such cost will not be material to the Company and will be able to be
funded through cash on hand. To date, the Company has incurred and expensed
only a nominal amount for Phase 1 activities under its Year 2000 plan,
primarily for the retention of outside consultants and assessment activities
under the plan.
The Company does not presently anticipate that it will experience a
material disruption in its business as a result of Year 2000 problems that
affect its network operations, information processing or interfacing with
roaming partners or LECs. However, during Phase 2 of its Year 2000 plan the
Company will develop a contingency plan to help provide for continuity of its
business operations in the event of unforeseen internal and external Year 2000
problems. Further, as the Year 2000 project continues, the Company may discover
additional Year 2000 problems. For example, the Company may not be able to
develop, implement, or test remediation or contingency plans and may find that
the costs of these activities exceed current expectations. If the Company fails
to satisfactorily resolve Year 2000 issues related to its business in a timely
manner, it could be exposed to liability from third parties which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
These statements appear in a number of places in this Report and include all
statements which are not historical facts and which relate to the intent,
belief or current expectations of the Company, its directors or its officers
with respect to, among other things: (i) the Company's financing plans,
including the Company's ability to obtain financing in the future; (ii) trends
affecting the Company's financial condition or results of operations, including
those related to Year 2000 issues; (iii) the Company's growth strategy
(including the Company's anticipated network buildout) and operating strategy;
(iv) the Company's anticipated capital needs and capital expenditures; and (v)
projected outcomes and effects on the Company of litigation and investigations
concerning the Company. When used in this Report, the words "expects,"
"intends," "believes," "anticipates," "estimates," "may," "could," "should,"
"would," "will," "plans" and similar expressions and variations thereof are
intended to identify forward-looking statements. 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 projected in forward-looking statements as a result of:
(i) factors affecting the availability, terms and cost of capital; risks
associated with the selection of the Company's PCS digital protocol and PCS
system implementation; competitive factors and pricing pressures; general
economic conditions; the failure of the market demand for the Company's
products and services to be commensurate with management's expectations or past
experience; the impact of present or future laws and regulations on the
Company's business; changes in operating expenses or the failure of operating
and buildout expenses to be consistent with management's expectations; and the
difficulty of accurately predicting the outcome and effect of certain matters,
such as matters involving litigation and investigations; (ii) various factors
discussed herein including, without
18
<PAGE> 19
limitation, the Year 2000 issue; and (iii) those factors discussed in detail in
the Company's filings with Securities and Exchange Commission (the
"Commission"), including the "Risk Factors" section of the Company's
Registration Statement on Form S-4 (Registration number (333-31399), as
declared effective by the Commission on July 31, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the Company's Form 10-K for the year ended
December 31, 1997 (as filed with the Commission on March 24, 1998) for a
discussion of certain legal proceedings. In addition to the legal proceedings
discussed therein, the Company is subject from time to time to legal
proceedings that arise out of the Company's business operations, including
service, billing and collection matters. Although the actual damages sought in
such legal proceedings are generally small, certain of these legal proceedings
may seek punitive damages and/or attempt to be certified as class actions.
While the Company currently does not expect such legal proceedings to have a
material adverse effect on the Company, no assurance can be given that the
resolution of any or all of such legal proceedings will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
ITEM 5. OTHER INFORMATION
Changes on Board of Directors. On October 16, 1998, Lawrence Gressette
resigned from the Board of Directors of the Company. Effective October 16,
1998, the Board of Directors filled the vacancy created by Mr. Gressette's
resignation through the election of Ann Milligan to the Board. On October 28,
1998, Bert G. Clifford resigned from the Board of Directors. The Board of
Directors has not yet filled the vacancy created by Mr. Clifford's resignation.
Recent SEC Announcements. The Commission recently amended Rule 14a-4
under the Exchange Act, which governs the use by the Company of discretionary
voting authority with respect to certain stockholder proposals. Rule
14a-4(c)(1) provides that, if the proponent of a stockholder proposal fails to
notify the Company at least 45 days prior to the month and day of the mailing
of the prior year's proxy statement, the proxies of the Company's Board of
Directors would be permitted to use their discretionary authority at the
Company's next annual meeting of stockholders if the proposal were raised at
the meeting without any discussion of the matter in the proxy statement. In
order to provide stockholders with notice of the deadline for the submission of
such proposals for the Company's 1999 Annual Meeting of Stockholders, the
Company hereby notifies all stockholders of the Company that after March 17,
1999 any stockholder proposal submitted outside the requirements of Rule 14a-8
will be considered untimely for purposes of Rules 14a-4 and 14a-5(e).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 Financial Data Schedule (for SEC use only).
(B) REPORTS ON FORM 8-K.
None.
19
<PAGE> 20
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.
POWERTEL, INC.
November 13, 1998 /s/ Allen E. Smith
----------------------------------------------------
Allen E. Smith
President and Chief Executive Officer
November 13, 1998 /s/ Fred G. Astor, Jr.
----------------------------------------------------
Fred G. Astor, Jr.
Executive Vice President and Chief Financial Officer
(Chief Accounting Officer)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF POWERTEL, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 286,399
<SECURITIES> 63,599
<RECEIVABLES> 28,159
<ALLOWANCES> 0
<INVENTORY> 16,543
<CURRENT-ASSETS> 373,949
<PP&E> 666,567
<DEPRECIATION> (90,678)
<TOTAL-ASSETS> 1,410,285
<CURRENT-LIABILITIES> 51,469
<BONDS> 833,469
0
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<COMMON> 270
<OTHER-SE> 135,811
<TOTAL-LIABILITY-AND-EQUITY> 1,410,285
<SALES> 15,954
<TOTAL-REVENUES> 122,140
<CGS> 49,684
<TOTAL-COSTS> 233,557
<OTHER-EXPENSES> 68,340
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,385
<INCOME-PRETAX> (179,757)
<INCOME-TAX> 0
<INCOME-CONTINUING> (179,757)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (179,757)
<EPS-PRIMARY> (6.76)
<EPS-DILUTED> (6.76)
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