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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 September 30, 1997
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 33-88350
PRICELLULAR WIRELESS CORPORATION
(Exact name of the registrant as specified in its charter)
Delaware 13-3784318
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
170 East Post Road
White Plains, NY 10601
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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)
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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 - 100 shares as of October 18, 1997
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<PAGE>
Index
Pricellular Wireless Corporation and Subsidiaries
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--September 30, 1997
and December 31, 1996.................................................. 2
Condensed Consolidated Statements of Operations--Three and
Nine Months Ended September 30, 1997 and 1996.......................... 3
Condensed Consolidated Statements of Cash Flows--Nine Months Ended
September 30, 1997 and 1996............................................ 4
Notes to Condensed Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 11
Item 2. Changes in Securities............................................. 11
Item 3. Defaults upon Senior Securities................................... 11
Item 4. Submission of Matters to a Vote of Security Holders............... 11
Item 5. Other Information................................................. 11
Item 6. Exhibits and Reports on Form 8-K.................................. 11
Signatures................................................................ 12
1
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Pricellular Wireless Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share data)
September December
30, 1997 31, 1996
----------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 65,452 $ 67,331
Accounts receivable (less allowance of $1,521 in
1997 and $1,767 in 1996) 21,048 13,429
Inventory 1,698 2,096
Other current assets 2,935 980
----------------------
Total current assets 91,133 83,836
Fixed assets--at cost:
Cellular facilities, equipment and other 117,621 76,943
Deposits on cellular equipment 2,615 10,100
Less accumulated depreciation (25,257) (13,728)
----------------------
Net fixed assets 94,979 73,315
Investment in cellular operations 37,007 39,641
Cellular licenses (less accumulated amortization of
$19,776 in 1997 and $10,415 in 1996) 497,780 377,808
Cellular licenses held for sale -- 13,721
Deferred financing costs (less accumulated
amortization of $4,251 in 1997 and $2,542 in 1996) 12,837 14,031
Cash committed for the acquisition of cellular
operations -- 91,400
Other assets 261 5,197
----------------------
Total assets $ 733,997 $ 698,949
======================
Liabilities and stockholder's equity
Current liabilities:
Accounts payable and accrued expenses $ 27,204 $ 23,925
Other current liabilities 2,688 4,776
Due to affiliates -- 4,929
----------------------
Total current liabilities 29,892 33,630
Long-term debt 514,357 483,430
Deferred taxes 3,797 --
Other long-term liabilities 1,281 1,756
Stockholder's equity:
Common Stock, $0.01 par value per share:
100 shares issued and outstanding
Additional paid-in capital 218,767 211,642
Accumulated deficit (34,097) (31,509)
----------------------
Total stockholder's equity 184,670 180,133
----------------------
Total liabilities and stockholder's equity $ 733,997 $ 698,949
======================
See notes to condensed consolidated financial statements.
2
<PAGE>
Pricellular Wireless Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
------------------------------------------------
Revenues
Cellular service $49,039 $31,086 $121,904 $75,560
Equipment sales 1,350 897 3,633 2,440
Other 1,368 864 4,504 2,978
------------------------------------------------
51,757 32,847 130,041 80,978
Costs and expenses
Cost of cellular service 13,788 8,479 34,136 20,999
Cost of equipment sold 3,302 2,407 8,883 6,822
Selling, general and
administrative 13,099 8,608 36,120 23,635
Depreciation and amortization 6,646 5,080 20,921 14,109
------------------------------------------------
36,835 24,574 100,060 65,565
------------------------------------------------
Operating income 14,922 8,273 29,981 15,413
Other income (expense)
Gain (loss) on sale of
investment in cellular
operations -- 177 8,424 177
Interest expense, net
(includes interest expense
in 1996 of $436 and $1,234
respectively, to Parent) (15,327) (10,225) (43,431) (29,809)
Other income, net 813 562 2,438 1,062
------------------------------------------------
(14,514) (9,486) (32,569) (28,570)
------------------------------------------------
Net income (loss) $ 408 $ (1,213) $ (2,588) $(13,157)
================================================
See notes to condensed consolidated financial statements.
3
<PAGE>
Pricellular Wireless Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30
1997 1996
----------------------
Net cash provided by operating activities $ 31,405 $ 25,445
----------------------
Investing activities
Purchase of cellular equipment (17,745) (12,966)
Proceeds from sale of investment in cellular
operations 1,255 26,614
Proceeds from sale of cellular operations 24,396 --
Acquisition of cellular operations (26,223) (80,480)
Dividend paid to Parent (12,000)
Proceeds from Parent -- 8,557
Investment in cellular operations -- (315)
Refund of escrow 5,000 --
Purchase of Cellular Information Systems, Inc.
shares (2,523) --
----------------------
Net cash used in investing activities (27,840) (58,570)
----------------------
Financing activities
Proceeds from capital contributions -- 33,613
Repayments of notes payable -- (1,875)
Repayment to affiliate (4,929) --
Payments for deferred financing costs (515) (48)
----------------------
Net cash (used in) provided by in financing
activities (5,444) 31,690
----------------------
Decrease in cash and cash equivalents (1,879) (1,435)
Cash and cash equivalents at beginning of period 67,331 26,669
----------------------
Cash and cash equivalents at end of period $ 65,452 $ 25,234
======================
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 8,884 $ 881
Income taxes 158 440
Supplemental schedule of noncash investing
activities
Capital contribution of cellular operations 19,125 --
Capital contribution of assets from Parent -- 26,079
Utilization of cash committed for the acquisition
of cellular operations 91,400 --
Debt issued in connection with acquisition of
cellular license -- 19,429
Exchange of cellular investments for the
acquisition of cellular operations 1,350 --
Record deferred tax liability arising from the
acquisition of cellular operations 3,797 --
Supplemental schedule of noncash financing
activities
Contribution to capital of junior subordinated debt -- 21,659
See notes to condensed consolidated financial statements.
4
<PAGE>
Pricellular Wireless Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
PriCellular Wireless Corporation including its subsidiaries ("Wireless") was
incorporated on August 23, 1994. On October 21, 1994 PriCellular Corporation
(100% stockholder of Wireless) ("Parent") contributed all of the assets, net of
certain liabilities, to Wireless. The transactions were accounted for in a
manner similar to a pooling of interests. Wireless and the businesses
contributed to Wireless are collectively referred to as the "Company." The
Company is principally engaged in the ownership and operation of cellular
telephone systems.
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 1996 Annual
Report on Form 10-K.
2. Acquisition of Cellular Operations
On January 7, 1997, the Company established its fourth operating cluster by
consummating the acquisition of four RSAs in Kentucky from a subsidiary of
Horizon Cellular Telephone Company, L.P. ("Horizon"). The 785,000 Pop cluster
was acquired for approximately $96.4 million in cash, and 1,948,052 shares of
the Parent's Class A Common Stock. The Parent subsequently contributed its
investment to Wireless.
On January 7, 1997, the Company consummated the acquisition of the WI-4 RSA
consisting of approximately 119,000 Pops contiguous to its Upper Midwest cluster
from a subsidiary of BellSouth Corporation for approximately $6.3 million in
cash.
On May 29, 1997, the Company consummated the acquisition of three counties in
the WI-5 RSA consisting of approximately 81,000 Pops which abut its Eau Claire,
WI MSA, its WI-1 RSA and AT&T Wireless Services, Inc.'s Minneapolis, MN MSA from
United States Cellular Corporation for approximately $10.6 million in cash and
the contribution of minority Pops (approximately 18,000 Pops).
5
<PAGE>
Pricellular Wireless Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
2. Acquisition of Cellular Operations (continued)
The above acquisitions were accounted for using the purchase method of
accounting and are therefore included in the results of operations from the date
of acquisition.
Pro forma consolidated results of operations for the period ended September 30,
1996, assuming the above mentioned acquisitions were consummated as of January
1, 1996, are as follows:
September
30, 1996
----------
Revenues $ 96,978
==========
Net loss $(13,464)
==========
No pro forma effect was given for the WI-4 or WI-5 acquisitions as their results
are not significant.
3. Disposition of Cellular Operations
On January 7, 1997, the Company sold its stand-alone wireline systems serving
the Florence, AL MSA (136,816 Pops) and AL-1B RSA (62,035 Pops) for $24.4
million in cash, of which $2.0 million is attributable to a two year covenant
not-to-compete. The transaction resulted in a gain of approximately $8.5
million.
4. Other
In July 1997, the Company transferred approximately $12.0 million in the form of
a dividend to the Parent. The dividend was within the terms of the restricted
payments covenants contained in the bond indentures.
6
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The results for the current three month period ending September 30, 1997 reflect
the continuation of the strong growth of the Company's fiscal operations and
subscriber additions. Net subscriber additions exceeded 22,400 for the three
months and 57,500 for the nine months ended September 30, 1997 compared to
16,000 and 46,100 for the same periods of the prior year. The Company ended the
current period with 222,200 subscribers resulting in penetration of 4.8%
compared to 135,800 and penetration of 3.2% for the same period of the prior
year.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
amounted to $22.4 million for the third quarter of 1997 compared to $13.9
million for the same period in 1996. For the current nine month period EBITDA
amounted to $53.3 million compared to $30.6 million for the same period in 1996.
Although the Company has experienced positive results when measured by EBITDA,
it expects to incur net accounting losses for the foreseeable future. EBITDA is
utilized as a measurement of performance within the industry, although it should
not be regarded as an alternative to either operating income or net income as an
indicator of operating performance or to cash flows as a measure of liquidity.
Further, EBITDA is not a GAAP-based financial measure, and it should not be
considered as an alternative to GAAP-based measures of financial performance.
Due to the acquisitions of the Kentucky cluster, the WI-4 RSA, and disposition
of the Florence, Alabama MSA in early 1997, as well as other markets acquired
during 1996, comparison to the same periods in 1996 is neither meaningful nor
indicative of future growth.
A comparison can be made of those markets that were owned by the Company
throughout the nine and three month periods in 1997 and 1996. The markets
included in the comparison account for approximately 59% and 73% of Net Pops for
the nine and three months in 1997 respectively and approximately 63% and 72% for
the nine and three months in 1996 respectively. The following represents certain
operating results (000's omitted except for subscriber growth) for these
markets:
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
Total revenues $ 31,885 $ 25,445 $ 70,128 $ 51,898
-------- -------- -------- --------
Operating income 9,743 5,939 16,801 9,768
-------- -------- -------- --------
EBITDA 15,188 10,358 29,430 20,259
-------- -------- -------- --------
Net subscriber additions 17,590 14,451 38,187 31,489
-------- -------- -------- --------
Penetration 5.0% 3.4% 5.1% 3.3%
-------- -------- -------- --------
7
<PAGE>
This data indicates that the Company experienced a significant amount of growth
from internal operations in addition to growth through acquisitions. Revenues
increased 25% and 35%, operating income increased 64% and 72% and EBITDA
increased 47% and 45% when comparing the third quarter of 1997 to the third
quarter of 1996 and the nine month period of 1997 to the nine month period of
1996, respectively.
Historical Results of Operations (000's omitted)
Three months ended September 30, 1997 compared with three months ended September
30, 1996.
Revenues for the quarter ended September 30, 1997 increased to $51,757
(consisting of cellular service revenues of $49,039 equipment sales revenues of
$1,350 and other revenues of $1,368) from $32,847 (consisting of cellular
service revenues of $31,086, equipment sales revenues of $897 and other revenues
of $864).
Total operating expenses for the quarter ended September 30, 1997 increased to
$36,835 (consisting of cost of cellular service of $13,788, cost of equipment
sold of $3,302, selling, general and administrative expenses of $13,099 and
depreciation and amortization of $6,646) from $24,574 of operating expenses for
the quarter ended September, 30, 1996 (consisting of cost of cellular service of
$8,479, cost of equipment sold of $2,407, selling, general and administrative
expenses of $8,608 and depreciation and amortization of $5,080).
The primary factor contributing to the increases in revenues, operating expenses
and operating income was the acquisitions completed in the first quarter of 1997
which are therefore fully reflected in the results for the three and nine months
of 1997, but only partially included in the three months of 1996. In addition,
the Company has achieved considerable growth through its distribution strategy
of primarily relying on its company owned retail stores and direct sales force
to effectively and economically add subscribers. Additionally, the Company's
decentralized operating philosophy, which includes a local customer service
presence, has led to a reduction in churn which in turn creates an increase in
revenue and a reduction in the net cost to acquire subscribers as well as
increases in operating margins.
Interest expense, net increased to $15,327 from $10,225 due to the Company's
issuance of $170.0 million of Senior Notes at 10-3/4% in November 1996.
Other income for the current three month period consists of revenue earned
directly from covenants not-to-compete of $813 in 1997 and $562 thousand in
1996.
8
<PAGE>
Nine months ended September 30, 1997 compared with nine months ended September
30, 1996.
Revenues for the nine months ended September 30, 1997 increased to $130,041
(consisting of cellular service revenues of $121,904, equipment sales revenues
of $3,633 and other revenues of $4,504) from $80,978 (consisting of cellular
service revenues of $75,560, equipment sales revenues of $2,440 and other
revenues of $2,978).
Total operating expenses for the nine months ended September 30, 1997 increased
to $100,060 (consisting of cost of cellular service of $34,136 cost of equipment
sold of $8,883 selling, general and administrative expenses of $36,120 and
depreciation and amortization of $20,921) from $65,565 (consisting of cellular
service of $20,999, cost of equipment sold of $6,822, selling, general and
administrative expenses of $23,635 and depreciation and amortization of
$14,109).
The primary factors contributing to the increase in revenues, operating expenses
and operating income was the acquisition of a portion of the operating systems
of the company subsequent to June 30, 1996, the inclusion for only five of the
nine months of 1996 of the Company's NY-6 RSA and Poughkeepsie, NY, MSA as well
as the acquisitions during 1997. In addition, the Company has achieved
considerable growth through its distribution strategy of primarily relying on
its company owned retail stores and direct sales force to effectively and
economically add subscribers. Additionally, the Company's decentralized
operating philosophy, which includes a local customer service presence, has led
to a reduction in churn which in turn creates an increase in revenue and a
reduction in the net cost to acquire subscribers as well as increases in
operating margins.
Interest expense net increased to $43,431 from $29,809 due to the Company's
issuance of $170.0 million of Senior Notes at 10-3/4% in November 1996.
The first nine months of 1997 includes a gain from the sale of cellular
properties of $8,424 resulting from the sale of the Florence, AL MSA and AL-1B
RSA as well as revenue earned directly from covenants not to compete of $2,438
in 1997 and $1,062 in 1996.
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 September 30, 1997, the Company
had $65.5 million of cash and cash equivalents and $61.2 million of working
capital.
9
<PAGE>
During the first nine months of 1997, the Company's principal sources of cash
were $31.4 million from operations, $24.4 million from the sale of the Florence,
AL MSA and AL-1B RSA and $5.0 million from the return of escrow for the
acquisition of the Kentucky Cluster.
The principal uses of cash were $8.9 million for the payment of interest on the
10-3/4% Senior Notes, $6.3 million for the acquisition of the WI-4 RSA, $10.6
million for the acquisition of the WI-5 RSA, $17.7 million for the purchase of
cellular equipment, $12.0 million for a dividend paid to parent, $4.9 million
for payments to an affiliate and $96.4 million for the acquisition of the
Kentucky Cluster (of which $91.4 million was previously reflected as cash
committed for the acquisition of cellular operations on the balance sheet of the
company at the end of 1996, and not included in the opening cash balance of
$67.3 million).
The cellular telephone industry requires significant capital expenditures when
acquiring new markets or upgrading existing markets. The Company has made a
commitment to enhance its markets' performance, particularly those acquired
during 1996, as well as expand its marketing efforts which include, but are not
limited to, an increase in funds for advertising, cellular telephone inventory
purchases and other expenditures relating to subscriber growth.
The Company continually reviews plans for future growth through acquisitions
which may require additional financing. Although the Company has been able to
obtain such financing, there is no guarantee that such financing will be
available.
10
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
None
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
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
11
<PAGE>
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.
PRICELLULAR WIRELESS CORPORATION
By: /s/ Steven Price
--------------------------------------
Name: Steven Price
Title: President/Chief Executive Officer
By: /s/ Stuart Rosenstein
--------------------------------------
Name: Stuart Rosenstein
Title: Executive Vice President/
Chief Financial Officer
Date: October 24, 1997
12
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 65,452
<SECURITIES> 21,048
<RECEIVABLES> 0
<ALLOWANCES> 1,521
<INVENTORY> 1,698
<CURRENT-ASSETS> 91,133
<PP&E> 120,236
<DEPRECIATION> 25,257
<TOTAL-ASSETS> 733,997
<CURRENT-LIABILITIES> 29,892
<BONDS> 514,357
0
0
<COMMON> 0
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<TOTAL-LIABILITY-AND-EQUITY> 733,997
<SALES> 3,633
<TOTAL-REVENUES> 130,041
<CGS> 8,883
<TOTAL-COSTS> 100,060
<OTHER-EXPENSES> (10,862)
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<INTEREST-EXPENSE> 43,431
<INCOME-PRETAX> (2,588)
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