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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, 2002
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 333-82408
Verizon Wireless of the East LP
(Exact name of registrant as specified in its charter)
Delaware 48-1262622
(State of Organization) (I.R.S. Employer
Identification No.)
180 Washington Valley Road
Bedminster, NJ 07921
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 306-7000
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
--- ---
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter: $0
--
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 of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Documents incorporated by reference: None
TABLE OF CONTENTS
Item No. Page
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PART I
1. Business 1
2. Properties 11
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters 13
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
7A. Quantitative and Qualitative Disclosures About Market Risk 23
8. Financial Statements and Supplementary Data 24
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 24
PART III
10. Directors and Executive Officers of the Registrant 24
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners and Management 24
13. Certain Relationships and Related Transactions 25
14. Controls and Procedures 39
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 39
Trademarks, service marks and other similar intellectual property owned by or
licensed to Cellco Partnership and used by us appear in italics when used. All
other trademarks in this annual report are the property of their respective
owners.
PART I
Item 1. Business
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Overview
Verizon Wireless of the East LP was formed by Cellco Partnership d/b/a Verizon
Wireless ("Cellco") on December 17, 2001 for the purpose of acquiring the
business assets of Price Communications Wireless, Inc. ("PCW"), a subsidiary of
Price Communications Corp. ("Price Communications"), pursuant to a transaction
agreement (the "Agreement") dated December 18, 2001, as amended. On August 15,
2002, the transactions contemplated by the Agreement were consummated:
o PCW contributed substantially all of its business assets and
approximately $160 million in cash to us; and Cellco, through its
subsidiaries, contributed to us Federal Communications Commission
("FCC") licenses to provide broadband personal communications
services ("PCS") within the Macon, Georgia Basic Trading Area ("BTA")
and a portion of the Atlanta, Georgia BTA, a $500 million 6.14%
promissory note receivable from Cellco, payable on demand, $235
million in cash and its aggregate 85% interest in the Orange
County-Poughkeepsie Limited Partnership ("OCP" or the "Predecessor");
o In exchange for the assets it contributed, PCW received a preferred
limited partnership interest from us, which is exchangeable, under
certain circumstances, into common stock of an entity whose sole
asset is an interest in Cellco ("Cellco IPO Entity") (if an initial
public offering of such stock occurs) or into common stock of Verizon
Communications Inc. ("Verizon Communications") on the fourth
anniversary of the asset contribution if a qualifying initial public
offering of the Cellco IPO Entity common stock is not completed prior
to such anniversary;
o PCW and two subsidiaries of Cellco (Verizon Wireless of Georgia LLC
and Verizon Wireless Acquisition South LLC) entered into an amended
and restated limited partnership agreement for Verizon Wireless of
the East LP. Verizon Wireless of Georgia LLC became the managing
general partner and Verizon Wireless Acquisition South LLC and PCW
became the limited partners. PCW's limited partner interest is a
preferred interest that provides PCW with an allocation of our
profits on a preferred basis up to an amount equal to 2.915% per
annum of PCW's capital account balance, which was approximately
$1,124 million on December 31, 2002. The balance of our profits are
allocated 1% and 99% to Verizon Wireless of Georgia LLC and Verizon
Wireless Acquisition South LLC, respectively; and
o We assumed certain liabilities of PCW relating to its business,
including liabilities that arose under PCW's $175 million of 11 3/4%
Senior Subordinated Notes due 2007 and $525 million of 9 1/8% Senior
Secured Notes due 2006 (collectively "Notes") and used the
approximately $160 million in cash contributed by PCW, the $235
million of cash contributed by Cellco, and the proceeds from a $350
million term note from Verizon Investments Inc., a wholly-owned
subsidiary of Verizon Communications, to effect a covenant defeasance
with respect to the Notes, which were redeemed on August 16, 2002.
The term note bears interest at a rate of approximately 8.9% per
year. It is guaranteed by PCW and matures on the earlier of February
15, 2007 or six months following the occurrence of certain specified
events.
Description of Business
We provide wireless communication services on a retail basis in the acquired
PCW markets in Alabama, Georgia, South Carolina and Florida. In addition, we
provide wholesale wireless communication services to resellers (primarily
Cellco) who operate in the Orange County and Poughkeepsie, New York
metropolitan areas. Cellco provides or arranges for the provision of certain
services to us in connection with our business. These services may include, but
are not limited to, administrative, accounting, billing, credit, collection,
legal, and such other services as may be necessary to administer the
Partnership and operate our wireless network. Cellco charges us for these
services at rates that are on substantially the same basis as it charges other
partnerships managed by Cellco.
1
Industry Overview
General
Wireless communications systems use a variety of radio frequencies to transmit
voice and data. Broadly defined, the wireless communications industry includes
one-way radio applications, such as paging services, and two-way radio
applications, such as cellular telephone service, enhanced specialized mobile
radio services, PCS and narrowband PCS service. The FCC licenses the radio
frequencies used to provide each of these applications.
Since the introduction of cellular service in 1983, wireless communications has
grown dramatically in the United States, although growth has slowed recently.
As illustrated by the following table, domestic cellular, enhanced specialized
mobile radio and PCS providers experienced compound rates of growth of 25.0%
and 29.7% in total service revenues and subscribers, respectively, over the
eight-year period from 1993 to 2001. Industry information for 2002 is not yet
available.
Wireless Industry Statistics*
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1993 1994 1995 1996 1997 1998 1999 2000 2001
- ------------------------------------------------------------------------------------------------------------------------------
Total service revenues (in billions).. $ 10.9 $ 14.2 $ 19.1 $ 23.6 $ 27.5 $ 33.1 $ 40.0 $ 52.5 $ 65.0
Ending subscribers (in millions)...... 16.0 24.1 33.8 44.0 55.3 69.2 86.0 109.5 128.4
Subscriber growth..................... 45.1% 50.8% 40.0% 30.4% 25.6% 25.1% 24.3% 27.3% 17.3%
Ending penetration.................... 6.2% 9.4% 13.0% 16.3% 20.2% 25.1% 30.8% 39.2% 45.7%
- ------------------------------------------------------------------------------------------------------------------------------
- ---------
* Source: Cellular Telecommunications & Internet Association and Paul Kagan
Associates.
Recent industry trends
The growth in the wireless communications industry in terms of subscribers,
revenue and cash flow has been substantial and has been influenced by the
following industry trends. While we believe that the industry will continue to
experience growth, we believe that the pace of future growth will slow.
Digital capabilities and innovative pricing are driving demand and penetration
levels and impacting network capacity. Increasing demands on network capacity
may lead to future alliances among carriers and further industry consolidation
fueled by carriers' needs for scope and scale. Digital network characteristics,
including longer battery life, improved voice quality, custom calling features
and data capabilities, have improved the subscriber experience. Many carriers
offer larger bundles of included minutes and national flat rate pricing,
increasing the affordability of wireless service and resulting in increased
penetration levels and usage. While increasing usage is driving network
efficiencies and revenue growth, it also is impacting capacity demand in some
markets, necessitating capital expenditures to increase existing network
capacity. The need for carriers to expend capital efficiently for these
purposes has led some carriers to enter into cooperative agreements in some
markets to share spectrum and/or network build-out expenses and may lead to
further industry consolidation.
Deployment of next generation network technology, digital platforms enabling
two-way short messaging, development of additional wireless data applications
and color screen handsets should drive expanded wireless usage. Existing and
future wireless data technologies, coupled with the widespread use of the
Internet, have caused wireless providers to focus on wireless data services.
Most carriers now offer wireless Internet access and two-way short messaging
services. Generally, adoption of most of these services by subscribers has not
been as fast as originally anticipated. However, short messaging service usage
has recently been increasing at a faster pace, particularly since the
introduction of inter-carrier operability that permits messages between
subscribers of different carriers. Most national carriers have recently
introduced applications that can be downloaded to their subscribers' handsets,
in addition to handsets with color screens that enhance the subscribers' use of
such applications. Most of these carriers have upgraded or are in the process
of upgrading their networks to permit higher-speed data transmission that
allows or will allow them to offer higher-speed applications such as enterprise
applications, image downloads, photo messaging, music, games and full browsing
capabilities for laptop computer users.
The wireless communications industry is experiencing significant technological
change, including the increasing pace of digital system changes, evolving
industry standards, ongoing improvements in the capacity and quality of digital
technology, shorter development cycles for new services and changes in end-user
needs and preferences. There is uncertainty regarding the extent customer
demand and service revenues will continue to increase, as well as the extent to
which airtime charges and monthly recurring charges may continue to decline. In
addition, alternative technologies may develop for the provision of services to
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subscribers that may provide wireless communications services or alternative
services superior to those currently available from wireless providers.
Business Strategy
Retail Markets
Our goal is to be the acknowledged market leader in providing wireless voice
and data services, with a focus on high-quality service across a cost-effective
digital network while meeting the growing needs of our subscribers. To
accomplish this goal, we must execute on our plan to complete the conversion of
our network to 1XRTT, the next generation of code division multiple access
("CDMA") technology, closely integrate our operations with the operations of
Cellco and market our services under Cellco's "Verizon Wireless" brand name as
follows:
Conversion of our network for our retail markets from time division multiple
access ("TDMA") to 1XRTT, the next generation of CDMA. The digital network we
acquired from PCW uses a wireless digital transmission standard known as TDMA.
Cellco's digital network generally uses a wireless digital transmission
standard known as CDMA. These two digital technologies are incompatible.
Accordingly, we are converting the TDMA network used in the former PCW markets
to 1XRTT and expect to be finished by the end of the third quarter of 2003.
Conversion of our TDMA network to 1XRTT will enable us to fully integrate our
network with Cellco's national digital network and allow us to provide
assurance to existing and potential subscribers that we provide the same high
quality network as Cellco and, after we complete the transition of our
information systems, all of the same wireless services as Cellco, including
wireless data.
Integration of our information systems for our retail markets with those used
by Cellco. We currently rely upon many of the legacy information systems
acquired from PCW in our retail markets. As we convert our network from TDMA to
1XRTT, we intend to transition from these legacy systems to Cellco's
information systems, including billing, point of sale, provisioning, customer
care, data warehouse, and fraud detection and prevention. Once the conversion
of our network and this transition are complete, we will be able to take full
advantage of the Verizon Wireless brand name, price plans, customer care
network and overall expertise.
Coordination and integration of our marketing in our retail markets with
Cellco's national marketing campaigns. We have no employees and rely on Cellco
for all of our marketing. We currently market under the CELLULARONE brand but
intend to transition our marketing to the Verizon Wireless brand as soon as the
conversion of our network is completed. Cellco's marketing efforts are focused
on a coordinated program of television, print, radio, outdoor signage, Internet
and point of sale media promotions. Cellco coordinates marketing efforts
throughout all markets using its Verizon Wireless brand name to ensure that its
marketing message is uniformly presented. Brand awareness for the Verizon
Wireless brand is 99% among wireless users and prospects, based on a recent
external study, the highest among the national wireless carriers. Cellco's
"Test Man" brand campaign has been successful in differentiating its network in
the marketplace. As soon as the conversion of our network and the transition of
our information systems are complete, we plan to adopt Cellco's pricing plans,
which include its national "America's Choice" plans, its Corporate America's
Choice national plans, for large corporate customers, and prepaid plans that
appeal to new users and various other business and consumer groups.
Coordination and integration with Cellco of our sales and distribution in our
retail markets. Our sales strategy is to use a mix of direct, indirect and
resale distribution channels in order to increase subscriber growth while
reducing subscriber acquisition costs. As of December 31, 2002, we operated and
maintained 34 company-owned stores within our retail markets. We also rely upon
indirect channels, many of which are provided through relationships with
Cellco, to maintain an extensive distribution system. As of December 31, 2002,
in our retail markets, we had approximately 115 indirect retail partner
locations selling wireless services, including 110 full-service locations.
Profitably acquire, satisfy and retain our subscribers by integrating our
customer service with Cellco. We believe we can achieve revenue and net income
growth by retaining our existing base of subscribers and increasing their usage
of our services, as well as by obtaining new subscribers. We believe quality
customer service increases subscriber satisfaction, which reduces churn, and is
a key differentiator in the wireless industry. Once the conversion of our
network and the transition of our information systems are complete, we will be
able to receive the full benefits of Cellco's customer care network for our
retail markets. Through Cellco's customer care network, we will be able to
offer customer care twenty-four hours a day/seven days a week. We are committed
to providing high-quality customer care, investing in loyalty and retention
efforts and continually monitoring customer satisfaction in all facets of our
service. Key elements of our commitment to customer service will include
offering Cellco's "Worry Free Guarantee," which outlines the specifics of our
commitment to each subscriber; incentives for two-year contracts; and
convenient locations to initiate service and receive customer support.
3
Wholesale Markets
Our goal with respect to our wholesale markets is to be the acknowledged market
leader in providing a high quality, cost-effective digital network while
meeting and exceeding the growing needs of our resellers. To accomplish this
goal, we will continue to build-out, expand and upgrade our digital network in
an effort to provide sufficient capacity, and seamless and superior coverage
throughout our licensed area. We believe that network quality is a key
differentiator in the U.S. market and a driver of customer satisfaction. As of
December 31, 2002, all of our cell sites in our wholesale markets had been
upgraded to 1XRTT.
Competition
There is substantial competition in the wireless telecommunications industry.
We expect competition to intensify as a result of the higher penetration levels
that currently exist in the industry, the development and deployment of new
technologies, the introduction of new products and services, the auction of
additional spectrum and regulatory changes. Other wireless providers, including
other cellular and PCS operators and resellers, serve each of the markets in
which we compete. Competition also may increase to the extent that smaller,
stand-alone wireless providers transfer licenses to larger, better capitalized
and more experienced wireless providers.
Currently, the primary competitor in each of our retail markets is the carrier
who holds the other cellular license in that market, depending on the market,
either Cingular Wireless, ALLTEL or Public Service Cellular. Our retail markets
have an average of five other competing wireless providers.
The wireless communications industry has experienced significant consolidation,
and we expect that this trend may continue. This consolidation trend may create
larger, well-capitalized competitors with substantial financial, technical,
marketing and other resources to compete with our offerings.
We believe that the following are the most important competitive factors in
our industry:
o Network coverage;
o Price;
o Brand recognition;
o Digital service;
o Customer service; and
o Capital resources.
As a result of competition, we have encountered and may in the future encounter
further market pressures to:
o increase advertising and promotional spending;
o reduce our prices;
o restructure our service packages to offer more value;
o respond to particular short-term, market-specific situations -- for
example, special introductory pricing or packages that may be offered
by new providers launching their service in a particular market;
o increase our capital investment to ensure we retain our market
leadership in service quality; or
o introduce new service offerings that are less profitable.
Such market pressures could cause us to experience lower revenues, margins and
average revenues per user.
We also expect that we will need to increase our advertising and promotional
spending in our retail markets to respond to competition. Our ability to
compete successfully will depend in part on Cellco's marketing efforts and on
its ability to anticipate and respond to various competitive factors affecting
the industry, including the factors described above, new services and
technologies, changes in consumer preferences, demographic trends, economic
conditions and pricing strategies by competitors.
In our wholesale markets, we do not compete directly for individual retail
subscribers. We do compete, however, with the other wireless licensees in these
markets for resellers. Cellco, which is our largest purchaser of wholesale
lines, competes with others and its success or failure impacts our results. Our
principal competitor in the wholesale wireless business is American Cellular, a
joint venture between Dobson Communications and AT&T Wireless.
4
Wireless Services
Voice
We offer reliable, high-quality, wireless voice communication services. We
offer basic voice services as well as enhanced services and features, including
caller ID, call waiting, call forwarding, three-way calling, no answer/busy
transfer and basic voice mail. Our service packages are designed around key
customer groups and include both pre-paid and post-paid offerings.
Data
Once the conversion of our network and the transition of our information
systems are complete, we will be able to offer to our subscribers the Verizon
Wireless data offerings, including:
Mobile Messenger/Text Messaging. Mobile Messenger service offers two-way short
messaging, which allows subscribers to both send and receive short text
messages using handsets and various other devices. We will also be able to
offer alert features, offering our subscribers numerous alert categories, which
they can select over the Internet, and inter-carrier service, providing
interoperability of short messaging services over different wireless providers'
networks;
Get It Now. The Verizon Wireless Get It Now service, using binary runtime
environment for wireless ("BREW") technology from Qualcomm, adds computer-like
functionality to handsets, enabling applications to be downloaded over-the-air
directly to the subscriber's wireless device. Consumers are charged
transactional fees for subscriptions or downloads, which are included with
their monthly service bill.
Mobile Web. Mobile Web service offers easy to use, customized access to content
through the Verizon Wireless portal, which is co-branded with Microsoft. This
service allows subscribers to access the Internet, e-mail and personal
information management tools, such as calendars and address books, through
handset-based menus.
While we anticipate that wireless data will assist us in attracting and
retaining subscribers, our wireless data services may not be as successful as
anticipated. The deployment and delivery of wireless data services relies, in
many instances, on new and unproven technology that may require substantial
capital outlays and additional spectrum capacity. Furthermore, wireless data
services entail additional specific risks. For example, the success of wireless
data services substantially depends on the ability of others to develop
applications for wireless devices and to develop and manufacture devices that
support wireless applications. In addition, there could be legal or regulatory
restraints on wireless data services as the applicable laws and rules evolve.
Marketing
Retail Markets
Since the acquisition of our retail markets on August 15, 2002, we have been
marketing our services under the CELLULARONE brand name, as did the previous
owner. We anticipate beginning to market under the Verizon Wireless brand name
in a portion of our retail markets by early in the second quarter of 2003.
Thereafter, we intend to continue our transition to the Verizon Wireless brand
on a market-by-market basis as we complete our new 1XRTT overlay network and
transition to Cellco's information systems in each market. We expect to begin
using the Verizon Wireless brand in all of our retail markets by the end of the
third quarter of 2003. Once we start marketing using the Verizon Wireless brand
in an area, we will cease marketing under the CELLULARONE name in that area. We
have no employees and rely on the employees of Cellco to conduct our marketing
and sales activities.
Sales and Distribution
Our sales strategy is to use a mix of direct and indirect distribution channels
in order to acquire new subscribers, while reducing subscriber acquisition
costs. A goal of our distribution strategy is to increase direct sales through
our company-owned stores, as well as through telemarketing and web-based
initiatives, while simultaneously strengthening our indirect channels to
maintain an extensive distribution system of highly-trained sales agents. We
presently do not have any wholesale distribution in our retail markets.
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Direct
Company-owned Stores. Company-owned stores are a core component of our
distribution strategy as they are one of our lowest-cost mass distribution
channels. Based upon our prior experience, we believe that subscribers who
enter through our store channel are less likely to cancel their service and
more likely to generate higher revenue per month on average than those who come
through other mass-market channels. Our stores sell wireless handsets and
accessories, including hands-free and other convenience and safety-related
equipment. Many stores include personnel dedicated to in-store customer service
and in-store handset technical support. On August 15, 2002, the date we
acquired the business assets of PCW, we operated 40 company-owned stores and
one kiosk. Since then, we have evaluated our stores to determine whether they
meet Cellco's standards for size, location and profitability. As we determined
that a store did not appear to meet Cellco's standards, we either closed the
store (in the case of two stores) or arranged for one of our indirect sales
agents to maintain a retail presence at the location. As a result of this
effort, as of December 31, 2002, we operated 34 company-owned stores and expect
that number to be reduced to and maintained at approximately 30 stores by the
end of the first quarter of 2003.
Business-to-Business. We use Cellco's business-to-business sales force. One
group services the small-to-medium size businesses, targeting regional and
local businesses in high-growth industries with less than 100 wireless users.
The other group focuses on large and national businesses.
Telemarketing. Once we begin marketing using the Verizon Wireless brand, we
will use Cellco's telemarketing sales force. In addition to providing
convenience for the customer, telemarketing is a low-cost channel. We believe
that telemarketing will grow as consumers become more accustomed to wireless
service and begin purchasing second and third wireless numbers for their
households.
Web-Based. We will fully leverage the brand equity of Verizon Wireless.
Therefore, we will not operate an independent website. We will instead rely
upon Verizon Wireless' website, www.verizonwireless.com, for representation.
This website enables prospective customers to purchase a complete service
package, including the handset, basic and enhanced features and accessories.
The online store provides a secure environment for transactions. We expect to
expand these web-based services throughout all of our markets over time.
Indirect Retailers and Agents
We also use indirect retail locations that sell wireless services. As of
December 31, 2002, in our retail markets, we had 115 indirect retail
distributor locations selling wireless services, including 110 full service
locations. We also intend to arrange for and use other indirect retail
distributor locations in our retail markets through Cellco's relationships with
certain regional and national retailers. For example, Cellco has a
"store-within-a-store" program with RadioShack, its largest indirect retailer,
which is staffed with trained RadioShack sales representatives at participating
RadioShack locations. There are currently 54 RadioShack locations in our retail
markets, all of which we expect will participate in this program.
Wholesale Markets
Through our 85% aggregate interest in OCP, we sell wholesale wireless capacity,
with approximately 127 thousand resale lines as of December 31, 2002.
Our wholesale business involves the sale of wholesale access and minutes to
separate companies that package and resell wireless services to end-users.
These resellers generally provide prepaid and postpaid services to subscribers
under their own brand names and also provide their own customer service and
billing. Because we sell these services on a wholesale basis we incur no direct
subscriber acquisition cost. Our largest reseller is Cellco, which accounted
for 91% of our total resale lines and 95% of our total resale revenue, as of
December 31, 2002.
Offer Customer Convenience and Ease of Use
Currently, we offer customer care and support in our retail markets primarily
through a call center acquired from PCW. It is open from 6 am until 11 pm each
day and is staffed by approximately 100 employees of Cellco (mostly former PCW
employees). Once the conversion of our network and the transition of our
information systems are complete, we will be able to receive the full benefits
of Cellco's customer care network for our retail markets. Cellco has 26
full-service call centers and provides customer support 24 hours a day, 7 days
a week. To increase customer satisfaction, Cellco has created dedicated teams
to handle specialized market groups, including data customers, business
customers, including both national accounts and small
6
to medium-sized businesses, paging and prepaid customers and is able to
capitalize on these resources through technologies such as intelligent
call-routing, which directs inquiries to specialized customer care
representatives as appropriate.
Once we have completed our network conversion and the transition of our
information systems, we plan to offer Cellco's Worry Free Guarantee under which
we commit to provide an extensive and advanced network, responsive customer
service, the option to change to any qualifying price plan or airtime promotion
at any time with a new two-year contract without payment of any additional
fees, and a 15-day money-back equipment satisfaction guarantee. It also
includes free handset upgrades every two years (up to a $100 value), which
Cellco calls its New Every Two plan, provided that subscribers sign new
two-year contracts with a retail price plan that costs $35 or more for monthly
access.
Network
Through our 85% aggregate interest in OCP, we operate using two cellular
licenses. The licenses cover the Orange County and Poughkeepsie, New York
metropolitan areas. As of December 31, 2002, the OCP network consisted of 38
cell sites, all using 1XRTT technology. The OCP network has one switching
location, using an all-digital switch. We plan to add two new cell sites in
2003.
With respect to our retail markets, we operate using 16 cellular licenses and
two PCS licenses. Our cellular licenses for our retail markets include licenses
for five metropolitan statistical areas ("MSA") and seven rural service areas
("RSA") in Georgia, two MSA's and one RSA in Alabama and one MSA in Florida.
Our two PCS licenses cover all of the Macon, GA BTA and the portion of the
Atlanta, GA BTA that overlaps our cellular license areas.
As of December 31, 2002, the network for our retail markets consisted of
approximately 400 cell sites and 3 switching locations. We plan to add
approximately 50 new cell sites in 2003.
We are in the process of converting the old PCW network from TDMA to 1XRTT, by
building an overlay 1XRTT network over the existing TDMA network. While we
convert our network, there will be a period of time during which we will be
providing service to new subscribers who have purchased and are using 1XRTT
handsets and former PCW subscribers still using their old TDMA handsets. We
expect to complete construction of our overlay 1XRTT network by the end of the
third quarter of 2003. Over the next 12 to 18 months we expect to shut down the
TDMA portion of the network. We completed the first portion of our 1XRTT
network overlay with respect to 42 cell sites in Georgia in November of 2002
and with respect to 83 additional cell sites in Georgia in January of 2003.
1XRTT, the next generation of CDMA digital technology, provides increased
network capacity for voice services. 1XRTT is a packet-switched protocol that
is also capable of data rates of 40 to 60 kilobits per second, with bursts of
up to 144 kilobits per second, depending on network traffic levels, which also
allows us to develop significantly higher data rates for wireless data
applications. Once our network conversion to 1XRTT is complete, our network
will be fully integrated with Cellco's national digital network.
The conversion of our network is a complex process that may result in
disruptions to service. In addition, as we continue to convert and build out
our network, we must complete, or have others complete, a variety of steps,
including securing rights to a number of new cell site locations and obtaining
zoning and other governmental approvals. Adding new cell sites has become
increasingly difficult. The ability to buy or lease property, obtain zoning
approval and construct the required number of radio facilities at locations
that meet the engineering design requirements is uncertain.
We also depend upon Cellco's various key suppliers and vendors to provide us
with equipment and services that we need to convert and build out our network.
If these suppliers or vendors fail to provide equipment or service to us on a
timely basis, we may be unable to provide services to our subscribers in a
competitive manner or continue to convert, maintain and upgrade our network.
These vendors may also be subject to litigation with respect to technology that
we depend on, and we are unable to predict whether our business will be
affected by that litigation. We expect this dependence to continue as we
develop and introduce more advanced generations of technology.
There are several existing digital technologies for mobile wireless
communications, and each is incompatible with the others. We have selected CDMA
technology and its compatible 1XRTT upgrade for our network because we believe
that this technology and its evolution path offer several advantages. Other
wireless service providers have chosen global system for mobile communications
("GSM"), or other technologies. At present, GSM leads in worldwide market
share. GSM's scale
7
advantages may enable lower equipment costs and a faster pace of technology
evolution. Current or future versions of CDMA and 1XRTT may not provide the
advantages that we expect.
Information Systems
Our information systems consist of the following systems: billing, point of
sale, provisioning, customer care, data warehouse, fraud detection and
prevention, financial and human resources. All of our information systems for
our wholesale markets are the same information systems used by Cellco. In our
retail markets, we are using Cellco's financial and human resources systems,
but we are still relying upon the legacy information systems acquired from PCW
to support our other functions. We are transitioning from these legacy systems
to Cellco's systems and expect to complete the transition by the end of the
third quarter of 2003.
Environmental Matters
We are subject to various foreign, federal, state and local environmental
protection and health and safety laws and regulations, and we incur costs to
comply with those laws. We own or lease real property, and some environmental
laws hold current or previous owners or operators of businesses and real
property liable for contamination on that property, even if they did not know
of and were not responsible for the contamination. Environmental laws may also
impose liability on any person who disposes of hazardous substances, regardless
of whether the disposal site is owned or operated by such person. Although we
do not currently anticipate that the costs of complying with environmental laws
will materially adversely affect us, we may incur material costs or liabilities
in the future due to the discovery of new facts or conditions, the occurrence
of new releases of hazardous materials or a change in environmental laws.
Employees
We do not have any employees. All of our operations are managed and performed
on our behalf by employees of Cellco.
As of December 31, 2002, Cellco employed approximately 40,500 employees. Cellco
considers its relationship with its employees to be good. Unions currently
represent approximately 50 of Cellco's employees, but labor unions are
attempting to organize various segments of its workforce and Cellco expects
ongoing efforts to organize its employees.
Intellectual Property
We currently operate using the CELLULARONE brand name pursuant to license
agreements with Cellular One Group assigned by PCW. CELLULARONE is a registered
service mark with the U.S. Patent and Trademark Office owned by Cellular One
Group. We intend to discontinue use of the CELLULARONE brand and terminate the
related license agreements by the end of the third quarter of 2003, after
completion of our network conversion and the transition of our information
systems.
Verizon Communications Inc. owns the trademarks issued for "Verizon" and
"Verizon Wireless" and some service offering names that we intend to use.
Verizon Communications has licensed these and other marks to Cellco on a
non-exclusive basis until 2 1/2 years after it ceases to own any interest in
Cellco or Cellco begins to use a different brand name. Neither Verizon
Communications nor Cellco has any obligation to permit us to use these
trademarks and could require us to discontinue their use at any time. We
believe that the Verizon Wireless brand name will be very important to our
business. If we are required to change our brand name and discontinue the use
of any trademarks owned by Verizon Communications, we would be required to
develop a new brand identity, which could be costly and take time to be
publicly recognized.
Regulatory Environment
Federal
The FCC regulates the licensing, construction, operation, acquisition and
transfer of wireless systems in the U.S. pursuant to the Communications Act of
1934, as amended by the Telecommunications Act of 1996, and other legislation
and the associated rules, regulations and policies promulgated by the FCC.
8
To use the radio frequency spectrum in the U.S., wireless communications
systems must be authorized by the FCC to operate the wireless network and
mobile devices in assigned spectrum segments, and must comply with the rules
and policies governing the use of the spectrum as adopted by the FCC. These
rules and policies, among other things: (1) regulate our ability to acquire and
hold radio spectrum; (2) impose technical obligations on the operation of our
network; (3) impose requirements on the ways we provide service to and
communicate with our subscribers; (4) regulate the interconnection of our
network with the networks of other carriers; and (5) impose a variety of fees
and charges on our business that are used to finance numerous regulatory
programs and part of the FCC's budget.
The process of obtaining U.S. operating authority for a wireless system
requires three separate proceedings to be completed by the FCC: (1) allocating
radio frequency spectrum segments for the services; (2) adopting rules and
policies to govern the operation of the wireless systems in the allocated
spectrum segments; and (3) issuing licenses to applicants for use of the
spectrum allocations.
In addition, because licenses are issued for only a fixed time, generally 10
years, we must periodically seek renewal of those licenses. The FCC will award
a renewal expectancy to a wireless licensee that has provided substantial
service during its past license term and has substantially complied with
applicable FCC rules and policies and the Communications Act. The FCC has
routinely renewed wireless licenses in the past, and none of our licenses has
ever been denied or even challenged. However, the Act provides that licenses
may be revoked for cause and license renewal applications denied if the FCC
determines that a renewal would not serve the public interest. Violations of
FCC rules may also result in monetary penalties or other sanctions. FCC rules
provide that competing renewal applications for licenses will be considered in
comparative hearings and establish the qualifications for competing
applications and the standards to be applied in hearings.
The FCC has begun a number of different proceedings to reexamine its existing
policies and rules governing the allocation and licensing of radio spectrum.
For example, in June 2002, the FCC formed a "Spectrum Task Force" charged with
comprehensively evaluating current spectrum policies and recommending changes
to the FCC. In October 2002, the task force issued its report, and the FCC
sought public comment on its recommendations. Among the areas discussed by the
task force in its report are the rights of incumbent spectrum users, whether to
adopt more "market-based" spectrum policies that would, for example, allow
spectrum sharing among licensed users, and whether to adopt new policies
governing interference with spectrum users. These proceedings could lead to
reassignment of various existing license holders to different spectrum bands,
change the technical and operational rules for various wireless services,
authorize new technologies to operate in bands previously licensed for other
uses, or adopt new radio interference standards for wireless services.
Depending on the specific actions the FCC takes, the outcome of one or more of
these proceedings could increase the radio interference with our operations
from other spectrum users, place new users adjacent to our licensed spectrum,
condition future renewals of our licenses on compliance with new spectrum use
rules, authorize new services to operate without having to purchase spectrum at
auction, or allow other users to share our spectrum. These changes potentially
impact the ways in which we use our licensed spectrum, the capacity of that
spectrum to carry traffic, and the value of that spectrum.
Wireless systems are also subject to Federal Aviation Administration and FCC
regulations governing the location, lighting and construction of transmitter
towers and antennas and are subject to regulation under federal environmental
laws and the FCC's environmental regulations, including limits on radio
frequency radiation from mobile handsets and antennas. State or local historic
preservation, zoning and land use regulations also apply to and can delay tower
siting and construction activities.
Recent Federal Regulatory Developments
The FCC does not specify the rates we may charge for our services nor does it
require us to file tariffs for our wireless operations. However, the
Communications Act states that an entity that provides commercial mobile radio
services is a common carrier, and is thus subject to the requirements of the
Act that it not charge unjust or unreasonable rates, nor engage in unreasonable
discrimination. The FCC may invoke these provisions to regulate the rates,
terms and conditions under which we provide service. In addition, the Act
defines a commercial mobile radio service provider as a telecommunications
carrier, which makes it subject to a number of other regulatory requirements in
its dealings with other carriers and subscribers. These requirements impose
restrictions on our business and increase our costs. Among the requirements
that affect us are the following:
The FCC has imposed rules for making emergency 911 services available by
cellular, PCS and other broadband commercial mobile radio service providers,
including enhanced 911 services that provide the caller's communications
number, location and other information. Commercial mobile radio service
providers are required to take actions enabling them to provide a caller's
automatic number identification and cell site if requested to do so by a public
safety dispatch agency, at the provider's own cost. Other rules require
providers over time to supply the geographic coordinates of the subscriber's
location, either by means of
9
network-based or handset-based technologies. Providers may not demand cost
recovery as a condition of doing so, although they are permitted to negotiate
cost recovery. These rules require us to make significant investments in our
network and to reach agreements both with vendors of 911 equipment and state
and local public safety dispatch agencies with no assurance that we can obtain
reimbursement for the substantial costs we incur.
The FCC has established federal universal service requirements that affect
commercial mobile radio service providers. Under the FCC's rules, commercial
mobile radio service providers are potentially eligible to receive universal
service subsidies; however, they are also required to contribute to the federal
universal service fund. In December 2002, the FCC issued an order that will
significantly increase the amount of universal service contributions that
commercial mobile radio service providers must pay beginning April 1, 2003. The
FCC also adopted new rules regulating how carriers bill subscribers for
universal service contribution costs that may require expenses for
modifications to our billing systems. The FCC has also proposed to make further
revisions later in 2003 that may have the effect of further increasing our
costs to support this program. Many states also have enacted or are considering
state universal service fund programs. A number of these state funds require
contributions, varying greatly from state to state, from commercial mobile
radio service providers above and beyond contributions to the federal program.
Expansion of these state programs will impose a correspondingly growing expense
on our business.
The FCC has adopted rules regulating the use of telephone numbers by wireless
and other providers as part of an effort to achieve more efficient number
utilization. These rules required that wireless carriers be capable of
participating in number "pooling" programs as of November 2002 and maintain
detailed records of numbers used subject to audit. These mandates impose
network capital costs as well as increased operating expenses on our business.
The FCC has adopted rules on wireless local number portability that will enable
wireless subscribers to keep their telephone numbers when switching to another
carrier. The FCC rules require wireless carriers to offer number portability to
their subscribers beginning in November 2003. While this requirement is
presently under appeal by the wireless industry, wireless carriers are
concurrently implementing automated processes to enable number portability. The
overall impact of this mandate is uncertain. If the wireless industry appeal is
unsuccessful, we anticipate that the mandate will impose increased operating
costs on our business and may cause a temporary increase in subscriber churn
and subscriber acquisition and/or retention costs.
The FCC has also adopted rules requiring wireless providers to provide
functions to facilitate electronic surveillance by law enforcement officials
pursuant to the Communications Assistance for Law Enforcement Act. This mandate
will impose costs on us to purchase, install and maintain the software and
other equipment needed.
The Communications Act and the FCC's rules grant various rights and impose
various obligations on commercial mobile radio service providers when they
interconnect with the facilities of local exchange carriers. Generally,
commercial mobile radio service providers are entitled to "reciprocal
compensation," in which they are entitled to charge the same rates for
terminating wireline-to-wireless traffic on their system that the local
exchange carriers charge for terminating wireless-to-wireline calls.
Interconnection agreements are typically negotiated by carriers, but in the
event of a dispute, state public utility commissions, courts and the FCC all
have a role in enforcing the interconnection provisions of the Act. Although we
have local exchange carrier interconnection agreements in place in most of our
service areas, those agreements are subject to modification, expiration or
termination in accordance with their terms, which may increase our costs beyond
the significant amounts we currently pay for interconnection. The FCC has begun
a proceeding that is reassessing its interconnection compensation rules. For
these reasons there may be changes to the interconnection prices or other terms
that we currently have in our agreements.
The FCC has adopted rules to govern customer billing by all telecommunications
carriers and the carriers' use and disclosure of customer proprietary
information. It adopted additional detailed billing rules for landline
telecommunications service providers and is considering whether to extend these
rules to commercial mobile radio services providers, which could add to the
expense of our billing process as systems are modified to conform to any new
requirements. In addition, as noted above, the new universal service fund rules
regulate the collection of universal service contributions from customers.
Other FCC rules determine the obligations of telecommunications carriers to
make their services accessible to individuals with disabilities. The order
requires wireless and other providers to offer equipment and services that are
accessible to and useable by persons with disabilities. While the rules exempt
telecommunications carriers from meeting general disability access requirements
if these results are not readily achievable, it is not clear how the FCC will
construe this exemption. For example, the FCC is considering whether to require
that digital handsets be modified to permit their use by hearing-impaired
customers. Accordingly, the rules may require us to make material changes to
our network, product line or services at our expense.
10
State Regulation and Local Approvals
With the rapid growth and penetration of wireless services has come a
commensurate surge of interest on the part of some state legislatures and state
public utility commissions in regulating our industry. This interest has taken
the form of efforts to regulate customer billing, termination of service
arrangements, advertising, filing of "informational" tariffs, certification of
operation, service coverage and quality, drivers' use of handsets, provision of
emergency 911 service and many other areas. We anticipate that this trend will
continue. It will require us to devote resources to working with the states to
respond to their concerns while minimizing any new regulation that could
increase our costs of doing business.
While the Communications Act generally preempts state and local governments
from regulating entry of, or the rates charged by, wireless carriers, it also
permits a state to petition the FCC to allow it to impose commercial mobile
radio service rate regulation. No state currently has such a petition on file,
but as wireless service continues to grow, the possibility of new regulation
increases. In addition, the Act does not preempt the states from regulating the
other "terms and conditions" of wireless service. Several states, although none
in our retail market service areas, have invoked this language to impose, or
propose, various consumer-related regulations on the wireless industry such as
rules governing customer contracts and advertising. States also may impose
their own universal service support regimes on wireless and other
telecommunications carriers, similar to the requirements that have been
established by the FCC.
At the local level, wireless facilities typically are subject to zoning and
land use regulation. Neither local nor state governments may categorically
prohibit the construction of wireless facilities in any community or take
actions, such as indefinite moratoria, which have the effect of prohibiting
service. Nonetheless, securing state and local government approvals for new
tower sites has been and is likely to continue to be difficult, lengthy and
costly.
In addition, state commissions have become increasingly aggressive in their
efforts to conserve telephone numbering resources. These efforts may impact us
and other wireless service providers disproportionately, given the industry's
growing demand for new numbers, by imposing additional costs or limiting access
to numbering resources. Examples of state conservation methods include number
pooling, number rationing and code sharing.
Finally, states have become more active in imposing fees and taxes on wireless
carriers to raise general revenues and to pay for various regulatory programs.
Item 2. Properties
- -------------------------------------------------------------------------------
We are managed by our managing general partner, Verizon Wireless of Georgia LLC
and have no employees. Consequently, we have no headquarters. We do maintain
facilities comprised of a customer care center, retail sales locations,
switching centers and cell sites. Locations are generally leased to provide
maximum flexibility.
As of December 31, 2002, we operated 34 retail stores that support our direct
distribution channel. At that date, network properties included 4 switching
locations and 438 cell sites. We believe that our facilities are suitable for
their purposes and that additional facilities can be secured for our
anticipated needs, although we may have difficulty obtaining additional cell
sites.
Prior to August 15, 2002, the financial information presented below primarily
reflects our gross investment in the property, plant and equipment of OCP, the
Predecessor of Verizon Wireless of the East LP. Our gross investment in
property, plant and equipment consisted of the following at December 31:
11
2002 2001
---------------- ---------------
Land and improvements $ 3,752 $ -
Buildings 26,364 9,451
Wireless plant equipment 152,974 33,803
Furniture, fixtures and equipment 4,684 381
Leasehold improvements 7,386 -
---------------- ---------------
Gross property, plant and equipment $ 195,160 $ 43,635
================ ===============
Item 3. Legal Proceedings
- -------------------------------------------------------------------------------
Legal Proceedings
In late January of 2003, we and other defendants were served with a Summons and
Amended Complaint and Demand for Jury Trial in Gordon, et al. v. Price
Communications Corporation, et. al., United States District Court for the
Middle District of Georgia (filed on or about January 23, 2003) which arises
out of an existing action by minority owners of certain previously existing
subsidiaries of PCW. As part of the transaction agreement setting forth the
terms of the contribution by PCW of substantially all of its operating assets,
PCW represented that it had "rolled-up" all of its previously existing
subsidiaries so that it could directly contribute all of the operating assets
previously held by such subsidiaries. The original action was brought by the
minority owners against PCW prior to the asset contribution, claiming that PCW
violated its fiduciary obligations, and federal securities and racketeering
laws, and committed fraud in conducting the roll-ups. The Amended Complaint
names as additional defendants Verizon Wireless of the East LP, Cellco
Partnership, and Verizon Wireless of Georgia LLC, and alleges that these
defendants "induced" PCW to breach, and "participated" in the breach, of its
fiduciary duties. The Amended Complaint also alleges that the additional
defendants "tortiously interfered" with the plaintiffs' business relationships.
Under the transaction agreement, we and our affiliates are indemnified by Price
Communications for claims relating to the "roll-up transactions" and also for
lawsuits existing prior to the closing date of the asset contribution
transaction. We have notified Price Communications of our claim for
indemnification concerning the allegations against us in the Amended Complaint.
We are not currently party to any legal proceedings, other than as set forth in
the preceding paragraph, although PCW and OCP are and from time to time have
been party to various litigation matters incidental to the conduct of their
businesses. While certain of PCW's litigation matters have been assumed by us
pursuant to the asset contribution, PCW has agreed to indemnify us for all
matters existing at the time of the contribution. OCP's potential liability for
any existing matter will not be affected by the asset contribution. OCP's
potential litigation liability includes not only matters in which it is a named
defendant, but also actions brought against Cellco that relate to OCP's service
areas. In the event Cellco incurs any litigation related-liability that is
fairly allocable to any service area that it manages, it allocates, pursuant to
the management arrangements between Cellco and the partnership or other entity
that owns such service area, an appropriate portion of such expense.
Accordingly, set forth below is a discussion of certain pending litigation
matters involving Cellco.
Under the U.S. Wireless Alliance Agreement between Vodafone Group Plc
("Vodafone") and Verizon Communications, Cellco has rights of indemnification
from Vodafone and Verizon Communications. Generally, under this agreement,
Vodafone and Verizon Communications, as the successor to Bell Atlantic
Corporation ("Bell Atlantic") and GTE Corporation ("GTE"), are required to
indemnify Cellco for losses, as that term is defined in the underlying
agreements, that may be incurred in connection with wireless businesses
formerly conducted by Vodafone, Bell Atlantic and GTE, and pertaining to events
which occurred or causes of action which existed prior to April 3, 2000, with
respect to Vodafone and Bell Atlantic, and prior to July 10, 2000, with respect
to GTE. This indemnification does not apply to PrimeCo Personal Communications
LP assets contributed to Cellco and is subject to exceptions.
To the extent, therefore, that Cellco may be subject to liability or loss in
connection with any of the following matters and arising out of events or
causes of action which existed prior to the dates set forth above, Cellco
intends to exercise its right to be indemnified by Vodafone or Verizon
Communications for such liability or loss.
Cellco is a defendant in a number of purported class actions brought on behalf
of subscribers throughout the country and alleging common law and statutory
claims of misrepresentation, inadequate disclosure, antitrust, unfair trade
practices, violation of laws prohibiting unsolicited advertisements, or breach
of contract related to advertising, sales, billing and collection practices.
12
These include claims relating to the practice, and alleged nondisclosure, of
rounding up of partial minutes of airtime usage to full minute increments,
send-to-end billing, negative options, ring time billing, billing for busy or
incomplete calls, billing while roaming, first incoming minute free feature,
monthly charges for bundled minutes, below cost sales, early disconnection
charges, charges for local and toll calls, subsidy locks, number portability,
handset insurance, price fixing, illegal tying, market allocation, price
discrimination and other practices and charges, as well as the adequacy of our
wireless coverage and the quality of service. The actions are in various stages
of the litigation process. Plaintiffs in these putative class actions have not
specified the alleged damages they seek. We are not currently able to assess
the impact, if any, of these actions on our financial position or results of
operations.
Cellco is defending a lawsuit, Freedom Wireless, Inc. v. BCG, Inc. et al., U.S.
District Court, Eastern District Court of Massachusetts, filed March 30, 2000,
alleging that the defendants are infringing or contributing to the infringement
of patents held by the plaintiff related to prepaid wireless service
technology. The plaintiff in the above suit seeks unspecified monetary damages
as well as injunctive relief. An adverse decision could materially affect our
prepaid business. Another patent infringement suit, Philip S. Jackson v. AT&T
Wireless Services, Inc., et al., filed June 19, 2002 in the U.S. District Court
in Illinois, alleging that the defendants are infringing a patent relating to
the use or sale of automated interactive telephone systems, was recently
dismissed without prejudice to repleading. Plaintiff in this case also sought
unspecified monetary damages and injunctive relief. The Freedom Wireless case
is, and the Jackson case was, at the time it was dismissed without prejudice,
at a preliminary stage, and we are not currently able to assess the impact, if
any, of these actions on our financial position or results of operations. In
each of these actions, Cellco intends to assert or already has asserted, the
right to be indemnified by its vendors for any losses arising out the claims of
infringement asserted against it. These matters are also covered, in part, by
the indemnification provisions in the alliance agreement. However, the
indemnification claims are unlikely to cover the full cost of defense and
potential liability.
Cellco is a defendant in a number of cases in various courts involving claims
by former agents and resellers who allege that it breached its contracts with
those agents and resellers, has tortiously interfered with their contractual
relationships with others and has engaged in fraud and unfair competition. Some
of the complaints have further alleged that Cellco is a franchisor under
applicable state franchise law and has violated franchise laws in its
relationship with them. State franchise laws often provide for treble damages
for violations. Cellco believes that it is not a franchisor under state law in
these cases. We are not currently able to assess the impact, if any, of these
actions on our financial position or results of operations.
Cellco is a defendant in lawsuits alleging personal injuries, including brain
cancer, from wireless phone use. All of these class actions have been removed
to federal court, ordered for coordinated pre-trial proceedings by the Judicial
Panel for Multi-District Litigation, and transferred to the U.S. District Court
in Maryland. The plaintiffs in these suits claim that wireless phones were
defective and unreasonably dangerous because the defendants failed to include a
proper warning about alleged adverse health effects, failed to encourage the
use of a headset, and failed to include a headset with the phone. Cellco
believes it is entitled to indemnification by handset manufacturers in
connection with all of these suits and intends to pursue those rights. In each
of these actions arising out of personal injury claims, Cellco believes that it
has, and has asserted, insurance coverage claims for any losses arising out of
the claims asserted against it. These matters are also covered by the
indemnification provisions in the alliance agreement. In addition, Cellco
believes that it has strong defenses that it has asserted or will assert in
these proceedings. An adverse outcome in any of these matters could have a
material adverse effect on our results of operations or financial conditions.
Cellco is also a defendant in other legal actions involving claims incidental
to the normal conduct of its business, including actions by customers, vendors
and employees. We believe that these other actions will not be material to our
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------------------------
Not Applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
Not Applicable.
13
Item 6. Selected Financial Data
- -------------------------------------------------------------------------------
The following selected consolidated historical financial data should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
financial statements and related notes thereto included elsewhere in this
filing. The statement of operations and cash flow data for the years ended
December 31, 2002, 2001 and 2000 and the balance sheet data as of December 31,
2002 and 2001 are derived from the audited financial statements included in
Item 8. We derived the remaining financial data from our audited or unaudited
financial statements.
Prior to August 15, 2002, the financial information presented below primarily
reflects the results of operations and financial condition of OCP, the
Predecessor of Verizon Wireless of the East LP.
(in thousands, except other operating data) (Unaudited) Year Ended December 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating Revenue:
Service revenue $ 200,938 $ 79,988 $ 56,360 $ 34,366 $ 19,658
Equipment and other 8,045 1,964 1,318 1,146 1,390
--------------------------------------------------------------------------
Total operating revenue 208,983 81,952 57,678 35,512 21,048
Operating Costs and Expenses:
Cost of service (excluding depreciation and
amortization related to network assets
included below) (1) 36,638 9,691 8,864 5,591 3,210
Cost of equipment 9,784 - - - -
Selling, general and administrative 49,423 2,625 2,100 1,639 1,180
Depreciation and amortization 15,006 3,583 3,077 2,529 2,131
Sales of assets, net (2) - - - -
--------------------------------------------------------------------------
Total operating costs and expenses 110,849 15,899 14,041 9,759 6,521
Operating Income 98,134 66,053 43,637 25,753 14,527
Other Income (Expenses):
Interest income, net 1,358 1,167 1,264 664 408
Minority interests (14,606) (10,082) (6,736) (3,964) (2,240)
--------------------------------------------------------------------------
Net Income $ 84,886 $ 57,138 $ 38,165 $ 22,453 $ 12,695
==========================================================================
Other Operating Data:
Subscribers (in thousands) (end of period) (2) 531.9 112.2 94.7 69.9 53.6
Average revenue per user (3) $ 62.41 $ 64.13 $ 57.18 $ 47.83 $ 35.80
Cash Flow Data:
Net cash provided by operating activities $ 111,239 $ 70,484 $ 46,845 $ 28,702 $ 17,696
Net cash (used in) investing activities (70,640) (4,887) (4,379) (5,527) (3,860)
Net cash (used in) financing activities (40,599) (65,597) (42,466) (23,175) (13,836)
Capital expenditures 70,704 4,887 4,654 6,269 5,024
Balance Sheet Data:
Property, plant and equipment, net $ 166,863 $ 26,057 $ 24,753 $ 23,406 $ 20,904
Total assets 1,872,100 46,314 50,713 40,470 31,971
Minority interests 9,471 6,866 7,284 5,798 4,614
Total partners' capital 1,424,314 38,918 41,277 32,862 26,164
- ---------
(1) Cost of service includes: (a) roaming charges billed to us for our
subscribers' usage outside of our network, (b) direct telecom charges,
which are costs to handle calls over our network, including landline
charges, trunk lines and other costs to maintain our network and (c) all
site rentals, tower rentals and network related salaries.
(2) All subscriber information, including the number of subscribers at any
date, churn and revenue per subscriber, is presented for our voice and
broadband data service and includes subscribers who purchase service from
resellers of our service.
(3) Average revenue per user is determined by dividing service revenues in
each month within a period by the sum of the average number of subscribers
per month in the period.
14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------------
Overview
Verizon Wireless of the East LP was formed by Cellco Partnership d/b/a Verizon
Wireless ("Cellco") on December 17, 2001 for the purpose of acquiring the
business assets of Price Communications Wireless, Inc. ("PCW"), a subsidiary of
Price Communications Corp., pursuant to a transaction agreement (the
"Agreement") dated December 18, 2001, as amended. On August 15, 2002, the
transactions contemplated by the Agreement were consummated.
We provide wireless voice and data communication services in the acquired PCW
markets in Alabama, Georgia, South Carolina and Florida. In addition, through
our 85% interest in Orange County-Poughkeepsie Limited Partnership
("Predecessor" or "OCP"), we provide wholesale wireless communication service
to resellers (primarily Cellco) operating in the Orange County and
Poughkeepsie, New York metropolitan areas.
Operating revenue. Our operating revenue consists of revenue from the provision
of services and revenue from sales in our retail markets of equipment.
Equipment revenue includes revenue from sales of handsets and accessories.
Equipment revenue associated with the sale of handsets, pagers and accessories
is recognized when the products are delivered to and accepted by the
subscriber, as this is considered to be a separate earnings process from the
sale of wireless services. Service revenue, which we record when services are
provided, includes revenue from:
o monthly access charges;
o airtime usage;
o long distance charges;
o toll and data usage charges;
o charges for features such as voice mail, short messaging services and
caller ID;
o gross roaming charges, or incollect fees, charged to our subscribers
for usage outside our network; and
o gross roaming charges, or outcollect fees, charged to other wireless
service providers whose subscribers use our network.
In 2002, approximately 54% of our service revenue was affiliate wholesale
revenue from Cellco, our primary purchaser of wholesale lines. The wholesale
rates charged to Cellco do not necessarily reflect current market rates. We are
re-evaluating the current rates and expect these rates to be reduced in the
future consistent with market rates and the terms of the Predecessor's limited
partnership agreement. In 2003, we expect revenue from our retail operations
will increase, reflecting a full year of PCW results.
Operating Costs and Expenses. Our operating expenses consist of the following:
o Cost of service: includes roaming charges billed to us for our
subscribers' usage outside of our network and direct telecom charges,
which are costs to handle calls over our network, including landline
charges, trunk lines and other costs to maintain our network, as well
as site rentals, tower rentals and network-related salaries;
o Cost of equipment: primarily includes costs of handsets and
accessories, and the cost of shipping, warehousing and distributing
these products. We subsidize the cost of handsets sold in our direct
channels to reduce the customer's up-front cost of our service and,
as a result, equipment revenue is more than offset by the related
cost of equipment, resulting in a net subsidy. As we expand our
direct distribution channels and continue to grow, the number of
handsets that we sell will continue to increase, which will result in
higher cost of equipment. We believe that, since Cellco as one of the
largest purchasers of handsets in the United States, Cellco will be
able to purchase handsets at attractive rates and will pass along
such rates to us;
o Selling, general and administrative expenses: includes all operating
expenses not included in the other operating expense categories,
including commissions; allocated expenses from Cellco for certain
services provided to us in connection with our business; and
o Depreciation and amortization: includes depreciation of network and
other fixed assets and amortization of intangibles. Beginning January
1, 2002, we no longer amortize the value of our cellular licenses,
goodwill or assembled workforce in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets."
15
Critical Accounting Policies and Estimates
The following discussion and analysis is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of our
financial statements requires management to make estimates and assumptions that
affect the reported amounts of revenue and expenses, and assets and
liabilities, during the periods reported. Estimates are used for, but not
limited to, the accounting for allowance for uncollectible accounts receivable,
unbilled revenue, fair values of financial instruments, depreciation and
amortization, useful life and impairment of assets, accrued expenses,
contingencies and allocation of purchase prices in connection with business
combinations. We base our estimates on historical experience, where applicable,
and other assumptions that we believe are reasonable under the circumstances.
Actual results may differ from those estimates.
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
o We recognize service revenue based upon access to the network (access
revenue) and usage of the network (airtime/usage revenue), net of
credits and adjustments for service discounts. We are required to
make estimates for service revenue earned but not yet billed at the
end of each reporting period. These estimates are based primarily
upon historical minutes of use processed. Our revenue recognition
policies are in accordance with the Securities and Exchange
Commission's ("SEC") Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
o We maintain allowances for uncollectible accounts receivable for
estimated losses resulting from the inability of our subscribers to
make required payments. We base our estimates on the aging of our
accounts receivable balances and our historical write-off experience,
net of recoveries.
o When recording our depreciation expense associated with our network
assets, we use estimated useful lives. As a result of changes in our
technology and industry conditions, we periodically evaluate the
useful lives of our network assets. These evaluations could result in
a change in our useful lives in future periods.
o We are allocated expenses from Cellco. Cellco estimates these
allocations based primarily on, but not limited to, our historical
minutes of use, our subscriber base, and the number of our gross
additions as a percent of Cellco's total. We believe these
allocations are reasonable.
In addition, we have adopted the provisions of SFAS No. 142 as of January 1,
2002. SFAS No. 142 requires that goodwill and indefinite-lived intangible
assets no longer be amortized. Instead, these assets must be reviewed annually
(or more frequently under certain conditions) for impairment in accordance with
this statement.
In the asset contribution transaction, we received certain wireless licenses
and other intangibles contributed by PCW and subsidiaries of Cellco. We have
completed a preliminary assessment of the useful lives of the intangible assets
contributed. The principal intangible asset contributed in the asset
contribution was wireless licenses. These licenses provide us with the
exclusive right to utilize certain radio frequency spectrum to provide wireless
communication services. Radio frequency spectrum is a resource that has always
existed and will continue to exist indefinitely. While licenses are issued for
only a fixed time, generally 10 years, such licenses are subject to renewal by
the Federal Communications Commission ("FCC"). Renewals of licenses typically
occur routinely and at nominal cost. We have determined that there are
currently no legal, regulatory, contractual, competitive, economic or other
factors that limit the useful life of the contributed wireless licenses. As a
result, the wireless licenses have been treated as an indefinite life
intangible asset under the provisions of SFAS No. 142 and were not amortized,
but rather were tested for impairment annually or between annual dates, if
events or circumstances warrant. We will reevaluate the useful life
determination for wireless licenses at least annually to determine whether
events and circumstances continue to support an indefinite useful life.
All of the contributed wireless licenses have been integrated into Cellco's
nationwide footprint. All of the licenses in Cellco's nationwide footprint are
tested in the aggregate for impairment under SFAS No. 142. When testing the
carrying value of the wireless licenses for impairment, Cellco determines the
fair value of the aggregated wireless licenses by subtracting from enterprise
discounted cash flows (net of debt) the fair value of all of the other net
tangible and intangible assets of Cellco. If the fair value of the aggregated
wireless licenses as determined above is less than the aggregated carrying
amount of the licenses, an impairment will be recognized by Cellco. Any
impairment loss recognized by Cellco will be allocated to its consolidated
subsidiaries based upon a reasonable methodology. Subsequent to the closing of
the transaction, Cellco performed an updated impairment test which incorporated
the contributed wireless licenses. No impairment was recognized. Future tests
for impairment will be performed by Cellco at least annually and more often if
events or circumstances warrant.
16
On January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This standard re-addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. It concludes
that a single accounting model be used for long-lived assets to be disposed of
by sale and broadens the presentation of discontinued operations to include
more disposal transactions. The adoption of SFAS No. 144 has had no material
effect on our results of operations or financial position.
Results of Operations
The following is a discussion of our results of operations and financial
condition. The consummation of the asset contribution was completed on August
15, 2002. The consolidated financial statements reflect the transfer of certain
Cellco assets, including its aggregate 85% interest in the Orange
County-Poughkeepsie Limited Partnership (the "Predecessor"), on a historical
basis as these transfers were among entities under common control. Results of
operations thus comprise those of the Predecessor for all periods presented.
The results of operations for the years ended December 31, 2001 and 2000 are
substantially those of the Predecessor since the asset contribution was not
consummated on or before December 31, 2001.
2002 Compared to 2001
Subscribers
We ended 2002 with 531.9 thousand subscribers, compared to 112.2 thousand
subscribers at the end 2001, an increase of 419.7 thousand net new subscribers,
or 374.1%. Of these new subscribers, approximately 2% were the result of
internal growth and 98% were the result of business acquisitions. In August
2002, we added approximately 411.0 thousand subscribers as a result of the
acquisition of PCW's operations in Alabama, Florida, Georgia and South
Carolina. The number of subscribers added to our subscriber count as a result
of the Price acquisition reflects downward adjustments we have made to conform
PCW's subscriber count to our methodology and to reflect our termination of
certain Price service offerings after the acquisition. The remainder of the
increase is due to the growth of the subscriber base of the Predecessor. The
overall composition of our subscriber base as of December 31, 2002 was 76.2%
retail and 23.8% wholesale.
Operating revenue
Total operating revenue for the year ended December 31, 2002 was $209 million,
an increase of $127 million, or 155.0%, compared to the year ended December 31,
2001.
Service revenue. Service revenue for the year ended December 31, 2002 was $201
million, an increase of $121 million, or 151.2%, compared to the year ended
December 31, 2001. This increase was primarily due to the 374.1% increase in
subscribers, partially offset by a slight decline in average service revenue
per user for the year ended December 31, 2002 compared to the similar period in
2001. In 2002, approximately 54% of our service revenue was affiliate wholesale
revenue from Cellco, our primary purchaser of wholesale lines. Excluding the
acquisition of PCW assets, service revenue grew by $32 million, or 39.5%, for
the year ended December 31, 2002 compared to the similar periods in 2001. This
increase was primarily due to a 51.9% increase in minutes of use per user on
our network in our wholesale markets, which in turn drove the increase in the
average service revenue per user of our Predecessor.
Average service revenue per user decreased 2.7% to $62.41 for the year ended
December 31, 2002 compared to the similar period in 2001. The decrease is
primarily due to our acquisition of the PCW retail markets. The retail
subscribers acquired generally have a lower level of service revenue per user
than the wholesale subscribers. The wholesale subscribers comprised
approximately 23.8% of the subscriber base at the end of 2002, compared to 100%
at the end of 2001. We are re-evaluating the current wholesale rates we charge
our largest reseller, Cellco. We expect these rates to be reduced consistent
with market rates and the terms of the Predecessor limited partnership
agreement, although based on current expectations, we do not anticipate such
reductions to adversely affect PCW's preferred return. Excluding the
acquisition of PCW's assets, average service revenue per user increased 25.1%
to $80.21 for the year ended December 31, 2002, compared to the similar periods
in 2001. The increase was primarily due to the increase in minutes of use per
subscriber on our network described above. Overall, average service revenue per
user is expected to decline as a result of the PCW acquisition.
Equipment and other revenue. Equipment and other revenue for the year ended
December 31, 2002 was $8 million, an increase of $6 million, or 309.6%,
compared to the year ended December 31, 2001. Equipment revenue exists solely
due to the acquisition of PCW, as the Predecessor had no retail subscribers and
did not sell equipment. Excluding the acquisition of
17
PCW's assets, other revenue consisting of cell site rental revenue and billing
services grew by $1 million, or 55.1%, for the year ended December 31, 2002
compared to the year ended December 31, 2001. This increase was primarily due
to an increase in the cell site rental revenue.
Operating costs and expenses
Cost of service. Cost of service includes roaming charges billed to us for our
subscribers' usage outside our network and direct telecom, as well as
network-related salaries, and site and tower rentals. Cost of service for the
year ended December 31, 2002 was $37 million, an increase of $27 million, or
278.1%, compared to the year ended December 31, 2001. The increase was
primarily due to increased direct telecom charges caused by increased minutes
of use and cost of roaming due to the acquisition of the retail operations of
PCW. Service margins decreased by 6.1% to 81.8% for the year ended December 31,
2002, compared to the similar period in 2001. The decrease is due to PCW's
lower service margins. Excluding PCW, service margins increased by 1.7% to
89.6% for the year ended December 31, 2002 compared to the year ended December
31, 2001. The increase is due to increased minutes of use in our wholesale
markets of approximately 51.9% offset by lower interconnection and long
distance rates. Service margins are expected to decline as a result of the PCW
acquisition.
Cost of equipment. Cost of equipment includes costs of handsets, accessories
and the cost of shipping and warehousing these products. Cost of equipment for
the year ended December 31, 2002 was $10 million. Cost of equipment exists
solely due to the acquisition of PCW's assets. The negative equipment margin,
or subsidy, was 111.4% for the year ended December 31, 2002. In 2003, we expect
to incur substantial costs for the replacement of subscriber handsets using
time division multiple access ("TDMA") technology with those using code
division multiple access ("CDMA") technology.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 2002 were $49 million,
an increase of $47 million, or 1,782.8%, compared to the year ended December
31, 2001. This increase was primarily from the acquisition of PCW. There was a
$9 million increase in selling expenses, a $6 million increase in general and
administrative salaries and a $19 million increase in allocated charges from
Cellco. The remaining increase was due to an increase in miscellaneous general
and administrative charges associated with the retail operations related to the
acquisition of PCW's assets. To the extent gross subscriber additions continue
to increase, we expect to continue to incur increased advertising and
subscriber acquisition-related expenses.
Depreciation and amortization. Depreciation and amortization for the year ended
December 31, 2002 was $15 million, an increase of $11 million, or 318.8%,
compared to the year ended December 31, 2001. The increase was primarily due to
increased depreciation expense related to the increase in depreciable assets as
a result of the acquisition of PCW's assets and the increase in depreciable
assets during 2002. Excluding the acquisition of PCW assets, depreciation
expense increased by $641 thousand, or 17.9%.
Other Income (Expenses)
Interest income, net. Interest income, net for the year ended December 31, 2002
was $1 million, an increase of $191 thousand, or 16.4%, compared to the year
ended December 31, 2001. The changes were attributable to changes in the due
from affiliates balance between the periods and the related interest income
allocated to us from Cellco. We expect interest expense to increase due to the
$350 million, 8.9% fixed rate term note from Verizon Investments Inc. and
additional borrowing from our affiliates to fund our network conversion of the
PCW markets from TDMA to CDMA technology. However, this increase will be
partially offset by the interest income on the $500 million note receivable
from Cellco.
Minority interests. Minority interest expense represents the minority interests
of the Predecessor's limited partners, Warwick Valley Telephone Company and
Taconic Telephone Corporation. Each of these partners holds a 7.5% limited
partnership interest in the Predecessor. Minority interests for the year ended
December 31, 2002 was $15 million, an increase of $5 million, or 44.9%,
compared to the year ended December 31, 2001. The increase was due to higher
net income in the Predecessor's results of operations. We expect minority
interests to increase in future periods due to expected increases in the
Predecessor's net income.
2001 Compared to 2000
Subscribers
As of December 31, 2001, our Predecessor had approximately 112.2 thousand
subscribers on its network through reseller arrangements, an increase of 18.5%
compared to December 31, 2000.
18
Operating revenue
Total operating revenue for the year ended December 31, 2001 was $82 million,
an increase of $24 million, or 42.1%, compared to the year ended December 31,
2000. The increase was primarily attributed to an increase in the number of
average subscribers.
Average revenue per user for the year ended December 31, 2001 was $64.13, an
increase of $6.95, or 12.2%, compared to the year ended December 31, 2000. The
increase is due to a 27.3% increase in the average monthly usage per subscriber
for the year ended December 31, 2001 compared to the year ended December 31,
2000.
Operating costs and expenses
Cost of service. Cost of service for the year ended December 31, 2001 was $10
million, an increase of $827 thousand, or 9.3%, compared to the year ended
December 31, 2000. The increase is due primarily to a 61.1% increase in minutes
of use on the Predecessor's network and allocated network salaries compared to
the year ended December 31, 2000.
General and administrative expenses. General and administrative expenses for
the year ended December 31, 2001 were $3 million, an increase of $525 thousand,
or 25.0%, compared to the year ended December 31, 2000. The increase is due
primarily to an increase in administrative costs.
Depreciation and amortization. Depreciation and amortization for the year ended
December 31, 2001 was $4 million, an increase of $506 thousand, or 16.4%,
compared to the year ended December 31, 2000. This increase is due to the
build-out of the Predecessor's digital network and the related capital
expenditures.
Other Income (Expenses)
Interest income, net. Interest income, net for the year ended December 31, 2001
remained constant at $1 million compared to the year ended December 31, 2000.
Minority interests. Minority interest expense represents the minority interests
of the Predecessor's limited partners, Warwick Valley Telephone Company and
Taconic Telephone Corporation. Each of these partners holds a 7.5% limited
partnership interest in the Predecessor. Minority interests for the year ended
December 31, 2001 was $10 million, an increase of $3 million, or 49.7%,
compared to the year ended December 31, 2000. The increase was due to higher
net income of the Predecessor.
Liquidity and Capital Resources
We will have significant cash needs over the next two years, as described
below. To meet these funding requirements, we will rely on a combination of
internally-generated funds and borrowings from affiliates. Financing from
affiliates will generally consist of borrowings and advances from our general
partner who in turn will be dependent upon borrowings and advances from Cellco.
We will therefore be dependent upon Cellco's access to capital in order to
provide us with financing. Cellco receives its funding from its own operating
cash flow and from borrowings, primarily from Verizon Communications Inc.
("Verizon Communications") and its subsidiaries, and also from unrelated
entities. As a result, we are ultimately dependent upon Verizon Communications'
access to capital. Verizon Communications has no commitment to provide any
financing to us, and we have no commitments from Cellco or any third party. The
failure to obtain financing on commercially reasonable terms or at all could
result in the delay or abandonment of our network conversion and build-out
plans or our inability to continue to provide service in all or portions of
some of our markets, which could harm our ability to attract and retain
subscribers.
The cost of borrowings from our general partner will reflect Cellco's overall
cost of borrowings from Verizon Communications. Interest charged to Cellco by
Verizon Communications is generally based on a blended interest rate calculated
using fixed rates and variable rates applicable to borrowings by Verizon
Communications to fund Cellco and other entities affiliated with Verizon
Communications. The interest rate on such borrowings as of December 31, 2002
was 5.5%.
Cash Flows Provided By Operating Activities
Our primary source of funds continues to be cash generated from operations. The
$41 million increase in net cash provided by operating activities for the year
ended December 31, 2002 compared to the similar period of 2001 was primarily
due to an increase in operating income excluding depreciation and amortization
resulting from revenue growth. Eighty percent of the
19
increase in cash flows provided by operating activities reflects the increase
in internally-generated cash flows from the operations of our Predecessor for
the year ended December 31, 2002 compared to the similar period of 2001. The
remainder of the increase is attributed to the operations of the newly acquired
PCW assets.
Cash Flows Used In Investing Activities
Capital expenditures continue to be the primary use of cash. Capital spending
of $71 million was funded by our internally-generated cash flows. The $66
million increase in capital spending for the year ended December 31, 2002
compared to the similar period of 2001 is primarily due to $63 million in
capital spending for the conversion of the former PCW network and other
infrastructure, with the remaining $3 million increase relating to capital
spending for the build-out and upgrade of the Predecessor's network.
Substantial capital outlays of approximately $230 million will be required for
the conversion of PCW's network over the next two years. Unforeseen delays,
cost overruns, unanticipated expenses, regulatory changes, engineering design
changes, weather-related delays, technological changes and other risks may also
require additional funds. We expect our total capital expenditures in 2003 to
be approximately $130 million and to have substantial capital requirements
thereafter. We expect to fund these capital outlays through
internally-generated funds and borrowings and advances from our general partner
who in turn will be dependent upon borrowings and advances from Cellco.
Cash Flows Used In Financing Activities
The $25 million decrease in cash used in financing activities during the year
ended December 31, 2002 compared to the year ended December 31, 2001 was
primarily due to a $36 million increase in due to affiliates offset by a $12
million increase in distributions to the partners of PCW and the partners of
the Predecessor.
Immediately after the closing of the asset contribution, we redeemed the entire
$550 million net debt assumed from PCW with the cash contributed from our
partners and a term note from an affiliate. The cost of the redemption above
the face amount of the debt was approximately $34 million. The term note from
the affiliate in the amount of $350 million was obtained for the purpose of
funding the redemption and bears interest at a rate of approximately 8.9% per
year. The term note is guaranteed by PCW. It matures the earlier of February
15, 2007 or six months following the occurrence of certain specified events.
In addition, Cellco contributed a $500 million 6.14% promissory note receivable
to us which is payable upon demand. We do not intend to call the demand note
receivable during the next fiscal year.
On May 31, 2002, Moody's Investor's Service ("Moody's") placed Cellco's long
term debt ratings, and the long term debt ratings of Verizon Communications, on
review for possible downgrade due to concerns with Verizon Communications' debt
levels and competitive issues. On December 18, 2002, Moody's lowered Cellco's
long term debt rating to A3 from A2 and lowered Verizon Communications' long
term debt rating to A2 from A1, and changed its outlook for Cellco and Verizon
Communications to stable from negative. Standard & Poor's and Fitch IBCA
continue to maintain a higher debt rating for Cellco and Verizon
Communications. In February 2003, Standard & Poor's upgraded its outlook for
Cellco and Verizon Communications to stable from negative. Any reduction in the
ratings assigned to Cellco or Verizon Communications could increase our cost of
capital and interest expense and/or make financing less readily available to
us.
According to the amended limited partnership agreement, we are required to make
cash distributions to PCW on a quarterly basis equal to 50% of PCW's preferred
return for the quarter. For the year ended December 31, 2002, we paid $2
million to PCW. For the year ended December 31, 2002, our Predecessor paid
distributions of $80 million to its partners. The Predecessor is required to
make distributions to its partners on a quarterly basis based upon the
Predecessor's operating results, cash availability and financing needs as
determined by its general partner (Verizon Wireless of the East LP) at the date
of the distribution. We intend to make additional distributions in the first
quarter of 2003 to the partners of the Predecessor and to PCW of approximately
$30 million and $4 million, respectively. We expect to fund these distributions
with internally-generated cash.
Contractual Obligations and Commercial Commitments
The following table provides a summary of our contractual obligations and
commercial commitments as of December 31, 2002. Additional details about these
items are included in the notes to the audited financial statements.
20
Payments Due by Year (Dollars in Thousands)
------------------------------------------------------------------------------
Contractual Obligations Total 2003 2004 - 2005 2006 - 2007 Thereafter
- -------------------------------------------------------------------------------------------------------------------------
Short-term debt $ - $ - $ - $ - $ -
Long-term debt (a) 478,032 31,038 62,076 384,918 -
Operating leases 21,748 6,349 9,217 3,554 2,628
Other long-term obligations - - - - -
------------------------------------------------------------------------------
Total contractual cash obligations $ 499,780 $ 37,387 $ 71,293 $ 388,472 $ 2,628
==============================================================================
- ---------
(a) Includes approximately $350 million term note borrowed from Verizon
Investments Inc. and expected interest payments. This term note bears
interest at a fixed rate of 8.9% per year.
Debt payments in the table include principal and interest. Our capital
expenditure estimates are described under "Cash Flows Used in Investing
Activities."
Financial Condition
Total assets at December 31, 2002 were $1,872 million, an increase of $1,826
million, compared to December 31, 2001. The increase was primarily the result
of the acquisition of PCW's operations. We recorded approximately $1,610
million of wireless licenses, $52 million of acquired customer lists and $98
million of tangible assets based on the preliminary purchase price allocation.
We do not expect that future adjustments to the purchase price allocation will
have a material effect on our financial condition or results of operations. The
remaining increase in total assets was primarily due to the increase in
property, plant and equipment as a result of the conversion of the network
contributed by PCW to CDMA technology.
Total liabilities at December 31, 2002 were $438 million, an increase of $438
million compared to December 31, 2001. The increase was primarily due to the
$350 million borrowings from an affiliate to partially fund the redemption of
the assumed debt from PCW. The remaining increases were due to the recording of
approximately $58 million in assumed liabilities from the acquisition of PCW
and approximately $30 million of additional borrowings from affiliates to fund
current year capital expenditures.
Total partners' capital was $1,424 million at December 31, 2002, an increase of
$1,385 million compared to December 31, 2001. The increase was primarily due to
the issuance of approximately $1,113 million of preferred limited partnership
interest to PCW and approximately $257 million of partnership interest to our
general and limited partners associated with their respective asset
contributions. The remaining increase was due to net income for the year ended
December 31, 2002, substantially offset by distributions to our partners of $70
million.
Factors that May Affect Future Results
In addition to the information set forth above, the following factors, as well
as the factors listed under "Cautionary Statement Concerning Forward-Looking
Statements," may adversely affect our future results.
Legislation and Regulation
The licensing, construction, operation, sale, and interconnection arrangements
of wireless communications systems are regulated to varying degrees by the FCC
and, depending on the jurisdiction, state and local regulatory agencies. In
addition, the FCC, together with the Federal Aviation Administration, regulates
tower marking and lighting, and other government agencies periodically consider
various mandates on the wireless industry. We are also subject to various
environmental protection and health and safety laws and regulations, including
limits on radio frequency radiation from mobile handsets and towers.
Additionally, our business is increasingly subject to efforts to adopt state
consumer protection regulation and legislation. Any of these agencies having
jurisdiction over our business could adopt regulations or take other actions
that could increase our costs, place restrictions on our operations and growth
potential or otherwise adversely affect our business.
The FCC and an increasing number of state authorities are requiring the
wireless industry to comply with, and in some cases to fund, various
initiatives, including federal and state universal service programs, telephone
number administration, local number portability, services to the
hearing-impaired and emergency 911 networks. In addition, many states have
imposed significant taxes on providers in the wireless industry and some have
adopted or are considering adoption of regulatory requirements on
21
customer billing and other matters. These initiatives are imposing increasing
costs on us and other wireless carriers and may otherwise adversely affect our
business. For example, the FCC has mandated that wireless providers supply the
geographic coordinates of a subscriber's location, either by means of
network-based or handset-based technologies, to public safety dispatch
agencies. This rule will impose significant costs on us and could lead us to
increase subsidies on handsets to offset the increased costs of handset-based
technologies. In addition, local number portability rules may cause us to incur
higher costs relating to subscriber churn, acquisition or retention, as well as
increased operating expenses. See "Business--Regulatory Environment" for a more
detailed description of the regulatory environment affecting us.
Legislation has been proposed in the U.S. Congress and many state and local
legislative bodies to restrict or prohibit the use of wireless phones while
driving motor vehicles. Similar laws have been enacted in other countries and,
to date, the State of New York and a small number of localities in the U.S.
have passed restrictive laws.
Health Concerns
Some studies have suggested that radio frequency emissions from wireless
handsets and cell sites may be associated with various health problems,
including cancer, and may interfere with electronic medical devices, including
hearing aids and pacemakers. In addition, lawsuits have been filed against
Cellco and other participants in the wireless industry alleging various adverse
health consequences as a result of wireless phone usage. The U.S. Food & Drug
Administration ("FDA") and the FCC have stated that the available scientific
evidence does not show that any health problems are associated with using
wireless phones, but that there is no proof that wireless phones are absolutely
safe. In May 2001, the U.S. General Accounting Office issued a report, entitled
Research and Regulatory Efforts on Mobile Phone Issues, observing that the
consensus of various major health agencies is that the research to date does
not show radio frequency energy emitted from mobile phones to have adverse
health effects but there is not yet enough information to conclude that they
pose no risk. The report offers recommendations to improve the FCC's review of
mobile phone testing, as well as the FCC's and FDA's consumer information on
health issues relating to mobile phones. Additional studies of radio frequency
emissions are ongoing. If consumers' health concerns increase, they may be
discouraged from using wireless handsets, and regulators may impose
restrictions on the location and operation of cell sites. These concerns could
have an adverse effect on the wireless communications industry and expose
wireless providers to further litigation, which, even if not successful, can be
costly to defend. Government authorities may increase regulation of wireless
handsets and cell sites as a result of these health concerns and wireless
companies may be held liable for costs or damages associated with these
concerns. The actual or perceived risk of radio frequency emissions could also
adversely affect us through a reduced subscriber growth rate, a reduction in
subscribers, reduced network usage per subscriber or reduced financing
available to the wireless communications industry.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations." This standard requires
entities to recognize the fair value of any legal obligation associated with
the retirement of long-lived assets and to capitalize that amount as a part of
the book value of the long-lived asset. That cost is then depreciated over the
remaining life of the underlying long-lived asset. We will adopt the standard
effective January 1, 2003. We do not expect the adoption of SFAS No.143 to have
a material effect on our results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This standard nullifies Emerging Issue Task
Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." This standard requires the recognition of
a liability for a cost associated with an exit or disposal activity at the time
the liability is incurred, rather than at the commitment date to exit a plan as
required by EITF 94-3. We will adopt this standard effective January 1, 2003.
We do not expect the impact of the adoption of SFAS No. 146 to have a material
effect on our results of operations or financial position.
Cautionary Statement Concerning Forward-Looking Statements
In this Management's Discussion and Analysis, and elsewhere in this Annual
Report and in our other public filings and statements (including oral
communications), we have made forward-looking statements. These statements are
based on our estimates and assumptions and are subject to risks and
uncertainties. Forward-looking statements include the information concerning
our possible or assumed future results of operations, capital expenditures,
anticipated cost savings and financing plans. Forward-looking statements also
include those preceded or followed by the words "may," "will," "expect,"
"intend,"
22
"plan," "anticipates," "believes," "estimates," "hopes" or similar expressions.
For those statements, we claim the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
Our actual future performance could differ materially from these
forward-looking statements, as these statements involve a number of risks and
uncertainties. Therefore, undue reliance should not be placed on these
statements. The following important factors could affect future results and
could cause those results to differ materially from those expressed in the
forward-looking statements:
o the duration and extent of the current economic downturn;
o materially adverse changes in economic conditions in the markets
served by us;
o the effects of the substantial competition that exists in our
markets, which has been intensifying;
o our ability to obtain sufficient financing to satisfy our substantial
capital requirements, including to fund capital expenditures, debt
repayment and distributions to our partners;
o the success of the network conversion of the PCW markets from TDMA to
CDMA technology;
o an adverse change in the ratings afforded Cellco's and Verizon
Communications' debt securities by nationally accredited ratings
organizations;
o our ability to continue to integrate our business with Cellco's, and
our ability to achieve revenue enhancements and anticipated cost
savings;
o our ability to develop future business opportunities, including
wireless data services, and to continue to adapt to the changing
conditions in the wireless industry;
o our ability to receive satisfactory service from Cellco's key vendors
and suppliers;
o our ability to generate additional subscribers, with acceptable
levels of churn, from distributors of our service;
o material changes in available technology, and technology substitution
that could impact the popularity and usage of our technology;
o our continued provision of satisfactory service to our subscribers at
an acceptable cost, in order to reduce churn;
o the impact of continued unionization efforts with respect to Cellco's
employees;
o regulatory developments, including new regulations that could
increase our cost of doing business or reduce demand for our
services;
o developments in connection with existing or future litigation;
o the impact of arrangements between us and Cellco, the sole member of
Verizon Wireless of Georgia LLC, our managing general partner, which
may not be the result of arm's length negotiations;
o changes in our accounting assumptions that regulatory agencies,
including the SEC, may require or that result from changes in the
accounting rules or their application, which could result in an
impact on earnings; and
o other factors described in our Registration Statement on Form S-4
(No. 333-82408) under the heading "Risk Factors."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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We are exposed to various types of market risk in the normal course of our
business. Our primary market risk will relate to changes in interest rates,
which could impact our results of operations. The intercompany loans from/to
our general partner bear interest at rates that vary with Verizon
Communications' cost of funding; because a portion of its debt is fixed-rate,
and because its funding may be affected by events related solely to it, the
interest rates on intercompany loans may not adjust in accordance with market
rates. As of December 31, 2002, we had a net payable position in our
intercompany loans to our general partner of approximately $18 million. A
change in our interest rates of 100 basis points wo