<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 MARCH 31, 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 May 11, 1999
Common Stock, $0.01 par value 27,475,044
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POWERTEL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.................................................. 3
Condensed Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998.................................. 3
Condensed Consolidated Statements of Operations for
the Three Months ended March 31, 1999 and 1998........................ 4
Condensed Consolidated Statements of Cash Flows for
the Three Months ended March 31, 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............ 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................... 15
Item 2. Changes in Securities and Use of Proceeds............................. 15
Item 6. Exhibits and Reports on Form 8-K...................................... 15
SIGNATURES
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POWERTEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 152,282 $ 204,787
Restricted cash for payment of interest ....................................... 33,375 33,375
Accounts receivable, net of allowance for doubtful accounts ................... 27,903 28,726
Inventories ................................................................... 23,133 20,683
Prepaid expenses and other .................................................... 17,693 9,248
----------- -----------
254,386 296,819
----------- -----------
PROPERTY AND EQUIPMENT, AT COST .................................................. 764,356 749,614
Less accumulated depreciation ................................................. (125,987) (107,210)
----------- -----------
638,369 642,404
----------- -----------
OTHER ASSETS:
Licenses, net ................................................................. 405,322 407,998
Restricted cash for payment of interest ....................................... 15,059 14,343
Deferred charges and other, net ............................................... 18,396 19,014
----------- -----------
438,777 441,355
----------- -----------
Total assets .............................................................. $ 1,331,532 $ 1,380,578
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable-- trade ...................................................... $ 11,907 $ 14,633
Accrued interest .............................................................. 11,125 2,781
Advance billings and customer deposits ........................................ 8,004 7,898
Accrued construction costs .................................................... 6,648 17,807
Accrued taxes other than income ............................................... 5,785 6,261
Accrued other ................................................................. 15,412 20,529
Current portion of long-term obligations ...................................... 50 49
----------- -----------
58,931 69,958
----------- -----------
LONG-TERM OBLIGATIONS:
12% Senior Discount Notes due February 2006 ................................... 283,475 275,069
12% Senior Discount Notes due May 2006 ........................................ 282,464 274,393
11.125% Senior Notes due June 2007 ............................................ 300,000 300,000
Credit facility ............................................................... 265,000 258,532
Other ......................................................................... 63 76
----------- -----------
1,131,002 1,108,070
----------- -----------
COMMITMENTS AND CONTINGENCIES
CUMULATIVE CONVERTIBLE, REDEEMABLE
PREFERRED STOCK ............................................................... 152,219 152,219
----------- -----------
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred stock ............................................................... 3 3
Common stock .................................................................. 275 273
Paid-in capital ............................................................... 482,562 479,876
Accumulated deficit ........................................................... (492,524) (428,774)
Deferred compensation ......................................................... (591) (702)
Treasury stock, at cost ....................................................... (345) (345)
----------- -----------
(10,620) 50,331
----------- -----------
Total liabilities and stockholders' (deficit) equity ...................... $ 1,331,532 $ 1,380,578
=========== ===========
</TABLE>
The accompanying condensed notes to financial statements are an
integral part of these statements.
3
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POWERTEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS, EXCEPT LOSS PER SHARE)
<S> <C> <C>
REVENUES AND SALES:
Postpaid revenues ............................................................. $ 40,073 $ 26,224
Roaming revenues .............................................................. 2,896 2,186
Prepaid revenues .............................................................. 8,739 --
Other revenues ................................................................ 2,160 1,667
-------- --------
Total service revenues ...................................................... 53,868 30,077
Equipment sales ............................................................... 8,118 6,646
-------- --------
Total revenues and sales .................................................... 61,986 36,723
-------- --------
OPERATING EXPENSES:
Cost of services .............................................................. 13,381 9,549
Cost of equipment sales ....................................................... 15,432 17,425
Operations .................................................................... 15,057 10,398
Selling and marketing ......................................................... 20,545 11,915
General and administrative .................................................... 9,794 8,130
Depreciation .................................................................. 18,777 12,935
Amortization .................................................................. 2,570 2,392
-------- --------
Total operating expenses .................................................... 95,556 72,744
-------- --------
OPERATING LOSS ................................................................... (33,570) (36,021)
-------- --------
OTHER EXPENSE (INCOME):
Interest expense, net ......................................................... 27,847 21,832
Miscellaneous income .......................................................... (104) (163)
-------- --------
Total other expense, net .................................................... 27,743 21,669
-------- --------
LOSS BEFORE INCOME TAXES ......................................................... (61,313) (57,690)
INCOME TAX PROVISION ............................................................. -- --
-------- --------
NET LOSS ......................................................................... (61,313) (57,690)
DIVIDENDS ON CUMULATIVE CONVERTIBLE,
REDEEMABLE PREFERRED STOCK .................................................... (2,437) --
-------- --------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS ........................................ $(63,750) $(57,690)
======== ========
LOSS PER SHARE DATA:
BASIC AND DILUTED LOSS PER COMMON SHARE ....................................... $ (2.33) $ (2.14)
======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ............................................... 27,317 26,965
======== ========
</TABLE>
The accompanying condensed notes to 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>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss ............................................................................... $ (61,313) $ (57,690)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ..................................................... 21,347 15,327
Bond accretion .................................................................... 16,477 14,286
Amortization of offering costs of notes ........................................... 619 612
Other, net ........................................................................ 111 157
Changes in assets and liabilities:
Decrease in accounts receivable ................................................. 823 14,316
Increase in inventories ......................................................... (2,450) (19,360)
Decrease (increase) in other assets ............................................. 812 (425)
Increase (decrease) in accounts payable, accrued expenses
and other current liabilities ................................................. 130 (26,234)
--------- ---------
Net cash used in operating activities ....................................... (23,444) (59,011)
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures ................................................................ (14,742) (34,745)
Decrease in accrued construction costs .............................................. (11,159) (5,186)
Short-term notes receivable ......................................................... (9,257) --
Purchase of investments ............................................................. (716) (1,162)
Microwave relocation ................................................................ 106 (374)
--------- ---------
Net cash used in investing activities ....................................... (35,768) (41,467)
--------- ---------
CASH FLOWS PROVIDED FROM FINANCING ACTIVITIES:
Borrowings under credit facility .................................................... 6,468 14,724
Proceeds from sale of common stock, net ............................................. 251 133
Other, net .......................................................................... (12) 100
--------- ---------
Net cash provided from financing activities ................................. 6,707 14,957
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS .............................................. (52,505) (85,521)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ....................................... 204,787 326,954
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................. $ 152,282 $ 241,433
========= =========
</TABLE>
The accompanying condensed notes to financial statements are
an integral part of these statements.
5
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POWERTEL, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
Article 10 of Regulation S-X of the Securities and Exchange
Commission. The accompanying unaudited condensed consolidated
financial statements reflect, in the opinion of management, all
adjustments necessary to achieve a fair statement of financial
position and results for the interim periods presented. All such
adjustments are of a normal recurring nature. It is suggested that
these condensed consolidated financial statements be read in
conjunction with the financial statements and notes thereto included
in the Annual Report of Powertel, Inc. ("Powertel" or the "Company")
on Form 10-K for the year ended December 31, 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 for the three months ended March 31,
1999 and 1998 is as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------
1999 1998
-------------------------------- -----------------------------------
PCS CELLULAR TOTALS PCS CELLULAR TOTALS
------- -------- ------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues and sales $ 56.9 $ 5.1 $ 62.0 $ 32.2 $ 4.5 $ 36.7
Operating (loss) income (36.1) 2.5 (33.6) (37.6) 1.6 (36.0)
Net (loss) income (63.8) 2.5 (61.3) (59.3) 1.6 (57.7)
</TABLE>
4. On April 30, 1999, pursuant to an Asset Purchase Agreement dated as of
January 5, 1999 by and among the Company, ICEL Inc. ("ICEL") (together
with the Company, the "Sellers") and InterCel Licenses, Inc., both
wholly-owned subsidiaries of the Company, and Public Service Cellular,
Inc. (the "Purchaser"), the Purchaser acquired substantially all of
the assets and FCC licenses of the Sellers, constituting the Sellers'
cellular telephone operations in eastern Alabama and western Georgia,
for approximately $89 million (the "Sale"). The Sale will result in an
approximate $75 million gain in the second quarter of 1999.
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 MARCH 31,
----------------------------------
PRO FORMA 1999 PRO FORMA 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Revenues and sales $ 56.9 $ 32.2
Net (loss) before dividends (63.8) (59.3)
Basic and diluted (loss) per common share $ (2.42) $ (2.20)
</TABLE>
5. Pursuant to an Asset Purchase Agreement, dated March 15, 1999 by and
among the Company, (the "Seller") and Crown Castle International Corp.
(the "Purchaser"), the Purchaser agreed to acquire up to approximately
650 of Seller's wireless transmission towers, related assets and
certain liabilities for up to approximately $275 million (the "Sale").
The closing of the Sale is subject to a number of significant
conditions, including: (i) compliance by Seller, its subsidiaries and
Crown Castle with the terms of the asset purchase agreement; (ii)
absence of litigation; (iii) receipt of regulatory approvals; and (iv)
absence of any material adverse effect
6
<PAGE> 7
with respect to Seller's and its subsidiaries' assets and assumed
liabilities. The Sale is expected to close in the second quarter of
1999.
6. On March 1, 1999, Powertel made an approximately $9.3 million short
term loan to Eliska Wireless, Inc. ("Eliska"), a "very small business"
as defined by the rules of the Federal Communications Commission.
Eliska used the proceeds of this loan to participate in the recent
auction of certain PCS licenses. In this auction, which concluded on
April 15, 1999, Eliska was the winning bidder for two licenses: a 15
MHz license in the Knoxville, Tennessee BTA and a 15 MHz license in the
Kingsport/Johnson City/Bristol, Tennessee BTA. Eliska's winning bids
were approximately $6.5 million in the aggregate for these two
licenses, which together cover approximately 1.6 million POPs.
Subsequent to March 31, 1999, Eliska repaid approximately $7.4 million
of its short term loan from Powertel.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We provide PCS services in the southeastern United States under the
name "Powertel" and cellular telephone service in contiguous portions of
eastern Alabama and western Georgia under the name "InterCel." On April 30,
1999, we sold our cellular telephone operations to Public Service Cellular,
Inc. for approximately $89 million.
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 PCS
spectrum in our MTA Markets, and we hold 20 MHz of PCS spectrum in all of the
BTA Markets except for the Knoxville, Tennessee BTA, where we hold a license
for 10 MHz of PCS 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
March 31, 1999, we had approximately 269,000 postpaid PCS subscribers and
69,000 prepaid PCS subscribers.
On March 15, 1999, we agreed, subject to certain conditions, to sell
up to 650 of our communications towers to a subsidiary of Crown Castle
International Corp. for an aggregate of $275 million in cash. The purchase
price is subject to adjustment based on the actual number of towers tendered at
the closing. In connection with this sale, we agreed to lease space for a
period of ten years on the towers that we are selling, with three five-year
renewal periods that we may exercise at our option. We expect to close this
transaction in the second quarter of 1999.
Average revenues per postpaid subscriber in the wireless industry have
generally 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 use wireless service for
personal convenience, security or as backup for their traditional landline
telephone as well as intensified competition within the wireless industry. We
believe the effect 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.
We incurred a net loss of $61.3 million for the three months ended
March 31, 1999, 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 PCS business and market our services, the subsidization of PCS
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 PCS customer base and subsidize the cost of PCS
handsets to our customers.
Minimizing customer attrition, or "churn," remains a challenge as our
subscriber base grows and the wireless marketplace becomes more competitive. We
generated an average monthly churn rate of 3.4% and 1.9% for our PCS and
cellular businesses, respectively, for the three months ended March 31, 1999.
We believe recent reductions in our PCS churn rate are the result of more
focused collections efforts, stricter credit evaluation policies,
implementation of fraud prevention tools, a proactive customer retention
program and the introduction of alternative methods of payment. In September
1998, we also introduced an intelligent network-based prepaid service for
credit-challenged customers. Despite these efforts, we expect that ongoing PCS
churn rates could be higher than historical churn rates for cellular carriers
as more competitors and competitive services continue to enter the marketplace.
Additionally, the ability of PCS subscribers to activate service via the phone
("over the air activation") without any face-to-face contact with our
representatives increases our susceptibility to subscription fraud, which
ultimately results in churn.
The Company is a member of the GSM Alliance, a consortium of 17 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 are beginning to launch international
roaming with several countries and expect to continue working with other
international GSM carriers to facilitate international roaming.
8
<PAGE> 9
RESULTS OF OPERATIONS
The following table reflects the composition of Powertel's cellular
and PCS service revenue and equipment sales and related gross margins, as well
as overall operating and other costs and margins. Powertel's historical results
of operations, particularly in view of the start-up costs associated with our
PCS business, will not be comparable with future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------
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 .................. $ 2,812 $ 37,261 $ 40,073 $ 2,838 $ 23,386 $ 26,224
Roaming revenues ................... 1,764 1,132 2,896 1,353 833 2,186
Prepaid revenues ................... -- 8,739 8,739 -- -- --
Other revenues ..................... 232 1,928 2,160 143 1,524 1,667
--------- --------- --------- --------- --------- ---------
Total service revenues ........... 4,808 49,060 53,868 4,334 25,743 30,077
Cost of services ...................... 411 12,970 13,381 448 9,101 9,549
--------- --------- --------- --------- --------- ---------
Gross margin ....................... $ 4,397 $ 36,090 $ 40,487 $ 3,886 $ 16,642 $ 20,528
========= ========= ========= ========= ========= =========
EQUIPMENT SALES & COST ANALYSIS:
Equipment sales ....................... $ 236 $ 7,882 $ 8,118 $ 200 $ 6,446 $ 6,646
Cost of equipment sales ............... 427 15,005 15,432 471 16,954 17,425
--------- --------- --------- --------- --------- ---------
Gross margin ....................... $ (191) $ (7,123) $ (7,314) $ (271) $ (10,508) $ (10,779)
========= ========= ========= ========= ========= =========
OPERATING MARGIN ANALYSIS:
Total revenues and sales .............. $ 5,044 $ 56,942 $ 61,986 $ 4,534 $ 32,189 $ 36,723
--------- --------- --------- --------- --------- ---------
Operating expenses:
Cost of services and equipment sales 838 27,975 28,813 919 26,055 26,974
Operations ......................... 437 14,620 15,057 464 9,934 10,398
Selling and marketing .............. 481 20,064 20,545 589 11,326 11,915
General and administrative ......... 402 9,392 9,794 428 7,702 8,130
Depreciation ....................... 390 18,387 18,777 526 12,409 12,935
Amortization ....................... -- 2,570 2,570 -- 2,392 2,392
--------- --------- --------- --------- --------- ---------
Total operating expenses ......... 2,548 93,008 95,556 2,926 69,818 72,744
--------- --------- --------- --------- --------- ---------
Operating income (loss) ............... $ 2,496 $ (36,066) (33,570) $ 1,608 $ (37,629) (36,021)
========= ========= ========= =========
Interest expense, net ................. 27,847 21,832
Miscellaneous income .................. (104) (163)
--------- ---------
Loss before income taxes .............. (61,313) (57,690)
Income tax provision .................. -- --
--------- ---------
Net loss ......................... $ (61,313) $ (57,690)
========= =========
OTHER SUPPLEMENTAL DATA:
Subscribers at end of period ....... 29,955 337,862 367,817 26,565 156,918 183,483
Capital expenditures ............... $ 296 $ 14,446 $ 14,742 $ 641 $ 34,104 $ 34,745
</TABLE>
9
<PAGE> 10
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
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.
Postpaid PCS service revenues increased $13.9 million, or 59.3%, for
the three months ended March 31, 1999 as compared to the same period of 1998.
This increase is the result of our continued PCS subscriber growth and our
launch of nine new PCS markets since the first quarter of 1998. Our postpaid
PCS subscribers grew to approximately 269,000 at March 31, 1999, from
approximately 157,000 at March 31, 1998, of which approximately 16,000 net
postpaid PCS subscribers were added during the three months ended March 31,
1999.
The average monthly service revenue ("RPU") per postpaid PCS subscriber
decreased to $47.42 for the three months ended March 31, 1999, as compared to
$57.23 for the same period of 1998. We have experienced a 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. In addition, the
first quarter 1998 results reflect that the majority of early-launch customers
were on a $50 unlimited use rate plan, excluding long distance. Currently, we
are offering wireless rate plans with more bundled airtime and toll minutes and
additional enhanced services and features in an effort to to stimulate increased
usage among our customers and thus generate additional incremental revenues. As
a result, we anticipate a slower decline in our RPU per postpaid PCS subscriber
in future periods.
The RPU per postpaid cellular subscriber decreased to $33.00 for the
three months ended March 31, 1999 as compared to $37.92 for the same period of
1998. As previously noted, this decrease reflects increased price competition
among wireless carriers, which has prompted us to offer cellular rate plans
with more bundled airtime minutes.
PCS roaming revenues (including roaming long distance) increased $.3
million, or 35.9%, for the three months ended March 31, 1999 as compared to the
same period of 1998. This increase is due primarily to continued market
penetration by the PCS industry as a whole. Cellular roaming revenues increased
$.4 million, or 30.4%, in 1999 as compared to 1998. This increase is due
primarily to an increase in the number of roamers and the increased usage per
roamer in 1999.
We generated $8.7 million in prepaid PCS service revenues for the
three months ended March 31, 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 $52.99 for the three months ended March 31, 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
$.5 million, or 29.6%, for the three months ended March 31, 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 and an increase in
interconnection fees as a result of increased traffic originating on the local
exchange carriers' networks and terminating on our PCS and cellular networks.
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
$3.9 million, or 42.5%, for the three months ended March 31, 1999, as compared
to the same period of 1998. This increase primarily reflects costs related to
the approximately 500 additional cell sites we placed in service since March
31, 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 90.4% on $7.9 million
of sales during the three months ended March 31, 1999, as compared to 163.0% on
$6.4 million of sales for the same period of 1998.
10
<PAGE> 11
The improvement in negative PCS equipment margin is primarily the result of an
increase in the sales price of handsets effective February 1999, which was
designed to limit the subsidization of handset upgrades for existing customers.
We generated a negative cellular equipment margin of 80.9% on $.2 million of
sales for the three months ended March 31, 1999, as compared to 135.5% on $.2
million of sales for the same period of 1998. 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 $4.7 million, or 44.8%,
for the three months ended March 31, 1999, as compared to the same period of
1998. Substantially all this increase is attributable to the costs of providing
customer service to the growing PCS customer base (which includes certain
start-up costs associated with our new centralized customer call center in
Jacksonville), to maintaining our expanding PCS network and to an increase in
the bad debt provision resulting from our expanding PCS customer base.
Selling and marketing costs increased $8.6 million, or 72.4%, for the
three months ended March 31, 1999, as compared to the same period of 1998. PCS
selling and marketing costs increased $8.7 million, or 77.1%, which 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. Cellular selling and
marketing costs decreased $.1 million, or 18.3%, which is attributable
primarily to reductions in headcount and commissions paid for sale of our goods
and services.
General and administrative costs increased $1.7 million, or 20.5%, for
the three months ended March 31,1999, as compared to the same period of 1998.
Substantially all of this increase is attributable to PCS general and
administrative costs, which increased due to increased headcount and the
related facilities costs at our corporate and regional administrative offices
and information technology center.
Depreciation and amortization increased $6.0 million, or 39.3%, for
the three months ended March 31, 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 500 additional
PCS cell sites and 40 additional retail stores that we placed in service since
March 31, 1998 and amortization associated with our launch of service in the
Nashville and Kentucky BTAs during the fourth quarter of 1998.
Net consolidated interest expense increased $6.0 million, or 27.6%,
for the three months ended March 31, 1999, as compared to the same period of
1998. This increase resulted primarily from additional interest expense
incurred due to increased funding under our credit facility, which was offset
by less interest income due to lesser funds available for investment because of
the continued buildout of our PCS network.
The effective income tax rate for the three months ended March 31,
1999 and 1998 was 0%. We generated a $61.3 million net loss for the three
months ended March 31, 1999 and expect to continue to incur operating losses
for the foreseeable future. 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 the support of the PCS
business, totaled approximately $15 million for the three months ended March
31, 1999. Costs associated with our PCS system buildout include tower sites,
leasehold improvements, base station and switch equipment and labor expenses
related to construction of sites. We currently estimate that capital
expenditures will total approximately $135 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.
11
<PAGE> 12
On March 15, 1999, we and five of our wholly-owned subsidiaries entered
into an agreement with Crown Castle International Corp. to sell up to 650
towers, related assets and certain liabilities for $275 million in cash. The
closing of the sale, which is subject to a number of significant conditions, is
expected to occur in the second quarter of 1999.
On January 5, 1999, we entered into an agreement with Public Service
Cellular, Inc. to sell substantially all of our cellular assets for an
aggregate purchase price of approximately $89 million. We closed this sale in
April 1999. This sale does not include any towers used in our cellular
business. We will lease space to Public Service Cellular on these towers and
will sell most of these towers to Crown Castle as part of the proposed tower
sale noted above.
Although we currently are unable to predict with certainty the amount
of expenditures that may be made beyond 1999, it is possible that we may
require additional capital. Sources of additional capital may include vendor
financing, cash flow from operations, public and private equity and debt
financing and asset dispositions. We may also require additional financing in
the event we decide to make acquisitions of additional licenses or businesses.
The extent of additional financing required will partially depend on the
success of our businesses. We currently have no other sources of income or cash
flows other than our cellular (which ended April 30, 1999) and PCS operations
and the interest income earned from investing our cash and the proceeds of our
previous public and private debt and equity offerings and the sale of our
cellular operations. We cannot guarantee that additional financing will be
available to us or, if available, that it can be obtained on terms acceptable
to us and within the limitations contained in our indentures, credit facility
or any future financing arrangements. The restrictions on additional
indebtedness under our indentures require us to satisfy specified leverage
ratios in order to incur indebtedness; however, they permit us and our
subsidiaries to incur an unlimited amount of additional indebtedness to finance
the acquisition of inventory or equipment.
We expect to incur significant operating losses and to generate
significant negative cash flow from operating activities in the future while we
continue to develop and construct our PCS system and build a PCS customer base.
Cash interest will not be payable on our Senior Discount Notes prior to 2001.
Our management believes that cash flow from operations may be insufficient to
repay our notes or any additional financing that we may obtain in full at
maturity and that our notes may need to be refinanced. We cannot guarantee that
any such refinancing could be effected successfully or on terms acceptable to
us.
During the three months ended March 31, 1999, we used net cash of
$23.4 million for operating activities, as compared to $59.0 million for the
same period of 1998. Operating activities for 1999 consisted primarily of $61.3
million of net loss, which was partially offset by $21.3 million of
depreciation and amortization and $16.5 million of bond accretion on the senior
discount notes.
Cash used in investing activities was $35.8 million for the three
months ended March 31, 1999, as compared to $41.5 million for the same period of
1998. Investing activities for 1999 consisted primarily of capital expenditures
totaling $14.7 million, a decrease in accrued construction costs of $11.2
million (both primarily related to the buildout of the PCS system and support
systems) and a short-term loan to Eliska Wireless, Inc. of $9.3 million related
to the recently-concluded PCS auction.
Cash provided from financing activities was $6.7 million for the three
months ended March 31, 1999, as compared to $15.0 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 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. 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.
12
<PAGE> 13
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 prepared
detailed test plans and have begun to test 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 our 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 includes development of
testing and remediation plans, as well as the implementation of those plans.
Once Phase 2 is completed, we should be able to better estimate 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). Phase 2 of the program is anticipated to be complete in
mid-1999.
We do not believe that the amount of remediation work required for us
to address Year 2000 problems will be extensive. Many of our financial and
network systems have been implemented in the last few years, and our management
believes that this newer equipment and software is generally Year 2000
compliant. However, we plan to conduct necessary Year 2000 readiness testing
and to continue to modify some of our existing hardware and software in order
for our systems to function properly in the year 2000 and thereafter. At this
time, we have not calculated the total estimated cost of addressing Year 2000
issues. Our management believes, however, that such cost will not be material
and will be able to be funded through cash on hand. To date, we
13
<PAGE> 14
have incurred and expensed less than $1 million for Phase 1 and Phase 2
activities under our Year 2000 plan, primarily for 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 or
information processing. We are hopeful that our local exchange carriers and
roaming partners have been diligent in their Year 2000 compliance efforts and
that no disruption will occur as a result of our interfaces with such entities.
Regardless, following Phase 2 of our Year 2000 plan we will develop a
contingency plan to provide for continuity of our business operations in the
event of unforeseen internal and external Year 2000 problems. Further, 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 and 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 statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act and the
Exchange Act. These statements appear in a number of places in this Report and
include all statements which are not historical facts and which relate to our
intent, belief or current expectations, or that of our directors or officers,
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 strategy (including our
anticipated network buildout) and operating strategy; (iv) our anticipated
capital needs and anticipated capital expenditures; (v) the amount of proceeds
expected to be received from various transactions; and (vi) projected outcomes
and effects of litigation and investigations concerning us. Investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in forward-looking statements as a
result of: (i) factors affecting the availability, terms and cost of capital,
risks associated with the selection of our PCS digital protocol and PCS system
implementation, 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-4 (Registration number (333-31399), as
declared effective by the Securities and Exchange Commission on July 31, 1997.
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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<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Powertel's 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 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. We intend to pay these
quarterly dividends in common stock for the foreseeable future. In January
1999, we issued 101,815 shares of our common stock to SCANA Communications,
Inc., who owns all of our Series E Preferred, and 101,815 shares of common
stock to ITC Wireless, Inc., who owns all of our Series F Preferred, as the
quarterly dividends owed on December 15, 1998. Dividends are paid on the Series
E Preferred and Series F Preferred at a rate of 6.5% per annum.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------- -------------------
<S> <C>
2(a) * Asset Purchase Agreement dated January 5, 1999, by and among
Public Service Cellular, Inc., Powertel, Inc., ICEL, Inc. and
InterCel Licenses, Inc. (Filed as Exhibit 99.1 to Powertel's Form
8-K dated January 5, 1999 and incorporated herein by reference.)
2(b) * Asset Purchase Agreement dated March 15, 1999 by and among
Crown Castle International Corp., CCP Inc., Powertel Atlanta
Towers, LLC, Powertel Birmingham Towers, LLC, Powertel
Jacksonville Towers, LLC, Powertel Kentucky Towers, LLC, Powertel
Memphis Towers, LLC and Powertel, Inc. (Filed as Exhibit 2(d) to
Powertel's Annual Report on Form 10-K for the year ended December
31, 1998 (the "1998 10-K") and incorporated herein by reference.)
2(c) * Escrow Agreement dated March 15, 1999 by and among Crown Castle
International Corp., CCP Inc., Powertel Atlanta Towers, LLC,
Powertel Birmingham Towers, LLC, Powertel Jacksonville Towers,
LLC, Powertel Kentucky Towers, LLC, Powertel Memphis Towers, LLC,
Powertel, Inc. and SunTrust Bank. (Filed as Exhibit 2(e) to the
1998 10-K and incorporated herein by reference.)
27 Financial Data Schedule (for SEC use only).
</TABLE>
- --------------------
* Previously filed.
(B) REPORTS ON FORM 8-K.
On January 21, 1999, Powertel filed a Current Report on Form 8-K dated
January 5, 1999 which reported events under Item 5 (Other Events) in connection
with the execution of an asset purchase agreement with respect to the sale of
all of Powertel's assets related to its cellular telephone operations in
Georgia and Alabama.
15
<PAGE> 16
On March 17, 1999, Powertel filed a Current Report on Form 8-K dated
March 15, 1999 which reported events under Item 5 (Other Events) in connection
with the execution of an asset purchase agreement with respect to the sale of
certain of its tower assets.
16
<PAGE> 17
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.
May 14, 1999 /s/ Allen E. Smith
----------------------------------------------------
Allen E. Smith
President and Chief Executive Officer
May 14, 1999 /s/ Fred G. Astor, Jr.
----------------------------------------------------
Fred G. Astor, Jr.
Executive Vice President and Chief Financial Officer
(Chief Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF POWERTEL, INC. FOR THE THREE MONTHS ENDED MARCH 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 152,282
<SECURITIES> 33,375
<RECEIVABLES> 31,685
<ALLOWANCES> (3,782)
<INVENTORY> 23,133
<CURRENT-ASSETS> 254,386
<PP&E> 764,356
<DEPRECIATION> (125,987)
<TOTAL-ASSETS> 1,331,532
<CURRENT-LIABILITIES> 58,931
<BONDS> 865,939
152,219
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<COMMON> 275
<OTHER-SE> (10,898)
<TOTAL-LIABILITY-AND-EQUITY> 1,331,532
<SALES> 8,118
<TOTAL-REVENUES> 61,986
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<INTEREST-EXPENSE> 27,847
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