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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, 2001 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 New York 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 New York Stock Exchange ("NYSE") on
March 15, 2002 ($17.95 as reported in the WALL STREET JOURNAL): approximately
$732.6 million.
The number of shares outstanding of the Company's common stock as of March 15,
2002 was 54,663,058.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-K incorporates certain information contained in
the proxy statement/prospectus filed jointly on Form S-4 by the registrant,
Verizon Wireless of the East LP and Verizon Communications Inc. in connection
with the registrant's 2002 Annual 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
"PCW" refer to Price Communications Wireless, Inc., a wholly-owned indirect
subsidiary of PCC, and its 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. 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. The
Company is currently party to an agreement to contribute its wireless business
to a partnership controlled by Verizon Wireless (see 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, 2001, the Company provided cellular
telephone service to 570,405 subscribers in Georgia, Alabama, South Carolina and
Florida in a total of 16 licensed service areas composed of eight Metropolitan
Statistical Areas ("MSA") and eight Rural Service Areas ("RSA"), with an
aggregate estimated population of 3.4 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
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
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.
AGREEMENT TO CONTRIBUTE BUSINESS OF PRICE COMMUNICATIONS WIRELESS
On December 18, 2001, the Company entered into an agreement (the
"Transaction Agreement") with affiliates of Cellco Partnership (doing business
as Verizon Wireless and referred to herein as "Verizon Wireless") pursuant to
which the Company agreed to contribute substantially all of the assets of PCW to
a new partnership controlled by Verizon Wireless ("New Limited Partnership"),
subject to shareholder approval, in exchange for a Preferred Exchangeable
Limited Partnership Interest (the "Preferred Exchangeable Interest") (the
"contribution transaction"). New Limited Partnership will assume certain
liabilities of PCW relating to the contributed business (including such
liabilities as arise under PCW's 11 3/4% Senior Subordinated Notes due 2007 and
9 1/8% Senior Secured Notes due 2006). The Company expects to account for the
Preferred Exchangeable Interest by applying the equity method of accounting.
If an initial public offering of Verizon Wireless common stock (meeting
certain size requirements) occurs within four years of the contribution
transaction, the Company may elect to exchange such Preferred Exchangeable
Interest for Verizon Wireless common stock during the sixty-day period
immediately following the later of (i) the date of the initial public offering
and (ii) the one-year anniversary of the contribution transaction. Any such
exchange will require the approval of the shareholders of PCC.
If Verizon Wireless does not complete such an initial public offering
prior to the four-year anniversary of the contribution transaction or if Verizon
Wireless does complete such an offering but an exchange into Verizon Wireless
common stock does not occur for other reasons, the Preferred Exchangeable
Interest will be exchanged for Verizon Communications common stock. The
2
timing of such exchange will depend upon the circumstances but in no event will
it occur after the tenth anniversary of the contribution transaction.
In addition, in certain circumstances (including a change in control of
PCC or a transfer of the Preferred Exchangeable Interest to a secured creditor
of the Company), Verizon Communications will have the right to cause an exchange
of the Preferred Exchangeable Interest into Verizon Communications common stock,
whether or not an initial public offering of Verizon Wireless common stock has
occurred.
The amount of PCW's initial capital account in the partnership will be
approximately $1.15 billion, subject to certain adjustments as defined in the
Transaction Agreement. Pursuant to the partnership agreement of New Limited
Partnership, any profits of New Limited Partnership will be allocated to PCW's
capital account annually up to an amount equal to approximately 4.00% per annum
(subject to downward adjustments relating to the interest rate payable on
certain indebtedness of New Limited Partnership) and it is currently expected
that the maximum preferred return after such adjustment will be approximately
3.6% per annum accreted quarterly on the weighted daily average balance of PCW's
capital account (for a maximum period of four years). Any losses incurred by New
Limited Partnership will be allocated to Verizon Wireless up to an amount equal
to its capital accounts before being allocated to PCW. With respect to each
quarter ending after the second anniversary of the contribution transaction, New
Limited Partnership will distribute to PCW an amount in cash equal to 50% of
PCW's share of any profits of New Limited Partnership. These distributions will
reduce PCW's capital account in New Limited Partnership. The transaction is
structured to be a tax-free exchange of assets under the Internal Revenue Code.
The Company expects to account for the Preferred Exchangeable Interest
using the equity method of accounting. The initial investment on the PCC balance
sheet will equal the credit in the capital account on the partnership's
financial statement. Thereafter, the Company will increase its investment by the
amount of income it will be entitled to based on the availability of profits and
the agreed upon preferred rate of return. Future cash distributions will reduce
the investment balance.
MARKETS AND SYSTEMS
Price Wireless' cellular telecommunications systems serve contiguous
licensed service areas in Georgia, Alabama and South Carolina. Price Wireless
also has a cellular service area in Panama City, Florida. The following table
sets forth, with respect to each service area in which Price Wireless owns a
cellular telecommunications system, the estimated population of such service
area and, for each MSA, its national ranking. Price Wireless is now the owner of
100% of all of its service areas (see Notes to Consolidated Financial
Statements).
ESTIMATED
SERVICE AREA MSARANK POPULATION(1)
------------ ------- -------------
Albany, GA............................................... 261 120,822
Augusta, GA.............................................. 108 452,846
Columbus, GA............................................. 153 250,929
Macon, GA................................................ 138 322,544
Savannah, GA............................................. 155 293,000
Georgia-6 RSA............................................ --- 211,408
Georgia-7 RSA............................................ --- 139,606
Georgia-8 RSA............................................ --- 166,601
Georgia-9 RSA............................................ --- 124,063
Georgia-10 RSA........................................... --- 162,261
Georgia-12 RSA........................................... --- 220,558
Georgia-13 RSA........................................... --- 157,068
Dothan, AL............................................... 246 137,916
Montgomery, AL........................................... 139 333,065
Alabama-8 RSA............................................ --- 196,259
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Subtotal............................................... 3,288,946
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Panama City, FL.......................................... 283 148,217
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Total.................................................. 3,437,163
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(1) Based on population estimates from Paul Kagan and Associates for 2000.
GEORGIA/ALABAMA
Seven MSAs, Montgomery and Dothan, Alabama and Macon, Columbus, Albany,
Augusta and Savannah, Georgia make up the core of the Company's Georgia/Alabama
cluster. The Company owns additional cellular service areas in this region
including the Georgia-9 RSA, Alabama-8 RSA, Georgia-7 RSA, Georgia-8 RSA,
Georgia-10 RSA, Georgia-12 RSA, Georgia-13 RSA and the 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
3
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, there has been an
influx of new manufacturing plants in this market. As of December 31, 2001 the
Company utilized 360 cell sites in this cluster.
4
PANAMA CITY
The Company owns the non-wireline cellular license for the Panama City,
Florida market. 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, 2001, the Company utilized 18
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 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 41 retail
outlets and a targeted sales staff solicits certain industry and government
subscribers. The Company's management believes that its internal sales force is
the best way to successfully select and screen new subscribers and select
pricing plans that realistically match subscriber means and needs. The Company
tries to minimize its use of independent agents.
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
nation wide area home rate roaming in the Company's systems and low flat rate
roaming in a four 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 bills.
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 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 network infrastructure will eventually be converted from
TDMA to CDMA (Code Division Multiple Access), subsequent to the completion of
the contribution transaction with Verizon Wireless. See "Agreement to Contribute
Business of Price Communications Wireless."
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.
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 $246.4 million in cash or cash
equivalents. Its ability to borrow additional funds is limited by the covenants
contained in the two outstanding debt instruments. The Company's cash interest
requirement is approximately $68.5 million for the next several years until the
$525.0 million 9 1/8% notes are repaid in 2006 and the $175.0
5
million 11 3/4% notes are repaid in July 2007. The 9 1/8% notes are callable
after June 15, 2002, and the 11 3/4% notes are callable after July 15, 2002. The
Company expects to generate sufficient operating cash flow to meet its liquidity
needs for the next 12 months.
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. However, should the proposed contribution
transaction take place, the Company's long term debt will be assumed by New
Limited Partnership.
LIMITATIONS ON ACCESS TO CASH FLOW OF SUBSIDIARIES. PCC does not have, and
may not in the future have, any significant assets other than the common stock
of its subsidiaries and cash which approximated $34.2 million at December 31,
2001. The current indentures of the Company's subsidiaries 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 indentures as well
as restrictions under applicable state corporation law. Under these indentures,
the Company's subsidiaries are prohibited for the foreseeable future from
dividending any monies to the Company. The Company has not in the past paid any
cash dividends to its common shareholders and does not expect to pay any cash
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 could
elect to accelerate the maturity of the loans under such indebtedness. In the
event of such acceleration, all 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.
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 and other wireless providers 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 cellular wireline
licensee in each of its cellular markets, most 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 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.
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: 2002
(two); 2006 (one); 2008 (seven), 2010 (two) and 2011 (four). 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
6
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."
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
(see "Agreement to Contribute Business of Price Communications Wireless" on page
2), 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 31, 2002. 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 complies 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.
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.
FOLLOWING COMPLETION OF THE CONTRIBUTION TRANSACTION, THE COMPANY MAY HAVE
LIMITED SOURCES OF CASH TO MEET ITS OBLIGATIONS. From the contribution
transaction until the exchange for Verizon Wireless common stock or Verizon
Communications common stock, the Preferred Exchangeable Interest will be
substantially all of the Company's assets. The Company will receive a taxable
allocation of any profits from New Limited Partnership equal to its preferred
return, and such allocations will increase the Company's capital account in New
Limited Partnership. For two years after the contribution transaction, the
Company will receive no cash distributions from New Limited Partnership. After
the second anniversary of the contribution transaction, for a period of up to
two years, the Company will receive cash distributions equal to 50% of its
preferred return. The Preferred Exchangeable Interest will in general be
non-transferable, although it may (with the consent of New Limited Partnership)
be pledged to a lender. The Company does not expect to have sources of cash
other than its cash remaining after the contribution transaction, the cash
distributions from New Limited Partnership, income from the investment of cash
and any funds that it may be able to borrow. Although the Company currently
anticipates that it will have sufficient cash to meet its tax and obligations,
there is a risk that its funds (including distributions) will be insufficient to
meet its obligations. Further, there is a risk that if the Company needs to
borrow money to meet such obligations, it may be forced to do so on unfavorable
terms.
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THERE ARE RESTRICTIONS ON THE COMPANY'S ACTIVITIES AFTER IT HAS EXCHANGED
THE PREFERRED EXCHANGEABLE INTEREST FOR VERIZON WIRELESS COMMON STOCK OR VERIZON
COMMUNICATIONS COMMON STOCK. At the time of an exchange of the Preferred
Exchangeable Interest for shares of either Verizon Wireless common stock or
Verizon Communications common stock, such shares may account for a substantial
portion of the asset value of PCC. As a result, in order to avoid being required
to register as an "investment company" under the Investment Company Act, which
would, among other things, limit the ability of other registered investment
companies to own shares of PCC's common stock, PCC may need to (1) liquidate or
(2) within one year from the Company's election to effect the exchange, in the
case of Verizon Wireless common stock, or within one year from the date of the
exchange, in the case of Verizon Communications common stock, be primarily
engaged in a business other than that of investing, reinvesting, owning, holding
or trading in securities. While the management of PCC has indicated that its
current intent is to recommend that PCC be liquidated, it has also indicated
that, consistent with its fiduciary duties, it intends to review other potential
business opportunities (including broadcasting, wireless and other similar
opportunities) during the period prior to any such recommendation. Registering
as an investment company could limit the Company's ability to take advantage of
potential business opportunities or require changes to the corporate and
operational structure of the Company.
THE COMPANY WILL HAVE CERTAIN LIMITED MANAGEMENT RIGHTS WITH RESPECT TO
NEW LIMITED PARTNERSHIP. Subject to the veto rights granted to the Company under
the limited partnership agreement of New Limited Partnership relating to, among
other things, acquisitions and dispositions of assets, engaging in other
business activities, incurring indebtedness, capital contributions and
distributions, related party transactions and equity issuances, the managing
general partner of New Limited Partnership, which is proposed to be a majority
owned affiliate of Verizon Wireless will have the right to manage the business
of New Limited Partnership. We cannot assure you that the managing general
partner will be successful in managing New Limited Partnership or that managing
general partner's interests in managing New Limited Partnership will not
conflict with the interests of the Company.
8
OPERATIONS
GENERAL
The Company is currently engaged in the construction, development,
management and operation of cellular telephone systems in the southeastern
United States. References herein to the "Acquisition" refer to the acquisition
by PCW of Palmer Wireless, Inc. ("Predecessor") and the related sales of the
Fort Myers and Georgia-1 systems of the Predecessor. At December 31, 2001, the
Company provided cellular telephone service to 570,405 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
3.4 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
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. 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,
regarding subscribers, penetration rate, cost to add a gross subscriber, average
monthly churn rate and average monthly service revenue per subscriber for the
Company.
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999 1998 1997(6)
---- ---- ---- ---- ------
Subscribers at end of period (1) ................. 570,405 528,405 453,984 381,977 309,606
Penetration at end of period (2) ................. 16.60% 15.89% 13.65% 11.57% 9.40%
Cost to add a gross subscriber (3) ............... $ 168 $ 177 $ 199 $ 214 $ 220
Average monthly churn (4) ........................ 2.14% 1.95% 1.95% 1.91% 1.88%
Average monthly service revenue per subscriber (5) $ 49.95 $ 53.93 $ 56.11 $ 52.04 $ 52.06
----------
(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 gross 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.
(6) Combines operating information of the Company for the period October 6,
1997 to December 31, 1997 and its Predecessor for the period January 1,
1997, to October 6, 1997. Gives effect to the Acquisition, as defined.
SUBSCRIBERS AND SYSTEM USAGE
The Company's subscribers have increased to 570,405 at December 31, 2001.
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 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 increasing the potential for additional
revenue. In 2001, cellular telephone service revenues represented 93.3% of the
Company's total revenues with equipment sales and installation representing the
balance.
9
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 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, 2001,
the Company maintained 41 retail stores and four 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. To enhance convenience for its customers, the Company has
opened some 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 compared to 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.
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.
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 and appropriate revisions to pricing of
service plans and equipment are made to meet the demands of the local
marketplace. The Company offers paging as an accessory to its cellular
customers.
10
The following table sets forth a breakdown of the Company's revenues after
giving effect to the Acquisition from the sale of its services and equipment for
the periods indicated.
COMPANY PREDECESSOR
-------------------------------------------------------------------- -------------
FOR THE PERIOD FOR THE
OCT. 1, 1997 NINE
FOR THE YEAR ENDED DEC. 31, THROUGH MONTHS ENDED
---------------------------------------------------- DEC. 31, SEPT. 30,
2001 2000 1999 1998 1997 1997
---- ---- ---- ---- ---- ----
SERVICE REVENUE:
Access and usage (1)................ $184,198 $175,988 $166,030 $140,024 $31,786 $ 89,339
Roaming (2)......................... 29,313 40,491 39,665 27,029 5,691 14,447
Long distance (3)................... 21,850 26,537 22,188 13,045 2,014 5,949
Other (4)........................... 10,456 9,497 5,692 4,554 891 2,061
-------- --------- --------- --------- ------- ---------
Total service revenue............... 245,817 252,513 233,575 184,652 40,382 111,796
Equipment sales and installation (5) 17,731 17,995 15,548 12,053 2,308 6,242
-------- -------- -------- -------- ------- ---------
Total............................... $263,548 $270,508 $249,123 $196,705 $42,690 $118,038
======== ======== ======== ======== ======= ========
(1) Access and usage revenues include monthly access fees for providing
service and usage fees based on per minute usage rates and for post and
prepaid subscribers.
(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. The roamers home systems 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. In 2001,
roaming revenue accounted for 11.9% of the Company's service revenues and 11.1%
of the Company's total revenue. This roaming revenue is due in part to the fact
that the Company's markets include several vacation destinations and a number of
its systems are located along major interstate travel corridors.
In order to develop the market for cellular telephone service, the Company
provides retail distribution and maintains inventories of cellular telephones
and accessories. 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, the Company has historically sold cellular telephones
below cost. However, the Company generally tries to earn a profit on the sales
of accessories.
The Company recently added several new services which it believes will
provide additional revenue sources. Using the TDMA IS-136 standard for the
Company's digital services, the Company offers Enhanced Short Messaging Services
(SMS) including text messaging and e-mail addresses. Subscribers are also able
to order content from internet sources such as weather reports, horoscopes,
stock quotes and various other data at their discretion, on a subscription
basis. The Company has engaged a third party provider to customize this service
for its subscribers. Additionally, the Company will deploy Wireless Application
Protocol (WAP) to allow customers to browse the internet with new handsets to be
introduced by certain manufacturers. This service will provide customers the
means to be totally interactive by selecting what information they desire real
time via wireless handsets.
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
11
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.
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 inter-connection 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 7,500 cities worldwide.
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).
The following table sets forth, by market, at the dates indicated, the
number of the Company's operational cell sites.
AT DECEMBER 31,
---------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Georgia/Alabama................................. 360 312 257 223 207
Panama City, FL................................. 18 16 15 12 12
---- ---- ---- ---- ----
Total....................................... 378 328 272 236 219
==== ==== ==== ==== ====
The Company constructed 50 cell sites in 2001 and plans to construct
additional cell sites with respect to its existing cellular systems during 2002
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 and decrease churn. The Company
believes that the increased cellular telephone coverage will have a positive
effect on market penetration and subscriber usage.
Microwave networks, previously built by the Company, 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.
12
DIGITAL CELLULAR TECHNOLOGY
Over the next few years, it is expected that cellular telephones will
gradually convert from analog to digital technology. This conversion is due in
part to capacity constraints of analog technology. 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 number of years 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 several years.
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.......................... Cingular Wireless
Savannah, GA....................... ALLTEL
Georgia-6 RSA...................... Cingular Wireless and Public Service Cellular(1)
Georgia-7 RSA...................... ALLTEL and Cingular Wireless(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......................... ALLTEL
Montgomery, AL..................... ALLTEL
Alabama-8 RSA...................... Public Service Cellular and ALLTEL(1)
Panama City, FL.................... ALLTEL
----------
(1) The FCC has granted licenses subdividing the service area between these
carriers.
The Company also faces 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.
13
A broadband PCS system operates on one of six frequency blocks in the
1800-1900 MHz bands that the FCC allocated for personal communications services.
PCS systems generally are used for two-way voice applications although they may
carry two-way data communications and fixed wireless services as well. For the
purpose of awarding PCS licenses, the FCC has divided the United States into 51
large regions called Major Trading Areas (MTAs), which are comprised of 493
smaller regions called Basic Trading Areas (BTAs). The FCC originally awarded
two PCS licenses for each MTA, known as the "A" and "B" blocks, and four
licenses for each BTA known as the "C," "D," "E," and "F" blocks. In their
initial allocation, the C block and F block licenses were limited to designated
entities meeting certain financial eligibility requirements. The two MTA
licenses authorize the use of 30 MHz of PCS spectrum. The C block is for 30 MHz
of spectrum and the D, E and F blocks are for 10 MHz each.
The FCC permits licensees to split their licenses and assign a portion, on
either a geographic, or "partitioned," basis or on a frequency, or
"disaggregated," basis or both, to a third party.
The FCC reauctioned a number of C and F block licenses returned to the FCC
or otherwise cancelled. In connection with the reauction, the FCC subdivided the
C block licenses into three 10 MHz licenses. Certain of these licenses were
subject to open bidding, while for others, the FCC retained the financial
eligibility requirements permitting only certain designated entities to bid.
There is ongoing litigation challenging the validity of the reauction.
While most of the Company's competitors primarily hold cellular or PCS
licenses, one of its principal competitors provides wireless services on
frequencies allocated to "Specialized Mobile Radio" (SMR) service. The Company
also faces competition from other existing communications technologies such as
conventional mobile telephone service, 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 systems are designed
primarily to serve remote areas and are subject to transmission delays inherent
in satellite communications, mobile satellite systems could augment or replace
communications with segments of land-based cellular systems. Based on current
technologies, however, satellite transmission services have not been
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. For example, customers 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
assist in the control of 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 wholly owned subsidiary
of Western Wireless Corporation. The Company uses the CELLULARONE service mark
to identify and promote its cellular telephone service pursuant to licensing
agreements with Cellular One Group. In 2001, the Company paid $366,000 in
licensing and advertising fees under these agreements. See "Certain
Considerations--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.
14
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
attorney's fees, of defending against them.
Subject to receipt of the requisite consent of Cellular One Group, the
Cellular One Agreements will be assigned to Verizon Wireless in connection with
the contribution agreement. See "Agreement to Contribute Business of Price
Communications Wireless" on page 2.
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"). A cellular system
operates on one of two 25 MHz frequency blocks, known as the "A" and "B" blocks,
in the 850 MHz band that the FCC allocates for cellular radio service. Cellular
systems principally are used for two-way mobile voice applications, although
they may be used for data applications and fixed wireless services as well.
Cellular licenses are issued for either Metropolitan Statistical Areas (MSAs) or
Rural Service Areas (RSAs), two in each area. No entity may hold a substantial
ownership interest in both the A and B blocks in a single rural service area.
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: 2002 (two); 2006 (one); 2008
(seven), 2010 (two) and 2011 (four). 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
which would have an 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.
The Company also uses common carrier point-to-point microwave facilities
to connect its wireless cell sites and to link them to the main switching
office. Where it uses point-to-point microwave facilities, the FCC licenses
these facilities separately, and they are subject to regulation as to technical
parameters and service. Microwave licenses must also be renewed every 10 years.
The Company can meet its need for new spectrum in two ways, by acquiring
spectrum held by others or by acquiring new spectrum licenses from the FCC. The
Communications Act requires the FCC to award new licenses for most commercial
wireless services to applicants through a competitive bidding process.
Therefore, if the Company needs additional spectrum, it may be able to acquire
that spectrum by participating in an auction for any new licenses that may
become available or by purchasing existing facilities and incorporating them
into its system, provided that it is permitted to do so under FCC rules. The
15
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 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 voted by non-U.S. citizens or
their representatives, by a foreign government or its representatives or by a
foreign corporation. 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 voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives or by a foreign
corporation, in each case, if the FCC finds that the public interest would be
served by such prohibitions. The 25% limitation has 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 legislation on its
operations.
Major provisions of the Telecom Act 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.
Under reciprocal compensation, a cellular licensee is entitled to collect
the same charges for terminating wireline-to-wireless traffic on their system
that the LECs charge for terminating wireless-to-wireline calls. Interconnection
agreements are typically negotiated by carriers, but in the event of a dispute,
state public utility commissions, courts and the FCC all have a role in
enforcing the interconnection provisions of the Telecom Act. The Company has
renegotiated interconnection agreements with LECs in the Company's markets.
These renegotiations have resulted in a substantial decrease in interconnection
expenses incurred by the Company. Interconnection agreements are subject to
modification, expiration or termination in accordance with their terms. The FCC
has begun a proceeding that is reassessing its interconnection compensation
rules.
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. 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
16
by schools, libraries and rural health care facilities. Many states are also
moving forward to develop state universal service fund programs. A number of
these state funds require contribution, varying greatly from state to state,
from cellular carriers such as the Company. The Company has revised its customer
billing to reflect additional costs related to these universal service fund
requirements. The FCC has been considering whether carriers who decide to pass
through their mandatory universal service contributions to their customers
should be required to provide a specific explanation of the charges on the
bills, as well as other aspects of the universal service contribution, including
whether to change the method for calculating each carrier's contribution from
being revenue-based to connection-based. The FCC has also initiated a proceeding
to determine whether it should spread its universal service support fund
contribution requirements to additional classes of telecommunications carriers.
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.
OTHER RECENT INDUSTRY DEVELOPMENTS. The FCC has a number of other complex
requirements and proceedings that affect the operation of the Company's
business. For example, FCC rules currently require wireless carriers to make
available emergency 911 services, including enhanced emergency 911 services that
provide the caller's telephone number, introduction of call origination location
services, and a requirement that emergency 911 services be made available to
users with speech or hearing disabilities. The Company also is subject or
potentially subject to number portability obligations; rules governing billing
and subscriber privacy; rules governing wireless resale and roaming obligations;
rules that require wireless service providers to configure their networks to
facilitate electronic surveillance by law enforcement officials; and rules
requiring the Company to offer equipment and services that are accessible to and
usable by persons with disabilities. These requirements are the subject of
pending FCC or judicial proceedings, and we are unable to predict how they may
affect our business, financial condition or results of operations.
The FCC has eliminated its cellular-PCS cross ownership rule, but retained
its cellular cross-interest rule, which limits an entity's ownership interest in
cellular licenses on different channel blocks (i.e., A and B) in overlapping
RSAs. The FCC recently decided to eliminate, by January 1, 2003, its spectrum
cap on aggregation of commercial mobile radio service (CMRS) spectrum. Under the
FCC's current spectrum cap rules, a cellular license and its affiliates may not
hold an attributable interest in more than 55 MHz of cellular, broadband PCS and
SMR spectrum in a single MSA or RSA. After January 1, 2003, the FCC will
eliminate the spectrum cap entirely and instead implement a case-by-case review
process to satisfy its obligation to ensure that CMRS spectrum acquisitions do
not have anticompetitive effects.
The Communications Act generally preempts state and local regulation of
the entry of, or the rates charged by, any provider of cellular service. The
FCC, to date, has denied all state petitions to regulate the rates charged by
commercial mobile radio service providers. State and local governments are
permitted to manage public rights of way and can require fair and reasonable
compensation from telecommunications providers, on a competitively neutral and
nondiscriminatory basis for the use of such rights of way by telecommunications
carriers, so long as the compensation required is publicly disclosed by the
government. States may also impose competitively neutral requirements that are
necessary for universal service, conserving telephone numbering resources,
protecting the public safety and welfare, ensuring continued service quality and
safeguarding the rights of consumers. While a state may not impose requirements
that effectively function as barriers to entry or create a competitive
disadvantage, the scope of state authority to maintain existing or to adopt new
such requirements is unclear.
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 2000 population of an MSA or RSA, as derived from the 2000
Paul Kagan and Associates Market Information Service. 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.
EMPLOYEES
At December 31, 2001, the Company had approximately 750 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, 2001, the Company had
approximately 41 leases for
17
retail stores used in conjunction with its operations and four leases for
administrative offices. The Company also had approximately 285 leases to
accommodate cell transmitters and antennas as of December 31, 2001.
The Company leases space for its headquarters in New York City. (See Note
13 of the Notes to Consolidated Financial Statements for information on minimum
lease payments by the Company and its subsidiaries for the next five years.)
18
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
19
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) MARKET FOR COMMON STOCK
PCC is listed on the New York Stock Exchange ("NYSE") under the ticker
symbol "PR". The range of high and low last sale prices for PCC's Common Stock
on the NYSE for each of the quarters of 2001 and 2000 as reported by the NYSE
was:
2002 2001 2000
---- ---- ----
QUARTER HIGH LOW HIGH LOW HIGH LOW
------- ---- --- ---- --- ---- ---
First (through March 15, 2002)......... $19.25 $17.72 $20.17 $16.00 $26.56 $21.00
Second................................. 20.25 16.15 25.00 18.75
Third.................................. 20.35 15.00 24.38 18.38
Fourth................................. 20.13 16.05 23.00 15.50
PCC'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" and trades in Euros on the Frankfurt and Munich Stock
Exchanges.
(b) HOLDERS
On March 15, 2002, there were approximately 400 holders of record of PCC's
Common Stock. The Company estimates that brokerage firms hold Common Stock in
street name for approximately 3,100 persons.
(c) DIVIDENDS
PCC 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.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables contain certain consolidated financial data with
respect to the Company and for Palmer Wireless, Inc. ("Predecessor") for the
periods and dates set forth below. This information has been derived from the
audited consolidated financial statements of the Company and Predecessor or the
Company's unaudited data.
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
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997(10)
---- ---- ---- ---- --------
Service Revenue ........................................ $ 245,817 $ 252,513 $ 233,575 $ 184,652 $ 41,365
Equipment Sales and Installation ....................... 17,731 17,995 15,548 12,053 2,348
--------- --------- --------- --------- ---------
Revenue ................................................ 263,548 270,508 249,123 196,705 43,713
Engineering, Technical and Other Direct Expenses ....... 32,796 25,321 29,666 28,122 5,978
Cost of Equipment ...................................... 33,028 32,685 28,650 23,086 5,259
Selling, General and Administrative Expenses ........... 74,738 64,984 65,150 61,093 16,750
Non-cash Compensation - Selling, General and
Administrative ...................................... 3,649 3,649 1,973 -- --
Depreciation and Amortization .......................... 47,975 46,981 45,157 43,625 11,107
--------- --------- --------- --------- ---------
Operating Income ....................................... 71,362 96,888 78,527 40,779 4,619
Other Income (Expense):
Interest, net ....................................... (61,248) (59,661) (72,892) (76,926) (20,063)
Other, net .......................................... 7,157 7,711 12,251 15,279 1,400
--------- --------- --------- --------- ---------
Total Other Income (Expense) ...................... (54,091) (51,950) (60,641) (61,647) (18,663)
Minority Interest ...................................... (631) (1,432) (1,664) (2,178) (414)
Extraordinary Item-Loss on Early Extinguishment of
Debt (net of tax benefit of $15,893) ................ -- -- -- (27,061) --
Cumulative effect on prior year of change in revenue
recognition (net of tax expense of $92) ............. -- (158) -- -- --
Income Tax (Expense) Benefit ........................... (5,695) (14,972) (6,002) 8,523 5,509
--------- --------- --------- --------- ---------
Net Income (Loss) ...................................... $ 10,945 $ 28,376 $ 10,220 $ (41,584) $ (8,949)
========= ========= ========= ========= =========
Per Share Amounts (1):
Basic Earnings (Loss) Per Share Before Cumulative Effect
of Accounting Change and Extraordinary Item ......... $ .20 $ .51 $ .22 $ (.40) $ (.22)
Basic Earnings (Loss) per share for Accounting Change
and Extraordinary Item .............................. -- -- -- (.73) --
--------- --------- --------- --------- ---------
Basic Earnings (Loss) Per Share ........................ $ .20 $ .51 $ .22 $ (1.13) $ (.22)
Diluted Earnings Per Share Before and After Cumulative
Effect of Accounting Change and Extraordinary Item .. $ .20 $ .50 $ .22 $ (1.13) $ (.22)
OTHER DATA:
Capital Expenditures ................................... $ 18,620 $ 27,218 $ 24,575 $ 14,725 $ 14,515
Operating Income Before Depreciation and
Amortization - Adjusted EBITDA (2) .................. $ 125,457 $ 150,367 $ 130,150 $ 88,595 $ 19,671
Adjusted EBITDA Margin on Service Revenue .............. 51.0% 59.6% 55.7% 48.0% 47.6%
Net Cash Provided By (Used In):
Operating Activities ................................ $ 67,745 $ 63,075 $ 74,591 $ 12,366 $ 6,451
Investing Activities ................................ 10,381 (41,490) (30,746) 21,361 (312,577)
Financing Activities ................................ (12,387) (32,108) (57,613) 141,821 252,220
Penetration (3) ........................................ 16.60% 15.89% 13.65% 11.60% 9.40%
Subscribers at the End of Period (4) ................... 570,405 528,405 453,984 381,977 309,606
Cost to Add a Gross Subscriber (5) ..................... $ 168 $ 177 $ 199 $ 214 $ 220
Cost to Add a Net Subscriber (6) ....................... $ 945 $ 509 $ 471 $ 448 $ 370
Average Monthly Revenue per
Subscriber (7) ...................................... $ 49.95 $ 53.93 $ 56.11 $ 52.04 $ 50.59
Average Monthly Churn (8) .............................. 2.14% 1.90% 1.95% 1.91% 1.84%
Ratio of Earnings to Fixed Charges (9) ................. 1.24x 1.61x 1.21x (8) (8)
21
(1) Per share amounts have been retroactively adjusted to reflect 5 for 4
stock splits in May 1999, January 1999, April 1998 (2), and December 1997,
the 2 for 1 stock split in August 1998 and the 5% stock dividend in August
1999.
(2) Adjusted EBITDA represents operating income before Depreciation and
Amortization, non-cash compensation, and overhead of the parent company
for 2001 ($2.5 million), 2000 ($2.8 million), 1999 ($4.5 million), 1998
($4.2 million) and 1997 ($3.9 million). Adjusted EBITDA may not be
identical to similarly titled measures reported by other companies.
Adjusted EBITDA should not be considered in isolation or as an alternative
measurement of operating performance or liquidity to net income (loss),
operating income (loss), cash flows from operating activities or any other
measure of performance under GAAP. The Company believes that adjusted
EBITDA is viewed as a relevant supplemental measure of performance in the
cellular telephone industry.
(3) Determined by dividing the aggregate number of subscribers by the
estimated population.
(4) Each billable telephone number in service represents one subscriber.
(5) 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
gross subscribers added during such period.
(6) 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.
(7) 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 post paid
subscribers for such period divided by the number of months in such
period.
(8) 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.
(9) 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
years ended December 31, 1998 and 1997, the deficit of earnings to fixed
charges was $41,584 and $8,949, respectively.
(10) Operating information for PCC in 1997 includes the cellular operating
results of PCW for the period subsequent to the acquisition of
Predecessor.
CONSOLIDATED BALANCE SHEET ITEMS
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Total Current Assets.................... $ 289,392 $ 254,287 $ 229,226 $ 237,555 $ 79,864
Total Assets............................ 1,261,698 1,264,803 1,258,620 1,285,965 1,173,523
Total Current Liabilities............... 56,751 50,672 51,626 46,795 55,518
Long-Term Debt.......................... 700,000 700,000 700,000 909,432 690,300
Shareholders' Equity.................... 175,642 172,612 173,190 4,379 60,926
22
CONSOLIDATED OPERATING STATEMENT ITEMS
FOR PREDECESSOR
--------------------------------------
FOR THE
NINE MONTHS
ENDED SEPTEMBER 30,
1997
----
Revenue:
Cellular Service .................................................... $ 134,123
Equipment Sales and Installation ................................. 7,613
---------
Total Revenue .................................................. 141,736
---------
Engineering, Technical and Other Direct Expenses ................. 23,301
Cost of Equipment ................................................ 16,112
Selling, General and Administrative Expenses ..................... 41,014
Depreciation and Amortization .................................... 25,498
---------
Operating Income ................................................. 35,811
---------
Other Income (Expense):
Interest, net .................................................. (24,467)
Other, net ..................................................... 208
---------
Total Other Expenses ......................................... (24,259)
---------
Minority Interest ................................................ (1,310)
Income Tax Expense ............................................. (4,153)
---------
Net Income ..................................................... $ 6,089
=========
OTHER DATA:
Capital Expenditures ................................................ $ 40,757
Operating Income Before Depreciation and .Amortization ("EBITDA") (2) $ 61,309
EBITDA Margin on Service Revenue .................................... 45.7%
Net Cash Provided By (used in):
Operating Activities ............................................. $ 38,791
Investing Activities ............................................. (73,759)
Financing Activities ............................................. 36,851
Penetration (3) ..................................................... 8.60%
Subscribers at the End of Period (4) ................................ 337,345
Cost to Add a Net Subscriber (5) .................................... $ 514
Average Monthly Service Revenue per Subscriber (6) .................. $ 53.99
Average Monthly Churn (7) ........................................... 1.89%
Ratio of Earnings to Fixed Charges (8) .............................. 1.45x
23
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 the related
Notes thereto.
The discussion contains statements which constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are made regarding the intent, belief or current
expectations of the Company and its directors or officers primarily with respect
to the future operating performance of the Company. Readers are cautioned that
any such forward-looking statements are not guarantees of future performance and
may involve risks and uncertainties, and that actual results may differ from
those in the forward-looking statements as a result of factors, many of which
are outside the control of the Company. If the agreement to contribute the
business of Price Communications Wireless is consummated, past operations will
not necessarily be indicative of future performance (see "Agreement to
Contribute Business of Price Communications Wireless").
OVERVIEW
The Company is engaged in the construction, development, management and
operation of cellular telephone systems in the southeastern United States. As of
December 31, 2001, the Company provided cellular telephone service to 570,405
subscribers in Georgia, Alabama, South Carolina and Florida in a total of 16
licensed service areas, composed of eight MSA's and eight RSA's, with an
aggregate estimated population of 3.4 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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentage
which certain amounts bear to total revenue.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000 1999
---- ---- ----
REVENUE:
Service.......................................... 93.3% 93.4% 93.8%
Equipment sales and installation................. 6.7 6.6 6.2
----- ----- -----
Total Revenue.......................................... 100.0 100.0 100.0
----- ----- -----
OPERATING EXPENSES:
Engineering, technical and other direct:
Engineering and technical (1)................. 6.6 5.2 5.5
Other direct costs of services (2)............ 5.9 4.1 6.5
Cost of equipment (3)............................ 12.5 12.1 11.5
Selling, general and administrative:
Selling and marketing (4)..................... 9.2 8.6 8.6
Customer service (5).......................... 8.2 7.4 6.6
General and administrative (6)................ 10.9 8.0 11.0
Non-cash compensation......................... 1.4 1.4 .8
Depreciation and amortization ................... 18.2 17.4 18.0
----- ----- -----
TOTAL OPERATING EXPENSES............................... 72.9 64.2 68.5
----- ----- -----
OPERATING INCOME....................................... 27.1% 35.8% 31.5%
OPERATING INCOME BEFORE DEPRECIATION AND
AMORTIZATION AND NON-CASH COMPENSATION (7).......... 46.7% 54.5% 50.4%
(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 prepaid service, costs of long
distance, costs of interconnection with wireline telephone companies and
other costs of services.
24
(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, sales commissions and
advertising and promotional expenses.
(5) Consists primarily of salaries and benefits of customer service personnel
and costs of printing and mailing subscriber's bills.
(6) Includes salaries and benefits of general and administrative personnel and
other overhead expenses.
(7) Operating income before depreciation and amortization and non-cash
compensation ("EBITDA") 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 and
non-cash compensation is viewed as a relevant supplemental measure of
performance in the cellular telephone industry.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Although the Company experienced subscriber growth during the year ended
December 31, 2001, increasing their total subscribers by 7.9% to 570,405 and the
related increase in penetration from 15.9% to 16.9%, the decrease in outcollect
roaming revenue and its related toll, more than offset the increase in local
revenue resulting in decreased operating income. Excluding outcollect air and
toll revenue, the average revenue per post paid subscriber increased from $35.94
for the year ended December 31, 2000 to $36.67 for the current year. The Company
was also negatively affected by an increase in the provision for bad debts ($6.5
million), which combined with decreased outcollect revenue accounts primarily
for the Company's decreased operating income.
REVENUE. Service revenues totaled approximately $245.8 million for the
current year compared to approximately $252.5 million for 2000 or a decrease of
2.7%. The $6.7 million decrease is principally a result of the reduction in
outcollect air and toll revenue ($15.0 million). Partially offsetting this
decrease, is an increase in access revenue ($8.7 million) principally due to an
increase in the average revenue per rate plan combined with added post paid
subscribers for the current twelve month period. Although the company was able
to realize an increase in its average access revenue per plan, there was a
corresponding increase in the number of free minutes included with these plans
which resulted in a decrease of $2.5 million in post paid airtime revenue. As
the Company moved toward the increased usage of multi state and national plans,
there was a decrease in the amount of long distance revenue billed to its
subscribers ($880,000). The number of prepaid subscribers increased during the
current year, which increased prepaid revenue by $2.0 million. Other local
revenue items resulted in an increase of $957,000 for the current twelve month
period. The reduction in outcollect air and toll revenue is a combination of
reduced average reimbursement rates ($.31 for the year ended December 31, 2000
compared to $.25 for the current year) and minutes of use (119.1 million minutes
for the current year compared with 129.9 million minutes for last year). The
decreasing reimbursement rates are a result of increased competition for roaming
traffic which led to reduced negotiated contractual rates with other cellular
carriers. This trend may continue as a result of new roaming rates negotiated
with some of the Company's roaming partners as well as the increased number of
wireless carriers in each market which can be utilized by other carriers'
subscribers.
Equipment and installation revenue was $17.7 million for the current year
compared to $18.0 million in 2000. An increase in the number of handsets sold or
upgraded (10,273 additional units for the current year) resulted in an increase
of $651,000 for phone revenue. For the current year, excluding upgrades, the
Company sold 227,633 handsets of which 151,085 were digital (66.4%) and 76,548
were analog (33.6%). For the prior year, 223,284 handsets were sold of which
85,044 were digital (38.1%) and 138,240 were analog (61.9%). A reduction of
$915,000 of accessory sales and installation revenue more than offset the
increase in handset revenue. Historically prepaid customers buy fewer
accessories than traditional post paid customers which contributed to the
decrease in accessory revenue.
OPERATING EXPENSES. Operating expenses increased $18.6 million from $173.6
million in 2000 to $192.2 million in 2001. As a percentage of total revenue,
operating expenses increased from 64.2% of total revenue in 2000 to 72.9% of
total revenue in 2001. After excluding non-cash compensation and depreciation
and amortization, operating expenses amount to 45.5% of total revenue for 2000
compared to 53.3% of total revenue for 2001. Total operating costs per
subscriber excluding PCC overhead and all non-cash charges amounted to $18.17 in
2001 compared with $17.27 in 2000.
Engineering, technical and other direct expenses increased from $25.3
million in 2000 to $32.8 million in 2001. There are three major components in
this category. The net cost of incollect roaming, which represents the
difference between the amount paid to other cellular carriers for the Company's
subscribers roaming in other carriers' markets and the amount charged to these
subscribers, variable network costs such as inter-trunk, long distance and
directory assistance costs, and engineering costs which consist principally of
salaries and related fringe benefits, fixed span line costs and tower rentals.
As a result of negotiations with other cellular carriers (see comments
above concerning outcollect revenue), the Company was able to reduce the amount
it reimburses those carriers for incollect roaming resulting in net incollect
revenue of $1.9 million for the current year compared to net revenue of $1.1
million for 2000. Incollect costs before the revenue offset dropped from $33.4
million in 2000 to $24.3 million in the current year. Significantly offsetting
the reduction in cost was a reduction in revenue billed
25
to the Company's subscribers for their roaming activity. As the Company offers
more multi-state and nationwide programs, the minutes associated with roaming
decreases. These minutes become home minutes for purposes of billing and are
then included in the total number of free minutes each subscriber has depending
on their particular plan, which in turn may or may not create airtime revenue
for the Company. Incollect revenue including toll decreased from $34.5 million
in 2000 to $26.1 million in 2001. This reduction was augmented by decreased long
distance and directory assistance costs resulting from renegotiated rates.
During the third quarter of 2000, the Company was forced to switch the
vendor that dealt with the prepaid system as the previous vendor went out of
business. As a result of the change, the additional cost to run the prepaid
system included in direct expenses amounted to $2.5 million for the current
year. Other direct costs, principally long distance, increased by $2.4 million
for the current year due to an increase in usage.
Engineering costs in total increased from $14.1 million for the year ended
December 31, 2000 to $17.4 million for the current year or an increase of $3.3
million. During the current year, the Company added 50 additional cell sites.
The additional cell sites cause additions in cell site rent and utilities for
the current year ($1.0 million). The additional sites also result in increases
in fixed span line and inter trunk costs.
The total cost of equipment increased from $32.7 million in 2000 to $33.0
million for the current year. Without the cost of accessories actual handset
costs decreased by $1.1 million despite the additional units sold or upgraded
and the increasing demand for digital rather than analog handsets. The average
handset cost decreased from $120 in 2000 to $99 for the current year. As a
percentage of recovered cost, the Company recovered 55.1% of the cost of
equipment in 2000 compared to a recovery of 53.7% in 2001 principally as a
result of diminished accessory sales that have a positive margin and a decrease
in installation revenue.
Selling, general and administrative ("SG&A") increased from $65.0 million
for 2000 to $74.7 for the current year. As a percentage of total revenue, SG&A
increased from 24.0% of total revenue in 2000 to 28.4% in 2001.
Sales and marketing costs included in SG&A are comprised of installation
costs, salaries, commissions and advertising. The sum of these components
amounted to $24.4 million for the year 2001 and $23.2 million for 2000.
Increases in commissions and advertising accounted for the increase. The cost to
add a gross subscriber, which consists of the net loss on equipment sales and
sales and marketing expenditures, decreased from $178.46 in 2000 to $167.64 in
2001.
Customer service costs (also included in SG&A), primarily billing costs
and payroll and related benefits, increased to $21.7 million in 2001 from $20.2
million in 2000. An increase of $2.6 million for the generation of subscriber's
monthly statements, which include printing and mailing costs, are a direct
function of the increases in the number of subscribers. Additional subscribers
require an increase in the number of cellular bills mailed out, as well as an
increase in the number of customer service representatives necessary to handle
the subscriber inquiries. In addition, temporary costs related to the mandated
area code changes in the markets contributed to the increase in costs.
Offsetting these increases was a $2.0 million credit issued to the Company by
its current billing vendor due to the problems encountered during the billing
conversion (see bad debts included in General and administrative expenses
described below).
General and administrative expenses the final component of SG&A increased
to $28.7 million in 2001 from $21.6 million in 2000. The increase for the
current year of $7.1 million is principally a result of the increase in the
current year of the provision for bad debts, which increased from $4.2 million
in 2000 to $10.7 million in 2001. During the fourth quarter of 2000, the Company
changed its billing vendor when it learned that the previous billing vendor
would not be a long-term participant in the cellular billing business. The
transition encountered problems and as a result, the Company's collection
efforts were hampered, which led to a longer average aging period of the
Company's accounts receivable and a necessity to provide a higher provision for
bad debts. In the fourth quarter of the current year, the Company has
consolidated the collection process in one location in order to perform the
collection process more efficiently. General and administrative expenses,
excluding customer service costs, increased from 8.0% of revenue for the
previous year to 10.9% for the current year.
Included in operating expenses for both 2001 and 2000 is a charge of $3.6
million representing the non-cash compensation charges related to the conversion
by an officer of the Corporation of the Company's Preferred stock into common
stock (see Notes to Consolidated Financial Statements). Such charges are being
expensed over the vesting period of the common stock.
Depreciation and amortization increased from $47.0 million in 2000 to
$48.0 million in 2001. The increase is a combination of additional depreciation
expense due to the increase in capital equipment additions during 2000 and 2001
and additional amortization for other intangible assets.
Operating income decreased from $96.9 million in 2000 to $71.4 million in
2001. Earnings before non-cash compensation and depreciation and amortization
("EBITDA") amounted to $147.5 million for 2000 or 54.5% of total revenue
compared to
26
$123.0 million or 46.6% of total revenue for 2000. The decline is primarily a
function of the decrease in roaming air and toll revenue and the increase in the
provision for bad debts.
INTEREST EXPENSE, OTHER INCOME, INCOME TAXES, AND NET INCOME. Net interest
expense increased to $61.2 in 2001 from $59.7 million in 2000 principally as a
result of an adjustment in 2000 for interest earned in a prior period.
Other income for 2001 includes $4.1 million resulting from the net gain on
the sale of the Company's minority equity investment in other cellular
properties. The remaining $3.1 million is principally attributed to net gains on
security transactions of PCC. Other income for 2000 resulted largely from gains
from security transactions of PCC.
The income tax provision for 2001 of $5.7 million compared to the
provision of $15.0 million in 2000 is principally a result of the decrease in
financial statement taxable income in 2001 at an effective rate of approximately
37% adjusted for certain non- taxable security transactions in both years.
The net income of $10.9 million for 2001 compared to net income of $28.4
million for 2000 is a function of the items discussed above. During the prior
year, the Company adopted Securities and Exchange Commission Staff Accounting
Bulletin No. 101 ("SAB 101") which requires the deferral of certain revenue over
the approximate length of a subscribers' contract or over the remaining unused
minutes for prepaid revenue. The effect on the prior year's financial statements
was not material.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Operating results for the year ended December 31, 2000 reflect the
continued improvement in operating cash flow ("EBITDA"), subscriber growth and
the related increase in penetration, a slight decrease in the Average Revenue
Per Subscriber ("ARPU") and the continuation of strong cost controls which
translate to a low average operating cost per subscriber.
REVENUE. Service revenues totaled approximately $252.5 million for the
current year compared to approximately $233.6 million for 1999 or an increase of
8.1%. The increase is principally a result of the greater amount of access
revenue ($5.7 million) due to the increase in the average number of post paid
subscribers, as well as increases in toll revenue ($4.4 million), feature
revenue ($2.5 million) and prepaid airtime revenue ($4.0 million). The increase
in toll revenue is primarily due to the increase in the number of minutes used
by post paid subscribers (an increase of 463 million minutes) which per
subscriber increased from 250 minutes per post paid subscriber in 1999 to 318
minutes in 2000. Despite the increase in minutes of use, airtime revenue was
flat as the Company's rate plans provided larger amounts of free minutes than in
the past in order to remain competitive in its markets. As a result of increased
competition for additional post paid cellular subscribers, the Company's local
revenue per cellular subscriber decreased slightly from $40.16 in 1999 to $39.42
in 2000. In addition, the Company's outcollect roaming revenue, which is revenue
that the Company derives from other cellular companies' subscribers roaming in
our markets, increased by ($826,000) as a result of an increase in usage from
105.8 million minutes in 1999 to 129.9 million minutes in 2000, partially offset
by reduced reimbursement rates from the other carriers. The Company expects this
trend to continue as a result of new roaming rates negotiated with some of the
Company's roaming partners as well as the increased number of wireless carriers
in each market which can be utilized by other carriers.
Equipment and installation revenue amounted to $18.0 million for the
current year compared to $15.5 million in 1999. The increase in equipment
revenue of 16.1% is primarily a combination of a greater number of gross pre and
post paid subscriber additions (39,409 increase over 1999) as well as a greater
emphasis on accessory sales to new subscribers.
OPERATING EXPENSES. Operating expenses increased $3.0 million from $170.6
million in 1999 to $173.6 million in 2000. As a percentage of total revenue,
operating expenses decreased from 68.5% of total revenue in 1999 to 64.2% of
total revenue in 2000. After excluding non-cash compensation and depreciation
and amortization, operating expenses amount to 45.5% of total revenue for 2000
compared to 49.6% of total revenue for 1999. Total operating costs per cellular
subscriber excluding PCC overhead and all non-cash charges amounted to $17.27 in
2000 and $20.68 in 1999.
Engineering, technical and other direct expenses decreased from $29.7
million in 1999 to $25.3 million in 2000. There are three major components in
this category. The net cost of incollect roaming, which represents the
difference between the amount paid to other cellular carriers for the Company's
subscribers roaming in other carriers' markets and the amount charged to these
subscribers, variable network costs such as inter trunk, long distance and
directory assistance costs, and engineering costs which consist principally of
salaries and related fringe benefits, fixed span line costs and tower rentals.
As a result of negotiations with other cellular carriers (see comments
above concerning outcollect revenue), the Company was able to reduce the amount
it reimburses those carriers for incollect roaming resulting in net incollect
revenue of $1.1 million for the current year compared to a net cost of $4.0
million for 1999. This reduction was augmented by decreased long distance and
27
directory assistance costs resulting from renegotiated rates. Partially
offsetting these cost savings, were increases in variable telephone costs such
as interconnect and reverse toll charges as well as the direct cost of prepaid
usage due to the increase in prepaid revenue and the implementation of a new
prepaid software system.
Decreases in engineering salaries and related expenses were offset by
increases in fixed span line costs and additional cell site rental costs as the
Company continued to build out its system by adding 56 new cell sites and
increasing the number of radios in the existing cell sites.
The increase in gross subscriber additions combined with the increase in
cellular phone upgrades as well as the higher cost of digital phones, resulted
in an increase of the cost of equipment sold from $28.7 million in 1999 to $32.7
million in 2000. In addition, increases in the sale of accessories contributed
to the increase. As a percentage of recovered cost, the Company recovered 55.1%
of the cost of equipment in 2000 compared to a recovery of 54.3% in 1999.
Selling, general and administrative ("SG&A") decreased slightly from $65.2
million for 1999 to $65.0 for the current year. As a percentage of total
revenue, SG&A decreased from 26.2% of total revenue in 1999 to 24.0% in 2000.
Sales and marketing costs which include installation costs, salaries,
commissions and advertising, amounted to $23.2 million for the year 2000 and
$21.5 million for 1999. Increases in salaries and related benefits, commissions
and advertising expenditures increased in total by $1.2 million as the number of
gross activations increased for the current year. The cost to add a gross
subscriber, which consists of the net loss on equipment sales and sales and
marketing expenditures, decreased from $198.68 in 1999 to $177.63 in 2000.
Customer service costs, primarily billing costs and payroll and related
benefits, increased to $20.2 million in 2000 from $16.4 million in 1999.
Increases in personnel and billing costs are a direct function of the increases
in the number of subscribers. Additional subscribers require an increase in the
number of cellular bills mailed out, as well as an increase in the number of
customer service representatives necessary to handle the additional subscriber
inquiries.
General and administrative expenses were reduced to $21.6 million in 2000
compared with $27.3 million in 1999. The Company's provision for bad debts
decreased from $7.1 million in 1999 to $4.2 million in 2000 due to additional
customer service staffing, as well as the utilization of outside collection
services. Additional savings in PCC overhead ($1.6 million reduction principally
from payroll related costs) as well as reductions in legal and professional fees
($800,000) and computer support services ($1.0 million) contributed to the $5.6
million reduction in expenses.
Included in operating expenses for 2000 and 1999 is a charge of $3.6
million and $2.0 million representing the non-cash compensation charges related
to the conversion by an officer of the Corporation of the Company's Preferred
stock into common stock (see Notes to Consolidated Financial Statements). Such
charges are being expensed over the vesting period of the common stock. The
conversions occurred during 1998 and 1999. Since the conversions occurred in
varying stages prior to December 31, 1999, the year 2000 has a full year of
amortization whereas 1999 has less than twelve months.
Depreciation and amortization increased from $45.2 million in 1999 to
$47.0 million in 2000. The increase is primarily a result of additional
depreciation expense due to the significant capital equipment additions during
1999 and 2000.
Operating income grew from $78.5 million 1999 to $96.9 million in 2000.
Earnings before non-cash compensation and depreciation and amortization
("EBITDA") amounted to $147.5 million for 2000 or 54.5% of total revenue
compared to $125.7 million or 50.4% of total revenue for 1999. The improvement
is a function of management's ability to control costs while still maintaining
subscriber growth. The increase in EBITDA from 1999 to 2000 represents a growth
of 17.3%.
INTEREST EXPENSE, OTHER INCOME, INCOME TAXES, AND NET INCOME. Interest
expense decreased to $71.4 in 2000 from $82.6 million in 1999. During 1999, long
term debt consisted of, $175 million of 11 3/4% Senior Subordinated Notes, $525
million of 9 1/8% Senior Secured Notes and $200 million of 11 1/4% Senior
Exchangeable Payable-in-Kind Notes. In June 1999, the Company allowed the
conversion of the $200 million 11 1/4% Payable-in-Kind Notes and therefore
incurred an additional six months of interest expense. The increase of $2.0
million in interest income is a result of the increase in the average rate the
Company earned on its cash during the year.
Other income for 2000 resulted largely from gains from security
transactions of the Parent company and in 1999 resulted primarily from the
liquidation of a long-standing investment by the Company ($8.5 million) combined
with net gains realized from security transactions by the Parent Company.
The income tax provision for 2000 of $15.0 million compared to the
provision of $6.0 million is principally a result of the increase in taxable
income in 2000 at an effective rate of approximately 37%.
28
The net income of $28.4 million for 2000 compared to net income of $10.2
million for 1999 is a function of the items discussed above. During the current
year, the Company adopted Securities and Exchange Commission Staff Accounting
Bulletin No. 101 ("SAB 101") which requires the deferral of certain revenue over
the approximate length of a subscribers' contract or over the remaining unused
minutes for prepaid revenue. The effect on the current financial statements was
not material.
29
LIQUIDITY AND CAPITAL RESOURCES
The Company's long-term capital requirements consist of funds for capital
expenditures, acquisitions and debt service. Historically, the Company has met
its capital requirements primarily through equity contributions, long-term debt,
and to a lesser extent, operating cash flow. Net cash provided by operating
activities amounted to $67.7 million for the year ended December 31, 2001.
Working capital at December 31, 2001 approximated $232.6 million. The current
level of operating cash flow is sufficient to fund the current anticipated level
of capital expenditures and cash interest, which interest amounts to
approximately $68.5 million related to the $175 million 11 3/4% Senior
Subordinated Notes due July 15, 2007 and the $525 million 9 1/8% Senior Secured
Notes due December 15, 2006. The 9 1/8% notes are callable after June 15, 2002,
and the 11 3/4% notes are callable after July 15, 2002. In addition, the Company
is obligated for operating leases of real and personal property for the years
subsequent to December 31, 2001 in the amount of $18.2 million. Further details
regarding the notes and lease obligations can be found in the Notes to the
Company's Consolidated Financial Statements.
The Company's cash flow from operating activities is principally a result
of net income adjusted for non-cash charges and marketable security
transactions. The change in accounts receivable positively effected the 2001
cash from operating activities and negatively effected the 2000 cash from
operating activities. The year ended December 31, 2000, saw a large increase in
accounts receivable as a result of the change in billing vendors during the
latter part of 2000 and the resulting problems with the conversion as previously
discussed. The difficulty incurred with the conversion caused customers
statements to be mailed later than normal which resulted in a delay in cash
payments from the Company's subscribers. During the year ended December 31,
2001, the Company reduced their receivable balance to a level comparable to the
balance at the end of 1999 which resulted in a positive cash flow of $13.2
million compared to a decrease of $12.4 million for 2000. Contributing to the
decrease in the level of accounts receivable was the centralization of the
collection process, resolution of the conversion issues and an increase of $5.9
million for accounts receivable reserved.
The Company spent a lower amount for capital expenditures for the current
year as compared to the previous two years resulting in a decrease of $8.6
million and $6.0 million for the current year when compared with 2000 and 1999,
respectively. At December 31, 2001, the Company had sold most of its marketable
securities and had sold its investment in other cellular properties. The Company
also repurchased less of its common stock, which was the principal component of
cash used in financing activities.
Assuming the Verizon transaction takes place during the second quarter of
2002, cash flows from the partnership will not be available to the Company until
the third quarter of 2004 whereupon 50% of the interest earned on its capital
account in the limited partnership will be distributed if available. Any other
cash income will be generated from interest or other investments the Company
acquires after the Verizon transaction is completed.
ACCOUNTING POLICIES
For financial reporting purposes, the Company reports 100% of revenues and
expenses for the markets for which it provides cellular telephone service.
However, in several of its markets, the Company held less than 100% of the
equity ownership prior to December 31, 2001. The minority stockholders' and
partners' share of income or losses in those markets is reflected in the
consolidated financial statements as "minority interest" except for losses in
excess of their capital accounts and cash call provisions which are not
eliminated in consolidation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company generally utilizes fixed debt to fund its acquisitions.
Management believes that the use of fixed rate debt minimizes the Company's
exposure to market conditions and the ensuing increases and decreases that could
arise with variable rate financing. See notes to consolidated financial
statements for description and terms of long term debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEE INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ON PAGE 30.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
PART III
The information called for by Items 10, 11, 12 and 13 is incorporated
herein by reference from the following portions of the proxy
statement/prospectus filed jointly on Form S-4 by PCC, Verizon Wireless of the
East LP and Verizon Communications Inc. in connection with PCC's 2002 Annual
Meeting of Shareholders.
ITEM INCORPORATED FROM
---- -----------------
ITEM 10. Directors and Executive Officers of the "Directors and Executive Officers" and
Registrant "Section 16(a) Beneficial Ownership
Reporting Compliance"
ITEM 11. Executive Compensation "Directors and Executive Compensation -
Executive Compensation" and "Related
Transactions"
ITEM 12. Security Ownership of Certain Beneficial "Principal Shareholders and Security
Owners and Management Ownership of Management"
ITEM 13. Certain Relationships and Related Transactions "Directors and Executive Compensation" and
"Related Transactions"
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) List of financial statements and financial statement
schedules:
See "Index to Consolidated Financial Statements" on page 30.
(Schedules other than those listed are omitted for the reason that
they are not required or are not applicable or the required
information is shown in the financial statements or notes thereto.)
(3) Exhibits
See Exhibit Index at page E-1, which is incorporated herein by
reference.
(b) Reports on Form 8-K.
Form 8-K filed on January 4, 2002, reporting agreement to contribute
substantially all of the assets of PCC's operating subsidiary, Price
Communications Wireless, Inc., to Verizon Wireless, for a limited partnership
interest in a newly formed limited partnership.
32
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
Auditors' Report ......................................................... F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000 ............. F-2
Consolidated Statements of Operations and Comprehensive Income for the
Years Ended December 31, 2001, 2000 and 1999 .......................... F-3
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999 ................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999 ...................................... F-5
Notes to Consolidated Financial Statements ............................... F-6
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS SCHEDULES
Schedule No
I. Condensed Financial Information of Registrant ................. F-16
II. Valuation and Qualifying Accounts ............................. F-20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Price Communications Corporation:
We have audited the accompanying consolidated balance sheets of Price
Communications Corporation (a New York Corporation) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations and comprehensive income, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. These
consolidated financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Price Communications
Corporation and subsidiaries as of December 31, 2001 and 2000, and the results
of its operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 3, the Company changed its methodology for revenue
recognition in the year ended December 31, 2000.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
consolidated financial statements are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
New York, New York
February 25, 2002
F-1
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
($ IN THOUSANDS EXCEPT SHARE DATA)
2001 2000
---- ----
Current assets:
Cash and cash equivalents ...................................................................... $ 246,447 $ 180,708
Accounts receivable, net of allowance for doubtful accounts of $1,196 in 2001 and $1,396 in 2000 21,260 34,435
Receivables from other cellular carriers ....................................................... 5,190 4,101
Available for sale securities .................................................................. 906 23,517
Inventory ...................................................................................... 5,129 6,015
Deferred income taxes .......................................................................... -- 1,091
Prepaid expenses and other current assets ...................................................... 10,460 4,420
----------- -----------
Total current assets ......................................................................... 289,392 254,287
----------- -----------
Property and equipment:
Land and improvements .......................................................................... 7,480 7,480
Buildings and improvements ..................................................................... 13,598 11,440
Equipment, communication systems and furnishings ............................................... 214,806 198,347
----------- -----------
235,884 217,267
Less accumulated depreciation .................................................................. 94,654 70,034
----------- -----------
Net property and equipment ................................................................... 141,230 147,233
Equity investment in other cellular properties .................................................... -- 11,310
Licenses, net of accumulated amortization of $97,428 in 2001 and $74,628 in 2000 .................. 815,178 832,471
Other intangible and other assets, net of accumulated amortization of $9,538 in 2001 and
$6,555 in 2000 .................................................................................. 15,898 19,502
----------- -----------
Total assets ................................................................................. $ 1,261,698 $ 1,264,803
=========== ===========
Current liabilities:
Accounts payable ............................................................................... $ 11,665 $ 8,181
Accrued interest payable ....................................................................... 11,421 12,374
Accrued salaries and employee benefits ......................................................... 1,281 1,329
Deferred revenue ............................................................................... 9,693 7,412
Customer deposits .............................................................................. 856 1,153
Outstanding put option contract ................................................................ -- 3,109
Income taxes payable ........................................................................... 9,621 8,013
Accrued engineering, technical and other direct ................................................ 2,811 4,480
Excise and sales taxes payable ................................................................. 1,982 1,811
Minority interests ............................................................................. 3,194 --
Other current liabilities ...................................................................... 4,227 2,810
----------- -----------
Total current liabilities .................................................................... 56,751 50,672
Long-term debt .................................................................................... 700,000 700,000
Accrued income taxes long-term .................................................................... 53,165 53,165
Deferred income taxes (net) ....................................................................... 276,140 283,075
Commitments and contingencies
Minority interests in cellular licenses ........................................................... -- 5,279
Shareholders' equity:
Preferred stock, par value $.01 per share; authorized 18,907,801 shares; no shares outstanding . -- --
Common stock, par value $.01; authorized 120,000,000 shares; outstanding 54,885,955 shares
in 2001 and 55,453,858 shares in 2000 ........................................................ 550 555
Additional paid-in-capital ..................................................................... 177,166 189,053
Unearned compensation .......................................................................... (58,680) (62,329)
Accumulated other comprehensive income (loss) .................................................. (129) (457)
Retained earnings .............................................................................. 56,735 45,790
----------- -----------
Total shareholders' equity ................................................................... 175,642 172,612
----------- -----------
Total liabilities and shareholders' equity ................................................... $ 1,261,698 $ 1,264,803
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000 1999
---- ---- ----
Revenue:
Cellular operations:
Service ................................................................. $ 245,817 $ 252,513 $ 233,575
Equipment sales and installation ........................................ 17,731 17,995 15,548
--------- --------- ---------
Total revenue ......................................................... 263,548 270,508 249,123
--------- --------- ---------
Operating expenses:
Engineering, technical and other direct ................................... 32,796 25,321 29,666
Cost of equipment ......................................................... 33,028 32,685 28,650
Selling, general and administrative ....................................... 74,738 64,984 65,150
Non-cash compensation (Selling, general and administrative) ............... 3,649 3,649 1,973
Depreciation and amortization ............................................. 47,975 46,981 45,157
--------- --------- ---------
Total operating expenses .............................................. 192,186 173,620 170,596
--------- --------- ---------
Operating income ............................................................. 71,362 96,888 78,527
Interest income .............................................................. 8,837 11,758 9,758
Interest expense ............................................................. (70,085) (71,419) (82,650)
Other income ................................................................. 7,157 7,711 12,251
Minority interest ............................................................ (631) (1,432) (1,664)
--------- --------- ---------
Income (loss) before income taxes ............................................ 16,640 43,506 16,222
Income tax expense ........................................................... 5,695 14,972 6,002
--------- --------- ---------
Income before cumulative effect of accounting change ......................... 10,945 28,534 10,220
Cumulative effect on prior year of change in revenue recognition
(net of income tax benefit of $92) ....................................... -- (158) --
--------- --------- ---------
Net income ................................................................... 10,945 28,376 10,220
Other comprehensive income (net of income tax expense of $194 for 2001 and
income tax benefit of $1,027 and $905 for the years 2000 and 1999
respectively).
Unrealized gains (losses) on available for sale securities ................ (61) (457) 1,291
Reclassification adjustment ............................................... 389 (1,291) (2,832)
--------- --------- ---------
Comprehensive income ......................................................... $ 11,273 $ 26,628 $ 8,679
========= ========= =========
Per share data:
Basic earnings per share before cumulative effect of accounting
change .................................................................. $ .20 $ .51 $ .22
Basic earnings per share for accounting change ............................ -- -- --
--------- --------- ---------
Basic earnings per share .................................................. $ .20 $ .51 $ .22
Diluted earnings per share before and after cumulative effect of accounting
change .................................................................. .20 .50 .22
Weighted average number of common shares outstanding - basic ................. 55,061 56,013 46,334
Weighted average number of common shares outstanding - diluted ............... 55,415 56,531 47,495
See accompanying notes to consolidated financial statements.
F-3
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
($ IN THOUSANDS)
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................ $ 10,945 $ 28,376 $ 10,220
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization ........................................ 47,975 46,981 45,157
Amortization of deferred finance costs ............................... 2,431 2,430 2,523
Minority interest share of income .................................... 631 1,432 1,664
Deferred income taxes ................................................ (3,430) (9,716) (3,648)
Accrued interest satisfied by issuance of PCC stock .................. -- -- 11,309
Gain on available for sale securities ................................ (1,780) (6,724) (12,607)
Gain on sale of equity investment in other cellular properties (net) . (4,109) -- --
Non-cash compensation ................................................ 3,649 3,649 1,973
Decrease (increase) in accounts receivable ........................... 13,175 (12,402) (4,477)
Increase in other current assets ..................................... (6,403) (4,039) (1,488)
(Decrease) increase in accounts payable and accrued expenses ......... 955 (11,402) 2,727
(Decrease) increase in accrued interest payable ...................... (953) 432 163
(Decrease) increase in other current liabilities ..................... (345) (382) 2,350
Increase (decrease) in deferred revenue .............................. 2,281 2,261 (80)
Increase in income taxes payable ..................................... 2,103 5,028 --
Increase in accrued income taxes long-term ........................... -- 17,044 18,340
Other ................................................................ 620 107 465
--------- --------- ---------
Total adjustments .................................................. 56,800 34,699 64,371
--------- --------- ---------
Net cash provided by operating activities .......................... 67,745 63,075 74,591
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ...................................................... (18,620) (27,218) (24,575)
Proceeds from sale of equity investment in other cellular properties ...... 15,419 -- --
Purchase of available-for-sale securities ................................. (14,315) (59,556) (7,718)
Proceeds from sale of available-for-sale securities ....................... 36,119 42,045 21,435
Purchase of additional minority interests in majority owned Company systems (8,223) (553) (7,732)
Purchase of minority equity interests in other cellular properties ........ -- -- (11,810)
Other ..................................................................... 1 792 2,654
--------- --------- ---------
Net cash provided by (used in) by investing activities ............. 10,381 (44,490) (27,746)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt issuance costs ............................................ -- -- (789)
Repurchase of Company's common stock ...................................... (13,583) (32,584) (57,055)
Exercise of employee stock options and warrants ........................... 1,196 476 231
--------- --------- ---------
Net cash used in financing activities .............................. (12,387) (32,108) (57,613)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............... 65,739 (13,523) (10,768)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .............................. 180,708 194,231 204,999
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR .................................... $ 246,447 $ 180,708 $ 194,231
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
($ AND SHARE AMOUNTS IN THOUSANDS)
Accumulated
other
Common Stock Additional compre-
Class A paid-in hensive Retained
Shares Value capital income (loss) earnings
------ ----- ------- ------------- --------
BALANCE, DECEMBER 31, 1998 ......................... 21,715 218 (5,869) 2,836 7,194
Stock splits and stock dividend .................... 14,663 147 (147) -- --
Issue of warrants from $105M debt redeemed in 1998 . 2,347 23 (23) -- --
Change in unrealized gain on marketable equity
securities, net of tax effect ................... -- -- -- (1,545) --
Purchase and retirement of treasury stock .......... (3,544) (35) (57,020) -- --
Exercise of stock options and warrants ............. 462 5 226 -- --
Other .............................................. 56 -- 686 -- --
Conversion of Class A and Class B preferred stock to
common stock .................................... 3,725 37 67,938 -- --
Deferred compensation expense associated with the
conversion of preferred stock to common stock ... -- -- -- -- --
Conversion of PIK notes, net ....................... 17,245 172 211,319 -- --
Tax benefit from the exercise of stock options ..... -- -- 2,786 -- --
Net income ......................................... -- -- -- -- 10,220
-------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1999 ......................... 56,669 567 219,896 1,291 17,414
Change in unrealized gain on marketable equity
securities, net of tax effect ................... -- -- -- (1,748) --
Purchase and retirement of treasury stock .......... (1,495) (15) (32,569) -- --
Exercise of stock options .......................... 279 3 473 -- --
Deferred compensation expense associated with the
conversion of preferred stock to common stock ... -- -- -- -- --
Tax benefit from the exercise of stock options ..... -- -- 1,253 -- --
Net income ......................................... -- -- -- -- 28,376
-------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2000 ......................... 55,453 555 189,053 (457) 45,790
Change in unrealized loss on marketable equity
securities, net of tax effect ................... -- -- -- 328 --
Purchase and retirement of treasury stock .......... (754) (7) (13,576) -- --
Exercise of stock options .......................... 186 2 1,195 -- --
Deferred compensation expense associated with the
conversion of preferred stock to common stock ... -- -- -- -- --
Tax benefit from the exercise of stock options ..... -- -- 494 -- --
Net income ......................................... -- -- -- -- 10,945
-------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 2001 ......................... 54,885 $ 550 $ 177,166 $ (129) $ 56,735
======== ========== ========== ========== ==========
Total
share-
Unearned holders'
Compensation Equity
------------ ----------
BALANCE, DECEMBER 31, 1998 ......................... -- 4,379
Stock splits and stock dividend .................... -- --
Issue of warrants from $105M debt redeemed in 1998 . -- --
Change in unrealized gain on marketable equity
securities, net of tax effect ................... -- (1,545)
Purchase and retirement of treasury stock .......... -- (57,055)
Exercise of stock options and warrants ............. -- 231
Other .............................................. -- 686
Conversion of Class A and Class B preferred stock to
common stock .................................... $ (67,951) 24
Deferred compensation expense associated with the
conversion of preferred stock to common stock ... 1,973 1,973
Conversion of PIK notes, net ....................... -- 211,491
Tax benefit from the exercise of stock options ..... -- 2,786
Net income ......................................... -- 10,220
---------- ----------
BALANCE, DECEMBER 31, 1999 ......................... (65,978) 173,190
Change in unrealized gain on marketable equity
securities, net of tax effect ................... -- (1,748)
Purchase and retirement of treasury stock .......... -- (32,584)
Exercise of stock options .......................... -- 476
Deferred compensation expense associated with the
conversion of preferred stock to common stock ... 3,649 3,649
Tax benefit from the exercise of stock options ..... -- 1,253
Net income ......................................... -- 28,376
---------- ----------
BALANCE, DECEMBER 31, 2000 ......................... (62,329) 172,612
Change in unrealized loss on marketable equity
securities, net of tax effect ................... -- 328
Purchase and retirement of treasury stock .......... (13,583)
Exercise of stock options .......................... -- 1,197
Deferred compensation expense associated with the
conversion of preferred stock to common stock ... 3,649 3,649
Tax benefit from the exercise of stock options ..... -- 494
Net income ......................................... -- 10,945
---------- ----------
BALANCE, DECEMBER 31, 2001 ......................... $ (58,680) $ 175,642
========== ==========
Seefaccompanying notes to consolidated financial statements.
F-5
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACQUISITION
Price Communications Corporation ("Price" or the "Company") owns 100% of
Price Communications Cellular, Inc., which owns 100% of Price Communications
Cellular Holdings, Inc. ("Holdings"), which owns 100% of Price Communications
Wireless, Inc. ("PCW"). The Company has total ownership in corporations and
partnerships which operate the non-wireline cellular telephone systems in eight
Metropolitan Statistical Areas ("MSA") in four states: Florida (one), Georgia
(five), Alabama (two), and South Carolina (one). The Company owns and operates
eight non-wireline cellular telephone systems in Rural Service Areas ("RSA") in
Georgia (seven) and Alabama (one).
2. AGREEMENT TO CONTRIBUTE BUSINESS OF PRICE COMMUNICATIONS WIRELESS
On December 18, 2001, the Company entered into an agreement (the
"Transaction Agreement") with affiliates of Cellco Partnership (doing business
as Verizon Wireless and referred to herein as "Verizon Wireless") pursuant to
which the Company agreed to contribute substantially all of the assets of PCW to
a new partnership controlled by Verizon Wireless ("New Limited Partnership"),
subject to shareholder approval, in exchange for a Preferred Exchangeable
Limited Partnership Interest (the "Preferred Exchangeable Interest") (the
"contribution transaction"). New Limited Partnership will assume certain
liabilities of PCW relating to the contributed business (including such
liabilities as arise under PCW's 11 3/4% Senior Subordinated Notes due 2007 and
9 1/8% Senior Secured Notes due 2006). The Company expects to account for the
Preferred Exchangeable Interest by applying the equity method of accounting.
If an initial public offering of Verizon Wireless common stock (meeting
certain size requirements) occurs within four years of the contribution
transaction, the Company may elect to exchange such Preferred Exchangeable
Interest for Verizon Wireless common stock during the sixty-day period
immediately following the later of (i) the date of the initial public offering
and (ii) the one-year anniversary of the contribution transaction. Any such
exchange will require the approval of the shareholders of PCC.
If Verizon Wireless does not complete such an initial public offering
prior to the four-year anniversary of the contribution transaction or if Verizon
Wireless does complete such an offering but an exchange into Verizon Wireless
common stock does not occur for other reasons, the Preferred Exchangeable
Interest will be exchanged for Verizon Communications common stock. The timing
of such exchange will depend upon the circumstances but in no event will it
occur after the tenth anniversary of the contribution transaction.
In addition, in certain circumstances (including a change in control of
the Company or a transfer of the Preferred Exchangeable Interest to a secured
creditor of the Company), Verizon Communications will have the right to cause an
exchange of the Preferred Exchangeable Interest into Verizon Communications
common stock, whether or not an initial public offering of Verizon Wireless
common stock has occurred.
The amount of PCW's initial capital account in the partnership will be
approximately $1.15 billion, subject to certain adjustments as defined in the
Transaction Agreement. Pursuant to the partnership agreement of New Limited
Partnership, any profits of New Limited Partnership will be allocated to PCW's
capital account annually up to an amount equal to approximately 4.00% per annum
(subject to downward adjustments relating to the interest rate payable on
certain indebtedness of New Limited Partnership) and it is currently expected
that the maximum preferred return after such adjustment will be approximately
3.6% per annum accreted quarterly on the weighted daily average balance of PCW's
capital account (for a maximum period of four years). Any losses incurred by New
Limited Partnership will be allocated to Verizon Wireless up to an amount equal
to its capital accounts before being allocated to PCW. With respect to each
quarter ending after the second anniversary of the contribution transaction, New
Limited Partnership will distribute to PCW an amount in cash equal to 50% of
PCW's share of any profits of New Limited Partnership. These distributions will
reduce PCW's capital account in New Limited Partnership. The transaction is
structured to be a tax-free exchange of assets under the Internal Revenue Code.
The Company expects to account for the Preferred Exchangeable Interest
using the equity method of accounting. The initial investment on the PCC balance
sheet will equal the credit in the capital account on the partnership's
financial statement. Thereafter, the Company will increase its investment by the
amount of income it will be entitled to based on the availability of profits and
the agreed upon preferred rate of return. Future cash distributions will reduce
the investment balance.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Price and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in the consolidated financial statements. Certain prior year
amounts have been reclassified to conform to current year presentation.
F-6
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments, including
treasury bills, purchased with original maturities of three months or less to be
cash equivalents.
FINANCIAL INSTRUMENTS
At December 31, 2001 and 2000, substantially all of the Company's
investment securities were marketable equity securities classified as
"Available-for-Sale Securities". Unrealized holding gains and losses for
Available-for-Sale Securities are excluded from earnings and reported, net of
taxes, as accumulated other comprehensive income (loss).
The Company sells put and call options, some of which are for the
Company's own common stock. These puts entitle the holders to sell publicly
traded securities to the Company during certain periods at certain prices. The
Company is required to maintain collateral to support options issued, therefore
such unsettled contracts have been classified as liabilities in the accompanying
consolidated balance sheets with changes in fair values recorded as part of
Other income. As at December 31, 2001, there were no unsettled contracts
outstanding.
INVENTORY
Inventory, consisting primarily of cellular handsets and telephone
accessories, is stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of additions and
improvements are capitalized while maintenance and repairs are charged to
expense when incurred. Depreciation is provided principally by the straight-line
method over the estimated useful lives, ranging from 5 to 20 years for buildings
and improvements and 5 to 10 years for equipment, communications systems and
furnishings.
ACQUISITIONS AND LICENSES
The cost of acquired companies is allocated first to the identifiable
assets, including licenses, based on the fair market value of such assets at the
date of acquisition. Accordingly, the Company has not recorded any goodwill.
Licenses are amortized on a straight-line basis over a 40-year period.
Subsequent to the acquisition of licenses and other long-lived assets, the
Company continually evaluates whether subsequent events and circumstances have
occurred that indicate the remaining estimated useful life of such licenses
might warrant revision or that the remaining balance of the license rights may
not be recoverable. The Company utilizes projected undiscounted cash flows over
the remaining life of the licenses and sales of comparable businesses to
evaluate the recorded value of licenses. The assessment of the recoverability of
the remaining balance of the license rights may be impacted if projected cash
flows are not achieved.
OTHER INTANGIBLE ASSETS
Other intangible assets consist principally of deferred financing costs.
These costs are being amortized on a straight-line basis over the lives of the
related debt agreements, which range from 8 to 10 years.
F-7
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
REVENUE RECOGNITION
Service revenue from cellular operations for prepaid and post paid
customers includes local subscriber revenue and outcollect roaming revenue.
In accordance with the Securities and Exchange Commission Staff Accounting
Bulletin No. 101 ("SAB 101"), which was adopted in the fourth quarter of 2000
effective January 1, 2000, prepaid airtime revenue is recognized when the
airtime is utilized and activation revenue is recognized over the estimated life
of the subscriber's contract or the expected term of the customers relationship,
whichever is longer. In addition, the financial statements for the years ended
December 31, 2001 and 2000, include a deferral of unearned revenue, and for the
year ended December 31, 2000, a cumulative catch up adjustment representing the
effect of the application of SAB 101 on prior years. Local subscriber revenue is
earned by providing access to the cellular network ("access revenue") or, as
applicable, for usage of the cellular network ("airtime revenue"). Access
revenue is billed one month in advance and is recognized when earned. Postpaid
airtime revenue is recognized when the service is rendered.
Outcollect roaming revenue represents revenue earned for usage of its
cellular network by subscribers of other cellular carriers. Outcollect roaming
revenue is recognized when the services are rendered.
Equipment sales and installation revenues are recognized upon delivery to
the customer or installation of the equipment.
COST TO ADD A SUBSCRIBER
The cost to add a subscriber which consists principally of the net loss on
the sale of equipment, as well as commissions, is recognized at the time the
subscriber starts to receive cellular service. Both commissions and the loss on
the sale of handsets, which represent a separate earnings process, are expensed
in the same month that the subscriber commences using the Company's system.
OPERATING EXPENSES - ENGINEERING, TECHNICAL AND OTHER DIRECT
Engineering, technical and other direct operating expenses represent
certain costs of providing cellular telephone services to customers. These costs
include incollect roaming expense. Incollect roaming expense is the result of
the Company's subscribers using cellular networks of other cellular carriers.
Incollect roaming revenue, billed to the Company's subscribers, is netted
against the incollect roaming expense to determine net incollect roaming expense
or net revenue.
PER SHARE DATA
Basic earnings per share exclude the dilutive effects of options, warrants
and convertible securities. Diluted earnings per share gives effect to all
dilutive securities that were outstanding during the period. The only difference
between basic and diluted earnings per share for the Company is the effect of
dilutive stock options and warrants.
The following table reconciles the number of shares used in the earnings
per share calculations:
DILUTED AVERAGE COMMON SHARES COMPUTATION 2001 2000 1999
----------------------------------------- ---- ---- ----
Basic average common shares outstanding ..................... 55,061 56,013 46,334
Dilutive potential common shares - options and warrants ..... 354 518 1,161
------ ------ ------
Diluted Average Common Shares ............................... 55,415 56,531 47,495
Options excluded from the computation of earnings per
share - diluted since option exercise price was greater
than the market price of the common shares for the period 442 69 N/A
STOCK OPTIONS
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock - Based
Compensation" ("SFAS No. 123"). As permitted by SFAS No. 123, the Company
continues to apply the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB
25). However, the Company has adopted the disclosure requirement of SFAS No. 123
as shown later in the document.
F-8
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The Company records income taxes to recognize full inter-period tax
allocations. Under the liability method, deferred taxes are recognized for the
future tax consequences of temporary differences by applying enacted statuatory
tax rates applicable to future years differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). This statement established accounting and reporting standards
that require all derivative instruments (including certain derivative
instruments embedded in other contracts) to be recorded on the balance sheet as
an asset or a liability and measured at its fair value. This statement requires
that changes in the derivatives fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Company does not have any
derivative instruments. Therefore the adoption of SFAS No. 133 did not have any
impact on the Company.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead will be reviewed
for impairment and written down as a charge to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The provisions of SFAS No. 142 will be adopted by PCW on
January 1, 2002. The Company does not have any goodwill recorded in its
consolidated financial statements and therefore does not believe the adoption of
SFAS No. 142 will have any effect on its financial position or results of
operations. However, PCW does have a significant intangible asset in the form of
cellular licenses. PCW believes its cellular licenses qualify as indefinite life
intangibles as defined by the Standard, and therefore will not be subject to
amortization upon adoption of SFAS No. 142. Amortization expense for these
licenses for the three years ended December 31, 2001, 2000 and 1999 amounted to
$22.8 million, $22.8 million and $22.7 million, respectively.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment of Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supercedes SFAS No. 121, but retains SFAS No. 121's fundamental provisions for
(a) recognition and measurement of impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale.
SFAS No. 144 also supercedes Accounting Principle Board Opinion No. 30
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions ("APB No. 30") for segments of a business to be disposed
of but retains APB No. 30's requirements to report discontinued operations
separately from continuing operations and extends that reporting to a component
of an entity that either has been disposed of or is classified as held for sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early application
encouraged. Based on preliminary estimates, the Company does not believe the
adoption of SFAS No. 144 will have a material impact on its consolidated
financial statements.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions used to estimate the fair
value of financial instruments are set forth below:
For cash and cash equivalents, accounts receivable, receivables from other
cellular carriers, accounts payable and accrued expenses, and virtually all
current liabilities, the carrying value approximates fair value due to the
short-term nature of those accounts. Investment securities are recorded at fair
value.
Rates currently available for long-term debt with similar terms and
remaining maturities are used to discount the future cash flows to estimate the
fair value of long-term debt.
As mentioned earlier, the Company has sold put and call options (including
some on the Company's common stock) which grant the holders the right to sell
publicly traded securities to the Company during certain periods at certain
prices. At December 31, 2001, there were no open put contracts outstanding.
F-9
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
------------
($ IN THOUSANDS)
----------------
2001 2000
---- ----
11 3/4% Senior Subordinated Notes .......... $175,000(a) $175,000(a)
9 1/8% Senior Secured Notes ................ 525,000(b) 525,000(b)
-------- --------
Long-term debt ............................. $700,000 $700,000
======== ========
(a) In July 1997, PCW issued $175.0 million of 11 3/4% Senior Subordinated
Notes ("11 3/4% Notes") due July 15, 2007 with interest payable
semi-annually commencing January 15, 1998. The 11 3/4% Notes contain
covenants that restrict the payment of dividends, incurrence of debt and
sale of assets. The fair market value of these notes approximated $185.5
million as of December 31, 2001.
(b) In June 1998, PCW issued $525.0 million of 9 1/8% Senior Secured Notes ("9
1/8% 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 the sale of
assets. The fair market value of these notes approximated $546.0 million
as of December 31, 2001.
The aggregate maturities of long-term debt are as follows:
DECEMBER 31,
2002 to 2006 .......................................... $525,000
Thereafter ............................................ 175,000
--------
$700,000
========
6. INCOME TAXES
Provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------
($ IN THOUSANDS)
----------------
2001 2000 1999
---- ---- ----
Current:
Federal ............................. $ 8,207 $ 4,238 $ 8,868
State and local ..................... 724 645 782
-------- -------- --------
8,931 4,883 9,650
-------- -------- --------
Deferred:
Federal ............................. (2,939) 8,803 (3,352)
State and local ..................... (297) 1,286 (296)
-------- -------- --------
(3,236) 10,089 (3,648)
-------- -------- --------
Tax provision ........................... $ 5,695 $ 14,972 $ 6,002
======== ======== ========
For the years ended December 31, 2001, 2000 and 1999, the provision for
income taxes differs from the amount computed by applying the federal income tax
rate (34%) because of the following items:
YEAR ENDED DECEMBER 31,
-----------------------
($ IN THOUSANDS)
----------------
2001 2000 1999
---- ---- ----
Tax at statutory federal income tax rate ...... $ 5,658 $ 14,792 $5,678
State taxes, net of federal income tax benefit 499 1305 324
Non-taxable gain on sale of securities ........ (425) (1,034) --
Other ......................................... (37) (91) --
-------- -------- ------
$ 5,695 $ 14,972 $6,002
======== ======== ======
F-10
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and liabilities and the principal temporary differences from
which they arise are as follows:
DECEMBER 31,
------------
($ IN THOUSANDS)
----------------
2001 2000
---- ----
Deferred tax assets:
Allowance for doubtful accounts ...................... $ 443 $ 517
Non-deductible accruals .............................. 122 121
Reserve on long-term investments ..................... 185 185
Unrealized loss on marketable equity securities ...... 74 268
Deferred compensation ................................ 3,430 2,080
-------- --------
Total deferred tax assets .......................... 4,254 3,171
-------- --------
Deferred tax liabilities:
Accumulated depreciation ................................. 19,994 17,942
Licenses ................................................. 258,903 267,213
Deferred expenses ........................................ 3,431 --
Other .................................................... 673 --
-------- --------
Total deferred tax liabilities ..................... 283,001 285,155
-------- --------
Net deferred tax liabilities ............................. $278,747 $281,984
======== ========
7. OTHER INCOME
Other income consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------
($ IN THOUSANDS)
----------------
2001 2000 1999
---- ---- ----
Gain on investments, net ............ $1,824 $6,724 $12,651
Other, net .......................... 5,333 987 (400)
------ ------- --------
$7,157 $7,711 $12,251
====== ======= ========
Other net for the year 2001 includes $4,109 for the net gain on sale of
equity investment in cellular properties.
8. MINORITY INTERESTS
The Company notified the minority interest holders in the subsidiary
corporations, general partnerships and limited partnerships that held certain of
the Company's cellular licenses that effective June 28 and June 30, 2001 these
subsidiaries were either dissolved and/or merged into Palmer Wireless Holdings,
Inc. (a wholly owned subsidiary of the Company). Pursuant to the mergers, the
minority interest holders have the right to receive merger consideration
totaling $16.2 million subject to appraisal rights or other remedies pursuant to
applicable state law. Amounts payable to such minority interest holders may be
finally determined by negotiations between the parties or if such negotiations
fail, by applicable state court proceedings. In addition, the Company expended
approximately $2.8 million for other purchases of minority interests during the
current year period. The Company owns 100% of its telephone operating systems.
The Company accounts for the purchase of minority interests by first eliminating
that portion of the minority interest that represents the Company's
proportionate liability to minority interest holders with the balance being
added to the value of the appropriate license. The Company believes that if the
predecessor company (Palmer Wireless) had owned 100% of the markets that it sold
to the Company, the acquisition price and therefore the value of the acquired
licenses would have increased.
9. SHAREHOLDERS' EQUITY
In October 1994, the Company declared a dividend distribution of one
Common Share Purchase Right (a "Right") for each outstanding share of the
Company's common stock. Until exercisable, the Rights will not be transferable
apart from the common stock. When exercisable, each Right will entitle its
holder to buy one share of the Company's common stock at an exercise price of
$3.51 until October 17, 2004. The Rights will become exercisable only if a
person or group acquires 20 percent of more of the Company's common stock. In
the event the Company is acquired in a merger, each Right entitles the holder to
purchase common stock of the surviving company having a market value of twice
the exercise price of the Rights. The Rights may be redeemed by the Company at a
nominal price prior to the acquisition of 20 percent of the outstanding shares
of the Company's common stock.
F-11
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following represents the various stock splits authorized by the
Company's Board of Directors during the period 1999-2001 including the
approximate number of shares issued. In each case, the stated par value per
share of $.01 was not changed.
HOLDERS OF NUMBER
DATE AUTHORIZED RECORD DATE TYPE OF SHARES
--------------- ----------- ---- ---------
January 4, 1999 January 12, 1999 5 for 4 5,421,000
April 14, 1999 April 21, 1999 5 for 4 6,688,000
August 5, 1999 August 12, 1999 5% stock dividend 2,560,000
All current and prior year earnings (loss) per common share as well as all
other share data have been adjusted to reflect all stock splits and the stock
dividend.
The Company is authorized by its Board of Directors to make purchases of
its common stock from time to time in the market or in privately negotiated
transactions when it is legally permissible to do so or believed to be in the
best interests of its shareholders. During the three years ended December 31,
2001 the Company purchased and retired the following: 1999 3.5 million shares at
an average cost of $16.10 per share; 2000 1.5 million at an average cost of
$21.80 per share; 2001 754,000 at an average cost of $18.01.
In August 1997, in connection with the issuance by a subsidiary of the
Company of the 13 1/2% Senior Secured Discount Notes, the Company issued
Warrants to purchase approximately 2.6 million shares of its common stock at an
exercise price of less than $0.01 per share. The Warrants expire on August 1,
2007. As of December 31, 2001, approximately 37,200 warrants remain unexercised,
which are convertible into approximately 238,000 shares of the Company's common
stock.
In June 1999, the Company allowed the conversion of the outstanding
indebtedness of Holdings into the Company's common stock. According to the
indenture, in the event the daily high price of the Company's common stock
equaled or exceeded 115% of the Exchange Price for 10 out of 15 consecutive
trading days, the Company could convert Holdings' $200 million 11 1/4% Senior
Exchangeable Payable-in-Kind Notes plus accrued interest. The terms of the
indenture were met and the Company issued 17.2 million shares of its common
stock in exchange for Holdings' Notes which included $20.7 million of accrued
interest to the date of conversion.
10. REDEEMABLE PREFERRED STOCK
During 1997, the Board of Directors authorized the issuance of
approximately 728,000 shares of the Company's Series A Preferred Stock, and
364,000 shares of the Company's Series B Preferred Stock to the Company's Chief
Executive Officer, Mr. Price. In June 1998, Mr. Price notified the Company that
he was considering the exercise of his right to have the Series B Preferred
Stock redeemed by the Company. The Series B Preferred Stock had a carrying value
of $10,000. Mr. Price, pursuant to the terms of the Series B Preferred Stock,
would have received a cash payment of $5.0 million in respect of the redemption.
In order to avoid a significant cash payment to Mr. Price at a time when the
Company had substantial indebtedness, Mr. Price and the Board agreed that in
place of such cash payment, the Company would issue 1.3 million shares of its
$.01 par value common stock to Mr. Price in exchange for his shares of Series B
Preferred Stock. The value of the Company's common stock received by Mr. Price
on the date of conversion approximated $5.0 million. The common stock vests over
a ten-year period or immediately upon a change of control or other events.
In June and August 1999, Mr. Price notified the Company that he was
considering the exercise of his right to have the Series A Preferred Stock
redeemed by the Company. The Series A Preferred Stock had a carrying value of
$25,000. Mr. Price, pursuant to the terms of the Series A Preferred Stock, would
have received cash payments totaling $63.0 million in respect of such
redemptions. In order to avoid a significant cash payment to Mr. Price at a time
when the Company had substantial indebtedness, Mr. Price and the Board agreed
that in place of such cash payment, the Company would issue approximately 3.7
million shares of its $.01 par value common stock to Mr. Price in exchange for
approximately 728,000 shares of Series A Preferred Stock. The value of the
Company's common stock received by Mr. Price on the two respective dates of
conversion approximated $63.0 million. The common stock vests over a twenty year
period or immediately upon a change of control or other events.
Accordingly, included in the Consolidated Statement of Operations for the three
years ended December 31, 2001 are charges of $3.6 million for 2001 and 2000 and
$2.0 million for 1999. Included as an offset to shareholders' equity is the
remaining unamortized unearned compensation related to the conversions of the
Class B and Class A Preferred Stock.
F-12
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. STOCK OPTION PLAN
The Company has a long-term incentive plan (the "1992 Long-Term Incentive
Plan"), which provides for granting incentive stock options, as defined under
current law, and other stock-based incentives to key employees and officers. The
maximum number of shares of the Company that are subject to awards granted under
the 1992 Long-Term Incentive Plan is 7,451,117. The exercise of such options
will be at a price not less than the fair market value on the date of grant, for
a period up to ten years.
In accordance with SFAS 123, the fair value of option grants is estimated
on the date of grant using the Black-Scholes option pricing model for proforma
footnote purposes with the following assumptions used for grants; dividend yield
of 0% in all years; risk free interest rate of 6.5% in 2001, 7.5% in 2000 and
6.5% and 5.7%, in 1999 respectively; and an expected life of 7 years for all
years. Expected volatility was assumed to be 26.9%, 44.6%, and 49.0% in 2001,
2000 and 1999, respectively.
A summary of plan transactions is presented in the table below:
WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE
SHARES EXERCISE PRICE FAIR VALUE
------ -------------- ----------
Outstanding at December 31, 1998 ..... 1,676,874 $ 1.68
Granted .......................... 249,115 $ 10.34 $ 6.15
Exercised ........................ (784,542) $ 1.62
Canceled ......................... (500,971) $ 2.13
---------
Outstanding at December 31, 1999 ..... 640,476 $ 1.68
Granted .......................... 145,000 $ 23.02 $ 13.51
Exercised ........................ (284,749) $ 2.17
Canceled ......................... (32,153) $ 13.28
---------
Outstanding at December 31, 2000 ..... 468,575 $ 11.68
Granted .......................... 472,000 $ 30.01 $ 4.41
Exercised ........................ (185,601) $ 6.45
Canceled ......................... (25,100) $ 20.85
---------
Outstanding at December 31, 2001 ..... 729,874 $ 24.54
=========
The following table summarizes information about stock options outstanding at
December 31, 2001:
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING EXERCISABLE
EXERCISE PRICE AT 12/31/01 LIFE AT 12/31/01
-------------- ----------- ------------ -----------
$ 1.64................................................... 45,833 6 years 45,833
$ 3.96................................................... 22,969 6 years 22,969
$ 8.02................................................... 24,609 6 years 24,609
$ 9.05................................................... 6,563 7 years 6,563
$13.90................................................... 29,400 7 years --
$15.20................................................... 10,500 7 years --
$21.00................................................... 21,000 8 years --
$25.56................................................... 61,000 8 years --
$20.75................................................... 31,000 8 years --
$23.31................................................... 5,000 8 years --
$18.50................................................... 22,000 9 years --
$19.11................................................... 50,000 9 years --
$31.00................................................... 200,000 9 years --
$33.00................................................... 200,000 9 years --
-------
729,874
=======
F-13
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As permitted by SFAS 123, the Company has chosen to continue accounting
for stock options at their intrinsic value. Accordingly, no compensation expense
is recognized. Had the fair value method of accounting been applied, the
proforma net income would be as follows:
($ IN THOUSANDS)
2001 2000 1999
---- ---- ----
Net income as reported ..................................... $10,945 $28,376 $10,220
Estimated fair value of the year's net option grants, net of
forfeitures and taxes .................................. 1,242 868 861
------- ------- -------
Proforma net income ........................................ $ 9,703 $27,508 $ 9,359
======= ======= =======
Porforma basic earnings per share .......................... $ .18 $ .49 $ .20
Porforma diluted earnings per share ........................ $ .18 $ .49 $ .20
12. RELATED PARTY TRANSACTIONS
PCW is a party to an agreement with H.O. Systems, Inc. under which H.O.
Systems provides billing and management information services to PCW, and in
respect of which PCW made payments to H.O. Systems during the year ended
December 31, 2001 aggregating approximately $8.5 million. A director of the
Company, and two adult children of the Chairman and CEO of the Company (and
trusts for their children) held indirect equity positions in H.O. Systems. Such
director and one of such adult children served as officers and directors of H.O.
Systems. Such adult child resigned from such positions in November 2001 and in
February 2002, H.O. Systems was sold to an unrelated third party. The Company
continues to use the services provided by H.O. Systems.
13. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and litigation in the ordinary
course of business. In the opinion of legal counsel and management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial statements.
The Company and its subsidiaries lease a variety of assets used in their
operations, including office space. Renewal options are available in the
majority of leases. The following is a schedule of the Company's minimum rental
commitment for operating leases of real and personal property for each of the
five years subsequent to 2001 and in the aggregate.
Year ending December 31,: ($ IN THOUSANDS)
2002....................................... $ 5,919
2003....................................... 4,802
2004....................................... 3,561
2005....................................... 2,283
2006....................................... 916
Thereafter................................. 704
-------
$18,185
========
Rental expense, net of sublease income, for operating leases was
approximately $5.7 million, $5.2 million and $4.0 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
14. SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental disclosure cash flow information for the
years ended December 31, 2001, 2000 and 1999.
($ IN THOUSANDS)
2001 2000 1999
---- ---- ----
Cash paid for:
Income taxes .................... $ 6,390 $ 2,031 $ 280
Interest ........................ $68,469 $68,469 $68,469
F-14
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
Year Ended December 31, 2000
Total revenue (a) ......... $ 65,355 $ 69,759 $ 68,766 $ 66,628 $270,508
Operating income (a) ...... 21,287 26,048 24,064 25,489 96,888
Net income ................ 5,600 7,709 7,862 7,204 28,376
Net income per share:
Basic ................ .10 0.14 0.14 0.13 0.51
Net income per share:
Diluted .............. .10 0.14 0.14 0.12 0.50
Year Ended December 31, 2001
Total revenue ............. $ 65,719 $ 66,246 $ 65,865 $ 65,718 $263,548
Operating income .......... 18,793 18,479 18,701 15,389 71,362
Net income ................ 1,466 5,412 4,330 (263) 10,945
Net income per share:
Basic ................ 0.03 0.10 0.08 (0.01) 0.20
Net income per share:
Diluted .............. 0.03 0.10 0.08 (0.01) 0.20
(a) Prior quarters restated due to adoption of Staff Accounting Bulletin No.
101.
F-15
PRICE COMMUNICATIONS CORPORATION
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
($ IN THOUSANDS)
2001 2000
---- ----
ASSETS:
Cash and cash equivalents .......................... $ 34,232 $ 10,641
Available for sale securities ...................... 906 23,517
Deferred income taxes .............................. 259 453
Prepaid expenses and other current assets .......... -- 12
-------- --------
Total current assets .......................... 35,397 34,623
Investments in and receivables from subsidiaries* .. 147,520 137,844
Deferred income taxes .............................. 2,757 2,080
Other Assets ....................................... 3,542 15,473
-------- --------
$189,216 $190,020
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses .............. $ 649 $ 755
Other current liabilities .......................... 12,923 16,653
-------- --------
Total current liabilities ..................... 13,572 17,408
Shareholders' equity ............................... 175,644 172,612
-------- --------
$189,216 $190,020
======== ========
* Eliminated in consolidation
See accompanying notes to condensed financial statements
F-16
PRICE COMMUNICATIONS CORPORATION
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----
Corporate expenses ............................................ $ (2,471) $ (2,849) $ (4,493)
Non-cash compensation ......................................... (3,649) (3,649) (1,973)
Other income (expense) ........................................ 5,171 913 (494)
Interest income ............................................... 744 1,702 1,563
Interest expense .............................................. (60) (17) (19)
Depreciation and amortization ................................. -- (11) (56)
Net gain on security transactions ............................. 1,824 6,724 12,651
Income of unconsolidated subsidiaries ......................... 9,501 25,479 5,697
-------- -------- --------
Income before income taxes ............................... 11,060 28,292 12,876
Income tax (expense) benefit .................................. (115) 84 (2,656)
-------- -------- --------
Net income ............................................... 10,945 28,376 10,220
Other comprehensive income, net of tax:
Unrealized gains (losses) on available for sale securities (61) (457) 1,291
Reclassification adjustment .............................. 389 (1,291) (2,832)
-------- -------- --------
Comprehensive income .......................................... $ 11,273 $ 26,628 $ 8,679
======== ======== ========
Per share data:
Basic earnings per share ................................. $ .20 $ .51 $ .22
Diluted earnings per share ............................... $ .20 $ .50 $ .22
See accompanying notes to condensed financial statements
F-17
PRICE COMMUNICATIONS CORPORATION
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income ......................................................... $ 10,945 $ 28,376 $ 10,220
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... -- 11 56
Income of unconsolidated subsidiaries .............................. (9,501) (25,479) (5,697)
Non-cash compensation .............................................. 3,649 3,649 1,973
Deferred income taxes .............................................. (677) (3,291) 758
Decrease in prepaid expenses and other assets ...................... 632 12 207
(Decrease) increase in accounts payable and accrued expenses ....... (206) (730) 887
(Decrease) increase in other liabilities ........................... (25) 5,200 6,622
Gain on available for sale of securities ........................... (1,780) (6,724) (12,651)
Gain on sale of equity investment in other cellular properties (net) (4,109) -- --
-------- -------- --------
Total adjustments .............................................. (12,017) (27,352) (7,845)
-------- -------- --------
Net cash (used in) provided by operating activities ............ (1,072) 1,024 2,375
-------- -------- --------
Cash flows from investing activities:
Sale of available for sale securities .............................. 36,119 42,045 21,435
Purchase of available for sale securities .......................... (14,315) (59,556) (7,718)
Sale of equity investment in other cellular properties (net) ....... 15,419 -- --
Purchase of investment in other cellular operations ................ -- -- (11,810)
Other .............................................................. -- (3,000) --
Advances (to) from subsidiaries .................................... (175) 1,231 178
-------- -------- --------
Net cash provided by (used in) investing activities ............ 37,048 (19,280) 2,085
-------- -------- --------
Cash flows from financing activities:
Cash transferred from PCH including cash used by PCC during
the year ....................................................... -- -- 86,588
Dividend received from Company's subsidiary ........................ -- 10,000 --
Repurchase of Company's common stock ............................... (13,583) (32,584) (57,055)
Proceeds from exercise of employee stock options and warrants ...... 1,198 477 230
-------- -------- --------
Net cash (used in) provided by financing activities ............ (12,385) (22,107) 29,763
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .................... 23,591 (40,363) 34,223
Cash and cash equivalents at beginning of year .......................... 10,641 51,004 16,781
-------- -------- --------
Cash and cash equivalents at end of year ................................ $ 34,232 $ 10,641 $ 51,004
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes, net of refunds ................................... $ (23) $ 1,115 $ --
======== ======== ========
Interest ....................................................... $ 60 $ -- $ --
======== ======== ========
See accompanying notes to condensed financial statements
F-18
PRICE COMMUNICATIONS CORPORATION
SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the parent company-only financial statements, the Company's investment
in subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The parent company-only financial
statements should be read in conjunction with the Company's consolidated
financial statements.
Certain reclassifications have been made to the 2000 and 1999 Financial
Statements to conform to the 2001 presentation.
2. ACQUISITION
In May 1997, the Company, through a wholly-owned indirect subsidiary,
entered into an agreement to acquire Palmer Wireless, Inc. The transaction was
consummated on October 6, 1997. See Note 1 of Notes to Consolidated Financial
Statements.
3. AGREEMENT TO CONTRIBUTE BUSINESS OF PRICE COMMUNICATIONS WIRELESS
On December 18, 2001, the Company entered into an agreement (the
"Transaction Agreement") with affiliates of Cellco Partnership (doing business
as Verizon Wireless and referred to herein as "Verizon Wireless") pursuant to
which the Company agreed to contribute substantially all of the assets of PCW to
a new partnership controlled by Verizon Wireless ("New Limited Partnership"),
subject to shareholder approval, in exchange for a Preferred Exchangeable
Limited Partnership Interest (the "Preferred Exchangeable Interest") (the
"contribution transaction"). New Limited Partnership will assume certain
liabilities of PCW relating to the contributed business (including such
liabilities as arise under PCW's 11 3/4% Senior Subordinated Notes due 2007 and
9 1/8% Senior Secured Notes due 2006). The Company expects to account for the
Preferred Exchangeable Interest by applying the equity method of accounting.
If an initial public offering of Verizon Wireless common stock (meeting
certain size requirements) occurs within four years of the contribution
transaction, the Company may elect to exchange such Preferred Exchangeable
Interest for Verizon Wireless common stock during the sixty-day period
immediately following the later of (i) the date of the initial public offering
and (ii) the one-year anniversary of the contribution transaction. Any such
exchange will require the approval of the shareholders of PCC.
If Verizon Wireless does not complete such an initial public offering
prior to the four-year anniversary of the contribution transaction or if Verizon
Wireless does complete such an offering but an exchange into Verizon Wireless
common stock does not occur for other reasons, the Preferred Exchangeable
Interest will be exchanged for Verizon Communications common stock. The timing
of such exchange will depend upon the circumstances but in no event will it
occur after the tenth anniversary of the contribution transaction.
In addition, in certain circumstances (including a change in control of
the Company or a transfer of the Preferred Exchangeable Interest to a secured
creditor of the Company), Verizon Communications will have the right to cause an
exchange of the Preferred Exchangeable Interest into Verizon Communications
common stock, whether or not an initial public offering of Verizon Wireless
common stock has occurred.
The amount of PCW's initial capital account in the partnership will be
approximately $1.15 billion, subject to certain adjustments as defined in the
Transaction Agreement. Pursuant to the partnership agreement of New Limited
Partnership, any profits of New Limited Partnership will be allocated to PCW's
capital account annually up to an amount equal to approximately 4.00% per annum
(subject to downward adjustments relating to the interest rate payable on
certain indebtedness of New Limited Partnership) and it is currently expected
that the maximum preferred return after such adjustment will be approximately
3.6% per annum accreted quarterly on the weighted daily average balance of PCW's
capital account (for a maximum period of four years). Any losses incurred by New
Limited Partnership will be allocated to Verizon Wireless up to an amount equal
to its capital accounts before being allocated to PCW. With respect to each
quarter ending after the second anniversary of the contribution transaction, New
Limited Partnership will distribute to PCW an amount in cash equal to 50% of
PCW's share of any profits of New Limited Partnership. These distributions will
reduce PCW's capital account in New Limited Partnership. The transaction is
structured to be a tax-free exchange of assets under the Internal Revenue Code.
The Company expects to account for the Preferred Exchangeable Interest
using the equity method of accounting. The initial investment on the PCC balance
sheet will equal the credit in the capital account on the partnership's
financial statement. Thereafter, the Company will increase its investment by the
amount of income it will be entitled to based on the availability of profits and
the agreed upon preferred rate of return. Future cash distributions will reduce
the investment balance.
F-19
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
($ IN THOUSANDS)
BALANCE AT ADDITIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO NET OF AT END
DESCRIPTION OF PERIOD EXPENSES RECOVERIES OF PERIOD
----------- --------- -------- ----------- ---------
For the year ended December 31, 2001:
Allowance for doubtful accounts....................... $1,396 $10,741 $(10,941) $1,196
For the year ended December 31, 2000:
Allowance for doubtful accounts....................... $2,003 $ 4,395 $ (5,002) $1,396
For the year ended December 31, 1999:
Allowance for doubtful accounts....................... $1,596 $ 6,303 $ (5,896) $2,003
F-20
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTIONS 13 AND 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PRICE COMMUNICATIONS CORPORATION
By: /s/ ROBERT PRICE
---------------------------
ROBERT PRICE,
CHIEF EXECUTIVE OFFICER
Dated: March 27, 2002
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED. EACH PERSON WHOSE
SIGNATURE APPEARS BELOW HEREBY AUTHORIZES AND APPOINTS ROBERT PRICE AS HIS
ATTORNEY-IN-FACT TO SIGN AND FILE IN HIS BEHALF INDIVIDUALLY AND IN EACH
CAPACITY STATED BELOW ANY AND ALL AMENDMENTS TO THIS ANNUAL REPORT.
SIGNATURE TITLE DATE
--------- ----- ----
BY: /s/ ROBERT PRICE Director, Chief Executive March 27, 2002
--------------------------- Officer and Treasurer
Robert Price (Principal Executive Officer)
BY: /s/ STUART B. ROSENSTEIN Director March 27, 2002
---------------------------
Stuart B. Rosenstein
BY: /s/ ROBERT F. ELLSWORTH Director March 27, 2002
---------------------------
Robert F. Ellsworth
BY: /s/ KIM I. PRESSMAN Director, Executive Vice March 27, 2002
--------------------------- President and Chief
Kim I. Pressman Financial Officer
BY: /s/ JOHN DEARDOURFF Director March 27, 2002
----------------------------
John Deardourff
II-1
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
---
2.1 Agreement and Plan of Merger with Palmer Wireless, Inc.,
incorporated by reference to Registration Statement on Form S-4 of
Price Communications Wireless, Inc. ("Wireless") (File No.
333-36253)
3.1 Restated Certificate of Incorporation of the Registrant as filed with
the Secretary of State of the State of New York on December 29, 1992,
incorporated by reference to Exhibit 3(a) to Registrant's Form 10-K for
the year ended December 31, 1992
3.2 Certificate of Amendment of the Certificate of Incorporation of the
Registrant as filed with the Secretary of State of New York on March
17, 1995, incorporated by reference to Exhibit 3(a)(2) to Registrant's
Form 10-K for the year ended December 31, 1996
3.3 Certificate of Amendment of the Certificate of Incorporation of the
Registrant as filed with the Secretary of State of New York on January
2, 1996, incorporated by reference to Exhibit 3(a)(2) to Registrant's
Form 10-K for the year ended December 31, 1996
3.4 Certificate of Amendment of the Certificate of Incorporation of the
Registrant as filed with the Secretary of State of New York on
October 29, 1997
3.5 Certificate of Amendment of the Certificate of Incorporation of the
Registrant as filed with the Secretary of State of New York on
January 12, 1998
3.6 Restated By-laws of the Registrant, incorporated by reference to
Exhibit 3(a)(2) to Registrant's Form 10-K for the year ended
December 31, 1996
3.7 Certificate of Amendment of the Certificate of Incorporation of the
Registrant as filed with the Secretary of the State of New York on
July 26, 1999
4.1 Indenture to 11 3/4% Senior Subordinated Notes due 2007 between
Wireless and Bank of Montreal Trust Company, as Trustee (including form
of Note), incorporated by reference to Registration Statement on Form
S-4 of Wireless (File No. 333-36254)
4.2 Indenture to 9 1/8% Senior Secured Notes due 2006 among Wireless, each
of the guarantors party thereto and Bank of Montreal Trust Company, as
trustee (including form of Note, form of Guarantee and form of Security
Agreement) incorporated by reference to Registration Statement on Form
S-4 of Wireless (333-64773)
10.1 The Registrant's 1992 Long Term Incentive Plan, incorporated by
reference to Exhibit 10(a) to Registrant's Form 10-K for the year
ended December 31, 1992
10.2 Indenture to 9 1/8% Senior Secured Notes due 2006 among Wireless,
each of the guarantors party thereto and Bank of 10.2 Iontreal Trust
Company, as trustee (including form on Note and Guarantee)
incorporated by reference to registration Statement on Form S-4 of
Wireless (333-64773)
10.3 Indenture to 11 3/4% Senior Subordinated Notes due 2007 between
Wireless and Bank of Montreal Trust Company, as Trustee (including form
of Note), incorporated by reference to Registration Statement on Form
S-4 of Wireless (File No. 333-36254)
10.4 Rights Agreement dated as of October 6, 1994 between the Registrant and
Harris Trust Company of New York, incorporated by reference to Exhibit
4 to Registrant's Form 8-K filed to report an event on October 6, 1994
10.5 Amendment dated January 12, 1995 to Rights Agreement dated as of
October 6, 1994 between the Registrant and Harris Trust Bank of New
York, incorporated by referenced to Exhibit 4 to Registrant's Form 8-K
filed to report an event on January 12, 1995
E-1
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
---
10.6 Amendment dated April 7, 1995 to Rights Agreement dated as of
October 6, 1994 between the Registrant and Harris Trust Bank of New
York
10.7 Amendment dated June 19, 1997 to Rights Agreement dated as of
October 6, 1994 between the Registrant and Harris Trust Bank of New
York
10.8 Amendment dated June 11, 1998 to Rights Agreement dated as of
October 6, 1994 between the Registrant and Harris Trust Bank of New
York, incorporated by reference to Registrant's Form 8-K filed to
report on event on August 11, 1998
10.9 Transaction Agreement dated as of November 14, 2000 among
Registrant, Price Communications Cellular Inc., Holdings, Wireless,
Verizon Wireless, Inc. ("Verizon"), Cellco Partnership ("Cellco")
and VWI Acquisition Corporation ("VWI")
10.10 Transaction Agreement dated as of December 18, 2001 among Price
Communications Corporation, Price Communications Cellular Inc.,
Price Communications Cellular Holdings, Inc., Price Communications
Wireless, Inc., Cellco Partnership and Verizon Wireless of the East
LP, incorporated by reference to Registrant's Form 8-K filed on
January 4, 2002
10.11 Agreement of Limited Partnership of Verizon Wireless of the East LP
among Verizon Wireless of Georgia LLC, Cellco Sub and Price
Communications Wireless, Inc., incorporated by reference to
Registrant's Form 8-K filed on January 4, 2002
10.12 Exchange Agreement dated as of December 18, 2001 among Price
Communications Corporation, Price Communications Cellular Inc.,
Price Communications Cellular Holdings, Inc., Price Communications
Wireless, Inc., Verizon Communications Inc., Verizon Wireless, Inc.,
Cellco Partnership and Verizon Wireless of the East LP, incorporated
by reference to Registrant's Form 8-K filed on January 4, 2002
10.13 Lock-up Agreement dated as of December 18, 2001 among Price
Communications Corporation, Price Communications Cellular Inc.,
Price Communications Cellular Holdings, Inc., Price Communications
Wireless and Verizon Wireless, Inc., incorporated by reference to
Registrant's Form 8-K filed on January 4, 2002
10.14 Lock-up Agreement dated as of December 18, 2001 among Price
Communications Corporation, Price Communications Cellular Inc.,
Price Communications Cellular Holdings, Inc., Price Communications
Wireless, Inc., and Verizon Communications Inc., incorporated by
reference to Registrant's Form 8-K filed on January 4, 2002
10.15 Pledge Agreement dated as of December 18, 2001 among Price
Communications Corporation, Price Communications Cellular Inc.,
Price Communications Cellular Holdings, Inc., Price Communications
Wireless, Inc., Cellco Partnership, Verizon Communications, Inc.,
and Verizon Wireless, Inc., incorporated by reference to
Registrant's Form 8-K filed on January 4, 2002
10.16 Amended and Restated Voting Agreement dated as of December 18, 2001
among Robert Price, Kim Pressman, Cellco Partnership, Verizon Wireless
of the East LP and Verizon Wireless, Inc., incorporated by reference to
Registrant's Form 8-K filed on January 4, 2002
21.1 Subsidiaries of Registrant
23.1 Consent of Public Accountants
99.0 Arthur Andersen's representation
E-2