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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
Annual Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
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(Mark One)
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1998 or
|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission file number 1-8309.
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Price Communications Corporation
(Exact name of registrant as specified in its charter)
New York 13-2991700
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
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45 Rockefeller Plaza, 10020
New York, New York (Zip code)
(Address of principal executive offices)
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Registrant's telephone number, including area code (212) 757-5600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $.01 per share American Stock Exchange
Boston Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
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 the
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) 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 the Form 10-K. |_|
AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NONAFFILIATES OF THE COMPANY
Aggregate market value of the Common Stock held by non-affiliates of the
Company, based on the last sale price on the American Stock Exchange ("AMEX") on
March 2, 1999 ($10.25 as reported in the Wall Street Journal): approximately
162.0 million.
The number of shares outstanding of the Company's common stock as of March 2,
1999 was 27,096,846
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-K incorporates certain information contained in
the registrant's definitive proxy statement to be filed by the registrant in
connection with its 1999 Meeting of Shareholders.
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PART I
Item 1. Business
General
Unless otherwise indicated, all references herein to "PCC" refer to Price
Communications Corporation and all references herein to the "Company" refer to
PCC and its subsidiaries and their respective predecessors. References herein to
the "Acquisition" refer to the acquisition by Price Communications Wireless,
Inc. ("PCW"), a wholly-owned indirect subsidiary of PCC, of Palmer Wireless,
Inc. ("Palmer") and the related sales of the Fort Myers and Georgia-1 systems of
Palmer, as described below under "The Acquisition." As used herein, the terms
"PCW" and "Palmer" include their respective subsidiaries and predecessors.
References to Holdings are to Price Communications Cellular Holdings, Inc., an
indirect wholly-owned subsidiary of PCC and the holder of 100% of the
outstanding capital stock of PCW. PCC was organized in New York in 1979 and
began active operations in 1981. Its principal executive offices are located at
45 Rockefeller Plaza, New York, New York 10020, and its telephone number is
(212) 757-5600. Except for historical financial information and unless otherwise
indicated, all information presented below relating to the Company and PCW,
including Pops, Net Pops and the systems, gives effect to the consummation of
the Acquisition (including the sales of the Fort Myers and Georgia-1 systems).
See "Certain Terms" for definitions of certain terms used herein.
The Company has historically been a nationwide communications company
owning and then disposing of a number of television, radio, newspaper, cellular
telephone and other communications and related properties. The Company's
business strategy is to acquire communications properties at prices it considers
attractive, finance such properties on terms satisfactory to it, manage such
properties in accordance with its operating strategy and dispose of them if and
when the Company determines such dispositions to be in its best interests. Prior
to 1995 the Company owned a number of television, radio, newspaper and other
media and related properties which were disposed of pursuant to the Company's
long-standing policy of buying and selling media properties at times deemed
advantageous by the Company's Board of Directors. On October 6, 1997, PCW
acquired Palmer in the acquisition described below.
The Company is currently engaged through PCW in the construction,
development, management and operation of cellular telephone systems in the
southeastern United States. At December 31, 1998, the Company provided cellular
telephone service to 381,977 subscribers in Georgia, Alabama, South Carolina and
Florida in a total of 16 licensed service areas composed of eight Metropolitan
Statistical Areas ("MSAs") and eight Rural Service Areas ("RSAs"), with an
aggregate estimated population of 3.3 million. The Company sells its cellular
telephone service as well as a full line of cellular products and accessories
principally through its network of retail stores. The Company markets all of its
products and services under the nationally recognized service mark CELLULARONE.
The Company has developed its business through the acquisition and
integration of cellular telephone systems, clustering multiple systems in order
to provide broad areas of uninterrupted service and achieve certain economies of
scale, including centralized marketing and administrative functions as well as
multi-system capital expenditures. The Company devotes considerable attention to
engineering, maintenance, and improvement of its cellular telephone systems in
an effort to deliver high-quality service to its subscribers and to implement
new technologies as soon as economically practicable. Through its participation
in the North American Cellular Network ("NACN"), the Company is able to offer
seven-digit dialing access to its subscribers when they travel outside the
Company's service areas, providing them with convenient roaming access
throughout large areas of the United States, Canada, Mexico and Puerto Rico
served by other NACN participants. By marketing its products and services under
the CELLULARONE name, the Company also enjoys the benefits of association with a
nationally recognized service mark.
2
Markets and Systems
The Company's cellular telephone systems serve contiguous licensed service
areas in Georgia, Alabama and South Carolina. The Company also has a cellular
service area in Panama City, Florida. The following table sets forth as of
December 31, 1998, with respect to each service area in which the Company owns a
cellular telephone system, the estimated population, the Company's beneficial
ownership percentage, the Net Pops and the date of initial operation of such
system by Palmer or a predecessor operator.
Estimated
Service area population(1) Percentage Net pops
- ------------ ------------- ---------- --------
Albany, GA ..................... 117,984 86.5% 102,056
Augusta, GA .................... 440,864 100.0 440,864
Columbus, GA ................... 250,845 85.2 213,720
Macon, GA ...................... 318,227 99.2 315,681
Savannah, GA ................... 288,736 98.5 284,405
Georgia-6 RSA .................. 203,899 96.3 196,355
Georgia-7 RSA .................. 135,121 100.0 135,121
Georgia-8 RSA .................. 157,912 100.0 157,912
Georgia-9 RSA .................. 118,111 100.0 118,111
Georgia-10 RSA ................. 151,827 100.0 151,827
Georgia-12 RSA ................. 215,935 100.0 215,935
Georgia-13 RSA ................. 148,361 86.5 128,332
Dothan, AL ..................... 133,618 94.6 126,403
Montgomery, AL ................. 320,687 92.8 297,598
Alabama-8, RSA ................. 173,677 100.0 173,677
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Subtotal .................. 3,175,804 3,057,997
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Panama City, FL ................ 149,953 78.4 117,563
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Total ..................... 3,325,757 3,175,560
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(1) Based on population estimates for 1998 from the DLJ 1998 Winter Book.
Georgia/Alabama
In 1988, Palmer acquired controlling interests in the licenses to operate
cellular telephone systems in the four MSAs (Montgomery and Dothan, Alabama and
Columbus and Albany, Georgia) that make up the core of its Georgia/Alabama
cluster. The Company continued to increase its presence in this market by
acquiring additional cellular service areas in 1989 (Macon, Georgia MSA), 1992
(Georgia-9 RSA), 1993 (Alabama-8 RSA), 1994 (Georgia-7 RSA, Georgia-8 RSA,
Georgia-10 RSA and Georgia-12 RSA), 1995 (Savannah, Georgia MSA and Augusta,
Georgia MSA) and 1996 (Georgia-1 RSA and Georgia-6 RSA). The Augusta, Georgia
MSA includes Aiken County in South Carolina. In the aggregate, these markets now
cover a contiguous service area of approximately 38,000 square miles that
includes Montgomery, the state capital of Alabama, prominent resort destinations
in Jekyll Island, St. Simons Island and Sea Island, Georgia, and over 710 miles
of interstate highway, including most of 1-95 from Savannah, Georgia to
Jacksonville, Florida. The Company collects substantial roaming revenue from
cellular telephone subscribers from other systems traveling in these markets
from nearby population centers such as Atlanta and Birmingham, as well as from
vacation and business traffic in the southeastern United States. Due in part to
the favorable labor environment, moderate weather and relatively low cost of
land during the last several years, there has been an influx of new
manufacturing plants in this market. As of December 31, 1998 the Company
utilized 223 cell sites in this cluster.
Panama City
The Company acquired control of the non-wireline cellular license for the
Panama City, Florida market in 1991. The Company collects substantial roaming
revenue in this market from subscribers from other systems who visit Panama
City, a popular spring and summer vacation destination. As of December 31, 1998,
the Company utilized 13 cell sites in this market.
Strategy
The Company's four strategic objectives are to: (1) expand its revenue
base by increasing penetration in existing service areas and encouraging greater
usage among its existing customers, (2) provide high-quality customer service to
create and maintain customer loyalty, (3) enhance performance by aggressively
pursuing opportunities to increase operating efficiencies and (4) expand its
regional wireless communications presence by selectively acquiring additional
interests in cellular telephone
3
systems (including minority interests). Specifically, the Company strives to
achieve these objectives through implementation of the following:
Aggressive, Direct Marketing. The Company employs a two-tier direct sales
force. A retail sales force handles walk-in traffic at the Company's 37 retail
outlets and a targeted sales staff solicits certain industry and government
subscribers. The Company's management believes that its internal sales force is
more likely than independent agents to successfully select and screen new
subscribers and select pricing plans that realistically match subscriber means
and needs.
Flexible, Value-Oriented Pricing Plans. The Company provides a range of
pricing plans, each of which includes a monthly access fee and a bundle of
"free" minutes. Additional home rate minutes are charged at rates dependent on
the customer's usage plan and time of day. In addition, the Company offers wide
area home rate roaming in the Company's systems and low flat rate roaming in a
six state region in the Southeastern United States.
The Company believes that its bundled minute offerings will encourage
greater customer usage. By increasing the number of minutes a customer can use
for one flat rate, subscribers perceive greater value in their cellular service
and become less usage sensitive, i.e.; they can increase their cellular phone
usage without seeing large corresponding increases in their cellular bill.
Continually Adopting State of the Art System Design. The Company's network
allows the delivery of full personal communication services ("PCS")
functionality to its digital cellular customers, including primarily caller ID,
short message paging and extended battery life. The Company's network provides
for "seamless handoff" between digital cellular and PCS operators that, like the
Company, employ TDMA (Time Division Multiple Access) technology, one of three
industry standards and the one employed by AT&T, SBC and others; i.e. the
Company's customers may leave the Company's service area and enter an area
serviced by a PCS provider using TDMA technology without noticing the difference
and vice versa. The Company has a favorable agreement with AT&T with respect to
PCS roaming and expects that other PCS operators may choose, like AT&T, to
concentrate PCS buildout in urban centers rather than the more rural areas in
which the Company concentrates.
Focusing on Customer Service. Customer service is an essential element of
the Company's marketing and operating philosophy. The Company is committed to
attracting new subscribers and retaining existing subscribers by providing
consistently high-quality customer service. In each of its cellular service
areas, the Company maintains a local staff, including a market manager, customer
service representatives, technical and engineering staff, sales representatives
and installation and repair facilities. Each cellular service area handles its
own customer-related functions such as credit evaluations, customer evaluations,
account adjustments and rate plan changes. To ensure high-quality service,
Cellular One Group authorizes a third-party marketing research firm to perform
customer satisfaction surveys of each of its licensees. Licensees must achieve a
minimum satisfaction level in order to continue using the Cellular One service
mark. The Company has repeatedly ranked number one in customer satisfaction
among all Cellular One operators (#l MSA in its category in 1998,1997, 1996,
1995, 1993, and 1992; #1 RSA in its category in 1995).
The Acquisition
On May 23, 1997, PCC, PCW and Palmer entered into an Agreement and Plan of
Merger (the "Merger Agreement"). The Merger Agreement provided, among other
things, for the merger of PCW with and into Palmer with Palmer as the surviving
corporation (the "Merger"). On October 6, 1997, the Merger was consummated and
Palmer changed its name to "Price Communications Wireless, Inc." Pursuant to the
Merger Agreement, PCC acquired each issued and outstanding share of common stock
of Palmer for a purchase price of $17.50 per share in cash and purchased
outstanding options and rights under employee and director stock purchase plans
for an aggregate price of $486.4 million. In addition, as a result of the
Merger, the Company assumed all outstanding indebtedness of Palmer of
approximately $378.0 million ("Palmer Existing Indebtedness"), making the
aggregate purchase price for Palmer (including transaction fees and expenses)
approximately $880.0 million. The Company refinanced all of the Palmer Existing
Indebtedness concurrently with the consummation of the Merger.
PCW entered into an agreement (the "Fort Myers Sale Agreement") to sell
Palmer's Fort Myers, Florida MSA covering approximately 382,000 Pops for $168.0
million (the "Fort Myers Sale"). On October 6, 1997, the Fort Myers Sale was
consummated, and generated proceeds to the Company of approximately $166.0
million. The proceeds of the Fort Myers Sale were used to fund a portion of the
acquisition of Palmer.
On October 21, 1997, PCC and PCW entered into an Asset Purchase Agreement
with MJ Cellular Company, L.L.C. (the "Georgia Sale Agreement") which provided
for the sale by PCW, for $25.0 million, of substantially all of the assets of
the non-wireline cellular telephone system serving the Georgia-1-Whitfield Rural
Service Area ("Georgia-1"), including the FCC licenses to operate Georgia-1 (the
"Georgia Sale"). The sale of the assets of Georgia-1 was consummated on December
30, 1997 and
4
generated proceeds to the Company of $24.2 million. A portion of the proceeds
from the Georgia Sale was used to retire a portion of the debt used to fund the
acquisition of Palmer. The Merger, the Fort Myers Sale, and the GA-1 Sale are
collectively referred to as the "Acquisition."
In order to fund the Acquisition and pay related fees and expenses, PCW
issued $175.0 million aggregate principal amount of 11 3/4% Senior Subordinated
Notes due 2007 (the "11 3/4% PCW Notes") and entered into a syndicated senior
loan facility providing for term loan borrowings in the aggregate principal
amount of approximately $325.0 million and revolving loan borrowings of $200.0
million (the "Credit Facility"). On October 6, 1997, PCW borrowed all term loans
available thereunder and approximately $120.0 million of revolving loans.
The Acquisition was also funded in part through a $44.0 million equity
contribution from the Company (the "PCC Equity Contribution") which was in the
form of cash and common stock of the Company. An additional amount of the
purchase price for the Acquisition was raised out of the proceeds from the
issuance and sale for $80.0 million of units consisting of $153.4 million
principal amount of 13 1/2% Senior Secured Discount Notes due 2007 of Holdings
(the "13 1/2% Holdings Notes") and warrants (the "Warrants") to purchase shares
of Common Stock of the Company, par value $.01 per share (the "PCC Shares").
Refinancing
In June 1998, PCW issued $525.0 million of 9 1/8% Senior Secured Notes
(the "91/8% Notes") due December 15, 2006 with interest payable semi-annually
commencing December 15, 1998. The 9 1/8% Notes contain covenants that restrict
the payment of dividends, incurrence of debt and sale of assets. The proceeds of
these notes were used principally to replace the then existing Credit Facility.
In August 1998, Holdings redeemed all of the outstanding 13 1/2% Holdings
Notes. The notes were redeemed at the redemption price per $1000 aggregate
principal amount of $711.61. The accreted value of the notes approximated $91.0
million. The redemption was financed out of the proceeds of a new $200.0 million
Holdings offering of 11 1/4% Senior Exchangeable Payable-in-Kind notes due 2008.
The notes are exchangeable, at the Exchange Price, in the event the daily high
price of the Company's shares equals or exceeds 115% of the Exchange Price for
10 out of 15 consecutive trading days. The current Exchange Price, after giving
effect to stock splits, is $16.00 per share.
Certain Considerations
In addition to the other matters described herein, holders of PCC's Common
Stock should carefully consider the following risk factors.
Leverage and Liquidity. The Company is highly leveraged which could limit
significantly its ability to make acquisitions, withstand competitive pressures
or adverse economic conditions, obtain necessary financing or take advantage of
business opportunities that may arise.
The Company at year-end had approximately $205.0 million in cash or cash
equivalents. Its ability to borrow additional funds is limited by the covenants
contained in the three debt instruments. The Company's cash interest requirement
is approximately $68.5 million for the year ending December 31, 1999. The
Company expects to generate sufficient cash flow to meet its liquidity needs for
the next 12 months. The Company intends to use working capital for general
corporate purposes and funding of capital expenditures and if the Company's tax
planning strategy is unsuccessful, the financing for the tax payment which may
be due with respect to the Fort Myers Sale and Georgia Sale which liability
should be partially offset by losses generated by the Company in the period
subsequent to the Acquisition. See "Notes to Consolidated Financial Statements.
In addition, the Company intends to pursue opportunities to acquire additional
cellular telephone systems which, if successful, will possibly require the
Company to obtain additional equity or debt financing to fund such acquisitions.
There can be no assurances as to the availability or terms of any such financing
or that the terms of the Senior Subordinated Notes, the Senior Secured Notes or
the Senior Exchangeable Payable-in-Kind Notes will not restrict or prohibit any
such debt financing.
The Company's ability to meet its debt service requirements will require
significant and sustained growth in the Company's cash flow. In addition, the
Company expects to fund its growth strategy with cash from operations. There can
be no assurance that the Company will be successful in improving its cash flow
by a sufficient magnitude or in a timely manner or in raising additional equity
or debt financing to enable the Company to meet its debt service requirements or
to sustain its growth strategy.
Limitations on Access to Cash Flow of Subsidiaries. The Company does not
have, and may not in the future have, any significant assets other than the
common stock of its subsidiaries, all but $16.8 million of the cash and cash
equivalents reflected
5
on the Consolidated Balance Sheets are held by the Company's subsidiaries. The
currently in place financing instruments to which the Company and its
subsidiaries are or may in the future be a party and in the future may impose
substantial restrictions on the ability of the Company's subsidiaries to pay
dividends to the Company. Any payment of dividends to the Company is subject to
the satisfaction of certain financial conditions set forth in the current
financing documents as well as restrictions under applicable state corporation
law. Under these financing documents, the Company's subsidiaries are currently
prohibited for the foreseeable future from dividending an aggregate of more than
$15.0 million to the Company. The Company has not in the past paid any dividends
to its common shareholders and does not expect to pay any dividends to common
shareholders in the foreseeable future. The ability of the Company and its
subsidiaries to comply with the conditions of its financial obligations may be
affected by events that are beyond the control of the Company. The breach of any
such conditions could result in a default under the financing agreements and in
the event of any such default, the lenders under the current financing
instruments could elect to accelerate the maturity of the loans under such
facility or such other indebtedness. In the event of such acceleration, all such
outstanding debt would be required to be paid in full before any cash could be
distributed to the Company. There can be no assurance that the assets of the
Company and its subsidiaries would be sufficient to repay all outstanding
indebtedness or meet other financial obligations.
Net Losses. For the years ended December 31, 1998 and 1997, the Company
incurred net losses of approximately $41.6 million and $8.9 million,
respectively. The Company expects to incur net losses for several years. See
"Selected Consolidated Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Competition. Although current policies of the FCC authorize only two
licensees to operate cellular telephone systems in each cellular market, there
is, and the Company expects there will continue to be, competition from various
wireless technology licensees authorized to serve each market in which the
Company operates, as well as from resellers of cellular service. Competition for
subscribers between the two cellular licensees in each market is based
principally upon the services and enhancements offered, the technical quality of
the cellular telephone system, customer service, system coverage and capacity
and price. The Company competes with a wireline licensee in each of its cellular
markets, some of which are larger and have access to more substantial capital
resources than the Company.
The Company also faces competition from other existing communications
technologies such as conventional mobile telephone service, specialized mobile
radio ("SMR") and enhanced specialized mobile radio ("ESMR") systems and paging
services and to a limited extent, satellite systems for mobile communications.
The Company also faces limited competition from and may in the future face
increased competition from PCS. Broadband PCS involves a network of small,
low-powered transceivers placed throughout a neighborhood, business complex,
community or metropolitan area to provide customers with mobile and portable
voice and data communications. PCS may be capable of offering, and PCS operators
claim they will offer, additional services not offered by cellular providers.
There can be no assurances that the Company will be able to provide nor that it
will choose to pursue, depending on the economics thereof, such services and
features. The FCC has also completed or announced plans for auctions in wireless
services such as narrowband PCS, local multipoint multichannel distribution
service ("LMDS"), interactive video distribution service ("IVDS"), wireless
communication service ("WCS") and general wireless communication service
("GWCS") spectrum. Some of this spectrum might be used for services competitive
in some manner with cellular service. The Company cannot predict the effect of
these proceedings and auctions on the Company's business. However the Company
currently believes that traditional tested cellular is economically proven
unlike many of these other technologies and therefore does not intend to pursue
such other technologies.
Although the Company believes that the technology, financing and
engineering of these other technologies is not as advanced as their publicity
would suggest, there can be no assurance that one or more of the technologies
currently utilized by the Company in its business will not become obsolete at
some time in the future. See "Business of the Company--Competition."
Potential for Regulatory Changes and Need for Regulatory Approvals. The
FCC regulates the licensing, construction, operation, acquisition, assignment
and transfer of cellular telephone systems, as well as the number of licensees
permitted in each market. Changes in the regulation of cellular activities could
have a material adverse effect on the Company's operations. In addition, all
cellular licenses in the United States are granted for an initial term of up to
10 years and are subject to renewal. The Company's cellular licenses expire in
the following years with respect to the following number of service areas: 2000
(two); 2001 (four); 2002 (two); 2006 (one); 2007 (four) and 2008 (three). While
the Company believes that each of these licenses will be renewed based upon FCC
rules establishing a renewal expectancy in favor of licensees that have complied
with their regulatory obligations during the relevant license period, there can
be no assurance that all of the Company's licenses will be renewed in due
course. In the event that a license is not renewed, the Company would no longer
have the right to operate in the relevant service area. The non-renewal of
licenses could have a material adverse effect on the Company's results of
operations. See "Business of the Company--Regulation."
6
Fluctuations in Market Value of License. A substantial portion of the
Company's assets consists of its interests in cellular licenses. The assignment
of interests in such licenses is subject to prior FCC approval and may also be
subject to contractual restrictions, future competition and the relative supply
and demand for radio spectrum. The future value of the Company's interests in
its cellular licenses will depend significantly upon the success of the
Company's business. While there is a current market for the Company's licenses,
such market may not exist in the future or the values obtainable may be
significantly lower than at present. As a consequence, in the event of the
liquidation or sale of the Company's assets, there can be no assurance that the
proceeds would be sufficient to pay the Company's obligations and a significant
reduction in the value of the licenses could require a charge to the Company's
results of operations.
Reliance on Use of Third Party Service Mark. The Company currently uses
the registered service mark CELLULARONE to market its services. The Company's
use of this is and has historically been governed by five-year contracts between
the Company and Cellular One Group, the owner of the service mark, for each of
the markets in which the Company operates. See "--Description of Cellular One
Agreements." Such contracts currently in effect are expiring at different times
through December 1, 2001. If for some reason beyond the Company's control, the
name CELLULARONE were to suffer diminished marketing appeal, the Company's
ability both to attract new subscribers and to retain existing subscribers could
be materially affected. AT&T Wireless Services, Inc., which has been the single
largest user of the CELLULARONE service mark, has significantly reduced its use
of the service mark as a primary service mark as has Centennial Cellular. There
can be no assurance that such reduction in use by any of such parties will not
have an adverse effect on the marketing appeal of the brand name.
Dependence on Key Personnel. The Company's affairs are managed by a small
number of key management and operating personnel, the loss of whom could have an
adverse impact on the Company. The success of the Company's operations and
expansion strategy depends on its ability to retain and to expand its staff of
qualified personnel in the future.
Radio Frequency Emission Concerns. Media reports have suggested that
certain radio frequency ("RF") emissions from portable cellular telephones may
be linked to certain types of cancer. In addition, recently a limited number of
lawsuits have been brought, not involving the Company, alleging a connection
between cellular telephone use and certain types of cancer. Concerns over RF
emissions and interference may have the effect of discouraging the use of
cellular telephones, which could have an adverse effect upon the Company's
business. As required by the Telecom Act, in August 1996, the FCC adopted new
guidelines and methods for evaluating RF emissions from radio equipment,
including cellular telephones. While the new guidelines impose more restrictive
standards on RF emissions from low power devices such as portable cellular
telephones, the Company believes that all cellular telephones currently marketed
and in use comply with the new standards.
The Company carries $2.0 million in General Liability insurance and $25.0
million in umbrella liability coverage. This insurance would cover (subject to
coverage limits) any liability suits with respect to human exposure to radio
frequency emissions.
Potential Antitakeover Effect of Class A Preferred Stock. Although the
Board of Directors and Compensation Committee of the Company believe that the
provisions of the Company's Series A Preferred Stock provide the Company's
President and Chief Executive Officer with incentive to maximize shareholder
value by providing such officer with significant profit upon the consummation of
various business combination transactions providing the holders of the Common
Stock with a payment per share (or upon the Common Stock trading at such prices
for certain periods) significantly in excess of the market price of the
Company's Common Stock at the time such Preferred Stock was issued, the Series A
Preferred Stock may be viewed as having the potential effect of discouraging a
bidder's proposal to acquire control of or merge with the Company in that such
Preferred Stock would increase the cost to a bidder of certain of such
transactions. In addition, the votes cast by such shares of Preferred Stock and
the President's Common Stock holdings together (a total of approximately 10.9
million votes including 3.6 million attributable to the preferred stock, or
35.6% of the total votes cast by all outstanding shares of Common Stock and
Preferred Stock as of March 2, 1999) would make it more difficult for a bidder
to elect directors or enact shareholder proposals opposed by management of the
Company.
Equipment Failure, Natural Disaster. Although the Company carries
"business interruption" insurance, a major equipment failure or a natural
disaster affecting any one of the Company's central switching offices or certain
of its cell sites could have a significant adverse effect on the Company's
operations.
7
Operations
General
The Company is currently engaged in the construction, development,
management and operation of cellular telephone systems in the southeastern
United States. At December 31, 1998, the Company provided cellular telephone
service to 381,977 subscribers in Georgia, Alabama, Florida and South Carolina
in a total of 16 licensed service areas composed of eight MSAs and eight RSAs
with an aggregate estimated population of 3.3 million. The Company sells its
cellular telephone service as well as a full line of cellular products and
accessories, including pagers, principally through its network of retail stores.
The Company markets all of its products and services under the nationally
recognized service mark CELLULARONE. The Company has developed its business
through the acquisition and integration of cellular telephone systems,
clustering multiple systems in order to provide broad areas of uninterrupted
service and achieve certain economies of scale, including centralized marketing
and administrative functions as well as multi-system capital expenditures. The
Company devotes considerable attention to engineering, maintenance and
improvement of its cellular telephone systems in an effort to deliver
high-quality service to its subscribers. Through its participation in the North
American Cellular Network ("NACN"), the Company is able to offer ten-digit
dialing access to its subscribers when they travel outside the Company's service
areas, providing them with convenient roaming access throughout large areas of
the United States, Canada, Mexico and Puerto Rico serves by other NACN
participants. By marketing its products and services under the CELLULARONE name,
the Company also enjoys the benefits of association with a nationally recognized
service mark.
The following table sets forth information, at the dates indicated after
giving effect to the Acquisition, regarding the Company's subscribers,
penetration rate, cost to add a net subscriber, average monthly churn rate and
average monthly service revenue per subscriber.
Year ended December 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Subscribers at end of period(1) ................. 381,977 309,606 243,204 187,870 99,626
Penetration at end of period(2) ................. 11.57% 9.40% 7.73% 6.61% 4.54%
Cost to add a net subscriber(3) ................. $ 448 $ 461 $ 436 $ 275 $ 247
Average monthly churn(4) ........................ 1.91% 1.88% 1.89% 1.51% 1.54%
Average monthly service revenue per subscriber(5) $ 51.67 $ 52.06 $ 52.20 $ 56.68 $ 60.02
- ----------
(1) Each billable telephone number in service represents one subscriber.
(2) Determined by dividing the aggregate number of subscribers by the
estimated population.
(3) Determined for the periods, by dividing (i) all costs of sales and
marketing, including salaries, commissions and employee benefits and all
expenses incurred by sales and marketing personnel, agent commissions,
credit reference expenses, losses on cellular telephone sales, rental
expenses allocated to retail operations, net installation expenses and
other miscellaneous sales and marketing charges for such period by (ii)
the net subscribers added during such period.
(4) Determined for the periods by dividing total subscribers discontinuing
service by the average number of subscribers for such period, and divided
by the number of months in the relevant period.
(5) Determined for the periods by dividing the (i) sum of the access, airtime,
roaming, long distance, features, connection, disconnection and other
revenues for such period by (ii) the average number of subscribers for
such period, divided by the number of months in the relevant period.
Subscribers and System Usage
The Company's subscribers have increased to 381,977 at December 31, 1998.
Reductions in the cost of cellular telephone services and equipment at the
retail level have led to an increase in cellular telephone usage by general
consumers for non-business purposes. As a result, the Company believes that
there is an opportunity for significant growth in each of its existing service
areas. The Company will continue to broaden its subscriber base for basic
cellular telephone services as well as increase its offering of customized
services. The sale of custom calling features typically results in increased
usage of cellular telephones by subscribers thereby further enhancing revenues.
In 1998, cellular telephone service revenues represented 93.6% of the Company's
total revenues with equipment sales and installation representing the balance.
8
Marketing
The Company's marketing strategy is designed to generate continued net
subscriber growth by focusing on subscribers who are likely to generate lower
than average deactivations and delinquent accounts, while simultaneously
maintaining a low cost of adding net subscribers. Management has implemented its
marketing strategy by training and compensating its sales force in a manner
designed to stress the importance of high penetration levels and minimum costs
per net subscriber addition. The Company's sales staff has a two-tier structure.
A retail sales force handles walk-in traffic, and a targeted sales staff
solicits certain industry and government subscribers.
The Company believes its use of an internal sales force keeps marketing
costs low, both because commissions are lower and because subscriber retention
is higher than if it used independent agents. The Company believes its cost to
add a net subscriber will continue to be among the lowest in the cellular
telephone industry, principally because of its in-house direct sales and
marketing staff.
The Company's sales force works principally out of retail stores in which
the Company offers its cellular products and services. As of December 31, 1998,
the Company maintained 37 retail stores and 3 offices. Retail stores, which
range in size up to 11,000 square feet, are fully equipped to handle customer
service and the sale of cellular services, telephones and accessories. Eight of
the newer and larger stores are promoted by the Company as "Superstores," seven
of which are located in the Company's Georgia/Alabama service areas and one in
the Panama City, Florida service area. Each Superstore has an authorized
warranty repair center and provides cellular telephone installation and
maintenance services. Most of the Company's larger markets currently have at
least one Superstore. In addition, to enhance convenience for its customers, the
Company has begun to open smaller stores in locations such as shopping malls.
The Company's stores provide subscriber-friendly retail environments-extended
hours, a large selection of phones and accessories, an expert sales staff, and
convenient locations-which make the sales process quick and easy for the
subscriber.
The Company markets all of its products and services under the name
CELLULARONE. The national advertising campaign conducted by Cellular One Group
enhances the Company's advertising exposure at a fraction of what could be
achieved by the Company alone. The Company also obtains substantial marketing
benefits from the name recognition associated with this widely used service
mark, both with existing subscribers traveling outside the Company's service
areas and with potential new subscribers moving into the Company's service
areas. In addition, travelers who subscribe to CELLULARONE service in other
markets may be more likely to use the Company's service when they travel in the
Company's service areas. Cellular telephones of non-wireline subscribers are
either programmed to select the non-wireline carrier (such as the Company) when
roaming, unless the non-wireline carrier in the roaming area is not yet
operational, or the subscriber dials a special code or has a cellular telephone
equipped with an "A/B" (wireline/non-wireline) switch and selects the wireline
carrier.
Through its membership in NACN and other special networking arrangements,
the Company provides extended regional and national service to its subscribers,
thereby allowing them to make and receive calls while in other cellular service
areas without dialing special access codes. This service distinguishes the
Company's call delivery features from those of many of its competitors.
Products and Services
In addition to providing high-quality cellular telephone service in each
of its markets, the Company also offers various custom-calling features such as
voicemail, call forwarding, call waiting, three-way conference calling, no
answer and busy transfer. Several rate plans are presented to prospective
subscribers so that they may choose the plan that will best fit their expected
calling needs. Generally, these rate plans include a high user plan, a medium
user plan, a basic plan and an economy plan. Most rate plans combine a fixed
monthly access fee, per minute usage charges and additional charges for
custom-calling features in a package that offers value to the subscriber while
enhancing airtime use and revenues for the Company. In general, rate plans that
include a higher monthly access fee typically include a lower usage rate per
minute. An ongoing review of equipment and service pricing is maintained to
ensure the Company's competitiveness. As appropriate, revisions to pricing of
service plans and equipment are made to meet the demands of the local
marketplace. In addition, the Company has recently added Paging as an accessory
to its offered services.
9
The following table sets forth a breakdown of PCW's revenues after giving
effect to the Fort Myers and Georgia Sales from the sale of its services and
equipment for the periods indicated.
PCW Predecessor (Palmer)
-------------------------------------------- ----------------------------------------
For the Years Ended December 31,
--------------------------------
For the Period
For the October 1, 1997 For the Nine
Year Ended Through Months Ended
December 31, December 31, September 30,
1998 1997 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
($ in thousands)
Service Revenue:
Access and usage (1) .............. $140,024 $ 31,786 $ 89,339 $105,006 $ 61,607 $ 37,063
Roaming(2) ........................ 27,029 5,691 14,447 13,099 11,157 5,844
Long distance(3) .................. 13,045 2,014 5,949 6,632 3,634 2,218
Other(4) .......................... 4,554 891 2,061 2,596 2,585 2,745
-------- -------- -------- -------- -------- --------
Total service revenue ............. 184,652 40,382 111,796 127,333 78,983 47,870
Equipment sales and installation(5) 12,677 2,308 6,242 7,027 6,830 6,381
-------- -------- -------- -------- -------- --------
Total ........................... $197,329 $ 42,690 $118,038 $134,360 $ 85,813 $ 54,251
======== ======== ======== ======== ======== ========
- ----------
(1) Access and usage revenues include monthly access fees for providing
service and usage fees based on per minute usage rates.
(2) Roaming revenues are fees charged for providing services to subscribers of
other systems when such subscribers or "roamers" place or receive a
telephone call within one of the Company's service areas.
(3) Long distance revenue is derived from long distance telephone calls placed
by the Company's subscribers.
(4) Other revenue includes, among other things, connect fees charged to
subscribers for initial activation on the cellular telephone system and
fees for feature services such as voicemail, call forwarding and call
waiting.
(5) Equipment sales and installation revenue includes revenue derived from the
sale of cellular telephones and fees for the installation of such
telephones.
Reciprocal roaming agreements between each of the Company's cellular
telephone systems and the cellular telephone systems of other operators allow
their respective subscribers to place calls in most cellular service areas
throughout the country. Roamers are charged usage fees, which are generally
higher than a given cellular telephone system's regular usage fees, thereby
resulting in a higher profit margin on roaming revenue. Roaming revenue is a
substantial source of incremental revenue for the Company. In 1998, roaming
revenues accounted for 14.6% of the Company's service revenues and 13.7% of the
Company's total revenue. This level of roaming revenue is due in part to the
fact that the Company's market in Panama City, Florida is a regional shopping
and vacation destination and a number of the Company's cellular telephone
systems in the Georgia and Alabama market are located along major interstate
travel corridors.
In order to develop the market for cellular telephone service, the Company
provides retail distribution of cellular telephones and maintains inventories of
cellular telephones. The Company negotiates volume discounts for the purchase of
cellular telephones and, in many cases, passes such discounts on to its
customers. The Company believes that earning an operating profit on the sale of
cellular telephones is of secondary importance to offering cellular telephones
at competitive prices to potential subscribers. To respond to competition and to
enhance subscriber growth, Palmer has historically sold cellular telephones
below cost.
The Company is currently developing several new services, which it
believes will provide additional revenue sources. Packet-switching technology
will allow data to be transmitted much more quickly and efficiently than the
current circuit-switching technology. Packet-switching uses the intervals
between voice traffic on cellular channels to send packets of data instead of
tying up dedicated cellular channels. The packets of information, which may be
transmitted using several different channels, are subsequently reassembled and
directed to the correct party at the receiving end. It is expected that the
development of this technology will make it possible for cellular carriers to
offer a broad range of cost-effective wireless data services, including
facsimile and electronic mail transmissions, point-of-sale credit
authorizations, package tracking, remote meter reading, alarm monitoring and
communications between laptop computer units and local area computer networks or
other computer databases. During 1999, the Company intends to utilize minicells
to supplement capacity requirements in heavily populated areas, such as downtown
locales, shopping malls, business centers and other densely populated areas.
These minicells are low-
10
power, self-contained units that can be mounted on rooftops or small poles that
will be able to support areas approximating one mile of densely populated areas.
Customer Service
The Company is committed to attracting new subscribers and retaining
existing subscribers by providing consistently high-quality customer service. In
each of its cellular service areas, the Company maintains a local staff,
including a store manager, customer service representatives, technical and
engineering staff, sales representatives and installation and repair facilities.
Each cellular service area handles its own customer-related functions such as
customer activations, account adjustments and rate plan changes. Local offices
and installation and repair facilities enable the Company to better service
customers, schedule installations and repairs and monitor the technical quality
of the cellular service areas.
To ensure high-quality customer service, the Cellular One Group authorizes
a third-party marketing research firm to perform customer satisfaction surveys
of each of its licensees. Licensees must achieve a minimum customer satisfaction
level in order to be permitted to continue using the CELLULARONE service mark.
In 1998, the Company was awarded the #1 MSA in CELLULARONE's National Customer
Satisfaction Survey. The Company has held number one ranking in its category in
six out of the last seven years. The Company believes it has achieved this first
place ranking through effective implementation of its direct sales and customer
service support strategy.
The Company has implemented a software package to combat cellular
telephone service fraud. This software system can detect counterfeit cellular
telephones while they are being operated and enable the Company to terminate
service to the fraudulent user of the counterfeit cellular telephone. The
Company also helps protect itself from fraud with pre-call customer validation
and subscriber profiles specifically designed to combat the fraudulent use of
subscriber accounts.
Networks
The Company strives to provide its subscribers with virtually seamless
coverage throughout its cellular service market areas, thereby permitting
subscribers to travel freely within this region and have their calls and custom
calling features, such as voicemail, call waiting and call forwarding, follow
them automatically without having to notify callers of their location or to rely
on special access codes. The Company has been able to offer virtually seamless
coverage by implementing a switch interconnection plan to mobile telephone
switching offices ("MTSO") located in adjoining markets. The Company's equipment
is built by NORTEL, formerly Northern Telecom, Inc. ("NTI"), and interconnection
between MTSOs is achieved by using the IS-41, Rev.C, standard protocol.
Through its participation in NACN since 1992 and other special networking
arrangements, the Company has pursued its goal of offering seamless regional and
national cellular service to its subscribers. NACN is the largest wireless
telephone network system in the world-linking non-wireline cellular operators
throughout the United States and Canada. Membership in NACN has aided the
Company in integrating its cellular telephone systems within its region and has
permitted the Company to offer cellular telephone service to its subscribers
throughout a large portion of the United States, Canada, Mexico and Puerto Rico.
NACN has provided the Company with a number of distinct advantages: (i) lower
costs for roaming verification, (ii) increased roaming revenue, (iii) more
efficient roaming service and (iv) integration of the Company's markets with
over 4,600 cities in more than 40 states in the United States, Canada, Mexico
and Puerto Rico.
System Development and Expansion
The Company develops its service areas by adding channels to existing cell
sites and by building new cell sites. Such development is done for the purpose
of increasing capacity and improving coverage in direct response to projected
subscriber demand. Projected subscriber demand is calculated for each cellular
service area on a cell by cell basis. These projections involve a traffic
analysis of usage by existing subscribers and an estimation of the number of
additional subscribers in each such area. In calculating projected subscriber
demand, the Company builds into its design assumptions a maximum call "blockage"
rate of 2.0% (percentage of calls that are not connected on first attempt at
peak usage time during the day).
11
The following table sets forth, by market, at the dates indicated, the
number of the Company's operational cell sites.
At December 31
--------------
1998 1997 1996 1995 1994
--- --- --- --- ---
Georgia/Alabama ........ 223 207 181 121 70
Panama City, FL ........ 13 12 11 9 7
--- --- --- --- ---
Total ............. 236 219 192 130 77
=== === === === ===
The Company constructed 17 cell sites in 1998 and plans to construct 30
additional cell sites with respect to its existing cellular systems during 1999
to meet projected subscriber demand and improve the quality of service. Cell
site expansion is expected to enable the Company to continue to add subscribers,
enhance use of its cellular telephone systems by existing subscribers, increase
services used by subscribers of other cellular telephone systems due to the
larger geographic area covered by the cellular telephone networks and further
enhance the overall efficiency of the network. The Company believes that the
increased cellular telephone coverage will have a positive effect on market
penetration and subscriber usage.
Microwave networks enable the Company to connect switching equipment and
cell sites without making use of local landline telephone carriers, thereby
reducing or eliminating fees paid to landline carriers. During 1996, Palmer
spent $1.0 million to build additional microwave connections. In addition, in
1996, Palmer spent $2.6 million to build a fiber optic network between Dothan,
Alabama and Panama City, Florida. The installation of this network resulted in
savings to the Company from a reduction in fees paid to telephone companies for
landline charges, as well as giving the Company the ability to lease out a
significant portion of capacity.
Digital Cellular Technology
Over the next decade, it is expected that cellular telephones will
gradually convert from analog to digital technology. This conversion is due in
part to capacity constraints in many of the largest cellular markets, such as
Los Angeles, New York and Chicago. As carriers reach limited capacity levels,
certain calls may be unable to be completed, especially during peak hours.
Digital technology increases system capacity and offers other advantages over
analog technology, including improved overall average signal quality, improved
call security, potentially lower incremental costs for additional subscribers
and the ability to provide data transmission services. The conversion from
analog to digital technology is expected to be an industry-wide process that
will take a number of years. The exact timing and overall costs of such
conversion are not yet known.
The Company began offering Time Division Multiple Access ("TDMA") standard
digital service, one of three standards for digital service, during 1997. This
digital network allows the Company to offer advanced cellular features and
services such as caller-ID, short message paging and extended battery life.
Where cell sites are not yet at their maximum capacity of radio channels, the
Company is adding digital channels to the network incrementally based on the
relative demand for digital and analog channels. Where cell sites are at full
capacity, analog channels are being removed and redeployed to expand capacity
elsewhere within the network and replaced in such cell sites by digital
channels. The implementation of digital cellular technology over a period of
several years will involve modest incremental expenditures for switch software
and possible significant cost reductions as a result of reduced purchases of
radio channels and a reduced requirement to split existing cells. However, as
indicated above, the extent of any implementation of digital radio channels and
the amount of any cost savings ultimately to be derived therefrom will depend
primarily on subscriber demand. In the ordinary course of business, equipment
upgrades at the cell sites have involved purchasing dual mode radios capable of
using both analog and digital technology.
The benefits of digital radio channels can only be achieved if subscribers
purchase cellular telephones that are capable of transmitting and receiving
digital signals. Currently, such telephones are more costly than analog
telephones. The widespread use of digital cellular telephones is likely to occur
only over a substantial period of time and there can be no assurance that this
technology will replace analog cellular telephones. In addition, since most of
the Company's existing subscribers currently have cellular telephones that
exclusively utilize analog technology, it will be necessary to continue to
support and if necessary, increase the number of analog radio channels within
the network for many years.
12
Acquisitions
The Company will continue to evaluate expansion through acquisitions of
both (i) contiguous cellular properties and other strategically located RSAs and
small to mid-sized MSAs and (ii) minority interests in its existing cellular
properties. In evaluating acquisition targets, the Company considers, among
other things, demographic factors, including population size and density,
geographic proximity to existing service areas, traffic patterns, cell site
coverage and required capital expenditures.
On June 20, 1996, Palmer acquired the cellular telephone system of USCOC
of Georgia RSA #1, Inc. ("USCOC") for an aggregate purchase price of $31.6
million including the cellular telephone system in the Georgia-1 RSA. The
cellular telephone system in the acquired RSA serves a geographic territory of
northwest Georgia between Chattanooga and Atlanta.
On July 5, 1996, two of Palmer's majority-owned subsidiaries acquired the
cellular telephone system of Horizon Cellular Telephone Company of Spalding,
L.P. ("Horizon") for an aggregate purchase price of $36.0 million including the
cellular telephone system in the Georgia-6 RSA. The cellular telephone system in
the acquired RSA serves a geographic territory of west central Georgia adjacent
to Palmer's Macon and Columbus, Georgia MSAs.
On January 31, 1997, a majority-owned subsidiary of Palmer acquired the
cellular telephone system serving the Georgia-13 RSA from Mobile Communications
Systems L.P. for a total purchase price of $31.5 million, which serves a
geographic territory of southwest Georgia adjacent to Palmer's Albany, Georgia
and Dothan, Alabama MSAs.
Competition
The cellular telephone service industry in the United States is highly
competitive. Cellular telephone systems compete principally on the basis of
services and enhancements offered, the technical quality of the cellular system,
customer service, coverage capacity and price of service and equipment.
Currently, the Company's primary competition in each of its service areas is the
other cellular licensee-the wireline carrier. The table below lists the wireline
competitor in each of the Company's existing service areas:
Market Wireline Competitor
------ -------------------
Albany, GA......................... ALLTEL
Augusta, GA........................ ALLTEL
Columbus, GA....................... Public Service Cellular
Macon, GA.......................... BellSouth
Savannah, GA....................... ALLTEL
Georgia-6 RSA...................... BellSouth
Georgia-7 RSA...................... ALLTEL and BellSouth(1)
Georgia-8 RSA...................... ALLTEL
Georgia-9 RSA...................... ALLTEL and Public Service Cellular(1)
Georgia-10 RSA..................... ALLTEL
Georgia-12 RSA..................... ALLTEL
Georgia-13 RSA..................... ALLTEL
Dothan, AL......................... BellSouth (2)
Montgomery, AL..................... ALLTEL
Alabama-8 RSA...................... Intercel (3)
Panama City, FL.................... ALLTEL
- ----------
(1) The purchasers of the authorization have subdivided the wireline service
area into two service areas for the RSA.
(2) Under contract to be acquired by ALLTEL.
(3) Under contract to be acquired by Public Service Cellular.
The Company also faces limited competition from and may in the future face
increased competition from broadband PCS. Broadband PCS involves a network of
small, low-powered transceivers placed throughout a neighborhood, business
complex, community or metropolitan area to provide customers with mobile and
portable voice and data communications. PCS subscribers communicate using
digital radio handsets.
The FCC allocated 120 MHz of spectrum for licensed broadband PCS. The
allocations for licensed PCS services are split into six blocks of
frequencies--blocks "A" and "B" being two 30 MHz allocations for each of the 51
Major Trading Areas
13
("MTAs") throughout the United States; block "C" being one 30 MHz allocation in
each of 493 Basic Trading Areas ("BTAs") in the United States; and blocks "D,"
"E" and "F" being three 10 MHz allocations in each of the BTAs. The FCC has
concluded the initial auction of all broadband PCS frequency blocks, although a
limited number of PCS licenses are from time to time reauctioned due to a
failure of the initial auction winner to complete the required payments for the
licenses.
The Company also faces competition from other existing communications
technologies such as conventional mobile telephone service, SMR, and ESMR
systems and paging services.
In addition, the FCC has licensed operators to provide mobile satellite
service in which transmissions from mobile units to satellites would augment or
replace transmissions to land-based stations. Although such a system is designed
primarily to serve remote areas and is subject to transmission delays inherent
in satellite communications, a mobile satellite system could augment or replace
communications with segments of land- based cellular systems. Based on current
technologies, however, satellite transmission services are not expected to be
competitively priced with cellular telephone services.
In order to grow and compete effectively in the wireless market, the
Company plans to follow a strategy of increasing its bundled minute offerings.
By increasing the number of minutes a customer can use for one flat rate,
subscribers perceive greater value in their cellular service and become less
usage sensitive, i.e., they can increase their cellular phone usage without
seeing large corresponding increases in their cellular bill. These factors
translate into more satisfied customers, greater customer usage and lower churn
among existing subscribers. The perceived greater value also increases the
number of potential customers in the marketplace. The Company believes that this
strategy will enable it to increase its share of the wireless market.
Service Marks
CELLULARONE is a registered service mark with the U.S. Patent and
Trademark Office. The service mark is owned by Cellular One Group, a Delaware
general partnership of Cellular One Marketing, Inc., a subsidiary of
Southwestern Bell Mobile Systems, Inc., together with Cellular One Development,
Inc., a subsidiary of AT&T and Vanguard Cellular Systems, Inc. The Company uses
the CELLULARONE service mark to identify and promote its cellular telephone
service pursuant to licensing agreements with Cellular One Group. In 1998, the
Company paid $290,000 in licensing and advertising fees under these agreements.
See "Risk Factors--Reliance on Use of Third-Party Service Mark."
Description of Cellular One Agreements
The Company is currently party to sixteen license agreements with Cellular
One Group, which cover separate cellular telephone system areas. The terms of
each agreement (each, a "Cellular One Agreement") are substantially identical.
Pursuant to each Cellular One Agreement, Cellular One Group has granted a
license to use the "CELLULARONE" mark (the "Mark") in its FCC-licensed territory
(the "Licensed Territory") to promote its cellular telephone service. Cellular
One Group has agreed not to license such mark to any other cellular telephone
service provider in such territory during the term of the agreement.
Each Cellular One Agreement has a term of five years and is renewable,
subject to the conditions described herein, at the option of the Company for
three additional five-year terms subject to provision of advanced written notice
by the Company. In connection with any renewal, the Company must execute
Cellular One Group's then-current form of license renewal agreement, which form
may contain provisions materially different than those in the Cellular One
Agreement.
Cellular One Group may terminate the Cellular One Agreements at any time
without written notice to the Company upon certain events, including bankruptcy,
insolvency and dissolution of the Company.
Cellular One Group may terminate the Cellular One Agreements if the
Company (i) fails to pay any amounts thereunder when due or fails to submit
information required to be provided pursuant to the Cellular One Agreement when
due or makes a false statement in connection therewith, (ii) fails to operate
its business in conformity with FCC directives, technical industry standards and
other standards specified from time to time by Cellular One Group, (iii)
misuses, makes unauthorized use of or materially impairs the goodwill of the
Mark, (iv) engages in any business under a name that is confusingly similar to
the Mark, or (v) permits a continued violation of any law or regulation
applicable to it, in each case subject to a thirty-day cure period.
The Cellular One Agreements are terminable by the Company at any time
subject to 120 days' written notice.
The Company has agreed to indemnify Cellular One Group and its employees
and affiliates, including its constituent partners, against all claims arising
from the operation of its cellular phone business and the costs, including
attorneys fees, of defending against them.
14
Regulation
As a provider of cellular telephone services, the Company is subject to
extensive regulation by the federal government.
The licensing, construction, operation, acquisition and transfer of
cellular telephone systems in the United States are regulated by the FCC
pursuant to the Communications Act of 1934, as amended (the "Communications
Act"). The FCC has promulgated rules governing the construction and operation of
cellular telephone systems and licensing and technical standards for the
provision of cellular telephone service ("FCC Rules"). For cellular licensing
purposes, the United States is divided into MSAs and RSAs. In each market, the
frequencies allocated for cellular telephone use are divided into two equal
blocks designated as Block A and Block B. Block A licenses were initially
reserved for non-wireline companies, such as Palmer, while Block B licenses were
initially reserved for entities affiliated with a local wireline telephone
company. Under current FCC Rules, a Block A or Block B license may be
transferred with FCC approval without restriction as to wireline affiliation,
but generally, no entity may own any substantial interest in both systems in any
one MSA or RSA. The FCC may prohibit or impose conditions on sales or transfers
of licenses.
Initial operating licenses are generally granted for terms of up to 10
years, renewable upon application to the FCC. Licenses may be revoked and
license renewal applications denied for cause after appropriate notice and
hearing. The Company's cellular licenses expire in the following years with
respect to the following number of service areas: 2000 (two); 2001 (four); 2002
(two); 2006 (one); 2007 (four) and 2008 (three). The FCC has issued a decision
confirming that current licensees will be granted a renewal expectancy if they
have complied with their obligations under the Communications Act during their
license terms and provided substantial public service. A potential challenger
will bear a heavy burden to demonstrate that a license should not be renewed if
the licensee's performance merits renewal expectancy. The Company believes that
the licenses it controls will continue to be renewed in a timely manner.
However, in the event that a license is not renewed, the Company would no longer
have the right to operate in the relevant service area. A non-renewal of all
licenses that are currently pending would have a material adverse effect on the
Company's results of operations.
Under FCC rules, each cellular licensee was given the exclusive right to
construct one of two cellular telephone systems within the licensee's MSA or RSA
during the initial five-year period of its authorization. At the end of such
five-year period, other persons are permitted to apply to serve areas within the
licensed market that are not served by the licensee and current FCC Rules
provide that competing applications for these "unserved areas" are to be
resolved through the auction process. The Company has no material unserved areas
in any of its cellular telephone systems that have been licensed for more than
five years.
The Company also regularly applies for FCC authority to use additional
frequencies, to modify the technical parameters of existing licenses, to expand
its service territory and to provide new services. The Communications Act
requires prior FCC approval for acquisitions by the Company of other cellular
telephone systems licensed by the FCC and transfers by the Company of a
controlling interest in any of its licenses or construction permits, or any
rights thereunder. Although there can be no assurance that any future requests
for approval or applications filed by the Company will be approved or acted upon
in a timely manner by the FCC, based upon its experience to date, the Company
has no reason to believe such requests or applications would not be approved or
granted in due course.
The Communications Act prohibits the holding of a common carrier license
(such as the Company's cellular licenses) by a corporation of which more than
20% of the capital stock is owned directly or beneficially by aliens. Where a
corporation such as the Company controls another entity that holds an FCC
license, such corporation may not have more than 25% of its capital stock owned
directly or beneficially by aliens, in each case, if the FCC finds that the
public interest would be served by such prohibitions. These limitations have
been relaxed with regard to certain foreign investors pursuant to a World Trade
Organization treaty and FCC actions implementing the treaty. Failure to comply
with these requirements may result in the FCC issuing an order to the Company
requiring divestiture of alien ownership to bring the Company into compliance
with the Communications Act. In addition, fines or a denial of renewal, or
revocation of the license are possible.
From time to time, federal and state legislators may propose legislation,
which could potentially affect the Company, either beneficially or adversely. On
February 8, 1996, the Telecommunications Act of 1996 (the "Telecom Act") was
signed into law, revising the Communications Act to eliminate unnecessary
regulation and to increase competition among providers of communications
services. The Company cannot predict the future impact of this or other
legislation on its operations.
15
The major provisions of the Telecom Act potentially affecting the Company
are as follows:
Interconnection. The Telecom Act required state public utilities
commissions and the FCC to implement policies that mandate cost-based reciprocal
compensation between cellular carriers and local exchange carriers ("LEC") for
interconnection services.
On August 8, 1996, the FCC released its First Report and Order in the
matter of Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996 ("FCC Order") establishing the rules for the
costing and provisioning of interconnection services and the offering of
unbundled network elements by incumbent local exchange carriers. The FCC Order
established procedures for the Company's renegotiations of interconnection
agreements with the incumbent local exchange carrier in each of the Company's
markets. LECs and state regulators filed appeals of the FCC Order, which were
consolidated in the US Court of Appeals for the Eighth Circuit. The Court
rejected most of the rules promulgated in the FCC Order. However, on further
appeal, the United States Supreme Court reversed most of the Court's actions and
remanded the case to the Court and the FCC for further consideration. Pending
further court action, much of the FCC Order will take effect.
The Company has renegotiated certain interconnection agreements with LECs
in most of the Company's markets. These negotiations have resulted in a
substantial decrease in interconnection expenses incurred by the Company.
Facilities siting for personal wireless services. The siting and
construction of cellular transmitter towers, antennas and equipment shelters are
often subject to state or local zoning, land use and other regulation. Such
regulation may require zoning, environmental and building permit approvals or
other state or local certification.
The Telecom Act provides that state and local authority over the
placement, construction and modification of personal wireless services
(including cellular and other commercial mobile radio services and unlicensed
wireless services) shall not prohibit or have the effect of prohibiting personal
wireless services or unreasonably discriminate among providers of functionally
equivalent services. In addition, local authorities must act on requests made
for siting in a reasonable period of time and any decision to deny must be in
writing and supported by substantial evidence. Appeals of zoning decisions that
fail to comply with the provisions of the Telecom Act can be made on an
expedited basis to a court of competent jurisdiction, which can be either
federal district or state court. The Company anticipates that, as a result of
the Telecom Act, it will more readily receive local zoning approval for proposed
cellular base stations. In addition, the Telecom Act codified the Presidential
memorandum on the use of federal lands for siting wireless facilities by
requiring the President or his designee to establish procedures whereby federal
agencies will make available their properties, rights of ways and other
easements at a fair and reasonable price for service dependent upon federal
spectrum.
Environmental effect of radio frequency emissions. The Telecom Act
provides that state and local authorities cannot regulate personal wireless
facilities based on the environmental effects of radio frequency emissions if
those facilities comply with the federal standard.
Universal service. The Telecom Act also provides that all communications
carriers providing interstate communications services, including cellular
carriers, must contribute to the federal universal service support mechanisms
established by the FCC. The FCC also provided that any cellular carrier is
potentially eligible to receive universal service support. The universal service
support fund will support telephone service in high-cost and low-income areas
and support access to telecommunications facilities by schools, libraries and
rural health care facilities. States will also be implementing requirements that
carriers contribute universal service funding from intrastate telecommunications
revenues. The Company has revised its customer billing to reflect additional
costs related to these universal service fund requirements. There can be no
guarantee that the Company will be able to continue to pass the costs of the
fund requirements on to its subscribers in the future.
The FCC has eliminated its cellular-PCS cross ownership rule, but retained
a spectrum cap on aggregation of CMRS spectrum. A cellular licensee and its
affiliates may not hold an attributable interest in more than 45 MHz of licensed
cellular, broadband PCS and SMRS in a particular geographic area.
The Communications Act preempts state and local regulation of the entry
of, or the rates charged by, any provider of cellular service.
16
Certain Terms
Interests in cellular markets that are licensed by the FCC are commonly
measured on the basis of the population of the market served with each person in
the market area referred to as a "Pop." The number of Pops or Net Pops owned is
not necessarily indicative of the number of subscribers or potential
subscribers. As used herein, unless otherwise indicated, the term "Pops" means
the estimate of the 1998 population of an MSA or RSA, as derived from the 1998
Donaldson, Lufkin & Jenrette Market Information Service. The term "Net Pops"
means the estimated population with respect to a given service area multiplied
by the percentage interest that the Company owns in the entity licensed in such
service area. MSAs and RSAs are also referred to as "markets." The term
"wireline" license refers to the license for any market initially awarded to a
company or group that was affiliated with a local landline telephone carrier in
the market, and the term "non-wireline" license refers to the license for any
market that was initially awarded to a company, individual or group not
affiliated with any landline carrier. The term "System" means an FCC-licensed
cellular telephone system. The term "CTIA" means the Cellular Telecommunications
Industry Association.
Employees
At December 31, 1998, the Company had approximately 572 full-time
employees, none of whom is represented by a labor organization. Management
considers its relations with employees to be good.
Item 2. Properties
For each market served by the Company's operations, the Company maintains
at least one sales or administrative office and operates a number of cell
transmitter and antenna sites. As of December 31, 1998, the Company had
approximately 35 leases for retail stores used in conjunction with its
operations and 4 leases for administrative offices. The Company also had
approximately 142 leases to accommodate cell transmitters and antennas as of
December 31, 1998.
The Company leases space for its headquarters in New York City. (See Note
14 of the Notes to Consolidated Financial Statements for information on minimum
lease payments by the Company and its subsidiaries for the next five years.)
Item 3. Legal Proceedings
The Company is not currently involved in any pending legal proceedings
likely to have a material adverse impact on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Market for Company's Common Stock and related Stockholder Matters
(a) Market for Common Stock
The Company's Common Stock is listed for trading on the American Stock
Exchange ("AMEX") under the ticker symbol "PR". The range of high and low last
sale prices for the Company's Common Stock on the AMEX as adjusted to reflect
its December 1997, April 1998 (2 in April), and January 1999 5 for 4 stock
splits and the August 1998 2 for 1 stock split for each of the four quarters of
1998 and 1997, as reported by the AMEX was:
1999 1998 1997
---- ---- ----
Quarter High Low High Low High Low
------- ---- --- ---- --- ---- ---
First (through March 2) ..... $12.90 $ 9.75 $ 4.21 $ 2.08 $ 2.05 $ 1.72
Second ...................... 6.30 4.13 1.98 1.29
Third ....................... 8.00 5.60 1.89 1.51
Fourth ...................... 10.35 4.90 2.28 1.63
17
The Company's Common Stock has been afforded unlisted trading privileges
on the Pacific Stock Exchange under the ticker symbol "PR.P", on the Chicago
Stock Exchange under the ticker symbol "PR.M" and on the Boston Stock Exchange
under the ticker symbol "PR.B".
(b) Holders
On March 2, 1999, there were approximately 400 holders of record of the
Company's Common Stock. The Company estimates that brokerage firms hold Common
Stock in street name for approximately 1,700 persons.
(c) Dividends
The Company, to date, has paid no cash dividends on its Common Stock. The
Board of Directors will determine future dividend policy based on the Company's
earnings, financial condition, capital requirements and other circumstances. It
is not anticipated that dividends will be paid on its Common Stock in the
foreseeable future.
Item 6. Selected Consolidated Financial Data
The following table contains certain consolidated financial data with
respect to the Company and for Palmer ("Predecessor") for the periods and dates
set forth below. This information has been derived from the audited consolidated
financial statements of the Company and Palmer.
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto, included elsewhere
herein.
Consolidated Operating Statement Items
Company
-------------------------------------------------------------
Year ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Total Revenue ..................................................... $ 197,329 $ 43,713 $ 2,962 $ 29,155 $ 24,039
Engineering, Technical and Other Direct Expenses .................. 30,022 5,978 -- -- --
Cost of Equipment ................................................. 23,710 5,259 -- -- --
Media Operating Expenses .......................................... -- -- 2,233 16,685 14,962
Selling, General and Administrative Expenses ...................... 59,193 16,750 2,373 2,687 4,475
Depreciation and Amortization ..................................... 43,625 11,107 467 3,919 3,958
--------- --------- --------- --------- ---------
Operating Income (Loss) ........................................... 40,779 4,619 (2,111) 5,864 644
Other Income (Expense):
Interest, net ................................................ (76,926) (20,063) 4,367 (2,099) (813)
Other, net ................................................... 15,279 1,400 92,995 7,114 16,245
--------- --------- --------- --------- ---------
Total Other Income (Expense) ............................ (61,647) (18,663) 97,362 5,015 15,432
Minority Interest ................................................. (2,178) (414) -- -- --
Extraordinary Item -Loss on early extinguishment of debt (net
of tax benefit of $15,893) ..................................... (27,061) -- -- -- --
Income Tax Benefit (Expense) ...................................... 8,523 5,509 (24,584) 47 (1,652)
--------- --------- --------- --------- ---------
Net Income (Loss) ................................................. $ (41,584) $ (8,949) $ 70,667 $ 11,126 $ 14,424
========= ========= ========= ========= =========
Per Share Amounts (1):
Basic (Loss) Earning Per Share ................................... ($ 1.49) $ (.29) $ 1.54 $ .23 $ 0.24
Diluted (Loss) Earning Per Share ................................. ($ 1.49) $ (.29) $ 1.53 $ .22 $ 0.24
(1) Per share amounts have been retroactively adjusted to reflect 5 for 4
stock splits in January 1999, April 1998, April 1998, December 1997 and
April 1995 and to reflect the 2 for 1 stock split in August 1998. All per
share amounts prior to 1997 have been restated to comply with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." See notes to
consolidated financial statements.
18
Consolidated Balance Sheet Items
As of December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Total Current Assets ..................... $ 239,242 $ 79,949 $ 114,809 $ 10,047 $ 9,093
Total Assets ............................. 1,287,652 1,173,608 115,888 95,985 90,852
Total Current Liabilities (2) ............ 48,482 55,603 7,109 36,309 9,076
Long-Term Debt ........................... 909,432 690,300 -- -- 21,310
Shareholders' Equity ..................... 4,379 60,926 108,779 40,876 39,079
- ----------
(2) Includes in 1995 $28.0 million of a note payable to Bank of Montreal which
was repaid upon the sale of three television stations on February 2, 1996.
PCW Predecessor
------------------------------------------------------------------------------
For the
Period
May 29, 1997 For the Nine
Through Months Ended
December 31, September 30,
1998 1997 1997 1996(3) 1995(2) 1994(1)
---- ---- ---- ------ ------- -------
($ In Thousands, Except Percentages and Subscriber Data)
Consolidated statement of operations data:
Revenue:
Service ........................................ $ 184,652 $ 41,365 $ 134,123 $ 151,119 $ 96,686 $ 61,021
Equipment sales and installation ............ 12,677 2,348 7,613 8,624 8,220 7,958
--------- --------- --------- --------- --------- ---------
Total revenue ............................. 197,329 43,713 141,736 159,743 104,906 68,979
--------- --------- --------- --------- --------- ---------
Engineering, technical and other
direct expenses ........................... 30,022 5,978 23,301 28,717 18,184 12,776
Cost of equipment ........................... 23,710 5,259 16,112 17,944 14,146 11,546
Selling, general administrative expenses .... 55,002 12,805 41,014 46,892 30,990 19,757
Depreciation and amortization ............... 43,569 11,055 25,498 25,013 15,004 9,817
--------- --------- --------- --------- --------- ---------
Operating income ............................ 45,026 8,616 35,811 41,177 26,582 15,083
--------- --------- --------- --------- --------- ---------
Other income (expense):
Interest, net ............................. (77,510) (22,198) (24,467) (31,462) (21,213) (12,715)
Other, net ................................ (19) 15 208 (429) (687) (70)
--------- --------- --------- --------- --------- ---------
Total other expenses .................... (77,529) (22,183) (24,259) (31,891) (21,900) (12,785)
--------- --------- --------- --------- --------- ---------
Minority interest share of (income) ......... (2,178) (414) (1,310) (1,880) (1,078) (636)
Income tax benefit (expense) ............ 12,831 5,129 (4,153) (2,724) (2,650) 0
--------- --------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item .................. $ (21,850) $ (8,852) $ 6,089 $ 4,682 $ 954 $ 1,662
========= ========= ========= ========= ========= =========
Other Data:
Capital expenditures ........................... $ 14,725 $ 14,499 $ 40,757 $ 41,445 $ 36,564 $ 22,541
Operating income before depreciation and
Amortization ("EBITDA")(4) ................ $ 88,595 $ 19,671 $ 61,309 $ 66,190 $ 41,586 $ 24,900
EBITDA margin on service revenue ............... 48.0% 47.6% 45.7% 43.8% 43.0% 40.8%
Net cash provided by (used in):
Operating activities ........................ $ 15,571 $ 11,313 $ 38,791 $ 30,130 $ 27,660 $ 7,238
Investing activities ........................ (12,725) (321,030) (73,759) (110,610) (196,610) (116,850)
Financing activities ........................ 78,365 337,643 36,851 78,742 169,554 110,940
Penetration(5) ................................. 11.60% 9.40% 8.60% 7.45% 6.41% 4.58%
Subscribers at the end of period(6) ............ 381,977 309,606 337,345 279,816 211,985 117,224
Cost to add a net subscriber(7) ................ $ 448 $ 370 $ 514 $ 407 $ 276 $ 247
Average monthly service revenue
per Subscriber (8) ........................ $ 51.67 $ 50.59 $ 53.99 $ 52.20 $ 56.68 $ 60.02
Average monthly churn(9) ....................... 1.91% 1.84% 1.89% 1.84% 1.55% 1.55%
Ratio of earnings to fixed charges (10) ........ N/A N/A 1.45x 1.28x 1.21x 1.17x
- ----------
(1) Includes the Georgia Acquisition (as defined herein), which occurred on
October 31, 1994. For the two months ended December 31, 1994, the Georgia
Acquisition resulted in revenues to Palmer of $1,803 and operating loss of
$645.
(2) Includes the GTE Acquisition (as defined herein), which occurred on
December 1, 1995. For the one month ended December 31, 1995, the GTE
Acquisition resulted in revenues to Palmer of $2,162 and operating income
of $208.
(3) Includes the acquisition of the cellular telephone systems of USCOC (as
defined herein) (Georgia-1 RSA), which occurred on June 20, 1996, and
Horizon (as defined herein) (Georgia-6 RSA), which occurred on July 5,
1996. The acquisitions of USCOC and Horizon resulted in revenues to Palmer
of $1,239 and $2,682, respectively, and operating (loss) income of $(278)
and $743, respectively, during such year.
(4) EBITDA should not be considered in isolation or as an alternative to net
income (loss), operating income (loss) or any other measure of performance
under GAAP. The Company believes that EBITDA is viewed as a relevant
supplemental measure of performance in the cellular telephone industry.
(5) Determined by dividing the aggregate number of subscribers by the
estimated population.
(6) Each billable telephone number in service represents one subscriber.
19
(7) Determined for a period by dividing (i) costs of sales and marketing,
including salaries, commissions and employee benefits and all expenses
incurred by sales and marketing personnel, agent commissions, credit
reference expenses, losses on cellular telephone sales, rental expenses
allocated to retail operations, net installation expenses and other
miscellaneous sales and marketing charges for such period, by (ii) the net
subscribers added during such period.
(8) Determined for a period by dividing (i) the sum of the access, airtime,
roaming, long distance, features, connection, disconnection and other
revenues for such period by (ii) the average number of subscribers for
such period divided by the number of months in such period.
(9) Determined for a period by dividing total subscribers discontinuing
service by the average number of subscribers for such period, and dividing
that result by the number of months in such period.
(10) The ratio of earnings to fixed charges is determined by dividing the sum
of earnings before interest expense, taxes and a portion of rent expense
representative of interest by the sum of interest expense and a portion of
rent expense representative of interest. The ratio of earnings to fixed
charges is not meaningful for periods that result in a deficit. For the
year ended December 31, 1993 the deficit of earnings to fixed charges was
$7,435.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to facilitate an understanding and
assessment of significant changes and trends related to the financial condition
and results of operations of the Company. This discussion should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes thereto. References to the Company also include its predecessor, Palmer.
Results for the Predecessor for the year ended December 31, 1996 are based
solely on the historical operations of the Predecessor prior to the Merger. The
discussion for 1997 is based upon the results of the Predecessor through
September 30, 1997 and the results of the Company from May 29, 1997 to December
31, 1997. The comparison for the year ended December 31, 1998 versus December
31, 1997 is for the full twelve-month periods and combines the results of the
predecessor with the results for the Company in 1997. The audited financial
statements of the company do not include such combined financial statements, as
this would not be in conformity with GAAP.
Overview
PCW, a wholly-owned subsidiary of Holdings, a wholly-owned subsidiary of
Price Communications Cellular, Inc., a wholly-owned subsidiary of PCC, was
incorporated on May 29, 1997 in connection with the purchase of Palmer.
In May 1997, PCC, PCW and Palmer entered into an Agreement and Plan of
Merger (the "Merger Agreement"). The Merger Agreement provided, among other
things, for the merger of PCW with and into Palmer with Palmer as the surviving
corporation (the "Merger"). In October 1997, the Merger was consummated and
Palmer changed its name to "Price Communications Wireless, Inc." Pursuant to the
Merger Agreement, PCC acquired each issued and outstanding share of common stock
of Palmer for a purchase price of $17.50 per share in cash and purchased
outstanding options and rights under employee and direct stock purchase plans
for an aggregate price of $486.4 million. In addition, as a result of the
Merger, PCW assumed all outstanding indebtedness of Palmer of approximately
$378.0 million. As a result, the aggregate purchase price for Palmer (including
transaction fees and expenses) was approximately $880.0 million. PCW refinanced
all of the Palmer Existing Indebtedness concurrently with the consummation of
the Merger.
PCW entered into an agreement to sell Palmer's Fort Myers, Florida MSA
covering approximately 382,000 Pops for $168.0 million (the "Fort Myers Sale").
In October 1997, the Fort Myers Sale was consummated and generated proceeds to
the Company of approximately $166.0 million. The proceeds of the Fort Myers Sale
were used to fund a portion of the acquisition of Palmer. Accordingly, no gain
or loss was recognized on the Fort Myers Sale.
On October 21, 1997, PCC and PCW entered into an Asset Purchase Agreement
with MJ Cellular Company, L.L.C. which provided for the sale by PCW for $25.0
million of substantially all of the assets of the non- wireline cellular
telephone system serving the Georgia-1-Whitfield Rural Service Area
("Georgia-1"), including the FCC licenses to operate Georgia-1 (the "Georgia
Sale"). The sale of the assets of Georgia-1 was consummated on December 30, 1997
for $24.2 million. The proceeds from the Georgia Sale were used to retire a
portion of the debt used to fund the acquisition of Palmer. Accordingly, no gain
or loss was recognized on the Georgia Sale.
In order to fund the Acquisition and pay related fees and expenses, in
July 1997, PCW issued $175.0 million aggregate principal amount of 11 3/4%
Senior Subordinated Notes due 2007 and entered into a syndicated senior loan
facility providing for term loan borrowings in the aggregate principal amount of
approximately $325.0 million and revolving loan borrowings of
20
$200.0 million. In October 1997, PCW borrowed all term loans available
thereunder and approximately $120.0 million of revolving loans.
The acquisition of Palmer was also funded in part through a $44.0 million
equity contribution from the Company. An additional amount of approximately
$76.0 million was raised out of the proceeds from the issuance and sale by
Holdings for $80.0 million of units consisting of $153.4 million principal
amount of 13 1/2% Senior Secured Discount Notes due 2007 and warrants to
purchase shares of common stock of the PCC.
The Company is engaged in the construction, development, management and
operation of cellular telephone systems in the southeastern United States. As of
December 31, 1998, the Company provided cellular telephone service to 381,977
subscribers in Alabama, Florida and Georgia in a total of 16 licensed service
areas, composed of eight MSA's and eight RSA's, with an aggregate estimated
population of 3.3 million. The Company sells its cellular telephone service as
well as a full line of cellular products and accessories principally through its
network of retail stores. The Company markets all of its products and services
under the nationally-recognized service mark CELLULARONE.
As stated above, the Fort Myers and GA-1 markets were sold during the
latter part of 1997 thereby making operating results for PCW for the year ended
December 31, 1998 versus the year ended December 31, 1997 not comparable. The
following highlights compare the operations of PCW for the years ended December
31, 1998 and 1997 after adjusting 1997 for the results of these markets:
Years Ended December 31,
------------------------
($ in thousands)
----------------
1998 1997
---- ----
Service revenue (in thousands) ................... $184,652 $152,178
Operating cash flow ("EBITDA") ................... 88,595 70,033
EBITDA % (% of service revenue) .................. 48.0% 46.0%
Subscriber growth ................................ 72,385 55,632
Average monthly revenue per sub .................. $ 51.67 $ 52.06
Average monthly operating costs per sub .......... $ 23.17 $ 24.67
Local minutes of use (in thousands) .............. 768,707 506,097
21
Results of Operations
The following table sets forth for PCW, for the periods indicated, the
percentage which certain amounts bear to total revenue.
PCW Predecessor
------------------------ -----------
For the Period For the
For the May 29, 1997 Nine Months For the
Year Ended Through Ended Year Ended
December 31, December 31, September 30, December 31,
1998 1997 1997 1996
------ ------ ------ ------
Revenue:
Service ................................................... 93.6% 94.6% 94.6% 94.6%
Installation .............................................. 6.4 5.4 5.4 5.4
------ ------ ------ ------
Total revenue .................................................. 100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating Expenses:
Engineering, technical and other direct:
Engineering and technical(1) ........................... 7.3 7.2 8.0 7.9
Other direct costs of services(2) ...................... 8.0 6.5 8.4 10.1
Cost of equipment(3) ...................................... 12.0 12.0 11.4 11.2
Selling, general and administrative:
Selling and marketing(4) ............................... 9.9 8.9 8.4 8.6
Customer service(5) .................................... 6.3 6.2 6.3 5.9
General and administrative(6) .......................... 11.6 14.2 14.2 14.9
Depreciation and amortization ............................. 22.1 25.3 18.0 15.7
------ ------ ------ ------
Total Operating Expenses ....................................... 77.2 80.3 74.7 74.3
------ ------ ------ ------
Operating Income ............................................... 22.8% 19.7% 25.3% 25.7%
Operating Income Before Depreciation And
Amortization(7) ............................................. 44.9% 45.0% 43.3% 41.4%
(1) Consists of costs of cellular telephone network, including inter-trunk
costs, span-line costs, cell site repairs and maintenance, cell site
utilities, cell site rent, engineers' salaries and benefits and other
operational costs.
(2) Consists of net costs of roaming, costs of long distance, costs of
interconnection with wireline telephone companies and other costs of
services.
(3) Consists primarily of the costs of the cellular telephones and accessories
sold, sales and marketing personnel, employee and agent commissions.
(4) Consists primarily of salaries and benefits of advertising and promotional
expenses.
(5) Consists primarily of salaries and benefits of customer service personnel
and costs of printing and mailing billings generated in-house.
(6) Includes salaries and benefits of general and administrative personnel and
other overhead expenses.
(7) Operating income before depreciation and amortization should not be
considered in isolation or as an alternative to net income, operating
income or any other measure of performance under generally accepted
accounting principles. The Company believes that operating income before
depreciation and amortization is viewed as a relevant supplemental measure
of performance in the cellular telephone industry.
Year ended December 31, 1998 compared to Year ended December 31, 1997
The results of operations for the Company for the year ended December 31,
1998 are not comparable to the results of the prior year principally due to the
fact that 1998 includes a full year of operations for the Acquisition, a full
year of interest to fund the Acquisition and certain extraordinary items net of
tax benefits, resulting from the refinancing in the current year. Included in
other income for the current year are the gains realized from the sale of common
stock and warrants of PriCellular Corporation (the total of which amounted to $
15.2 million). For the year ended December 31, 1998 the Company recorded a net
loss of $41.6 million principally because of the extraordinary item of $27.1
million related to the early extinguishment of debt and the additional interest
expense for the full year. Basic and diluted earnings per share for 1998 were a
loss of $1.49 compared to a loss of $0.29 for 1997.
Year ended December 31, 1997 compared to Year ended December 31, 1996
22
The Company's revenues, operating expenses and interest expense for the
year ended December 31, 1997 are not comparable to the year ended December 31,
1996 due to the Merger between PCC, PCW and Palmer which took place on October
6, 1997, the issuance of the 11 3/4% Senior Subordinated Notes by PCW in July,
1997, the debt incurred by PCW under the syndicated loan facility and the
issuance by Holdings of the 13 1/2% Senior Secured Discount Notes in August
1997. During the first quarter of the year ended December 31, 1996, the Company
sold its four network affiliated television stations. The Company's revenue and
operating expenses for 1996 represent the results of those television stations
through their respective dates of sale. During 1996, the Company recognized a
$95.0 million pretax gain on the sale of the television stations, which is
included in other income (expense) and recorded tax expense related primarily to
the gain of approximately $25.6 million. The Company recorded net income of
$70.7 million in 1996 or $7.45 per share. For 1997, the Company recorded a net
loss of $8.9 million, primarily as a result of the increased depreciation and
amortization charges related to the assets acquired in the Merger, and interest
expense of $24.4 million for the year incurred to complete the Merger as
described above. Basic and diluted earnings per share for 1997 were a loss of
$0.29 after adjustment for stock splits through January 1999.
Results of Operations of Price Communications Wireless, Inc. and Subsidiaries
compared to Palmer Wireless, Inc. and Subsidiaries (Predecessor)
The following discussion is intended to facilitate an understanding and
assessment of significant changes and trends related to the financial condition
and results of operations of the Company's indirectly wholly owned subsidiary.
This discussion should be read in conjunction with Price Communications
Wireless, Inc.'s Consolidated Financial Statements and related Notes thereto and
the Consolidated Financial Statements and Notes thereto of Palmer Wireless, Inc.
and Subsidiaries (the "Predecessor") included as a supplement to this report.
References to the Company where appropriate also include its subsidiaries, PCW,
Holdings and the Predecessor.
Results for the Predecessor for the year ended December 31, 1996 and the
nine months ended September 30, 1997 are based solely on the historical
operations of the Predecessor prior to the Merger. The discussion for 1997 is
based on the combination of results of the Predecessor through September 30,
1997 and the results of PCW for the period May 29, 1997 through December 31,
1997. As a result, the combined information has not been prepared in accordance
with generally accepted accounting principles. The 1998 and 1997 results do not
include operations at the parent company level of PCC.
Price Communications Wireless and Predecessor Year Ended December 31, 1998
Compared To Year Ended December 31, 1997
Revenue. Service revenues totaled $184.7 million for 1998, an increase of
5.2% over $175.5 million for 1997. The increase is primarily attributable to a
24.5% increase in the average number of subscribers to 345,490 for 1998 versus
277,487 for 1997 after adjusting for the sale of the Fort Myers and GA-1
markets. Substantially offsetting this increase is the loss of service revenue
of the cellular telephone systems resulting from the sale of Fort Myers and
GA-1, which approximated $21.1 million. The increase in subscribers is the
result of internal growth, which the Company attributes primarily to its strong
sales and marketing efforts. In addition to the subscriber base growth, service
revenues also increased because of a significant increase in the minutes of use
for the Company's subscribers.
Average monthly revenue per subscriber decreased 2.5% to $44.54 for 1998
from $45.70 for 1997, which excluded incollect revenue. This modest decrease is
due to a common trend in the cellular telephone industry, where on average, new
customers use less airtime than existing subscribers. Therefore, service
revenues generally do not increase proportionately with the increase in
subscribers. In addition, the decline reflects more competitive rate plans
introduced into the Company's markets. The decrease however is below the
industry average.
Equipment sales and installation revenue, which consists primarily of
cellular subscriber equipment sales, increased to $12.7 million for 1998 from
$10.0 million for 1997. As a percentage of total cellular revenue, equipment
sales and installation revenue increased to at 6.4% of service revenue from 5.4%
for 1997, reflecting the increased recurring revenue base as well as the ability
to obtain increased prices for our cellular equipment sold to customers.
Operating Expenses. Engineering and technical expenses decreased slightly
by 2.1% to $14.3 million for 1997 from $14.6 million in 1997. As a percentage of
revenue, engineering and technical expenses decreased to 7.3 % of total revenue
from 7.9% for 1997. This reflects the increased co