<PAGE> 1
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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 JUNE 30, 1999.
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 August 10, 1999
Common Stock, $0.01 par value 27,799,855
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POWERTEL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements............................................. 3
Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998............................ 3
Condensed Consolidated Statements of Operations for the
Three Months and Six Months ended June 30, 1999 and
1998........................................................... 4
Condensed Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1999 and 1998........................ 5
Condensed Notes to Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 8
Item 3. Quantitative and Qualitative Disclosure About Market
Risks........................................................ 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................ 20
Item 2. Changes in Securities and Use of Proceeds........................ 20
Item 4. Submission of Matters to a Vote of Security Holders.............. 20
Item 6. Exhibits and Reports on Form 8-K................................. 21
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POWERTEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 450,306 $ 204,787
Restricted cash for payment of interest ...................... 32,393 33,375
Accounts receivable, net of allowance for doubtful accounts... 33,808 28,726
Inventories .................................................. 13,353 20,683
Prepaid expenses and other ................................... 15,324 9,248
----------- -----------
545,184 296,819
----------- -----------
PROPERTY AND EQUIPMENT, AT COST ................................. 654,969 749,614
Less: accumulated depreciation ............................... (121,226) (107,210)
----------- -----------
533,743 642,404
----------- -----------
OTHER ASSETS:
Licenses, net ................................................ 405,723 407,998
Restricted cash for payment of interest ...................... -- 14,343
Deferred charges and other, net .............................. 17,786 19,014
----------- -----------
423,509 441,355
----------- -----------
Total assets ............................................. $ 1,502,436 $ 1,380,578
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade .................................... $ 11,248 $ 14,633
Accrued taxes other than income .............................. 15,645 6,261
Advance billings and customer deposits ....................... 8,216 7,898
Accrued construction costs ................................... 5,541 17,807
Accrued interest ............................................. 2,781 2,781
Accrued other ................................................ 20,262 20,529
Current portion of long-term obligations ..................... 51 49
----------- -----------
63,744 69,958
----------- -----------
LONG-TERM OBLIGATIONS:
12% Senior Discount Notes due February 2006 .................. 292,048 275,069
12% Senior Discount Notes due May 2006 ....................... 290,857 274,393
11.125% Senior Notes due June 2007 ........................... 300,000 300,000
Credit facility .............................................. 265,000 258,532
Deferred gain on sale-leaseback .............................. 84,817 --
Other ........................................................ 50 76
----------- -----------
1,232,772 1,108,070
----------- -----------
COMMITMENTS AND CONTINGENCIES
CUMULATIVE CONVERTIBLE, REDEEMABLE
PREFERRED STOCK .............................................. 152,219 152,219
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock .............................................. 3 3
Common stock ................................................. 278 273
Paid-in capital .............................................. 486,848 479,876
Accumulated deficit .......................................... (431,965) (428,774)
Deferred compensation ........................................ (1,118) (702)
Treasury stock, at cost ...................................... (345) (345)
----------- -----------
53,701 50,331
----------- -----------
Total liabilities and stockholders' equity ............... $ 1,502,436 $ 1,380,578
=========== ===========
</TABLE>
The accompanying condensed notes to consolidated financial statements are an
integral part of these statements.
3
<PAGE> 4
POWERTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Postpaid revenues....................................... $ 41,197 $ 31,429 $ 81,270 $ 57,653
Roaming revenues........................................ 2,369 2,619 5,265 4,805
Prepaid revenues........................................ 11,491 -- 20,230 --
Other revenues.......................................... 2,595 1,769 4,755 3,436
----------- ----------- ----------- -----------
Total service revenues................................ 57,652 35,817 111,520 65,894
Equipment sales......................................... 6,304 4,962 14,422 11,608
----------- ----------- ----------- -----------
Total revenues and sales.............................. 63,956 40,779 125,942 77,502
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of services........................................ 13,341 10,372 26,722 19,921
Cost of equipment sales................................. 16,146 12,585 31,578 30,010
Operations.............................................. 16,762 14,028 31,819 24,426
Selling and marketing................................... 21,936 13,350 42,481 25,265
General and administrative.............................. 10,132 8,662 19,926 16,792
Depreciation............................................ 19,953 13,597 38,730 26,532
Amortization............................................ 2,541 2,389 5,111 4,781
----------- ----------- ----------- -----------
Total operating expenses.............................. 100,811 74,983 196,367 147,727
----------- ----------- ----------- -----------
OPERATING LOSS............................................. (36,855) (34,204) (70,425) (70,225)
----------- ----------- ----------- -----------
OTHER (INCOME) EXPENSE:
Interest expense, net................................... 27,347 23,660 55,194 45,492
Gain on sale of assets.................................. (127,161) -- (127,161) --
Miscellaneous income.................................... (38) (56) (142) (219)
----------- ----------- ----------- -----------
Total other (income) expense.......................... (99,852) 23,604 (72,109) 45,273
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.......................... 62,997 (57,808) 1,684 (115,498)
INCOME TAX PROVISION....................................... -- -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS).......................................... 62,997 (57,808) 1,684 (115,498)
DIVIDENDS ON CUMULATIVE CONVERTIBLE,
REDEEMABLE PREFERRED STOCK.............................. (2,438) (180) (4,875) (180)
------------ ------------ ------------ -----------
NET INCOME (LOSS) AVAILABLE TO COMMON
STOCKHOLDERS............................................ $ 60,559 $ (57,988) $ (3,191) $ (115,678)
=========== =========== =========== ===========
PER SHARE DATA:
BASIC INCOME (LOSS) PER COMMON SHARE.................... $ 2.19 $ (2.15) $ (0.12) $ (4.29)
=========== =========== =========== ===========
DILUTED INCOME (LOSS) PER COMMON SHARE.................. $ 1.22 $ (2.15) $ (0.12) $ (4.29)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING -- BASIC................ 27,594 26,982 27,507 26,968
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING --
DILUTED.............................................. 49,631 26,982 27,507 26,968
=========== =========== =========== ===========
</TABLE>
The accompanying condensed notes to consolidated financial statements are an
integral part of these statements.
4
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POWERTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss) ......................................................... $ 1,684 $(115,498)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Gain on sale of subsidiary, net ...................................... (79,312) --
Realized gain on sale-leaseback, net ................................. (47,849) --
Depreciation and amortization ........................................ 43,841 31,313
Bond accretion ....................................................... 33,443 28,756
Other ................................................................ 763 1,502
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ......................... (8,724) 10,983
Decrease (increase) in inventories ................................. 7,018 (18,671)
Decrease (increase) in other assets ................................ 1,003 (1,746)
Decrease in accounts payable and accrued expenses .................. (6,923) (35,653)
Increase in advance billings and customer deposits ................. 961 1,525
--------- ---------
Net cash used in operating activities .......................... (54,095) (97,489)
--------- ---------
CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sale-leaseback ........................................... 261,501 --
Proceeds from sale of subsidiary ....................................... 89,339 --
Capital expenditures ................................................... (52,192) (74,202)
Liquidation of short-term investments .................................. 15,325 14,430
Decrease in accrued construction costs ................................. (12,266) (14,803)
Short-term notes receivable ............................................ (7,140) --
Microwave relocation costs ............................................. (2,836) (549)
--------- ---------
Net cash provided from (used in) investing activities .......... 291,731 (75,124)
--------- ---------
CASH FLOWS PROVIDED FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net ................................ 1,439 187
Borrowings under credit facility ....................................... 6,468 42,851
Proceeds from sale of cumulative convertible, redeemable preferred
stock, net ........................................................... -- 149,651
Other, net ............................................................. (24) 145
--------- ---------
Net cash provided from financing activities .................... 7,883 192,834
--------- ---------
NET INCREASE IN CASH ...................................................... 245,519 20,221
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 204,787 326,954
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 450,306 $ 347,175
========= =========
</TABLE>
The accompanying condensed notes to consolidated financial statements are an
integral part of these statements.
5
<PAGE> 6
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, 1998.
2. Certain prior year amounts have been reclassified to conform to the
current period presentation.
3. The Company classifies its operations into two business segments: PCS
and cellular. Certain corporate administrative expenses have been
allocated to the segments based upon the nature of the expense.
Intersegment revenues are not material. Summarized financial
information by business segment is as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
PCS CELLULAR(A) TOTALS PCS CELLULAR TOTALS
------ ----------- ------ ------ -------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales............ $ 62.0 $ 2.0 $ 64.0 $ 35.7 $5.1 $ 40.8
Operating (loss) income....... (37.9) 1.0 (36.9) (36.4) 2.2 (34.2)
Net (loss) income ............ (17.4) 80.4 63.0 (60.0) 2.2 (57.8)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------
1999 1998
------------------------------- ----------------------------------
PCS CELLULAR(A) TOTALS PCS CELLULAR TOTALS
------ ----------- ------ ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales............ $118.9 $ 7.0 $125.9 $ 67.9 $9.6 $ 77.5
Operating (loss) income....... (74.0) 3.6 (70.4) (74.0) 3.8 (70.2)
Net (loss) income ............ (81.2) 82.9 1.7 (119.3) 3.8 (115.5)
</TABLE>
- ----------------
(a) The Company sold its cellular operations in April 1999. See Note 4
below.
4. On April 30, 1999, pursuant to an Asset Purchase Agreement dated
January 5, 1999, the Company and certain of its wholly-owned
subsidiaries sold to Public Service Cellular, Inc. ("PSC")
substantially all of the assets and FCC licenses of the Company
relating to its cellular telephone operations in eastern Alabama and
western Georgia for $89 million. The transaction constituted the sale
of all of the Company's cellular telephone operations. At closing, PSC
paid the Company $83.1 million in cash (including reimbursement for
certain capital expenditures of $.3 million) and paid $6.2 million into
escrow, which will be released as set forth in the agreement. The sale
resulted in a $79.3 million gain to the Company.
6
<PAGE> 7
The following unaudited pro forma condensed consolidated statements of
operations (in millions, except per share data) assume the sale
occurred at the beginning of each period presented. In the opinion of
management, all adjustments necessary to present fairly such unaudited
pro forma condensed statements of operations have been made.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
------ ------ ------ -------
<S> <C> <C> <C> <C>
Revenues and sales................................ $ 62.0 $ 35.7 $118.9 $ 67.9
Net loss before dividends......................... (17.4) (60.0) (81.2) (119.3)
Basic and diluted loss per common share........... $ (.63) $(2.22) $(2.95) $ (4.42)
</TABLE>
5. On June 2, 1999, pursuant to an Asset Purchase Agreement dated March
15, 1999, the Company sold to Crown Castle PT Inc., a wholly-owned
subsidiary of Crown Castle International Corp. ("CCI"), 619 of its
wireless transmission towers, related assets and certain liabilities
for $261.5 million (the "Sale"). In connection with the sale, the
Company entered into master lease agreements with CCI to lease space on
these towers for a monthly rent of $1,800 per tower for an initial
lease term of ten years, with three five-year renewal periods at the
option of the Company. The transaction was recorded as a
sale-leaseback. Accordingly, $85.5 million of the total gain on sale of
$133.3 million was deferred and will be amortized over the initial
lease term of ten years as a reduction of tower rent expense. The
unamortized portion of the deferred gain is recorded as a long-term
obligation in the accompanying condensed consolidated balance sheets.
Following the closing of this sale, the Company and CCI entered into a
binding letter agreement that contemplates, subject to certain
conditions, the Company will sell an additional 31 towers to CCI for
approximately $13 million. This transaction is expected to close in the
fourth quarter of 1999. This letter agreement also contemplates a
build-to-suit tower construction contract between the Company and CCI,
subject to CCI's right of first refusal, for 40 towers to be
constructed prior to December 31, 2000.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Powertel provides PCS services in the southeastern United States under
the name "Powertel." Our PCS licenses encompass a territory of approximately
246,000 contiguous square miles with a population of approximately 24.4 million
people. We hold licenses to serve the Atlanta, Georgia MTA, the Jacksonville,
Florida MTA, the Memphis, Tennessee/Jackson, Mississippi MTA and the Birmingham,
Alabama MTA and 13 BTAs in Kentucky and Tennessee. We hold 30 MHz of spectrum
licensed for PCS in the MTA Markets, and we hold 20 MHz of spectrum licensed for
PCS in all of the BTA Markets except for the Knoxville, Tennessee BTA, where we
hold a license for 10 MHz of spectrum. We have one of the largest contiguous
licensed PCS footprints in the southeastern United States. We introduced our PCS
services in October 1996 in Jacksonville, Florida and Montgomery, Alabama and,
to date, have launched our PCS services in a total of 34 markets in the
Southeast. As of June 30, 1999, we had approximately 292,000 postpaid PCS
subscribers and 90,000 prepaid PCS subscribers.
On April 30, 1999, we sold substantially all of our cellular telephone
assets to Public Service Cellular, Inc. for $89 million. Prior to that sale, we
provided cellular telephone service in contiguous portions of eastern Alabama
and western Georgia under the name "InterCel."
On June 2, 1999, we sold 619 of our towers, related assets and
liabilities to a subsidiary of Crown Castle International Corp. for $261.5
million in cash. In connection with this sale, we agreed to lease space on these
towers for a period of ten years, with three five-year renewal periods that we
may exercise at our option. Following the closing of this sale, we and Crown
Castle entered into a binding letter agreement that contemplates, subject to
certain conditions, us selling an additional 31 towers to Crown Castle for
approximately $13 million. We expect to close this transaction in the fourth
quarter of 1999. This letter agreement also contemplates a build-to-suit
construction contract between Crown Castle and us, subject to Crown Castle's
right of first refusal, for 40 tower sites to be constructed prior to December
31, 2000.
We had net income of $63 million for the three months ended June 30,
1999, as a result of the gain on sale of our cellular operations and towers
noted above. However, exclusive of this gain, we incurred an operating loss of
$36.9 million for this same period as a result of the significant costs required
to build out and maintain our PCS system, the hiring and management of required
personnel to operate our business and market our services, the subsidization of
handsets to our customers and the depreciation of PCS equipment and amortization
of the PCS licenses. We expect to continue incurring operating losses during the
remainder of 1999 and thereafter as we continue to build out our PCS system,
develop our customer base and subsidize the cost of handsets to our customers.
Average revenues per subscriber in the wireless industry have declined
during recent quarters and are expected to continue to gradually decline in the
future. We believe this downward trend is the result of the continued addition
of lower usage customers who utilize wireless service for personal convenience,
security or as backup for their traditional landline telephones as well as
intensified price competition within the wireless industry. We believe the
effects of these trends on our earnings will be mitigated by a corresponding
increase in the number of wireless subscribers and our continued focus on
strategies designed to encourage increased usage among our customers.
Minimizing customer attrition, or "churn," remains a challenge as the
subscriber base grows and competition intensifies. We generated an average
monthly postpaid PCS churn rate of 2.8% for the three months ended June 30,
1999. We believe our continued improvement in our postpaid PCS churn rate is the
result of more focused collections efforts, stricter credit evaluation policies,
implementation of fraud prevention tools, a proactive customer retention
program, the introduction of alternative methods of payment, and the
availability of prepaid service offerings. Despite these efforts, we expect that
ongoing postpaid PCS churn rates could be higher than historical cellular churn
rates 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
our representatives increases our susceptibility to subscription fraud, which
ultimately results in churn.
8
<PAGE> 9
Powertel is a member of the GSM Alliance, a consortium of PCS carriers
who offer GSM-based PCS service throughout North America. All members of the
Alliance have executed roaming agreements with each other, which allow GSM
customers to roam throughout many major metropolitan areas in the United States
and Canada. Additionally, we have signed several international roaming
agreements and expect to sign numerous others with international GSM carriers to
facilitate international roaming.
9
<PAGE> 10
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
The following table reflects the composition of our cellular and PCS
service revenue and equipment sales and related gross margins, as well as
overall operating and other costs and margins. Our historical results of
operations, particularly in view of the sale of our cellular telephone assets
and the start-up costs associated with our PCS business, will not be comparable
with future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------
1999 1998
------------------------------------- -----------------------------------
COMBINED COMBINED
CELLULAR CELLULAR
AND AND
CELLULAR PCS PCS CELLULAR PCS PCS
--------- --------- --------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SERVICE REVENUE & COST ANALYSIS:
Service revenues:
Postpaid revenues ..................... $ 979 $ 40,218 $ 41,197 $ 2,872 $ 28,557 $ 31,429
Roaming revenues ...................... 833 1,536 2,369 1,766 853 2,619
Prepaid revenues ...................... -- 11,491 11,491 -- -- --
Other revenues ........................ 72 2,523 2,595 224 1,545 1,769
--------- --------- --------- ------- --------- ---------
Total service revenues .............. 1,884 55,768 57,652 4,862 30,955 35,817
Cost of services ......................... 153 13,188 13,341 496 9,876 10,372
--------- --------- --------- ------- --------- ---------
Gross margin .......................... $ 1,731 $ 42,580 $ 44,311 $ 4,366 $ 21,079 $ 25,445
========= ========= ========= ======= ========= =========
EQUIPMENT SALES & COST ANALYSIS:
Equipment sales .......................... $ 80 $ 6,224 $ 6,304 $ 194 $ 4,768 $ 4,962
Cost of equipment sales .................. 171 15,975 16,146 406 12,179 12,585
--------- --------- --------- ------- --------- ---------
Gross margin .......................... $ (91) $ (9,751) $ (9,842) $ (212) $ (7,411) $ (7,623)
========= ========= ========= ======= ========= =========
OPERATING MARGIN ANALYSIS:
Total revenues and sales ................. $ 1,964 $ 61,992 $ 63,956 $ 5,056 $ 35,723 $ 40,779
--------- --------- --------- ------- --------- ---------
Operating expenses:
Cost of services and equipment sales... 324 29,163 29,487 902 22,055 22,957
Operations ............................ 139 16,623 16,762 464 13,564 14,028
Selling and marketing ................. 177 21,759 21,936 528 12,822 13,350
General and administrative ............ 135 9,997 10,132 488 8,174 8,662
Depreciation .......................... 131 19,822 19,953 443 13,154 13,597
Amortization .......................... -- 2,541 2,541 -- 2,389 2,389
--------- --------- --------- ------- --------- ---------
Total operating expenses ............ 906 99,905 100,811 2,825 72,158 74,983
--------- --------- --------- ------- --------- ---------
Operating income (loss) .................. $ 1,058 $ (37,913) (36,855) $ 2,231 $ (36,435) (34,204)
========= ========= ======= =========
Interest expense, net .................... 27,347 23,660
Gain on sale of assets ................... (127,161) --
Miscellaneous income ..................... (38) (56)
--------- ---------
Income (loss) before income taxes ........ 62,997 (57,808)
Income tax provision ..................... -- --
--------- ---------
Net income (loss) ................... $ 62,997 $ (57,808)
========= =========
OTHER SUPPLEMENTAL DATA:
Subscribers at end of period ............. -- 382,309 382,309 27,529 181,431 208,960
Capital expenditures ..................... $ 30 $ 37,420 $ 37,450 $ 245 $ 39,212 $ 39,457
</TABLE>
10
<PAGE> 11
The following discussion reflects the results of operations for our PCS
and cellular lines of business. All general corporate costs have been allocated
to those lines of business based on management's estimates of actual expenses
incurred related to such lines of business. We sold substantially all of our
cellular telephone assets on April 30, 1999.
Postpaid PCS service revenues increased $11.7 million, or 40.8%, for
the three months ended June 30, 1999 as compared to the same period of 1998.
This increase is the result of our continued PCS subscriber growth and our
launch of eight new PCS markets since the second quarter of 1998. Our postpaid
PCS subscribers grew to approximately 292,000 at June 30, 1999, from
approximately 181,000 at June 30, 1998, of which approximately 22,000 net
postpaid PCS subscribers were added during the three months ended June 30, 1999.
The average monthly service revenue ("RPU") per postpaid PCS subscriber
decreased to $48.30 for the three months ended June 30, 1999 as compared to
$56.11 for the same period of 1998. We have experienced a gradual reduction in
RPU per postpaid PCS subscriber because new customers tend to choose lower
fixed-rate plans and because of intense price competition among wireless
carriers, which we believe are trends consistent throughout the wireless
industry. During 1999, we are offering wireless rate plans with more bundled
airtime and toll minutes and additional enhanced services and features in an
effort to stimulate increased usage among our customers and thus generate
additional incremental revenues. We anticipate a marginal decline in our RPU per
postpaid PCS subscriber in future periods due primarily to our continued focus
on improving our mix of rate plans and services.
PCS roaming revenues (including roaming long distance) increased $.7
million, or 80.1%, for the three months ended June 30, 1999 as compared to the
same period of 1998. This increase is due primarily to an increase in the number
of roamers and usage per roamer, which is the result of continued market
penetration by the PCS industry as a whole.
We generated $11.5 million in prepaid PCS service revenues for the
three months ended June 30, 1999 as compared to $0 for the same period of 1998,
which is attributable to the introduction of our intelligent network-based
prepaid service alternative in September 1998. RPU per prepaid PCS subscriber
was $51.05 for the three months ended June 30, 1999.
Other service revenues, which include activation fees, fees from
enhanced services, co-location revenue and interconnection fees billed to local
exchange carriers for connections to our PCS network, increased $.8 million, or
46.7%, for the three months ended June 30, 1999 as compared to the same period
of 1998. This increase is due primarily to the re-introduction of activation
fees in 1999, which were waived for a substantial portion of new activations for
the same period of 1998.
Cost of services includes the cost of interconnection with local
exchange carrier facilities, direct cell site costs (e.g., property taxes and
insurance, site lease costs and electric utilities), roaming validation
(provided by a third-party clearinghouse), long distance toll costs and
supplementary services (such as voice mail). PCS cost of services increased $3.3
million, or 33.5%, for the three months ended June 30, 1999 as compared to the
same period of 1998. This increase primarily reflects costs related to the
approximately 470 additional cell sites we placed in service since June 30,
1998, as well as increased interconnection and toll costs related to increased
traffic on our expanding PCS network.
We generated a negative PCS equipment margin of 156.7% on $6.2 million
of sales during the three months ended June 30, 1999 as compared to 155% on $4.8
million of sales for the same period of 1998. We offered several handsets at
special promotional prices during both quarters in an effort to stimulate sales
during a traditionally slow season of the year. We expect to continue
subsidizing the cost of handsets to consumers for the foreseeable future.
PCS operations costs, which include the costs of managing and
maintaining our PCS system, customer service, credit and collections (including
bad debt) and inventory management increased $3.1 million, or 22.6%, for the
three months ended June 30, 1999 as compared to the same period of 1998.
Substantially all of this
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increase is attributable to the costs of providing customer service to the
growing PCS customer base (which includes certain start-up and initial operating
costs associated with our new centralized customer call center in Jacksonville)
and the costs of maintaining our expanding PCS network.
PCS selling and marketing costs increased $8.9 million, or 69.7%, for
the three months ended June 30, 1999 as compared to the same period of 1998.
Substantially all of this increase is attributable to continued increases in
advertising and marketing costs and the expansion of our sales distribution
channels, including increases in headcount, commissions and retail location
costs.
PCS general and administrative costs increased $1.8 million, or 22.3%,
for the three months ended June 30, 1999 as compared to the same period of 1998.
Substantially all of this increase is attributable to increased headcount and
facilities costs at our corporate and regional administrative offices and
information technology center.
Depreciation and amortization increased $6.5 million, or 40.7%, for the
three months ended June 30, 1999 as compared to the same period of 1998 and
consists principally of the depreciation of the PCS network and the amortization
of PCS licenses. Substantially all of the increase is attributable to
depreciation associated with the approximately 470 additional PCS cell sites
that we placed in service since June 30, 1998, as well as depreciation of
computer systems and infrastructure costs required to manage the administrative
functions of our business.
Net consolidated interest expense increased $3.7 million, or 15.6%, for
the three months ended June 30, 1999 as compared to the same period of 1998.
This increase in interest expense resulted primarily from increased borrowing
under our credit facility and an increase in bond accretion.
We recorded a gain on sale of assets of $127.1 million for the three
months ended June 30, 1999 as compared to $0 for the same period of 1998. In
April we sold our cellular telephone operations for $89 million, which resulted
in a gain of $79.3 million. In June we sold 619 of our wireless transmission
towers for $261.5 million, which resulted in a total gain of $133.3 million. The
sale was recorded as a sale-leaseback. Accordingly, $85.5 million of the gain
was deferred and will be amortized over the initial lease term of ten years as a
reduction of tower rent expense.
The effective income tax rate for the three months ended June 30, 1999
and 1998 was 0%. We generated net income of $63 million for the three months
ended June 30, 1999 due to the asset sales. However, we have accumulated
substantial net loss carryforwards for tax purposes and expect to incur a net
loss for 1999 and beyond. We will not recognize the tax benefit of these losses
until management determines that it is more likely than not that such benefit is
realizable.
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Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
The following table reflects the composition of our cellular and PCS
service revenue and equipment sales and related gross margins, as well as
overall operating and other costs and margins. Our historical results of
operations, particularly in view of the sale of our cellular telephone assets
and the start-up costs associated with our PCS business, will not be comparable
with future periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
COMBINED COMBINED
CELLULAR CELLULAR
AND AND
CELLULAR PCS PCS CELLULAR PCS PCS
--------- --------- --------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SERVICE REVENUE & COST ANALYSIS:
Service revenues:
Postpaid revenues ..................... $ 3,791 $ 77,479 $ 81,270 $ 5,710 $ 51,943 $ 57,653
Roaming revenues ...................... 2,597 2,668 5,265 3,119 1,686 4,805
Prepaid revenues ...................... -- 20,230 20,230 -- -- --
Other revenues ........................ 304 4,451 4,755 367 3,069 3,436
--------- --------- --------- -------- --------- ---------
Total service revenues .............. 6,692 104,828 111,520 9,196 56,698 65,894
Cost of services ......................... 564 26,158 26,722 944 18,977 19,921
--------- --------- --------- -------- --------- ---------
Gross margin .......................... $ 6,128 $ 78,670 $ 84,798 $ 8,252 $ 37,721 $ 45,973
========= ========= ========= ======== ========= =========
EQUIPMENT SALES & COST ANALYSIS:
Equipment sales .......................... $ 316 $ 14,106 $ 14,422 $ 394 $ 11,214 $ 11,608
Cost of equipment sales .................. 598 30,980 31,578 877 29,133 30,010
--------- --------- --------- -------- --------- ---------
Gross margin .......................... $ (282) $ (16,874) $ (17,156) $ (483) $ (17,919) $ (18,402)
========= ========= ========= ======== ========= =========
OPERATING MARGIN ANALYSIS:
Total revenues and sales ................. $ 7,008 $ 118,934 $ 125,942 $ 9,590 $ 67,912 $ 77,502
--------- --------- --------- -------- --------- ---------
Operating expenses:
Cost of services and equipment sales... 1,162 57,138 58,300 1,821 48,110 49,931
Operations ............................ 576 31,243 31,819 928 23,498 24,426
Selling and marketing ................. 658 41,823 42,481 1,117 24,148 25,265
General and administrative ............ 537 19,389 19,926 916 15,876 16,792
Depreciation .......................... 521 38,209 38,730 969 25,563 26,532
Amortization .......................... -- 5,111 5,111 -- 4,781 4,781
--------- --------- --------- -------- --------- ---------
Total operating expenses ............ 3,454 192,913 196,367 5,751 141,976 147,727
--------- --------- --------- -------- --------- ---------
Operating income (loss) .................. $ 3,554 $ (73,979) (70,425) $ 3,839 $ (74,064) (70,225)
========= ========= ======== =========
Interest expense, net .................... 55,194 45,492
Gain on sale of assets ................... (127,161) --
Miscellaneous income ..................... (142) (219)
--------- ---------
Income (loss) before income taxes ........ 1,684 (115,498)
Income tax provision ..................... -- --
--------- ---------
Net income (loss) ................... $ 1,684 $(115,498)
========= =========
OTHER SUPPLEMENTAL DATA:
Subscribers at end of period ............. -- 382,309 382,309 27,529 181,431 208,960
Capital expenditures ..................... $ 326 $ 51,866 $ 52,192 $ 886 $ 73,316 $ 74,202
</TABLE>
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The following discussion reflects the results of operations for our PCS
and cellular lines of business. All general corporate costs have been allocated
to those lines of business based on management's estimates of actual expenses
incurred related to such lines of business. We sold substantially all of our
cellular telephone assets on April 30, 1999.
Postpaid PCS service revenues increased $25.5 million, or 49.2%, for
the six months ended June 30, 1999 as compared to the same period of 1998. This
increase is the result of our continued PCS subscriber growth and our launch of
eight new PCS markets since the second quarter of 1998. Our postpaid PCS
subscribers grew to approximately 292,000 at June 30, 1999, from approximately
181,000 at June 30, 1998, of which approximately 38,000 net postpaid PCS
subscribers were added during the six months ended June 30, 1999.
The RPU per postpaid PCS subscriber decreased to $47.86 for the six
months ended June 30, 1999, as compared to $56.79 for the same period of 1998.
We have experienced a gradual reduction in RPU per postpaid PCS subscriber
because new customers tend to choose lower fixed-rate plans and because of
intense price competition among wireless carriers, which we believe are trends
consistent throughout the wireless industry. During 1999, we are offering
wireless rate plans with more bundled airtime and toll minutes and additional
enhanced services and features in an effort to stimulate increased usage among
our customers and thus generate additional incremental revenues. We anticipate a
marginal decline in our RPU per postpaid PCS subscriber in future periods due
primarily to our continued focus on improving our mix of rate plans and
services.
The RPU per postpaid cellular subscriber decreased to $33.17 for the
six months ended June 30, 1999 as compared to $37.37 for the same period of
1998. As previously noted, this decrease reflects increased price competition
among wireless carriers, which prompted us to offer cellular rate plans with
more bundled airtime minutes.
PCS roaming revenues (including roaming long distance) increased $1
million, or 58.2%, for the six months ended June 30, 1999 as compared to the
same period of 1998. This increase is due primarily to an increase in the number
of roamers and usage per roamer, which is the result of continued market
penetration by the PCS industry as a whole.
We generated $20.2 million in prepaid PCS service revenues for the six
months ended June 30, 1999, as compared to $0 for the same period of 1998, which
is attributable to the introduction of our intelligent network-based prepaid
service alternative in September 1998. RPU per prepaid PCS subscriber was $52.22
for the six months ended June 30, 1999.
Other service revenues, which include activation fees, fees from
enhanced services, co-location revenue and interconnection fees billed to local
exchange carriers for connections to our PCS and cellular networks, increased
$1.3 million, or 38.4%, for the six months ended June 30, 1999 as compared to
the same period of 1998. This increase is due primarily to our concentrated
efforts to secure tenants for co-location on our towers prior to the sale of
these towers. In February 1999 we also re-introduced activation fees, which were
waived for a portion of the six months ended June 30, 1998.
Cost of services includes the cost of interconnection with local
exchange carrier facilities, direct cell site costs (e.g., property taxes and
insurance, site lease costs and electric utilities), PCS and cellular roaming
validation (provided by a third-party clearinghouse), long distance toll costs
and supplementary services (such as voice mail). PCS cost of services increased
$7.2 million, or 37.8%, for the six months ended June 30, 1999, as compared to
the same period of 1998. This increase primarily reflects costs related to the
approximately 470 additional cell sites we placed in service since June 30,
1998, as well as increased interconnection and toll costs related to increased
traffic on our expanding PCS network.
We generated a negative PCS equipment margin of 120% on $14.1 million
of sales during the six months ended June 30, 1999, as compared to 160% on $11.2
million of sales for the same period of 1998. The
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improvement in negative PCS equipment margin is primarily attributable to an
increase in the sales price of handsets effective February 1999, which reflects
our desire to limit the subsidization of handset upgrades for existing
customers, combined with a continued decline in the cost of these handsets. We
generated a negative cellular equipment margin of 89.2% on $.3 million of sales
for the six months ended June 30, 1999, as compared to 123% on $.4 million of
sales for the same period of 1998. As previously noted, this improvement in
negative margin is attributable to a continued decrease in the cost of cellular
handsets combined with a gradual change in the handset mix, which enabled us to
increase sales prices. We expect to continue subsidizing the cost of handsets to
consumers for the foreseeable future.
Operations costs, which include the costs of managing and maintaining
our cellular and PCS systems, customer service, credit and collections
(including bad debt) and inventory management increased $7.4 million, or 30.3%,
for the six months ended June 30, 1999, as compared to the same period of 1998.
Substantially all of this increase is attributable to the costs of providing
customer service to the growing PCS customer base (which includes certain
start-up and initial operating costs associated with our new centralized
customer call center in Jacksonville) and the costs of maintaining the expanding
PCS network.
Selling and marketing costs increased $17.2 million, or 68.1%, for the
six months ended June 30, 1999 as compared to the same period of 1998.
Substantially all of this increase is attributable to continued increases in PCS
advertising and marketing costs and the expansion of our sales distribution
channels, including increases in headcount, commissions and retail location
costs.
General and administrative costs increased $3.1 million, or 18.7%, for
the six months ended June 30, 1999 as compared to the same period of 1998.
Substantially all of this increase is attributable to increased headcount and
the related facilities costs at our corporate and regional administrative
offices and information technology center.
Depreciation and amortization increased $12.5 million, or 40%, for the
six months ended June 30, 1999 as compared to the same period of 1998 and
consists principally of the depreciation of the PCS and cellular network and the
amortization of PCS licenses. Substantially all of the increase is attributable
to depreciation associated with the approximately 470 additional PCS cell sites
that we placed in service since June 30, 1998, as well as depreciation of
computer systems and infrastructure costs required to manage the administrative
functions of our business.
Net consolidated interest expense increased $9.7 million, or 21.3%, for
the six months ended June 30, 1999 as compared to the same period of 1998. This
increase in net interest expense resulted primarily from increased borrowing
under our credit facility, and increase in our bond accretion and a decrease in
interest income due to lower cash balances available for investment because of
the continued buildout of the PCS network.
We recorded a gain on sale of assets of $127.1 million for the six
months ended June 30, 1999 as compared to $0 for the same period of 1998. In
April we sold our cellular telephone operations for $89 million, which resulted
in a gain of $79.3 million. In June we sold 619 of our wireless transmission
towers for $261.5 million, which resulted in a total gain of $133.3 million. The
sale was recorded as a sale-leaseback. Accordingly, $85.5 million of the gain
was deferred and will be amortized over the initial lease term of ten years as a
reduction of tower rent expense.
The effective income tax rate for the six months ended June 30, 1999
and 1998 was 0%. We generated net income of $1.7 million for the six months
ended June 30, 1999 due to the asset sales. However, we have accumulated
substantial net loss carryforwards for tax purposes and expect to incur a net
loss for 1999 and beyond. We will not recognize the tax benefit of these
operating losses until management determines that it is more likely than not
that such benefit is realizable.
LIQUIDITY AND CAPITAL RESOURCES
We require significant amounts of capital for funding the operations
and expansion of our PCS business. Total capital expenditures, including capital
expenditures for information technology and other support of the PCS business,
totaled approximately $52 million for the six months ended June 30, 1999. Costs
associated with the PCS system buildout include tower sites, leasehold
improvements, base station and switch equipment and labor expenses related to
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<PAGE> 16
construction of sites. We currently estimate that capital expenditures will
total approximately $98 million for the remainder of 1999, primarily relating to
the continued expansion of our PCS network to satisfy customer needs and
competitive requirements, maintenance of our network service quality and billing
system functionality and completion of customer service enhancement projects.
On June 2, 1999, we sold 619 of our towers, related assets and
liabilities to a subsidiary of Crown Castle International Corp. for $261.5
million in cash. In connection with this sale, we agreed to lease space on these
towers for a period of ten years, with three five-year renewal periods that we
may exercise at our option. Following the closing of this sale, we and Crown
Castle entered into a binding letter agreement that contemplates, subject to
certain conditions, is selling an additional 31 towers to Crown Castle for
approximately $13 million. We expect to close this transaction in the fourth
quarter of 1999. This letter agreement also contemplates a build-to-suit
contract between Crown Castle and us, subject to Crown Castle's right of first
refusal, for 40 tower sites to be constructed prior to December 31, 2000.
On April 30, 1999, we sold to Public Service Cellular, Inc.
substantially all of our cellular assets for $89 million. At closing, PSC paid
us $83.1 million in cash (including reimbursement for certain capital
expenditures of $.3 million) and paid $6.2 million into escrow, which will be
released as set forth in the agreement.
Although we are unable to predict the amount of expenditures that we
will make beyond 1999, we may need to raise additional capital to fund and
expand our business operations. We also will need to raise additional capital if
we decide to acquire additional licenses or businesses. We may attempt to raise
additional capital through public or private debt or equity financings, vendor
financings or other means. However, we cannot guarantee that additional
financing will be available to us or, if available, that we will be able to
obtain it on terms acceptable to us, favorable to our stockholders and within
the limitations contained in our indentures, credit facility and any future
financing arrangements. If we fail to obtain additional financing, we could
experience delays in some or all of our development and expansion plans and
expenditures, which could limit our ability to meet our debt service obligations
and could materially adversely affect our business, financial condition and
operating results.
We expect to continue to incur significant operating losses and to
generate significant negative cash flows from operating activities in the future
while we continue to construct our PCS system and build our customer base. Our
ability to satisfy our debt repayment obligations and covenants depends upon our
future performance, which is subject to a number of factors, many of which are
beyond our control. Cash interest will not be payable on our Senior Discount
Notes prior to 2001. We cannot guarantee that we will generate sufficient cash
flow from our operating activities to meet our debt service and working capital
requirements, and we may need to refinance our indebtedness. However, our
ability to refinance our indebtedness will depend on, among other things, our
financial condition, the state of the public and private debt and equity
markets, the restrictions in the instruments governing our indebtedness and
other factors, some of which may be beyond our control. In addition, if we do
not generate sufficient cash flow to meet our debt service requirements or if we
fail to comply with the covenants governing our indebtedness, we may need
additional financing in order to service or extinguish our indebtedness. We may
not be able to obtain financing or refinancing on terms that are acceptable to
us or favorable to us or our stockholders.
During the six months ended June 30, 1999, we used net cash of $54.1
million for operating activities as compared to $97.5 million for the same
period of 1998. Operating activities for 1999 consisted primarily of $127.2
million of gain on sale of assets, which was partially offset by $43.8 million
of depreciation and amortization and $33.4 million of bond accretion on the
senior discount notes.
Cash provided from investing activities was $291.7 million for the six
months ended June 30, 1999 as compared to cash used in investing activities of
$75.1 million for the same period of 1998. Investing activities for 1999
consisted primarily of proceeds from the sale of assets of $350.8 million and
the liquidation of short-term investments of $15.3 million, which were partially
offset by capital expenditures totaling $52.2 million, a decrease in accrued
construction costs of $12.3 million (both primarily related to the buildout of
the PCS system and support systems) and advances to Eliska Wireless, Inc. of
$7.1 million related to the recently concluded C-block auction.
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Cash provided from financing activities was $7.9 million for the six
months ended June 30, 1999 as compared to $192.8 million for the same period of
1998. Financing activities for 1999 consisted primarily of borrowings of $6.5
million under our credit facility.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is effective for fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133", which amends Statement 133 to be effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000 (that is, January 1, 2001 for
companies with calendar-year fiscal years). SFAS 133 establishes accounting and
reporting standards for derivative instruments and transactions involving hedge
accounting. We do not anticipate this statement will have a material impact on
our financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which is
effective for fiscal years beginning after December 15, 1998. SOP 98-1 requires
capitalization of certain costs of internal-use software. We adopted SOP 98-1 in
January 1999, and it did not have a material impact on our financial statements.
OTHER
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., "99" for 1999). 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, we established a Year 2000 Task Force consisting of
representatives from our 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, we also engaged an outside consulting firm with
expertise in Year 2000 issues relating to the telecommunications industry. With
the support of this outside consulting firm, we completed Phase 1 of our Year
2000 compliance program in December 1998, which consisted of assessing internal
hardware and software we use for Year 2000 readiness, as well as the state of
readiness of outside third parties with whom we have significant relationships
(e.g., vendors and suppliers).
Our assessment of internal systems included our 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, we also requested assurances from our
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. In many cases,
we are relying on such assurances that new and upgraded software and hardware
will be Year 2000 compliant. During Phase 2, we have begun testing such
third-party products, but cannot be sure that our tests will be adequate or
that, if problems are identified, they will be addressed by the supplier in a
timely and satisfactory manner. We also contacted PCS roaming partners and local
exchange carriers that carry and terminate calls on our PCS networks to
determine the extent to which their interfaces with our networks are vulnerable
to Year 2000
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issues. These actions are intended to help identify and mitigate the possible
external impacts of the Year 2000 problem. However, it is impossible to fully
assess the potential external consequences on our operations in the event
service interruptions occur from suppliers, roaming partners, local exchange
carriers and other third parties. We may also be at risk if certain critical
infrastructure services providers, such as electricity, water or telephone
service providers, experience difficulties that result in disruption of service
supplied to us.
Phase 2 of the Year 2000 compliance program includes development of
testing plans and remediation plans, as well as the implementation of those
plans. We have completed a substantial portion of necessary remediation to date
and have made commitments to conduct extensive lab testing of our network
infrastructure in September. Once Phase 2 is completed, we should be able to
predict the potential impacts of Year 2000 noncompliance with respect to our
internal systems as well as external third parties with whom we have significant
relationships (e.g., vendors and suppliers). As part of our Phase 2 activities,
we have also begun our contingency planning process to provide for continuity of
our business operations in the event of unforeseen internal and external Year
2000 issues. Phase 2 of the program is anticipated to be complete by early
fourth quarter 1999.
At this time, we have not calculated the total estimated cost of
addressing Year 2000 issues. Our management believes, however, that such total
cost will not be materially more than the amounts spent or committed to date. We
believe these costs will be able to be funded through cash on hand. To date, we
have incurred and expensed or committed to spend approximately $8 million for
Phase 1 and Phase 2 activities under our Year 2000 plan, primarily for network
infrastructure upgrades, retainer of outside consultants and assessment
activities under the plan.
We are optimistic that we will not experience a material disruption in
our business as a result of Year 2000 problems in our network operations,
information processing or interfacing with local exchange carriers or roaming
partners. However, as the Year 2000 project continues, we may discover
additional Year 2000 problems. For example, we may uncover Year 2000 problems
for which we are not able to develop, implement, or test remediation or
contingency plans or may find that the costs of these activities exceed current
expectations. If we fail to satisfactorily resolve Year 2000 issues related to
our business in a timely manner, we could be exposed to liability from third
parties which could have a material adverse effect on our business, financial
condition or results of operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements appear in a number of places in this
Report and include all statements which are not historical facts and which
relate to our intent, belief or current expectations, or that of our directors
or officers. In this Report, we may have made forward-looking statements with
respect to, among other things: (i) our financing plans, including our ability
to obtain financing in the future; (ii) trends affecting our financial condition
or results of operations; (iii) our growth and operating strategies; and (iv)
our anticipated capital needs and capital expenditures. We caution investors
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 our PCS digital protocol, competitive factors
and pricing pressures, general economic conditions, the failure of the market
demand for our products and services to be commensurate with our management's
expectations or past experience, the impact of present or future laws and
regulations on our business, changes in operating expenses or the failure of
operating and buildout expenses to be consistent with our 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; and (iii) those factors discussed in
detail in our previous filings with the Securities and Exchange Commission,
including the "Risk Factors" section of our Registration Statement on Form S-3
(Registration number (333-84951) as filed with the Securities and Exchange
Commission on August 11, 1999.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We believe our exposure to market rate fluctuations on our investments
is nominal due to the short-term nature of those investments. We have market
risk to the extent of our borrowings under our credit facility because of the
variable interest rate on the credit facility. However, our management does not
foresee any material prolonged changes in interest rates in the near future. At
present, we have no plans to enter into any hedging arrangements with respect to
our borrowings.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to our Form 10-K for the year ended December 31, 1998
(as filed with the Securities and Exchange Commission on March 29, 1999) for a
discussion of certain legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
We pay a quarterly dividend of 6.5% per annum on our Series E 6.5%
Cumulative Convertible Preferred Stock (the "Series E Preferred") and Series F
6.5% Cumulative Convertible Preferred Stock (the "Series F Preferred"). Although
the terms of the Series E Preferred and Series F Preferred allow us to pay these
dividends in stock or in cash, we are prohibited from paying cash dividends for
the foreseeable future because of restrictions contained in our credit facility
and the indentures relating to our outstanding bonds. Therefore, we intend to
pay these quarterly dividends in common stock for the foreseeable future. In May
1999, we issued 91,799 shares of our common stock to SCANA Communications, Inc.,
who owns all of our Series E Preferred, and 91,799 shares of common stock to ITC
Wireless, Inc., who owns all of our Series F Preferred, in payment of the
quarterly dividends owed on March 15, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 1999 annual meeting of the stockholders on May 20, 1999. We
asked the stockholders to vote on the following matters:
Ratification of preferred stock issuance and approval of shares of
common stock issuable in connection therewith. We asked the stockholders to
consider and ratify the issuance of our Series E Preferred and Series F
Preferred and to approve all shares of common stock that may be issued upon
conversion of, and as dividends on, the preferred stock. Votes cast for and
against the proposal were 18,794,396 and 68,688, respectively. Broker non-votes
and abstentions were 3,117,043 and 220,890, respectively.
Amendment of 1991 Stock Option Plan. We asked the stockholders to
consider and vote upon a proposed amendment to our 1991 Stock Option Plan to
increase the number of shares of common stock reserved for issuance thereunder
from 3,000,000 shares to 5,000,000 shares. Votes cast for and against the
proposal were 17,854,440 and 1,003,574, respectively. Broker non-votes and
abstentions were 3,117,043 and 225,960, respectively.
Election of directors. We asked the stockholders to elect Donald W.
Burton and Maurice P. O'Connor to our Board of Directors, each for a three-year
term. Votes cast for and against the election of each of Messrs. Burton and
O'Connor were 21,172,053 and 1,028,964, respectively. There were no broker
non-votes or abstentions. The following persons continue to serve as directors:
Campbell B. Lanier; Allen E. Smith; O. Gene Gabbard; Ann Milligan; William H.
Scott, III; William B. Timmerman; and Donald W. Weber.
Accountants. We asked the stockholders to ratify the appointment by the
Board of Directors of Arthur Andersen LLP as our independent public accountants
for the year ending December 31, 1999. Votes cast for and against the proposal
were 21,985,254 and 5,730, respectively. Broker non-votes and abstentions were 0
and 210,033, respectively.
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27 Financial Data Schedule (for SEC use only).
</TABLE>
(B) REPORTS ON FORM 8-K.
On May 17, 1999, we filed a Current Report on Form 8-K dated April 30,
1999 which reported events under Item 2 (Acquisition or Disposition of Assets)
in connection with the closing of the sale of all of our cellular telephone
assets in Georgia and Alabama. We filed unaudited pro forma financial statements
therewith.
On June 16, 1999, we filed a Current Report on Form 8-K dated June 2,
1999 which reported events under Item 2 (Acquisition or Disposition of Assets)
in connection with the closing of the sale of 619 towers and related assets and
liabilities to a subsidiary of Crown Castle International Corp. We were not
required to file financial statements in connection with the sale.
21
<PAGE> 22
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.
August 12, 1999 /s/ Allen E. Smith
-------------------------------------
Allen E. Smith
President and Chief Executive Officer
August 12, 1999 /s/ Fred G. Astor, Jr.
-------------------------------------
Fred G. Astor, Jr.
Executive Vice President and
Chief Financial Officer
(Chief Accounting Officer)
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF POWERTEL, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 450,306
<SECURITIES> 32,393
<RECEIVABLES> 33,808
<ALLOWANCES> 0
<INVENTORY> 13,353
<CURRENT-ASSETS> 545,184
<PP&E> 654,969
<DEPRECIATION> (121,226)
<TOTAL-ASSETS> 1,502,436
<CURRENT-LIABILITIES> 63,744
<BONDS> 882,905
0
3
<COMMON> 278
<OTHER-SE> 53,420
<TOTAL-LIABILITY-AND-EQUITY> 1,502,436
<SALES> 14,422
<TOTAL-REVENUES> 125,942
<CGS> 31,578
<TOTAL-COSTS> 196,367
<OTHER-EXPENSES> (72,109)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,194
<INCOME-PRETAX> 1,684
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,684
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,191)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
