<PAGE> 1
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 33-96218
PROSPECTUS SUPPLEMENT NO.1
TO PROSPECTUS DATED SEPTEMBER 21, 1999
1,224,557 Shares
POWERTEL, INC.
Common Stock
----------------------------
This prospectus supplement updates information included in our
prospectus dated September 21, 1999. Our prospectus relates to the offer and
sale of up to 1,224,557 shares of our common stock to the holders of our
currently outstanding warrants to purchase shares of common stock upon the
exercise thereof by such holders and in accordance with a warrant agreement
relating to the warrants between us and Bankers Trust Company, as warrant
agent. This prospectus supplement includes our Quarterly Report on Form 10-Q
for the period ended September 30, 1999, which we filed with the Securities and
Exchange Commission on November 12, 1999.
This prospectus supplement should be read in conjunction with our
prospectus dated September 21, 1999.
----------------------------
YOU SHOULD CONSIDER CAREFULLY THE "RISK FACTORS" BEGINNING ON PAGE 4
OF THE PROSPECTUS DATED SEPTEMBER 21, 1999 BEFORE PURCHASING
ANY OF THE COMMON STOCK OFFERED HEREBY.
----------------------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus Supplement is November 15, 1999.
<PAGE> 2
================================================================================
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,
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 November 10, 1999
Common Stock, $0.01 par value 29,799,821
================================================================================
<PAGE> 3
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
September 30, 1999 (Unaudited) and December 31, 1998.......................................... 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1999 and 1998 (Unaudited)....................................................... 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998 (Unaudited)..................................... 5
Condensed Notes to Consolidated Financial Statements
(Unaudited)................................................................................... 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................................................................................. 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 18
Item 2. Changes in Securities and Use of Proceeds..................................................... 18
Item 5. Other Information............................................................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................................................. 18
SIGNATURES
</TABLE>
2
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POWERTEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 403,534 $ 204,787
Restricted cash for payment of interest ................................... 32,882 33,375
Accounts receivable, net of allowance for doubtful accounts ............... 38,958 28,726
Inventories ............................................................... 11,946 20,683
Prepaid expenses and other ................................................ 16,442 9,248
----------- -----------
503,762 296,819
----------- -----------
PROPERTY AND EQUIPMENT, AT COST .............................................. 700,760 749,614
Less: accumulated depreciation ........................................... (140,598) (107,210)
----------- -----------
560,162 642,404
----------- -----------
OTHER ASSETS:
Licenses, net ............................................................. 403,134 407,998
Restricted cash for payment of interest ................................... -- 14,343
Deferred charges and other, net ........................................... 17,171 19,014
----------- -----------
420,305 441,355
----------- -----------
Total assets ........................................................ $ 1,484,229 $ 1,380,578
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable-- trade ................................................. $ 12,156 $ 14,633
Accrued construction costs ................................................ 23,850 17,807
Accrued taxes other than income ........................................... 14,006 6,261
Accrued interest .......................................................... 11,125 2,781
Advance billings and customer deposits .................................... 9,239 7,898
Accrued other ............................................................. 15,010 20,529
Current portion of long-term obligations .................................. 52 49
----------- -----------
85,438 69,958
----------- -----------
LONG-TERM OBLIGATIONS:
12% Senior Discount Notes due February 2006 ............................... 300,974 275,069
12% Senior Discount Notes due May 2006 .................................... 299,411 274,393
11.125% Senior Notes due June 2007 ........................................ 300,000 300,000
Credit facility ........................................................... 265,000 258,532
Deferred gain on sale-leaseback ........................................... 82,678 --
Other ..................................................................... 37 76
----------- -----------
1,248,100 1,108,070
----------- -----------
COMMITMENTS AND CONTINGENCIES
CUMULATIVE CONVERTIBLE, REDEEMABLE
PREFERRED STOCK ........................................................... 152,219 152,219
----------- -----------
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock ........................................................... 3 3
Common stock .............................................................. 297 273
Paid-in capital ........................................................... 490,974 479,876
Accumulated deficit ....................................................... (490,824) (428,774)
Deferred compensation ..................................................... (1,633) (702)
Treasury stock, at cost ................................................... (345) (345)
----------- -----------
(1,528) 50,331
----------- -----------
Total liabilities and stockholders' (deficit) equity ................ $ 1,484,229 $ 1,380,578
=========== ===========
</TABLE>
The accompanying condensed notes to consolidated
financial statements are an integral part of these statements.
3
<PAGE> 5
POWERTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------------
1999 1998 1999 1998
--------- -------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES AND SALES:
Postpaid revenues ......................... $ 46,451 $ 36,184 $ 127,721 $ 93,837
Roaming revenues .......................... 1,651 2,503 6,916 7,308
Prepaid revenues .......................... 14,509 -- 34,739 --
Other revenues ............................ 3,790 1,605 8,545 5,041
--------- -------- --------- ---------
Total service revenues ................. 66,401 40,292 177,921 106,186
Equipment sales ........................... 5,955 4,346 20,377 15,954
--------- -------- --------- ---------
Total revenues and sales ............ 72,356 44,638 198,298 122,140
--------- -------- --------- ---------
OPERATING EXPENSES:
Cost of services .......................... 15,920 11,539 42,642 31,460
Cost of equipment sales ................... 17,072 19,674 48,650 49,684
Operations ................................ 14,800 13,793 46,619 38,219
Selling and marketing ..................... 22,933 14,920 65,414 40,185
General and administrative ................ 10,503 9,068 30,429 25,860
Depreciation .............................. 19,372 14,447 58,102 40,979
Amortization .............................. 2,550 2,389 7,661 7,170
--------- -------- --------- ---------
Total operating expenses ............ 103,150 85,830 299,517 233,557
--------- -------- --------- ---------
OPERATING LOSS ............................... (30,794) (41,192) (101,219) (111,417)
--------- -------- --------- ---------
OTHER EXPENSE (INCOME):
Interest expense, net ..................... 25,695 22,893 80,889 68,385
Gain on sale of assets .................... -- -- (127,161) --
Miscellaneous (income) expense ............ (67) 174 (209) (45)
--------- -------- --------- ---------
Total other expense (income) ........ 25,628 23,067 (46,481) 68,340
--------- -------- --------- ---------
LOSS BEFORE INCOME TAXES ..................... (56,422) (64,259) (54,738) (179,757)
INCOME TAX PROVISION ......................... -- -- -- --
--------- -------- --------- ---------
NET LOSS ..................................... (56,422) (64,259) (54,738) (179,757)
DIVIDENDS ON CUMULATIVE CONVERTIBLE,
REDEEMABLE PREFERRED STOCK ................ (2,437) (2,438) (7,312) (2,573)
--------- -------- --------- ---------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS .... $ (58,859) $(66,697) $ (62,050) $(182,330)
========= ======== ========= =========
PER SHARE DATA:
BASIC AND DILUTED LOSS PER COMMON SHARE ... $ (2.10) $ (2.47) $ (2.24) $ (6.76)
========= ======== ========= =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING .......... 28,053 26,984 27,751 26,981
========= ======== ========= =========
</TABLE>
The accompanying condensed notes to consolidated
financial statements are an integral part of these statements.
4
<PAGE> 6
POWERTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss .......................................................................... $ (54,738) $(179,757)
Adjustments to reconcile net 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 ............................................... 65,763 48,149
Bond accretion .............................................................. 50,923 43,065
Other ....................................................................... (577) 2,239
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ............................... (13,874) 6,390
Decrease (increase) in inventories ....................................... 8,425 (12,568)
Increase in other assets ................................................. (102) (2,842)
Decrease in accounts payable and accrued expenses ........................ (4,562) (24,059)
Increase in advance billings and customer deposits ....................... 1,984 2,633
--------- ---------
Net cash used in operating activities ............................... (73,919) (116,750)
--------- ---------
CASH FLOWS PROVIDED FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sale-leaseback ................................................ 261,501 --
Proceeds from sale of subsidiary ............................................ 89,339 --
Capital expenditures ........................................................ (97,983) (124,034)
Liquidation of short-term investments ....................................... 14,836 13,486
Increase (decrease) in accrued construction costs ........................... 6,043 (18,949)
Short-term notes receivable ................................................. (7,153) --
Microwave relocation costs .................................................. (2,797) (550)
--------- ---------
Net cash provided from (used in) investing activities ............... 263,786 (130,047)
--------- ---------
CASH FLOWS PROVIDED FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net ..................................... 2,448 200
Borrowings under credit facility ............................................ 6,468 56,272
Proceeds from sale of cumulative convertible, redeemable
preferred stock, net ..................................................... -- 149,708
Other, net .................................................................. (36) 62
--------- ---------
Net cash provided from financing activities ......................... 8,880 206,242
--------- ---------
NET INCREASE (DECREASE) IN CASH ................................................... 198,747 (40,555)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................. 204,787 326,954
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................ $ 403,534 $ 286,399
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ......................................................... $ 33,185 $ 31,004
</TABLE>
The accompanying condensed notes to consolidated
financial statements are an integral part of these statements.
5
<PAGE> 7
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. Through April 30, 1999, the Company classified 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 SEPTEMBER 30,
---------------------------------------------------------------------------------------
1999 1998
---------------------------------------- ---------------------------------------
PCS CELLULAR(A) TOTALS PCS CELLULAR TOTALS
-------- ----------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales ........ $ 72.4 $ -- $ 72.4 $ 39.7 $ 4.9 $ 44.6
Operating (loss) income ... (30.8) -- (30.8) (43.3) 2.1 (41.2)
Net (loss) income ......... (56.4) -- (56.4) (66.4) 2.1 (64.3)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------
1999 1998
---------------------------------------- ---------------------------------------
PCS CELLULAR(A) TOTALS PCS CELLULAR TOTALS
-------- ----------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales ........ $ 191.3 $ 7.0 $ 198.3 $ 107.7 $ 14.4 $ 122.1
Operating (loss) income ... (104.8) 3.6 (101.2) (117.3) 5.9 (111.4)
Net (loss) income ......... (137.6) 82.9 (54.7) (185.7) 5.9 (179.8)
</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 and
resulted in a $79.3 million gain to the Company. 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. On November 1, 1999, substantially all funds were
released from escrow to the Company.
6
<PAGE> 8
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------------
1999 1998 1999 1998
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Revenues and sales......................................... $ 72.4 $ 39.7 $ 191.3 $ 107.7
Net loss before dividends.................................. (56.4) (66.4) (137.6) (185.7)
Basic and diluted loss per common share.................... $ (2.10) $ (2.46) $ (4.96) $ (6.88)
</TABLE>
5. On June 2, 1999, pursuant to an Asset Purchase Agreement dated March
15, 1999, the Company and certain of its subsidiaries 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. In
connection with the sale, certain of the Company's subsidiaries
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 lessee. The transaction was recorded as a sale-leaseback.
Accordingly, $85.5 million of the $133.3 million total gain on the
sale was deferred and will be amortized over the initial lease term of
ten years as a reduction of tower rent expense. Amortization was $2.1
million for the three months ended September 30, 1999. The unamortized
portion of the deferred gain is recorded as a long-term obligation in
the accompanying condensed consolidated balance sheets.
On September 27, 1999, the Company and CCI entered into an asset
purchase agreement regarding the sale by the Company of an additional
31 towers to CCI for approximately $13 million. This transaction is
expected to close in the fourth quarter of 1999. On September 27,
1999, the Company and CCI also entered into a build-to-suit tower
construction contract that grants CCI a right of first refusal to
build, acquire and lease back to the Company up to 40 towers prior to
December 31, 2000.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We provide wireless PCS services in the southeastern United States.
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 September 30, 1999, we had approximately 319,000 postpaid PCS
subscribers and 119,000 prepaid PCS subscribers.
On April 30, 1999, we sold substantially all 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 and certain of our subsidiaries 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,
certain of our subsidiaries have agreed to lease space on these towers for a
period of ten years, with three five-year renewal periods that the lessees may
exercise at their option. On September 27, 1999, we entered into an asset
purchase agreement with Crown Castle regarding the sale by us of an additional
31 towers to Crown Castle for approximately $13 million. We expect to close
this transaction in the fourth quarter of 1999. On September 27, 1999, we also
entered into a build-to-suit construction contract with Crown Castle that
grants Crown Castle a right of first refusal to build, acquire and lease back
to us up to 40 tower sites to be constructed prior to December 31, 2000.
We had a net loss of $56 million for the three months ended September
30, 1999, primarily as a result of the significant costs required to maintain
our expanding PCS network, 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 our PCS
licenses. We expect to continue incurring operating losses during the remainder
of 1999 and thereafter as we continue to expand our PCS network, increase 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 may continue to 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
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, the introduction of additional value-added
services primarily in the data area and our continued focus on pricing
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 2.7% for the three months ended September
30, 1999 as compared to 4.5% for the same period of 1998. We believe the
continued improvement in our postpaid PCS churn rate is the result of stricter
credit evaluation policies, improved customer service response, focused
collections efforts and the availability of prepaid service alternatives. We
anticipate further decline in and stabilization of our postpaid PCS churn rate
during the remainder of 1999 and beyond.
The Company 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
8
<PAGE> 10
and Canada. Additionally, we have signed a substantial number of international
roaming agreements and expect to sign numerous others with international GSM
carriers to facilitate international roaming, which we officially launched
during August 1999.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended September
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 SEPTEMBER 30,
---------------------------------------------------------------------------------------
1999 1998
------------------------------------------- --------------------------------------
COMBINED COMBINED
CELLULAR CELLULAR
AND AND
CELLULAR(A) PCS PCS CELLULAR PCS PCS
-------------- --------- --------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SERVICE REVENUES & COST ANALYSIS:
Service revenues
Postpaid revenues .................. $ -- $ 46,451 $ 46,451 $ 2,844 $ 33,340 $ 36,184
Roaming revenues ................... -- 1,651 1,651 1,696 807 2,503
Prepaid revenues ................... -- 14,509 14,509 -- -- --
Other revenues ..................... -- 3,790 3,790 150 1,455 1,605
-------------- --------- --------- -------- --------- ---------
Total service revenues .......... -- 66,401 66,401 4,690 35,602 40,292
Cost of services ...................... -- 15,920 15,920 476 11,063 11,539
-------------- --------- --------- -------- --------- ---------
Gross margin ....................... $ -- $ 50,481 $ 50,481 $ 4,214 $ 24,539 $ 28,753
============== ========= ========= ======== ========= =========
EQUIPMENT SALES & COST ANALYSIS:
Equipment sales ....................... $ -- $ 5,955 $ 5,955 $ 200 $ 4,146 $ 4,346
Cost of equipment sales ............... -- 17,072 17,072 372 19,302 19,674
-------------- --------- --------- -------- --------- ---------
Gross margin ....................... $ -- $ (11,117) $ (11,117) $ (172) $ (15,156) $ (15,328)
============== ========= ========= ======== ========= =========
OPERATING MARGIN ANALYSIS:
Total revenues and sales .............. $ -- $ 72,356 $ 72,356 $ 4,890 $ 39,748 $ 44,638
-------------- --------- --------- -------- --------- ---------
Operating expenses:
Cost of services and equipment sales -- 32,992 32,992 848 30,365 31,213
Operations ......................... -- 14,800 14,800 485 13,308 13,793
Selling and marketing .............. -- 22,933 22,933 551 14,369 14,920
General and administrative ......... -- 10,503 10,503 450 8,618 9,068
Depreciation ....................... -- 19,372 19,372 457 13,990 14,447
Amortization ....................... -- 2,550 2,550 -- 2,389 2,389
-------------- --------- --------- -------- --------- ---------
Total operating expenses ........ -- 103,150 103,150 2,791 83,039 85,830
-------------- --------- --------- -------- --------- ---------
Operating income (loss) ............... $ -- $ (30,794) (30,794) $ 2,099 $ (43,291) (41,192)
============== ========= ======== =========
Interest expense, net ................. 25,695 22,893
Miscellaneous income .................. (67) 174
--------- ---------
Loss before income taxes .............. (56,422) (64,259)
Income tax provision .................. -- --
--------- ---------
Net loss ........................ $ (56,422) $ (64,259)
========= =========
OTHER SUPPLEMENTAL DATA:
Subscribers at end of period .......... -- 438,226 438,226 28,037 228,654 256,691
Capital expenditures .................. $ -- $ 45,791 $ 45,791 $ 487 $ 49,345 $ 49,832
</TABLE>
- -------------
(a) We sold our cellular operations in April 1999.
9
<PAGE> 11
Unless specifically noted, the following discussion reflects the
results of operations for our PCS line of business only. We sold substantially
all of the assets for our cellular line of business in the second quarter of
1999.
Postpaid PCS service revenues increased $13.1 million, or 39.3%, for
the three months ended September 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 six new PCS markets since the third quarter of 1998. Our postpaid
PCS subscribers grew to approximately 319,000 at September 30, 1999, from
approximately 228,000 at September 30, 1998, of which approximately 27,000 net
postpaid PCS subscribers were added during the three months ended September 30,
1999. A significant portion of our subscriber growth for the third quarter is
attributable to the introduction of our nationwide one-rate plans (the
"50-State Rate") in July.
The average monthly service revenue ("RPU") per postpaid PCS
subscriber decreased to $50.89 for the three months ended September 30, 1999 as
compared to $54.15 for the same period of 1998. This decline in RPU reflects
the addition of new customers who utilize wireless services less, which we
believe is an industry-wide trend, and our current wireless rate plan
offerings, which emphasize bundled airtime and toll minutes for higher-priced
rate plans.
PCS roaming revenues (including roaming long distance) increased $.8
million, or 104.6%, for the three months ended September 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 our
continued effort to obtain roaming agreements with other carriers and our
launch of international roaming in August, which presently includes agreements
with approximately 30 countries outside North America.
We generated $14.5 million in prepaid PCS service revenues for the
three months ended September 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 $46.40 for the three months ended September 30, 1999 and we
added approximately 29,000 net prepaid PCS subscribers during the quarter (to
approximately 119,000 at September 30, 1999).
Other service revenues, which include activation fees, fees from
enhanced services and interconnection fees billed to local exchange carriers
("LEC's") for connections to our PCS network, increased $2.3 million, or
160.5%, for the three months ended September 30, 1999 as compared to the same
period of 1998. This increase is due primarily to the increase in
interconnection fees as a result of increased utilization of our PCS network by
LEC's and the re-introduction of activation fees in 1999, which were waived for
substantially all new activations for the same period of 1998.
Cost of services includes the cost of interconnection with LEC
facilities, direct cell site costs (e.g., property taxes and insurance, site
lease costs and electric utilities), roaming validation (provided by
third-party clearinghouses), long distance toll costs and supplementary
services (such as voice mail). PCS cost of services increased $4.9 million, or
43.9%, for the three months ended September 30, 1999 as compared to the same
period of 1998. This increase primarily reflects costs related to the
approximately 400 additional cell sites we placed in service since September
30, 1998, as well as increased interconnection and toll costs related to
increased traffic on our expanding PCS network and increased commissions
related to increases in prepaid card renewals.
We generated a negative PCS equipment margin of 187% on $6.0 million
of sales during the three months ended September 30, 1999 as compared to a
negative 366% on $4.1 million of sales for the same period of 1998. The
improvement in margins reflects a continued decrease in the average cost of
handsets sold driven by changes in the handset mix, as well as our efforts to
limit the subsidization of handset upgrades for existing customers. 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 $1.5 million, or 11.2%, for the
three months ended September 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 and the costs
10
<PAGE> 12
of maintaining our expanding PCS network, which increased due to certain
equipment warranty expirations. This increase was partially offset by a
substantial reduction in bad debt provisions as a percent of service revenue
resulting from improvements in credit and collections and fraud management, as
well as the success of our prepaid service alternative.
PCS selling and marketing costs increased $8.6 million, or 59.6%, for
the three months ended September 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 personnel, sales commissions and retail store
locations.
PCS general and administrative costs increased $1.9 million, or 21.9%,
for the three months ended September 30,1999 as compared to the same period of
1998. Substantially all of this increase is attributable to increases in
personnel and facilities costs at our corporate and regional administrative
offices and information technology center.
Depreciation and amortization increased $5.5 million, or 33.8%, for
the three months ended September 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 on network equipment associated with the approximately 400
additional cell sites that we placed in service since September 30, 1998, as
well as depreciation of computer systems and infrastructure costs required to
manage the administrative functions of our business. This increase was
partially offset by a reduction in depreciation associated with the towers that
were sold in the second quarter of 1999.
Net consolidated interest expense increased $2.8 million, or 12.2%,
for the three months ended September 30, 1999 as compared to the same period of
1998. This increase in interest expense resulted primarily from increased
borrowing under our credit facility.
The effective income tax rate for the three months ended September 30,
1999 and 1998 was 0%. We generated a net loss of $56.4 million for the three
months ended September 30, 1999 and expect to incur a net loss for the
remainder of 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.
11
<PAGE> 13
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
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>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1999 1998
--------------------------------------- -------------------------------------
COMBINED COMBINED
CELLULAR CELLULAR
AND AND
CELLULAR(A) PCS PCS CELLULAR PCS PCS
----------- --------- --------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SERVICE REVENUES & COST ANALYSIS:
Service revenues:
Postpaid revenues ..................... $ 3,791 $ 123,930 $ 127,721 $ 8,554 $ 85,283 $ 93,837
Roaming revenues ...................... 2,597 4,319 6,916 4,815 2,493 7,308
Prepaid revenues ...................... -- 34,739 34,739 -- -- --
Other revenues ........................ 304 8,241 8,545 517 4,524 5,041
--------- --------- --------- -------- --------- ---------
Total service revenues .............. 6,692 171,229 177,921 13,886 92,300 106,186
Cost of services ........................... 564 42,078 42,642 1,420 30,040 31,460
--------- --------- --------- -------- --------- ---------
Gross margin .......................... $ 6,128 $ 129,151 $ 135,279 $ 12,466 $ 62,260 $ 74,726
========= ========= ========= ======== ========= =========
EQUIPMENT SALES & COST ANALYSIS:
Equipment sales ............................ $ 316 $ 20,061 $ 20,377 $ 594 $ 15,360 $ 15,954
Cost of equipment sales .................... 598 48,052 48,650 1,249 48,435 49,684
--------- --------- --------- -------- --------- ---------
Gross margin .......................... $ (282) $ (27,991) $ (28,273) $ (655) $ (33,075) $ (33,730)
========= ========= ========= ======== ========= =========
OPERATING MARGIN ANALYSIS:
Total revenues and sales ................... $ 7,008 $ 191,290 $ 198,298 $ 14,480 $ 107,660 $ 122,140
--------- --------- --------- -------- --------- ---------
Operating expenses:
Cost of services and equipment sales ... 1,162 90,130 91,292 2,669 78,475 81,144
Operations ............................. 576 46,043 46,619 1,413 36,806 38,219
Selling and marketing .................. 658 64,756 65,414 1,668 38,517 40,185
General and administrative ............. 537 29,892 30,429 1,366 24,494 25,860
Depreciation ........................... 521 57,581 58,102 1,426 39,553 40,979
Amortization ........................... -- 7,661 7,661 -- 7,170 7,170
--------- --------- --------- -------- --------- ---------
Total operating expenses ............. 3,454 296,063 299,517 8,542 225,015 233,557
--------- --------- --------- -------- --------- ---------
Operating income (loss) .................... $ 3,554 $(104,773) (101,219) $ 5,938 $(117,355) (111,417)
========= ========= ======== =========
Interest expense, net ...................... 80,889 68,385
Gain on sale of assets ..................... (127,161) --
Miscellaneous income ....................... (209) (45)
--------- ---------
Loss before income taxes ................... (54,738) (179,757)
Income tax provision ....................... -- --
--------- ---------
Net loss ............................. $ (54,738) $(179,757)
========= =========
OTHER SUPPLEMENTAL DATA:
Subscribers at end of period ............... -- 438,226 438,226 28,037 228,654 256,691
Capital expenditures ....................... $ 326 $ 97,657 $ 97,983 $ 1,373 $ 122,661 $ 124,034
</TABLE>
- ----------------
(a) We sold our cellular operations in April 1999.
12
<PAGE> 14
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 $38.6 million, or 45.3%, for
the nine months ended September 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 six new PCS markets since the second quarter of 1998. Our
postpaid PCS subscribers grew to approximately 319,000 at September 30, 1999,
from approximately 228,000 at September 30, 1998, of which approximately 65,000
net postpaid PCS subscribers were added during the nine months ended September
30, 1999.
RPU per postpaid PCS subscriber decreased to $49.04 for the nine
months ended September 30, 1999 as compared to $55.51 for the same period of
1998. Historically, 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 have
been offering wireless rate plans with graduated levels of bundled airtime and
toll minutes and additional enhanced services and features in an effort to
stimulate increased usage of higher-priced rate plans among our customers and
generate additional incremental revenues.
PCS roaming revenues (including roaming long distance) increased $1.8
million, or 73.2%, for the nine months ended September 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 our continued
efforts to obtain roaming agreements with other carriers and our launch of
international roaming in August, which presently includes agreements with
approximately 30 countries outside North America.
We generated $34.7 million in prepaid PCS service revenues for the
nine months ended September 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. Year-to-date RPU
per prepaid PCS subscriber was $49.71, and we added approximately 78,000 net
prepaid PCS subscribers for the nine months ended September 30, 1999.
Other service revenues, which include activation fees, fees from
enhanced services, co-location revenue and interconnection fees billed to LEC's
for connections to our PCS and cellular networks, increased $3.7 million, or
82.2%, for the nine months ended September 30, 1999 as compared to the same
period of 1998. This increase is due primarily to the increase in
interconnection fees as a result of increased utilization of our PCS network by
LEC's and 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 LEC
facilities, direct cell site costs (e.g., property taxes and insurance, site
lease costs and electric utilities), PCS and cellular roaming validation
(provided by third-party clearinghouses), long distance toll costs and
supplementary services (such as voice mail). PCS cost of services increased
$12.0 million, or 40.1%, for the nine months ended September 30, 1999, as
compared to the same period of 1998. This increase primarily reflects costs
related to the approximately 400 additional cell sites we placed in service
since September 30, 1998, as well as increased interconnection and toll costs
related to increased traffic on our expanding PCS network and increased
commissions related to increases in prepaid card renewals.
We generated a negative PCS equipment margin of 140% on $20.1 million
of sales during the nine months ended September 30, 1999, as compared to a
negative 215% on $15.4 million of sales for the same period of 1998. The
improvement in margins reflects a continued decrease in the average cost of
handsets sold, as well as our efforts to limit the subsidization of handset
upgrades for existing customers. We expect to continue subsidizing the cost of
handsets to consumers for the foreseeable future.
13
<PAGE> 15
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 $9.2 million, or 25.1%,
for the nine months ended September 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 and the costs of
maintaining our expanding PCS network, which was partially offset by a
substantial reduction in bad debt provisions as a percent of service revenue
resulting from improvements in credit and collections and fraud management, as
well as the success of our prepaid service alternative.
Selling and marketing costs increased $26.2 million, or 68.1%, for the
nine months ended September 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 personnel, commissions and retail store
locations.
General and administrative costs increased $5.4 million, or 22.0%, for
the nine months ended September 30,1999 as compared to the same period of 1998.
Substantially all of this increase is attributable to increases in personnel
and the related facilities costs at our corporate and regional administrative
offices and information technology center.
Depreciation and amortization increased $18.5 million, or 39.6%, for
the nine months ended September 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 on network equipment associated with the approximately 400
additional cell sites that we placed in service since September 30, 1998, as
well as depreciation of computer systems and infrastructure costs required to
manage the administrative functions of our business. This increase was
partially offset by a reduction in depreciation associated with the towers that
were sold in the second quarter of 1999.
Net consolidated interest expense increased $12.5 million, or 18.3%,
for the nine months ended September 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, an increase in our bond accretion and a
decrease in interest income due to lower cash balances available for investment
because of the continued expansion of our PCS business.
We recorded a gain on sale of assets of $127.2 million for the nine
months ended September 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 nine months ended September 30,
1999 and 1998 was 0%. We generated a net loss of $54.7 million for the nine
months ended September 30, 1999 and expect to incur a net loss for the
remainder of 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 to fund our operations and
expand our PCS business. Total capital expenditures, including capital
expenditures for information technology and the support of the PCS business,
totaled approximately $98 million for the nine months ended September 30, 1999.
Costs associated with the PCS system buildout include tower sites, leasehold
improvements, base station and switching equipment and labor expenses related
to the construction of tower sites. We currently estimate that capital
expenditures will total approximately $52 million for the remainder of 1999,
primarily relating to the continued expansion of our PCS network, maintenance
of our network service quality and billing system functionality and completion
of customer service enhancement projects.
14
<PAGE> 16
On June 2, 1999, we and certain of our subsidiaries 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,
certain of our subsidiaries have agreed to lease space on these towers for a
period of ten years, with three five-year renewal periods that the lessees may
exercise at their option. On September 27, 1999, we entered into an asset
purchase agreement with Crown Castle regarding the sale by us of an additional
31 towers to Crown Castle for approximately $13 million. We expect to close
this transaction in the fourth quarter of 1999. On September 27, 1999, we also
entered into a build-to-suit construction contract with Crown Castle that
grants Crown Castle a right of first refusal to build, acquire and lease back
to us up to 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. On November 1,
1999, substantially all funds were released from escrow to us.
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. Although 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 nine months ended September 30, 1999, we used net cash of
$73.9 million for operating activities as compared to $116.8 million for the
same period of 1998. Operating activities for 1999 consisted primarily of
$127.2 million of gain on the sale of assets, which was partially offset by
$65.8 million of depreciation and amortization and $50.9 million of bond
accretion on the Senior Discount Notes.
Cash provided from investing activities was $263.8 million for the
nine months ended September 30, 1999 as compared to cash used in operating
activities of $130.0 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 $14.8 million, which
were partially offset by capital expenditures totaling $98.0 million primarily
related to the buildout of the PCS system and support systems.
Cash provided from financing activities was $8.9 million for the nine
months ended September 30, 1999 as compared to $206.2 million for the same
period of 1998. Financing activities for 1999 consisted primarily of borrowings
of $6.5 million under the Credit Facility.
15
<PAGE> 17
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 SFAS 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 are or will be Year 2000 compliant. During Phase 2, we have been
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 and
cellular roaming partners and local exchange carriers that carry and terminate
calls on our PCS and cellular networks to determine the extent to which their
interfaces with our networks are vulnerable to Year 2000 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 has included development
of testing plans and remediation plans, as well as the implementation of those
plans. Once Phase 2 is completed, which is expected in November
16
<PAGE> 18
1999, 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).
To date, the amount of remediation work required to address Year 2000
problems has not been, and the amount of remediation work remaining to be
performed is not expected to be, extensive. Given that many of our financial and
network systems have been implemented in the last few years, our management is
confident that this newer equipment and software is generally Year 2000
compliant. However, we expect to continue to conduct limited Year 2000 readiness
testing and to modify some of our existing hardware and software in order for
our systems to function properly in the year 2000 and thereafter. As of October
31, 1999, the total costs of addressing Year 2000 issues incurred by us were
approximately $7.96 million. Our management believes that the total remaining
costs related to this project will not be material and will be able to be funded
through cash on hand.
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 part of our Phase 2 activities, we have retained a third
party consulting firm that specializes in contingency planning. The most
reasonably likely worst case scenario to us would involve failure of software
and hardware dependencies, or critical vendors and suppliers that support the
mission critical business processes identified by us during Phase 1. At this
time, we are not aware of any material risks to internal dependencies and have
worked closely with our critical suppliers and third party software and
hardware vendors to confirm their readiness and complete end-to-end testing for
Year 2000 compliance. Contingency plans are being developed and should be
completed by November 30, 1999 that address the continued operations of mission
critical business processes in the event of unforeseen software, hardware, or
critical vendor or supplier failure. These plans are scheduled to be tested by
December 15, 1999.
As the Year 2000 project continues, we may discover additional Year
2000 problems. For example, we may not be able to develop, implement, or test
remediation or contingency plans, or we 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; (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. These statements can sometimes be identified by our use of
forward-looking words such as "believe," "may," "will," "anticipate,"
"estimate," "continue," "expect," "could," "should," "would" or "intend." We
caution investors that any such forward-looking statements are not guarantees
of future performance and involve risks and uncertainties. Our actual results
may differ materially from those projected in these 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 No. 333-84951), as declared effective by the
Securities and Exchange Commission on September 24, 1999.
17
<PAGE> 19
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.
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 July 1999, we issued 56,484 shares of our common stock
to SCANA Communications, Inc., who owns all of our Series E Preferred, and
56,484 shares of common stock to ITC Wireless, Inc., who owns all of our Series
F Preferred, in payment of the quarterly dividends owed on June 15, 1999.
ITEM 5. OTHER EVENTS
On September 22, 1999, The Huff Alternative Income Fund, L.P.
("Huff"), which purchased 50,000 shares of our Series C Convertible Preferred
Stock (the "Series C Preferred") on June 5, 1997, converted all of these shares
of Series C Preferred into 1,764,706 shares of common stock. The resale of
these shares of common stock has been registered on Form S-3 (Registration No.
333-84951), and Huff may offer and sell these shares from time to time. We will
not receive any proceeds from the sale of these shares.
On September 15, 1999, Sonera Ltd. ("Sonera") purchased 100,000 shares
of our Series A Convertible Preferred Stock (the "Series A Preferred") from
Ericsson Inc., which originally purchased the Series A Preferred from us on
June 28, 1996. Through its ownership of the Series A Preferred shares, Sonera
beneficially owns approximately 14% of our outstanding common stock.
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.
18
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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 12, 1999 /s/ Allen E. Smith
----------------------------------------------------
Allen E. Smith
President and Chief Executive Officer
November 12, 1999 /s/ Fred G. Astor
----------------------------------------------------
Fred G. Astor, Jr.
Executive Vice President and Chief Financial Officer
(Chief Accounting Officer)
19
