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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ended March 31, 1998
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From __________________ to _______________
Commission File Number 1-13526
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PRICELLULAR CORPORATION
(Exact name of the registrant as specified in its charter)
Delaware 22-3043811
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
711 Westchester Avenue
White Plains, New York 10604
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(Address of principal executive (Zip Code)
offices)
(914) 422-0800
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if changed since
last report)
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 (or for such shorter periods 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 practical date.
Class A Common Stock, $0.01 Par Value - 21,987,847 shares as of May 10, 1998
Class B Common Stock, $0.01 Par Value - 12,970,994 shares as of May 10, 1998
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<PAGE>
Index
PriCellular Corporation and Subsidiaries
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--March 31, 1998
and December 31, 1997............................................. 2
Condensed Consolidated Statements of Operations--Three
Months Ended March 31, 1998 and 1997............................. 3
Condensed Consolidated Statements of Cash Flows--Three Months Ended
March 31, 1998 and 1997........................................... 4
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 12
Item 2. Changes in Securities........................................ 12
Item 3. Defaults upon Senior Securities.............................. 12
Item 4. Submission of Matters to a Vote of Security Holders.......... 12
Item 5. Other Information............................................ 13
Item 6. Exhibits and Reports on Form 8-K............................. 13
Signature............................................................ 14
1
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
PriCellular Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in Thousands, except share data)
March 31, December 31,
1998 1997
-----------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 60,884 $ 61,357
Accounts receivable (less allowance of $1,636 in
1998 and $1,686 in 1997) 22,981 19,465
Inventory 1,553 2,232
Other current assets 1,468 1,797
---------------------
Total current assets 86,886 84,851
Fixed assets--at cost:
Cellular facilities, equipment and other 147,337 134,156
Less accumulated depreciation (34,147) (29,302)
---------------------
Net fixed assets 113,190 104,854
Investment in cellular operations 37,007 37,017
Cellular licenses (less accumulated amortization of
$26,779 in 1998 and $23,119 in 1997) 560,706 493,315
Deferred financing costs (less accumulated
amortization of $5,839 in 1998
and $5,191 in 1997) 13,939 13,352
Cash committed for the acquisition of cellular
operations 13,000
Other assets 1,242 1,268
---------------------
Total assets $ 812,970 $ 747,656
=====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 44,938 $ 38,208
Other current liabilities 1,313 2,125
---------------------
Total current liabilities 46,251 40,333
Long-term debt 635,016 568,323
Deferred taxes 3,797 3,797
Other long-term liabilities 1,055 1,023
Stockholders' equity:
Preferred Stock, $0.01 par:
Series A, cumulative convertible: authorized
10,000,000 shares; issued and
outstanding 96,000 shares
Common Stock, $0.01 par: 1 1
Class A: Authorized 100,000,000 shares; issued and
outstanding 21,987,847 shares 220 218
Class B: Authorized 50,000,000 shares;
issued and outstanding 12,970,994 shares 129 131
Additional paid-in capital 180,704 180,704
Accumulated deficit (54,203) (46,874)
---------------------
Total stockholders' equity 126,851 134,180
---------------------
Total liabilities and stockholders' equity $ 812,970 $ 747,656
=====================
See notes to condensed consolidated financial statements.
2
<PAGE>
PriCellular Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands, except share data)
Three Months Ended
March 31
1998 1997
---------------------------
Revenues
Cellular service $ 48,000 $ 32,679
Equipment sales 1,341 1,140
Other 2,162 1,747
---------------------------
51,503 35,566
Costs and expenses
Cost of cellular service 13,460 9,274
Cost of equipment sold 2,630 2,467
Selling, general and
administrative 14,779 11,278
Non-recurring charges 2,389 --
Depreciation and amortization 8,532 6,724
---------------------------
41,790 29,743
---------------------------
Operating income (loss) 9,713 5,823
Other income (expense)
Gain on sale of investment
in cellular operations -- 8,451
Interest expense, net (17,854) (14,696)
Other income, net 812 812
---------------------------
(17,042) (5,433)
---------------------------
Net income (loss) $ (7,329) $ 390
===========================
Net income (loss) after
adjustment for accrued
preferred stock dividend $ (9,028) $ (1,209)
===========================
Basic and diluted earnings
(loss) per common share $ (.26) $ (.03)
===========================
Weighted average number of
common shares used in
computation of net income
(loss) per common share 34,959,000 39,058,000
See notes to condensed consolidated financial statements.
3
<PAGE>
PriCellular Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
Three months ended
March 31
1998 1997
---------------------
Net cash provided by operating activities $ 12,703 $ 5,911
---------------------
Investing activities
Purchase of cellular equipment (11,459) (6,494)
Proceeds from sale of cellular operations -- 24,396
Acquisition of cellular operations (481) (12,754)
Investment in cellular operations -- (2,523)
Refund of escrow and deposit for Personal
Communications Service auction -- 7,000
---------------------
Net cash provided by (used in)
investing activities (11,940) 9,625
---------------------
Financing activities
Costs incurred in connection with the issuance of
preferred
and common stock -- (205)
Payments for deferred financing costs (1,236) (292)
Proceeds from exercise of stock option -- 15
Purchase and retirement of common stock -- (15,440)
---------------------
Net cash used in financing activities (1,236) (15,922)
---------------------
Decrease in cash and cash equivalents (473) (386)
Cash and cash equivalents at beginning of period 61,357 100,364
---------------------
Cash and cash equivalents at end of period $ 60,884 $ 99,978
=====================
4
<PAGE>
PriCellular Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
(Dollars in Thousands)
Three months ended
March 31
1998 1997
------------------
Supplemental disclosure of cash flow
information
Cash paid during the period for:
Interest $ 96 $ --
Income taxes 78 1,307
Supplemental schedule of noncash investing
activities
Common stock issued in connection with acquisition
of cellular operation -- 19,125
Utilization of cash committed for the acquisition
of cellular operations 13,000 91,400
Debt issued in connection with acquisition of
cellular license 60,000 19,429
Supplemental schedule of noncash financing
activities
Conversion of Class B Common Stock to Class A
Common Stock 2 3
See notes to condensed consolidated financial statements.
5
<PAGE>
PriCellular Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The condensed consolidated financial statements include the accounts of
PriCellular Corporation and its subsidiaries (the "Company"). All significant
intercompany items and transactions have been eliminated.
The condensed consolidated financial statements have been prepared by the
Company without audit, in accordance with rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the statements
reflect all adjustments necessary for a fair presentation of the results for the
interim period. The results of operations for the interim period are not
necessarily indicative of the results for a full year. These condensed
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 1997 Annual
Report on Form 10-K.
Net Income (Loss) per Share
All earnings (loss) per share amounts for all periods have been presented and,
where appropriate restated to conform to Financial Accounting Standards Board
Statement No. 128 issued in 1997. For the periods ending March 31 1998 and 1997,
no effect has been given to options outstanding under the Company's 1994 Stock
Option Plan, outstanding warrants to purchase Class B common stock, the 12-3/4%
Senior Convertible Discount Notes or the Cumulative Convertible Preferred Stock,
since the exercise of any of these items would have an antidilutive effect on
net loss per share.
3. Sale of the Company
On March 6, 1998 the Company and American Cellular Corporation ("ACC") entered
into an Agreement and Plan of Merger ("Merger Agreement") pursuant to which ACC
will merge into the Company, with ACC to be the surviving corporation. At the
effective time each issued and outstanding share of Class A and Class B common
stock and the outstanding Series A Convertible Preferred stock will be redeemed
at $14.00 per share payable in cash.
In connection with the Merger Agreement, the Principal Shareholders of the
Company entered into a voting agreement with ACC. Pursuant to the agreement, the
Principal Shareholders, the beneficial owners of approximately 39% of the
outstanding common stock and preferred stock of the Company (or 57% of the fully
diluted voting power of the Company), agreed to vote
6
<PAGE>
PriCellular Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
their shares in favor of the adoption of the Merger Agreement. The transaction
is subject to, among other things, regulatory approvals.
As a result of this transaction, the Company has incurred approximately $2.4
million in fees and expenses which amounts are shown as non-recurring charges on
the Condensed Consolidated Statement of Operations.
4. Acquisition of Cellular Operation
On January 15, 1998, Kyle Cellular, a wholly owned subsidiary of the Company,
acquired the TN-4 RSA with approximately 264,000 Pops from Bachtel Liquidity,
L.P., an affiliate of Bachow & Associates, Inc. for approximately $73.0 million
in cash. The RSA , adjacent to three MSAs including Knoxville TN, is located
south of the Company's Kentucky Cluster and features such tourist attractions as
the towns of Gatlinburg and Pigeon Forge , Dollywood and the entrance to the
Great Smoky Mountains National Park. Of the total purchase price, $13.0 million
was funded through cash committed for the acquisition at December 31, 1997 with
the balance provided by a $60.0 million Senior Secured Reducing Revolver due in
the year 2005.
7
<PAGE>
PriCellular Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
4. Acquisition of Cellular Operations (continued)
The above acquisition is accounted for on the purchase method and is included in
the results of operations from the date of acquisition.
Pro forma consolidated results of operations for the period ended March 31,
1997, assuming the acquisition was consummated as of January 1, 1997, is as
follows:
March 31,
1997
--------
Revenue $ 39,065
========
Net loss $ (1,218)
========
Net loss per common share $ (.03)
========
5. Long-Term Debt
In January 1998, the Company, through its wholly owned subsidiary Kyle Cellular,
entered into a $60.0 million Senior Secured Reducing Revolver (the "Borrowing")
with J.P. Morgan Securities Inc. The Borrowing matures eight years from the
closing date with repayment commencing in the year 2001 and final payment in the
year 2005 with payments ranging from 10.0% to 25.0% of the then outstanding
balance. Interst is currently charged at the LIBOR rate plus a premium ranging
from 1.500% to 2.2500% depending on the ratio of debt to cash flow as defined.
The Borrowing requires the attainment of certain financial ratios in order to
maintain the permitted level of indebtedness. Violation of such ratios requires
the permanent prepayment of an amount to cure the deficiency. The Borrowing is
secured by the assets of Kyle Cellular.
Pursuant to the agreement the Company has entered into an interest rate swap
which effectively converts a portion of the interest on the outstanding
indebtedness from a variable rate basis to a fixed rate basis. The notional
amount required to be hedged is 50% of the aggregate outstanding principal
amount.For the period commencing January 21, 1998 and ending July 21, 1998 the
Company has "locked in" an effective annual rate of 7.64% on the total
outstanding indebtedeness of $60.0 million.
6. Legal Proceedings
On March 24, 1998, a purported class action lawsuit was filed in the Supreme
Court of the State of New York, County of Westchester, allegedly on behalf of
the stockholders of the Company, against the Company (as nominal defendant) and
certain of the Company's directors (the "eIndividual Defendants"), Doyle v.
Price et. al., Index No. 98-04050. The complaint alleges breach of fiduciary
duties to the stockholders of the Company and that the proposed acquisition of
the Company by ACC (the "Transaction") involves unfair dealing and an unfair and
inadequate price. The complaint also alleges, among other things, that certain
of the terms of the proposed Transaction, including the break-up fee, are
improper, and that ACC is controlled by at least one of the Company's directors.
The complaint seeks to enjoin the contemplated Transaction, recission if the
Transaction is consummated, and unspecified compensatory or recissionary
damages, and costs, including attorneys' fees and experts' fees. The Company
believes that the complaint is without merit and that the Individual Defendants
deny all allegations or wrongdoing set forth in the complaint.
8
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
General
The current three month period ending March 31, 1998 reflects the continuing
financial growth of the Company's operations. Net subscriber additions
approximated 25,000 for the current quarter of which approximately 14,400 were
from internal growth, which is comparable to last year's first quarter. The
Company ended the current period with approximately 275,000 subscribers
resulting in penetration of 5.4% compared to approximately 179,000 subscribers
and a penetration rate of 3.8% at March 31, 1997. Churn for the Company
continued its improvement ending the current quarter at a rate of 1.4% compared
to 1.6% for last year's three month period.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
amounted to $19.1 million for the first quarter of 1998 compared to $13.4
million for the same period in 1997 or an increase of 43%. Management believes
that EBITDA is an effective measure of operating performance because it is
industry practice to use a multiple of EBITDA as one method of evaluating
cellular properties. EBITDA does not represent cash flow from operations as
defined by GAAP, and is not necessarily indicative of cash available to fund all
cash flow needs and should not be considered as an alternative to net income.
The Company in fact expects to incur net accounting losses for the foreseeable
future due to interest and non-cash charges such as depreciation and
amortization.
Except for the acquisition of the TN-4 RSA in January 1998, the financial
results of the Company are substantially comparable. The following is
principally a function of operations and not a result of acquisitions.
Historical Results of Operations
Three months ended March 31, 1998 compared with three months ended March 31,
1997.
Revenues for the quarter ended March 31, 1998 increased to $51.5 million
(consisting of cellular service revenues of $48.0 million, equipment sales
revenues of $1.3 million and other revenues of $2.2 million) from $35.6 million
(consisting of cellular service revenues of $32.7 million, equipment sales
revenues of $1.1 million and other revenue of $1.8 million). The significant
increase in the subscriber base which generates additional monthly revenue and
increased air time revenue is the primary reason for the increase. In addition
the Company's commitment to improving coverage in the markets through capital
additions has resulted in increased roaming revenue.
9
<PAGE>
Total expenses for the quarter ended March 31, 1998 increased to $41.8 million
(consisting of cost of cellular service of $13.5 million, cost of equipment sold
of $2.6 million, selling, general and administrative expenses of $14.8 million,
non-recurring charges related to the sale of the Company of $2.4 million and
depreciation and amortization of $8.5 million) from $29.7 million of operating
expenses for the quarter ended March 31, 1997 (consisting of cost of cellular
service of $9.3 million, cost of equipment sold of $2.4 million, selling,
general and administrative expenses of $11.3 million and depreciation and
amortization of $6.7 million).
The primary factor contributing to the increase in expenses is the increase in
the volume of revenue due to the growth of the business. On a percentage basis
the cost of cellular service represents 28% of cellular revenue both for the
current and prior three month periods. Operating expenses consisting of the cost
of cellular servive, the cost of equipment and selling, general and
administrative expenses increased by $7.9 million, but as a percentage of total
revenue decreased from 65% for the quarter ending March 31, 1997 to 60% for the
current quarter.
The gain on sale of investment in cellular operations resulted from the sale in
January 1997 of the Florence AL MSA and AL-1B RSA.
Interest expense, net increased to $17.9 million from $14.7 million due to the
Company's issuance of $60.0 million of a Senior Secured Reducing Revolver at an
effective rate of approximately 7.7% per annum in January 1998, a reduction in
the amount of interest earned resulting from the lower cash balances for the
current three months and higher interest expense for the discounted indebtedness
outstanding as their balances approach the face value of the Notes.
Liquidity and Capital Resources
The cellular telephone business requires substantial capital to acquire,
construct and expand cellular telephone systems and to fund operating
requirements. The Company historically has financed its acquisitions and other
capital needs through the proceeds received from the issuance of debt
securities, the sale of equity interests, borrowings, vendor credit facilities
and, more recently, operating cash flow. As of March 31, 1998, the Company had
$60.9 million of cash and cash equivalents and $40.6 million of working capital.
During the first three months of 1998, the Company's principal source of cash
was $12.7 million from operations. The principal use of cash was $11.5 million
for the acquisition of cellular equipment The acquisition of the TN-4 RSA for
approximately $73.0 million was financed through the issuance of $60.0 million
of debt and the utilization of $13.0 million of cash previously reflected as
cash committed for the acquisition of cellular operations on the balance sheet
of the Company at the end of 1997, and not included in the opening cash balance
of $61.4 million.
10
<PAGE>
The cellular telephone industry requires significant capital expenditures when
acquiring new markets or upgrading existing markets. The Company continues to
make a commitment to enhance its market's performance, particularly those
acquired during 1996 and 1997, as well as expand its marketing effects which
include, but are not limited to an increase in funds for advertising, cellular
telephone inventory purchase and other expenditures relating to subscriber
growth.
During the second quarter of 1998, the Company will pay approximately $22.0
million in interest and approximately $44.0 million for the remainder of the
year on their fully accreted Notes
11
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
On March 24, 1998, a purported class action lawsuit was filed in the
Supreme Court of the State of New York, County of Westchester, allegedly
on behalf of the stockholders of the Company, against the Company (as
nominal defendant) and certain of the Company's directors (the "Individual
Defendants"), Doyle v. Price et. al., Index No. 98-04050. The complaint
alleges breach of fiduciary duties to the stockholders of the Company and
that the proposed acquisition of the Company by ACC (the "Transaction")
involves unfair dealing and an unfair and inadequate price. The complaint
also alleges, among other things, that certain of the terms of the
proposed Transaction, including the break-up fee, are improper, and that
ACC is controlled by at least one of the Company's directors. The
complaint seeks to enjoin the contemplated Transaction, recission if the
Transaction is consummated, and unspecified compensatory or recissionary
damages, and costs, including attorneys' fees and experts' fees. The
Company believes that the complaint is without merit and that the
Individual Defendants deny all allegations or wrongdoing set forth in the
complaint.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
12
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
13
<PAGE>
SIGNATURE
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.
PRICELLULAR CORPORATION
By: /s/ Steven Price
---------------------------------
Name: Steven Price
Title: President
By: /s/ Stuart Rosenstein
---------------------------------
Name: Stuart Rosenstein
Title: Executive Vice President/
Chief Financial Officer
Date: May 15, 1998
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 60,884
<SECURITIES> 0
<RECEIVABLES> 22,981
<ALLOWANCES> 1,636
<INVENTORY> 1,553
<CURRENT-ASSETS> 86,886
<PP&E> 147,337
<DEPRECIATION> 34,147
<TOTAL-ASSETS> 812,970
<CURRENT-LIABILITIES> 46,251
<BONDS> 635,016
0
1
<COMMON> 349<F1>
<OTHER-SE> 126,501
<TOTAL-LIABILITY-AND-EQUITY> 812,970
<SALES> 1,341
<TOTAL-REVENUES> 51,503
<CGS> 2,630
<TOTAL-COSTS> 41,790
<OTHER-EXPENSES> 812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,854
<INCOME-PRETAX> (7,329)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,329)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,329)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> 0
<FN>
Common stock consists of 220 shares of Class A and 129 shares of Class B.
</FN>
</TABLE>
