<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1996 COMMISSION FILE NUMBER 0-21840
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PITTENCRIEFF COMMUNICATIONS, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 75-2609476
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
1 VILLAGE DRIVE, SUITE 500, ABILENE, TEXAS 79606
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (915) 690-5800
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Indicate by 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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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The number of shares outstanding on the Registrant's common stock as of August
8, 1996, was 26,162,225 shares of common stock.
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC.
INDEX TO FORM 10-Q
JUNE 30, 1996
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets
as of December 31, 1995 and June 30, 1996. 3
Consolidated Condensed Statements of Operations
for the Three Months and Six Months Ended
June 30, 1995 and 1996. 4
Consolidated Condensed Statements of Cash Flows
for the Six Months Ended June 30, 1995 and 1996. 5
Notes to Consolidated Condensed Financial
Statements 6-8
ITEM 2: Management's Discussion and
Analysis of Financial Condition and
Results of Operations. 9-12
PART II. OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K 13-14
2
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1995 1996
------------ ------------
(Derived from (Unaudited)
audited
statements)
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................................ $ 568 $ 1,425
Accounts receivable:
Trade, less allowance for doubtful accounts of
$564 in 1995 and $477 in 1996.............................. 4,337 4,710
Employees..................................................... 499 264
Inventories...................................................... 5,680 4,671
Deferred income taxes............................................ 248 248
Prepaid expenses and other current assets........................ 1,891 1,414
------------ ------------
Total current assets.......................................... 13,223 12,732
Property and equipment, net (note 3)................................ 41,207 41,581
FCC licenses and other assets, net.................................. 64,708 124,801
Goodwill............................................................ -- 19,758
Deferred income taxes............................................... 754 --
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$ 119,892 $ 198,872
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------------ ------------
LIABILITITES AND SHAREHOLDERS EQUITY
Current Liabilities:
Notes payable.................................................... 1,532 6,238
Current portion of long-term debt................................ 2,276 2,044
Accounts payable................................................. 4,319 1,409
Accrued liabilities.............................................. 2,379 2,352
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Total current liabilities..................................... 10,506 12,043
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Long-term debt, excluding current................................... 1,083 898
Finance obligation, excluding current portion....................... 12,513 12,151
Deferred income taxes............................................... -- 17,449
Shareholders' equity
Common stock, $.01 par value, authorized 50,000,000 shares:
outstanding 14,204,722 shares in 1995 and 26,162,225 shares
in 1996....................................................... 144 262
Additional paid-in capital....................................... 111,413 174,602
Accumulated deficit.............................................. (15,767) (18,533)
Treasury stock at cost, 6,366,666 shares in 1995 and 1996........ -- --
------------ ------------
Total shareholders' equity.................................... 95,790 156,331
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$ 119,892 $ 198,872
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</TABLE>
See accompanying notes to consolidated condensed financial statements
3
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Radio services revenue............................... $ 5,336 $ 5,754 $10,740 $11,134
Rental income........................................ 706 483 1,465 997
Equipment and parts sales............................ 3,147 3,890 6,540 7,136
-------- -------- -------- --------
9,189 10,127 18,745 19,267
Costs and expenses related to revenues:
Cost of operations................................... 4,421 4,700 8,772 9,507
Cost of equipment and parts sales.................... 2,428 3,423 5,112 6,156
General and administrative........................... 1,758 1,853 3,407 3,706
Depreciation and amortization........................ 1,780 2,315 3,537 4,408
-------- -------- -------- --------
10,387 12,291 20,828 23,777
-------- -------- -------- --------
Operating loss.................................. (1,198) (2,164) (2,083) (4,510)
Other income (expense):
Interest expense, ................................... (592) (548) (1,621) (1,107)
Gain on sales of assets, net (note 3)................ -- 197 -- 1,084
Interest income and other............................ 438 104 581 143
-------- -------- -------- --------
(154) (247) (1,040) 120
-------- -------- -------- --------
Loss before income taxes.................................. (1,352) (2,411) (3,123) (4,390)
Income tax benefit........................................ (500) (892) (1,155) (1,624)
-------- -------- -------- --------
Net loss........................................ $ (852) $(1,519) $(1,968) (2,766)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per common share and
share equivalent......................................... $ (0.06) $ (0.06) $ (0.14) $ (0.11)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $ (1,968) $ (2,766)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation..................................................... 2,627 2,700
Amortization of FCC licenses and other assets.................... 910 1,480
Amortization of goodwill......................................... -- 228
Provision for doubtful accounts.................................. 251 325
Provision for inventory obsolescence............................. -- 150
Accretion and amortization of debt discount...................... 508 89
Gain on disposition of assets, net............................... -- (1,084)
Deferred income taxes............................................ (1,155) (1,624)
Change in assets and liabilities, net of effects
from acquisitions:
Accounts receivable........................................... (47) 581
Inventories, prepaid expenses and
other current assets....................................... 585 1,144
Accounts payable and accrued liabilities...................... (1,051) (3,101)
-------- --------
Net cash provided by (used in) operating activities................. 660 (1,878)
Cash flows from investing activities:
Acquisitions, net of cash acquired.................................. (185) (1,725)
Capital expenditures................................................ (1,905) (675)
FCC licenses and other assets....................................... (1,558) (146)
Proceeds from sale of assets........................................ 2,500 643
-------- --------
Net cash used in investing activities............................... (1,148) (1,903)
Cash flows from financing activities:
Payments on notes payable........................................... (11,083) (3,038)
Payments on other long-term debt.................................... (1,084) (826)
Payments on finance obligation...................................... (901) (501)
Proceeds from other long-term debt and notes payable................ 200 8,562
Proceeds from finance obligation.................................... 13,638 191
Net proceeds from issuance of common stock.......................... -- 250
-------- --------
Net cash provided by financing activities........................... 770 4,638
-------- --------
Net increase in cash and cash equivalents................................ 282 857
Cash and cash equivalents at beginning of period......................... 698 568
-------- --------
Cash and cash equivalents at end of period............................... $ 980 $ 1,425
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) GENERAL
(a) Description of Business
Pittencrieff Communications, Inc. and subsidiaries ("Company") are
engaged in the acquisition and operation of Specialized Mobile Radio
("SMR") wireless communication systems, primarily in the southwestern
United States. The Company also engages in sales of radios, equipment
service, radio rental, paging and microwave services.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of
Pittencrieff Communications, Inc. and its subsidiaries. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(c) Interim Financial Information
In the opinion of management, the accompanying unaudited consolidated
condensed financial information of the Company contains all
adjustments, consisting only of those of a recurring nature, necessary
to present fairly the Company's financial position as of June 30,
1996, the results of operations for the three months and six months
ended June 30, 1996 and 1995, and the consolidated condensed
statements of cash flows for the six months ended June 30, 1996 and
1995. These financial statements are for interim periods and do not
include all detail normally provided in annual financial statements
and should be read in conjunction with the Company's 1995 Annual
Report on Form 10-K. The results of operations for the six months
ended 1996 and 1995 are not necessarily indicative of the results to
be expected for the respective full years.
(d) Inventories
Inventories consist primarily of radios, accessories, parts and
supplies for the communications business and are stated at the lower
of average cost or market.
(e) Net Loss Per Common Share
Net loss per common share and share equivalent is based on the net
loss applicable to the weighted average number of common and common
equivalent shares outstanding of 26,133,841 and 14,320,282 for the
three months ended June 30, 1996 and 1995, respectively, and
25,077,183 and 13,861,636 for the six months ended June 30, 1996 and
1995, respectively. Common stock equivalents were excluded because
the effect would be antidilutive.
6
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DISPOSITIONS
During 1995 and the six months ended June 30, 1996 the Company acquired
several communications businesses located principally in Texas, New Mexico,
Arizona, Oklahoma, North Dakota and South Dakota. The consideration for
the acquisitions consisted of cash, notes payable and PCI Common Stock.
The Company used the purchase method to account for these acquisitions.
The results of the acquired operations have been included in the Company's
consolidated condensed statements of operations from the acquisition dates.
In January and February, 1995, the Company sold its entire network of 133
communications towers and sold certain FCC licenses and SMR equipment
located in Las Vegas, Nevada. The sales price for these two transactions
was paid with cash and notes receivable (see note 3). In March 1995, the
Company issued common stock, valued at $3,463,000, in payment of a note and
accrued interest issued pursuant to one of the Company's acquisitions
which was closed in 1994.
On January 16, 1996, the Company completed its Agreement and Plan of Merger
with Pittencrieff Communications, Inc., a Delaware corporation ("New PCI"),
pursuant to which the Company merged into New PCI, with New PCI as the
surviving corporation. Also on January 16, 1996, the Company finalized the
Contribution Agreement among New PCI, Advanced MobileComm, Inc., a
Massachusetts corporation ("AMI"), and a number of related and unrelated
companies and individuals (collectively, the "AMI Parties"), pursuant to
which the AMI Parties contributed to New PCI certain SMR assets and all the
capital stock of certain of the AMI Parties in exchange for 11,909,842
unregistered shares of the common stock $0.01 par value of New PCI (the
"Transaction").
In May 1996, the Company completed the acquisition of 26 800 MHz SMR
channels in Phoenix for additional cash consideration of $1.5 million. The
acquisition, as originally structured, had an initial closing in 1994
pending FCC approval, but the Company was relieved of its obligation to
complete the transaction because of the lack of timely FCC action. The FCC
subsequently approved the transfer of certain licenses, and the acquisition
was restructured on that basis.
The unaudited fair values assigned to assets acquired and liabilities
assumed, net of cash acquired in these acquisitions, are as follows (in
thousands):
Six Months Ended
June 30,
-----------------------
1995 1996
-------- --------
Net working capital $ 36 $ 232
Property and equipment 544 2,233
FCC licenses and other assets 1,206 61,557
Goodwill -- 19,953
Assumption of deferred tax liabilities -- (19,827)
-------- --------
$ 1,786 $ 64,148
-------- --------
-------- --------
7
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(2) ACQUISITIONS AND DISPOSITIONS (CONTINUED)
The acquisitions were paid for as follows:
Six Months Ended
June 30,
-------------------------
1995 1996
-------- --------
Cash $ 185 $ 1,725
Notes payable and long-term debt -- 257
Common stock 1,601 62,166
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$ 1,786 $ 64,148
-------- --------
-------- --------
Unaudited pro forma financial information for the six months ended June 30,
1995 and 1996 as though the 1995 and 1996 acquisitions and dispositions had
occurred as of January 1, 1995, is as follows (in thousands, except per
share amounts):
Six Months Ended
June 30,
-------------------------
1995 1996
-------- --------
Revenues $ 21,589 $ 19,713
Operating loss (1,991) (4,288)
Loss before income taxes (1,317) (3,886)
Net loss (830) (2,448)
Net loss per common
share and share equivalent (0.03) (0.09)
-------- --------
-------- --------
(3) PROPERTY AND EQUIPMENT
During January and February 1995, the Company sold substantially all of its
communications towers and sold certain FCC Licenses and SMR equipment
located in Las Vegas, Nevada. The sales price of these transactions was
paid with cash of $16,900,000 and a note for $762,000. In connection with
the sale of the towers, the Company agreed to an initial eight year lease
of space on the towers that the Company utilizes for its own SMR services.
Additionally, the Company entered into a management agreement with respect
to the towers pursuant to which the Company operated the towers for a
monthly fee until December 31, 1995. The sale and leaseback of the
communications towers is accounted for by the financing method. Under the
financing method, lease payments, exclusive of an interest portion,
decrease the finance obligation. The towers continue to be reported as an
asset and are depreciated over the shorter of the lease term or their
useful lives. The sale of the FCC licenses and SMR equipment was accounted
for as a reduction of the applicable asset category. No gain or loss was
realized on this transaction.
As of June 30, 1996, the Company transferred certain 2 GHz licenses located
in Arizona as the result of recent FCC auctions for Personal Communications
Service ("PCS") licenses. The compensation received for these licenses was
paid with cash of $375,000 and short-term notes receivable of $775,000 due
in July 1996.
8
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
JUNE 30, 1995
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Total revenues for the first six months of 1996 increased 3% to $19.3 million
compared to the same period in 1995. Increases in revenue were primarily
confined to equipment and parts sales. Rental revenues decreased by 32% from
$1.47 million to $997,000 during the period which reflects the overall decrease
in the Company's emphasis on rental programs. The decrease in rental revenues
was offset by a $394,000 increase in radio services revenue. This 4% increase
for the six months ended June 30, 1996 can be attributed to the additional
subscribers acquired in the AMI Transaction.
Cost of operations during the six month period ended June 30, 1996, increased to
$9.5 million, up 8% as compared with $8.8 million in the same period of 1995.
This increase can be attributed to the assimilation of operations acquired in
the AMI Transaction as well as the costs incurred to consolidate certain of the
Company's sales and service centers. Cost of equipment and parts sales
increased from 78% in 1995 to 86% in 1996 which reflects continued pricing
competition in certain of the Company's markets, accruals for inventory
obsolescence and a new commission program which also compensates sales personnel
for additions to recurring revenues, thereby adding a component to commissions
unrelated to equipment sales.
General and administrative expenses in the first six months of 1996 increased 9%
to $3.7 million compared with $3.4 million in the first six months of 1995.
This increase is primarily attributable to the timing of certain professional
fees during the first six months of 1996 compared to the same period in 1995.
EBITDA for the period ended June 30, 1996 was ($102,000) or a 107% decline from
the same period in 1995. This decline is principally due to the decreased
profit margins on equipment and parts sales, and increased costs of operations
as a result of consolidation of certain sales and service centers. ("EBITDA" is
defined as earnings before interest, taxes, depreciation, amortization and other
income (expense)).
Depreciation and amortization expenses for the first six months of 1996
increased to $4.4 million from $3.5 million during the first six months of 1995.
The increase is due to additions in property, equipment, licenses and goodwill
resulting from acquisitions completed in the first six months of 1996 coupled
with approximately $4 million of capital expenditures in 1995 and $821,000 in
the first six months of 1996.
Other income (expense) includes interest expense, interest income and gains on
sales of assets. The principal factor contributing to the $1.2 million increase
in other income (expense) from the first six months of 1995 is $1.1 million in
gain on sales of assets in 1996 related to the sale of certain 2 GHz licenses.
Income tax benefit for the first six months of 1996 and 1995 reflects the
Company's income taxes at combined U.S. federal and state tax rates.
9
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED JUNE 30, 1996, COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Total revenues in the second quarter of 1996 increased to $10.1 million from
$9.2 million in the same period of 1995, an increase of 10%. This increase can
be attributed to a $743,000 increase in equipment and parts sales. Increases in
radio services revenues as a result of the AMI Transaction more than offset the
32% reduction in rental income, as a result of the Company's move away from
rental programs.
Cost of operations increased to $4.7 million for the three months ended June 30,
1996, a 6% increase over the same period in 1995. This increase reflects the
larger scale of operations as a result of the AMI Transaction. This increase is
mitigated by the overall effect of increased revenues, as the cost of operations
decreased as a percentage of total revenues from 48% in 1995 to 46% in 1996.
Cost of equipment parts and sales as a percentage of equipment and parts sales
increased from 77% in 1995 to 88% in 1996 primarily due to accruals for
inventory obsolescence and a new commission program which also compensates sales
personnel for additions to recurring revenues, thereby adding a component to
commissions unrelated to equipment sales.
General and administrative expenses in the second quarter of 1996 increased to
$1.9 million compared with $1.8 million in the same period of 1995. This 5%
increase is attributable to additional professional fees incurred in connection
with FCC and general legal and tax matters.
EBITDA for the three month period ended June 30, 1996, decreased to $151,000
compared to $582,000 in the same period in 1995. This decrease is principally
due to decreased profit margins realized on equipment and parts sales.
Depreciation and amortization expense in the second quarter of 1996 increased by
30% to $2.3 million from $1.8 million in the same period of 1995, due to
increases in property, equipment, licenses and goodwill added from acquisitions
and capital expenditures during 1995 and 1996.
Other income (expense) includes interest expense, interest income and gains on
sales of assets. The main factor contributing to the increase of $93,000
between the quarter ended June 30, 1996 and 1995 is the absence of a one-time
credit to other income amounting to $453,000 realized during the three months
ended June 30, 1995.
Income tax benefit for the three months ended June 30, 1996 and 1995 reflects
the Company's income taxes at combined U.S. federal and state tax rates.
10
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES:
During the first six months of 1996, the Company experienced negative cash flow
from operating activities of $1.9 million compared to positive cash flow of
$660,000 during the same period in 1995. This decrease can be attributed to the
significant use of working capital in 1996 to reduce accounts payable and
accrued liabilities which amounted to a $2.1 million net change between 1995 and
1996.
CASH FLOWS FROM INVESTING ACTIVITIES
During the first six months of 1996, acquisition and capital expenditure
activities were funded through third party short-term indebtedness and proceeds
from the sale of assets. The Company invested $1.7 million in acquisitions and
$821,000 in capital expenditures during the six months ended June 30, 1996.
Additionally, during this period, the Company sold certain of its 2 GHz licenses
in Arizona pursuant to the recent FCC auctions of PCS licenses for $375,000 in
cash and short-term notes for $800,000.
The Company was also a successful bidder in the FCC's 900 MHz Auctions ("900
Auctions") which concluded in April 1996 and committed the Company for $1.6
million which was paid in July 1996. Management anticipates that capital
expenditures will increase significantly as a result of participation in the
FCC's other spectrum auctions to be held later in 1996 and the ultimate
implementation of an enhanced channel compression technology.
CASH FLOWS FROM FINANCING ACTIVITIES
In addition to the proceeds from sales of assets during the first six months of
1996, the Company utilized $7 million of its credit facility with First
Interstate Bank of Texas, N.A. to fund excess working capital and provide
financing for acquisitions and the Company's participation in the 900 Auctions.
CURRENT LIQUIDITY AND FUTURE CAPITAL NEEDS
On June 30, 1996, the Company had cash and cash equivalents of approximately
$1.4 million. The Company also had $21.3 million in long-term debt, notes
payable and a finance obligation at June 30, 1996. Third party indebtedness
predominantly consisted of a bank credit facility, various capital asset
financings, the finance obligation related to the tower sale, and amounts due to
sellers of acquired companies or assets. Although the Company provides for
deferred income taxes on its financial accounting income, it has access to net
operating loss carryforwards for tax purposes of approximately $26.3 million as
of December 31, 1995, of which $10.8 million is subject to a limitation under
Section 382 of the Internal Revenue Code of 1986. However, the available net
operating losses are expected to defer the payment of federal income tax in
1996.
Based on available cash and cash flow from operations, the Company may be
increasingly cash-constrained. As discussed below, the Company's cash needs may
be addressed, in part, by accessing a line of credit provided by First
Interstate Bank of Texas, N.A. ("First Interstate"). In addition, the Company
may receive up to an additional $660,000 of funds which were put into escrow in
connection with the sale of the Company's communications towers if the Company's
total market capitalization exceeds $150 million by the end of 1996.
In January 1995, the Company sold the majority of its communications towers
located throughout Texas, New Mexico, Oklahoma, Arizona, Colorado and Nevada to
Castle Tower Corporation. The Company sold 125 towers for a total consideration
of $15.1 million, consisting of (i) $8.1 million cash at closing, (ii) a short-
term promissory note for $6.4 million (subsequently reduced to $6.3 million),
and (iii) a long-term promissory note for $1.1 million (subsequently reduced to
$762,000) payable over five years. The short-term note was modified to provide
for payment of $5.4 million in April 1995 with the reduced balance paid in
November 1995. In connection with the sale, the Company agreed to an initial
eight year lease of space on the towers that the Company currently utilizes for
its own SMR services. Additionally, the Company entered into a management
agreement with respect to the towers pursuant to which the Company managed the
operation of the towers for a monthly fee for a period of one year, ending
December 31, 1995. Due to the non-recourse nature of the long-term promissory
note received by the Company, the transaction has been accounted for by the
financing method.
11
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONT.)
The Company recognizes that in order to upgrade and expand its services, attract
new subscribers and enhance its ability to expand its footprint in certain
areas, the Company may incur capital expenditures to construct a network
utilizing a channel compression technology. As an initial step towards this
goal, the Company participated in the 900 Auctions and intends to participate in
the 800 MHz Auctions ("800 Auctions") conducted by the FCC. The 900 Auctions
included 20 blocks of 10 channels each of 900 MHz licenses auctioned on a MTA
basis. The Company was the successful bidder on 18 blocks located in four MTAs
for a total consideration of $1.6 million. The beginning date of the 800
Auctions has not been finalized by the FCC, but it is anticipated that they will
commence sometime in the last quarter of 1996. The licenses obtained in the 900
Auctions will provide additional capacity in certain areas of the Company's
footprint and licenses that may be obtained in the 800 Auctions could provide
access to various enhanced technologies. In November 1995, AMI's indirect
parent, FMR Corp. ("FMR"), loaned the Company $1 million ("Auction Loan") for
the bid deposit in order to participate in the 900 Auctions. The loan was
structured as a demand note, bearing interest at the prime rate plus 2% and
secured by a pledge of the capital stock of the Company's primary operating
subsidiary, A&B Electronics Inc. ("A&B"), and substantially all of the assets of
the Company, excluding accounts receivable and inventories.
On January 16, 1996, the Company closed the Transaction with the AMI Parties.
At that time, the Company entered into negotiations with FMR relative to a $20
million credit line. On January 31, 1996, the Company borrowed an additional
$1.5 million from FMR under the Auction Loan and the collateral was adjusted to
include a pledge of the capital stock of the companies acquired and a security
interest in the other assets acquired by PCI in the Transaction.
In March 1996, FMR agreed to make available a letter or letters of credit ("LC")
in the aggregate amount of up to $10 million for the purpose of securing a
revolving line of credit with First Interstate ("Revolving Loan"). The initial
line of credit is for $10 million and the proceeds, $7 million of which have
been advanced, are being used for acquisitions, including the 900 Auctions, and
working capital. The Revolving Loan was closed on March 18, 1996, and the
initial draw of $5 million was used to repay the $2.5 million Auction Loan and a
$500,000 working capital line with another bank, and the balance was made
available for working capital. FMR retained the collateral it received for the
Auction Loan and, additionally, the Company has pledged its accounts receivable
and inventories. The Company, FMR, and First Interstate also entered into a
tri-party agreement contemporaneous with the Revolving Loan, which provides that
FMR, upon five day's notice to First Interstate, can purchase the Revolving Loan
at its principal balance plus accrued interest and any unpaid fees or expenses
outstanding. FMR will then succeed to any rights as secured lender held by
First Interstate on the date of purchase. Upon the occurrence of an event of
default, as defined in the Revolving Loan, FMR will have ten business days
within which to exercise its right to purchase the Revolving Loan or cure or
remedy the event of default before First Interstate will draw against the LC.
The Revolving Loan has an initial term of one year, bears interest at LIBOR plus
1.5% (or First Interstate's prime rate), and is secured by the LC. As
consideration for pledging the LC, the Company has agreed to issue warrants to
FMR ("FMR Warrants") for the purchase of 500,000 shares of PCI Common Stock.
The FMR Warrants will have a term of ten years from issuance and will be issued
in two equal tranches. Warrants to purchase 250,000 shares were issued upon
closing of the Revolving Loan at an exercise price of $4.50 per share. In
September 1996, the Company will issue warrants to purchase an additional
250,000 shares at an exercise price of $4.73 per share.
The Company anticipates that an additional $10 million credit line will be
arranged through FMR and will be available for use in the 800 Auctions, although
there can be no assurance that an additional facility will be provided. The
Company believes that FMR will provide an LC much in the same manner that it has
for the Revolving Loan. At such time as an additional $10 million facility is
provided by FMR, additional warrants for the purchase of 500,000 shares of PCI
Common Stock will be issued.
12
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONT.)
Effective September 1, 1995, the State of Texas created the Telecommunications
Infrastructure Fund ("TIF") and directed the Texas Comptroller of Public
Accounts ("Comptroller") to assess and collect a total annual amount of $75
million from telecommunications utilities and a total annual amount of $75
million from commercial mobile service providers. The stated purpose of the TIF
is to finance, among other things, programs to provide telecommunications
equipment for education, libraries, and telemedicine services, as well as
related training and materials. The underlying statute provides that a
"commercial mobile service provider" means a provider of commercial mobile
service under the Communications Act. Because of the separate assessments, the
portion of the TIF payable by each commercial mobile service provider would be
equal to the ratio that the annual taxable telecommunications receipts reported
by that provider under state sales tax laws bear to the total annual taxable
telecommunications receipts reported by all commercial mobile service providers.
In January 1996, however, a Texas state judge ruled that the resulting higher
tax rate for commercial mobile service providers violated the state constitution
and that all providers would pay the lower rate, estimated at approximately
1.36% of Texas revenues. The definition of commercial mobile service provider
may, however, now, or in the future, include the Company and other CMRS
providers. There can be no assurance that the Company will not be classified as
a commercial mobile service provider for purposes of the TIF or that all or part
of its revenues will not be considered telecommunications receipts, or that
additional judicial or legislative action will not result in a higher tax rate.
If the Company is subject to the TIF, the annual assessment and collection of
the Company's share of the TIF could have a material adverse effect on the
Company's results of operation and financial condition, whether or not the
assessment is passed on to the Company's subscribers.
From time to time, the Company has had discussions with third parties regarding
potential equity investment and debt financing arrangements. The Company
expects that similar discussions will occur from time to time in the future in
order to provide the funds needed for future capital expenditures, including the
800 Auctions, and other purposes, including the funding of working capital and
operating losses in connection with any post-auction digital construction. At
present, other than the debt financing arrangements that are currently in place
as described herein, the Company has no commitments with any third parties to
obtain any of the additional equity or debt financing that it will need to
obtain. In the event new financing cannot be obtained on a timely basis,
management's plans may include the sale of assets and cost reductions. Results
of operations for 1996 could be adversely impacted if the Company were required
to implement such plans.
The Company is also, from time to time, engaged in ongoing discussions with
respect to selected acquisitions and strategic partnerships, and expects to
continue to assess these and other acquisition opportunities and strategic
partnerships. The Company may also require additional financing in the event
that it decides to make additional acquisitions in its footprint or elsewhere.
There can be no assurance, however, that any such acquisitions or other
opportunities will arise, or that the additional financing will be available
when required on terms satisfactory to the Company.
13
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amended and Restated Pledge Agreement dated as of March 18,
1996, among the Company, certain wholly-owned subsidiaries
of the Company and FMR Corp. (incorporated by reference to
Exhibit 10.64 to the Company's Form S-4 Registration
Statement No. 33-83810).
10.2 Amended and Restated Security Agreement dated as of March
18, 1996, among the Company, certain wholly-owned
subsidiaries of the Company and FMR Corp. (incorporated by
reference to Exhibit 10.65 to the Company's Form S-4
Registration Statement No. 33-83810).
27 Financial Data Schedule
(b) Reports on Form 8-K
1. Current Report on Form 8-K dated June 14, 1996, as filed
with the Securities and Exchange Commission on June 17,
1996, reflecting certain other events including the purchase
of 900 MHz licenses through the FCC's 900 MHz Auctions, the
completion of a binding letter of intent to sell the
Company's 900 MHz SMR systems in San Diego, California, and
the acquisition of 26 800 MHz SMR channels in Phoenix,
Arizona.
14
<PAGE>
PITTENCRIEFF COMMUNICATIONS, INC. AND SUBSIDIARIES
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.
PITTENCRIEFF COMMUNICATIONS, INC.
---------------------------------
(Registrant)
Date: August 13, 1996 /s/ Warren D. Harkins
---------------------
Warren D. Harkins
President and Chief Executive Officer
Duly Authorized Officer of the Registrant
/s/ Thomas R. Modisett
----------------------
Thomas R. Modisett
Vice President - Finance
Chief Financial and Accounting Officer
15
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