United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1996
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 registrant as specified in its charter)
Delaware 13-3784318
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45 Rockefeller Plaza
New York, New York 10020
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 459-0800
--------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
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 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best knowledge of the registrant, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 24, 1997 was $0.
The number of shares outstanding of each class of the registrant's common stock,
as of January 24, 1997: 100.
Documents incorporated by reference: None.
The registrant meets the conditions set forth in General Instruction J(1)(a) and
(b) of Form 10-K and is therefore filing this form with the reduced disclosure
format.
<PAGE>
Table of Contents
Part I
Item 1. Business.................................................. 2
General................................................... 2
Cellular Markets and Systems.............................. 3
Acquisitions and Dispositions............................. 6
Business Strategy......................................... 9
Cellular Operations....................................... 11
Overview of Cellular Telephone Industry................... 17
Regulations............................................... 22
Item 2. Properties................................................ 25
Item 3. Legal Proceedings......................................... 26
Item 4. Submission of Matters to a Vote of Security Holders....... 26
Part II
Item 5. Market for the Company's Common Equity and
Related Stockholder Matters............................. 27
Item 6. Selected Financial Data................................... 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 28
Item 8. Financial Statements and Supplementary Data............... 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 32
Part III
Items 10., 11.,
12. and 13. Directors and Executive Officers of the Registrant,
Executive Compensation, Security Ownership of
Certain Beneficial Owners and Management and
Certain Relationships and Related Transactions.......... 33
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................. 34
Exhibit Index ........................................................ 34
Signatures ........................................................ 37
<PAGE>
Part I
Unless otherwise indicated all references herein to "PriCellular" or the
"Company" include its subsidiaries and predecessors. See "Item 1.
Business-Certain Terms" for the definitions of certain other terms used herein.
Item 1. Business.
General
PriCellular, through its subsidiaries, owns and operates FCC licensed cellular
telephone systems in the United States, primarily in smaller MSAs and
strategically located RSAs. PriCellular owns cellular interests representing
approximately 4.8 million Net Pops. These interests consist principally of four
large operating clusters of cellular Systems:
Upper Midwest Cluster--a 1.7 million Net Pop cluster of 14 non-wireline
Systems covering approximately 70,000 contiguous square miles in Minnesota,
Wisconsin and Michigan. Mid-Atlantic Cluster--an 857,000 Net Pop cluster of
five contiguous non-wireline Systems consisting of five RSAs in Ohio,
Pennsylvania and West Virginia covering more than 10,000 contiguous square
miles. New York Cluster--a 1.1 million Net Pop cluster of two MSAs and two
RSAs covering more than 8,000 contiguous square miles in suburban New York
located between New York City and the Albany, NY MSA of SBC Communications
Inc., formerly Southwestern Bell Corporation ("Southwestern Bell").
Kentucky Cluster--a 785,000 Net Pop cluster of four RSAs adjacent to
Louisville and Lexington, KY. These 38 counties cover more than 13,000
square miles.
In addition, the Company owns a 44.5% interest in a joint venture with
Southwestern Bell (which is managed and operated by Southwestern Bell),
representing 264,000 Net Pops, and certain other cellular interests.
PriCellular is a wholly-owned subsidiary of PriCellular Corporation ("Parent").
Parent completed an initial public offering of its Class A Common Stock in
December 1994. Its principal stockholders include members of the family of
Robert Price, President of the Company, AT&T Wireless Services, Inc.
("McCaw/Wireless"), a subsidiary of AT&T Corp. ("AT&T"), Aeneas Venture
Corporation, an affiliate of Harvard Private Capital Group, Inc. and a wholly
owned subsidiary of the President and Fellows of Harvard College, Spectrum
Equity Investors, L.P., ("Spectrum"), The Thomas H. Lee Company, Sandler Capital
Management and The Public School Employes' Retirement System of Pennsylvania.
During 1994 and 1995, these stockholders invested in excess of $135.0 million in
exchange for their current equity interests. McCaw/AT&T Wireless' investment in
the Company consisted of cash, minority interests and a significant amount of
capital equipment.
The Company has a strategic alliance with McCaw/AT&T Wireless which allows the
Company to take advantage of McCaw/AT&T Wireless' acquisition experience, and
benefit from McCaw/AT&T Wireless' volume purchasing power. The Company purchases
landline interlata telephone service for its switched cellular systems and
cellular telephones at volume discounts through its relationship with McCaw/AT&T
Wireless thereby minimizing two of the principal costs associated with providing
cellular service and acquiring new subscriber additions. The volume discounts
also extend to the equipment necessary for the Company's system development and
expansion thereby reducing the Company's capital expenditures. The Company
believes that the proximity of three of its operating clusters to McCaw/AT&T
Wireless' Systems affords significant opportunities for joint marketing,
promotions and other programs. The Company's Upper Midwest Cluster is contiguous
to McCaw/AT&T Wireless' Systems serving the Minneapolis/St. Paul, MN MSA and the
St. Cloud, MN MSA.
2
<PAGE>
The Company's Mid-Atlantic Cluster borders the Pittsburgh, PA, Steubenville, OH
and Wheeling, WV MSAs, which are owned by McCaw/AT&T Wireless. The Company's New
York Cluster abuts the northern border of McCaw/AT&T Wireless' New York City
MSA, including Westchester and Rockland counties. The New York Cluster is also
adjacent to three MSAs owned by Southwestern Bell, with whom the Company has a
joint venture in Illinois and Texas.
The Company's acquisition strategy is to continue to expand its current clusters
through the acquisition of contiguous properties and, secondarily, to target for
purchase other small to mid-sized MSAs and strategic RSAs that it believes are
undervalued, underdeveloped or that possess traits indicative of potentially
high cellular usage and superior financial performance. The operation of
contiguous markets permits the Company to provide broad areas of uninterrupted
service and achieve certain economies of scale, including certain centralized
marketing, administrative and engineering functions. The Company believes that
smaller MSAs and certain RSAs often exhibit a concentration of small businesses,
longer commute times and well-traveled roads, all indicators of strong cellular
use. Many of these markets serve as hubs for retail trading areas and as
business, cultural or medical centers for populations spread over wide
geographic areas. In addition, management believes that because its markets are
less densely populated, they are less likely to face the level of competition
expected to be experienced in large urban areas.
The Company's operating strategy is, upon acquiring a cellular system, to effect
significant management, operational and organizational changes in order to
increase the number and quality of subscribers and enhance operating cash flow,
while controlling costs to acquire subscribers and promoting superior customer
service. Management believes that the majority of its Systems are in the early
stages of their growth cycle and represent significant growth opportunities. In
addition, many of these systems were underdeveloped prior to their acquisition
by the Company. After selectively upgrading the engineering in its cellular
network, the Company has implemented aggressive marketing programs to add
subscribers and reduce deactivations or "churn." In its Systems, the Company
markets under the CELLULARONE(R) brand name and participates in the North
American Cellular Network ("NACN"), a cellular network whose goal is to make
cellular service "seamless" across system borders throughout North America.
A key element of the Company's operating strategy is the positioning of its
cellular systems as the quality local service provider. The Company's chain of
local retail stores, which are staffed with sales and customer service
representatives, differentiate the Company from many of its larger competitors,
which frequently centralize customer service and other functions outside the
local market. In addition, these stores provide the Company with more control
over the sales process than if it relied upon independent agents. Management
believes that the Company's local presence enhances its ability to provide a
higher level of customer service and satisfaction.
The Company was incorporated under the laws of the State of Delaware on August
23, 1994. In October 1994, all of the assets of Parent were transferred from
Parent to the Company. The principal executive offices of the Company are
located at 45 Rockefeller Plaza, New York, New York 10020 and its telephone
number is (212) 459-0800.
Cellular Markets and Systems
The table on the next page summarizes certain information concerning the
Company's markets assuming the acquisition of the remaining shares of Cellular
Information Systems, Inc. ("CIS") Stock by the Company. The Company acquired a
controlling interest in CIS in November 1994. See "Acquisitions and
Dispositions."
3
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<TABLE>
<CAPTION>
Cellular Markets and Systems
Total Date of
Market(a) Pops Ownership Net Pops Acquisition
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Upper Midwest Cluster
Duluth, MN/Superior, WI MSA 240,234 100.0% 240,234 04/28/94
Eau Claire, WI MSA 143,701 97.1% 139,588 04/28/94
Wausau, WI MSA 121,727 95.4% 116,069 03/28/95
MN-2A RSA 38,766 100.0% 38,766 07/07/95
MN-3 RSA 59,528 100.0% 59,528 04/28/94
MN-4 RSA 15,226 100.0% 15,226 07/27/95
MN-5 RSA 207,107 100.0% 207,107 07/07/95
MN-6 RSA 220,067 100.0% 220,067 11/23/94 (b)
WI-1 RSA 110,749 100.0% 110,749 04/28/94
WI-2 RSA 85,645 100.0% 85,645 11/18/96
WI-3 RSA 140,697 100.0% 140,697 11/23/94 (b)
WI-4 RSA 118,993 100.0% 118,993 01/07/97
WI-6A RSA 32,939 100.0% 32,939 11/23/94 (b)
MI-1 RSA 203,391 100.0% 203,391 03/07/95
Mid-Atlantic Cluster
OH-7 RSA 257,290 100.0% 257,290 09/27/95
OH-10A RSA 62,345 100.0% 62,345 09/29/95
PA-9 RSA 188,096 100.0% 188,096 02/02/96
WV-2 RSA 79,567 100.0% 79,567 12/20/95
WV-3 RSA 269,709 100.0% 269,709 07/23/96
New York Cluster
Orange County, NY MSA 327,053 100.0% 327,053 10/17/96
Poughkeepsie, NY MSA 263,723 94.8% 249,942 04/23/96
NY-5 RSA 382,180 100.0% 382,180 12/29/95
NY-6 RSA 111,373 100.0% 111,373 04/23/96
Kentucky Cluster
KY-4 RSA 245,952 100.0% 245,952 01/07/97
KY-5 RSA 158,204 100.0% 158,204 01/07/97
KY-6 RSA 260,920 100.0% 260,920 01/07/97
KY-8 RSA 119,840 100.0% 119,840 01/07/97
Southwestern Bell Joint Venture
Laredo, TX MSA 176,162 44.5% 78,392 11/30/95 (b)
IL-4 RSA 216,119 44.5% 96,173 11/30/95 (b)
IL-6 RSA 201,234 44.5% 89,549 11/30/95 (b)
Other Interests n/a n/a 81,633 various
------------ ------------
Total 5,058,537 4,787,217
============ ============
</TABLE>
(a) All of the Company's licenses are non-wireline licenses with the exception
of the license for the Laredo, TX MSA.
(b) Assumes the acquisition of the remaining shares of Cellular Information
Systems, Inc. ("CIS"). On November 23, 1994, the Company acquired
approximately 90.8% (on a fully diluted basis) of the equity of CIS. As of
December 31, 1996, the Company owned approximately 93.3% (on a fully
diluted basis) of the equity of CIS.
4
<PAGE>
Markets
Upper Midwest Cluster
The Upper Midwest Cluster consists of approximately 1.7 million Net Pops in 14
contiguous Systems and covers over 70,000 square miles. The Upper Midwest
Cluster includes four of the Company's original Systems acquired in April 1994
and has grown steadily to 14 Systems through the acquisition of three Systems in
November 1994, two Systems in March 1995, three Systems in July 1995, one System
in November 1996 and one System in January 1997.
The Systems in the Upper Midwest Cluster all operate under the CELLULARONE(R)
brand name. The Systems in the Upper Midwest Cluster compete against various
wireline cellular service providers marketing under six different names.
Management believes that the diversity of competitors operating under various
names and the Company's use of the CELLULARONE(R) brand name affords the Company
marketing, advertising and other operational advantages relative to those
competitors. These advantages include advertising and marketing the Company's
services as a single brand name on a regional basis, allowing the Company to set
regional roaming rates, being a single cellular service provider to corporate
accounts, allowing calls to be handed-off between cell sites that cross market
borders and reducing the number of dropped calls as subscribers exit an
individual license area.
The Mid-Atlantic Cluster
The Mid-Atlantic Cluster comprises approximately 857,000 Pops and includes
portions of southeastern Ohio as well as adjacent portions of Pennsylvania and
northern West Virginia south of Pittsburgh. The Mid-Atlantic Cluster was
established with the acquisition of two Systems in September 1995 and currently
includes five contiguous RSAs as a result of acquisitions in December 1995,
February 1996 and July 1996. Prior to the Company's acquisition of the
Mid-Atlantic Cluster, the Systems constituting the Mid-Atlantic Cluster were
owned by three distinct companies and operated as separate markets with separate
switching equipment. Management believes that the operation of these contiguous
Systems as a cluster will generate significant operational and marketing
synergies. In addition, the Mid-Atlantic Cluster abuts Columbus, OH and three
MSAs owned by McCaw/AT&T Wireless including its Pittsburgh, PA System, affording
the opportunity for joint marketing and promotions.
The New York Cluster
The Company's New York Cluster consists of approximately 1.1 million Net Pops
and over 8,000 square miles in suburban New York. The New York Cluster is
adjacent to McCaw/AT&T Wireless' New York City MSA and is located between the
New York City MSA and Southwestern Bell's Albany, NY MSA. The New York Cluster
was established with the acquisition of the NY-5 RSA in December 1995 and
currently includes two MSAs and two RSAs as a result of acquisitions in April
and October of 1996. With the recent addition of the Orange County, NY MSA, the
Company's New York Cluster includes the entire Hudson Valley/Catskill region,
thereby creating significant marketing and promotional synergies and
opportunities.
5
<PAGE>
The Orange County, NY MSA is directly north of the New York City MSA and abuts
Westchester, Putnam and Rockland counties. Serving as a residential community of
metropolitan New York, Orange County includes the cities of Newburgh,
Middletown, Port Jervis and the affluent towns of Tuxedo and Warwick. Major
tourist destinations include The United States Military Academy at West Point,
Storm King State Park and Sterling Forest. The MSA contains more than 40 miles
of the New York State Thruway (I-87), approximately 50 miles of I-84 and 35
miles of Route 17.
The Kentucky Cluster
The Kentucky Cluster consists of four RSAs consisting of approximately 785,000
Pops and 13,000 square miles. Three of the RSAs (KY-4, 5 and 6) form a
contiguous cluster encompassing all of Kentucky south of Louisville and
Lexington and north of the Nashville, TN MSA and other Tennessee markets. The
120,000 Pop KY-8 RSA serves the northeastern suburbs of Lexington.
The Southwestern Bell Joint Venture
The Company owns 44.5% of a joint venture with Southwestern Bell in which the
Company contributed its System serving the Laredo, TX MSA and SBC contributed
its Systems serving the IL-4 RSA and IL-6 RSA (the "Southwestern Joint
Venture"). The Company owns 44.5% of the Systems serving the combined 593,515
Pops, or 264,114 Net Pops. The Southwestern Joint Venture was consummated on
November 30, 1995.
Pursuant to the Southwestern Joint Venture, the Company will receive guaranteed
preferential distributions in the first four years of the Southwestern Joint
Venture increasing from $3.3 million in the first year to $5.8 million in the
last year. The Company will have the option to remain in the Southwestern Joint
Venture for four years or "put" its Joint Venture interest in the Southwestern
Joint Venture to Southwestern Bell at any time during the four year period at a
price beginning at $28.5 million and increasing to approximately $39.0 million
at the end of the four year period. Southwestern Bell had the right to purchase
the Company's interest during the first year at approximately $56.0 million and
has the right to purchase the Company's interest on the day prior to
Southwestern Joint Venture's fourth anniversary at 5% above the then "put"
price. Southwestern Bell will have operating control of these properties during
the term of the Southwestern Joint Venture.
Acquisitions and Dispositions
Recent Transactions
During 1995, 1996 and January 1997, the Company consummated several strategic
acquisitions which expanded its Upper Midwest Cluster, established the
Mid-Atlantic Cluster, the New York Cluster and the Kentucky Cluster. In
addition, during July 1996, November 1996 and January 1997, the Company disposed
of its standalone wireline Systems in Alabama and its MI-2 RSA which were
considered by management to be non-strategic.
Expansion of Upper Midwest Cluster
On March 7, 1995, the Company acquired from Buckhead Telephone Company the
assets of the System serving the MI-1 RSA (which represents 203,391 Pops) for
approximately $17.7 million in cash.
6
<PAGE>
On March 28, 1995, the Company acquired a 50.02% general partnership interest
and a 0.58% limited partnership interest in Wausau Cellular Limited Partnership,
a Delaware limited partnership that wholly owns the System serving the Wausau,
WI MSA (116,069 Net Pops) for $5.4 million in cash.
On July 7, 1995, the Company consummated a transaction with Western Wireless
Corporation ("Western Wireless") pursuant to which the Company exchanged the
System serving the Lubbock, TX MSA (229,051 Pops) for approximately 330,000 Net
Pops, most of which are contiguous to the Upper Midwest Cluster. The Net Pops
acquired consist of the System serving the MN-5 RSA, the portion of the System
serving the MN-3 RSA that the Company did not own, a portion of the MN-2 RSA
(Beltrami County), approximately 87.0% of the System serving the Alton/Granite
City, IL MSA, an additional 10.0% of the System serving the Eau Claire, WI MSA
and an additional 14.5% of the System serving the Wausau, WI MSA. In addition,
Western Wireless agreed to pay the Company $3.0 million in exchange for the
Company's agreement not to compete with Western Wireless within the Lubbock, TX
MSA for a period of three years following the exchange. Western Wireless
retained ownership of certain cell sites and other capital equipment.
On August 10, 1995, the Company acquired from Louise Hart 49.0% of the System
serving the MN-4 RSA (7,461 Net Pops), for approximately $75,000. In addition,
the Company entered into an agreement, in accordance with FCC rules, to provide
management and operation services to the MN-4 RSA.
On November 18, 1996, the Company acquired from Wisconsin II Venture the 85,645
Pop WI-2 RSA for approximately $4.3 million in cash, or $50 per Pop. Prior
thereto, the Company had interim operating authority for the WI-2 RSA.
In January 1997, the Company entered into two transactions with a subsidiary of
Bell South Corporation. The standalone wireline systems serving the Florence, AL
MSA (136,816 Pops) and AL 1B RSA (62,035 Pops) were sold for $24,000,000 in
cash, of which $2,000,000 is attributable to a two year covenant not to compete.
The transactions resulted in a gain of approximately $8,000,000. In addition,
the Company acquired for $6,000,000 the WI-4 RSA (118,993 Pops). The WI-4 RSA
abuts the Company's MI-1 RSA to the northeast, its WI-3 RSA to the northwest and
its Wausau, WI MSA to the west.
The Mid-Atlantic Cluster Acquisitions
On September 27, 1995, the Company acquired from United States Cellular
Corporation ("USCC") substantially all of the assets of the System serving the
OH-7 RSA (257,290 Pops) for $39.8 million in cash.
On December 20, 1995, the Company acquired from USCC substantially all of the
assets of the System serving the WV-2 RSA (79,567 Pops) for $7.8 million in
cash.
On February 2, 1996, the Company acquired from USCC substantially all of the
assets of the System serving the PA-9 RSA (188,096 Pops) for $26.1 million in
cash.
On July 23, 1996, the Company acquired all of the assets of the System serving
the WV-3 RSA (269,709 Pops) from a subsidiary of Horizon Cellular Telephone
Company, L.P. for $35.0 million in cash.
7
<PAGE>
The New York Cluster Acquisitions
On December 29, 1995, the Company acquired from Cellular of Upstate New York
Inc. substantially all of the assets of the System serving the NY-5 RSA (382,180
Pops) for approximately $65.9 million in cash.
On April 23, 1996, the Company acquired from subsidiaries of USCC the System
serving the NY-6 RSA (111,373 Pops) and 83% of the System serving the
Poughkeepsie, NY MSA (218,890 Net Pops). The Company acquired substantially all
of the assets serving the NY-6 RSA for approximately $19.8 million in cash and
83.0% of the stock of the Dutchess County Cellular Telephone Company serving the
Poughkeepsie, NY MSA for approximately $38.9 million, with one half paid in cash
and the balance in a three-year note bearing interest at the prime rate (the
"Poughkeepsie Note"). The note was subsequently prepaid during November 1996.
On October 17, 1996, the Company consummated an exchange transaction with
Vanguard Cellular Systems, Inc., pursuant to which it exchanged certain of its
Systems in the Mid-Atlantic Cluster for, among other things, the Orange County,
NY MSA and an additional 11.1% of the Company's majority-owned Poughkeepsie, NY
MSA. The Company exchanged an aggregate of 520,528 Net Pops consisting of its
OH-9 RSA, a portion of its OH-10 RSA (excluding Perry and Hocking counties) and
the Parkersburg, WV/Marietta, OH MSA for the Orange County, NY MSA (327,053
Pops), 11.1% of the Poughkeepsie, NY MSA (29,367 Net Pops), 12.2% of the
Janesville, WI MSA (18,296 Net Pops) and approximately 28,509 additional Net
Pops, including small interests in the Eau Claire, WI and Wausau, WI MSAs (in
each of which the Company currently has a majority interest).
Kentucky Cluster Acquisition
In January 1997, the Company acquired from a subsidiary of Horizon Cellular
Telephone Company, L.P. four RSAs in Kentucky (approximately 785,000 Net Pops)
for $116.5 million (subject to adjustment) consisting of $94.0 million in cash
and $22.5 million in Parent's Class A Common Stock.
Dispositions
During July 1996, the Company consummated the sale of its recently-acquired AL-4
RSA for $27.5 million in cash ($2.5 million of which is attributable to a two
year covenant not to compete). In November 1995, the Company had acquired this
stand-alone RSA for total consideration of $20.0 million.
In a disputed acquisition of November 14, 1994, RFB Cellular, Inc. signed a
contract to acquire the MI-2 RSA (110,742 Pops). The Company believed it should
have had the right to purchase the property and initiated legal proceedings. In
May 1995, as a result of this litigation, the Court of Chancery of the State of
Delaware awarded the Company the right to acquire the MI-2 RSA. The defendant in
the lawsuit appealed the decision. On March 22, 1996, the Delaware Supreme Court
reversed the lower court's decision and ordered the Company to reverse the
acquisition and sell the license and operating assets to the defendant. The sale
was consummated on October 31, 1996. The Company received $6.5 million pursuant
to such sale. The Company believes that the loss of MI-2's operating results
will not be material to the Company's results of operations.
8
<PAGE>
Remaining Shares of CIS
The Company intends to acquire all of the outstanding shares of capital stock of
CIS not owned by the Company, although the Company is not required to do so.
Such acquisitions may be effected through privately negotiated or open market
purchases, subsequent tender offers, a merger or similar business combination
between the Company and CIS or otherwise. As of December 31, 1996, there were
outstanding approximately 841,000 shares of CIS capital stock not owned by the
Company, representing approximately 6.7% of the fully diluted equity of CIS. The
Company principally acquired its current holdings of CIS capital stock in
November 1994 for approximately $2 per share.
Business Strategy
Acquisition Strategy
The Company's strategy is to continue to expand its current clusters through the
acquisition of contiguous properties and, secondarily, to target for purchase
other small to mid-sized MSAs and strategic RSAs that it believes are
undervalued, underdeveloped or that possess traits indicative of potentially
high cellular usage and superior financial performance. The operation of
contiguous markets permits the Company to provide broad areas of uninterrupted
service and achieve certain economies of scale, including certain centralized
marketing, administrative and engineering functions. The Company believes that
smaller MSAs and certain RSAs often exhibit a concentration of small businesses,
longer commute times and well-travelled roads, all indicators of strong cellular
use. Many of these markets serve as hubs for retail trading areas and as
business, cultural or medical centers for populations spread over wide
geographic areas. In addition, management believes that because its markets are
less densely populated, they are less likely to face the level of competition
expected to be experienced in large urban areas.
Operating Strategy
Upon acquiring a cellular system, the Company's operating strategy is to effect
certain management, operational and organizational changes in order to increase
the number and quality of subscribers and enhance operating cash flow, while
controlling subscriber acquisition costs and promoting superior customer
service. The Company seeks to accomplish these changes by employing the
following practices:
- - Decentralized Management. The Company manages each of its Systems on a
decentralized basis, delegating direct responsibility for all hiring,
marketing, distribution, customer service, churn control, billing, roaming
and other day-to-day operating decisions to the general manager of each
System. General managers must strictly adhere to a budget designed to
improve operating cash flow and reduce churn and their compensation is
linked to their ability to meet or exceed their budgeted goals. The Company
believes its decentralized management structure fosters a strong sense of
customer service and community spirit, enables it to customize its
marketing strategy to the needs of the local market, and eliminates the
need for a large corporate staff or for a centralized multi-system customer
service center that is located outside of the local market. The Company
believes that placing decision-making responsibility in the hands of its
general managers fosters the decisive actions necessary to meet competitive
challenges.
9
<PAGE>
- - Aggressive Marketing and Promoting of Cellular Service. After selectively
upgrading the engineering in its cellular network, the Company implements
aggressive marketing programs to increase subscriber activations and reduce
churn. Many of these programs are designed to distinguish the Company as
the local market's highest quality cellular service provider, stressing its
localized sales offices, customer service and commitment to the community.
These programs also include offering distinctive rate plans and roaming
rates to emphasize "value" and the "advantage" of the Company's cellular
service, launching targeted advertising campaigns aimed at the most
attractive cellular user segments, creating regional marketing alliances
with neighboring cellular carriers and taking an active, visible role in
community, government and charity organizations. Management believes that
the Company's positioning of its cellular system as the local service
provider often contrasts with its larger competitors, which frequently
centralize customer service and other functions outside the local market.
- - Strong Retail and Direct Sales Effort. A key element of the Company's
positioning in its markets is its use of local retail stores, as well as a
local direct sales force. A retail location complemented by a direct sales
force provides the Company with more control over the sales process than if
it were to rely exclusively on independent agents. The Company has
aggressively opened its own retail stores and currently operates in excess
of 75 retail locations. Management believes that this local presence
enhances its ability to provide higher quality customer service, and that
on average customers who purchase cellular service directly from the
Company through its retail stores and direct sales force tend to have fewer
complaints and higher usage than subscribers who activate with independent
agents or independent retailers.
- - Dedication to Customer Service. The Company strives to maintain a high
level of customer satisfaction through a variety of techniques, including
tying sales commissions to subscriber retention, outbound telemarketing to
subscribers on a regular basis, maintaining 24-hour customer service and
active ongoing contact with new customers. The Company believes that its
emphasis on superior customer service has helped reduce its average monthly
churn rate. For example, the Company's average monthly churn rate for the
year ended December 31, 1996 was 1.6%.
- - System Development and Expansion. The Company develops or builds out its
cellular service areas by adding channels to existing cell sites and by
building new cell sites with an emphasis on improving coverage for
hand-held phones in heavily-trafficked areas. Such development is done for
the purpose of increasing capacity and improving coverage in response to
projected subscriber demand and in response to competitive factors.
Projected subscriber demand is calculated for each cellular service area on
a cell-by-cell basis. These projections involve a traffic analysis of usage
by existing subscribers, coverage quality analysis and an estimate of the
number of additional subscribers in each such area. In calculating
projected subscriber demand, the Company builds into its design assumptions
a maximum call "blockage" rate of 2% (percentage of calls that are not
connected on first attempt at peak usage time during the day). After
calculating projected subscriber demand, the Company determines the most
cost-efficient manner of meeting such projected demand. The Company has
historically met such demand through a combination of augmenting channel
capacity in existing cell sites and building new cell sites.
Cell site expansion is expected to enable the Company to continue to add
subscribers, enhance use of the systems by existing subscribers, increase
roamer traffic due to the larger geographic area covered by the cellular
network and further enhance the overall efficiency of the network.
10
<PAGE>
Cellular Operations
General
The Company has concentrated its recent efforts on creating an integrated
network of cellular systems in its operating clusters. The Company operates four
clusters of cellular systems as well as certain other markets and minority
interests. As of December 31, 1996, PriCellular had over 150,000 subscribers, or
3.8% penetration. Through the participation of its non-wireline Systems in NACN
(as described below) and other special networking arrangements between the
Company and other non-wireline operators of cellular systems in the United
States, management believes the Company's subscribers are able to receive
quality coverage throughout the United States.
Management believes that the majority of its Systems are in the early stages of
their growth cycle and afford significant opportunities for improvements in
performance, particularly with respect to rates of penetration and churn. There
can be no assurances, however, that the Company will be able to maintain such
improvements or achieve similar improvements with respect to its other Systems.
Management believes that, prior to the Company's assumption of ownership, many
of these Systems had been significantly undermanaged or underdeveloped. Some of
the Systems had minimal signal coverage, had never been actively marketed and
had never developed a subscriber base. Certain other markets had adequate signal
coverage but the sales and marketing activity had largely been dormant. The
following table sets forth certain information with respect to the performance
of the Company's Systems owned as of the dates indicated.
<TABLE>
<CAPTION>
Years ended December 31
1996 1995 1994 1993
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Ending subscribers (1) 150,328 78,227 17,344 9,886
Ending penetration (2) 3.8% 2.2% .95% .53%
Ending Pops (in millions) 3.9 3.6 1.8 1.8
Churn (3) 1.6% 2.0% 2.7% 3.2%
Average monthly revenue per subscriber (4) $ 82 $ 107 $ 123 $ 156
Average marketing cost per net subscriber
addition (5) $ 371 $ 403 $ 497 $ 496
</TABLE>
- ----------
(1) Each billable telephone number in service represents one subscriber, not
including test, demonstration or other telephone numbers for which payment
is not expected.
(2) Represents the ratio of ending subscribers to the estimated total
population of majority owned Systems and the Southwestern Bell Joint
Venture.
(3) Represents the average monthly churn for the periods presented. Churn
equals the ratio of disconnected monthly subscribers to average monthly
subscribers.
(4) Represents the ratio of total service revenues to average monthly
subscribers.
(5) Determined by dividing the amount of marketing costs by the net subscribers
added. Marketing cost represents all selling expenses and losses incurred
on equipment sales.
11
<PAGE>
Subscribers and System Usage
The Company's cellular subscribers have increased to approximately 150,000 as of
December 31, 1996 from approximately 78,000 as of December 31, 1995 and
approximately 17,000 as of December 31, 1994. The Company's subscribers fall
into 12 major categories: construction, professional/management, medical, sales,
real estate, agriculture, service industry, transportation, financial,
government, manufacturing and other, which includes low usage subscribers.
Reductions in the cost of cellular services have led to an increase in cellular
telephone usage by general consumers for nonbusiness purposes. In addition, the
Company believes that several categories of its subscribers will develop
requirements for specialized cellular applications, such as wireless data
technology. As a result, the Company believes that there is an opportunity for
significant growth in each of its existing service areas. The Company will
continue to seek to broaden its subscriber base for basic cellular services as
well as to increase its offering of customized services. The sale of custom
calling features typically results in increased usage of cellular telephones by
subscribers, thereby further enhancing revenues.
Marketing
The Company markets all of its cellular products and services under the name
CELLULARONE(R), one of the most recognized brand names in the cellular industry.
See "-Service Marks." The national advertising campaign conducted by the
Cellular One Group enhances the Company's advertising exposure at a fraction of
the cost of what could be achieved by the Company alone. The Company also
obtains substantial marketing benefits from the name recognition associated with
this widely used service mark, both with existing subscribers traveling outside
the Company's service areas and with potential new subscribers moving into the
Company's service areas. In addition, travelers who subscribe to CELLULARONE(R),
service in other markets may be more likely to use the Company's service when
they travel in the Company's service areas, primarily due to the technical
operation of the cellular telephone. Cellular telephones of non-wireline
subscribers are programmed to select the non-wireline carrier (such as the
Company) when roaming, unless the non-wireline carrier in the roaming area is
not yet operational or the subscriber either dials a special code or has a
cellular telephone equipped with an "A/B" (non-wireline/wireline) switch and
selects the wireline carrier.
Through its membership in NACN and other special networking arrangements, the
Company provides extended regional and national service to subscribers in its
markets, thereby allowing them to make and receive calls while in other cellular
service areas without dialing special access codes. This service distinguishes
the Company's service and call delivery features from those of some of its
competitors. NACN is the largest wireless telephone network system in the world,
linking non-wireline cellular operators throughout the United States and Canada.
NACN connects key areas across North America so that customers can use their
cellular phones to place and receive calls in these areas as easily as they do
in their home areas. Through NACN, customers receive calls automatically without
the use of complicated roaming codes as they "roam" in more than 4,500 cities,
or approximately 90% of the cities in the United States and Canada. By dialing
subscribers' cellular telephone numbers, the caller can reach subscribers
without knowing their location or having to dial additional roaming access
numbers. In addition, special services such as call forwarding and call waiting
automatically follow the subscribers as they travel.
The Company's marketing strategy is designed to generate continued net
subscriber growth by focusing on subscribers who are likely to generate higher
than average monthly revenues and lower than average churn rates, while
simultaneously maintaining a low cost of adding net subscribers. The Company
principally uses in-house sales and marketing staff and its own retail outlets.
12
<PAGE>
Management has implemented its marketing strategy by training and compensating
its sales force in a manner designed to stress the importance of customer
service, high penetration levels and minimum acquisition costs per subscriber.
The Company believes that its internal sales force is better able to select and
screen new subscribers and select pricing plans that realistically match
subscriber means and needs than are independent agents. In addition, the Company
motivates its direct sales force to sell appropriate rate plans to subscribers,
thereby reducing churn, by linking payment of commissions to subscriber
retention. As a result, the Company's use of an internal sales force keeps
marketing costs low both directly because commissions are lower and indirectly
because subscriber retention is higher than when independent agents are used.
The Company believes that it helps minimize its churn rate through an after-sale
telemarketing program implemented through its sales force and customer service
personnel. This program not only enhances customer loyalty, which reduces churn,
but also increases add-on sales and customer referrals. The telemarketing
program allows the sales staff to check customer satisfaction as well as to
offer additional calling features, such as voicemail, call waiting and call
forwarding.
The Company's sales force works principally out of its own retail stores in
which the Company offers a full line of cellular products and services. As of
December 31, 1996, the Company maintained approximately 75 retail locations.
Ranging from 250 square feet to 4,000 square feet, each store is fully equipped
to handle customer service and telephone maintenance and installation. Some of
these stores are also authorized warranty repair centers. The Company's stores
provide subscriber-friendly retail environments (extended hours, large
selection, an expert sales staff and convenient locations) which make the sales
process quick and easy for the subscriber.
Products and Services
In addition to providing high-quality cellular telephone service in each of its
markets, the Company also offers various custom-calling features such as
voicemail, call forwarding, call waiting, three-way conference calling and no
answer transfer. In 1997, the Company intends to provide caller I.D., short
messaging services and sleep mode for longer battery life in some of its
markets. The Company also sells cellular equipment at discount prices as a way
to encourage use of its mobile services. The Company continually reviews its
equipment and service pricing in order to maintain its competitive position.
Several rate plans are presented to prospective customers so that they may
choose the plan that will best fit their expected calling needs. Unlike some of
its competitors, the Company designs rate plans on a market-by-market basis. The
Company's local general managers generally have the authority to modify existing
rate plans and initiate new rate plans depending upon market and competitive
conditions. Generally, these rate plans include a high-volume user plan, a
medium-volume user plan, a basic plan and an economy plan. Most rate plans
combine a fixed monthly access fee, per-minute usage charges and additional
charges for custom-calling features in a package which offers value to the
customer while enhancing airtime use and revenues for the Company. In general,
rate plans which include a higher monthly access fee typically include a lower
usage rate per minute. An ongoing review of equipment and servicing pricing is
maintained to ensure the Company's competitiveness. As appropriate, revisions to
pricing of service plans and equipment are made to meet the demands of the local
marketplace.
Reciprocal agreements between each of the Company's cellular systems and the
cellular systems of other operators allow their respective subscribers to place
calls in most cellular service areas throughout the country. Roamers are charged
usage fees which are generally higher than a given cellular system's regular
usage fees,
13
<PAGE>
thereby resulting in a higher profit margin on roaming revenue. Roaming revenue
is a substantial source of incremental revenue for the Company due in part to
the fact that a number of the Company's systems are located along major travel
corridors and because certain of the Company's Systems are in the early stages
of their growth cycle.
Customer Service
Customer service is an essential element of the Company's marketing and
operating philosophy. The Company is committed to attracting new subscribers and
retaining existing subscribers by providing consistently high-quality customer
service. In each of its cellular service areas, the Company maintains a local
staff, including a market manager, customer service representatives, technical
and engineering staff, sales representatives and installation and repair
facilities. Each cellular service area handles its own customer-related
functions such as credit evaluation, customer activations, account adjustments
and rate plan changes. Local offices and installation and repair facilities
enable the Company to service customers better, schedule installations and make
repairs. Through the use of sophisticated monitoring equipment, technicians at
the customer service center are able to monitor the technical performance of its
cellular service areas.
In addition, the Company's customers generally are able to report cellular
telephone service or account problems 24-hours a day to a local office
representative. Management believes its decentralized philosophy and emphasis on
customer service in each of its markets affords it a competitive advantage over
its large competitors who typically centralize customer service outside of the
local market.
System Development and Expansion
The Company develops or builds out its cellular service areas by adding channels
to existing cell sites and by building new cell sites with an emphasis on
improving coverage for hand-held phones in heavily-trafficked areas. Such
development is designed to increase capacity and to improve coverage in response
to projected subscriber demand and in response to competitive factors. Projected
subscriber demand is calculated for each cellular service area on a cell-by-cell
basis. These projections involve a traffic analysis of usage by existing
subscribers and an estimation of the number of additional subscribers in each
such area. In calculating projected subscriber demand, the Company builds into
its design assumptions a maximum call "blockage" rate of 2% (percentage of calls
that are not connected on first attempt at peak usage time during the day).
After calculating projected subscriber demand, the Company has historically met
such demand through a combination of augmenting channel capacity in existing
cell sites and building new cell sites.
Cell site expansion is expected to enable the Company to continue to add
subscribers, enhance use of the Systems by existing subscribers, increase roamer
traffic due to the larger geographic area covered by the cellular network and
further enhance the overall efficiency of the network. The Company believes that
the increased cellular coverage will have a positive impact on market
penetration and subscriber usage.
The Company also continues to evaluate expansion through acquisitions of other
cellular properties that will further enhance its network. In evaluating
acquisition targets, the Company considers, among other things, demographic
factors, including population size and density, traffic patterns, cell site
coverage and required capital expenditures.
14
<PAGE>
Competitors and Adjoining Systems
The Company competes with various competitors in each of its clusters.
Management believes that its integrated network of contiguous cellular systems
operating as CELLULARONE(R) affords it significant advantages over many of its
cellular competitors. In the Upper Midwest Cluster, the Company competes against
six distinct operators, in the Mid-Atlantic Cluster, the Company competes
against four distinct operators, and in the Kentucky Cluster, the Company
expects to compete against three distinct operators.
The following chart lists the Company's cellular competitors in each of its main
clusters and the major adjoining operators.
<TABLE>
<CAPTION>
Company Cluster Competitors Adjoining Systems
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Upper Midwest Cluster US West Cellular AT&T Wireless
United States Cellular Corp. BellSouth
CelluLink Western Wireless
Cellular 2000
CellCom
Century Telephone Enterprises
Mid-Atlantic Cluster United States Cellular Corp. AT&T Wireless
360 Communications Airtouch Communications, Inc.
Ameritech
Bell Atlantic NYNEX Vanguard
New York Cluster Bell Atlantic NYNEX Bell Atlantic NYNEX
AT&T Wireless
Southwestern Bell
Vanguard
Kentucky Cluster BellSouth Mobility GTE Corp.
Ramcell, Inc. United States Cellular Corp.
Bluegrass Cellular
</TABLE>
Telecommunications Act of 1996; Other Regulatory Developments
The Telecommunications Act of 1996 ("Telecom Act") is the first legislation
enacted in over sixty years that attempts comprehensive reform of
telecommunications regulation, although the legislation did not have as a
principal focus the cellular industry. In general, the Telecom Act's goal is to
remove the statutory, regulatory and court-ordered barriers that historically
prohibited new entrants into many segments of the telecommunications industry.
To facilitate the entry of competitors, the Telecom Act imposes certain
interconnection and equal access requirements on local exchange carriers. The
FCC adopted rules on telephone number portability pursuant to which subscribers
will be able to migrate their landline telephone numbers to a cellular carrier
or other Commercial Mobile Radio Service ("CMRS") or landline carrier, or from a
cellular carrier to another CMRS carrier or a landline carrier.
In August 1996, the FCC released its decision implementing the interconnection
portions of the Telecom Act. In September 1996, the FCC issued a reconsideration
of certain aspects of that decision. The FCC's decision is complex and has been
the subject of a number of petitions for additional reconsideration and judicial
review. In September 1996, the United States Court of Appeals for the Eighth
Judicial Circuit temporarily stayed the
15
<PAGE>
effectiveness of the major portions of FCC's interconnection decision. The
Company cannot predict the eventual outcome of the interconnection proceeding
and judicial review or the effects of the eventual implementation of the
interconnection provisions or other aspects of the Telecom Act.
The FCC's interconnection decision concluded that CMRS providers are entitled to
reciprocal compensation arrangements with incumbent local exchange carriers and
prohibited a local exchange carrier from charging CMRS providers for terminating
traffic initiated on the local exchange carrier's network. While the FCC noted
the potential for asserting jurisdiction over certain aspects of CMRS
interconnection with landline local exchange carriers, it has so far determined
to defer primarily to the states in implementing interconnection policies
pursuant to general guidelines established by the FCC. Under these guidelines,
states must set arbitrated rates for interconnection and access to unbundled
elements based upon local exchange carriers' long-run incremental costs, plus a
reasonable share of forward-looking joint and common costs. In lieu of such
cost-based rates, the FCC also established for use by states a benchmark range
of 0.2 per minute for end office termination pending further cost-based studies,
and subject to a possible "true-up" payment later.
In its interconnection decision, the FCC declined to require cellular carriers
to comply with certain interconnection provisions of the Telecommunications Act
of 1996 applicable to local exchange carriers. Prior to passage of the Telecom
Act, the FCC had proposed to require CMRS providers to interconnect directly
with other mobile service providers but tentatively concluded that it would be
premature to adopt such a requirement. Since then, the FCC has stated that it
would revisit this issue in the future.
The Telecom Act requires all carriers providing interstate services to
contribute to a federal universal service support mechanism to be established by
the FCC. The Company cannot predict the outcome of the FCC's proceeding which
may require cellular carriers to pay charges to support universal service.
The FCC has eliminated its PCS-cellular cross ownership rule, but retained a
spectrum cap on aggregation of CMRS spectrum. A cellular licensee and its
affiliates may not hold an attributable interest in more than 45 MHz of licensed
cellular, broadband PCS and Specialized Mobile Radio ("SMR") spectrum in a
particular geographic area.
The FCC has revised its rules pertaining to cellular licensees' obligations to
allow resale of cellular service. The FCC requires a cellular carrier (and
certain other wireless carriers) to permit unrestricted resale of its service
(including to other FCC-licensed wireless carriers). This rule contains a sunset
provision which provides that the rule will lapse five years following the FCC's
grant of the last group of initial broadband PCS licenses.
Pursuant to an earlier amendment to the Communications Act of 1934, as amended,
Congress preempted state or local regulation of the entry of, or rates charged
by, any CMRS or private mobile service carrier. However, states were allowed to
petition the FCC for authority to continue their authority to regulate rates and
entry by August 10, 1994. Eight states filed petitions for authority to continue
such regulation and the FCC denied all of them. States may also petition to
engage in new rate and entry regulation of CMRS carriers, but to date no state
has filed such a petition.
Service Marks
CELLULARONE(R) is a registered service mark with the U.S. Patent and Trademark
Office. The service mark is owned by Cellular One Group, a Delaware general
partnership of Cellular One Marketing, Inc., a subsidiary of Southwestern Bell
Mobile Systems, Inc., together with Cellular One Development, Inc., a subsidiary
of McCaw/AT&T Wireless and Vanguard Cellular Systems, Inc. The Company uses the
CELLULARONE(R) service
16
<PAGE>
mark to identify and promote its cellular telephone service pursuant to
licensing agreements with Cellular One Group (the "Licensor"). Licensing and
advertising fees are determined based upon the population of the licensed areas.
The licensing agreements require the Company to provide high-quality cellular
telephone service to its customers and to maintain a certain minimum overall
customer satisfaction rating in surveys commissioned by the Licensor. The
licensing agreements which the Company has entered into are for original
five-year terms expiring on various dates. These agreements may be renewed at
the Company's option for three additional five-year terms.
Employees and Agents
Currently, the Company has approximately 600 employees. In addition, the Company
has agreements with numerous independent sales agents, including car
dealerships, electronics stores, paging services companies and independent
contractors. None of the Company's employees are represented by a labor
organization, and the Company's management considers its employee relations to
be good.
Overview of Cellular Telephone Industry
The cellular telephone industry is a regulated duopoly. The FCC has designated
734 distinct markets in the country, 306 MSAs and 428 RSAs. Since it became
operational in 1983, the cellular telephone industry has experienced significant
growth. For the year ended December 31, 1995, the cellular industry reported
total revenues of $19.1 billion, versus $14.0 and $10.9 billion for the same
periods in 1994 and 1993, respectively. The industry, for the same periods,
expanded its subscriber base by 40.0% to 33.8 million users from 24 million
users in 1994 and 19 million in 1993. According to industry reports, the
national average penetration rate of cellular telephones was approximately 12.6%
at December 31, 1995, up significantly from 9.2% in 1994 and 6.2% at year-end in
1993. Paul Kagan Associates, Inc. predicts continued rapid growth for the
cellular industry and forecasts that the penetration rate of cellular telephones
will be 33.3% of U.S. Pops at year-end 2006.
The following table sets forth information published by the Cellular
Telecommunication Industry Association ("CTIA") with respect to the number of
subscribers served by cellular telephone systems in the United States and the
combined penetration rate of such wireline and non-wireline systems as of the
dates indicated:
<TABLE>
<CAPTION>
As of December 31
1995 1994 1993 1992 1991
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Subscribers (in thousands) 33,786 24,134 16,009 11,033 7,557
Ending penetration (1) 12.59% 9.22% 6.21% 4.23% 3.00%
</TABLE>
(1) Determined by dividing the aggregate number of subscribers by estimated
population. Rates reflect combined penetration of both wireline and
non-wireline cellular operators.
Cellular telephone technology is based upon the division of a given market area
into a number of smaller geographic areas or "cells." Each cell has "base
stations" or "cell sites," which are physical locations equipped with
transmitter receivers and other equipment that communicate by radio signal with
cellular telephones located within range of the cell. Cells generally have an
operating range from two to 25 miles. Each cell site is connected to a mobile
telephone switching office ("MTSO") which, in turn, is connected to the local
landline telephone network. As cellular telephone systems are fully
interconnected with the landline telephone network and long-
17
<PAGE>
distance networks, subscribers can receive and originate both local and
long-distance calls from their cellular telephones on a worldwide basis.
When a cellular subscriber in a particular cell dials a number, the cellular
telephone sends the call by radio signal to the cell's transmitter-receiver,
which then sends it to the MTSO. The MTSO then completes the call by connecting
it with the landline telephone network or another cellular telephone unit.
Incoming calls are received by the MTSO, which instructs the appropriate cell to
complete the communications link by radio signal between the cell's
transmitter-receiver and the cellular telephone. Each conversation on a cellular
system occurs on a pair of radio talking paths, thus providing full duplex
telephone service. The relatively short-range transmissions between cell sites
and cellular telephones permit the two distinguishing features of cellular
telephone systems: frequency re-use, enabling the simultaneous use of the same
frequency in two or more adequately separated cells, and call hand-off,
occurring when the MTSO routes a mobile user to an adjacent cell that can
provide a higher quality signal and without interrupting an ongoing call.
Frequency re-use allows for the efficient use of the radio frequencies allocated
to each cellular operator. Each cell in a cellular telephone system is assigned
a specific set of frequencies for use between that cell's base station and
cellular telephones within the operations range of the cell, so that the radio
frequencies being used in one cell do not interfere with those being used in
adjacent cells. Due to the relatively low transmission power of the base
stations and cellular telephones, two or more cells which are sufficiently far
apart can use the same frequencies within the same market without interfering
with one another.
A cellular telephone system's capacity can be increased in various ways. Within
certain limitations, increasing demand may be met by simply adding available
frequency capacity to cells as required, or by using directional antennae to
divide a cell into discrete multiple sectors or coverage areas, thereby reducing
the required distance between cells using the same frequency. Furthermore, areas
within a system may be served by more than one cell through procedures which
utilize available channels in adjacent cells. When all possible channels are in
use, further growth can be accomplished through a process called "cell
splitting". Cell splitting entails dividing a single cell into a number of
smaller cells served by lower-power transmitters, thereby increasing the re-use
factor and the number of calls that can be handled in a given area. Although the
Company has generally not experienced any material capacity constraints in its
systems, the Company plans to implement a program of cell splitting to meet
projected capacity demands for the next several years.
Call hand-off in a cellular telephone system is automatic and virtually
unnoticeable to the user. The MTSO and base stations continuously monitor the
signal strength of the call in progress. The signal strength of the transmission
between the cellular telephone and the base station declines as the caller moves
away from the base station in that cell. When the signal strength of a call
declines to a predetermined threshold level, the MTSO automatically determines
if the signal strength is greater in an adjacent cell and, if so, hands off the
call to that cell. If the cellular telephone leaves the service areas of the
cellular telephone system, the call can often be handed off to an adjacent
system through intersystem networking arrangements. The Company currently has
several such networking arrangements and will continue to work towards
establishing intersystem networking with all adjacent Systems.
Digital Cellular Technology
Over the next few years, it is expected that many cellular systems will convert
from analog to digital technology. This conversion is due in part to capacity
constraints in many of the largest cellular markets, such as New York, Los
Angeles and Chicago. As carriers reach limited capacity levels, certain calls
may be unable to be completed,
18
<PAGE>
especially during peak hours. Digital technology
increases system capacity and offers other advantages, including improved
overall average signal quality, improved call security, potentially lower
incremental costs for additional subscribers and the ability to provide data
transmission services. The conversion from analog to digital technology is
expected to be an industry-wide process that will take a number of years to
complete. The exact timing and overall costs of such conversion are not yet
known. Management does not believe that its network will experience capacity
constraints in the foreseeable future that would require converting its network
from analog to digital technology. The Company intends to convert some of its
Systems from analog to digital beginning in 1997 in order to offer the advanced
services referred to above and to provide certain features for its subscribers
such as Caller ID, message waiting indicators, paging and longer battery life.
Competition; New Technology
The Company currently competes with one other cellular licensee in each of its
cellular markets, many of which are larger and have greater financial resources
than the Company, as well as paging companies and landline telephone service
providers. Current policies of the FCC authorize only two licensees to operate
cellular systems in each market, and the Company expects there will continue to
be competition from the other licensee authorized to serve each cellular market
in which the Company operates. Competition for subscribers between cellular
licensees is based principally upon the services and enhancements offered, the
technical quality of the cellular system, customer service, system coverage and
capacity and price .
The FCC requires all cellular system operators to provide service to
"resellers." A reseller provides cellular service to customers but does not hold
an FCC cellular license or own cellular facilities. Instead, the reseller buys
blocks of cellular telephone numbers from a licensed carrier and resells service
through its own distribution network to the public. Thus, a reseller may be both
a customer of a cellular licensee's services and, also, a competitor of that
licensee. The Company does not know of any significant resellers currently
operating in competition with the Company's Systems.
Cellular telephones have become the technology of choice for mobile
communications in those markets in which cellular systems have become
operational. Older mobile radio systems had a capacity limitation that only
permitted a small number of subscribers per market, and they were unable to
offer continuous call processing between service areas. The use of a single,
high power system transmitter covering a typical radius of 45 miles in
conjunction with high power mobile transceivers resulted in poor sound quality
and bulkier, more expensive mobile telephone units. Potential users of cellular
systems may, however, find their communications needs satisfied by other current
and developing technologies, particularly in the broadband personal
communications services described below. There are potentially six broadband
Personal Communication Services ("PCS") providers in each PCS service area.
Licensing areas for broadband PCS have been divided into 51 Major Trading Areas
("MTAs") and 493 smaller Basic Trading Areas ("BTAs") based on the geographic
divisions in the 1992 Rand McNally Commercial Atlas & Marketing Guide. Three
licensees will hold 30 MHz of PCS spectrum, one of which will be licensed for a
BTA, and the remaining three licensees will hold 10 MHz of PCS spectrum. It is
anticipated that the 10 MHz licensees will provide niche services or will be
purchased by existing cellular operators for added spectrum while the 30 MHz
licensees will offer a broad range of voice, data and related communications
services. One-way paging or beeper services that feature voice message and data
display as well as tones may be adequate for potential subscribers who do not
need to speak to the caller. In the future, cellular service may also compete
more directly with traditional landline telephone service providers.
19
<PAGE>
Continuing technological advances in telecommunications make it impossible to
predict the extent of future competition. A consortium of telecommunications
providers known as American Mobile Satellite Corporation has been licensed by
the FCC to provide mobile satellite service. In addition, the FCC has issued
licenses for low-orbit satellite systems that would provide voice and data
mobile communications to subscribers throughout the world. These include
Motorola's proposed "Iridium" system, Loral/Qualcomm's proposed "Globalstar"
system and TRW's proposed "Odyssey" system. Other proposals for additional
mobile satellite service and spectrum are pending before the FCC. The FCC is
developing rules for these services, and international and foreign regulatory
authorities must also approve aspects of some mobile satellite systems and
services. The International Maritime Satellite Organization ("Inmarsat") has
been planning for several years an "Inmarsat-P" international global satellite
telephone and data service that is expected to commence service in 1999 or 2000.
Mobile satellite systems could augment or replace communications within land
based cellular systems. Similar technological advances may make available
alternatives to cellular service, creating additional sources of competition.
The FCC has adopted rules for the licensing of both "narrowband" and "broadband"
PCS services. Narrowband PCS services typically are advanced paging and
messaging services. Broadband PCS services will consist of wireless two-way
telecommunications services for voice, data and other transmissions employing
digital micro-cellular technology. Many broadband PCS services are expected to
compete with existing cellular telephone systems. Narrowband PCS will operate in
the 900 MHz frequency band and broadband PCS will operate in the 1850 to 1990
MHz band. On July 29, 1994, the FCC completed a spectrum auction of nationwide
licenses for narrowband PCS services. The first auction of 30 regional
narrowband PCS licenses ended on November 8, 1994. On June 13, 1994, the FCC
released amended rules establishing a licensing framework for broadband PCS. The
first auction of broadband PCS licenses ended on March 13, 1995 and included 102
MTA-wide licenses which were granted by the FCC to the auction winners on June
23, 1995. The FCC plans to auction 1,972 additional broadband PCS licenses, 986
of which are in the "Entrepreneurs' Blocks." Eligibility to bid for
"Entrepreneurs' Blocks" is limited to certain entities controlled by small
businesses and rural telephone companies. The first "Entrepreneurs' Block"
auction which began on December 18, 1995 and ended on May 6, 1996 included 493
BTA licenses (one 30 MHz license in each of the 493 BTAs). No entity may have an
attributable ownership interest in more than 98 Entrepreneurs' Block licenses.
On January 14, 1997, the FCC completed the auctions for the D, E and F Licenses
for each of 493 BTA's. As there were three licenses available for each BTA this
auction offered a total of 1,479 licenses. The F licenses were available to only
those auction participants who qualified to bid on the "Entrepreneurs' Block."
The FCC will allocate a total of 2,074 broadband licenses by auction, according
to rules that, among other things, limit a cellular licensee until the year 2000
to a two 10 MHz PCS licenses in areas in which it also provides cellular
services to 10 percent or more of the population. Thus, given the 25 MHz of
spectrum afforded cellular carriers under the cellular rules, cellular carriers
are subject to a 45 MHz spectrum cap for their combined PCS and cellular
spectrum in areas where they offer both services. After January 1, 2000,
cellular licensees will be permitted to acquire an additional five MHz for a
total of 15 MHz of PCS spectrum in their cellular service areas.
In addition, the FCC allocated 30 MHz to unlicensed PCS, which will consist of
terminal devices, such as telephones, without centralized base stations. The
devices will likely consist of new cordless telephones, local area networks in
offices and other kinds of short range communications. Unlicensed PCS operations
are restricted to very low power.
20
<PAGE>
SMR and other land mobile radio systems, such as those historically used by
taxicabs, tow truck services, and other communications services that have the
technical capability to handle mobile telephone calls (including interconnection
to the landline telephone network), may provide competition to cellular-services
in certain markets. Beginning in February 1991, the FCC granted waivers of
certain of its SMR rules to permit several large operators of SMR systems to
construct and operate Enhanced Specialized Mobile Radio ("ESMR") systems in
specified major metropolitan areas. The FCC may grant similar waivers to other
SMR service providers in other areas. These waivers allow SMR operators to use
digital technology to provide a wide-area mobile communications service in those
metropolitan areas and will substantially increase the number of customers that
can be served. The ESMR system incorporates characteristics of cellular
technology, including multiple low power transmitters and interconnection with
the landline telephone network. ESMR service may compete with cellular service
by providing higher-quality digital communication technology, lower rates,
enhanced privacy and additional features such as electronic mail and built-in
paging. ESMR handsets are likely to be more expensive than cellular telephones
and there may be other differences between cellular and ESMR services. In August
1994, the FCC decided to license SMR systems operating in the 800 and 900 MHz
bands for wide-area use based upon MTAs. The FCC began auctioning 900 MHz SMR
licenses on December 5, 1995. On December 15, 1995, the FCC adopted new rules
for the 800 MHz SMR service. The new rules are designed to promote wide area SMR
systems that will likely make SMR more competitive with other wireless services,
including cellular. The FCC will auction the upper 200 channels of the SMR bank
(861-866 MHz) on an economic area basis. Licenses of 120, 60 and 20 contiguous
channels will be awarded. The wide-area may increase the ability of SMR
operators to compete with cellular operators. These rules may be subject to
reconsideration by the FCC and court review.
The FCC has adopted rules that authorize the award of a "pioneer's preference"
to companies that develop new spectrum based communications technologies.
Pioneer's preferences have been awarded in the context of PCS and other
technologies. Such preferences may encourage the development of new technologies
that would compete with cellular service. Any such new technology could provide
substantial competition for cellular operators in the future. Under the FCC's
rules, companies awarded a pioneer's preference for broadband PCS will be
required to pay only 85 percent of average per population price of the bids paid
by other companies for similar licenses. The preferences awarded for broadband
PCS did not involve any of the Company's markets other than the NY-5 RSA, which
is within the New York City PCS market. The FCC's pioneer's preference rules
were modified in June and December 1995. The FCC also in June 1995 affirmed its
selection of three broadband PCS pioneer preference recipients. Both actions are
subject to judicial review. In addition, a 1993 federal law requires the
reallocation to commercial use of at least 200 MHz of spectrum currently
reserved for government use. In February 1994, the Department of Commerce issued
a report identifying spectrums for reallocation and, in August 1994, the FCC
issued a report commenting on the proposed reallocation. In October 1994, the
FCC proposed to convert the reallocated spectrum to commercial use. In February
1995, the FCC allocated 10 MHz for use by unlicensed asynchronous (data) PCS
devices, 15 MHz for Part 15 equipment and devices and 25 MHz for unspecified
fixed and mobile services, collectively known as the General Wireless
Communications Service ("GWCS"). In August 1995, the FCC further defined the
GWCS as any fixed or mobile service except broadcasting, radio location, and
satellite services and established rules for licensing GWCS spectrum. Among the
services the FCC anticipates in the GWCS are: voice, video and data
transmission, private microwave, broadcast auxiliary, and ground-to-air voice
and video.
As a result of the above, the Company's cellular operations may face increased
competition from entities providing other communication technologies and
services. The Company cannot predict the success of such competing technologies
nor their operational abilities. While some of these technologies and services
are currently operational on a limited basis, others are being developed or may
be developed in the future. The
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<PAGE>
Company's cellular operations may face additional competition from new market
entrants such as PCS to the extent they become feasible. PCS operators could
compete directly with the Company and may have access to substantial capital
resources although in most instances such resources are limited at this time. If
these technologies are successfully developed, and PCS operators claim they may,
provide services and features in addition to those currently provided by
cellular companies. There can be no assurance that the Company will be able to
provide nor that it will choose to pursue, depending on the economics thereof,
such services and features. The Company believes that traditional tested
cellular is economically proven unlike certain of the PCS and other "Buck
Rogers" technologies. While the Company believes that other technologies may be
developed over either the short or long term, the Company believes that POCS
(plain old cellular service) is tested and that the development thereof and the
expansion of the Company's clusters is the best strategy for the Company.
The Company's cellular operations may also face competition from other "Buck
Rogers" technologies which may be developed in the future, including, but not
limited to, mobile satellite systems. In addition, the FCC has licensed SMR
system operators to construct digital mobile communications systems on existing
SMR frequencies, referred to as ESMR in many cities throughout the United
States, including each of the cities in which the Company operates. The Company
believes that the technology, financing and engineering of these other
technologies is not as advanced as their publicity would suggest. Nonetheless,
there can be no assurance that one or more of the technologies currently used by
the Company, will not become obsolete sometime in the future.
Regulations
Regulation and Licensing of Cellular Telephone Systems
The FCC regulates the construction, operation and acquisition of cellular
systems in the United States pursuant to the Communications Act. FCC regulations
specify that two cellular radio licenses are available for any given area within
each of the 734 FCC designated markets in the United States (306 Metropolitan
Statistical Area and 428 Rural Service Areas). Frequency block "B" was initially
awarded to incumbent landline local exchange carriers (the "Wireline" license)
and frequency block "A" was initially awarded to nonincumbents (the
"Non-Wireline" license). Apart from the different frequency blocks, there is no
technical difference between Wireline and Non-Wireline cellular systems and the
operational requirements imposed on Wireline and Non-Wireline licensees are the
same. The regulatory distinction between Wireline and Non-Wireline systems only
concerns an applicant's eligibility to apply for an initial authorization. After
initial authorization, a Non-Wireline company may purchase interests in a
Wireline system, subject to restrictions on common ownership of Wireline and
Non-Wireline systems in the same market and to any necessary prior approval of
the FCC. Likewise, a company affiliated with a landline telephone service
provider may purchase an interest in a Non-Wireline system, subject to the same
restrictions on common ownership and prior FCC approval where necessary.
FCC licensing of all MSA markets and the FCC's initial lotteries of all of the
RSA markets have been completed. Additional lotteries will continue to be held
for RSA markets in which the initially selected applicant has been disqualified.
The FCC has permitted partial settlement agreements by competing wireline RSA
applicants, but has prohibited such agreements with regard to non-wireline RSA
applicants.
For Systems below the top 90 MSA markets (including all RSA markets), the
issuance of a construction permit initiates an 18-month period during which the
permittee must construct at least one cell and begin providing service via those
facilities. A permittee that does not complete initial construction within 18
months is subject to
22
<PAGE>
having its permit canceled. A small number of RSA permittees have already
forfeited their permits on this ground. In August 1994 (effective January 1,
1995), the FCC adopted a single uniform application for all terrestrial mobile
service providers and also adopted a uniform construction requirement for all
commercial mobile service providers.
Following notice of completion of construction, a cellular operator obtains
Initial Operating Authority. Cellular authorizations are issued generally for a
10-year term beginning on the date of the grant of the Initial Operating
Authority and are renewable upon application to the FCC for periods of up to 10
years. The FCC may revoke a license prior to the end of its term in
extraordinary circumstances (such as when serious violations of FCC rules have
occurred).
Under FCC rules, the authorized service area of a cellular provider in each of
its markets is referred to as the "Cellular Geographic Service Area" ("CGSA").
The CGSA may be coincident with, or smaller than, the related FCC-designated MSA
or RSA. A cellular licensee has the exclusive right to expand its CGSA
boundaries within the licensee's MSA or RSA for a period of five years after
grant of the licensee's construction permit. At the end of the five-year period,
however, any entity may apply to serve portions of the MSA or RSA outside the
licensee's CGSA. The five-year exclusivity period has expired for some licensees
and parties have filed "unserved area" applications. The FCC has granted a
number of unserved area applications for areas within both MSA and RSA markets,
some filed by incumbent operators and others filed by new entrants.
Near the conclusion of the license term (the years 1997 to 2001, in the case of
the Company's current licenses), licensees must file applications for renewal of
licenses to obtain authority to operate for up to an additional 10-year term.
Applications for license renewal may be denied if the FCC determines that the
grant of an application would not serve the public interest. In addition, at
license renewal time, other parties may file competing applications for the
authorization. In the event that qualified competitors file applications for a
licensee's market, the FCC may be required to hold a hearing to determine
whether the incumbent or the competitor will receive the license. In 1993, the
FCC adopted specific standards to apply to cellular renewals, concluding that it
will award a renewal expectancy to a cellular licensee that meets certain
standards of past performance. If the existing licensee receives a renewal
expectancy, it is very likely that the existing licensee's cellular license will
be renewed without a full comparative hearing. To receive a renewal expectancy,
a licensee must show that it (i) has provided "substantial" service during its
past license term; and (ii) has substantially complied with applicable FCC rules
and policies and the Communications Act. "Substantial" service is defined as
service which is sound, favorable and substantially above a level of mediocre
service that might only minimally warrant renewal.
Cellular radio service providers also must satisfy a variety of FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent cellular users,
permittees and licensees in order to avoid interference between adjacent
Systems. In addition, the height and power of base station transmitting
facilities and the type of signals they emit must fall within specified
parameters. The FCC also regulates cellular service resale practices and the
terms under which certain ancillary services may be provided through cellular
facilities. Cellular systems are subject to certain Federal Aviation
Administration regulations respecting the location, lighting and construction of
cellular transmitter towers and antennae and may be subject to regulation under
the National Environmental Policy Act and the environmental regulations of the
FCC. State or local zoning and land use regulations may also apply. The Company
uses common carrier point to point microwave facilities to connect cell sites
and to link them to the main switching office. These facilities are separately
licensed by the FCC and are subject to regulation as to technical parameters and
service.
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<PAGE>
In July 1994, the FCC issued a notice proposing to require that all cellular
carriers provide interexchange carriers with equal access. Currently, only
McCaw/AT&T's cellular carriers and the cellular affiliates of the Regional Bell
Operating Companies ("RBOCs") are required to provide equal access. The FCC also
proposed requiring all CMRS providers to provide interconnection to other mobile
service providers. In April 1995, however, the FCC tentatively concluded that it
would be premature to adopt such a requirement. In addition, any cellular system
in which one of the RBOCs has an ownership interest, even if noncontrolling, may
be subject to significant constraints on their services imposed by the 1984
consent decree under which these companies were divested from AT&T. In such
cases, the cellular system may have to forego providing certain services, or the
RBOC may have to obtain a waiver from the United States District Court, which
could result in substantial delays.
Congress amended the Communications Act to preempt, as of August 10, 1994, state
or local regulation of the entry of, or the rates charged by, any commercial
mobile service or any private mobile service which includes cellular telephone
service. Notwithstanding such preemption, a state had until August 10, 1994 to
petition the FCC for authority to continue regulating the rates for any
commercial mobile service. Eight states filed petitions to continue their rate
regulation authority: Arizona, California, Connecticut, Hawaii, Louisiana, New
York, Ohio and Wyoming. In May 1995, the FCC denied all eight petitions and
precluded those states from regulating the rates for commercial mobile service
providers, including cellular operators. Its actions on those petitions remain
subject to judicial review.
Transfers and Assignments of Cellular Licenses
The Communications Act and FCC rules require the FCC's prior approval of the
assignment or transfer of control of a construction permit or license for a
cellular system. Subject to FCC approval, a license or permit granted to a
non-wireline entity may be transferred or assigned to a wireline entity and vice
versa. In most cases, noncontrolling interests in an entity that holds a
cellular license or cellular system generally may be bought or sold without
prior FCC approval. In the case of a sale proposed to occur before the
expiration of certain holding periods, the FCC may prohibit or impose
limitations on such a sale or require the seller to make certain representations
as a condition precedent to such a sale. For RSAs, the minimum holding period
generally expires upon completion of initial construction. The FCC has permitted
sales prior to completion of initial construction under certain circumstances.
Specifically, the seller must demonstrate that it did not file its application
for the purpose of speculating in cellular licenses. Any acquisition by the
Company of cellular interests may also require the prior approval of state or
local regulatory authorities having jurisdiction over the cellular telephone
industry.
In certain circumstances, the FCC's rules prohibit the alienation of cellular
interests. No ownership interest in an RSA application, or an entity holding
such an application, may be transferred or otherwise alienated prior to the
grant of a construction permit. For cellular unserved areas, no substantial
change in ownership may take place until after the FCC has granted both a
construction permit and a license and the licensee has provided service to the
public for at least one year. These restrictions prevent prospective purchasers,
including the Company, from entering into agreements for assignment or transfer
of unserved areas and RSA acquisitions prior to the lapse of the applicable
transfer restriction periods. These transfer restrictions should not have a
greater effect on the Company than on any other prospective buyer.
Character and Citizenship Requirements
Applications for FCC authority may be denied and, in extreme cases, licenses may
be revoked if the FCC finds that an entity lacks the requisite "character"
qualifications to be a licensee. In making that determination, the FCC considers
whether an applicant or licensee has been the subject of adverse findings in a
judicial or
24
<PAGE>
administrative proceeding involving felonies, the possession or sale of unlawful
drugs, fraud, antitrust violations or unfair competition, employment
discrimination, misrepresentations to the FCC or other government agencies, or
serious violations of the Communications Act or FCC regulations. The FCC also
requires licensees to comply with statutory restrictions on the direct or
indirect ownership or control of radio licenses by non-U.S. persons or entities.
The FCC has found the Company to be qualified to hold FCC licenses.
Federal Legislation
Legislative changes to the Communications Act and the antitrust consent decree
applicable to the RBOCs could affect the cellular industry. Many bills have been
introduced in recent years without enactment. The passage of any bill which
becomes law may have impacts which are uncertain and could be negative or
positive. Congress decided not to pass any significant telecommunications
legislation in 1994. However, similar and expanded legislation has been
introduced this year and separate bills have been passed by the Senate and the
House of Representatives. If enacted, such legislation could, among other
changes, affect competition for local telecommunications services,
interconnection arrangements for carriers, universal service funding and the
provision of interexchange services by the RBOCs' wireless systems.
Other Restrictions
The Communications Act currently limits the interest of foreign governments and
non-U.S. corporations and citizens in radio licensees, which include cellular
licensees. The cellular industry is also subject to other rules and policies of
the FCC and state commissions.
Certain Terms
Interests in cellular markets that are licensed by the Federal Communications
Commission (the "FCC") are commonly measured on the basis of the population of
the market served, with each person in the market area referred to as a "Pop".
The number of Pops or Net Pops owned is not necessarily indicative of the number
of subscribers or potential subscribers. As used in this Form 10-K, unless
otherwise indicated, the term "Pops" means the estimate of the 1996 population
of a Metropolitan Statistical Area ("MSA") or Rural Service Area ("RSA"), as
derived from the 1996 Donnelley Market Information Service population estimates.
The term "Net Pops" means the estimated population with respect to a given
service area multiplied by the percentage interest that the Company owns in the
entity licensed in such service area. MSAs and RSAs are also referred to as
"markets." The term "wireline" license refers to the license for any market
initially awarded to a company or group that was affiliated with a local
landline telephone carrier in the market, and the term "non-wireline" license
refers to the license for any market that was initially awarded to a company,
individual or group not affiliated with any landline carrier. The term "System"
means an FCC-licensed cellular telephone system.
Item 2. Properties
The Company maintains its corporate headquarters in New York City. The Company
leases this space which is approximately 4,000 square feet. In addition to its
corporate headquarters, the Company's cellular operations lease sales and
administrative offices and lease and own locations for cell site and switching
equipment. The Company anticipates that it will review these leases from time to
time and may, in the future, lease or acquire new facilities as needed.
PriCellular does not anticipate that it will encounter any material difficulties
in meeting its future needs for any leased space.
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<PAGE>
Item 3. Legal Proceedings
The Company is not currently involved in any pending legal proceedings that
individually, or in the aggregate are material to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted pursuant to General Instruction J of Form 10-K
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Part II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters.
There is no established public trading market for the Company's Common Stock.
All of the Company's outstanding capital stock is owned by Parent.
Item 6. Selected Financial Data.
PriCellular Wireless Corporation
The Company acquired all of its existing Systems (excluding minority interests)
between April 1994 and January 1997. Many of the Systems at the time of
acquisition were relatively dormant or running at a minimum level of operating
efficiency. Accordingly, the following historical financial data is not
necessarily indicative of future results of operations. The selected financial
data set forth below for the Company for the years ended December 31, 1996, 1995
and 1994 and, as of December 31, 1996 and 1995, is derived from, and qualified
by reference to, the audited consolidated financial statements included
elsewhere herein. The selected financial data set forth below for the Company
for the years ended December 31, 1993 and 1992 and as of December 31, 1994, 1993
and 1992 are derived from audited consolidated financial statements not included
elsewhere herein. The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Years ended December 31
1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Operating revenues $ 112,378 $ 41,504 $ 5,209 $ 3,809 $ 4,859
Cost of cellular service 29,571 10,694 1,892 835 1,265
Cost of equipment sold 10,073 4,951 814 255 411
-----------------------------------------------------------------------------------
Gross margin 72,734 25,859 2,503 2,719 3,183
General and administrative 17,289 8,754 4,640 1,280 3,272
Sales and marketing 16,708 7,465 1,151 379 517
Depreciation and amortization 19,537 10,279 2,720 1,695 3,089
-----------------------------------------------------------------------------------
Operating income (loss) 19,200 (639) (6,008) (635) (3,695)
Gain (loss) on sale of investments in
cellular operations (1,401) 11,598 6,819 11,986 2,557
Interest expense, net (41,556) (18,573) (1,949) (271) (572)
Other income (expense), net 1,626 520 (97) (439) (855)
-----------------------------------------------------------------------------------
Income (loss) before provision for income
taxes and extraordinary item (22,131) (7,094) (1,235) 10,641 (2,565)
Provision for income taxes (172)
Gain on early extinguishment of debt,
net of tax 147
-----------------------------------------------------------------------------------
Net income (loss) $ (22,131) $ (7,094) $ (1,235) $ 10,616 $ (2,565)
===================================================================================
As of December 31
1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------
(In thousands)
Balance Sheet Data:
Working capital (deficit) $ 50,206 $ 16,431 $ 20,615 $ (139) $ 3,277
Net fixed assets 73,315 52,041 26,144 389 1,700
Total assets 698,949 442,993 209,799 6,755 19,719
Long-term debt 483,430 298,650 113,683 4,000 6,410
Total liabilities 518,816 322,080 137,436 4,680 10,144
Stockholder's equity 180,133 120,913 72,363 2,075 9,575
</TABLE>
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<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
The current year, including the beginning of 1997, was highlighted by the
strategic repositioning of the Company as it strengthened its New York Cluster,
sold or exchanged its Alabama properties and expanded into its fourth market,
the Kentucky Cluster. As was disclosed in prior years, comparison of operating
results is not meaningful due to the significant acquisitions accomplished in
the current year as well as the additions in 1995 which although completed
throughout the year were principally concluded in the latter half. Thus the
results of operations for a significant number of markets include a full year
for 1996 whereas 1995 reflects results for only a portion of the year.
Although the Company experienced positive cash flow from operations in 1996 and
1995, the Company expects to incur net losses for several years due to interest
expense and significant noncash charges of license amortization and depreciation
on equipment.
Historical Results of Operations
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Operating revenues increased from $41,504,000 in 1995 (consisting of cellular
revenues of $38,757,000, equipment sales of $1,717,000 and other revenues of
$1,030,000) to $112,378,000 in 1996 (consisting of cellular revenues of
$104,950,000, equipment sales of $3,430,000 and other revenues of $3,998,000).
The significant increase in cellular revenues and equipment sales results from
properties added in 1996 which were not present in 1995 including the addition
of the New York Cluster significant additions to the Mid-Atlantic Cluster and
Upper Midwest Cluster in the latter half of 1995 for which a full year of
revenue was earned in 1996. The increase in other revenue from $1,030,000 in
1995 to $3,998,000 in 1996 is principally a function of the inclusion of the
guaranteed preferential distributions from the Joint Venture agreement with SBC
Corporation for a full year in 1996 ($3,375,000) compared to only one month in
1995 ($275,000) partially offset by the income recorded in 1995 from the
management of the AL-4 RSA ($755,000) which is not present in 1996.
Total costs and expenses rose from $42,143,000 for 1995 to $93,178,000 for 1996.
The increase is principally a result of the factors stated above: new markets in
1996 for which no expenses were incurred in 1995 and the addition in 1995 toward
the latter part of the year of a significant number of markets which therefore
have a full year of expenses for 1996 but less than six months of expenses for
1995.
The result of these factors is an increase in the cost of cellular service to
$29,571,000 in 1996 from $10,694,000 in 1995, an increase to $10,073,000 in 1996
for the cost of equipment sold from $4,951,000 in 1995 and an increase in
general and administrative expenses to $17,289,000 in 1996 from $8,754,000 in
1995. Sales and marketing amounted to $16,708,000 in 1996 compared to $7,465,000
in 1995. The aggressive marketing and sales promotion efforts geared to
subscriber increases, the addition of retail locations combined with the
increase in the number of markets account for the increase.
Depreciation and amortization increased to $19,537,000 in 1996 from $10,279,000
in 1995 because of the additional equipment and cellular licenses associated
with the acquisition of new markets in 1996 and a full year's depreciation and
amortization in 1996 for markets acquired during 1995.
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<PAGE>
The loss on sale of investments in cellular operations in 1996 of $1,401,000 is
a result of the loss from the sale of the AL-4 RSA of $1,640,000 and MI-2 RSA of
$1,578,000 partially offset by the gain on the sale of minority Pops of
$1,817,000. The gain in 1995 of $11,598,000 is due to the disposition of the
Company's interest in the nonwireline system serving the Abilene, TX MSA.
The increase in interest expense from $21,569,000 in 1995 to $44,053,000 in 1996
is a function of a full year of interest for the current year on the 12-1/4%
Senior Subordinated Discount Notes issued in September 1995 compared with only
three months in the prior year, combined with additional interest related to the
issuance of the 10-3/4% Poughkeepsie Note in the amount of $19,000,000 for
approximately six and one-half months and the interest for one and one-half
months on the 10-3/4% Senior Notes, face amount of $170,000,000 issued in
November 1996.
Other income for 1996 includes $625,000 related to the two year covenant not to
compete from the sale of the AL-4 RSA in July 1996, $1,000,000 for the covenant
not to compete from the Lubbock/Minnesota exchange in July 1995 for which
one-half year or $500,000 is included for 1995.
The decrease in interest income from $2,996,000 in 1995 to $2,497,000 in 1996 is
a result of the decrease in cash flow for 1996 due principally to acquisitions
of Cellular properties partially offset by the cash on hand resulting from the
proceeds of the $170,000,000 10-3/4% Senior Notes received in November 1996.
Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
Operating revenues of $5,209,000 (consisting of cellular service revenues of
$4,825,000 and equipment sales of $384,000) for the year ended December 31, 1994
represented the operations of the market acquired in 1994 from their respective
dates of acquisition on April 28, 1994 and November 23, 1994, whereas operating
revenues of $41,504,000 (consisting of cellular service revenues of $38,757,000
equipment sales of $ 1,717,000 and other revenues of $1,030,000) for the year
ended December 31, 1995 represented operations of the market acquired in 1994
for a full year, as well as operations of the markets acquired during 1995 from
their respective dates of acquisition in March, July, September, November and
December 1995. In addition, other revenues in 1995 consist of management fee
income of $755,000 related to the Company's interim management of the AL-4 RSA
property prior to the consummation of the Company's acquisition of such property
on November 7, 1995 and $275,000 of guaranteed preferential distributions from
the SBC Joint Venture for the month of December 1995.
Total costs and expenses incurred for the year ended December 31, 1995 of
$42,143,000 increased from $11,217,000. This increase was due to 1995 including
a full year of costs and expenses related to the properties acquired during 1994
whereas, in 1994, costs and expenses related to such properties were only
included from the dates of acquisition. In addition, total costs and expenses in
1995 included amounts related to the markets acquired during 1995 for which
there are no comparable amounts in 1994 due to the larger number of acquired
markets in operation incurring system telephone expenses and rental expenses on
leased facilities. Cost of equipment sold increased to $4,951,000 in 1995 from
$814,000 due to an increased number of phones being sold in 1995. General and
administrative expenses increased to $8,754,000 in 1995 from $4,640,000 in 1994
due primarily to costs associated with operating new markets and opening
numerous administrative and retail offices in 1995. Sales and marketing expenses
increased in 1995 to $7,465,000 from $1,151,000 in 1994 due to aggressive
marketing kickoff campaigns for certain newly acquired markets. Depreciation and
amortization increased to $10,279,000 in 1995 from $2,720,000 in 1994 due to the
larger amount of equipment and intangible assets than were owned in 1994.
29
<PAGE>
Gain on sale of investments in cellular operations in 1995 and 1994 of
$11,598,000 and $6,819,000, respectively, were due to the disposition of the
Company's interest in the non-wireline system serving the Abilene, TX MSA and
the sale of the Company's remaining interest in the Wichita Falls System,
respectively.
Interest expense of $21,569,000 in 1995, increased from $2,245,000 in 1994 due
primarily to the increase in the average amount of indebtedness outstanding
during the year ended December 31, 1995. Interest expense in 1995, includes a
full year of interest expense on the 14% Senior Subordinated Discount Notes
issued in November 1994, as compared to approximately five weeks of interest
expense in 1994. In addition, interest expense in 1995 also includes interest
expense related to the 12-1/4% Senior Subordinated Discount Notes issued in
September 1995, for which there is no comparable amount in 1994.
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 from the issuance of debt securities, the
contribution by parent from its sale of equity interests, borrowings, vendor
credit facilities and more recently internally generated cash flows. As of
December 31, 1996, the Company had $67.0 million of cash and cash equivalents
and $50.0 million of working capital. In addition, the Company held $91.4
million disclosed separately on the balance sheet, at December 31, 1996 as cash
committed for the acquisition of Cellular operations.
During 1996, the Company's principal sources of cash were (i) the issuance by
the Company of $170.0 million aggregate principal amount of 10 3/4% Senior Notes
due 2004, (ii) an aggregate of $37.2 million of proceeds from the disposition of
certain non-strategic Systems (the Systems serving the AL-4 RSA and the MI-2 RSA
and certain minority pops), (iii) $33.6 million as a capital contribution from
Parent, (iv) $26.1 million representing the payment for and simultaneous
contribution by parent of the assets of the PA-9 acquisition, and (v) $36.8
million of cash provided by operating activities. The Company's principal uses
of cash in 1996 were (i) $177.7 million to finance acquisitions (the
acquisitions of the Systems serving the NY-6 RSA, Poughkeepsie, NY MSA, WV-3
RSA, WI-2 RSA) and the cash committed for the acquisition of the Kentucky
cluster in January, 1997 and (ii) $29.5 million of capital expenditures related
to the build-out and improvement of its Systems. In connection with the
acquisition of the Poughkeepsie NY MSA, the Company issued a $19.0 million
aggregate principal amount three-year note bearing interest at the prime rate
(the "Poughkeepsie Note"). The Poughkeepsie Note was prepaid in November 1996.
Interest was not a significant use of cash during 1996 since the Company's 14%
Senior Subordinated Discount Notes due 2001 and 12 1/4% Senior Subordinated
Discount Notes due 2003, were each issued with an original issue discount and do
not begin to pay cash interest until May 1998 and April 1999. The 10 3/4% Senior
Notes due 2004 issued by the Company in November 1996 are cash pay instruments.
The Company will incur $18.3 million of cash interest expense per annum, payable
semi-annually beginning May 1, 1997.
During 1995, the Company's principal sources of cash were (i) the issuance and
sale of $205.0 million aggregate principal amount of 12 1/4% Senior Subordinated
Discount Notes due 2003, which were issued with an original issue discount for
aggregate net proceeds of $143.3 million, (ii) the issuance and sale by Parent
of shares of its Class A Common Stock for aggregate net proceeds of $31.6
million of which $10.3 million was contributed to the Company and (iii) $15.9
million of aggregate net proceeds from the disposition of the Company's
non-strategic System serving the Abilene, TX MSA. Cash provided by operations
was positive for the first time in 1995 generating $3.4 million. The Company's
principal use of cash in 1995 was $213.7 million
30
<PAGE>
to finance acquisitions (the acquisitions of the Systems serving the NY-5 RSA,
OH-7 RSA, OH-9 RSA, OH-10 RSA, WV-2 RSA, MI-1 RSA and Wausau, WI MSA). The
Company also acquired the System serving the AL-4 RSA in 1995 for $10.0 million
in cash and the contribution by Parent for its share of the assets acquired by
the issuance of 1,836,000 shares of Parent's Class A Common Stock.
During 1994, the Company's principal sources of cash were (i) the issuance and
sale of $165.0 million aggregate principal amount of 14% Senior Subordinated
Discount Notes due 2001, which were issued with an original issue discount for
aggregate net proceeds of $110.3 million, and (ii) Parent's initial public
offering of 6.9 million shares of Class A Common Stock which generated $34.7
million of net proceeds as well as equity contributions from Parent's principal
stockholders of $32.9 million of which total $28.6 million was contributed to
the Company. The Company's principal use of cash in 1994 was $130.4 million to
finance acquisitions. Cash used in operations was $1.5 million.
As was previously mentioned, the cellular telephone industry requires
significant expenditures for capital additions. Certain of the new markets
acquired in 1996 will require substantial additions as the Company seeks to
better develop subscriber coverage and in general enhance the market's
performance as has been the Company's operating strategy.
The Company continues to expand its marketing efforts which includes, but is not
limited to, the 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 historically
been able to obtain such financing, there is no guarantee that such financing
will continue to be available.
Forward Looking Statements
The Company has made in this report, and from time to time may otherwise make,
statements which constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements include
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers primarily with respect to the Company's operations
and financial performance. 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 in the
forward looking statements as a result of various factors. Some of these factors
may include (i) the Company's limited operating history and history of net
losses, (ii) the Company's high degree of leverage and the requirement for
significant and sustained growth in the Company's cash flow to meet its debt
service requirements, (iii) the status of any pending potential acquisitions or
dispositions of Systems and the risk that new Systems and Systems recently
acquired may not perform as expected, (iv) competition from the other cellular
operator in the Company's Clusters or from other technologies, (v) dependence on
corporate management, (vi) reliance on CELLULARONE(R), trademark, (vii)
potential for adverse regulatory change and need for renewal of cellular
licenses, (viii) fluctuations in market value of licenses, (ix) equipment
failure or natural disaster and (x) concerns about radio frequency emissions.
31
<PAGE>
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with this report; see
Item 14 of Part IV.
Quarterly Results of Operations
The following is a summary of the quarterly results of operations for the years
ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Three Months ended
March 31 June 30 September 30 December 31
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1996
Operating revenues (1) $ 21,025 $ 27,106 $ 32,847 $ 31,400
Operating income (1) (3) 1,845 5,295 8,273 3,787
Net income (loss) (1) (7,265) (4,679) (1,213) (8,974)
1995
Operating revenues $ 5,533 $ 8,128 $ 11,526 $ 16,317
Operating income (loss) (684) 193 929 (1,077)
Net income (loss) (2) 6,512 (2,277) (2,679) (8,650)
</TABLE>
(1) The quarterly results of operations for 1996 include the following:
a. The NY-5 RSA acquired December 29, 1995
b. The NY-6 RSA and Poughkeepsie MSA acquired April 23, 1996
c. The acquisition of the WV-3 RSA on July 1, 1996.
(2) The quarter ended March 31, 1995 includes an $11,598,000 gain from the sale
of the Company's Abilene, TX System.
(3) Certain amounts have been reclassified to conform to the year-end
presentation.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
32
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
Omitted pursuant to General Instruction J of Form 10-K
Item 11. Executive Compensation.
Omitted pursuant to General Instruction J of Form 10-K
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted pursuant to General Instruction J of Form 10-K
Item 13. Certain Relationships and Related Transactions.
Omitted pursuant to General Instruction J of Form 10-K
33
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. The Consolidated Financial Statements of PriCellular Wireless
Corporation (see index to financial statements at F-1).
2. Financial Statement Schedules:
Schedules not included with this. Additional financial data has been
omitted because it is not applicable or the required information is
shown in the Consolidated Financial Statements or Notes thereto.
3. Exhibits:
Exhibit Index
2.1 Form of Purchase and Sale Agreement relating to the CIS
Acquisition (1)
2.2 Contribution Agreement by and among Texas/Illinois Cellular
Limited Partnership, a Delaware limited partnership,
Southwestern Bell Mobile Systems, Inc., a Delaware and
Virginia corporation, Parent and Cellular Information
Systems of Laredo, Inc., a Texas corporation, dated as of
April 10, 1995 (certain schedules have been omitted but will
be furnished supplementally to the Commission upon request)
(2)
2.3 Acquisition Agreement, dated as of July 31, 1995, by and
among Cellular of Upstate New York, Inc., Alexandra Cellular
Corporation, the Company and Parent (certain exhibits and
schedules have been omitted but will be furnished
supplementally to the Commission upon request) (2)
2.4 Asset Purchase Agreement dated as of September 27, 1995 by
and among Seven Cellular Corporation, the Company, USCOC of
Ohio RSA #7, Inc. and United States Cellular Corporation
(certain exhibits and schedules have been omitted but will
be furnished supplementally to the Commission upon request)
(3)
2.5 Acquisition Agreement dated as of June 28, 1995 by and among
Great Seal Cellular Limited Partnership, Parent and Chill
Cellular Corporation (certain exhibits and schedules have
been omitted but will be furnished supplementally to the
Commission upon request) (2)
2.6 Asset Acquisition Agreement dated as of October 15, 1996
among Parent, Cellular Information Systems of Florence, Inc.
and Horizon Cellular Telephone Company of Central Kentucky,
L.P.
3.1 Amended and Restated Certificate of Incorporation of the
Company (1)
3.2 By-Laws of the Company (1)
4.1 Indenture to 14% Senior Subordinated Discount Notes due 2001
among Parent, and the Company and Bank of Montreal Trust
Company, as Trustee (including form of Note) (1)
4.2 Indenture of 12-1/4% Senior Subordinated Notes due 2003
among Parent, the Company, and Bank of Montreal Trust
Company, Trustee (including form of Note) (3)
4.3 Indenture to 10-3/4% Senior Notes due 2004 between the
Company and Bank of Montreal Trust Company, as Trustee
(including form of Note) (5)
34
<PAGE>
10.1 1994 Stock Option Plan of Parent (1)
10.2 Voting Agreement, dated as of December 28, 1995, by and
among Parent and the parties named therein (4)
10.3 Operating Agreement, dated as of April 28, 1994, by and
between Parent and McCaw (1)
10.4 Form of Purchase and Sale Agreement of Parent relating to
the CIS Acquisition (see Exhibit 2.1)
10.5 Contribution Agreement by and among Texas/Illinois Cellular
Limited Partnership, a Delaware limited partnership,
Southwestern Bell Mobile Systems, Inc., a Delaware and
Virginia corporation, Parent and Cellular Information
Systems of Laredo, Inc., a Texas corporation, dated as of
April 10, 1995 (certain schedules have been omitted but will
be furnished supplementally to the Commission upon request)
(see Exhibit 2.2)
10.6 Acquisition Agreement, dated as of July 31, 1995, by and
among Cellular of Upstate New York, Inc., Alexandra Cellular
Corporation, Parent and the Company (certain exhibits and
schedules have been omitted but will be furnished
supplementally to the Commission upon request) (see Exhibit
2.3)
10.7 Asset Purchase Agreement dated as of September 27, 1995 by
and among Seven Cellular Corporation, the Company, USCOC of
Ohio RSA #7, Inc. and United States Cellular Corporation
(certain exhibits and schedules have been omitted but will
be furnished supplementally to the Commission upon request)
(see Exhibit 2.4)
10.8 Acquisition Agreement dated as of June 28, 1995 by and among
Great Seal Cellular Limited Partnership, Parent and Chill
Cellular Corporation (certain exhibits and schedules have
been omitted but will be furnished supplementally to the
Commission upon request) (see Exhibit 2.5)
10.9 Asset Acquisition Agreement dated as of October 15, 1996
among Parent, Cellular Information Systems of Florence, Inc.
and Horizon Cellular Telephone Company of Central Kentucky,
L.P. (see Exhibit 2.6)
10.10 Employment Agreement, dated as of December 28, 1995, by and
between Parent and Robert Price (4)
27.1 Financial Data Schedule (included in electronic version
only)
------------
(1) Incorporated herein by reference to Parent's Registration
Statement on Form S-1, No. 33-85678.
(2) Incorporated herein by reference to the Company's
Registration Statement on Form S-1, No. 33-95834.
(3) Incorporated herein by reference to Parent's Registration
Statement on Form S-1, No. 33-98156.
(4) Incorporated herein by reference to Parent's Annual Report
on Form 10-K for the year ended December 31, 1995.
(5) Incorporated herein by reference to the Company's
Registration Statement on Form S-4, No. 333-17067.
35
<PAGE>
(b) Reports on Form 8-K
During the last quarter of fiscal 1996, the Company filed two reports on
Form 8-K: (i) a Current Report on Form 8-K dated October 15, 1996
announcing that the Company had begun a private offering of senior notes
with estimated net proceeds to the Company of $135 million to finance the
Company's previously announced acquisitions and (ii) a Current Report on
Form 8-K dated October 16, 1996 the purpose of which was to file the
Company's unaudited pro forma condensed consolidated statements of
operations for the nine months ended September 30, 1996 and for the year
ended December 31, 1995 and unaudited pro forma condensed consolidated
balance sheet at September 30, 1996.
36
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of New York,
State of New York, on the 10th day of February 1997.
PriCellular Wireless Corporation
By /s/Robert Price
-------------------------------------
Robert Price
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------------------------------------------------------
/s/ Robert Price
- -----------------------------
Robert Price Director and President February 10, 1997
(Principal Executive
Officer)
/s/ Stuart B. Rosenstein
- -----------------------------
Stuart B. Rosenstein Senior Vice President, February 10, 1997
Chief Financial Officer
and Treasurer (Principal
Financial and Accounting
Officer)
/s/ Steven Price
- -----------------------------
Steven Price Director and Vice February 10, 1997
President Corporate
Development
/s/ Kim I. Pressman
- -----------------------------
Kim I. Pressman Director, Vice February 10, 1997
President and
Secretary
/s/ Brion B. Applegate
- -----------------------------
Brion B. Applegate Director February 10, 1997
/s/ Scott Sperling
- -----------------------------
Scott Sperling Director February 10, 1997
37
<PAGE>
Form 10-K--Item 14(a)(1) and (2)
PriCellular Wireless Corporation and Subsidiaries
Index to Consolidated Financial Statements
The following consolidated financial statements of PriCellular Wireless
Corporation and subsidiaries are included in Item 8:
Report of Independent Auditors...................................... F-2
Consolidated Balance Sheets--December 31, 1996 and 1995............. F-3
Consolidated Statements of Operations--Years Ended
December 31, 1996, 1995 and 1994................................. F-4
Consolidated Statements of Stockholder's Equity--Years Ended
December 31, 1996, 1995 and 1994................................. F-5
Consolidated Statements of Cash Flows--Years Ended
December 31, 1996, 1995 and 1994................................. F-6
Notes to Consolidated Financial Statements.......................... F-8
The following consolidated financial statement schedule of PriCellular Wireless
Corporation is included in Item 14(a):
Schedule II--Valuation and Qualifying Accounts...................... F-23
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
PriCellular Wireless Corporation
We have audited the consolidated balance sheets of PriCellular Wireless
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PriCellular Wireless Corporation and subsidiaries at December 31, 1996 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
New York, New York
January 24, 1997
F-2
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31
1996 1995
--------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 67,331 $ 26,669
Accounts receivable (less allowance of $1,767 in 1996 and $2,076 in 1995) 13,429 8,725
Due from affiliate - 575
Inventory 2,096 1,651
Other current assets 980 568
--------------------------------
Total current assets 83,836 38,188
Fixed assets--at cost:
Cellular facilities and equipment 71,801 56,375
Furniture and equipment 5,142 1,675
Deposits on cellular equipment 10,100 -
--------------------------------
87,043 58,050
Less accumulated depreciation (13,728) (6,009)
--------------------------------
Net fixed assets 73,315 52,041
Investment in cellular operations 39,641 37,386
Cellular licenses (less accumulated amortization of $10,415 in 1996 and
$3,833 in 1995) 377,808 305,375
Cellular license held for sale 13,721 -
Deferred financing costs (less accumulated amortization of $2,542 in 1996
and $971 in 1995) 14,031 9,989
Cash committed for the acquisition of cellular operations 91,400 -
Other assets 5,197 14
--------------------------------
Total assets $ 698,949 $ 442,993
================================
Liabilities and stockholder's equity Current liabilities:
Accounts payable and accrued expenses $ 23,925 $ 16,257
Long-term debt--current portion - 1,971
Other current liabilities 4,776 3,529
Due to affiliate 4,929 -
--------------------------------
Total current liabilities 33,630 21,757
Long-term debt 483,430 278,225
Junior subordinated discount note to parent - 20,425
Other long-term liabilities 1,756 1,673
Commitments and contingent liabilities
Stockholder's equity:
Common Stock, $0.01 par value per share:
100 shares authorized, issued and outstanding
Additional paid-in capital 211,642 130,291
Accumulated deficit (31,509) (9,378)
--------------------------------
Total stockholder's equity 180,133 120,913
--------------------------------
Total liabilities and stockholder's equity $ 698,949 $ 442,993
================================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands)
Year ended December 31
1996 1995 1994
---------------------------------------
Revenues
Cellular service $ 104,950 $ 38,757 $ 4,825
Equipment sales 3,430 1,717 384
Other 3,998 1,030 --
---------------------------------------
112,378 41,504 5,209
Costs and expenses
Cost of cellular service 29,571 10,694 1,892
Cost of equipment sold 10,073 4,951 814
General and administrative 17,289 8,754 4,640
Sales and marketing 16,708 7,465 1,151
Depreciation and amortization 19,537 10,279 2,720
---------------------------------------
93,178 42,143 11,217
---------------------------------------
Operating income (loss) 19,200 (639) (6,008)
Other income (expense)
Gain (loss) on sale of investments in
cellular operations (1,401) 11,598 6,819
Interest expense (44,053) (21,569) (2,245)
Interest income 2,497 2,996 296
Other income (expense), net 1,626 520 (97)
---------------------------------------
(41,331) (6,455) 4,773
---------------------------------------
Net income (loss) $ (22,131) $ (7,094) $ (1,235)
=======================================
See notes to consolidated financial statements.
F-4
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Consolidated Statements of Stockholder's Equity
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated Stockholder's
Shares Amount Capital Deficit Equity
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance--December 31, 1993 100 $ -- $ 3,124 $ (1,049) $ 2,075
Contributions by Stockholder 72,423 72,423
Distribution to Stockholder (900) (900)
Net loss for the year ended December 31, 1994 (1,235) (1,235)
---------------------------------------------------------------------
Balance--December 31, 1994 74,647 (2,284) 72,363
Contributions by stockholder 55,644 55,644
Net loss for the year ended December 31, 1995 (7,094) (7,094)
---------------------------------------------------------------------
Balance--December 31, 1995 100 -- 130,291 (9,378) 120,913
Contributions by stockholder 59,692 59,692
Forgiveness of Junior subordinated
debt to parent 21,659 21,659
Net loss for the year ended December 31, 1996 (22,131) (22,131)
---------------------------------------------------------------------
Balance--December 31, 1996 100 $ -- $211,642 $(31,509) $180,133
=====================================================================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Operating activities
Net (loss) $ (22,131) $ (7,094) $ (1,235)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 19,537 10,278 2,720
Interest on Senior and Junior Subordinated Discount Notes 40,150 21,254 1,672
(Gain) loss on sale of investment in cellular operations 1,401 (11,598) (6,819)
Equity loss from investment in Wichita Falls -- -- 97
Amortization of covenant not to compete (1,625) (500) --
Provision for losses on accounts receivable 2,079 936 99
Proceeds from covenant not to compete 2,500 3,000 --
Changes in operating assets and liabilities net of acquisitions and
dispositions of Cellular Systems:
Accounts receivable (9,098) (4,768) (848)
Inventory (369) (891) (250)
Due from affiliate -- -- (784)
Other current assets (343) (193) (52)
Accounts payable and accrued expenses 4,629 (2,178) 3,711
Other current liabilities (250) (4,490) --
Other long-term liabilities 410 (388) 127
Other, net (99) 21 80
-----------------------------------------------
Net cash provided by (used in) operating activities 36,791 3,389 (1,482)
-----------------------------------------------
Investing activities
Purchase of cellular equipment (29,470) (6,794) (3,013)
Amounts deposited in escrow to acquire cellular properties (5,000) -- (800)
Proceeds from affiliate, net -- 209 160
Proceeds from sale of investment in cellular operations 2,813 -- 3,669
Proceeds from sale of cellular operations 31,936 19,478 --
Acquisition of cellular operations, net of cash (86,285) (213,686) (130,366)
Investment in cellular operations (75) (166)
Redemption of short-term investments -- 991 --
Cash committed for the acquisition of cellular operations (91,400) -- --
-----------------------------------------------
Net cash (used in) investing activities (177,481) (199,968) (130,350)
-----------------------------------------------
Financing activities
Distribution to Parent -- -- (900)
Proceeds from capital contributions 33,600 30,903 61,479
Proceeds from notes payable and due to related parties -- -- 7,380
Repayments of notes payable and due to related parties (23,540) (3,499) (3,140)
Payments for deferred financing costs (5,612) (6,145) (4,818)
Due to affiliate 6,904 -- --
Proceeds from issuance of long-term debt 170,000 163,307 110,276
-----------------------------------------------
Net cash provided by financing activities 181,352 184,566 170,277
-----------------------------------------------
Increase (decrease) in cash and cash equivalents 40,662 (12,013) 38,445
Cash and cash equivalents at beginning of year 26,669 38,682 237
-----------------------------------------------
Cash and cash equivalents at end of year $ 67,331 $ 26,669 $ 38,682
===============================================
</TABLE>
F-6
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest $ 1,110 $ 874 $ 194
Income taxes 448 2,803 --
Supplemental schedule of noncash investing activities
Capital contribution of equipment and minority interest in cellular operations -- -- 8,155
Contribution of net assets into joint venture -- 35,516 --
Supplemental schedule of noncash financing activities
Debt canceled in exchange for capital contributions -- -- 2,791
Debt canceled in connection with the sale of minority interest in cellular -- -- 4,024
operations
Capital contribution of cellular systems from Parent 26,079 24,741 --
Forgiveness of junior subordinated debt to Parent 21,659 -- --
Debt issued in connection with acquisition of cellular systems 19,429 -- --
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. Organization
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.
2. Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in the consolidated financial statements.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Inventory consists primarily of cellular telephones and accessories.
Investments in Cellular Operations
Investments in cellular operations in which the Company's interest is 20% or
more are accounted for under the equity method. Interest in investments that are
less than 20% are accounted for under the cost method.
F-8
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
On November 30, 1995, the Company entered into a Joint Venture with SBC
Communications, Inc. ("SBC"), formerly Southwestern Bell, in which the Company
contributed its system serving the Laredo, TX MSA (approximately 176,000 Pops)
and SBC contributed cellular properties in the Illinois 4 and 6 RSAs. The
Company owns 44.5% of the combined 594,000 Pops or approximately 264,000 Net
Pops. Under the terms of the Joint Venture agreement, the Company receives
preferential distributions in the first four years of the Joint Venture rising
from $3,300,000 in the first year to $5,800,000 in the last year. Such
preferential distributions are guaranteed by SBC. The Company also has an option
to put its Joint Venture interest to SBC at prices beginning at $28,500,000 and
escalating to $39,000,000 at the end of the four-year period. SBC has operating
control of the properties and has certain rights to purchase the Company's
interests on the day prior to the fourth anniversary. The Company's guaranteed
preferential distribution from the Joint Venture for 1996 amounted to $3,375,000
and for the month of December 1995, totalled $275,000, which are included in
other revenue.
Cellular License
The Company primarily uses a 40 year life to amortize cellular licenses
acquired. Amortization expense for the years ended December 31, 1996, 1995 and
1994 was $9,456,000, $4,287,000 and $1,262,000, respectively.
The Company periodically reviews the carrying value of licenses to determine
whether such amounts are recoverable based on undiscounted future cash flows of
the market to which the license relates, and by comparing the cellular licenses
to the estimated market value of the cellular systems, in order to determine
whether a reduction to fair value is necessary. The Company has determined that
no such reductions were necessary through December 31, 1996.
Income Recognition
Revenues are recognized during the period service is provided or when equipment
is delivered.
F-9
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Expense Recognition
Marketing costs (including advertising) relating to new subscribers are expensed
in the period that they are incurred.
Fixed Assets
Fixed assets are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful life of the asset of three to
seven years.
Deferred Financing Costs
Deferred financing costs primarily represent underwriting discounts and related
fees incurred in connection with the issuance of the Company's long-term debt
(see Note 4--Long-Term Debt). These costs are being amortized over the terms of
the related debt.
3. Acquisition of Cellular Operations
All acquisitions are accounted for utilizing the purchase method of accounting.
The allocation of purchase price for certain acquisitions described below is
tentative.
During the year ended December 31, 1996, the Company strategically strengthened
its footprint by; adding approximately 688,000 net Pops to its existing New York
market, by exchanging 521,000 Pops previously owned from its Ohio cluster as
well as through acquisitions, by adding approximately 458,000 Pops to the Ohio
cluster through the acquisition of PA-9 (188,000 Pops) and WV-3 (270,000 Pops).
Additionally, the Company acquired in January 1997, its fourth significant
cluster through the acquisition of the Kentucky Cluster which contains 785,000
Pops and over 13,000 square miles.
F-10
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Acquisition of Cellular Operations (continued)
The following acquisitions were completed during 1996 and 1995:
<TABLE>
<CAPTION>
Acquisition Purchase Net Pops
System Market Date Price Acquired
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Upper Midwest Cluster WI-2 RSA November 18, 1996 $ 4,300,000 85,645
----------------
85,645
----------------
Mid-Atlantic Cluster PA-9 RSA February 2, 1996 26,100,000 188,096
WV-3 RSA July 23, 1996 35,000,000 269,709
----------------
457,805
----------------
New York Cluster NY-6 RSA April 23, 1996 19,800,000 (A) 111,373
Poughkeepsie, NY MSA April 23, 1996 38,900,000 (A)(B) 218,890
Orange County, NY MSA October 17, 1996 (B) 327,053
----------------
657,316
----------------
Various Various October 17, 1996 (B) 70,740
----------------
70,740
----------------
Total for 1996 1,271,506
================
1995
Upper Midwest Cluster MI-1 RSA March 7, 1995 17,700,000 203,391
Wausau, WI MSA March 28, 1995 5,400,000 59,640
MN-2A RSA July 7, 1995 (C) 38,766
MN-3B RSA July 7, 1995 (C) 35,572
MN-5 RSA July 7, 1995 (C) 207,107
Alton/Granite City, IL MSA July 7, 1995 (C) 18,112
Eau Claire, WI MSA July 7, 1995 (C) 14,269
Wausau, WI MSA July 7, 1995 (C) 17,289
MI-2 RSA August 28, 1995 7,200,000 (D) 110,514
----------------
704,660
----------------
Mid-Atlantic Cluster Parkersburg, WV/
(Ohio Cluster) Marietta, OH MSA September 27, 1995 (B) (E) 154,510
OH-7 RSA September 27, 1995 39,800,000 257,290
OH-9 RSA September 27, 1995 28,800,000 (B) 279,577
OH-10 RSA September 29, 1995 17,600,000 (B) 173,714
WV-2 RSA December 20, 1995 7,800,000 79,567
----------------
944,658
----------------
Alabama Cluster AL-4 RSA November 7, 1995 (F) 140,200
----------------
140,200
----------------
New York Cluster NY-5 RSA December 29, 1995 65,900,000 382,180
----------------
382,180
----------------
Total for 1995 2,171,698
================
</TABLE>
F-11
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Acquisition of Cellular Operations (continued)
(A) The Company acquired from a subsidiary of United States Cellular
Corporation the system serving the NY-6 RSA for approximately $19,800,000
and 83% of the stock of the system serving the Poughkeepsie, NY MSA for
approximately $38,900,000, with one half paid in cash and the balance in a
three-year note (subsequently repaid in November 1996, see Note
4--Long-Term Debt.)
(B) The Company exchanged with Vanguard Cellular Systems, Inc. its OH-9 RSA,
the majority of its OH-10 RSA and its Parkersburg, WV/Marietta, OH MSA for
the Orange County, NY MSA, an additional 11.1% of the Poughkeepsie, NY MSA,
12.2% of the Janesville, WI MSA and approximately 28,509 additional Net
Pops, including small interests in the Eau Claire, WI and Wausau, WI MSAs
(in each of which the Company currently has a majority interest).
(C) The Company received these licenses in exchange for its 100% interest in
the Lubbock, TX MSA non-wireline license. In addition, Western Wireless
paid $3,000,000 to secure the Company's agreement not to compete with
Western Wireless within the Lubbock, TX MSA for a period of three years
following the exchange.
(D) On May 22, 1995, the Court of Chancery of the State of Delaware awarded the
right to acquire the MI-2 RSA to the Company, subject to FCC approval, for
approximately $7,200,000, which is payable over several years. The MI-2 RSA
includes the eastern portion of Michigan's Upper Peninsula and abuts the
Company's MI-1 RSA. On March 22, 1996, the Delaware Supreme Court reversed
the lower court's decision and ordered the Company to reverse the
acquisition and sell the license and operating assets to the defendant. The
Company received approximately $6,500,000 from the sale (see Note 7--Sale
of Cellular Operations).
(E) In connection with the acquisition, the Company paid $9,924,000 in cash and
Parent issued an $8,800,000 unsecured five year 6% note convertible at $11
per share which was converted into 796,639 shares of Parent's Class A
Common Stock at $11 per share. The Company's stock was valued at $12.25 per
share on the date of conversion. The portion of the assets acquired by
Parent were contributed to the Company.
F-12
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Acquisition of Cellular Operations (continued)
(F) The purchase price consisted of $10,000,000 in cash and 1,836,000 shares
(adjusted for the two 5-for-4 stock splits of the Parent in 1996) of
Parent's Class A Common Stock. Parent contributed the portion of the assets
acquired through the issuance of the Class A Common Stock. In July 1996,
the Company sold the property for $27,500,000 in cash of which $2,500,000
is attributable to a two year covenant not to compete (see Note 7--Sale of
Cellular Operations).
The Pro Forma unaudited condensed consolidated results of operations for the
years ended December 31, 1996 and 1995, assuming the transactions were
consummated as of January 1, 1995, are as follows:
Year ended December 31
1996 1995
-----------------------------
Revenue $ 111,769 $ 71,870
=============================
Net loss $ (24,401) $ (34,030)
=============================
4. Long-Term Debt
Long-term debt consists of the following:
December 31
1996 1995
------------------------------
14% Senior Subordinated Discount Notes
due 2001 $146,783,000 $128,160,000
12-1/4% Senior Subordinated Discount Notes
due 2003
166,647,000 147,925,000
10-3/4% Senior Notes due 2004 170,000,000 --
Other long-term debt -- 4,111,000
------------------------------
483,430,000 280,196,000
Less current portion -- 1,971,000
------------------------------
$483,430,000 $278,225,000
==============================
F-13
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Long-Term Debt (continued)
On November 23, 1994, the Company issued approximately $165,000,000 aggregate
principal amount of 14% Senior Subordinated Discount Notes due 2001 (the "14%
Notes") primarily to finance the acquisition of Cellular Information Systems,
Inc. ("CIS"). The 14% Notes were issued at a price of 66.834% or $110,276,000.
The original issue discount on the 14% Notes accretes at a rate of 14%,
compounded semiannually, to an aggregate principal amount of approximately
$165,000,000 by November 15, 1997. Interest will thereafter accrue at 14% per
annum, payable semiannually in cash beginning May 15, 1998.
On September 27, 1995, the Company, issued approximately $205,000,000 aggregate
principal amount of 12-1/4% Senior Subordinated Discount Notes due 2003 (the
12-1/4% Notes") to finance the acquisition of the OH-7 RSA, OH-9 RSA, OH-10 RSA,
Parkersburg, WV/Marietta, OH MSA, WV-2 RSA, AL-4 RSA, PA-9 RSA and NY-5 RSA
cellular systems. The 12-1/4% Notes were issued at a price of 69.906% or
$143,307,000. The original issue discount on the 12-1/4% Notes accretes at a
rate of 12-1/4% compounded semiannually to an aggregate principal amount of
approximately $205,000,000 by October 1, 1998. Interest will thereafter accrue
at 12-1/4% per annum payable semiannually in cash beginning April 1, 1999.
On November 6, 1996, the Company issued $170,000,000 principal amount of 10-3/4%
Senior Notes due 2004 (the "10-3/4% senior notes"), primarily to finance the
acquisition in January 1997 of the Kentucky cluster for $116,500,000 consisting
of approximately $94,000,000 in cash and $22,500,000 in the Parent's Class A
Common Stock. Approximately $19,000,000 of the proceeds was used to repay the
note issued in connection with the purchase on April 23, 1996 of the
Poughkeepsie, NY MSA (see (A) in Note 3--Acquisition of Cellular Operations).
Interest is payable semi-annually on each May 1 and November 1.
The Company's long-term debt includes restrictions on the Company's debt, on
dividends, on liens, on payments and the transfer of net assets from the Company
to Parent.
F-14
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Long-Term Debt (continued)
The maturities of the Company's long-term debt for each of the five years
subsequent to December 31, 1996 are as follows:
1997 $ --
1998 --
1999 --
2000 --
2001 146,783,000
Thereafter 336,647,000
------------
Total $483,430,000
============
5. Income Taxes
The significant components of the Company's deferred tax liabilities and assets
are as follows:
December 31
1996 1995
----------------------------
Deferred tax liabilities:
Depreciation $ (4,340,000) $ (4,591,000)
Amortization (5,957,000) (2,738,000)
Deferred tax assets:
Net operating loss carryforwards 3,195,000 3,104,000
Alternative minimum tax carryforwards 175,000 175,000
Amortization of original issue discount 19,745,000 7,795,000
State and local deferred taxes 1,956,000 856,000
Accruals 2,658,000 2,221,000
Other 1,630,000 1,556,000
----------------------------
Net deferred tax asset 19,062,000 8,378,000
Valuation allowance (19,062,000) (8,378,000)
----------------------------
$ -- $ --
============================
F-15
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
At December 31, 1996, the Company had tax net operating loss carryforwards
("NOLs") of approximately $9,397,000, which are available to offset future
taxable income. NOLs begin expiring in the year 2007 through 2010 as follows:
2007 $1,280,000, 2009 $2,936,000, 2010 $1,699,000 and 2011 $3,482,000. Pursuant
to Section 338 of the Internal Revenue Code, the Company elected to treat the
stock purchase of CIS as a purchase of assets and, accordingly, accrued
approximately $2,000,000 in Federal income taxes payable representing
alternative minimum tax arising as a result of the election. The Company paid
these taxes during 1995.
6. Capital Contributions
During the second quarter of 1994, Parent entered into the following
transactions:
o AT&T Wireless Services, Inc. ("McCaw/Wireless" or "AT&T Wireless")
purchased 2,031,250 shares of Class B Common Stock of Parent (Class B
shares are entitled to ten votes per share.
o Harvard Private Capital Group, Inc. ("Harvard") purchased 42,130
shares of Series A Convertible Preferred Stock of Parent.
o Spectrum Equity Investors L.P. ("Spectrum") purchased 6,018 shares of
Series A Convertible Preferred Stock of Parent and a $6 million
convertible promissory note which was converted into 12,739 shares of
Series B Convertible Preferred Stock of Parent on July 9, 1994.
Spectrum assigned and transferred a portion of the note totaling $1.5
million to two funds managed by Investment Advisors, Inc. ("IAI").
In connection with the above mentioned transactions, Parent received $36,200,000
consisting of cash, capital equipment and minority interests in an FCC
non-wireline cellular license. The capital equipment and minority interest were
valued at $3,385,000 which approximates their historical net book value.
F-16
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Capital Contributions (continued)
During July 1994, McCaw/Wireless exercised its preemptive rights by purchasing
16,049 shares of the Parent's Series A Convertible Preferred Stock for
$7,559,000 in the form of a reduction of notes payable, minority interests in
certain FCC MSA non-wireline cellular licenses, and capital equipment. The
minority interests and capital equipment were recorded at their approximate
historical net book value.
In connection with the formation of the Company, Parent contributed these assets
to Wireless.
On December 22, 1994, Parent closed on its IPO of 7,812,000 shares of Class A
Common Stock resulting in net proceeds of $34,697,000 after deducting expenses
related to the offering and contributed $28,619,000 to the Company.
In connection with the over-allotment agreement with the underwriters of the
Parent's IPO, during January 1995, Parent sold an additional 586,000 shares of
Class A Common Stock which resulted in net proceeds of approximately $2,567,000
of which $927,000 was contributed to the Company.
On July 14, 1995, Harvard Private Capital Group, Inc. and Spectrum Equity
Investors L.P. exercised an option to purchase a total of 1,293,000 shares of
Parent's Class A Common Stock. The proceeds to Parent totaled $5,000,000, of
which $1,750,000 was contributed to the Company.
On August 21, 1995, Parent issued approximately $60,000,000 aggregate principal
amount of 10-3/4% Senior Subordinated Convertible Discount Notes due 2004. The
notes were issued at a price of 59.345% or $35,607,000 of which $18,600,000 was
concurrently contributed to the Company.
On November 22, 1995, Parent sold 3,125,000 shares of Class A Common Stock to an
institutional investor. Proceeds to parent totaled $24,066,000, of which
$8,575,000 was contributed to the Company.
The Company's Parent issued 96,000 shares of Series A cumulative convertible
preferred stock. The issuance resulted in net proceeds to the Parent of
approximately $80,000,000 of which $33,600,000 was contributed to the Company.
F-17
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Sale of Cellular Operations
The Company made the following dispositions of cellular properties and
interests:
<TABLE>
<CAPTION>
Date Description Sales Price Gain (Loss)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996
July AL-4 RSA, sale of license $ 25,000,000 $ (1,640,000)
September Sale of Minority Pops 2,813,000 1,817,000
November MI-2 RSA, sale of license 6,500,000 (1,578,000)
--------------
$ (1,401,000)
==============
1995
January Abilene, Texas, sale of assets $ 15,928,000 $ 11,598,000
March Minnesota 6, sale of a portion of the license
representing 31,000 Pops 3,550,000 --
--------------
$ 11,598,000
==============
1994
June Wichita Falls Celltelco Partnership, sale of approximate
49.5% interest $ 7,693,000 $ 6,819,000
==============
</TABLE>
In connection with the Wichita Falls transaction, the Company entered into a
management agreement whereby it ran the operations and received a management fee
of 6% of the revenue until the remaining 49.5% interest in Wichita Falls was
sold on June 15, 1994. For the period January 1, 1994 to June 15, 1994, the
Company earned approximately $93,000, for management fee income.
In 1994, in connection with the sale of Wichita Falls to McCaw/AT&T for
$7,693,000, the Company received net proceeds of $3,829,000. The net proceeds
reflect the sales price of $7,693,000 plus the repayment of $160,000 due from
affiliate less $4,024,000 from cancellation of a portion of the notes payable to
McCaw/AT&T.
F-18
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Subsequent Events
Kentucky Cluster Acquisition
In January 1997, the Company established its fourth operating cluster as a
result of the acquisition of four RSAs in Kentucky from a subsidiary of Horizon
Cellular Telephone Company, L.P. The 785,000 Pop cluster was acquired for
$94,000,000 in cash, subject to adjustments at closing, and $22,500,000 of
Parent's Class A Common Stock (1,948,052 shares). Cash committed for the
acquisition of cellular license operations was $91,400,000. In addition, other
assets includes $5,000,000 for money held in escrow as of December 31, 1996.
WI4/Florence Transactions
In January 1997, the Company entered into two transactions with a subsidiary of
Bell South Corporation. The standalone wireline systems serving the Florence, AL
MSA (136,816 Pops) and AL 1B RSA (62,035 Pops) were sold for $24,000,000 in
cash, of which $2,000,000 is attributable to a two year covenant not to compete.
The transactions resulted in a gain of approximately $8,000,000. In addition,
the Company acquired for $6,000,000 the WI-4 RSA (118,993 Pops).
9. Pending Transactions
Remaining Shares of CIS Stock
The Company may acquire the remaining shares of CIS Stock. Such acquisitions may
be effected through privately negotiated or open market purchases, subsequent
tender offers, a merger or similar business combination between the Company and
CIS or otherwise. The Company has included in other current liabilities
$2,523,000 for the acquisition of remaining shares of CIS Stock.
F-19
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Commitments and Contingencies
Stock Option Plan
Under Parent's 1994 Stock Option Plan (the "Plan") the Board of Directors can
grant options to purchase up to 2,636,000 shares of Class A Common Stock to
certain eligible employees and directors (Class A shares are entitled to one
vote per share). During 1996, Parent registered approximately 2,636,000 shares
of Class A Common Stock reserved for issuance under the Plan. The Plan provides
that the option price cannot be less than the fair market value of the stock on
the date of grant, and accordingly, no compensation expense is recognized. All
options granted subsequent to January 1, 1995, have 10 year terms and vest and
become fully exercisable at the end of three years of continued employment.
Parent has elected to follow APB 25 and related interpretations in accounting
for its employee stock options because, as discussed below, the alternative fair
value accounting provided for under FASB No. 123, Accounting for Stock-Based
Compensation, requires use of option valuation models that were not developed
for use in valuing employee stock options and are highly subjective.
Pro forma information regarding net income (loss) and earnings (loss) per common
share is required by statement 123, and has been determined as if the Company
has accounted for Parent's employee stock options under the fair value method of
that statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996: risk free interest rate 6.25%; dividend yield 0%;
.48 volatility factors of the expected market price of Parent's Class A Common
Stock; and a weighted-average expected life of options of 4 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models did not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
December 31
1996 1995
-----------------------
Net income (loss):
As reported $(22,131) $(7,094)
Pro forma $(22,906) $(7,309)
Since compensation expense associated with option grants is recognized over the
vesting period, the initial impact of applying FAS 123 on pro forma net income
(loss) is not representative of the potential impact on pro forma net income
(loss) in future years when the effect of recognition of a portion of
compensation expense from multiple awards would be reflected.
A summary of Parent's stock option activity, and related information was as
follows:
Number of
Shares Under Price Per
Options Share
-----------------------------
Options granted 1,040,039 $3.71
---------
Balance at December 31, 1994 1,040,039 $3.71
Options granted 770,117 $4.54 to $8.72
Options returned for future issuance (41,016) $4.54 to $4.67
---------
Balance at December 31, 1995 1,769,140 $3.71 to $8.72
Options granted 343,125 $10.80 to $10.90
Options exercised (8,329) $ 4.54 to $ 4.67
Options returned for future issuance (55,704) $ 4.54 to $10.90
---------
Balance at December 31, 1996 2,048,232
=========
The following table summarizes information about stock options outstanding at
December 31, 1996:
Options
Options Outstanding Exercisable
---------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life Price at 12/31/96 Price
- --------------------------------------------------------------------------------
$3.71 to $4.67 1,600,263 8 years $ 4.05 1,226,780 $ 3.86
$8.72 108,594 9 years $ 8.72 36,198 $ 8.72
$10.80 to $10.90 399,375 9.5 years $10.86 -- --
Lease Commitments
Total rent expense amounted to approximately $2,378,000, $877,000 and $166,000
for the years ended December 31, 1996, 1995 and 1994, respectively, of which
$137,000, $60,000 and $20,000 was paid to an affiliate during 1996, 1995 and
1994, respectively. At December 31, 1996, the Company is committed under the
following noncancellable operating leases:
Period
1997 $ 2,463,000
1998 2,008,000
1999 1,722,000
2000 1,435,000
2001 835,000
Thereafter 1,629,000
-------------
$ 10,092,000
=============
11. Related Party Transactions
The Company and McCaw/AT&T are parties to an operating agreement dated April 28,
1994, which provides for, among other services, switch sharing agreements with
McCaw/AT&T's adjacent systems, assistance in obtaining cellular system service
and equipment discounts, assistance in evaluating potential acquisitions and in
securing financing.
12. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheet approximate fair value.
Long-term debt: The fair value of the Senior Notes and Senior Subordinated
Discount Notes is based on the quoted market price.
F-20
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Fair Values of Financial Instruments (continued)
The carrying amounts and fair values of the Company's financial instruments at
December 31, 1996 are as follows:
Carrying Fair
Amount Value
---------------------------
Cash and cash equivalents $ 67,331,000 $ 67,331,000
Long-term debt:
10-3/4% Senior Notes 170,000,000 176,800,000
14% Senior Subordinated Discount Notes 146,783,000 162,525,000
12-1/4% Senior Subordinated Discount Notes 166,647,000 175,275,000
13. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
December 31
1996 1995
---------------------------
Accounts payable $ 4,592,000 $ 4,307,000
Professional fees 1,345,000 1,327,000
Interest payable 2,792,000 119,000
Accrued operating expenses 3,819,000 2,929,000
Income and other taxes payable 2,597,000 1,860,000
Deferred revenue and other 8,780,000 5,715,000
---------------------------
$ 23,925,000 $ 16,257,000
===========================
F-21
<PAGE>
PriCellular Wireless Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Other Current Liabilities
Other current liabilities consist of the following:
December 31
1996 1995
---------------------------
Amount due for untendered CIS shares $ 2,523,000 $ 2,525,000
Unearned covenant not to compete 2,250,000 1,000,000
Other 3,000 4,000
---------------------------
$ 4,776,000 $ 3,529,000
===========================
F-22
<PAGE>
PriCellular Wireless Corporation
Schedule I--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to Charged to Balance
Beginning Cost and Other at End
Description (000's) of Year Expenses Accounts Deductions of Year
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts $ -- $ 99 $ 636(A) $ -- $ 735
============================================================================
Valuation allowance for deferred
income taxes $ 910 $ 551 $ -- $ -- $ 1,461
============================================================================
Year ended December 31, 1995
Allowance for doubtful accounts $ 735 $ 936 $ 1,982(A) $ (1,577) $ 2,076
============================================================================
Valuation allowance for deferred
income taxes $ 1,461 $ 6,917 $ -- $ -- $ 8,378
============================================================================
Year ended December 31, 1996
Allowance for doubtful accounts $ 2,076 $ 2,079 $ 58(A) $ (2,446) $ 1,767
============================================================================
Valuation allowance for deferred
income taxes $ 8,378 $ 10,684 $ -- $ -- $ 19,062
============================================================================
</TABLE>
(A) Results principally from the acquisition of cellular systems.
[EXECUTION COPY]
================================================================================
ASSET ACQUISITION AGREEMENT
AMONG
HORIZON CELLULAR TELEPHONE COMPANY OF CENTRAL KENTUCKY, L.P.
CELLULAR INFORMATION SYSTEMS OF FLORENCE, INC.
AND
PRICELLULAR CORPORATION
October 15, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
----
1. Certain Definitions; Purchase and Sale of Assets; Assumption of
Liabilities.............................................................1
1.1 Certain Definitions...............................................1
1.2 Purchased Assets..................................................5
1.3 Excluded Assets...................................................6
1.4 Assumption of Liabilities by Purchaser............................7
1.5 Excluded Liabilities..............................................7
1.6 Assets Not Assignable.............................................8
2. Escrow, Acquisition Price and Closing.....................................8
2.1 Escrow............................................................8
2.2 Acquisition Price.................................................9
2.3 Manner of Payment.................................................9
2.4 Acquisition Price Adjustment.....................................10
2.5 Allocation of Acquisition Price..................................11
2.6 The Closing......................................................12
2.7 Rescission.......................................................12
2.8 Closing Costs; Transfer Taxes and Fees...........................12
3. Representations and Warranties of Seller.................................13
3.1 Organizational Status............................................13
3.2 Qualification....................................................13
3.3 Authorization; No Conflict.......................................13
3.4 Financial Statements.............................................14
3.5 Compliance with Laws.............................................14
3.6 Permits; FCC Licenses............................................14
3.7 Litigation.......................................................15
3.8 Real Property....................................................15
3.9 Personal Property Leases.........................................16
3.10 Contracts and Other Agreements...................................16
3.11 Consents.........................................................16
3.12 Title; Condition.................................................17
3.13 No Material Adverse Change.......................................17
3.14 Taxes............................................................17
3.15 Environmental Matters............................................17
3.16 ERISA; Employee Benefits.........................................18
3.17 Intellectual Property............................................18
3.18 Representations Correct..........................................18
3.19 Inventories......................................................18
<PAGE>
3.20 Condition of Cellular Assets.....................................18
3.21 Investment Representation........................................19
4. Representations and Warranties of Purchaser and PriCellular..............19
4.1 Organizational Status............................................19
4.2 Qualification....................................................20
4.3 Capitalization...................................................20
4.4 Authorization; No Conflict.......................................20
4.5 Compliance with Laws.............................................21
4.6 Litigation.......................................................21
4.7 Consents.........................................................21
4.8 FCC and PSC Matters..............................................21
4.9 Financial Ability to Close.......................................22
4.10 Share Validity...................................................22
4.11 Securities Law Compliance........................................22
4.12 Public Filings...................................................22
4.13 Title Condition..................................................23
4.14 No Material Adverse Change.......................................23
5. Covenants of Seller, PriCellular and Purchaser...........................23
5.1 Continuance of Business..........................................23
5.2 Access to Information; Notice of Breach..........................24
5.3 Governmental Permits and Approvals; Consents.....................25
5.4 Employees; Employee Compensation.................................25
5.5 HSR Act..........................................................25
5.6 Regulatory Approvals.............................................25
5.7 Restrictions on Certain Actions..................................26
5.8 Casualty or Condemnation.........................................26
5.9 Tax Cooperation; Allocation of Taxes..............................27
5.10 Environmental Audits.............................................28
5.11 Disclaimer of Other Representations and Warranties...............28
5.12 Guaranty by PriCellular of Purchaser's Obligations...............29
5.13 Excluded Leases..................................................29
5.14 Supplemental Disclosure..........................................29
5.15 Like-Kind Exchange...............................................29
5.16 Registration Statement...........................................30
5.17 Securities Filings...............................................30
6. Conditions Precedent to Purchaser's and PriCellular's Obligations........30
6.1 Regulatory Approvals.............................................30
6.2 Premerger Notification Compliance................................30
6.3 Representations and Warranties on Closing Date...................30
6.4 Terms, Covenants and Conditions..................................31
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6.5 No Material Adverse Change.......................................31
6.6 Absence of Litigation............................................31
6.7 Absence of Restricted Interests..................................31
6.8 Closing Deliveries...............................................31
7. Conditions Precedent to Seller's Obligations.............................31
7.1 Regulatory Approvals.............................................31
7.2 Premerger Notification Compliance................................31
7.3 Representations and Warranties on Closing Date...................31
7.4 Terms, Covenants and Conditions..................................32
7.5 No PriCellular Material Adverse Change...........................32
7.6 Absence of Litigation............................................32
7.7 Registration Statement...........................................32
7.8 Closing Deliveries...............................................32
8. Deliveries at the Closing................................................32
8.1 Seller's Deliveries..............................................32
8.2 Purchaser's Deliveries...........................................33
9. Confidentiality..........................................................34
10. Survival of Representations and Warranties..............................34
11. Indemnification.........................................................35
11.1 Obligation to Indemnify by Seller................................35
11.2 Obligation to Indemnify by Purchaser and PriCellular.............35
11.3 Procedures for Claims Between the Parties........................35
11.4 Defense of Third-Party Actions...................................36
11.5 Limitations......................................................36
12. Breaches and Defaults; Termination; Remedies............................37
12.1 Breaches and Defaults; Opportunity to Cure.......................37
12.2 Termination......................................................37
12.3 Effect of Termination............................................38
13. Interim Management......................................................38
13.1 Management of the Systems During the Management Period...........38
13.2 Reimbursement of Costs...........................................38
14. Miscellaneous...........................................................38
14.1 Resolution of Disputes...........................................38
14.2 Expenses.........................................................39
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14.3 Further Assurances..............................................39
14.4 Access to Records...............................................39
14.5 Indemnification of Brokerage....................................40
14.6 Severability....................................................40
14.7 Notices.........................................................40
14.8 Entire Agreement................................................41
14.9 Amendments and Waivers..........................................41
14.10 Governing Law...................................................41
14.11 Assignment; Binding Effect......................................41
14.12 Beneficiaries of Agreement......................................42
14.13 Counterparts; Facsimile Signatures..............................42
14.14 Exhibits and Schedules..........................................42
14.15 Computation of Days; Holidays...................................42
14.16 Headings........................................................42
14.17 Limited Recourse................................................42
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LIST OF EXHIBITS AND SCHEDULES
EXHIBITS
1.1(a) Form of Registration Rights Agreement
2.1 Form of Escrow Agreement
2.3(a) Form of Instrument of Assumption
8.l(b)(i) Form of Opinion of Seller's Corporate Counsel
8.1(b)(ii) Form of Opinion of Seller's FCC Counsel
8.2(f)(i) Form of Opinion of Purchaser's Corporate Counsel
8.2(f)(ii) Form of Opinion of Purchaser's SEC Counsel
SCHEDULES
1.1 Permitted Encumbrances
1.2 Purchased Assets
1.2(e) Excluded Leases
1.2(g) Prepaid Expenses
1.2(i) Excluded Contracts
1.3(h) Certain Affiliate Assets Not Used Exclusively for the Systems
1.3(l) Other Excluded Assets
1.4 Assumed Liabilities
2.3(b)(ii) Capital Expenditures
2.4(a)(ii) Targeted Subscribers
3.4 Unaudited Financial Statements
3.5 Unlicensed Facilities
3.6(b) FCC Licenses
3.6(c) PSC Licenses
3.7 Litigation
3.8(a) Owned Real Property
3.8(b) Real Property Leases
3.9 Material Personal Property Leases
3.10 Material Contracts
3.11 Seller's Material Consents
3.14 Taxes
3.16 Employee Benefit Plans
3.20 Dual-Licensed Sites
4.3 PriCellular Capitalization
4.7 PriCellular's Consents
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ASSET ACQUISITION AGREEMENT
THIS ASSET ACQUISITION AGREEMENT (this "Agreement") is made as of October
15, 1996 among HORIZON CELLULAR TELEPHONE COMPANY OF CENTRAL KENTUCKY, L.P., a
Delaware limited partnership ("Seller"), PRICELLULAR CORPORATION, a Delaware
corporation ("PriCellular"), and CELLULAR INFORMATION SYSTEMS OF FLORENCE, INC.,
an Alabama corporation and wholly-owned subsidiary of PriCellular ("Purchaser").
WITNESSETH
WHEREAS, Seller is the sole holder of certain licenses, including the
cellular licenses granted by the Federal Communications Commission (the
"FCC"), for Kentucky Non-Wireline Cellular Rural Service Area No. 4
("Kentucky #4"), Kentucky Non-Wireline Rural Service Area No. 5 ("Kentucky
#5"), Kentucky Non-Wireline Rural Service Area No. 6 ("Kentucky #6") and
Kentucky Non-Wireline Rural Service Area No. 8 ("Kentucky #8" and, together
with Kentucky #4, Kentucky #5 and Kentucky #6, the "Kentucky Cluster");
WHEREAS, Seller is the owner and operator of the cellular telephone
communication systems in the Kentucky Cluster (the "Systems") and, in connection
therewith, is engaged in the business of marketing, selling and providing
cellular telephone service in the Kentucky Cluster (the "Kentucky Business");
WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to
acquire from Seller, all of the Purchased Assets (as hereinafter defined) in
accordance with the terms and conditions hereinafter set forth; and
WHEREAS, the parties acknowledge that the terms and conditions set forth
in this Agreement and the performance by the parties of their respective
obligations hereunder are subject to and are intended to be in compliance with
all FCC and other state and local governmental rules and regulations governing
the transactions contemplated by this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and agreements contained herein, the parties hereto, intending to be
legally bound hereby, agree as follows:
1. Certain Definitions; Purchase and Sale of Assets; Assumption of
Liabilities.
1.1 Certain Definitions. As used in this Agreement, the following terms
have the following meanings unless the context otherwise requires:
"affiliate", with respect to any person, means any other person
controlling, controlled by or under common control with such person. For the
purposes of this definition, "control" when used with respect to any person
means the possession, directly or indirectly, of
<PAGE>
the power to direct or cause the direction of the management and policies of
such person whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"business day" means any day other than a Saturday, Sunday, legal
holiday in the Commonwealth of Pennsylvania or the State of New York or other
day of the year on which banks are authorized or required by law to close.
"Closing Price" per share of PriCellular Common Stock on any date
shall be the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular way, in
either case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the New York
Stock Exchange or American Stock Exchange, as the case may be, or, if the
PriCellular Common Stock is not listed or admitted to trading on the New York
Stock Exchange or American Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the PriCellular Common Stock
is listed or admitted to trading, or, if the PriCellular Common Stock is not
listed or admitted on any national securities exchange, the last quoted sale
price, or, if not so quoted, the average of the high bid and low asked prices in
the over-the-counter market, as reported on the Nasdaq National Market or such
other system then in use, or, if on any such date the PriCellular Common Stock
is not quoted by any such organization, the average of the closing bid and asked
prices as furnished by a professional market maker making a market in the
PriCellular Common Stock mutually selected by Seller and the Board of Directors
of PriCellular.
"Current Market Price" per share of PriCellular Common Stock on any
date shall be the average of the Closing Prices of a share of PriCellular Common
Stock for the 15 consecutive Trading Days ending on the third Trading Day before
such date. If on any such Trading Day the PriCellular Common Stock is not quoted
by any organization referred to in the definition of Closing Price, the fair
market value of the PriCellular Common Stock on such day, the fair market value
of the PriCellular Common Stock on such day shall be deemed to be the average of
the closing bid and asked prices as furnished by a professional market maker
making a market in the PriCellular Common Stock mutually selected by Seller and
the Board of Directors of PriCellular.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, codes, plans, injunctions, permits, concessions,
grants, franchises, licenses, agreements and governmental restrictions, whether
now or hereafter in effect, relating to the environment, the effect of the
environment on human health or to emissions, discharges or releases of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic, radioactive or hazardous substances or wastes into the
environment including without limitation ambient air, surface water, ground
water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or
2
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petroleum products, chemicals or industrial, toxic, radioactive or hazardous
substances or wastes or the clean-up or other remediation thereof.
"Environmental Liabilities" means any and all liabilities of or
relating to Seller or any of its affiliates (including any entity which is, in
whole or in part, a predecessor of Seller or any such affiliate) or arising in
connection with or in any way relating to the Systems, the Purchased Assets or
activities or operations occurring or conducted at any real property
constituting part of the Purchased Assets (including, without limitation,
offsite disposal), whether vested or unvested, contingent or fixed, actual or
potential, known or unknown, which (i) arise under or relate to Environmental
Laws and (ii) relate to actions occurring or conditions existing on or prior to
the Closing Date.
"Executive Officers" shall mean Messrs. Michael E. Kalogris,
Steven R. Skinner, Bruce M. Hernandez and Steven Lochmueller and Ms. Patricia
Greteman.
"Final Order" has the meaning set forth in Section 3.6(d) herein.
"GAAP" means United States generally accepted accounting principles
as in effect from time to time, applied on a basis consistent with the most
recent financial statements of Seller or PriCellular, as applicable.
"governmental or regulatory body" means any government or political
subdivision thereof, whether federal, state, local or foreign, or any agency or
instrumentality of any such government or political subdivision.
"herein," "hereby," "hereunder," "hereof" or other equivalent words
refer to this Agreement and not solely to the particular section or portion of
this Agreement in which any such word is used.
"includes", "including" or other equivalent words mean "including,
without limitation."
"lien or other encumbrance" means any lien, pledge, mortgage,
security interest, claim, lease, charge, option, right of first refusal,
easement, servitude, transfer restriction under any stockholder or similar
agreement, encumbrance or any other restriction or limitation whatsoever.
"Management Agreement" means the Management Agreement between
Purchaser and Seller in the form mutually agreed to by the parties.
"Management Period" has the meaning set forth in Section 2.3(b)(iii)
herein.
"Permitted Encumbrances" means any lien or other encumbrance set
forth on Schedule 1.1.
3
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"person" means any individual, corporation, limited liability
company, partnership, limited liability partnership, firm, joint venture,
association, joint-stock company, trust, unincorporated organization,
governmental or regulatory body or other entity.
"PriCellular Material Adverse Change" means a material adverse
change in the business, condition (financial or otherwise) or results of
operations of PriCellular and its consolidated subsidiaries, taken as a whole,
excluding any such material adverse change resulting solely from changes,
developments or circumstances that adversely affect the cellular telephone or
telecommunications industry generally.
"PriCellular Material Adverse Effect" means an effect that would
result in a PriCellular Material Adverse Change.
"PriCellular Common Stock" means the Class A Common Stock, par value
$.01 per share, of PriCellular.
"Registration Rights Agreement" means the Registration Rights
Agreement between PriCellular and Seller in substantially the form attached
hereto as Exhibit 1.1(a).
"SEC Documents" has the meaning set forth in Section 4.12 herein.
"Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder.
"Seller Material Adverse Change" means a material adverse change in
the Purchased Assets, in the Kentucky Business, or the condition (financial or
otherwise) or results of operations of the Systems, taken as a whole, excluding
any such material adverse change resulting solely from changes, developments or
circumstances that adversely affect the cellular telephone or telecommunications
industry generally.
"Seller Material Adverse Effect" means an effect that would result
in a Seller Material Adverse Change.
"to PriCellular's knowledge" or any similar phrase means the actual
knowledge of one of PriCellular's executive officers, after due inquiry.
"to Seller's knowledge" or any similar phrase means the actual
knowledge of one of the Executive Officers after due inquiry.
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<PAGE>
"Trading Day" means a day on which the principal national securities
exchange on which the PriCellular Common Stock is listed or admitted to trading
is open for the transaction of business or, if the PriCellular Common Stock is
not listed or admitted to trading on any national securities exchange, any day
other than Saturday, Sunday, or a day on which banking institutions in the State
of New York are authorized or obligated by law or executive order to close.
1.2 Purchased Assets. On the terms and subject to the conditions contained
in this Agreement, Seller agrees to sell, assign, transfer and deliver to
Purchaser all of the right, title and interest of Seller in or to all of the
assets, properties and business, of every kind and description (other than the
Excluded Assets), wherever located, real, personal or mixed, tangible or
intangible, now owned or held by Seller or hereafter acquired by Seller on or
prior to the Closing Date and used in connection with the Systems or the
Kentucky Business, including all assets shown on Schedule 1.2 as owned by Seller
and the following assets in existence as of the Closing Date (as hereinafter
defined) (collectively referred to herein as the "Purchased Assets"):
(a) all negotiable instruments or other instruments and chattel
paper generated in the conduct of the Kentucky Business;
(b) all new inventory in original packaging, including cellular
mobile telephones and related accessories in original packaging (collectively,
the "Inventory");
(c) all furniture, fixtures, transmitters, switching and receiving
equipment, cellular systems and other equipment and machinery, cellular
switches, cell site equipment, electrical power units, antennas, transmission
lines, microwave equipment, test equipment, tools, vehicles, office equipment,
computers, improvements, parts and other tangible personal property other than
Inventory, whether or not obsolete;
(d) all those certain lots and pieces of ground now owned by Seller
or acquired hereafter by Seller on or prior to the Closing Date together with
the buildings, structures and improvements erected thereon, and together with
all easements, rights and privileges appurtenant thereto (the "Owned Real
Property");
(e) except as set forth on Schedule 1.2(e), all leasehold interests
created by all leases of personal property (the "Personal Property Leases") or
real property (the "Real Property Leases") under which Seller is a lessee or
lessor or under which Seller becomes a lessee or lessor hereafter on or prior to
the Closing Date;
(f) all of Seller's interest in all buildings, towers, facilities
and other structures and improvements located on the Owned Real Property and the
real property subject to a Real Property Lease (the "Leased Real Property", and
together with the Owned Real Property, the "Real Property"), together with
Seller's interest in all fixtures, furnishings, installations, machinery,
equipment and appliances used in connection with the operation, maintenance or
occupancy of the Real Property and Seller's interest in all leasehold
improvements;
5
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(g) all prepaid expenses set forth on Schedule 1.2(g);
(h) all licenses, permits, franchises, registrations, certificates
of public convenience and necessity, approvals and operating rights to the
extent transferable under applicable law or with any required consent relating
to the Kentucky Business, including all licenses, permits and authorizations
issued by the Federal Aviation Administration (the "FAA Permits"), the FCC (the
"FCC Licenses") and the Kentucky Public Service Commission (the "PSC") (the "PSC
Licenses") and pending applications with the FCC and PSC, any interim operating
authority, or other regulatory authority, in connection with the Kentucky
Business and the construction and operation of the Systems, and all planning,
zoning, building, environmental, occupancy and other permits and licenses used
in connection with the Systems (collectively, and including the FAA Permits, the
FCC Licenses and the PSC Licenses, the "Permits");
(i) except as set forth on Schedule 1.2(i), all rights of Seller
under all contracts, agreements, commitments, sales and purchase orders and
other instruments relating to the Kentucky Business (collectively, and including
the Personal Property Leases and the Real Property Leases, the "Contracts");
(j) originals or copies (at the option and expense of Seller) of all
books and records, including manuals, files, tax returns and operating data
relating to the Kentucky Business or the Purchased Assets;
(k) all intangibles; and
(l) all subscriber accounts receivable.
1.3 Excluded Assets. Notwithstanding anything to the contrary contained
herein or otherwise, the Purchased Assets do not include the following:
(a) all cash on hand and in financial institutions, cash
equivalents, marketable securities and bonds;
(b) all roaming accounts receivable billed and unbilled and all
receivables from any of Seller's affiliates;
(c) all federal, state and local income, personal property (tangible
and intangible) and franchise tax credits and tax refund claims relating to the
pre-Closing Date period;
(d) partnership record books and tax returns of Seller;
(e) any insurance policies maintained by Seller with respect to the
Kentucky Business;
6
<PAGE>
(f) all claims, causes of action and rights of recovery arising out
of, or relating to, events or occurrences prior to the Closing Date relating to
any of the Systems or any part of the Kentucky Business, whether asserted or
commenced before, on or after the Closing Date;
(g) Seller's rights under this Agreement;
(h) those assets set forth on Schedule 1.3(h), which assets are used
by affiliates of Seller and do not relate to the operation of any of the
Systems;
(i) obligations of any of Seller's affiliates to Seller;
(j) all inventory other than the Inventory;
(k) all prepaid expenses not set forth on Schedule 1.2(g); and
(l) the personal effects, memorabilia and other assets described on
Schedule 1.3(l).
1.4 Assumption of Liabilities by Purchaser. On the Closing Date, Purchaser
shall assume and agree to discharge and perform, as and when due, (a) the
liabilities and obligations of Seller with respect to the pre-Closing Date
Period which are set forth on Schedule 1.4 (which shall be prepared by
Purchaser) and (b) any liabilities and obligations of Seller incurred during the
Management Period consistent with the terms of the Management Agreement, in each
case except for the Excluded Liabilities (as hereinafter defined) (collectively
the "Assumed Liabilities").
1.5 Excluded Liabilities. Purchaser is assuming only the Assumed
Liabilities and is not assuming any other liability or obligation of Seller of
whatever nature whether presently in existence or arising hereafter. All such
other liabilities and obligations shall be retained by and remain obligations
and liabilities of Seller, as the case may be (all such liabilities and
obligations not being assumed herein referred to as the "Excluded Liabilities"),
and, notwithstanding anything to the contrary in this Agreement, except as set
forth in the Management Agreement, none of the following shall be Assumed
Liabilities for the purposes of this Agreement:
(a) any obligations of Seller to any of Seller's affiliates;
(b) any liabilities for legal, accounting and audit fees and any
other expenses incurred by Seller in connection with the preparation of,
negotiation of, and performance under, this Agreement (and the transactions and
other agreements contemplated hereby);
(c) any obligation or liability for Tax arising from or with respect
to the Purchased Assets, any of the Systems or any part of the Kentucky Business
incurred or attributable to any period prior to (or prior to and including) the
Closing Date;
7
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(d) any liabilities of Seller to pay severance benefits, if any, to
any employees of Seller whose employment is terminated by Seller prior to or in
connection with the sale of the Kentucky Business or otherwise relating to
employee benefits or compensation arrangements existing on or prior to the
Closing Date;
(e) any liabilities of Seller as a borrower under any loan
agreements, subordinated debt agreements or other credit facilities;
(f) any liabilities or obligations relating to any asset that is not
a Purchased Asset; and
(g) any Environmental Liability.
1.6 Assets Not Assignable. To the extent that any interest in the
Contracts, Permits or other Purchased Assets is not capable of being assigned,
transferred or conveyed without the consent, waiver or authorization of a third
person (including a governmental or regulatory body), or if such assignment,
transfer or conveyance or attempted assignment, transfer or conveyance would
constitute a breach of any of the Contracts, Permits or other Purchased Assets,
or a violation of any law, statute, decree, rule, regulation or other
governmental edict or is not immediately practicable, this Agreement shall not
constitute an assignment, transfer or conveyance of such interest, or an
attempted assignment, transfer or conveyance of such interest (any such interest
being referred to herein as a "Restricted Interest"). Anything in this Agreement
to the contrary notwithstanding, Seller shall not be obligated to transfer to
Purchaser any Restricted Interest without first having obtained the required
consent, waiver or authorization necessary for such transfer.
2. Escrow, Acquisition Price and Closing.
2.1 Escrow. (a) Concurrently with the execution of this Agreement,
Purchaser has delivered to CoreStates Bank, N.A., Philadelphia, Pennsylvania, as
escrow agent (the "Escrow Agent"), the amount of $5,000,000, which amount
(including, unless otherwise stated herein, any interest earned on such sum
thereafter, the "Escrow Amount") shall be held by the Escrow Agent pursuant to
the terms of a certain escrow agreement of even date herewith (the "Escrow
Agreement") in the form of Exhibit 2.1. In the event of the termination of this
Agreement by Seller in accordance with the terms of Section 12.2(c)(ii), Seller
shall be entitled to retain the entire Escrow Amount.
(b) As security for the indemnification covenants of Seller
contained in this Agreement, $8,000,000 (including, unless otherwise stated
herein, any interest earned thereon, the "Indemnification Escrow") shall be held
and released by the Escrow Agent pursuant to the terms of the Escrow Agreement.
The Indemnification Escrow shall be funded at the Closing, as set forth in
Section 2.3(c), by the delivery by the Purchaser to the Escrow Agent of
PriCellular Common Stock having an aggregate Current Market Value as of the
Closing Date of $8,000,000
8
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(the "Indemnification Shares"). Purchaser shall be entitled to draw upon the
Indemnification Escrow for payment of all indemnification claims made by
Purchaser to the extent, but only to the extent, provided in the Escrow
Agreement. Notwithstanding anything to the contrary contained herein or in the
Escrow Agreement, the Indemnification Escrow shall constitute Purchaser's sole
recourse for recovery of Seller's indemnification covenants contained in this
Agreement.
2.2 Acquisition Price. The aggregate acquisition price for the Purchased
Assets shall be $116,500,000, subject to initial adjustment at or prior to the
Closing Date as provided in Section 2.3(b)(ii) through (v) herein (as so
adjusted, the "Preliminary Acquisition Price") consisting of (a) $94,000,000
(the "Cash Portion") and (b) shares of PriCellular Common Stock having an
aggregate Current Market Price as of the Closing Date of $22,500,000 (the
"PriCellular Shares"). The Preliminary Acquisition Price shall be further
adjusted after the Closing Date as provided herein (as so further adjusted, the
"Acquisition Price").
2.3 Manner of Payment. Subject to adjustment as provided in this
Agreement, at Closing:
(a) Purchaser shall assume the Assumed Liabilities by written
instrument of assumption in the form of Exhibit 2.3(a) (the "Instrument of
Assumption");
(b) Purchaser shall pay to Seller (or to any other person as Seller
may direct in writing prior to the Closing Date) by wire transfer of immediately
available funds to such banks and accounts thereat as shall be specified in
writing by Seller, the following:
(i) $94,000,000; plus
(ii) the sum of (A) Seller's capital expenditures previously
approved by Purchaser, as set forth on Schedule 2.3(b)(ii), and (B) any other
capital expenditures made on or after the date hereof and approved in writing by
Purchaser (collectively, to be reflected in the capital expenditures summary
(the "Capital Expenditures Summary") to be delivered by Seller to Purchaser at
Closing); plus
(iii) in the event that (A) the Closing shall not have
occurred within 65 days after the later of the date on which Purchaser filed for
regulatory approval with the Kentucky PSC and, if such initial filing is deemed
defective by the Kentucky PSC, the date on which the Kentucky PSC has accepted
such filing for review (the later such date, the "Acceptance Date"), (B) the
waiting period under the HSR Act shall have expired or been terminated and (C)
the Purchaser and Seller have executed the Management Agreement, an additional
amount in cash equal to (x) $10,833 multiplied by (y) the number of days in the
period between the Closing Date and such 65th day after the Acceptance Date (the
"Management Period"); provided, that in no event shall the amount obtained
pursuant to this Section 2.3(a)(iii) exceed $325,000; plus or minus
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<PAGE>
(iv) the Initial Adjustments Amount (as hereinafter defined),
as the case may be; plus
(v) in the event the Closing shall not have occurred within 95
days after the Acceptance Date, an additional amount in cash obtained by
multiplying (A) the Preliminary Acquisition Price, after the adjustments set
forth in clauses (ii) through (iv), inclusive, times (B) 12% by (C) the number
of days elapsed between the Closing Date and such 95th day, divided by 365;
(c) Purchaser shall deliver to the Escrow Agent the Indemnification
Shares, which represent the Indemnification Escrow; and
(d) Purchaser shall deliver to Seller (or to any other person as
Seller may direct in writing at least five business days prior to the Closing
Date) shares of PriCellular Common Stock having an aggregate Current Market
Price as of the Closing Date of $14,500,000.
2.4 Acquisition Price Adjustment.
(a) The Preliminary Acquisition Price shall be increased or
decreased (the "Acquisition Price Adjustment") on a dollar-for-dollar basis for
the cumulative net adjustment required by the following: (i) the Cash Portion of
the Preliminary Acquisition Price shall be adjusted by dollar amount (positive
or negative) of the Net Working Capital of Seller on the Closing Date. As used
herein, the term "Net Working Capital" shall mean Seller's current assets (other
than Excluded Assets and, with respect to subscriber accounts receivable, net of
reserves calculated as follows: 2.5% for subscriber receivables that are current
or less than or equal to 30 days past due; 15% for subscriber receivables that
are between 31 and 60 days past due; 50% for subscriber receivables that are
between 61 and 90 days past due; and 100% for subscriber receivables that are
more than 90 days past due) minus current liabilities (other than Excluded
Liabilities, but including accrued expenses relating to Kentucky property
taxes), as such amounts are reflected on the Closing Date Balance Sheet (as
hereinafter defined); and (ii) if at Closing the number of actual ending
subscribers (excluding demos, loaners and employee accounts) for the Systems on
the last day of the month prior to Closing ("Actual Subscriber Number") is less
than 90% of the budgeted ending number of subscribers for the Systems as of the
month prior to Closing (as reflected on Schedule 2.4(a)(ii) (the "Minimum
Subscriber Number"), then there shall be deducted from the Cash Portion of the
Preliminary Acquisition Price an amount equal to $300 times the difference
between the Minimum Subscriber Number and the Actual Subscriber Number. If at
Closing the Actual Subscriber Number is greater than 110% of the budgeted ending
number of subscribers for the Systems as of the month prior to Closing (as
reflected on Schedule 2.4(a)(ii) (the "Maximum Subscriber Number"), then there
shall be added to the Cash Portion of the Preliminary Acquisition Price an
amount equal to $300 times the difference between the Maximum Subscriber Number
and the Actual Subscriber Number.
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(b) The initial adjustments to the Preliminary Acquisition Price
will be made at the Closing based upon a good faith estimate by Seller of the
dollar amounts of such adjustment (the "Initial Adjustments Amount") based upon
an unaudited balance sheet to be prepared by Seller as of the end of the month
immediately preceding the Closing Date, such estimate to be delivered by Seller
to Purchaser at least three business days prior to Closing along with such
balance sheet.
(c) As promptly as practicable after the Closing Date (but in no
event later than 60 days thereafter) Seller shall prepare and deliver to
Purchaser for its review and comment (i) a balance sheet dated as of the close
of business on the Closing Date (the "Closing Date Balance Sheet") and (ii) an
accompanying closing statement (the "Closing Statement") reasonably detailing as
of the close of business on the Closing Date Seller's determination of each
element of the Acquisition Price Adjustment. The Closing Date Balance Sheet
shall fairly present the financial position of the Seller as at the close of
business on the Closing Date in accordance with GAAP (except for the omission of
certain footnotes and other presentation items required by GAAP with respect to
such financial statements). If Purchaser objects to any amounts reflected on the
Closing Date Balance Sheet or the Closing Statement, Purchaser must, within 30
days after Purchaser's receipt of the Closing Date Balance Sheet and Closing
Statement, give written notice (the "Notice") to Seller specifying in reasonable
detail its objections, or Seller's determination of the Acquisition Price
Adjustment shall be final, binding and conclusive on the parties. With respect
to any disputed amounts, the parties shall meet in person and negotiate in good
faith during the 30 day period (the "Resolution Period") after the date of
Seller's receipt of the Notice to resolve any such disputes. If the parties are
unable to resolve all such disputes within the Resolution Period, then within
five business days after the expiration of the Resolution Period, all disputes
shall be submitted to Arthur Andersen & Co. or, if such firm is unavailable or
unwilling to resolve such disputes, to another nationally recognized accounting
firm mutually acceptable to Purchaser and Seller (the "Independent Accountant")
who shall be engaged to provide a final and conclusive resolution of all
unresolved disputes within 45 days after such engagement. The determination of
the Independent Accountant shall be final, binding and conclusive on the parties
hereto, and the fees and expenses of the Independent Accountant shall be borne
by the party who, in the Independent Accountant's determination, submitted a
disputed amount that differs more significantly from the amount finally
determined by the Independent Accountant. From and after the Closing Date,
Purchaser will provide Seller with access to the books, records and personnel of
Purchaser that Seller reasonably requests.
(d) If the Acquisition Price Adjustment (as finally determined in
accordance with the provisions set forth above) less the Initial Adjustments
Amount is a positive (negative) amount, then, within five business days after
such final determination, Purchaser (Seller) shall pay to Seller (Purchaser)
such amount in immediately available funds.
2.5 Allocation of Acquisition Price. On the Closing Date, Purchaser and
Seller shall mutually agree in writing upon the allocation of the Acquisition
Price among the Purchased Assets. Such allocation shall be adjusted as necessary
in connection with the final determination of the Acquisition Price Adjustment.
The parties agree that such allocation shall be made based
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upon the relative fair market values of the Purchased Assets as of the Closing
Date conforming with the requirements of Section 1060 of the Internal Revenue
Code of 1986, as amended. The parties will agree as to the fair market value of
the tangible personal property of Seller to be transferred to Purchaser on the
Closing Date. The parties agree to file with their respective federal income tax
returns for the tax year in which the Closing occurs IRS Form 8594 containing
the information agreed upon by the parties pursuant to this Section 2.5. Seller
and Purchaser agree not to assert for income tax purposes (including in
connection with any tax return, tax audit or similar proceeding) any allocation
of the Acquisition Price that differs from that determined pursuant to this
section and contained in IRS Form 8594.
2.6 The Closing. Unless this Agreement shall have been earlier terminated
in accordance with the terms hereof, the transactions contemplated by this
Agreement shall be consummated (the "Closing") at the offices of Kleinbard, Bell
& Brecker, 1900 Market Street, Philadelphia, Pennsylvania 19103, on the tenth
business day after receipt of the Regulatory Approvals (as hereinafter defined)
in accordance with Section 5.6, or at such other place or on such other date as
Purchaser and Seller may agree in writing. The date on which the Closing shall
occur is referred to in this Agreement as the "Closing Date." The Closing shall
be deemed to have occurred as of 11:59 p.m. on the Closing Date.
2.7 Rescission. In the event that the transactions contemplated hereby are
consummated prior to the receipt of the Final Orders and an initial FCC approval
is subsequently withdrawn and if at such time or thereafter the parties are
legally obligated to rescind, the parties shall rescind the transaction in a
manner that puts each party in the position it would have been as of the Closing
Date (or if Purchaser manages the Systems pursuant to the Management Agreement,
the date that Purchaser commences such management), had the transactions
contemplated hereby not been consummated. Purchaser further covenants and agrees
that in the event of a rescission pursuant to this Section 2.7, Purchaser will
transfer, assign and deliver the Purchased Assets to Seller in substantially the
same condition as the Purchased Assets existed on the Closing Date (or if
Purchaser manages the Systems pursuant to the Management Agreement, the date
that Purchaser commences such management), except for (i) ordinary wear and
tear, (ii) Purchased Assets sold, transferred or otherwise disposed of in the
ordinary course of business and (iii) changes in any Purchased Assets (including
the loss or destruction thereof) after the Balance Sheet Date to the extent such
changes are not due to the acts or omissions of Purchaser or would have occurred
absent the consummation of the transactions contemplated hereby; provided, that
in the event of the loss or destruction of any Purchased Assets, Purchaser shall
deliver to Seller all insurance proceeds, if any, Purchaser receives with
respect thereto.
2.8 Closing Costs; Transfer Taxes and Fees. Seller and Purchaser shall be
equally responsible for (i) any documentary and transfer taxes and any sales,
use or other taxes imposed by reason of the transfers of Purchased Assets
provided hereunder and any deficiency, interest or penalty asserted with respect
thereto; provided, that if the amount of such taxes exceeds $400,000 in the
aggregate, Purchaser shall be additionally responsible for the amount by which
such taxes exceed $400,000; (ii) any fees and costs of recording or filing all
applicable conveyancing instruments described in Section 8.l(a) or otherwise;
(iii) all costs of applying for
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new Permits and obtaining the transfer of existing Permits that may be lawfully
transferred; (iv) the filing fee required under the HSR Act (as hereinafter
defined) and (v) the costs and expenses of the environmental audits that are
conducted pursuant to Section 5.10. At the Closing, Purchaser will deliver to
Seller its portion of the tax liability in Section 2.8(i), and Seller will remit
such amount, together with its portion of the Section 2.8(i) liability, to the
appropriate government entity in Kentucky and within the statutory prescribed
time required under Kentucky law. In the event that Purchaser's portion of such
tax liability is not delivered to such taxing authority within thirty (30) days
of the Closing, Seller shall pay Purchaser interest equal to the prime rate of
interest charge by CoreStates Bank, N.A., plus two percent. The interest payment
shall be calculated as follows: (x) Purchaser's portion of the tax liability
multiplied by (y) a fraction the numerator of which is the number of days
between the Closing Date and the date the tax is paid and the denominator which
is 365.
3. Representations and Warranties of Seller . Seller represents and
warrants to Purchaser that:
3.1 Organizational Status. Seller is a limited partnership duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Seller has all requisite partnership power and authority to own, lease and
operate its assets, properties, and the Kentucky Business, and to carry on the
Kentucky Business as now being conducted.
3.2 Qualification. Seller is duly qualified to do business and is in good
standing as a foreign partnership in all jurisdictions where such qualification
is required except for those jurisdictions where the failure to be so qualified
would not reasonably be expected to have a Seller Material Adverse Effect.
3.3 Authorization; No Conflict. Seller has the full legal right and all
partnership power and authority required to enter into, execute and deliver this
Agreement and the documents and other agreements required to be executed and
delivered hereunder and to perform fully its obligations hereunder and
thereunder. The execution, delivery and performance of this Agreement by Seller
has been duly authorized by all necessary partnership action on the part of
Seller. This Agreement has been duly executed and delivered and constitutes, and
each of the other agreements and documents to be delivered by Seller hereunder
when executed and delivered by Seller will constitute, the valid and binding
obligation of Seller, enforceable in accordance with their respective terms,
subject to bankruptcy, insolvency, reorganization, moratorium or similar laws
now or hereafter in effect affecting creditors' rights generally. The execution,
delivery and performance of this Agreement and the documents and other
agreements to be delivered hereunder by Seller and the consummation of the
transactions contemplated hereby and thereby by Seller will not (i) violate any
provision of Seller's certificate of limited partnership or partnership
agreement, (ii) violate, conflict with or result in the breach of any of the
terms of result in a modification of the effect of otherwise give any other
contracting party the right to terminate, or constitute (or with notice or lapse
of time or both constitute) a default under, any contract to which Seller is a
party or by or to which it or any of its assets or properties
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may be bound or subject, excluding in any case such violations, conflicts,
breaches or defaults that would not individually or in the aggregate reasonably
be expected to have a Seller Material Adverse Effect, (iii) violate any order,
judgment, injunction, award or decree of any court, arbitrator or governmental
or regulatory body by which Seller, or the assets, properties or the Kentucky
Business of Seller are bound, (iv) violate any statute, law or regulation,
excluding in any case such violations that individually or in the aggregate
would not reasonably be expected to have a Seller Material Adverse Effect, or
(v) violate or cause any revocation of or limitation on any Permit the
violation, revocation or limitation of which could reasonably be expected to
have a Seller Material Adverse Effect.
3.4 Financial Statements. Seller has delivered to Purchaser copies of the
audited annual financial statements of Horizon Cellular Telephone Company, L.P.
("Horizon") as of December 31, 1995, 1994 and 1993 and for the years then ended
(collectively, the "Financial Statements"). The Financial Statements (i) are
true and correct in all material respects, (ii) fairly present the financial
condition of Horizon as of such dates and the results of its operations and
changes in its cash flows for the periods covered thereby, and (iii) were
prepared in accordance with GAAP. Seller has also delivered to Purchaser copies
of Seller's unaudited financial statements as of August 31, 1996 (the "Balance
Sheet Date") and for the period then ended (the "Unaudited Financial
Statements"). The Unaudited Financial Statements (i) are true and correct in all
material respects, (ii) fairly present the financial condition of Seller as of
such date and the results of its operations for the period covered thereby, and
(iii) were prepared in accordance with GAAP (subject to year-end adjustments and
except for the omission of certain footnotes and other presentation items
required by GAAP with respect to audited financial statements).
3.5 Compliance with Laws. Seller is in, and has operated in, compliance in
all material respects with all applicable federal (including the Communications
Act of 1934, as amended, and the rules, regulations, orders, policies and
procedures of the FCC promulgated thereunder (the "Communications Act")), state
and local laws, regulations and ordinances and any applicable requirements of
any governmental or regulatory body, court or arbitrator affecting its Business
or its assets, except to the extent set forth on Schedule 3.5 and except for
noncompliance that individually or in the aggregate has not and would not
reasonably be expected to have a Seller Material Adverse Effect.
3.6 Permits; FCC Licenses.
(a) Except as set forth on Schedule 3.5, Seller has all of the
Permits necessary to operate the Systems as now operated, except for those
Permits the absence of which individually or in the aggregate would not
reasonably be expected to have a Seller Material Adverse Effect. Such Permits
are in full force and effect, and are unimpaired by any acts or omissions of
Seller.
(b) Except as set forth on Schedule 3.5, Seller has obtained the FCC
Licenses in compliance with the Communications Act and is, and on the Closing
Date will be, the exclusive holders of the FCC Licenses. A list of the FCC
Licenses is set forth on
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Schedule 3.6(b). The FCC Licenses are in full force and effect. Except as set
forth on Schedule 3.7, there are no existing or, to Seller's knowledge,
threatened proceedings by or before the FCC that could reasonably be expected to
result in the revocation, cancellation, suspension, or material adverse
modification of the FCC Licenses, except for proceedings that affect the
cellular industry generally. Subject to obtaining the Regulatory Approvals,
Seller will transfer to Purchaser at Closing all of Seller's right, title and
interest in and to the FCC Licenses free and clear of any lien or other
encumbrance other than Permitted Encumbrances.
(c) Seller has obtained the PSC Licenses in compliance with the laws
of the Commonwealth of Kentucky, and Seller is, and on the Closing Date will be,
the exclusive holder of the PSC Licenses. A list of the PSC Licenses is set
forth on Schedule 3.6(c). The PSC Licenses are in full force and effect. There
are no existing or, to Seller's knowledge, threatened proceedings by or before
the PSC that individually or in the aggregate could reasonably be expected to
result in the revocation, cancellation, suspension, or material adverse
modification of the PSC Licenses, except for proceedings that affect the
cellular industry generally. Subject to obtaining the Regulatory Approvals,
Seller will transfer to Purchaser at Closing all of Seller's right, title and
interest in and to the PSC Licenses free and clear of any lien or other
encumbrance other than Permitted Encumbrances.
(d) A "Final Order," as used in this Agreement, means an action by
the FCC or PSC (i) that is not reversed, stayed, enjoined, set aside, annulled
or suspended within the deadline, if any, provided by applicable statute or
regulation, (ii) with respect to which no request for stay, motion or petition
for reconsideration or rehearing, application or request for review, or notice
of appeal or other judicial petition for review that is filed within such period
is pending, and (iii) as to which the deadline, if any, for filing any such
request, motion, petition, application, appeal or notice, and for the entry of
orders staying, reconsidering or reviewing on the FCC's or PSC's own motion have
expired.
3.7 Litigation. Except for legal or administrative proceedings affecting
the cellular telephone industry generally and except as set forth on Schedule
3.7, there is no action, suit, claim, arbitration, investigation or other legal
or administrative proceeding (collectively, "Actions") pending or, to Seller's
knowledge, threatened against Seller with respect to the Kentucky Business or
any of the Purchased Assets, excluding in any case such Actions that
individually or in the aggregate would not reasonably be expected to have a
Seller Material Adverse Effect.
3.8 Real Property.
(a) Schedule 3.8(a) sets forth a brief description of each parcel of
Owned Real Property used in connection with any of the Systems and showing, in
each case, the record title holder, location, improvements, the uses being made
thereof and any indebtedness secured by a mortgage or other lien thereon. Except
as set forth in Schedule 3.8(a), there are no leases, subleases, tenancies or
other rights of occupancy affecting such Owned Real Property.
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(b) Schedule 3.8(b) sets forth a list of all of the Real Property
Leases. There have been made available to Purchaser true and complete copies of
all of the Real Property Leases. All of the Real Property Leases are valid, in
full force and effect and binding upon Seller, and to Seller's knowledge, the
other parties thereto, enforceable in accordance with their respective terms,
subject to bankruptcy, insolvency, reorganization, moratorium or similar laws
now or hereafter in effect affecting creditors' rights generally. Seller is not
in default under any of them, nor does any condition exist that, with notice or
lapse of time or both, would constitute such a default, excluding in any case
such defaults that individually or in the aggregate would not reasonably be
expected to have a Seller Material Adverse Effect.
3.9 Personal Property Leases. Set forth on Schedule 3.9 is a list of all
Personal Property Leases, copies of which have been previously made available to
Purchaser. Each Personal Property Lease is valid, binding and enforceable
against Seller in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium or similar laws now or hereafter in effect affecting
creditors' rights generally. Seller is not in default of any Personal Property
Lease nor, to Seller's knowledge, has any event occurred that constitutes, or
with notice or lapse of time or both may constitute, a default under any
Personal Property Lease, excluding in any case such defaults that individually
or in the aggregate would not reasonably be expected to have a Seller Material
Adverse Effect.
3.10 Contracts and Other Agreements.
(a) Schedule 3.l0 lists the following contracts and other agreements
relating to the Kentucky Business to which Seller is a party:
(i) those contracts and other agreements that involve, as of
the date hereof, the receipt or payment by Seller of more than $25,000 annually;
and
(ii) those contracts and other agreements that involve the
receipt or payment after the date hereof by Seller of more than $10,000 annually
(but less than $25,000 annually) that are not terminable by Seller on thirty
(30) or fewer days' notice at any time without penalty.
(b) There have been made available to Purchaser true and complete
copies of all of the contracts and other agreements set forth on Schedule 3.10.
Except as disclosed on Schedule 3.10, all of such contracts and other agreements
are valid, in full force and effect, binding upon Seller, and, to Seller's
knowledge, the other parties thereto and enforceable in accordance with their
respective terms, subject to bankruptcy, insolvency, reorganization, moratorium
or similar laws now or hereafter in effect affecting creditors' rights
generally. Seller is not in default under any of them, nor, to Seller's
knowledge, does any condition exist that, with notice or lapse of time or both,
would constitute such a default, excluding in any case such defaults that
individually or in the aggregate would not reasonably be expected to have a
Seller Material Adverse Effect.
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3.11 Consents. Except for (i) the consent of such governmental or
regulatory body or third parties as are separately identified on Schedule 3.11
(the "Material Consents"), (ii) the consent of the FCC to the assignment of the
FCC Licenses from Seller to Purchaser, (iii) the consent of the PSC to the
assignment of the PSC Licenses from Seller to Purchaser, and (iv) the expiration
of the waiting period under the HSR Act, no consent, approval or authorization
of, or registration or filing with any person is required by Seller in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, excluding in any case such consents,
approvals, authorizations, registrations or filings, the failure of which to
obtain or make, as the case may be, individually or in the aggregate would not
reasonably be expected to have a Seller Material Adverse Effect.
3.12 Title; Condition. Seller has good and marketable title to all of the
Purchased Assets. Seller will at Closing convey to Purchaser good and marketable
title to all Purchased Assets, in each case free and clear of any lien or other
encumbrance other than Permitted Encumbrances.
3.13 No Material Adverse Change. Since the Balance Sheet Date, there has
been no Seller Material Adverse Change.
3.14 Taxes. Except as set forth on Schedule 3.14, (i) Seller has timely
filed or caused to be filed with the appropriate taxing authorities all true,
correct and complete tax returns for any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales, use, ad valorem, franchise,
capital, paid-up capital, profits, greenmail, license, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, property,
environmental or windfall profit tax, custom, duty or other like assessment or
charge of any kind whatsoever, together with any interest or any penalty,
addition to tax or additional amount imposed by any governmental authority
(domestic or foreign) responsible for the imposition of any such tax
(collectively, "Taxes"), (ii) all Seller's Taxes, in respect of periods
beginning before the Closing Date, have been timely paid or an adequate reserve
has been established therefor in the Financial Statements and (iii) there are no
pending or, to Seller's knowledge, threatened audits, investigations or claims
for or relating to any additional liability in respect of Seller's Taxes.
3.15 Environmental Matters. Neither the Kentucky Business nor the
operation thereof by Seller, nor the ownership or use of the Purchased Assets by
Seller or any of its Affiliates, violates any applicable Environmental Law, and
no condition or event has occurred with respect to the Business or Purchased
Assets that, with the giving of notice, lapse of time, or both, would constitute
a violation of any such Environmental Law, excluding in any event such
violations, conditions and events that, individually or in the aggregate, would
not reasonably be expected to have a Seller Material Adverse Effect. To Seller's
knowledge, no other person has violated any Environmental Law with respect to
the Kentucky Business or the Purchased Assets. Seller has never generated,
manufactured, refined, transported, treated, stored, handled, disposed,
transferred, produced or processed any Contaminant in any reportable quantity at
or in the vicinity of any Real Property. For purposes of this Section,
"Contaminant" means any waste, pollutant, hazardous or toxic substance or waste,
petroleum, petroleum-based substance or waste,
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special waste, or any constituent of any such substance of waste as defined in
or pursuant to any Environmental Law.
3.16 ERISA; Employee Benefits. Except as set forth on Schedule 3.16,
Seller does not maintain, and has never maintained, an "employee benefit plan"
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended, nor any other type of employee benefit plan. Except as
set forth on Schedule 3.16, all contributions required by law or contract to be
made to fund the employee benefit plans for any plan year, or other period on
the basis of which contributions are required ending before the date hereof,
have been made as of the date hereof. The transactions contemplated by this
Agreement shall not create any material obligation on the part of Purchaser for
any severance payment or similar payment to any employee of Seller or any of its
affiliates.
3.17 Intellectual Property. To Seller's knowledge, the conduct by Seller
of the Kentucky Business does not infringe upon or violate, and has not
infringed upon or violated, any patents, trademarks, service marks, trade names,
trade secrets, copyrights, license or rights of any person, including those of
Northern Telecom, and no claim is pending or, to Seller's knowledge, threatened
to the effect that the conduct by Seller of the Kentucky Business infringes upon
or violates any patents, trademarks, service marks, trade names, trade secrets,
copyrights, licenses or rights of any person.
3.18 Representations Correct. No representation or warranty or other
statement made by Seller herein or in any other document, certificate or
instrument furnished or to be furnished to Purchaser pursuant to this Agreement
or in connection with the transactions contemplated herein contains or will
contain any untrue statement of a material fact. All copies of agreements and
documents delivered and to be delivered to Purchaser pursuant hereto have been
and will be true, correct and complete.
3.19 Inventories. The inventories reflected on the Closing Date Balance
Sheet will be usable or salable in the ordinary course of business, except for
obsolete materials and materials of below standard quality, which have either
been written down in the accounts and records of Seller (with such write-down
reflected on the Closing Date Balance Sheet) to realizable market value or for
which adequate reserves have been provided for in such accounts and such
inventories will not be excessive in light of past experience or current
projections.
3.20 Condition of Cellular Assets. (a) The Purchased Assets are in a state
of good maintenance and repair, normal wear and tear excepted, and are in
operating condition.
(b) Seller has not sold, encumbered, assigned or transferred any
assets or properties which would have been included in the Purchased Assets if
the Closing had occurred on the Balance Sheet Date or on any date since then,
except for the sale of assets in the ordinary course of business consistent with
prior practice.
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(c) Seller has in operation or in cooperation with the neighbor
cellular providers through dual-licensed sites, as described on Schedule 3.20,
adequate cellular base stations required to provide 32 dBu contour coverage, as
calculated under the formula prescribed by the FCC in 47 C.F.R. ss.ss. 22.911,
to all areas of the Systems except for coverage gaps that are less than 50
contiguous square miles in size. Except as set forth on Schedule 3.5, all
cellular base and microwave stations in operation as of the date hereof are in
accordance with the FCC licenses therefor (subject to tolerances permitted under
FCC regulations), shall through the Closing Date be maintained in a state of
good maintenance and repair, normal wear and tear excepted, and shall be
maintained in operation.
3.21 Investment Representation. (a) Seller represents and warrants that
it, or any entity to which Seller assigns the right to acquire the PriCellular
Common Stock to be issued pursuant hereto, is an "accredited investor" within
the meaning of Rule 501(a) of Regulation D under the Securities Act, and it is
acquiring the shares of PriCellular Common Stock for its own account and not
with a view to, or for sale in connection with, any distribution thereof in
violation of the Securities Act. Seller understands that the shares of
PriCellular Common Stock have not been registered under the Securities Act by
reason of a specific exemption from registration provisions thereof which
depends upon, among other things, the bona fide nature of Seller's (or such
other entity's) investment intent as expressed herein. Seller (or such other
entity) hereby acknowledges and agrees that upon the original issuance thereof,
and until such time as the same is no longer required under the applicable
requirements of the Securities Act, the certificates representing shares of
PriCellular Common Stock may bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE LAWS
REGULATING THE SALE OF SECURITIES AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED UNLESS REGISTERED OR UNLESS AN OPINION OF
COUNSEL SATISFACTORY TO THE CORPORATION IS OBTAINED TO THE EFFECT
THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) Seller (or such other entity) further acknowledges and agrees
that it shall not transfer shares of PriCellular Common Stock where such
transfer would be in material violation of the Communications Act, or the rules,
regulations and published policies of the FCC promulgated pursuant thereto, or
would result in PriCellular's or any of its subsidiary's being in violation
thereof.
4. Representations and Warranties of Purchaser and PriCellular. Purchaser
and PriCellular jointly and severally represent and warrant to Seller as
follows:
4.1 Organizational Status. (a) PriCellular is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite
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corporate power and authority to own, lease and operate its assets, properties,
and its business, and to carry on its business as now being and as heretofore
conducted.
(b) Purchaser is a corporation duly organized, validly existing and
in good standing under the laws of the State of Alabama and has all requisite
corporate power and authority to own, lease and operate its assets, properties,
and its business, and to carry on its business as now being and as heretofore
conducted.
4.2 Qualification. Each of Purchaser and PriCellular is duly qualified to
do business and is in good standing as a foreign corporation in all
jurisdictions where such qualification is required except for those
jurisdictions where the failure to be so qualified would not reasonably be
expected to have a PriCellular Material Adverse Effect.
4.3 Capitalization. The authorized capitalization of PriCellular consists
of: 60,000,000 shares of Common Stock, par value $.01 per share, comprised of
40,000,000 shares of Class A Common Stock, par value $.01 per share, and
20,000,000 shares of Class B Common Stock, par value $.01 per share, and
10,000,000 shares of Preferred Stock, par value $.01 per share, comprised of
96,000 shares of Series A Cumulative Convertible Preferred Stock, $.01 per
share. As of June 30, 1996, there were 13,575,649 shares of Class A Common Stock
outstanding, 17,218,621 shares of Class B Common Stock outstanding, and 96,000
shares of Series A Cumulative Convertible Preferred Stock outstanding. No other
class or series of capital stock of PriCellular is, or as of the Closing Date
will be, authorized and issued. All such shares outstanding on June 30, 1996
have been duly authorized, validly issued and are fully paid and nonassessable.
Except as set forth on Schedule 4.3 and, except for options or other securities
issued pursuant to PriCellular's existing employee benefit plans, there no
outstanding options, warrants, rights, puts, calls, commitments or other
contracts, arrangements or understandings issued by or binding upon PriCellular
requiring or providing for, and there are no outstanding debt or equity
securities of PriCellular that upon the conversion, exchange or exercise thereof
would require or provide for, the issuance by PriCellular of any shares of
capital stock (or any other securities of PriCellular that, with notice, lapse
of time and/or payment of monies, are or would be convertible into or
exercisable or exchangeable for shares of capital stock of PriCellular). Except
as set forth on Schedule 4.3, there are no preemptive or similar rights
available to the existing holders of PriCellular Common Stock or other
securities of PriCellular. Except as set forth on Schedule 4.3, PriCellular has
not granted registration rights to any person with respect to any of its capital
stock or debt securities.
4.4 Authorization; No Conflict. Each of Purchaser and PriCellular has the
full corporate power and authority required to enter into, execute and deliver
this Agreement and the documents and other agreements required to be executed
and delivered hereunder and to perform fully its obligations hereunder and
thereunder. The execution, delivery and performance of this Agreement by
Purchaser have been duly authorized by all necessary corporate action on the
part of Purchaser and PriCellular, respectively. This Agreement has been duly
executed and delivered and constitutes, and each of the other agreements and
documents to be delivered by Purchaser and PriCellular hereunder when executed
and delivered by Purchaser or PriCellular, as the case
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may be, will constitute, the valid and binding obligation of Purchaser or
PriCellular, as the case may be, enforceable in accordance with their respective
terms, subject to bankruptcy, insolvency, reorganization, moratorium or similar
laws now or hereafter in effect affecting creditors' rights generally. The
execution, delivery and performance of this Agreement and the documents and
other agreements to be delivered hereunder by Purchaser or PriCellular and the
consummation of the transactions contemplated hereby and thereby by Purchaser or
PriCellular will not (i) violate any provision of Purchaser's or PriCellular's
certificate of incorporation or bylaws, (ii) to PriCellular's knowledge,
violate, conflict with or result in the breach of any of the terms of, result in
a modification of the effect of otherwise give any other contracting party the
right to terminate, or constitute (or with notice or lapse of time or both
constitute) a default under, any contract to which Purchaser or PriCellular is a
party or by or to which it or any of its assets or properties may be bound or
subject, excluding in any case such violations, conflicts, breaches or defaults
that would not reasonably be expected to have a PriCellular Material Adverse
Effect, (iii) violate any order, judgment, injunction, award or decree of any
court, arbitrator or governmental or regulatory body by which Purchaser or
PriCellular, or their respective assets or properties are bound, (iv) to
PriCellular's knowledge, violate in any respect any statute, law or regulation,
excluding in any case such violations that would not reasonably be expected to
have a PriCellular Material Adverse Effect, (v) violate or cause any revocation
of or limitation on any permit, the violation, revocation or limitation of which
could reasonably be expected to have a PriCellular Material Adverse Effect.
4.5 Compliance with Laws. To PriCellular's knowledge, each of PriCellular
and Purchaser is in, and has operated in, compliance in all material respects
with all applicable federal (including the Communications Act), state and local
laws, regulations and ordinances and any applicable requirements of any
governmental or regulatory body, court or arbitrator affecting its business or
its assets, except for noncompliance that has not and would not reasonably be
expected to have a PriCellular Material Adverse Effect.
4.6 Litigation. Except for legal or administrative proceedings affecting
the cellular telephone industry generally, there is no Action pending or, to
PriCellular's knowledge, threatened against Purchaser or PriCellular with
respect to its business, excluding in any case such Actions that would not
reasonably be expected to have a PriCellular Material Adverse Effect.
4.7 Consents. Except for (i) the consent of the FCC to the assignment of
the FCC Licenses from Seller to Purchaser, (ii) the consent of the PSC to the
assignment of the PSC Licenses from Seller to Purchaser, (iii) the expiration of
the waiting period under the HSR Act, and (iv) the consent of such other
governmental or regulatory body or third parties as are separately identified on
Schedule 4.7, no approval, consent or authorization of, or registration or
filing with any person is required by Purchaser in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
4.8 FCC and PSC Matters. Purchaser is fully qualified under the
Communications Act and any comparable Kentucky state law to be an FCC and PSC
licensee, respectively, and to
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be approved as the assignee of the FCC Licenses and the PSC Licenses,
respectively. PriCellular knows of no reason why the FCC and the PSC will not
grant its consent to the assignment of the FCC Licenses and the PSC Licenses,
respectively, from Seller to Purchaser. Neither Purchaser, nor any "real party
in interest" (as defined by Section 22.13 of the FCC's rules) (i) has had the
FCC or PSC deny an application for an authorization, (ii) has had the FCC or PSC
revoke an authorization granted to it, or (iii) has been the subject of an
investigation by the FCC or PSC.
4.9 Financial Ability to Close. Each of PriCellular and Purchaser
presently has, and at Closing will have, the financial ability to perform its
respective obligations under this Agreement.
4.10 Share Validity. The shares of PriCellular Common Stock to be issued
to the Seller hereunder shall be, upon such issuance in accordance with this
Agreement, duly authorized, validly issued, fully paid and nonassessable, and
free and clear of any liens and preemptive and other similar rights.
4.11 Securities Law Compliance. Assuming the representations and
warranties of Seller set forth in Section 3.21 hereof are true and correct, the
issuance of the shares of PriCellular Common Stock made pursuant to this
Agreement will be exempt from the registration requirements of the Securities
Act and all applicable state securities or "Blue Sky" laws. PriCellular has
given Seller and its agents, and agrees to continue to give Seller and its
agents through the Closing Date, the opportunity to ask questions of, and
receive answers from, executive officers of PriCellular concerning PriCellular
and the PriCellular Common Stock. Neither PriCellular nor, to PriCellular's
knowledge, any person acting on its behalf has, in connection with the
PriCellular Shares offered hereby, engaged in (i) any form of general
solicitation or general advertising (as those terms are used within the meaning
of Rule 502(c) under the Securities Act); (ii) any action involving a public
offering within the meaning of Section 4(2) of the Securities Act; or (iii) any
action that would require the registration under the Securities Act of the
offering and sale of the PriCellular Shares pursuant to this Agreement or that
would violate applicable state securities or "Blue Sky" laws. PriCellular has
not made and will not prior to the Closing make, directly or indirectly, any
offer or sale of securities of the same or a similar class as the PriCellular
Shares if as a result the offer and sale of the PriCellular Shares contemplated
hereby would fail to be entitled to exemption from the registration requirements
of the Securities Act. As used in this Section 4.11, the terms "offer" and
"sale" have the meanings specified in Section 2(3) of the Securities Act.
4.12 Public Filings. (a) PriCellular has made available to Seller true and
complete copies of its annual report on Form 10-K for the fiscal year ended
December 31, 1995, its quarterly reports on Form 10-Q for fiscal quarters ended
March 31, 1996 and June 30, 1996, respectively, all current reports on Form 8-K
filed since January 1, 1996, its 1995 Annual Report to Stockholders and its
proxy statement in connection with the 1996 annual meeting of stockholders
(collectively, the "SEC Documents") and will make available to Seller any
similar SEC Documents filed with the U.S. Securities and Exchange Commission
(the "SEC") on or before the Closing Date. As of their respective filing dates,
each SEC Document complied, or
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will comply, in all material respects with the requirements of the Securities
Exchange Act, and as of their respective dates none of the SEC Documents
contained, or will contain, any untrue statement of a material fact or omitted,
or will omit, to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. As used in this Agreement, the
consolidated balance sheet of PriCellular and its consolidated subsidiaries at
June 30, 1996 included in the Form 10-Q for the fiscal quarter then ended is
hereinafter referred to as the "PriCellular Balance Sheet," and June 30, 1996 is
hereinafter referred to as the "PriCellular Balance Sheet Date."
(b) Except to the extent expressly set forth in, or contemplated by,
the PriCellular Balance Sheet, or the notes, schedules or exhibits thereto, or
as disclosed in, or contemplated by, the SEC Documents, (i) as of the
PriCellular Balance Sheet Date, neither PriCellular nor any of its consolidated
subsidiaries had any material liabilities or obligations (whether absolute,
contingent, accrued or otherwise) that would be required to be included on a
consolidated or condensed balance sheet or in the notes, schedules or exhibits
thereto prepared in accordance with GAAP and (ii) since the PriCellular Balance
Sheet Date, PriCellular and its consolidated subsidiaries have not incurred any
such material liabilities or obligations other than in the ordinary course of
business or as so disclosed or contemplated.
4.13 Title Condition. PriCellular has good and marketable title to all of
its assets, except to the extent that the failure to have such title would not,
individually or in the aggregate, have a PriCellular Material Adverse Effect.
4.14 No Material Adverse Change. Since the PriCellular Balance Sheet Date,
there has been no PriCellular Material Adverse Change.
4.15 Representations Correct. No representation or warranty or other
statement made by Purchaser or PriCellular herein or in any other document,
certificate or instrument furnished to or to be furnished to Seller pursuant to
this Agreement or in connection with the transactions contemplated herein
contains or will contain any untrue statement of a material fact. All copies of
agreements and documents delivered and to be delivered to Seller pursuant hereto
have been and will be true, complete and correct.
5. Covenants of Seller, PriCellular and Purchaser. Seller, on the one
hand, and PriCellular and Purchaser, jointly and severally, on the other,
covenant and agree with the other as follows:
5.1 Continuance of Business. From the date hereof until the Closing Date
(or the earlier termination hereof), Seller agrees that it will, unless
otherwise consented to in writing by Purchaser, which consent will not be
unreasonably withheld, conditioned or delayed:
(a) use commercially reasonable efforts to carry on the Kentucky
Business in the usual, regular and ordinary course in substantially the same
manner as heretofore carried on; preserve intact all material Permits and the
present business organization of the Kentucky
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Business; maintain the properties and assets (including the Purchased Assets) of
the Kentucky Business in good condition and repair, normal wear and tear
excepted; and use its best efforts to preserve its relationships with customers,
suppliers and others having business dealings with the Kentucky Business to the
end that its goodwill and ongoing business shall be conducted on substantially
the same basis on the Closing Date as on the date hereof;
(b) use commercially reasonable efforts to increase its net
activations of subscribers in the usual, regular and ordinary course in
substantially the same manner as heretofore carried on and consistent with the
budget previously provided to Purchaser, provided that, in the course thereof,
Seller will not offer materially different standard rate plans, activation terms
or equipment pricing;
(c) keep in full force and effect insurance comparable to that
carried by Seller with respect to the Kentucky Business and the Purchased Assets
on the date hereof;
(d) perform in all material respects all of Seller's obligations
under all contracts and other agreements relating to the Kentucky Business,
including the discharge of all accounts payable of the Kentucky Business in
accordance with past practices, except when the amount thereof is being
contested in good faith;
(e) not amend its certificate of limited partnership or limited
partnership agreement in any way which could reasonably be expected to have a
Seller Material Adverse Effect or which would prevent, enjoin, alter or
materially delay the transactions contemplated hereby;
(f) not amend, terminate or waive any rights under any material
Contracts or enter into any material Contracts relating to the Kentucky
Business, except in the ordinary course of business; and
(g) shall at all times prior to the Closing Date maintain the FCC
Licenses and PSC Licenses in full force and effect and shall maintain the books,
accounts and records in the usual, regular and ordinary manner on a basis
consistent with prior years and in accordance with GAAP.
Notwithstanding the foregoing, Seller shall not be deemed to have been breached
this Section 5.1 by any action taken by (or any omission to take any action
required by) Purchaser as manager of the Systems in accordance with the terms of
the Management Agreement.
5.2 Access to Information; Notice of Breach. From the date hereof until
the Closing Date (or the earlier termination hereof), at reasonable times and
upon reasonable advance written notice to the Executive Officers, Purchaser
shall be entitled, through its employees and representatives, to make such
investigation of the assets, properties, facilities, personnel, business and
operations of the Kentucky Business and such examination of the books, records
and financial condition of the Kentucky Business as Purchaser reasonably
requests; provided,
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however, that any such inspection shall be done in such a manner so as not to
unreasonably disrupt Seller's conduct of the Kentucky Business and shall be
subject to any reasonable restrictions imposed by the Executive Officers.
Purchaser agrees to provide Seller with prompt written notice if Purchaser
determines that, based upon information provided to Purchaser or through its own
investigation, Seller is in breach of any representation, warranty or covenant
of Seller set forth in this Agreement. Seller agrees to provide Purchaser with
prompt written notice if Seller determines that Purchaser is in breach of any
representation, warranty or covenant of Purchaser set forth in this Agreement.
If this Agreement is terminated, Purchaser agrees to return or cause to be
returned all such information provided to Purchaser or its representatives
within five days after the date of such termination.
5.3 Governmental Permits and Approvals; Consents.
(a) Seller and Purchaser shall use commercially reasonable efforts
to obtain promptly all permits and approvals (including Material Consents) from
any governmental or regulatory body or third-party necessary for lawful
consummation of the Closing. In furtherance of the foregoing, Purchaser agrees
to provide all information (including financial information) that is reasonably
requested by any person from whom any approval or consent (including any
Material Consent) is necessary for lawful consummation of the Closing.
(b) With respect to any Material Consent that Seller is unable to
obtain and deliver to Purchaser, Seller and Purchaser shall use commercially
reasonable efforts to (i) provide to Purchaser the benefits of the related
Restricted Interest, and (ii) cooperate in reasonable and lawful arrangements
designed to provide such benefits to Purchaser.
5.4 Employees; Employee Compensation. Seller agrees to terminate each of
its employees as of the Closing Date. Purchaser has no obligation to re-employ
any of the employees of Seller. Seller shall not make any representations to the
contrary to any such employees. At least 14 days prior to the Closing Date,
Purchaser shall provide notice to Seller identifying any employees of Seller to
whom Purchaser does not intend to extend offers of employment; provided, that
Seller agrees that it will not disclose the contents of such notice or of any
discussions between Seller and Purchaser regarding any employees of Seller
without the prior written consent of Purchaser. Purchaser shall consult with
Seller prior to any communications with employees regarding future employment.
Seller shall use commercially reasonable efforts to maintain staffing at current
levels and with existing employees through Closing except as previously
disclosed by Seller and as otherwise agreed to by the parties.
5.5 HSR Act. Promptly (but in any event within ten business days) after
the date hereof, the parties shall file all information and documents required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act").
5.6 Regulatory Approvals.
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(a) The parties agree that in order to consummate the transactions
contemplated hereby, the FCC and the PSC shall have given their respective
consents to the assignment of the FCC Licenses and the PSC Licenses from Seller
to Purchaser and to the transactions contemplated hereby (collectively, the
"Regulatory Approvals"), and, subject to Section 5.6(b), the consent of the FCC
and PSC shall have become Final Orders.
(b) Notwithstanding anything to the contrary contained herein or
otherwise, if no petitions to deny or comments against the FCC application to
assign the FCC Licenses from Seller to Purchaser have been filed within the
applicable public comment period and the FCC thereafter grants its consent to
the assignment and such grant becomes legally effective (the "Effective
Orders"), Purchaser may, at its option by written notice to Seller, waive on
behalf of the parties the agreement in Section 5.6 (a) that the Regulatory
Approvals with respect to the FCC Licenses shall have become Final Orders.
(c) Promptly (but in any event within five business days) after the
execution hereof, the parties shall submit for filing to the FCC and the PSC all
information and documents required in connection with obtaining the approvals of
the FCC and the PSC to the transactions contemplated by this Agreement.
(d) Promptly after execution hereof, Seller shall undertake to
obtain licenses from the FCC that reflect authorization for operations on the
paths of the microwave stations listed on Schedule 3.5 (the "Schedule 3.5
Paths"). In the event that corrected licenses cannot be obtained from the FCC,
Seller shall undertake to file any applications necessary to obtain licenses
that authorize operations on the Schedule 3.5 Paths (the "Modification
Applications"). The FCC's approval of the Modification Applications shall not be
a condition to the obligation of either Purchaser or Seller to consummate the
transactions contemplated hereby. If the FCC has not granted the Modification
Applications as of the date 14 days prior to the Closing Date, Purchaser shall
undertake, at Seller's sole expense, to obtain special temporary authorization
from the FCC to operate the Schedule 3.5 Paths commencing on the Closing Date.
If Purchaser obtains special temporary authorization to operate the Schedule 3.5
Paths commencing on the Closing Date, Purchaser and Seller shall thereafter
cooperate to amend, at Seller's sole expense, the Modification Applications to
specify Purchaser as the applicant. If, due to the pendency of the Modification
Applications, Seller is unable to assign the FCC licenses associated with the
Schedule 3.5 Paths on the Closing Date, Purchaser and Seller shall cooperate, at
Seller's sole expense, to make all necessary filings with the FCC to authorize
Purchaser to operate the Schedule 3.5 Paths as of the Closing Date, and shall
thereafter cooperate, at Seller's sole expense, to assign the licenses
reflecting authorization for operations on the Schedule 3.5 Paths.
5.7 Restrictions on Certain Actions. From the date hereof until the
earlier to occur of the Closing Date or the termination of this Agreement,
Purchaser will not, and Purchaser will use commercially reasonable efforts to
ensure that all persons whose actions or ownership interests would be
attributable to Purchaser under the Communications Act or any comparable
Kentucky state law will not, in any manner, directly or indirectly, solicit,
initiate, encourage or participate in applications, bids, purchases or
negotiations with respect to the acquisition of any interest in
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an FCC or PSC license that, if consummated, would have the effect under the
Communications Act or any comparable Kentucky state law of preventing or
delaying Purchaser from consummating the acquisition of the Purchased Assets as
contemplated by this Agreement.
5.8 Casualty or Condemnation. If, after the date hereof but prior to the
Closing Date, any of the Purchased Assets is damaged, destroyed or lost by fire
or other casualty, or if condemnation or eminent domain proceeding are proposed,
threatened or commenced against any of the Purchased Assets, Seller will
promptly notify Purchaser of such event. Seller shall, at its option, (i)
repair, rebuild or replace the portion of the Purchased Assets damaged,
destroyed or lost prior to the Closing Date, or (ii) assign to Purchaser at
Closing any and all insurance or condemnation proceeds, if any, payable as the
result of such casualty or condemnation.
5.9 Tax Cooperation; Allocation of Taxes. (a) Purchaser and Seller agree
to furnish or cause to be furnished to each other, upon request, as promptly as
practicable, such information and assistance relating to the Purchased Assets,
the Systems and the Kentucky Business as is reasonably necessary for the filing
of all Tax returns, and making of any election related to Taxes, the preparation
for any audit by any taxing authority, and the prosecution or defense of any
claim, suit or proceeding relating to any Tax return. Seller and Purchaser shall
cooperate with each other in the conduct of any audit or other proceeding
related to Taxes involving the Purchased Assets or the Kentucky Business and
each shall execute and deliver such powers of attorney and other documents as
are necessary to carry out the intent of this paragraph (a) of Section 5.9.
(b) All real property taxes, personal property taxes and similar ad
valorem obligations levied with respect to the Purchased Assets for a taxable
period which includes (but does not end on) the Closing Balance Sheet Date
(collectively, the "Apportioned Obligations") shall be apportioned between
Seller and Purchaser as of the Closing Date based on the number of days of such
taxable period included in the period prior to the Closing Date and the number
of days of such taxable period included in the period after the Closing Date;
provided that any days during the Management Period shall be attributed to the
period after the Closing Date. Seller shall be liable for the proportionate
amount of such taxes that is attributable to the period prior to the Closing
Date (excluding any days during the Management Period), and Purchaser shall be
liable for the proportionate amount of such taxes that is attributable to the
period following the Closing Date (including any days during the Management
Period). Within 90 days after the Closing Date, Seller and Purchaser shall
present a statement to the other setting forth the amount of reimbursement to
which each is entitled under this Section 5.9(b) together with such supporting
evidence as is reasonably necessary to calculate the proration amount. The
proration amount shall be paid by the party owing it to the other within 10 days
after delivery of such statement. Thereafter, Seller shall notify Purchaser upon
receipt of any bill for real or personal property taxes relating to the
Purchased Assets, part or all of which are attributable to the period after the
Closing Date (including any days during the Management Period), and shall
promptly deliver such bill to Purchaser who shall pay the same to the
appropriate taxing authority, provided that if such bill covers the period prior
to the Closing Date (excluding any days in the Management Period), Seller shall
also remit prior to the due date of assessment to Purchaser
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payment for the proportionate amount of such bill that is attributable to the
such pre-Closing Date period. In the event that either Seller or Purchaser shall
thereafter make a payment for which it is entitled to reimbursement under this
Section 5.9(b), the other party shall make such reimbursement promptly but in no
event later than 30 days after the presentation of a statement setting forth the
amount of reimbursement to which the presenting party is entitled along with
such supporting evidence as is reasonably necessary to calculate the amount of
reimbursement. Any payment required under this Section 5.9 and not made within
10 days of delivery of the statement shall bear interest at the rate per annum
determined, from time to time, under the provisions of Section 6621(a) (2) of
the Internal Revenue Code of 1986, as amended, for each day until paid.
5.10 Environmental Audits.
(a) Seller will cause to be conducted preliminary environmental site
assessments (Phase Ones) ASTM Standard of each parcel of its Real Property. Such
Phase Ones shall be performed by licensed environmental professionals selected
by Seller with the consent of Purchaser, which consent will not be unreasonably
withheld, conditioned or delayed. Copies of the reports of each Phase One
conducted will be provided to Purchaser at least 30 days prior to the Closing.
(b) If any Phase One reveals any condition that the Purchaser
reasonably determines would be likely to require remediation under applicable
state or federal law, then Seller shall have the option of undertaking such
remediation itself at its expense or relocating the affected cell site provided
that the same coverage will be afforded in each party's reasonable determination
(in which case the affected asset will be excluded from, and the new site and
related assets shall be included in, the Purchased Assets and the Assumed
Liabilities). If the foregoing remediation or relocation, as applicable, has not
been completed by Closing, a portion of the Acquisition Price (representing the
parties' reasonable estimation of the remaining remediation or relocation costs
to be incurred) shall be delivered into escrow, subject to a mutually
satisfactory escrow arrangement, pending completion of such remediation or
relocation after Closing. Such payments shall not affect the amount of the
Indemnification Escrow, if any, nor be subject to Section 11.5.
(c) Notwithstanding the foregoing, if it is estimated that the
remediation costs will exceed $1,000,000, Seller may, at its option, elect not
to undertake such remediation or relocation, and may instead elect to terminate
this Agreement without further cost or obligation on the part of any party
hereto.
(d) Notwithstanding the foregoing, if it is estimated that the
remediation costs will exceed $1,000,000 then Purchaser shall have the right, at
its option, to terminate this Agreement without further cost or obligation on
the part of any party hereto.
(e) Subject to the foregoing, if any Phase One or Phase Two uncovers
an environmental condition of which Seller does not have knowledge on the date
hereof and that
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due to Seller's then-gained knowledge of such condition, then comprises a breach
of any of Seller's representations or warranties herein (which were qualified as
to Seller's knowledge), Seller shall not have breached such representation or
warranty of this Agreement.
5.11 Disclaimer of Other Representations and Warranties. Purchaser
acknowledges and agrees that Seller does not make, and has not made, any
representations or warranties relating to Seller, the Kentucky Business or the
Purchased Assets other than the representations and warranties of Seller
expressly set forth in this Agreement or in any agreement or certificate
delivered pursuant hereto. Without limiting the generality of the disclaimer set
forth in the preceding sentence, Seller does not make, and Seller, its officers,
employees and agents have not made, and shall not be deemed to have made any
representations or warranties in the Confidential Offering Memorandum dated
September 1995, and any supplements or addenda thereto (collectively, the
"Offering Memorandum"), any presentation relating to Seller, the Kentucky
Business or the Purchased Assets given in connection with the transactions
contemplated by this Agreement, in any filing made by or on behalf of Seller
with any governmental agency or in any other information provided to or made
available to Purchaser, and no statement contained in the Offering Memorandum,
made in any such presentation, made in any such filing or contained in any such
other information shall be deemed to be a representation or warranty of Seller
hereunder or otherwise.
5.12 Guaranty by PriCellular of Purchaser's Obligations. PriCellular
agrees to take all action necessary or appropriate to cause and enable Purchaser
to perform all of its covenants, agreements and obligations under this
Agreement. In addition, PriCellular hereby irrevocably and unconditionally
guarantees to Seller the prompt and full discharge by Purchaser of all of
Purchaser's covenants, agreements, obligations and liabilities under this
Agreement, including, without limitation, the due and punctual payment of all
amounts which are or may become due and payable by Purchaser hereunder when and
as the same shall become due and payable (collectively, the "Purchaser
Obligations"), in accordance with the terms hereof. PriCellular acknowledges and
agrees that, with respect to all Purchaser Obligations to pay money, such
guaranty shall be a guaranty of payment and performance and not of collection
and shall not be conditioned or contingent upon the pursuit of any remedies
against Purchaser. If Purchaser shall default in the due and punctual
performance of any Purchaser Obligation, including the full and timely payment
of any amount due and payable pursuant to any Purchaser Obligation, PriCellular
will forthwith perform or cause to be performed such Purchaser Obligation and
will forthwith make full payment of any amount due with respect thereto at its
sole cost and expense.
5.13 Excluded Leases. [Intentionally omitted.]
5.14 Supplemental Disclosure. Seller shall have the right, from time to
time, prior to the Closing Date to supplement the Schedules hereto relating to
representations and warranties, Purchased Assets or Prepaid Expenses with
respect to any matter hereafter arising that was not known as of the date hereof
but that, if existing or known as of the date hereof, would have been required
to be set forth or described in the Schedules hereto. Notwithstanding the
foregoing, (i) no such supplemental disclosure shall relieve Seller in any way
from its indemnification
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obligations pursuant to Section 11.1 if any such representation or warranty was
inaccurate or incorrect when given and (ii) such supplemental disclosure by
Seller shall not (unless expressly contemplated by this Agreement) alter, amend
or otherwise expand the scope of the Assumed Liabilities as described herein on
the date hereof, cause any Seller Material Adverse Change or change any of the
financial terms hereof.
5.15 Like-Kind Exchange. At Purchaser's request, and at no cost to Seller,
Seller will agree to take all actions reasonably requested by Purchaser in order
to effectuate all or any part of the transactions contemplated by this Agreement
as a like-kind exchange in accordance with Section 1031 of the Internal Revenue
Code of 1986, as amended, and the rules and regulations thereunder. Purchaser
agrees to indemnify Seller pursuant to Section 11 hereof for any Losses incurred
by Seller in connection with such actions or as a result of such like-kind
exchange.
5.16 Registration Statement. At Seller's request and in accordance with
the Registration Rights Agreement, PriCellular shall, at its expense, prepare
and file, on the Closing Date, a registration statement on Form S-3 (the
"Registration Statement") under the Securities Act with the SEC.
5.17 Securities Filings. PriCellular agrees that no information (financial
or otherwise) concerning Seller, its financial condition or results of
operations (collectively, the "Seller Information") may be included in any SEC
Documents unless Seller has reviewed such Seller Information and such SEC
Document, in advance of the filing thereof, and has consented in writing (which
consent shall not be unreasonably withheld or delayed) that any such Seller
Information may be included therein; provided, that no such consent shall be
required if, in the reasonable opinion of PriCellular's legal counsel, such
disclosure is required by applicable law.
6. Conditions Precedent to Purchaser's and PriCellular's Obligations. The
obligation of Purchaser and PriCellular to consummate the transactions
contemplated hereby is subject to the satisfaction on or prior to the Closing
Date of the following conditions, any of which may be waived in writing by
Purchaser or PriCellular (provided that if any condition shall not have been
satisfied due to the action or inaction of Purchaser or PriCellular or any of
its affiliates, such condition shall be deemed to have been satisfied or waived
by Purchaser and PriCellular):
6.1 Regulatory Approvals. All Regulatory Approvals shall have been
received in accordance with the provisions of Section 5.6.
6.2 Premerger Notification Compliance. All requirements under the HSR Act
and the rules promulgated thereunder applicable to the transactions contemplated
hereby shall have been met, including all necessary filing and waiting
requirements, and neither the United States Department of Justice nor the
Federal Trade Commission shall have raised an objection to the transactions
contemplated hereby.
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6.3 Representations and Warranties on Closing Date. All representations and
warranties of Seller made in this Agreement and in any certificate or other
writing delivered by Seller pursuant hereto shall be true and correct on and as
of the Closing Date with the same force and effect as though such
representations and warranties were made on and as of the Closing Date, except
for (i) inaccuracies that, disregarding all qualifications and exceptions
contained in such representations and warranties relating to materiality, Seller
Material Adverse Effect or Seller Material Adverse Change, would not
individually or in the aggregate reasonably be expected to have a Seller
Material Adverse Effect, (ii) changes contemplated by this Agreement, (iii)
inaccuracies that have been waived in writing by Purchaser and (iv)
representations and warranties that are made as of a specific date.
6.4 Terms, Covenants and Conditions. All the terms, covenants and
conditions of this Agreement to be complied with and performed by Seller on or
prior to the Closing Date shall have been complied with and performed in all
material respects unless waived in writing by Purchaser.
6.5 No Material Adverse Change. There shall have been no Seller Material
Adverse Change or any event or occurrence that could reasonably be expected to
have a Seller Material Adverse Effect since the date of this Agreement.
6.6 Absence of Litigation. No Action shall have been instituted before any
court or governmental or regulatory body by any person (other than Purchaser or
any of its affiliates), or instituted or threatened by any governmental or
regulatory body, to prevent the carrying out of the transactions contemplated
hereby.
6.7 Absence of Restricted Interests. There shall be no Restricted Interests
as of the Closing Date which are reasonably likely to result in a Seller
Material Adverse Change.
6.8 Closing Deliveries. Seller shall have delivered or caused to be
delivered to Purchaser at Closing those items specified in Section 8.1.
7. Conditions Precedent to Seller's Obligations. The obligation of Seller
to consummate the transactions contemplated hereby is subject to the
satisfaction on or prior to the Closing Date of the following conditions, any of
which may be waived in writing by Seller (provided that if any condition shall
not have been satisfied due to the action or inaction of Seller or any of its
affiliates, such condition shall be deemed to have been satisfied or waived by
Seller):
7.1 Regulatory Approvals. All Regulatory Approvals shall have been received
in accordance with the provisions of Section 5.6.
7.2 Premerger Notification Compliance. All requirements under the HSR Act
and the rules promulgated thereunder applicable to the transactions contemplated
hereby shall have been met, including all necessary filing and waiting
requirements, and neither the United States
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Department of Justice nor the Federal Trade Commission shall have raised an
objection to the transactions contemplated hereby.
7.3 Representations and Warranties on Closing Date. All representations and
warranties of Purchaser and PriCellular contained in this Agreement shall be
true and correct on and as of the Closing Date with the same force and effect as
though such representations and warranties were made on and as of the Closing
Date, except for (i) inaccuracies that, disregarding all qualifications and
exceptions contained in such representations and warranties relating to
materiality, PriCellular Material Adverse Effect or PriCellular Material Adverse
Change, would not individually or in the aggregate reasonably be expected to
have a PriCellular Material Adverse Effect, (ii) inaccuracies that have been
waived in writing by Seller and (iii) representations and warranties that are
made as of a specific date.
7.4 Terms, Covenants and Conditions. All the terms, covenants and
conditions of this Agreement to be complied with and performed by Purchaser and
PriCellular on or prior to the Closing Date shall have been complied with and
performed in all material respects unless waived in writing by Seller.
7.5 No PriCellular Material Adverse Change. There shall have been no
PriCellular Material Adverse Change or any event or occurrence that could
reasonably be expected to have a PriCellular Material Adverse Effect since the
date of this Agreement.
7.6 Absence of Litigation. No Action shall have been instituted before any
court or governmental or regulatory body by any person (other than Seller or any
of its affiliates) or instituted or threatened by any governmental or regulatory
body, to prevent the carrying out of the transactions contemplated hereby.
7.7 Registration Statement. PriCellular shall have filed the Registration
Statement with the SEC.
7.8 Closing Deliveries. Purchaser shall have delivered or caused to be
delivered to Seller at Closing those items specified in Section 8.2.
8. Deliveries at the Closing. The following deliveries shall be made at the
Closing, each of which shall be conditional on completion of all the others and
all of which shall be deemed to have taken place simultaneously:
8.1 Seller's Deliveries. At the Closing, Seller shall deliver or cause to
be delivered to Purchaser all of the following:
(a) all conveyances, deeds, assignments, bills of sale, and other
appropriate conveyancing instruments transferring to Purchaser the Purchased
Assets, along with any other documents that Purchaser reasonably requests;
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(b) the opinions of Kleinbard, Bell & Brecker, corporate counsel to
Seller, and Latham & Watkins, FCC counsel to Seller, substantially in the forms
to be negotiated in good faith by the parties within ten business days hereof
and attached hereto as Exhibits 8.l(b)(i) and 8.1(b)(ii), respectively;
(c) the Capital Expenditures Summary;
(d) a certificate executed by an executive officer of Horizon G.P.,
Inc., a Delaware corporation ("Horizon Corporate") that is the general partner
of KCCGP, L.P., a Delaware limited partnership ("KCCGP") that is the general
partner of Seller, confirming the matters contained in Sections 6.3, 6.4 and
6.5;
(e) a certificate of the secretary of Horizon Corporate attesting to
(i) the resolutions adopted by the board of directors of Horizon Corporate duly
authorizing the execution, delivery and performance of this Agreement by Seller
and the execution and delivery by Seller of all instruments and documents
contemplated hereby, and (ii) the signatures of the officers of Horizon
Corporate who have been authorized to execute and deliver this Agreement and any
other agreement executed or to be executed in connection herewith;
(f) good standing certificates of Seller, KCCGP and Horizon Corporate
from the Secretary of State of Delaware; and
(g) the Material Consents (or, alternatively, with respect to any
Material Consent that Seller was unable to deliver to Purchaser, Seller shall
have complied with its obligations under the provisions of Section 5.3(b)).
8.2 Purchaser's Deliveries. At the Closing, Purchaser and PriCellular shall
deliver or cause to be delivered to Seller (or to any other person as directed
by Seller in writing prior to the Closing Date or, in the case of Section 8.2(d)
below, at least five business days prior to the Closing Date) all of the
following:
(a) the Instrument of Assumption;
(b) the amount in cash determined pursuant to Section 2.3(b);
(c) the Registration Rights Agreement;
(d) a certificate representing shares of PriCellular Common Stock
having an aggregate Current Market Price as of the Closing Date of $14,500,000;
(e) the opinions of Vorys, Sater, Seymour and Pease, corporate
counsel to the Purchaser and PriCellular and Davis Polk & Wardwell, SEC counsel
to the Purchaser and PriCellular, substantially in the forms to be negotiated in
good faith by the parties within ten business days hereof and attached hereto as
Exhibit 8.2(e)(i) and 8.2(e)(ii);
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(f) a certificate executed by an executive officer each of Purchaser
and PriCellular confirming the matters contained in Sections 7.3, 7.4 and 7.5;
and
(g) a certificate of the secretary of Purchaser attesting to (i) the
resolutions adopted by the board of directors of Purchaser duly authorizing the
execution, delivery and performance of this Agreement by Purchaser and the
execution and delivery by Purchaser of all instruments and documents
contemplated hereby, and (ii) the signatures of the officers of Purchaser who
have been authorized to execute and deliver this Agreement and any other
agreement executed or to be executed in connection herewith;
(h) a certificate of the secretary of PriCellular attesting to the
resolutions adopted by the board of directors of PriCellular duly authorizing
the execution, delivery and performance of this Agreement by PriCellular, the
execution and delivery by PriCellular of all instruments and documents
contemplated hereby and the issuance by PriCellular of the shares of PriCellular
Common Stock contemplated hereby;
(i) the Indemnification Shares to the Escrow Agent;
(j) a good standing certificates of Purchaser from the Secretary of
State of Alabama; and
(k) a good standing certificate of PriCellular from the Secretary of
State of Delaware.
9. Confidentiality. Prior to the Closing Date and after any termination of
this Agreement, Purchaser shall use commercially reasonable efforts to keep
secret and retain in strictest confidence, and shall use commercially reasonable
efforts to not, without the express prior written consent of one of the
Executive Officers, directly or indirectly, disclose, disseminate, publish,
reproduce, retain, use (for its benefit or for the benefit of others) or
otherwise make available in any manner whatsoever, any Confidential Information
(as hereinafter defined) regarding Seller (or this Agreement or the transactions
contemplated hereby) to anyone except (i) to Purchaser's representatives (who
shall be informed of the confidential nature of such information and who shall
agree to keep such information confidential), (ii) as otherwise required by law
(including the requirements of the Securities Act and the Securities Exchange
Act), (iii) as required to obtain the Regulatory Approvals and (iv) to the
extent such information can be shown to have been previously known on a
nonconfidential basis by Purchaser, is in the public domain or is later lawfully
acquired by Purchaser from sources other than Seller. As used in this Agreement,
the term "Confidential Information" shall mean all confidential and proprietary
knowledge and information not readily available to the public heretofore or
hereafter conceived, learned or disclosed (including all documents, writings,
memoranda, business plans, computer software, reports, pricing, cost and sales
information, financial statements, customer and supplier lists, trade secrets,
discoveries, ideas, concepts, models, prototypes, diagrams and marketing
strategies, plans and techniques). If Purchaser
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breaches, or threatens to commit a breach of, any of the provisions of this
Section 9, Seller shall have the right (in addition to any other rights and
remedies available to Seller at law or in equity) to equitable relief (including
injunctions) against such breach or threatened breach, it being acknowledged and
agreed that any such breach or threatened breach will cause irreparable harm to
Seller and that money damages would not be an adequate remedy to Seller.
10. Survival of Representations and Warranties. Unless this Agreement is
terminated as provided herein, the representations and warranties of Seller and,
except as otherwise set forth herein, Horizon, on the one hand, and Purchaser
and PriCellular, on the other, contained herein shall survive the consummation
of the transactions contemplated hereby and the Closing Date and shall expire 18
months after the Closing Date. Notwithstanding the preceding sentence, any
representation or warranty in respect of which indemnity may be sought under
this Agreement shall survive the time at which it would otherwise terminate
pursuant to the preceding sentence, if notice of the inaccuracy thereof giving
rise to such right to indemnity shall have been given to the party against whom
such indemnity may be sought prior to such time.
11. Indemnification.
11.1 Obligation to Indemnify by Seller. Subject to the terms of Section 10,
from and after the Closing Date, Seller agrees to indemnify, defend and hold
harmless Purchaser (and its affiliates, and their respective directors,
officers, stockholders and employees), from and against all losses, Taxes,
liabilities, damages, lawsuits, deficiencies, claims, demands, costs or
expenses, including interest, penalties and reasonable attorneys' fees and
disbursements (collectively, "Losses"), based upon (i) any breach of any
representation or warranty of Seller contained in this Agreement, (ii) any
breach of any covenant or agreement of Seller contained in this Agreement or
(iii) any of the items set forth on Schedules 3.5 and 3.7.
11.2 Obligation to Indemnify by Purchaser and PriCellular. Subject to the
terms of Section 10, from and after the Closing Date, Purchaser and PriCellular
jointly and severally agree to indemnify, defend and hold harmless Seller (and
its partners, affiliates, and their directors, officers, stockholders and
employees) from and against all Losses based upon (i) any breach of any
representation or warranty of Purchaser or PriCellular contained in this
Agreement, or (ii) any breach of any covenant or agreement of Purchaser or
PriCellular contained in this Agreement.
11.3 Procedures for Claims Between the Parties. If a claim (a "Claim") is
to be made by the party claiming indemnification (the "Claimant") against the
other party (the "Indemnifying Party"), the Claimant shall give written notice
(a "Claim Notice") to the Indemnifying Party as soon as practicable after the
Claimant becomes aware of the facts, condition or event that gave rise to Losses
for which indemnification is sought under this Section 11, provided that, except
to the extent permitted by Section 10, in no event shall such notice be
effective if given after the date that is 18 months after the Closing Date.
Following receipt of the Claim Notice from the Claimant, the indemnifying Party
shall have 30 days to make such investigation of the Claim as the Indemnifying
Party deems necessary or desirable.
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For the purposes of such investigation, the Claimant agrees to make available to
the Indemnifying Party and/or its authorized representative(s) the information
relied upon by the Claimant to substantiate the Claim. If the Claimant and the
Indemnifying Party agree at or prior to the expiration of said 30 day period to
the validity and amount of such Claim, the Indemnifying Party shall pay to the
Claimant the amount of such Claim. If the Claimant and the Indemnifying Party do
not agree within said period, the Claimant may seek appropriate legal remedy in
accordance with the provisions of Section 13.1. Seller's obligation for any
indemnifiable Loss shall, to the extent the Escrow Agent holds cash sufficient
to satisfy Seller's obligation in respect thereof, be satisfied pursuant to the
procedures established in the Escrow Agreement.
11.4 Defense of Third-Party Actions. If any lawsuit or enforcement action
(a "Third Party Action") is filed against a Claimant entitled to the benefit of
indemnity hereunder, written notice thereof (the "Third-Party Action Notice")
shall be given by the Claimant to the Indemnifying Party as promptly as
practicable (and in any event within five business days after the service of the
citation or summons or other manner of process), provided, that the failure to
provide such timely notice shall not relieve the Indemnifying Party of its
indemnification obligations hereunder unless it has been unduly prejudiced
thereby and provided further that, except to the extent permitted by Section 10,
in no event shall such notice be effective if given after the date that is 18
months after the Closing Date. After such notice, if the Indemnifying Party
shall acknowledge in writing to the Claimant that the Indemnifying Party shall
be obligated under the terms of its indemnity hereunder in connection with such
Third-Party Action, then the Indemnifying Party shall be entitled, if it so
elects, (i) to take control of the defense and investigation of such Third-Party
Action, (ii) to employ and engage attorneys of its choice reasonably
satisfactory to the Claimant to handle and defend the same, at the Indemnifying
Party's cost, risk and expense, and (iii) to compromise or settle such
Third-Party Action, which compromise or settlement shall be made only with the
written consent of the Claimant (such consent not to be unreasonably withheld,
conditioned or delayed) unless such compromise or settlement involves only the
payment of money damages and does not impose an injunction or other equitable
relief upon the Claimant. If the Indemnifying Party fails to assume the defense
of such Third-Party Action within 15 days after receipt of the Third-Party
Action Notice, the Claimant will (upon delivering notice to such effect to the
Indemnifying Party) have the right to undertake the defense, compromise or
settlement of such Third-Party Action; provided, however, that such Third-Party
Action shall not be compromised or settled without the prior written consent of
the Indemnifying Party, which consent shall not be unreasonably withheld,
conditioned or delayed. In the event the Claimant assumes the defense of the
Third-Party Action, the Claimant will keep the Indemnifying Party timely
informed of the progress of any such defense, compromise or settlement.
11.5 Limitations. The Indemnifying Party's obligations to indemnify the
Claimant pursuant to this Section 11 shall be subject to the following
limitations:
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(a) No indemnification shall be required to be made by the
Indemnifying Party until the aggregate amount of the Claimant's Losses exceeds
$165,000, in which case the Indemnifying Party shall be liable for the full
amount of such Losses.
(b) No indemnification shall be required to be made by the
Indemnifying Party for the amount of Claimant's Losses that is in excess the
Indemnification Escrow. From and after the Closing Date, the indemnification
rights contained in this Section 11 shall constitute the sole and exclusive
remedies of the parties hereunder.
(c) The indemnification obligation of an Indemnifying Party shall be
reduced so as to give effect to any net reduction in federal, state, local or
foreign income or franchise tax liability realized at any time by the Claimant
in connection with the satisfaction by the Indemnifying Party of a Claim with
respect to which indemnification is sought hereunder. The indemnification
obligation of an Indemnifying Party shall also be reduced to the extent of any
available insurance proceeds. Additionally, the Claimant shall refund to the
Indemnifying Party any amount of the Claimant's Losses that are subsequently
recovered by the Claimant pursuant to a settlement or otherwise.
12. Breaches and Defaults; Termination; Remedies.
12.1 Breaches and Defaults; Opportunity to Cure. Prior to the exercise by a
party of any termination rights afforded under this Agreement, if either party
(the "Non-Breaching Party") believes the other (the "Breaching Party") to be in
breach hereunder, the Non-Breaching Party shall provide the Breaching Party with
written notice specifying in reasonable detail the nature of such breach,
whereupon the Breaching Party shall have 30 days from the receipt of such notice
to cure such breach; provided, however, that if such breach is not capable of
being cured within such period and if the Breaching Party shall have commenced
action to cure such breach within such period and is diligently attempting to
cure such breach, then the Breaching Party shall be afforded an additional
reasonable amount of time to cure such breach; provided, further, however,
Purchaser shall have no opportunity to cure the breach of its obligation to
deliver any required portion of the Acquisition Price to be delivered to Seller
at Closing. If the breach is not cured within such time period, then the
Breaching Party shall be in default hereunder and the Non-Breaching Party shall
be entitled to terminate this Agreement (as provided in Section 12.2). This
right of termination shall be in addition to, and not in lieu of, any legal
remedies available to the Non-Breaching Party.
12.2 Termination. This Agreement may be terminated at any time prior to the
Closing as follows:
(a) by mutual written agreement of the parties hereto;
(b) by Purchaser or PriCellular, provided neither Purchaser nor
PriCellular is then in breach of this Agreement, pursuant to a written notice to
Seller, (i) if any one or more of the conditions to Purchaser's or PriCellular's
obligation to close has not been fulfilled in any
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material respect as of the Closing Date, (ii) subject to Section 12.1 if Seller
has breached in any material respect any representation, warranty, covenant or
agreement contained in this Agreement, or (iii) if the Closing shall not have
taken place by the date that is 12 months after the date of the execution of
this Agreement (the "Outside Date") (unless any of the foregoing events shall
have resulted primarily from Purchaser or PriCellular's breaching any
representation, warranty, covenant or agreement contained in this Agreement);
and
(c) by Seller, provided Seller is not then in breach of this
Agreement, pursuant to a written notice to Purchaser and PriCellular, (i) if any
one or more of the conditions to Seller's obligation to close has not been
fulfilled in any material respect as of the Closing Date, (ii) subject to
Section 12.1, if Purchaser has breached in any material respect any
representation, warranty, covenant or agreement contained in this Agreement, or
(iii) if the Closing shall not have taken place by the Outside Date (unless any
of the foregoing events shall have resulted primarily from Seller's breach of
any representation, warranty, covenant or agreement contained in this
Agreement).
12.3 Effect of Termination. In the event of any termination of this
Agreement, all obligations of the parties hereto under this Agreement (except
for the obligations contained in Sections 2.8, 9, 14.1, 14.2 and 14.5) shall
terminate as of such date of termination and this Agreement shall thereafter
become void and be of no further force and effect, and upon such termination no
party hereto shall be liable to the other party, except for damages and expenses
(including attorneys', accounting and other professional fees and expenses)
resulting from breaches of this Agreement prior to such termination.
13. Interim Management.
13.1 Management of the Systems During the Management Period. If (i) the
Closing has not occurred within 65 days after the Acceptance Date and (ii) the
waiting period under the HSR Act shall have expired or been terminated,
Purchaser and Seller shall enter into the Management Agreement pursuant to which
Purchaser shall become manager of the Systems during the Management Period.
13.2 Reimbursement of Costs. If this Agreement is terminated pursuant to
Section 12.2, then in addition to settlements among the parties pursuant to
Sections 2.8 and 14.2, if any, Seller shall reimburse Purchaser for any
preapproved capital expenditures as specified in the Management Agreement.
14. Miscellaneous.
14.1 Resolution of Disputes.
(a) Any controversy, dispute or claim (collectively, a "Dispute")
between the parties arising out of or relating to this Agreement, or the breach,
termination or validity thereof, shall be finally settled by arbitration in
accordance with the commercial arbitration rules of the
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American Arbitration Association ("AAA") then obtaining. However, in all events,
these arbitration provisions shall govern over any conflicting rules that may
now or hereafter be contained in the AAA rules. The arbitration shall be held in
New York, New York unless the parties mutually agree to have the arbitration
held elsewhere, and judgment upon the award made therein may be entered by any
court having jurisdiction in New York, New York; provided, however, that nothing
contained in this Section 14.1 shall be construed to limit or preclude a party
from bringing any action in any court of competent jurisdiction for injunctive
or other provisional relief to compel another party to comply with its
obligations under this Agreement during the pendency of the arbitration
proceedings. Any judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction over the subject matter hereof. The
arbitrator shall have the authority to grant any equitable and legal remedies
that would be available in any judicial proceeding instituted to resolve any
claim hereunder.
(b) Any such arbitration will be conducted before three arbitrators,
one of which shall be chosen by Seller, one of which shall be chosen by
Purchaser, and the third chosen by the other two arbitrators. The decision of a
majority of the arbitrators will be the decision of the arbitrators. The
arbitrators shall permit such discovery as they shall determine is appropriate
in the circumstances, taking into account the needs of the parties and the
desirability of making discovery expeditious and cost-effective. Any such
discovery shall be limited to information directly related to the controversy or
claim in arbitration and shall be concluded within 30 days after appointment of
the third arbitrator.
(c) The prevailing party in any arbitration hereunder shall be
entitled to an award of its reasonable costs incurred in connection therewith,
including attorneys' fees.
(d) For any Dispute submitted to arbitration, the burden of proof
will be as it would be if the claim were litigated in a judicial proceeding.
(e) Upon the conclusion of any arbitration proceedings hereunder, the
arbitrators will render findings of fact and conclusions of law and a written
opinion setting forth the basis and reasons for any decision reached and will
deliver such documents to each party to this Agreement along with a signed copy
of the award.
(f) The arbitrators chosen in accordance with these provisions will
not have the power to alter, amend or otherwise affect the terms of these
arbitration provisions or the provisions of this Agreement.
14.2 Expenses. The parties to this Agreement shall, except as otherwise
specifically provided herein, bear their respective expenses incurred in
connection with the preparation, negotiation, execution and performance of this
Agreement and the transactions contemplated hereby, including all fees and
expenses of agents, representatives, consultants, counsel and accountants.
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14.3 Further Assurances. Each of the parties shall execute such agreements
and documents and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby. Each such party shall use its best efforts (which shall not include the
payment of money) to fulfill or obtain the fulfillment of the conditions to the
Closing, including the execution and delivery of any other agreement or
document, the execution and delivery of which are conditions precedent to the
Closing.
14.4 Access to Records. From and after the Closing Date, Seller shall allow
Purchaser, and its counsel, accountants and other representatives, such access
to Seller's records that after the Closing are in the custody or control of
Seller as Purchaser reasonably requires in order to comply with its obligations
under law or under contracts constituting Assumed Liabilities or Purchased
Assets. From and after the Closing Date, Purchaser shall allow Seller, and its
counsel, accountants and other representatives, such access to records that
after the Closing are in the custody or control of Purchaser as Seller
reasonably require in order to comply with their obligations under law
(including with respect to tax matters and the preparation of the Closing Date
Balance Sheet and the Closing Statement).
14.5 Indemnification of Brokerage. Seller agrees to indemnify and save
Purchaser harmless from any claim or demand for commissions or other
compensation by any broker, finder, agent or similar intermediary claiming to
have been employed by or on behalf of Seller or any affiliate (including Morgan
Stanley & Co. Incorporated) in connection with the transactions contemplated
hereby, and to bear the cost of reasonable legal fees and expenses incurred in
defending against any such claim. Purchaser agrees to indemnify and save Seller
harmless from any claim or demand for commissions or other compensation by any
broker, finder, agent or similar intermediary claiming to have been employed by
or on behalf of Purchaser or any affiliate (including Donaldson, Lufkin &
Jenrette Securities Corporation) in connection with the transactions
contemplated hereby and to bear the cost of reasonable legal fees and expenses
incurred in defending against such claim.
14.6 Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. If any court determines that any covenant, or any part of
any covenant is invalid or unenforceable, such covenant shall be enforced to the
extent permitted by such court, and all other covenants shall not thereby be
affected and shall be given full effect, without regard to the invalid portions.
14.7 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed to have been duly given when
received if delivered personally against receipt; when transmitted if
transmitted by telecopy, electronic or digital transmission method; the next day
if sent for next day delivery by a nationally recognized overnight courier
service; or upon receipt if sent by certified, registered or express mail,
return receipt requested, postage prepaid. In each case notice shall be sent as
follows:
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(a) if to Seller, to:
Horizon Cellular Group
101 Lindenwood Drive / Suite 125
Malvern, PA 19355
Telecopy No.: 610-993-2683
Attention: Mr. Bruce M. Hernandez
with a required copy to:
Kleinbard Bell & Brecker
1900 Market Street / Suite 700
Philadelphia, Pennsylvania 19103
Telecopy No.: 215-568-0140
Attention: Howard J. Davis, Esquire
(b) if to Purchaser, to:
PriCellular Corporation
45 Rockefeller Plaza / Suite 3200
New York, NY 10020
Telecopy No.: 212-245-3058
Attention: Mr. Robert Price
with a required copy to:
Vorys, Sater, Seymour and Pease
52 East Gay Street
Columbus, OH 43216
Telecopy No.: 614-464-6350
Attention: Ronald A. Robins, Jr.
Any party may by notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
14.8 Entire Agreement. This Agreement (including the Schedules and
Exhibits) and the agreements (including the Escrow Agreement), certificates and
other documents delivered hereunder contain the entire agreement between the
parties with respect to the transactions described herein, and, except as
provided in the next sentence, supersede all prior agreements, written or oral,
with respect thereto. This Agreement, the Management Agreement and that certain
Confidentiality Agreement dated September 8, 1995 between Purchaser and Horizon
shall be construed as integrated and complementary of each other.
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14.9 Amendments and Waivers. This Agreement may be modified or amended, and
the terms hereof may be waived, only by a written instrument signed by the
parties or, in the case of a waiver, by the party waiving compliance. No delay
on the part of any party in exercising any right, power or privilege hereunder
shall operate as a waiver thereof, nor shall any waiver on the part of any party
of any such right, power or privilege, nor any single or partial exercise of any
such right, power or privilege, preclude any further exercise thereof or the
exercise of any other such right, power or privilege.
14.10 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware without regard to principles
of conflicts of law.
14.11 Assignment; Binding Effect. Neither this Agreement nor any of the
rights or obligations hereunder may be assigned (including by operation of law)
by any party without the prior written consent of the other party which consent
shall not be unreasonably delayed, conditioned or withheld. Notwithstanding the
foregoing, Purchaser may assign its rights under this Agreement and the other
agreements contemplated hereby to Bank One Trust Company, N.A., a national
banking association or another "qualified intermediary" in order to facilitate a
like-kind exchange under Section 1031 of the Internal Revenue Code of 1986, as
amended; provided that such assignment does not release Purchaser from its
obligations hereunder. Subject to the foregoing, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
14.12 Beneficiaries of Agreement. The representations, warranties,
covenants and agreements expressed in this Agreement are for the sole benefit of
the other party hereto and are not intended to benefit, and may not be relied
upon or enforced by, any other party as a third-party beneficiary or otherwise.
14.13 Counterparts; Facsimile Signatures. This Agreement may be executed by
the parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a number
of copies hereof each signed by less than all, but together signed by all of the
parties hereto. Facsimile signatures on this Agreement and any of the agreements
and documents executed in connection herewith shall be deemed original
signatures.
14.14 Exhibits and Schedules. The Exhibits and Schedules are a part of this
Agreement as if fully set forth herein. All references herein to Sections,
subsections, clauses, Exhibits and Schedules shall be deemed references to such
parts of this Agreement, unless the context shall otherwise require.
14.15 Computation of Days; Holidays. Whenever this Agreement provides for a
period of time that is expressed in terms of a numbers of days prior to or
within which actions or events are to occur or not occur, such time period shall
be measured in calendar days unless otherwise expressly provided. Whenever this
Agreement provides for a date, day or period of time on or prior to which
actions or events are to occur or not occur, and if such date, day or last day
of such
42
<PAGE>
period of time falls on a Saturday, Sunday, or legal holiday, then the same
shall be deemed to fall on the immediately following business day.
14.16 Headings. The headings in this Agreement are for reference only, and
shall not affect the meaning or interpretation of this Agreement.
14.17 Limited Recourse. Except as provided in this Section 14.17, this
Agreement and all of the agreements and documents executed in connection
herewith shall be non-recourse to the partners, affiliates and officers of
Seller and its partners, affiliates, officers, directors and/or stockholders. If
Seller is in default hereunder or under any such other agreement or document,
Purchaser's and PriCellular's recourse shall be limited solely to (a) the
Indemnification Escrow or (b) in the case of claims for fraud or intentional
tort by Seller, to Horizon and Horizon's equity in its assets without any
recourse to Horizon's partners, affiliates or officers or to their partners,
affiliates, officers, directors and/or stockholders.
43
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HORIZON CELLULAR TELEPHONE
COMPANY OF CENTRAL KENTUCKY, L.P.
By: KCCGP, L.P., its general partner
By: HORIZON G.P., INC., its general partner
By:_________________________________________
Name:
Title:
CELLULAR INFORMATION SYSTEMS OF
FLORENCE, INC.
By:_________________________________________
Name: Robert Price
Title: President
PRICELLULAR CORPORATION
By:_________________________________________
Name: Robert Price
Title: President
44
<PAGE>
SCHEDULE 1.2(e)
Excluded Leases
<PAGE>
SCHEDULE 1.2(g)
Prepaid Expenses
<PAGE>
SCHEDULE 1.2(i)
Excluded Contracts
<PAGE>
SCHEDULE 4.3
PriCellular Capitalization
1. See attached Beneficial Ownership table.
2. PriCellular has granted preemptive or similar rights to some or all of the
entities listed in 3. below, as reflected in the SEC Documents, including
the exhibits thereto.
3. PriCellular has granted registration rights to the following entities, as
reflected in the SEC Documents, including the exhibits thereto:
Aeneas Venture Corporation
Spectrum Equity Investors, L.P.
Dominion Resources, Inc.
AT&T Wireless Services, Inc. (f/k/a McCaw Cellular Communications, Inc.)
Thomas H. Lee Equity Fund III, L.P.
THL-CCI Investors Limited Partnership
The Public School Employees' Retirement System
<PAGE>
SCHEDULE 4.7
PriCellular's Consents
1. PriCellular requires consents from each of the entities listed below in
connection with the Registration Rights Agreement:
Aeneas Venture Corporation
Spectrum Equity Investors, L.P.
Dominion Resources, Inc.
AT&T Wireless Services, Inc. (f/k/a McCaw Cellular Communications, Inc.)
Thomas H. Lee Equity Fund III, L.P.
THL-CCI Investors Limited Partnership
The Public School Employees' Retirement System
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 67,331
<SECURITIES> 0
<RECEIVABLES> 13,429
<ALLOWANCES> 1,767
<INVENTORY> 2,096
<CURRENT-ASSETS> 83,836
<PP&E> 87,043
<DEPRECIATION> 13,728
<TOTAL-ASSETS> 698,949
<CURRENT-LIABILITIES> 33,630
<BONDS> 483,430
0
0
<COMMON> 0
<OTHER-SE> 180,133
<TOTAL-LIABILITY-AND-EQUITY> 698,949
<SALES> 3,430
<TOTAL-REVENUES> 112,378
<CGS> 10,073
<TOTAL-COSTS> 93,178
<OTHER-EXPENSES> (2,722)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,053
<INCOME-PRETAX> (22,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,131)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
