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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
1-8309
PRICE COMMUNICATIONS CORPORATION
(Exact Name of Registrant as specified in its charter)
New York 13-2991700
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
45 Rockefeller Plaza, 10020
New York, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number (212) 757-5600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $.01 per share New York Stock Exchange
Associated Common Stock Rights Under Rights Plan Boston Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
The number of shares outstanding of the issuer's common stock as of July 31,
2002 was 54,513,301
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PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
(Unaudited) Condensed Consolidated Balance Sheets- June 30, 2002 and December 31, 2001.. I-1
(Unaudited) Condensed Consolidated Statements of Operations - Three months ended
June 30, 2002 and 2001 and six months ended June 30, 2002 and 2001..................... I-2
(Unaudited) Condensed Consolidated Statements of Cash Flows - Six months ended
June 30, 2002 and 2001................................................................. I-3
(Unaudited) Condensed Consolidated Statement of Shareholders' Equity - Six months ended
June 30, 2002 ......................................................................... I-4
Notes to Unaudited Condensed Consolidated Financial Statements.......................... I-5
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................. I-10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.............................. I-18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................................... II-1
ITEM 2. Changes in Securities................................................................... II-1
ITEM 3. Defaults Upon Senior Securities- None................................................... II-1
ITEM 4. Submission of Matters to a Vote of Security Holders..................................... II-1
ITEM 5. Other Information....................................................................... II-1
ITEM 6. Exhibits and Reports on Form 8-K........................................................ II-1
SIGNATURES......................................................................................... II-2
ii
ITEM 1. FINANCIAL STATEMENTS
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
UNAUDITED
---------
JUNE 30, DECEMBER 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 251,903 $ 246,447
Trade accounts receivable, net of allowance
for doubtful accounts 20,923 21,260
Receivable from other cellular carriers 3,895 5,190
Available for sale securities 4,886 906
Inventory 2,794 5,129
Prepaid expenses and other current assets 15,728 10,460
------------- ------------
Total current assets 300,129 289,392
Net property and equipment 136,284 141,230
Licenses, net of amortization 817,186 815,178
Other intangible and other assets, net of amortization 14,596 15,898
------------- ------------
$ 1,268,195 $ 1,261,698
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,874 $ 11,665
Accrued interest payable 11,421 11,421
Accrued salaries and employee benefits 1,051 1,281
Deferred revenue 10,132 9,693
Income taxes payable 14,174 9,621
Minority interests 2,732 3,194
Other current liabilities 5,095 9,876
------------- ------------
Total current liabilities 58,479 56,751
Long-term debt 700,000 700,000
Accrued income taxes - long term 53,165 53,165
Deferred income taxes 277,688 276,140
------------- ------------
Total liabilities 1,089,332 1,086,056
------------- ------------
Commitments and contingencies
Shareholders' equity 178,863 175,642
------------- ------------
$ 1,268,195 $ 1,261,698
============= ============
See accompanying notes to condensed consolidated financial statements.
I-1
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------ -------------- ------------
Revenue:
Service $ 67,932 $ 69,148 $ 134,747 $ 136,968
Equipment sales and installation 4,207 4,544 9,799 8,799
------------- ------------ -------------- ------------
Total revenue 72,139 73,692 144,546 145,767
------------- ------------ -------------- ------------
Operating expenses:
Engineering, technical and other direct 16,471 14,795 30,907 29,104
Cost of equipment 6,729 8,327 15,595 17,174
Selling, general and administrative 18,469 19,146 36,707 36,498
Non-cash compensation-selling, general and administrative 912 912 1,824 1,824
Depreciation and amortization 6,473 12,033 12,690 23,895
------------- ------------ -------------- ------------
Total operating expenses 49,054 55,213 97,723 108,495
------------- ------------ -------------- ------------
Operating income 23,085 18,479 46,823 37,272
------------- ------------ -------------- ------------
Other income (expense):
Interest expense, net (16,742) (15,172) (33,328) (29,263)
Other income, net 49 3,852 387 2,823
------------- ------------ -------------- ------------
Total other expense (16,693) (11,320) (32,941) (26,440)
------------- ------------ -------------- ------------
Income before minority interest
share of income and income taxes 6,392 7,159 13,882 10,832
Minority interest share of income - (331) - (631)
------------- ------------ -------------- ------------
Income before income taxes 6,392 6,828 13,882 10,201
Income tax expense 2,371 1,416 5,147 3,323
------------- ------------ -------------- ------------
Net income 4,021 5,412 8,735 6,878
------------- ------------ -------------- ------------
Other comprehensive income, net of tax
Unrealized gain (loss) on available for sale securities (1,002) 680 (1,032) (2,105)
Reclassification adjustment 5 (141) - (156)
------------- ------------ -------------- ------------
Comprehensive income $ 3,024 $ 5,951 $ 7,703 $ 4,617
============= ============ ============== ============
Per share data:
Basic earnings per share $ 0.07 $ 0.10 $ 0.16 $ 0.12
Weighted average shares outstanding 54,605,000 56,252,000 54,670,000 55,198,000
Diluted earnings per share $ 0.07 $ 0.10 $ 0.16 $ 0.12
Weighted average shares outstanding 54,930,000 56,592,000 55,002,000 55,556,000
See accompanying notes to condensed consolidated financial statements.
I-2
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 8,735 $ 6,878
------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 12,690 23,895
Minority interest share of income - 631
Deferred income taxes 3,214 (675)
Gain on available for sale marketable securities (332) (1,851)
Non-cash compensation 1,824 1,824
Amortization of deferred finance costs 1,216 1,217
Decrease in trade and other receivables 1,632 9,384
(Decrease) increase in accounts payable and accrued expenses (6) 9,073
Decrease in accrued interest payable - (953)
Changes in other accounts (2,559) (1,385)
------------ ------------
Total adjustments 17,679 41,160
------------ ------------
Net cash provided by operating activities 26,414 48,038
------------ ------------
Cash flows from investing activities:
Capital expenditures (7,598) (7,331)
Proceeds from sale of available for sale securities 6,539 12,097
Purchase of available for sale securities (11,752) (12,574)
Purchase of minority interests (2,470) (6,601)
Investment in option contracts 574 -
Decrease in other assets 86 -
------------ ------------
Net cash used in investing activities (14,621) (14,409)
------------ ------------
Cash flows from financing activities:
Purchase and retirement of common stock (6,385) (10,219)
Decrease in other intangible assets and other assets - (275)
Exercise of employee stock options 48 920
------------ ------------
Net cash used in financing activities (6,337) (9,574)
------------ ------------
Net increase in cash and cash equivalents 5,456 24,055
Cash and cash equivalents at the beginning of period 246,447 180,708
------------ ------------
Cash and cash equivalents at the end of period $ 251,903 $ 204,763
============ ============
Supplemental disclosure of cash flow information:
Income taxes paid, net $ 61 $ 2,774
============ ============
Interest paid $ 34,234 $ 34,234
============ ============
See accompanying notes to condensed consolidated financial statements.
I-3
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS)
(UNAUDITED)
Common Stock Accumulated
Class A Additional other
---------------------- paid-in comprehensive Retained
Shares Par Value capital income/(loss) earnings
----------- --------- ---------- ------------- ----------
Balance at December 31, 2001 54,885 $ 550 $ 177,166 $ (129) $ 56,735
Change in unrealized gain (loss) on
available for sale securities net of tax effect (1,032)
Purchase and retirement of treasury stock (353) (3) (6,382)
Exercise of stock options 14 - 48
Deferred compensation expense
associated with the conversion of preferred
stock to common stock
Tax benefit from the exercise of stock options 30
Net income 8,735
----------- --------- ---------- ------------- ----------
Balance June 30, 2002 54,546 $ 547 $ 170,862 $ (1,161) $ 65,470
=========== ========= ========== ============= ==========
Total
Deferred shareholders'
compensation equity
------------ -------------
Balance at December 31, 2001 $ (58,680) $ 175,642
Change in unrealized gain (loss) on
available for sale securities net of tax effect (1,032)
Purchase and retirement of treasury stock (6,385)
Exercise of stock options 48
Deferred compensation expense
associated with the conversion of preferred
stock to common stock 1,825 1,825
Tax benefit from the exercise of stock options 30
Net income 8,735
-
------------ -------------
Balance June 30, 2002 $ (56,855) $ 178,863
============ =============
See accompanying notes to condensed consolidated financial statements.
I-4
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Price
Communications Corporation and its subsidiaries (the "Company" or "Price").
Price Communications Wireless, Inc. ("PCW") is a wholly owned subsidiary of
Price Communications Corporation and represents the operating entity for the
cellular business. All significant intercompany items and transactions have been
eliminated.
The Consolidated Financial Statements have been prepared by the Company
without audit in accordance with the rules and regulations of the Securities and
Exchange Commission. These Condensed Consolidated Financial Statements should be
read in conjunction with the audited Consolidated Financial Statements
previously filed on the Company's Form 10-K and 10-K/A amendment 2. In the
opinion of management, the statements reflect all adjustments necessary for a
fair presentation of the results of interim periods. All such adjustments are of
a normal and recurring nature. The results of operations for any interim period
are not necessarily indicative of the results to be expected for a full year.
(2) AGREEMENT TO CONTRIBUTE COMPANY'S BUSINESS
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"), in exchange for a Preferred Exchangeable Limited
Partnership Interest (the "Preferred Exchangeable Interest") (the "asset
contribution"). It is anticipated that this transaction will close on August
15, 2002. New Limited Partnership will assume certain liabilities of
PCW relating to the contributed business (including such liabilities as arise
under PCW's $175 million 11 3/4% Senior Subordinated Notes due 2007 and
$525 million 9 1/8% Senior Secured Notes due 2006). For financial statement
purposes, the Company expects to record a gain on the transaction during the
third quarter of the current year.
Under a letter agreement dated August 9, 2002, Verizon Communications
agreed to provide Verizon Wireless of the East with $350 million of debt
financing (previously contemplated to be provided by an independent lender)
to be used in connection with the covenant defeasance and redemption of PCW's
Senior Subordinated Notes and Senior Secured Notes referred to above. PCW
agreed to provide its guaranty of such indebtedness, provided that in no
event shall PCW be obligated to make payment under such guaranty until
Verizon Communications shall have exhausted all remedies against Verizon
Wireless of the East. Price has agreed to guarantee PCW's obligations under
such guaranty, and to deposit $70 million in cash or other property to secure
such guaranty. Price will control the investment of the assets deposited in
the collateral account, has the right to withdraw cash dividends or interest
on cash or marketable securities in such account, and has the right, in
addition, to withdraw up to $5 million from such account to cover its
ordinary operating expenses. Price and Verizon Communications have further
agreed that Price will retain its cash existing at the closing of the asset
contribution which is not reserved to satisfy known liabilities existing at
such time (and in any event in a minimum amount of $2 million) for the
purpose of making such investments as Price deems appropriate.
If an initial public offering of Verizon Wireless common stock (meeting
certain size requirements) occurs within four years of the contribution
transaction, Price will have an option, subject to the approval of the
shareholders of Price, to exchange such Preferred Exchangeable Interest for
Verizon Wireless common stock during the sixty-day period which begins upon the
later of (i) the date of the initial public offering and (ii) the one-year
anniversary of the asset contribution.
If Verizon Wireless does not complete such an initial public offering
prior to the four-year anniversary of the asset contribution 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.
In addition, in certain circumstances (including a change in control of
Price 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.
Subject to certain adjustments, the amount of PCW's initial capital
account in the partnership will be approximately $1.112 billion. PCW will
receive taxable allocations of any profits from Verizon Wirelss of the East
equal to its preferred return, which is currently expected to be 2.9% per
annum after giving effect to certain adjustments (which allocations to the
extent not distributed in cash will increase PCW's capital account in Verizon
Wireless of the East). Any losses incurred by the partnership will be
allocated to Verizon Wireless up to an amount equal to its capital accounts
before being allocated
I-5
to PCW. With respect to each quarter ending after the contribution transaction,
the partnership will distribute to PCW an amount in cash equal to 50% of PCWs
share of any profits of the
I-6
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
partnership. These distributions will reduce PCW's capital account in the
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 estimated to be $1.112 billion 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.
The Company believes that a substantial portion of the employees of
PCW will be assumed by Verizon Wireless of the East L.P. and accordingly any
amount of severance payments will not be material.
(3) SHAREHOLDERS' EQUITY
The Company's Board of Directors has authorized stock repurchase
programs of the Company's Common Stock. The Company is authorized to make
such purchases 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 the Company. During the first six months of 2002, the
Company repurchased and retired 349,000 shares at an average price of $18.20
per share.
(4) REVISIONS TO PREVIOUSLY REPORTED AMOUNTS
Based on discussions with the SEC, the Company revised the
classification of incollect roaming revenue to reflect such revenue as part of
revenues from cellular service, rather than as an offset to incollect roaming
costs, as the Company has done historically. This change in classification
resulted in an increase in corporate revenue from cellular service and a
corresponding increase in engineering, technical and other direct costs of $7.4
million and $13.8 million for the three and six month periods ended June 30,
2001, respectively. Total operating income, net income and all other financial
statements are not affected by this change in classification.
(5) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 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 would be reviewed
for impairment and written down and charged 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 were adopted by the Company
on January 1, 2002. The Company does not have any goodwill recorded in its
consolidated financial statements and therefore the adoption of SFAS No. 142 did
not have any effect on its financial position or results of operations as it
relates to goodwill. However, the Company does have a significant intangible
asset in the form of cellular licenses. Based upon the Verizon agreement and the
valuation of PCW's business contained therein, management of the Company does
not believe that there has been an impairment and accordingly has not recorded a
charge against earnings for the three and six month periods ended June 30, 2002.
In addition, the Company believes its cellular licenses qualify as indefinite
life intangibles as defined by SFAS No. 142, and accordingly the current three
and six-month periods do not include any amortization for licenses. Had the
Company adopted SFAS No. 142 at the beginning of 2001, operating income would
have increased by $5,680 and $11,361 to $24,158 and $48,633 for the three and
six month periods ended June 30, 2001, respectively, net income would have
increased by $3,578 and $7,157 to $8,990 and $14,035 for the three and six month
periods ended June 30, 2001, respectively, earnings per share (basic and
diluted) would have increased by $.06 to $.16 for the three month period ending
June 30, 2001, basic earnings per share would have increased by $.14 to $.26 and
fully diluted would have increased by $.13 to $.25 per share for the six month
period ended June 30, 2001.
In August 2001, the FASB issued SFAS No 144 "Accounting for the
Impairment or 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
I-7
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
I-8
PRICE COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
segments of a business to be disposed of but retains APB No. 30's requirement 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. Effective January 1, 2002, the Company adopted
SFAS No. 144 which adoption had no effect on the Condensed Consolidated
Statements of Operations.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has sold put and call options. 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 if and when outstanding were
classified as liabilities with changes in fair values recorded as part of other
income (expense). At June 30, 2002, approximately $647,000 of these contracts
were still open expiring on August 16, 2002 and October 18, 2002.
(7) 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.
I-9
ITEM 2. 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 Condensed Consolidated Financial Statements and
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 of the control of the Company.
References to the "Company" or "Price" in this report include Price
Communications Corporation and its subsidiaries unless the context otherwise
indicates.
OVERVIEW
The Company has been engaged in the construction, development,
management and operation of cellular telephone systems in the southeastern
United States. As of June 30, 2002, the Company provided cellular telephone
service to approximately 573,000 subscribers in Alabama, Florida, Georgia, and
South Carolina in a total of 16 licensed service areas, composed of eight
Metropolitan Statistical Areas ("MSAs") and eight Rural Service Areas ("RSAs"),
with an aggregate estimated population of 3.4 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.
AGREEMENT TO CONTRIBUTE COMPANY'S BUSINESS
On December 18, 2001, the Company agreed to the contribution of
substantially all of the assets of PCW and approximately $150 million in cash
to Verizon Wireless of the East in exchange for a preferred limited
partnership interest in Verizon Wireless of the East. Verizon Wireless of the
East will assume and redeem $700 million of indebtedness of PCW. It is
expected that this transaction will close on August 15, 2002.It is currently
anticipated that after giving effect to certain adjustments provided for in
the transaction agreement governing the asset contribution, PCW's initial
capital account in Verizon Wireless of the East will be approximately $1.112
billion. PCW will receive taxable allocations of any profits from Verizon
Wireless of the East equal to its preferred return, which is currently
expected to be 2.9% per annum after giving effect to certain adjustments
(which allocations to the extent not distributed in cash will increase PCW's
capital account in Verizon Wireless of the East). After the asset
contribution, for a period of up to four years, PCW will receive cash
distributions equal to 50% of its preferred return.
Under a letter agreement dated August 9, 2002, Verizon Communications
agreed to provide Verizon Wireless of the East with $350 million of debt
financing (previously contemplated to be provided by an independent lender)
to be used in connection with the covenant defeasance and redemption of PCW's
Senior Subordinated Notes and Senior Secured Notes referred to above. PCW
agreed to provide its guaranty of such indebtedness, provided that in no
event shall PCW be obligated to make payment under such guaranty until
Verizon Communications shall have exhausted all remedies against Verizon
Wireless of the East. Price has agreed to guarantee PCW's obligations under
such guaranty, and to deposit $70 million in cash or other property to secure
such guaranty. Price will control the investment of the assets deposited in
the collateral account, has the right to withdraw cash dividends or interest
on cash or marketable securities in such account, and has the right, in
addition, to withdraw up to $5 million from such account to cover its
ordinary operating expenses. Price and Verizon Communications have further
agreed that Price will retain its cash existing at the closing of the asset
contribution which is not reserved to satisfy known liabilities existing at
such time (and in any event in a minimum amount of $2 million) for the
purpose of making such investments as Price deems appropriate.
Following consummation of the asset contribution, the preferred
interest, cash reserves to cover liabilities existing at the time of such
cash contribution and the assets in the collateral account referred to above
are expected to be substantially all of the assets of the Company and it is
expected that the Company will own no operating assets. It is anticipated
that substantially all of the Company's income will be derived from cash
dividends and interest on investments in such collateral account and from
cash distributions it is entitled to receive in respect of its preferred
return. The Company does not expect to have any significant operating
expenses other than income taxes attributed to such dividends and interest
and the preferred return. The Company believes that a substantial portion
of the employees of PCW will be assumed by Verizon Wireless of the East L.P.
and accordingly any amount of severance payments will not be material.
Verizon Wireless of the East will be managed by a wholly owned
subsidiary of Cellco Partnership, and PCW will have limited veto rights over
certain transactions in which Verizon Wireless of the East may engage. There can
be no assurance that the managing partner of Verizon Wireless of the East will
be successful in managing Verizon Wireless of the East or that the managing
general partner's interests in managing Verizon Wireless of the East will not
conflict with the interests of the Company.
Following an exchange of the preferred interest for either Verizon
Wireless or Verizon Communications common stock, to the extent that the Company
has not acquired other assets, substantially all of the Company's income will be
derived from dividends that may be paid in respect of the shares of Verizon
Wireless or Verizon Communications common stock received in the exchange. The
Company is not contractually entitled to receive any dividends or distributions
in respect of the shares of common stock it receives in the exchange and
therefore there can be no assurances that either Verizon Wireless or Verizon
Communications will pay dividends to its shareholders.
I-10
MARKET OWNERSHIP
The Company's cellular telephone systems serve contiguous licensed
service areas in Georgia, Alabama and South Carolina. The Company also has a
cellular service area in Panama City, Florida. The following table sets forth,
with respect to each service area in which the Company owns a cellular telephone
system, the estimated population and national MSA ranking of such service area.
MSA ESTIMATED
SERVICE AREA RANK 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
---------
Subtotal................................ 3,288,946
---------
Panama City, FL.............................. 283 148,217
---------
Total................................... 3,437,163
---------
(1) Based on population estimates from U.S. Census 2000.
RESULTS OF OPERATIONS
The following table sets forth for the Company for the periods
indicated, the percentage, which certain amounts bear to total revenue.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2002 2001 2002 2001
----- ----- ----- -----
REVENUE:
Service......................................... 94.2% 93.8% 93.2% 94.0%
Equipment sales and installation................ 5.8 6.2 6.8 6.0
----- ----- ----- -----
TOTAL revenue.............................. 100.0 100.0 100.0 100.0
----- ----- ----- -----
OPERATING EXPENSES:
Engineering, technical and other direct:
Engineering and technical (1)................ 7.2 5.5 7.0 5.3
Other direct costs of services (2)........... 15.6 14.6 14.3 14.6
Cost of equipment (3)........................... 9.3 11.3 10.8 11.8
Selling, general and administrative:
Sales and marketing (4)...................... 9.0 8.3 8.9 8.2
Customer service (5)......................... 7.9 8.5 8.2 7.0
General and administrative (6)............... 8.7 9.2 8.3 9.9
Non-cash compensation........................ 1.3 1.3 1.3 1.3
Depreciation and amortization................... 9.0 16.2 8.8 16.3
----- ----- ----- -----
TOTAL OPERATING EXPENSES................... 68.0 74.9 67.6 74.4
----- ----- ----- -----
Operating income................................ 32.0% 25.1% 32.4% 25.6%
Operating income before depreciation and
amortization and non-cash compen-
sation - adjusted EBITDA (7)................. 42.2% 42.6% 42.4% 43.2%
Operating income before depreciation and
amortization - Price Communications
Wireless, Inc. (8)........................... 44.2% 43.5% 44.0% 44.1%
I-11
----------
(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 costs of incollect roaming, costs of long distance, costs of
interconnection with wireline telephone companies, costs for prepaid airtime
usage and other costs of services.
(3) Consists primarily of the costs of the cellular handsets and accessories
sold.
(4) Consists primarily of salaries and benefits of sales and marketing
personnel, advertising and promotion expenses and employee and agent
commissions.
(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, the
provision for bad debts and other overhead expenses.
(7) Adjusted EBITDA represents operating income before interest expense,
provision for taxes, depreciation and amortization and non-cash
compensation. Adjusted EBITDA should not be considered in isolation or as an
alternative measurement of operating performance or liquidity to net income,
operating income or any other measure of performance under generally
accepted accounting principles. This measure may not be similar to other
company's calculation of adjusted EBITDA. The Company believes that
adjusted EBITDA is viewed as a relevant supplemental measure of
performance in the cellular telephone industry.
(8) Represents operating income before interest expense, provision for income
taxes, and depreciation and amortization of the Company's operating
subsidiary Price Communications Wireless, Inc. It does not include $1.4
million and $2.3 million and $597,000 and $1.3 million for the three months
and six-month periods ended June 30, 2002 and the three and six-month
periods ended June 30, 2001, respectively, of the parent company's general
and administrative expenses.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001
REVENUE. Service revenue totaled $67.9 million for the second quarter of
2002, a decrease of $1.2 million or approximately 1.8% from $69.1 million for
the second quarter of 2001. Included in service revenue is gross access revenue
which increased by $1.7 million because of an increase in the average access per
post-paid subscriber. It was augmented by a reduction of promotional access
credits of $1.5 million and decreased by $674,000 from a reduction in airtime
revenue principally due to migration of the Company's subscribers to higher
monthly access rate plans which incorporate a larger proportion of free airtime
minutes. Prepaid revenue, which is recognized by the Company as the minutes are
used, decreased by $1.4 million as a result of the Company's promotion of a
"local only" rate plan which does not require a contract or credit review and
has unlimited local minutes. That plan became a substitute rate plan for the
prepaid subscriber. The Company's outcollect airtime roaming revenue, which is
revenue that the Company collects from other wireless carrier's subscribers
using their phones in the Company's markets, decreased $1.2 million from $7.6
million for the three months ended June 30, 2001to $6.4 million for the same
period in the current year. The decrease was a result of a reduction in the
reimbursement rate from $0.24 per minute for last year's second quarter to $0.20
for the current three months slightly offset by an increase in minutes of use
for the current three-month period. The Company raised the toll rates it charges
to other cellular carriers which increased outcollect toll revenue by $2.2
million for the current three-month period. Increased competition from other
cellular carriers has prompted the Company to introduce rate plans that extend
the subscriber's home area, which enables the subscribers to call outside of
their immediate area without being charged for roaming or toll. The changes in
rate plans resulted in a decrease of $3.2 million in incollect airtime and a
decrease of $494,000 in toll revenue. Other items of local revenue, principally
feature revenue, increased approximately $400,000 for the current three-month
period.
The Company's computation of average monthly revenue per post-paid
subscriber (based upon service revenue excluding prepaid revenue) includes local
revenue as well as outcollect, but excludes incollect revenue from subscribers,
as this revenue is more than offset in incollect costs which are accounted for
in direct cost of service. Such revenue statistic increased from $45.18 for the
three-month period ended June 30, 2001 to $47.45 for the current three-month
period because of the factors discussed above.
Equipment sales and installation revenue, which consists primarily of
sales of handsets and related accessories to subscribers, decreased from $4.5
million for the second quarter of 2001 to $4.2 million for the same
I-12
period in 2002. During the current three-month period, the Company sold 47,063
handsets of which 86% were digital compared with 55,051 for the same period last
year of which 68% were digital. The decrease in units sold was the principal
reason for the decrease in equipment revenue. Installation fees for both
three-month periods were not material.
OPERATING EXPENSES. Total operating expenses decreased by $6.1 million
to $49.1 million for the current three-month period from $55.2 million for the
three-month period ended June 30, 2001. As a percentage of total revenue the
current three months' operating expenses amounted to 68.0% compared with 74.9%
for the same period in 2001.
Engineering, technical and other direct costs of service increased by
$1.7 million from $14.8 million for the second quarter of 2001 to $16.5 million
for the second quarter of 2002. Included in engineering, technical and other
direct is the cost of incollect roaming which represents the amount paid to
other cellular carriers for the Company's subscribers roaming in those carriers'
markets. The current three-month period resulted in an increase of $383,000 for
incollect air and toll. The increase is a result of an increase in minutes of
use (3.5 million) offset by a reduction in the reimbursement rate ($0.27 for the
current three months compared with $0.30 for the prior quarter). The reduced
rate that the Company pays to these other carriers affects the amount of roaming
revenue collected since the reimbursement the Company received for outcollect
roaming also decreased during the current period. Costs to operate the Company's
cellular system such as fixed span line costs and cell site rents and utilities
accounted for an additional $1.8 million. Due to the reduction in prepaid
customer usage (see revenue analysis above), the Company was able to reduce cost
of prepaid service by $497,000.
Cost of equipment decreased by $ 1.6 million from $8.3 million for the
second quarter of 2001 to $6.7 million for the second quarter of 2002. The
decrease resulted from a decrease in units sold during the current quarter and
an increase in the percentage of digital phones sold during the current
three-month period. As a result of technical innovations in the wireless
industry, the cost of digital phones has decreased from the unit costs of a year
ago. 86% of the handsets sold during the current quarter were digital with an
average cost of $107 compared to 54% at an average cost of $120 for the three
months ended June 30, 2001. For the current three-month period, the Company
recovered 63% of the cost of equipment compared with a recovery of 55% for the
three months ended June 30, 2001.
Selling, general and administrative expenses ("SG&A") decreased
$600,000 from $19.1 million in the second quarter of 2001 to $18.5 million
for the same period of the current year. As a percentage of revenue, SG&A for
the current three-month period is 25.6% of revenue compared with 26.0% for
the same three-month period in 2001.
Sales and marketing increased $332,000 from $6.1 million for the second
quarter of 2001 to $6.4 million for the current three-month period principally
due to increased sales commissions. Commissions paid to the Company's internal
sales force decreased for the current three-month period by $136,000 as
non-agent gross cellular additions decreased approximately 14,000. Outside
agents' commissions however, increased $608,000 for the current quarter as gross
cellular adds through agents increased 5,700. Agents' commissions are higher
than those paid by the Company's internal sales force. The cost to add a
gross subscriber, which consists of the net equipment loss and sales and
marketing expenditures increased from approximately $175 for the three-month
period ending June 30, 2001 to $186 for the current three-month period.
Customer service costs (also included in SG&A), which are principally
comprised of billing and payroll and related benefits, amounted to $5.7 million
compared with $6.2 million for the same period in 2001. The $500,000 net cost
savings is primarily a function of decreased payroll and related benefits and a
decrease in temporary employment.
General and administrative expenses, the final component of SG&A,
decreased from $6.8 million for the prior three month period to $6.3 million for
the current three month period. The net $500,000 decrease primarily resulted
from a $1.5 million decrease in the provision for doubtful accounts from $2.5
million for the three months of last year to $944,000 for the current
three-month period, partially offset by increases in corporate salaries and
benefits. The decrease in the provision for bad debts is a result of improvement
in the billing system, as well as the benefit derived from centralizing the
collection process.
I-13
During the first quarter of 2002, the company adopted Financial
Accounting Standard No. 142 "Goodwill and Other Intangible Assets". Management
believes the Company's cellular licenses qualify as indefinite life intangibles
which are not subject to amortization as of January 1, 2002. Accordingly, the
current three-month period does not include any amortization for cellular
licenses, which amounted to $5.7 million for the three months ended June 30,
2001, and is included in depreciation and amortization.
Operating income increased to $23.9 million for the second quarter of
2002 from $18.5 million for the second quarter of 2001. Operating income before
depreciation and amortization and non-cash compensation was 42.2% of revenue for
the current quarter compared with 42.6% for the second quarter of 2001. The
decrease in operating margin is a result of the items discussed above.
Management's continuing concentration on cost controls, maintained the Company's
low operating cost per subscriber (total operating costs before non-cash
compensation, depreciation and amortization and parent company overhead) of
$20.99 for the current three-month period compared with $22.62 for the same
period of the prior year.
NET INTEREST EXPENSE, OTHER INCOME, INCOME TAXES AND NET INCOME. Net
interest expense increased by $1.6 million for the second quarter of 2002
amounting to $16.7 million for the three-months ended June 30, 2002 compared
with $15.2 million for the comparable prior three-month period. The increase
in net interest expense is a result of the decrease in interest income as a
result of the lower interest rates earned during the current three-month
period. Other income for both three-month periods consists principally of
gains on security transactions of PCC. During the second quarter of 2001, the
Company realized approximately $3.0 million of gains from put and call
transactions on the Company's stock, which are not taxable to the Company. The
current period's income tax expense of $2.3 million compared with a provision
of $1.4 million for the three-month period in 2001 is a result of the higher
financial statement taxable income for the current three month period
compared with the three-months ended June 30, 2001 combined with the
non-taxable security transactions described above during the second quarter
of 2001.
The net income for the three-month period ended June 30, 2002 of $4.0
million compared with net income for the second quarter of 2001 of $5.4 million
is a function of the items discussed above.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001
REVENUE. Service revenue amounted to $134.7 million for the first six
months of 2002, a decrease of $2.3 million from $137.0 million for the same
period in 2001. Access revenue increased by $5.3 million principally as a result
of the increase in the average access revenue per post-paid subscriber. In
addition, a reduction of $2.1 million in promotional access credits further
contributed to the increase in access revenue. Airtime revenue from post-paid
subscribers decreased by $995,000 principally as a result of subscribers
migrating to rate plans that feature higher monthly access charges with an
increased amount of free airtime minutes available. Prepaid revenue, which is
recognized by the Company as the minutes are used, decreased by $2.5 million for
the current six-month period. The Company's promotion of a local only rate plan
which does not require a contract or credit review and has unlimited local
minutes of use became a substitute for the prepaid user, resulting in a
reduction of prepaid revenue. The Company's outcollect roaming airtime revenue,
which is revenue that the Company collects from other wireless carrier's
subscribers using their phones on the company's system, decreased $2.4 million
from $15.1 million for the six-month period ended June 30, 2001 to $12.7 million
for the current six-month period. An increase in the number of outcollect
minutes of use from 59.7 million for the six-month period ended June 30, 2001,
to 60.0 million for the current six-month period was offset by the reduction in
the average reimbursement rate from other cellular carriers from $0.25 in 2001
to $0.21 for the current-six month period. The Company raised the toll rates it
charges to other cellular carriers resulting in an increase of roaming toll
revenue of $3.7 million for the current six-month period. Because of increased
competition in the wireless business, the Company has introduced additional rate
plans, which expand the subscriber's home calling area and enable the subscriber
to call outside of their immediate area without being charged for roaming or
toll. These changes in rate plans resulted in a decrease of $5.4 million in
incollect airtime and a decrease of $1.2 million in toll revenue. Other items of
local revenue, principally feature revenue, increased by approximately $1.3
million for the current six-month period.
The Company's computation of average monthly revenue per post-paid
subscriber (based upon service revenue excluding prepaid revenue) includes local
revenue as well as outcollect revenue, but excludes incollect revenue from
subscribers, since this revenue is more than offset in incollect costs which are
accounted for in direct
I-14
cost of service. The average monthly revenue per post-paid subscriber increased
from $44.66 for the six-month period ended June 30, 2001 to $46.64 for the
current six-month period because of the factors discussed above.
Equipment sales and installation revenue, which consists primarily of
sales of handsets and related accessories to subscribers increased $1.0 million
from $8.8 million for the six months ended June 30, 2001 to $9.8 million for the
same period in the current year. For the six-month periods ended June 30, 2002
and 2001, there was approximately the same number of units sold and upgraded
(143,253 for the current six months compared with 144,848 for last year's six
month period). The number of digital units sold in the current six-month period
amounted to 85% of the total compared with only 54% for last year's six month
period. The average selling price for a digital handset is higher than that for
an analog unit, which accounts for the increase in equipment revenue.
OPERATING EXPENSES. Total operating expenses decreased by $10.8 million
to $97.7 million for the current six-month period from $108.5 million for the
six-month period ended June 30, 2001. As a percentage of total revenue the
current six months' operating expenses amounted to 67.6% compared with 74.4% for
the same period in 2001.
Engineering, technical and other direct costs of service increased $1.8
million to $30.9 million for the current six months from $29.1 million for the
same period in 2001. Included in engineering, technical and other direct costs
of service is the cost of incollect roaming which represents the amount paid to
other cellular carriers for the Company's subscribers roaming in those carriers'
markets. The current six-month period resulted in a decrease of $580,000 for
incollect air and toll which is a function of an increase in the amount
of minutes used (6.4 million minutes) offset by a decrease in the reimbursement
rate ($0.265 for the current six month period compared with $0.324 for the same
period last year). The reduction in rate that the company pays to other carriers
for the current period effects the amount of roaming revenue collected from
these same carriers since their reimbursement rate to the company also decreased
during the current period. Additional costs to operate the Company's cellular
system such as fixed span line costs and cell site rent and utilities accounted
for an additional $3.6 million. Due to the reduction in prepaid customer usage
(see revenue analysis above), the Company was able to reduce the cost of
operating the prepaid system by $1.3 million during the current six-month
period.
The cost of equipment was lowered from $17.2 million for the six-month
period ended June 30, 2001 to $15.6 million for the current six-month period.
Although there were 1,595 less handsets sold or upgraded during the current
six-month period, the principal reason for the decrease was the reduction of the
unit cost for digital handsets during the current six-month period. As a result
of technical innovations, the average cost of a digital handset was lowered from
$123 for last year's six months period to $103 for the current six-month period.
The percentage of equipment cost recovered increased from 51% for the six-month
period in 2001 to 63% for the current six months.
Selling, general and administrative expenses ("SG&A") increased $209,000
from $36.5 million for the first six months of 2001 to $36.7 million for the
same period of the current year. As a percentage of revenue, SG&A for the
current six-month period is 25.4% of revenue compared with 25.0% for the same
six-month period in 2001.
Sales and marketing increased $978,000 from $11.9 million for the
six-month period ending June 30, 2001 to $12.9 million for the current six-month
period principally due to increases in sales commissions and to a lesser extent
increases in advertising expenditures. During the current year, the Company has
relied more heavily on outside agents to increase its subscriber base.
Approximately 30% of the current six-month customer additions are from agents as
compared to 13% for the prior six-month period. Agents traditionally are paid at
a higher rate than the Company's internal sales force, which accounts for the
additional $780,000 in agent commissions during the current six-month period.
The cost to add a gross subscriber, which includes sales and marketing costs
combined with the loss on equipment sales, decreased from $173.41 for the
six-month period ending June 30, 2001 to $156.48 for the current six-month
period.
For the current six-month period, customer service costs (also included
in SG&A), primarily subscriber billing costs and payroll and related benefits,
amounted to $11.8 million for the current six-month period compared to $10.1
million for the same period in 2001 or an increase of $1.7 million. During the
last quarter of 2000, the Company changed its billing vendor and encountered
various problems during the conversion to the new system. Because of these
problems and the resultant failure to mail subscribers' bills on a timely basis,
the company's provision for bad debts increased significantly (see analysis of
general and administrative expenses below). The
I-15
billing vendor acknowledged its role in creating the problem by issuing a $2
million credit to the Company in the first quarter of 2001. The prior year
credit is the principal reason for the $1.7 million increase in customer
service costs.
General and administrative expenses (excluding customer service),
decreased $2.4 million from $14.4 million for the prior six month period to
$12.0 million for the current six month period. The decrease was primarily a
result of a $3.7 million decrease in the provision for doubtful accounts from
$5.6 million for the six-month period ended June 30, 2001 to $1.8 million for
the current six-month period. The decrease in the provision is a result of the
improvement in the billing system, as well as the benefit derived from the
centralization of the collection process. Somewhat reducing this benefit was an
increase in corporate expenses, principally payroll and related benefits.
General and administrative expenses, excluding customer service, decreased from
9.9% of total revenue for the six-month period of the prior year to 8.3% for the
current six-month period.
During the first quarter of 2002, the Company adopted Financial
Accounting Standard No. 142 "Goodwill and Other Intangible Assets", Management
believes its cellular licenses qualify as indefinite life intangibles which are
not subject to amortization as at January 1, 2002. Accordingly, the current
six-month period does not include any amortization for licenses, which amounted
to $11.4 million for the six months ended June 30, 2001 and was included in
depreciation and amortization.
Operating income increased to $46.8 million for the six-month period
ending June 30, 2002 from $37.3 million for the same period in 2001 or an
increase of $9.5 million. Operating income before depreciation and amortization
and non-cash compensation amounted to 42.4% as a percentage of total revenue for
the current six-month period compared with 43.2% for the same period of the
prior year. The decrease in operating margin is attributable to the items
discussed above. The Company, as a result of strong cost controls, was able to
maintain its low operating cost per subscriber (total operating costs before
non-cash compensation, depreciation and amortization and parent company
overhead), which amounted to $20.63 for the current six-month period, compared
to $22.40 for the same period last year.
NET INTEREST EXPENSE, OTHER INCOME, INCOME TAXES AND NET INCOME. Net
interest expense increased to $33.3 million for the six months of 2002 from
$29.3 million for the same period in 2001. The $4.0 million increase in net
interest expense is a result of the decrease in interest income as a result of
the lower interest rates earned during the current six-month period. Other
income for both six-month periods consists primarily of gains on security
transactions of PCC. During the six-month period ended June 30, 2001, the
Company realized approximately $1.2 million of gains from put and call
transactions on the Company's stock, which are not included in the provision for
taxes. The current six month period's income tax expense of $5.1 million
compared with the tax provision of $3.3 million for the six month period in
2001, is a result of the higher financial statement taxable income for the
current six-month period compared with the financial statement taxable income
for the prior six-month period and certain non taxable security transactions.
The net income for the current six-month period of $8.7 million compared
with net income of $6.9 million for the six-month period ended June 30, 2001 is
a function of the items discussed above.
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 the issuance of debt and by
operating cash flow. During the current six-month period, the Company generated
$26.4 million of cash flow from operating activities as shown in the Condensed
Consolidated Statements Of Cash Flows. The Company's EBITDA (earnings before
interest, depreciation and amortization, non-cash compensation and taxes) was
$61.3 million for the six-month period ending June 30, 2002. The Company's debt
service requirements for the current year consist of cash interest payments of
$68.5 million, of which $34.2 million has been paid through June 30, 2002. The
remaining cash interest requirements are approximately $10.3 million in the
third quarter and $24.0 million in the fourth quarter. Based upon the Company's
current ability to generate operating cash flow combined with its available cash
of $251.9 million, there does not appear to be a necessity to provide additional
funding for the foreseeable future. The Company's outstanding debt instruments
consist of $525 million 9 1/8% Senior Secured Notes due December 15, 2006 and
$175 million 11 3/4% Senior Subordinated Notes due July 15, 2007. The 9 1/8%
notes are callable after June 15, 2002 and the 11 3/4% notes are callable after
July 15, 2002. Both of these
I-16
instruments contain covenants that restrict the payment of dividends, incurrence
of debt and sale of assets, among other things.
From the asset contribution transaction to the exchange of the
preferred interest for either the common stock of Verizon Wireless Inc. or
Verizon Communications, the preferred interest, and the investments in the
collateral account described under "Agreement to Contribute Company's
Business" above are expected to be substantially all of the Company's assets.
The Company will receive taxable allocations of any profits from Verizon
Wireless of the East equal to its preferred return (which allocation to the
extent not distributed in cash, will increase Price Communications Wireless'
capital account in Verizon Wireless of the East). After the asset
contribution for a period of up to four years, PCW will receive cash
distributions equal to 50% of its preferred return. The Company currently
expects to retain approximately $73 million of total net cash and securities
(assuming a closing on August 15, 2002), of which $70 million will be
deposited in the collateral account. During the period following the asset
contribution the Company does not expect to have sources of cash other than
the cash remaining after the asset contribution reserved for liabilities
existing at the time of such contribution, the cash distributions from
Verizon Wireless of the East, income from cash dividends and interest on
investments in the collateral account, an aggregate of $5 million which the
Company is authorized to withdraw from the collateral account to cover its
ordinary operating expenses, and any funds that the Company may be able to
borrow. The Company currently anticipates that its cash and income will be
sufficient to meet its cash obligations during the period. There is a risk,
however, if significant unexpected cash needs arise (such as a demand for
payment under the Company's guaranty to Verizon Communications), that its
funds (including distributions, interest and dividends) will be insufficient
to meet its obligations and if the Company needs to borrow money to meet such
obligations, it may be unable to do so or forced to do so on unfavorable
terms.
If the asset contribution is not completed, the Company would require
certain additional capital expenditures over the next few years both to comply
with government mandated projects, such as emergency 911 service and local
number portability, and to upgrade its technology to global system for mobile
communications/general packet radio service (GSM/GPRS) as a step toward
provision of 3G (third generation) services to its customers, similar to the
recent announcement by AT&T Wireless of its intention to add a GSM-overlay to
its network. As a result, the Company estimates that its capital expenditures
for the years 2003 and 2004 could increase to approximately $52 million and $58
million, respectively. The Company's operating cash flow and cash on hand should
be sufficient to finance these expenditures.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information, the instructions to Form
10-Q and Article 10 of Regulation S-X. The preparation of our financial
statements requires us to make estimates that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosures of contingent
assets and liabilities. We base our accounting estimates on historical
experience and other factors that are believed to be reasonable under the
circumstances. However, actual results may vary from these estimates under
different assumptions or conditions. The following is a summary of our critical
significant accounting policies and estimates:
FINANCIAL INSTRUMENTS. At June 30, 2002 and December 31, 2001,
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. 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 (if
unsettled at the balance sheet date) with changes in fair values recorded as
part of other income (expense).
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
I-17
Company has not recorded any goodwill. Licenses are not amortized since the
company considers them indefinite life assets as defined by SFAS No. 142.
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 discounted 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.
REVENUE RECOGNITION. Service revenue from cellular operations for
prepaid and post paid customers includes local subscriber revenue and outcollect
roaming revenue.
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 six months
ended June 30, 2002 and for the year ended December 31, 2001 include a
deferral of unearned revenue. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company utilizes fixed rate debt instruments 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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10(a) Amendment No. 1 to the Transaction Agreement with Cellco
Partnership and Verizon Wireless of the East LP, incorporated by reference
from registrant's Form 8-K filed on April 22, 2002.
(b) REPORTS ON FORM 8-K
Form 8-K filed on April 22, 2002 relating to Amendment No. 1 to the
Transaction Agreement with Cellco Partnership and Verizon Wireless of the East
LP.
EXHIBIT INDEX
10(a) Amendment No. 2 to the Transaction Agreement with Cellco
Partnership and Verizon Wireless of the East LP, incorporated by reference
from registrant's Form 8-K filed on April 22, 2002.
II-1
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has fully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRICE COMMUNICATIONS CORPORATION
Date: August 14, 2002 By: /s/ Robert Price
-------------------------
Robert Price
Director, President and Treasurer
By: /s/ Kim I Pressman
-------------------------
Kim I Pressman
Vice President and Chief Financial Officer
By: /s/ Michael Wasserman
-------------------------
Michael Wasserman
Vice President and Chief Accounting Officer
II-2