UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________ to __________.
Commission File Number: 000-27901
TeleCorp PCS, Inc.
Exact name of registrant as specified in charter
DELAWARE 54-1872248
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
and the following subsidiary:
TeleCorp Communications, Inc.
DELAWARE 52-2105807
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
-----------------
1010 N. Glebe Road, Suite 800
Arlington, VA 22201
(Address of principal executive office)
(703) 236-1100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act: None Securities registered pursuant to
Section 12(g) of the Act:
Class A Voting Common Stock, par value $0.01
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Class A Common Stock held by
non-affiliates of the Registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate) on March 26, 2000, was
$4,530,016,950 based on the last reported sale price on the Nasdaq National
Market.
As of March 26, 2000, the Registrant had 86,698,889 shares of Class A
Common Stock outstanding.
Documents Incorporated By Reference
The following documents (or parts thereof) are incorporated by reference into
the following parts of this Form 10-K: Certain information required in Part III
of this Form 10-K is incorporated from the Registrant's Proxy Statement for the
2000 Annual Meeting of Stockholders to be held on May 24, 2000.
Forward-Looking Statements or Information
This Form 10-K, future filings of the registrant, press releases of the
registrant, and oral statements made with the approval of one of our authorized
executive officers may contain forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1955. In connection therewith,
please see the cautionary statements contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Forward Looking
Statements: Cautionary Statements" and elsewhere in this report which identify
important factors which could cause actual results to differ materially from
those in any such forward-looking statements.
PART I
Item 1. Business.
Overview
We are the largest AT&T Wireless affiliate in the United States in terms of
licensed population, with licenses covering approximately 16.7 million people.
We provide wireless personal communication services, or PCS, in selected markets
in the south-central and northeast United States and in Puerto Rico,
encompassing eight of the 100 largest metropolitan areas in the United States.
Commencing with the launch of operations in the New Orleans market in February
1999, we have successfully launched our services in 26 markets. At December 31,
1999, we had more than 142,000 customers and our networks covered approximately
66% of the population where we held licenses.
We entered into a venture with AT&T in July 1998 under which AT&T
contributed PCS licenses to us in exchange for ownership in our company. We are
AT&T's exclusive provider of wireless mobility services, using equal emphasis
co-branding with AT&T, in our covered markets, subject to AT&T's right to resell
services on our network. We have the right to use the AT&T brand name and logo
together with our SunCom brand name and logo, giving equal emphasis to each in
our covered markets. We are AT&T's preferred roaming partner for digital
customers in our markets. Additionally, our relationship with AT&T allows us to
provide coast-to-coast coverage to our customers.
Our PCS licenses include both major population centers as well as popular
vacation destinations, such as:
o San Juan, Puerto Rico and the U.S. Virgin Islands;
o New Orleans and Baton Rouge, Louisiana;
o Memphis, Tennessee;
o Little Rock, Arkansas;
o Manchester, Concord and Nashua, New Hampshire; and
o Worcester, Cape Cod, Martha's Vineyard and Nantucket, Massachusetts.
We market our services through our own stores, retail outlets, through our
direct corporate and telemarketing sales forces and on the Internet through our
website. We have a strong distribution presence in our markets through our
company-owned stores and retail outlets where consumers can purchase our
services, including Best Buy, Circuit City, Office Depot, Office Max, Staples
and Radio Shack. Our affiliation with AT&T enables us to leverage their
marketing and sales efforts in our markets.
Recent Developments
On February 28, 2000, we agreed to merge with Tritel, Inc. through a merger
of each of us and Tritel into a newly formed subsidiary of a new holding
company. The new holding company, to be called TeleCorp PCS, Inc., will be
controlled by our voting preference common stockholders, and we and Tritel will
become subsidiaries of the holding company. In connection with the merger, AT&T
Wireless agreed to contribute certain wireless rights and commitments in the
Midwestern United States, cash of approximately $20 million and a two year
extension of its brand license in exchange for approximately $410 million worth
of common shares in the newly formed company. Additionally, in a separate
transaction, we agreed to exchange our licenses in several New England markets
for certain wireless properties or rights to acquire additional wireless
properties of AT&T Wireless in the Milwaukee, Wisconsin and Des Moines, Iowa
markets, a cash payment of approximately $80 million and the right to extend the
term and geographic coverage of AT&T Wireless' license and roaming agreements
with us to include the new markets, either through amending our existing
agreements or entering into new agreements with the holding company on
substantially the same terms as our existing agreements. AT&T has also agreed to
extend its affiliation agreements to include licenses covering an additional 1.4
million people in the Midwest if we acquire them.
The proposed merger has been unanimously approved by our and Tritel's board
of directors, with three of our directors abstaining. In addition, shareholders
with greater than 50% of the voting power of each company have agreed to vote in
favor of the merger. The merger is subject to regulatory approval and other
conditions and is expected to close in the last quarter of 2000.
The Wireless Communications Industry
Wireless communications systems use a variety of radio airwaves to transmit
voice and data signals. In the wireless communications industry, applications
that transmit these signals include one-way radio applications, such as paging
or beeper services, and two-way radio applications, such as PCS, cellular
telephone and other technologies. Each application is licensed and operates in a
distinct radio airwave block. The two principal services licensed by the Federal
Communications Commission, or FCC, for transmitting voice and data signals are
PCS and cellular. PCS is a term commonly used to refer to service carried over
the 1850 Megahertz (or MHz) to 1990 MHz portion of the radio airwaves. Megahertz
is a method of measuring radio airwaves. Cellular is a term commonly used to
refer to service carried over the 824 MHz to 893 MHz portion of the radio
airwaves. Cellular service systems were originally analog-based systems,
although digital technology has been introduced in some markets. PCS systems use
digital technology. Analog technology has several limitations, including lack of
privacy and limited transmission capacity. Digital systems convert voice or data
signals into a stream of digits that is compressed before transmission, enabling
a single radio channel to carry multiple simultaneous signal transmissions. This
enhanced capacity, along with improvements in digital signaling, allows
digital-based wireless technologies to offer new and enhanced services, such as
greater call privacy and robust data transmission features, including mobile
office applications like facsimile, e-mail and wireless connections to
computer/data networks, including the Internet.
Operation of Wireless Communications Systems
Wireless communications system service areas, whether PCS, cellular or
other technologies, are divided into multiple units, each containing a
transmitter, a receiver and signaling equipment to transmit wireless signals to
individual phones. This equipment is connected by telephone lines or microwave
signals to call connection equipment that uses computers to control the
operation of the communications system for the entire service area. The call
connection equipment controls the connection of calls and the connection of the
wireless network to local telephone systems and long distance carriers. As a
customer's handset travels, the system
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controls the transfer of calls from one equipment site to another, coordinates
calls to and from handsets, allocates calls among the network equipment sites
within the system and connects calls to the local telephone system or to a long
distance telephone carrier. Wireless communications providers must establish
agreements with local and long distance carriers that allow them to pass calls,
or interconnect, thereby integrating their system with the existing
communications system.
Because the signal strength of a transmission between a handset and a
network equipment site declines as the handset moves away from the originating
network equipment site, the wireless network monitors the signal strength of
calls in progress. When the signal strength of a call declines, the call
connection equipment may transfer the call to another network equipment site
where the signal is stronger. If a handset leaves the service area of a PCS or
cellular system, the call is disconnected unless there is a technical connection
with the adjacent system. If there is a technical connection with the adjacent
system, the customer may roam onto the adjacent system.
Although PCS and cellular systems use similar technologies and hardware,
they operate on different portions of the airwaves and use different technical
and network standards. The use of advanced handsets makes it possible for
customers using one type of system to roam on a different type of system outside
of their service area, and to transfer calls from one type of system to another
if the appropriate agreements are in place and the networks are properly
configured to transfer calls from one system to the next.
Currently, PCS systems operate under one of three principal digital signal
transmission technology standards that various operators and vendors have
proposed for use in PCS systems: time division multiple access (or TDMA), code
division multiple access (or CDMA) or global system for mobile communications
(or GSM). TDMA and GSM are both time division-based technologies, but are
incompatible with each other and with CDMA. Accordingly, a customer of a system
that uses TDMA technology is unable to use a TDMA handset when travelling in an
area not served by TDMA-based PCS operators, unless the customer carries a
special handset that permits the customer to use the analog or digital system on
the cellular portion of the airwaves in that area and the appropriate agreements
are in place.
If a PCS system operated by the service provider or covered by a roaming
agreement is operating in the area, the call will be placed via this system. If
there is no PCS system providing coverage, the call will be placed through a
digital system on the cellular portion of the airwaves operating in the area and
providing coverage to the user, and if no digital system on the cellular portion
of the airwaves is providing coverage, the call will be connected over an analog
system that uses the cellular portion of the airwaves providing coverage.
Advanced handsets allow for a call in progress to be handed off to an adjacent
system, without interruption, if appropriate agreements are in place, whereas
earlier generations of handsets would cut off the call when the handset left the
coverage of one system, requiring the customer to redial the call using the
adjacent system.
Our Revenue Sources
We derive our revenue from:
o Services. The various types of revenue associated with PCS for our
customers include monthly recurring access charges and monthly
non-recurring airtime charges for local, long distance and roaming
airtime used in excess of pre-subscribed usage. Our customers' charges
are rate plan-dependent, based on the number of pooled minutes
included in their plans. Service revenue also includes monthly
non-recurring airtime usage associated with our prepaid customers and
non-recurring activation and de-activation service charges.
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o Roaming Charges. We charge monthly, non-recurring, per minute fees to
other wireless companies whose customers use our network facilities to
place and receive wireless calls.
o Equipment Sales. We sell wireless personal communications handsets and
accessories that are used by our customers in connection with our
wireless services.
Strategic Alliance with AT&T
We have a strategic alliance with AT&T Wireless which provides us with many
business, operational and marketing advantages. We are AT&T's exclusive provider
of wireless mobility services using equal emphasis co-branding with AT&T in our
covered markets, subject to AT&T's right to resell services on our network.
We have the right to use the AT&T brand name and logo together with the
SunCom brand name and logo in our markets, giving equal emphasis to each. We are
also AT&T's preferred roaming partner for digital customers in our markets and
outside our markets, our customers can place and receive calls in AT&T Wireless'
markets and the markets of AT&T Wireless' other roaming partners. We receive
preferred terms on selected products and services, including handsets,
infrastructure equipment and back office support from companies who provide
these products and services to AT&T. In addition, we benefit from AT&T's
nationwide marketing and advertising campaigns, including the success of the
AT&T Digital One RateSM plans, in the marketing of our own national SunRate
plans and we are working with AT&T's national sales representatives to jointly
market our wireless services to AT&T corporate customers located in our markets.
Service
Our primary service is wireless calling, which features advanced handsets,
enhanced voice clarity, improved protection from eavesdropping and a broad
feature set. Our basic wireless service offering includes caller identification,
three-way conference calling, call waiting, voicemail, paging and
short-messaging. As part of our basic service offering, we sell easy-to-use,
interactive menu-driven handsets that can be activated over the air.
Sales and Distribution
Our sales and distribution strategy is to use a balanced mix of
distribution channels to maximize penetration within our licensed service area
while minimizing customer acquisition costs. Our channels include a network of
company stores, nationally recognized retailers, a direct sales force for
corporate and business customers, regional and local mass merchandisers,
telesales, direct mail and online sales. We also work with AT&T's sales channels
to cooperatively exchange leads and develop new business.
Company Stores. Our stores range in size from small kiosks to 3,600 square
foot stores in the principal retail district in each market.
Retail Outlets. We have negotiated distribution agreements with national
and regional mass merchandisers and consumer electronics retailers, including
Circuit City, Cellular Warehouse, Metrocall, Office Depot, Staples, Best Buy and
Office Max in the U.S. and Farmacia El Amal, Let's Talk Wireless, Beeper
Connections and Radio Shack in Puerto Rico. We select distributors based upon
their ability to reach our target customers in our service area. In some of
these retail store locations, we are implementing a store-within-a-
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store concept, which uses visual merchandising to leverage the brand awareness
created by both SunCom and AT&T advertising.
Direct Sales and Marketing. Our direct corporate sales force focuses on
high-revenue, high-margin corporate users. We also benefit from AT&T's national
corporate accounts sales force. AT&T, in conjunction with us, supports marketing
of our services to AT&T's large national accounts located in our service areas.
We also employ telesales representatives in our Memphis call center and contract
for Spanish speaking telesales representatives in Convergys' Fort Lauderdale,
Florida operations. We use direct marketing to generate leads and stimulate
prospects, allowing us to maintain low selling costs and to offer our customers
additional features or customized services.
Online Sales. Our web page provides current information about us, our
markets and our products and services. All information that is required to make
a purchasing decision is available through our website and online store.
Customers are able to choose any of our rate plans, features, handsets and
accessories. The online store provides a secure environment for transactions,
and customers purchasing through the online store experience a similar business
process to that of customers purchasing service through other channels.
Customer Care
We are committed to building strong customer relationships by providing
customers with prompt and helpful service. We serve our customers from our
state-of-the-art facility in Memphis, Tennessee. Convergys, a leading provider
of outsourced call center services, provides back up call center support and
bilingual customer service for our Spanish speaking customers from two
facilities in Florida. The multiple center structure allows us to distribute
customer service calls between the centers to promote cost effective 24
hour/seven days a week customer service. We have strict quality standards in our
customer care operation, including a commitment to answering at least 80% of
calls within twenty seconds. All of our centers have sophisticated
infrastructure and information systems, including automated call distributors
and advanced diagnostic tools for one-call trouble resolution. We emphasize
proactive and responsive customer service, including welcome packages along with
first bill, three months and one year anniversary calls. We are expanding our
web-based services to include online account information to allow customers to
check billing, modify service or otherwise manage their accounts.
Network Development
We launched commercial operations in February 1999 and have commenced our
services in each of our major markets. We launched in markets which have
attractive characteristics for a high volume of wireless communications usage,
including metropolitan areas, the surrounding suburbs, commuting and travel
corridors, and popular leisure and vacation destinations. Immediately upon
launch, customers had access to coast-to-coast coverage through roaming
arrangements with AT&T and its roaming partners, both inside and outside our
licensed areas. Within each market, geographic coverage will be based upon
changes in wireless communications usage patterns, demographic changes within
our licensed areas and our experiences in those markets. As of December 31,
1999, we provided coverage to approximately 66% of the population of our
licensed area. We define coverage to include an entire basic trading area if we
have a significantly developed system in that basic trading area.
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Construction of our network is scheduled for multiple phases. In 1999, we
completed the first phase of our network build out. We expect to complete the
second phase by the end of 2000. We successfully launched commercial service in
the following 26 markets in 1999:
Fayetteville, AR Nantucket, MA
Hot Springs, AR Worcester, MA
Jonesboro, AR Concord, NH
Little Rock, AR Manchester, NH
Baton Rouge, LA Nashua, NH
Hammond, LA Portsmouth, NH
Houma, LA Arecibo, PR
Lafayette, LA Humacao, PR
New Iberia, LA Mayaguez, PR
New Orleans, LA Ponce, PR
Thibodaux, LA San Juan, PR
Cape Cod, MA Jackson, TN
Martha's Vineyard, MA Memphis, TN
The third and fourth phases of our network buildout plan will focus on
expanding our coverage to over 40 markets including a population of 3.3 million,
and entail launching service in Beaumont, Texas; Alexandria, Louisiana;
Evansville, Indiana; Paducah, Kentucky; Columbia and Jefferson City, Missouri;
Pine Bluff and Fort Smith, Arkansas and the Virgin Islands. Upon completion of
the fourth phase, which we expect by the end of 2001, we expect our network to
be available to a population of 15.9 million.
At December 31, 1999, our network covered a population of 11.0 million and
our customer base had grown to more than 142,000 customers.
Network Construction
We develop the network design, including frequency planning for our network
equipment sites. We designed our network to allow us to use existing sites,
which minimizes the construction of new towers and significantly reduces our
need to obtain zoning approvals. We use two experienced vendors to perform
property acquisition, construction and installation of our sites.
Network Operations
We maintain a network operations center to ensure continuous monitoring and
maintenance of our network. The effective operation of our network requires:
o connection agreements and agreements to transmit signals from network
equipment sites to call connection equipment with other communications
providers;
o long distance connection;
o the implementation of roaming arrangements;
o the development of network monitoring systems; and
o the implementation of information technology systems.
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Connection Agreements
Our network is connected to the public telephone network to facilitate the
origination and termination of traffic between our network and both the local
and long distance carriers. We have signed agreements with multiple carriers,
including BellSouth, SBC Communications, Bell Atlantic and Puerto Rico
Telephone. In most cases these agreements are standard agreements entered into
with all qualifying carriers on generally the same terms, with each party
agreeing to pay the other for the carrying or completion of calls on the other's
network.
Long Distance Connection
We have executed a wholesale long distance agreement with AT&T providing
for preferred rates for long distance services.
Roaming Arrangements
Through our arrangements with AT&T and via the use of advanced handsets,
our customers have roaming capabilities on AT&T's wireless network and AT&T's
customers have roaming capability on our wireless network. Further, we have the
benefit of AT&T's roaming agreements with third party carriers at AT&T's
preferred pricing. These agreements, together with AT&T's wireless network,
cover approximately 98% of the U.S. population, including in-market roaming
agreements covering all of our launched service areas.
Network Monitoring Systems
Our network operations center provides around-the-clock monitoring and
maintenance of our entire network. The network operations center is equipped to
constantly monitor the status of all network equipment sites and call connection
equipment and to record network traffic. The network operations center provides
continuous monitoring of system quality for blocked or dropped calls, call
clarity and evidence of tampering, cloning or fraud. We designed our network
operations center to oversee the interface between customer usage, data
collected by call connection equipment and our billing systems. Our network
operations center is located in the Memphis site containing call connection
equipment, and we also have back-up network operations center capabilities in
our Arlington, Virginia data center.
Information Technology Systems
We operate management information systems to handle customer care, billing,
network management and financial and administrative services. The systems focus
on three primary areas:
o network management, including service activation, pre-pay systems,
traffic and usage monitoring, trouble management and operational
support systems;
o customer care, including billing systems and customer service and
support systems; and
o business systems, including financial, purchasing, human resources and
other administrative systems.
We have incorporated sophisticated network management and operations
support systems to facilitate network fault detection, correction and
management, performance and usage monitoring and security. System capabilities
have been developed to allow over-the-air activation of handsets and implement
fraud protection measures. We maintain stringent controls for both voluntary and
involuntary deactivations. We attempt to
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minimize customer disconnects initiated by us by performing credit review and
preactivation screening to identify prior fraudulent or bad debt activity. We
use this information to identify where activation and termination policy
adjustments are needed.
TDMA Technology
We have chosen digital TDMA technology for our network. TDMA technology
allows for:
o the use of advanced handsets which allow for roaming across the PCS
and cellular portion of the airwaves, including both analog and
digital technologies;
o enhanced services and features, such as short-messaging, extended
battery life, added call security and improved voice quality; and
o network equipment sites that are small and that improve network
coverage with low incremental investment.
TDMA technology is the digital technology choice of two of the largest
wireless communications companies in the United States, AT&T and SBC
Communications. This technology served an estimated 35 million customers
worldwide and 19 million customers in North America as of December 31, 1999,
according to the Universal Wireless Communications Consortium, an association of
TDMA providers and manufacturers. We believe that the increased volume of TDMA
customers has increased the probability that this technology will remain an
industry standard.
Competition
We believe that customers choose a wireless communications service provider
principally based upon network coverage, pricing, quality of service and
customer care. We compete directly with at least two cellular providers and
other PCS providers in each of our markets and against enhanced special mobile
radio operations in some of our markets. We compete with at least one analog,
one CDMA and one GSM operator in each of our markets other than Puerto Rico and
New Orleans. Most of the existing cellular providers in our markets have an
infrastructure in place and have been operational for a number of years. These
cellular operators may upgrade their networks to provide services comparable to
those offered by us. We also compete with other PCS license holders in each of
our markets.
In addition, we compete with resellers of wireless communications services
in each of our markets. Resellers purchase large volumes of services on a
wireless operator's network, usually at a discount, and resell the services to
end users under the reseller's own brand name. While the network operator
receives some revenue from the sale of services to the reseller, the operator is
competing with its own customer for sales to the end users. The principal
resellers in our markets include MCI in New England and Motorola in Puerto Rico.
We have agreed to resell services to AT&T in each of our markets should AT&T
desire to do so. We have not yet entered into any such arrangements with AT&T or
any other party.
As a recent entrant into the market for wireless communications services,
we do not believe that we have obtained a significant share of the market in any
of our areas of operation. As a recent entrant, we face significant competition
from operators who have already established strong market positions and have
signed up many customers. Most of the existing cellular operators have developed
systems that have larger local and regional coverage than we currently have. We
seek to compete by offering a competitive product with attractive pricing plans
and through our extensive access to roaming, including in-region roaming, which
gives us an effective coverage area competitive with that of our principal
competitors. We have developed our
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pricing plans to be competitive and to emphasize the advantages of our
offerings. We have and may continue to discount our pricing in order to obtain
customers or in response to downward pricing in the market for wireless
communications services.
We anticipate that market prices for wireless communications services
generally will decline in the future based upon increased competition. Our
ability to compete successfully will depend, in part, on our ability to
anticipate and respond to various competitive factors affecting the industry,
including new services that may be introduced, changes in consumer preferences,
demographic trends, economic conditions and competitors' discount pricing
strategies, all of which could adversely affect our operating margins. We plan
to use our digital feature offerings, national network through our AT&T
affiliations, contiguous footprint providing an extended home calling area, and
local presence in secondary markets, to combat potential competition. We believe
that our extensive digital network, once deployed, will provide a cost effective
means to react appropriately to any price competition.
Government Regulation
We are subject to substantial regulation by the FCC, state public utility
commissions and, in some cases, local authorities. Our principal operations are
classified as commercial mobile radio service by the FCC, subject to regulation
under Title II of the Communications Act of 1934, as amended by the
Telecommunications Act of 1996, as a common carrier and subject to regulation
under Title III of the Communications Act as a radio licensee. The states are
preempted from regulating our entry into and rates for commercial mobile radio
service offerings, but remain free to regulate other terms and conditions of our
commercial mobile radio services and to regulate other intrastate offerings by
us. Congress and the states regularly enact legislation, and the FCC, state
commissions and local authorities regularly conduct rulemaking and adjudicatory
proceedings that could have a material adverse effect on us. In addition,
government regulation may adversely affect our ability to engage in, or rapidly
complete, transactions and may require us to expend additional resources in due
diligence and filings related to FCC and other requirements, as compared to
unregulated entities.
FCC Common Carrier Regulation Under Title II
Under Title II of the Communications Act, among other things, we are:
o required to offer service upon reasonable request;
o prohibited from imposing unjust or unreasonable rates, terms or
conditions of service;
o proscribed from unjustly or unreasonably discriminating among
customers;
o required to reserve communications capacity for law enforcement
surveillance operations and to make technical network changes to
facilitate this surveillance;
o required to make our services and products accessible to, and usable
by, Americans with disabilities, if readily achievable; and
o required to comply with limitations on our use of customer proprietary
network information.
Under the Telecommunications Act, we are entitled to benefits when
negotiating interconnection arrangements with other communications carriers,
such as resale rights, our customers being able to keep their
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old numbers when switching to us, and compensation equal to that of other
carriers, but we are subject to many of those same requirements when other
carriers seek to interconnect with our network. The FCC is still in the process
of implementing some of these benefits. While the rates of common carriers are
subject to the FCC's jurisdiction, the FCC forbears from requiring commercial
mobile radio service carriers to file tariffs for their services. Common
carriers, including commercial mobile radio service providers, are also
prohibited under the Communications Act from unreasonably restricting the resale
of their services and are required to offer unrestricted resale.
FCC Radio License Regulation Under Title III
Among other things, Title III of the Communications Act:
o does not permit licenses to be granted or held by entities that have
been subject to the denial of federal benefits;
o requires us to seek prior approval from the FCC to transfer control of
us or to assign our radio authorizations, including subdividing our
radio airwaves or partitioning geographic license areas, except in
very limited circumstances; and
o limits foreign ownership in radio licensees, including PCS providers.
FCC Commercial Mobile Radio Service Regulation
The FCC rules and policies impose substantial regulations on commercial
mobile radio service providers. Among other regulations, commercial mobile radio
service providers such as us:
o incur costs as a result of required contributions to federal programs;
o are prohibited from acquiring or holding an attributable interest in
PCS, cellular or specialized mobile radio licenses with more than
45MHz of airwaves in the same metropolitan area, and more than 55 MHz
in rural markets;
o are required to provide manual roaming service to enable a customer of
other providers to obtain service while roaming in our service area;
o are required to route emergency calls to public safety centers and
provide the public safety centers under certain circumstances with
information regarding the originating number and the general location
of the caller; and
o will eventually be required to allow customers to retain their
telephone numbers when changing service providers, in some
circumstances.
FCC Personal Communications Services Regulation
We are subject to service-specific regulations under the FCC's rules. Among
other things, these regulations provide that PCS licensees, such as us, are
granted licenses for a 10-year term, subject to renewal. Under these policies,
we will be granted a renewal expectancy that would preclude the FCC from
considering competing applications if we have:
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o provided "substantial" performance, that is "sound, favorable and
substantially above a level of mediocre service just minimally
justifying renewal;" and
o substantially complied with FCC rules and policies and the
Communications Act.
These regulations also govern the transmission characteristics of PCS
handsets and network equipment sites and other technical requirements. PCS
licensees are required to comply with limits intended to ensure that these
operations do not interfere with radio services in other markets or in other
portions of the airwaves and to ensure emissions from mobile transmitters do not
cause adverse health effects. We are also subject to minimum construction
requirements that will require us to deploy facilities with service coverage of
a particular amount of the population of our licensed area within specified time
periods.
Relocation of Fixed Microwave Licensees
Because PCS carriers use airwaves occupied by existing microwave licensees,
the FCC has adopted special regulations governing the relocation of incumbent
microwave systems and cost-sharing among licensees that pay to relocate
microwave incumbents. Relocation usually requires a PCS operator to compensate
an incumbent for the costs of system modifications and new equipment required to
move the incumbent to new portions of the airwaves, including possible premium
costs for early relocation to alternate portions of the airwaves. The transition
plan allows most microwave users to operate in the PCS portion of the airwaves
for a one-year voluntary negotiation period and an additional one-year mandatory
negotiation period following the issuance of the PCS license. These periods are
longer for public safety entities. We have entered into all necessary agreements
for microwave relocation. Under certain circumstances, relocated licensees may
exercise their rights to move back to their original sites in the event the new
sites are inadequate.
Local Multipoint Distribution Service Regulation
TeleCorp LMDS holds certain Local Multipoint Distribution Service ("LMDS")
licenses that are subject to service specific FCC regulations. Like the PCS
service specific regulations, these regulations provide that LMDS licensees,
such as us, are granted licenses for a 10-year term, subject to renewal. Under
these policies, we will be granted a renewal expectancy that would preclude the
FCC from considering competing applications if we have:
o provided "substantial" performance, that is "sound, favorable and
substantially above a level of mediocre service just minimally
justifying renewal;" and
o substantially complied with FCC rules and policies and the
Communications Act.
These regulations also govern the transmission characteristics of LMDS
systems and other technical requirements. LMDS licensees are required to comply
with limits intended to ensure that these operations do not interfere with radio
services in other markets or in other portions of the airwaves and to ensure
emissions from transmitters do not cause adverse health effects. In addition,
depending upon how the Company uses such licenses, the Company may become
subject to additional federal or state regulations.
FCC and Federal Aviation Administration Facilities Regulation
Because we acquire and operate antenna sites for use in our network, we are
subject to FCC and Federal Aviation Administration regulations governing
registration of towers, the marking and lighting of structures and regulations
governing compliance with the National Environmental Policy Act of 1969, which
requires carriers to assess the impact of their operations on the environment,
including the health effects of radio airwave radiation on humans.
12
FCC Designated Entity Regulation
Each of TeleCorp Holding, TeleCorp LMDS, and Viper Wireless obtained their
FCC licenses under the FCC's designated entity policies. Under such policies,
for a period of five years from initial license grant, some of our licenses can
only be held by a company that meets the FCC's criteria for "entrepreneurial"
status. In addition, some of our licenses were awarded subject to bidding
credits because the original bidder met the criteria for "small business" or
"very small business" status. With respect to our designated entity licenses,
we:
o believe we met the relevant eligibility and benefits criteria at the
time we received such licenses;
o believe we continue to hold such licenses in compliance with the FCC's
eligibility and benefits criteria;
o intend to diligently pursue and maintain our eligibility and benefits
criteria in compliance with applicable FCC rules.
We rely on representations of our investors to determine our compliance
with the FCC's rules applicable to PCS licenses.
Entrepreneurial Eligibility. Under the FCC's designated entity rules for
PCS, the C and F Blocks of PCS spectrum were set aside by the FCC for
entrepreneurs. Only entrepreneurs were eligible to bid for these licenses and,
for a period of five years from the original grant, only entrepreneurs may hold
these licenses. TeleCorp Holding and Viper both hold PCS licenses as
entrepreneurs, having won some licenses at auction and having acquired some
licenses from other entrepreneurs. To qualify as an entrepreneur, our designated
entity subsidiaries, their attributable investors, the affiliates of our
designated entity subsidiaries, and the affiliates of the attributable investors
in our designated entity subsidiaries must have less than $500 million in net
assets and average aggregate gross revenues of less than $125 million for the
two years prior to filing its license application. To the extent an entrepreneur
grows beyond these limits as a result of normal business growth, it will retain
its eligibility to holds its licenses and even may continue to acquire
additional entrepreneurial licenses from other entrepreneurs.
Small Business and Very Small Business Status. Under the FCC's designated
entity policies, TeleCorp Holding, TeleCorp LMDS, and Viper received their
licenses subject to bidding credits, and in some cases, government financing,
awarded because of their status as very small businesses. In order to qualify
for bidding credits or government financing, or to aquire licenses originally
awarded with bidding credits or government financing without being subject
to penalty payments, the FCC considers the aggregate average gross revenues of
the applicant, its attributable investors, the applicant's affiliates, and the
affiliates of the applicant's attributable investors for the prior three years.
If these average annual revenues are less than $40 million, the entity will be
considered a small business. If these average annual revenues are less than $15
million, the entity will be considered a very small business. To the extent a
small business or very small business grows beyond these limits as a result of
normal business growth, it will not lose its bidding credits or government
financing, but its status is not grandfathered for other licenses its
subsequently acquires. Each of TeleCorp Holding, TeleCorp LMDS, and Viper
qualified as a very small business in the relevant auction. TeleCorp Holding has
also acquired licenses in the aftermarket as a very small business. After 1999,
however, our designated entity subsidiaries will only qualify as small
businesses for future acquisitions.
Control Group Requirements. For our designated entity subsidiaries to
avoid attribution of the revenues and assets of some of their investors, our
subsidiaries are required to maintain a conforming control group and to limit
the amount of equity held by other investors on a fully-diluted basis. These
requirements mandate that the control group, among other things, has and
maintains both actual and legal control of the licensee. Under these control
group requirements:
o an established group of investors meeting the financial qualifications
must own at least three-fifths of the control group's equity, or 15%
of the licensee's overall equity, on a fully-diluted basis and at
least 50.1% of the voting power, in the licensee entity; and
o additional members of the control group may hold up to two-fifths of
the control group's equity, or up to 10% of the equity interest, on a
fully-diluted basis, in the licensee entity.
Additional members may be non-controlling institutional investors,
including most venture capital firms. A licensee must have met the requirements
at the time it filed its application to acquire these licenses and must continue
to meet the requirements for five years following the date that a license is
granted, although normal business growth is permitted. Beginning the fourth year
of the license term, the FCC rules:
o eliminate the requirement that additional members hold the 10% equity
interest; and
o allow the qualifying investors to reduce the minimum required equity
interest from 15% to 10%.
FCC Transfer Restrictions. During the first five years of their license
terms, designated entity PCS licensees may only transfer or assign their
license, in whole or in part, to other qualified entrepreneurs. The acquiring
entities would take over the license, or any portion of the license, subject to
13
separately established installment payment obligations. After five years,
licenses are transferable to entrepreneurs and non-entrepreneurs alike, subject
to unjust enrichment penalties. If transfer occurs during years six through ten
of the initial license term to a company that does not qualify for the same
level of auction preferences as the transferor, the sale would be subject to
immediate payment of the outstanding balance of the government installment
payment debt and payment of any unjust enrichment assessments as a condition of
transfer. The FCC has also initiated transfer disclosure regulations that
require licensees who transfer control of or assign a PCS license within the
first three years to file associated contracts for sale, option agreements,
management agreements or other documents disclosing the total consideration that
the applicant would receive in return for the transfer or assignment of its
license.
State and Local Regulation
The FCC permits the states to:
o regulate terms and conditions of our commercial mobile radio services
other than rates and entry and may regulate all aspects of our
intrastate toll services;
o regulate the intrastate portion of services offered by local telephone
carriers, and therefore the rates we must pay to acquire critical
facilities from other common carriers;
o administer numbering resources, subject to federal oversight; and
o have other responsibilities that impact the nature and profitability
of our operations, including the ability to specify cost-recovery
mechanisms for network modifications to support emergency public
safety services.
States and localities also regulate construction of new antenna site facilities
and are responsible for zoning and developmental regulations that can materially
impact our timely acquisition of sites critical to our radio network.
Emission and Hands-Free Regulation
Media reports have suggested that some radio airwave emissions from
wireless handsets may be linked to health concerns, including the incidence of
cancer. Data gathered in studies performed by manufacturers of wireless
communications equipment dispute these media reports. The FCC has adopted rules
specifying the methods to be used in evaluating radio airwave emissions from
radio equipment, including wireless handsets. The hand-held digital telephones
that we offer to our customers comply with the standards adopted under the new
rules, although these handsets may not comply with any rules adopted by the FCC
in the future. Recent studies have shown that hand-held digital telephones
interfere with medical devices, including hearing aids and pacemakers and
additional studies are underway.
Various state legislatures have proposed or considered measures that would
require hands free use of cellular phones while operating motor vehicles, ban
cellular phone use or limit the length of calls while driving and require
drivers to pull to the side of the road to use cellular phones. In addition,
some gas stations have banned the use of mobile phones on their premises.
Intellectual Property
The AT&T and globe design logo is a service mark registered with the U.S.
Patent and Trademark Office. AT&T owns the service mark. We use the AT&T and
globe design logo, on a royalty free basis, with
14
equal emphasis on our SunCom brand and logo, solely within our licensed area in
connection with marketing, offering and providing licensed services to end-users
and resellers of our services. Our license agreement with AT&T grants us the
right and license to use licensed marks on permitted mobile phones. This license
agreement contains numerous restrictions with respect to the use and
modification of licensed marks.
We, Triton PCS and Tritel Communications have adopted a common brand,
SunCom, that is co-branded with equal emphasis with the AT&T brand and logo.
Each of the SunCom companies owns one-third of Affiliate License Co., which owns
the SunCom name and has no other operations. We and the other SunCom companies
license the SunCom name from Affiliate License Co. We use the brand to market,
offer and provide services to end-users and resellers of our PCS.
Employees
As of December 31, 1999, we employed approximately 914 people. None of our
employees currently are represented by a union and we believe that our relations
with our employees are good.
Segment Reporting
The Company presently operates in a single business segment as a provider
of wireless mobility services in its licensed regions primarily in the
south-central and northeastern United States and in Puerto Rico. The Company
operates in various MTAs including New Orleans, LA, Memphis, TN, Little Rock,
AR, Boston, MA and San Juan, Puerto Rico.
Acquisition History
On April 20, 1999, we acquired PCS licenses covering the Baton Rouge,
Houma, Hammond and Lafayette, Louisiana basic trading areas from Digital PCS. As
consideration for the licenses, we issued $2.3 million of our common and
preferred stock, paid Digital PCS approximately $0.3 million in reimbursement of
interest paid on U.S. government debt related to the licenses and assumed $4.1
million of debt owed to the U.S. government related to these licenses. These
licenses cover a population of approximately 1.6 million, including a population
of 1.2 million in Baton Rouge and Lafayette covered by licenses we already
owned.
On May 25, 1999, we completed the acquisition of a PCS license and related
assets covering the San Juan major trading area from AT&T Wireless. On May 24,
1999, we sold to AT&T $40.0 million of our series A, D and F preferred stock. On
May 25, 1999, we purchased the license and related assets from AT&T for $96.5
million in cash. In addition, we reimbursed AT&T $3.2 million for microwave
relocation and $0.3 million for other expenses it incurred in connection with
the acquisition. This license covers a population of approximately 3.9 million
in Puerto Rico and the U.S. Virgin Islands.
On June 2, 1999, we acquired PCS licenses covering the Alexandria, Lake
Charles and Monroe, Louisiana basic trading areas from Wireless 2000. As
consideration for the licenses, we issued approximately $0.4 million of our
common and preferred stock, paid $0.2 million for Wireless 2000's costs for
microwave relocation related to the Monroe license and $0.4 million in
reimbursement of interest paid on government debt related to their licenses, and
assumed $7.4 million of debt owed to the U.S. government related to these
licenses. These licenses cover a population of approximately 0.8 million. We
cannot, without AT&T's consent, develop the markets covered by the Monroe
license.
Our agreements with AT&T Wireless were extended to cover these markets,
except for a portion of the Monroe basic trading area, upon the closing of the
Louisiana and Puerto Rico acquisitions.
15
On October 14, 1999, we agreed to purchase 15 MHz of additional airwaves in
the Lake Charles, Louisiana basic trading area from Gulf Telecomm, LLC. As
consideration for the additional airwaves we will pay Gulf Telecomm $362,844 in
cash, assume approximately $2.3 million in FCC debt related to the license and
reimburse Gulf Telecomm for all interest it paid to the FCC on debt related to
the license from June, 1998 until the date the transaction is completed. We have
received FCC approval and expect to consummate the acquisition no later than the
second quarter of 2000.
On October 18, 1999, we entered into a plan of reorganization and
agreement of merger with Messrs. Vento and Sullivan and TeleCorp Holding Corp.
to acquire the 15% of Viper Wireless, Inc. that we do not yet own from Messrs.
Vento and Sullivan in exchange for an aggregate of 323,372 shares of our class A
common stock and 800 shares of our series E preferred stock. TeleCorp Holding
Corp. acquired 85% of Viper Wireless on March 1, 1999 in exchange for
$32,286,000 contributed by AT&T and some of our other initial investors for
additional shares of our preferred and common stock. Viper Wireless' used the
proceeds to participate in the FCC's reauction of PCS licenses. Viper Wireless
was subsequently granted six PCS licenses in the reauction. We have received FCC
approval for the acquisition of the final 15% of Viper Wireless and expect to
consummate the acquisition no later than the second quarter of 2000.
On October 18, 1999, we agreed to acquire TeleCorp LMDS, Inc. through an
exchange of all of the outstanding stock of TeleCorp LMDS for 834,300 shares of
our class A common stock and 2,700 shares of our series C preferred stock.
TeleCorp LMDS's stockholders are Mr. Vento, Mr. Sullivan and three of our
initial investors. By acquiring TeleCorp LMDS, we will gain local multipoint
distribution service licenses covering 1100 MHz of airwaves in the Little Rock,
Arkansas basic trading area and 150 MHz of airwaves in each of the Beaumont,
Texas, New Orleans, Louisiana, San Juan and Mayaguez, Puerto Rico, and U.S.
Virgin Islands basic trading areas. The completion of this transaction is
contingent upon FCC approval, which is expected in the second quarter of 2000.
Item 2. Properties.
We lease space for our call connection equipment in New Orleans, Boston and
Puerto Rico and for our network operations center, our call connection
equipment, our customer care and our data center in Memphis. Further, we have
operating leases primarily related to our headquarters, regional offices, retail
store locations, distribution outlets, office space and network equipment sites.
Item 3. Legal Proceedings.
We were not a party to any lawsuit or proceeding which is likely, in the
opinion of management, to have a material adverse effect on our financial
position, results of operations and cash flows. We are a party to routine
filings and customary regulatory proceedings with the FCC relating to our
operations.
Item 4. Submission of Matters to Vote of Security Holders.
On November 5, 1999, the holders of 90.3% of the class A common stock and
all of the holders of the voting preference common stock, by written consent in
lieu of a special meeting:
o approved an amendment to our certificate of incorporation to effect a
3.09-for-1 stock split of and increase the authorized amount of all
classes of our common stock and our series F preferred stock;
16
o approved the adoption of our Fifth Amended and Restated Certificate of
Incorporation effective upon the closing of our initial public
offering on November 30, 1999 that (a) increased the authorized number
of shares of our class A common stock by 300 million, (b) added 1
million new undesignated shares of authorized preferred stock subject
to blank check preferred stock provisions, (c) reduced the number of
directors that holders of series A preferred stock can nominate to
one, (d) added a provision that permits the Board of Directors to
amend the By-laws, (e) added a provision for a classified Board of
Directors, (f) added provisions regarding number, selection and
removal of directors, (g) added provisions regarding director
appointments and vacancies and (h) integrated all prior amendments
into a single document;
o approved the adoption of our Second Amended and Restated By-Laws
effective upon the closing of our initial public offering on November
30, 1999 to (a) amend notice of meeting provisions to increase
percentage of outstanding shares needed to call special meeting, (b)
amend quorum and voting provisions, (c) amend provisions regarding
number, term, selection and removal of directors, (d) add provisions
regarding notice of a stockholder proposals, including directors
nominees, and (e) add provisions that permits the Board of Directors
to amend By-laws; and
o approved an amendment to our Stockholders' Agreement to, among other
things, change the provisions with respect to the election of
directors and delete provisions rendered inapplicable as a result of
our IPO.
The holders of 9.7 % of the class A common stock took no action with
respect to such consent.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
Our Class A Common Stock began trading on the Nasdaq National Market on
November 23, 1999 under the symbol "TLCP." The following table sets forth, for
the period indicated, the high and low last reported sales price for our Class A
Common Stock, as reported by the Nasdaq National Market since it commenced
public trading.
Class A
Common Stock
------------
Fiscal Year Ended December 31, 1999 High Low
----------------------------------- ---- ---
Fourth Quarter ended December 31, 1999
(from November 231999) ..................................... $42.875 $ 31.00
Stockholders
As of March 26, 2000, there were approximately 48 stockholders of record.
Dividends
17
We have never paid cash dividends to our stockholders since our inception
and do not plan to pay cash dividends in the foreseeable future. We currently
intend to retain earnings, if any, to finance our growth. Our ability to pay
dividends is restricted by the terms of our preferred stock, our senior
subordinated notes indenture and our senior credit facilities.
Unregistered Sales of Securities
None.
Use of Proceeds from Registered Securities
On November 23, 1999, in connection with our initial public offering, a
registration statement on Form S-1 (File No. 333-89393) was declared effective
by the Securities and Exchange Commission, pursuant to which 10.58 million
shares of our class A common stock were sold at a price of $20 per share,
generating gross proceeds of $211.6 million. The managing underwriters were
Salomon Smith Barney Inc., Lehman Brothers Inc., Deutsche Bank Securities Inc.
and Merrill Lynch, Pierce, Fenner & Smith Incorporated. After deducting
approximately $14.3 million in underwriting discounts and commissions and
approximately $1.8 million in other offering expenses payable by us, the net
proceeds to us were approximately $195.5 million. In addition, in January of
2000, we completed a private offering to AT&T of 2.245 million shares of our
class A common stock at a price of $18.65 per share generating proceeds of $41.9
million. The following table approximates our intended use of the net offering
proceeds:
Construction of plant, building and facilities .................. $170.0
Working Capital ................................................. 25.5
------
Total ........................................................ $195.5
======
The foregoing use of net proceeds does not represent a material change in the
use of net proceeds described in the registration statement.
18
Item 6. Selected Financial Data.
The following sets fourth certain consolidated financial data for the
periods indicated and should be read in conjunction with the Consolidated
Financial Statements, related notes and other financial information appearing
elsewhere in Part II of this Annual Report on Form 10K (dollar amounts in
thousands, except per share amounts).
July 29, 1996
(inception) to
December 31, For the year ended December 31,
1996 --------------------------------------------
(Predecessor) 1997 1998 1999
------------ --------------------------------------------
Statements of Operations Data:
Revenue:
Service revenue ................... $ -- $ -- $ -- $ 41,319
Roaming revenue ................... -- -- 29 29,010
Equipment revenue ................ -- -- -- 17,353
------------ ------------ ------------ ------------
Total revenue ........ -- -- 29 87,682
------------ ------------ ------------ ------------
Operating expense:
Cost of revenue ................... -- -- -- 39,259
Operations and development (c) .... -- -- 9,772 35,979
Selling and marketing (c) ......... 10 304 6,325 71,180
General and administrative (c) .... 515 2,637 26,239 92,585
Depreciation and amortization ..... -- 11 1,584 55,110
------------ ------------ ------------ ------------
Total operating expense ....... 525 2,952 43,920 294,113
------------ ------------ ------------ ------------
Operating loss ................ (525) (2,952) (43,891) (206,431)
Other (income) expense:
Interest expense .................. -- 396 11,934 51,313
Interest income ................... -- (13) (4,697) (6,464)
Other expense ..................... -- -- 27 (284)
------------ ------------ ------------ ------------
Net loss ...................... (525) (3,335) (51,155) (250,996)
Accretion of mandatorily
redeemable preferred stock ... (289) (726) (8,567) (24,124)
------------ ------------ ------------ ------------
Net loss attributable to
common equity ................ $ (814) $ (4,061) $ (59,722) $ (275,120)
============ ============ ============ ============
Net loss attributable to common
equity per share
- basic and diluted ................. $ (44.45) (111.74) $ (2.19) $ (3.58)
============ ============ ============ ============
Weighted average common equity shares
outstanding-basic and diluted ....... 18,313 36,340 27,233,786 76,895,391
============ ============ ============ ============
Other Operating Data:
Subscribers (end of period) ......... -- -- -- 142,231
Covered population (end of period) .. -- -- -- 11.0 million
19
As of December 31,
----------------------------------------------
1996 1997
(Predecessor) (Predecessor) 1998 1999
----------------------------------------------
Balance Sheet Data:
Cash and cash equivalents ....................... $ 52 $ 2,567 $ 111,733 $ 182,330
(524) (6,656) (4,676)
Working capital ................................. 94,082
Property and equipment, net ..................... 1 3,609 197,469 400,450
PCS licenses and microwave relocation costs, net -- 10,018 118,107 267,682
Intangible assets -AT&T agreements, net ......... -- -- 26,285 37,908
Total assets .................................... 7,574 16,295 466,644 952,202
Total debt ...................................... 499 7,727 243,385 640,571
Mandatorily redeemable preferred stock, net(a)(b) 7,789 4,144 164,491 263,181
Total stockholders' equity (deficit) ........... $ (812) $ (4,875) $ (64,500) (90,554)
- ---------
(a) Net of deferred compensation and preferred stock subscription receivable of
$4 and $75,914, respectively, as of December 31, 1998.
(b) Net of preferred stock subscription receivable of $97,001 as of December
31, 1999.
(c) Includes non cash stock compensation.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
For periods prior to 1999 we were a development stage company. In the first
quarter of 1999, we exited the development stage and commenced commercial
operations in each of our major mainland U.S. markets, after having launched our
New Orleans market for roaming services in late December 1998. We launched
service in our Puerto Rico markets on June 30, 1999. At December 31, 1999 we had
launched our service in 26 markets covering approximately 66% of the population
of our licensed area.
Revenue
We derive our revenue from:
o Services. We sell wireless personal communications services. The
various types of service revenue associated with personal
communications services for our customers include monthly recurring
access charges and monthly non-recurring airtime charges for local,
long distance and
20
roaming airtime used in excess of pre-subscribed usage. Our customers'
charges are rate plan dependent, based on the number of pooled minutes
included in their plans. Service revenue also includes monthly
non-recurring airtime usage associated with our prepaid customers and
non-recurring activation and de-activation service charges.
o Roaming Charges. We charge monthly, non-recurring, per minute fees to
other wireless companies whose customers use our network facilities to
place and receive wireless calls.
o Equipment Sales. We sell wireless personal communications handsets and
accessories that are used by our customers in connection with our
wireless services.
Service revenue constituted our largest component of revenue during the
year ended December 31, 1999 at 47%. Roaming revenue and equipment revenue
represented 33% and 20%, respectively. We expect that as our customer base
grows, service revenue will become an even larger percentage of revenue, while
roaming revenue and equipment revenue are expected to decrease as a percentage
of revenue. Roaming minutes on our network are expected to increase as AT&T and
other carriers increase the number of customers on their networks. Under our
reciprocal roaming agreement with AT&T Wireless, our largest roaming partner,
the amount we will receive and pay per roaming minute declines for each of the
next several years.
It appears that the wireless industry is experiencing a general trend
towards offering rate plans containing larger buckets of minutes. This is
expected to result in decreases in gross revenue per minute.
We have autonomy in determining our pricing plans. We have developed our
pricing plans to be competitive and to emphasize the advantages of our service.
We may discount our pricing from time to time in order to obtain additional
customers or in response to downward pricing in the market for wireless
communications services.
Cost of Revenue
o Equipment. We purchase personal communications handsets and
accessories from third party vendors to resell to our customers for
use in connection with our services. The cost of handsets is, and is
expected to remain, higher than the resale price to the customer. We
record as cost of revenue an amount approximately equal to our revenue
on equipment sales. We record the excess cost of handsets as a sales
and marketing operating expense. We do not manufacture any of this
equipment.
o Roaming Fees. We pay fees to other wireless communications companies
based on airtime usage of our customers on other communications
networks. It is expected that reciprocal roaming rates charged between
us and other carriers will decrease. We do not have any significant
minimum purchase requirements other than our obligation to purchase at
least 15 million roaming minutes from July 1999 to January 2002 from
another wireless provider in Puerto Rico relating to customers roaming
outside our coverage area. We believe we will be able to meet these
minimum requirements.
o Clearinghouse Fees. We pay fees to an independent clearinghouse for
processing our call data records and performing monthly inter-carrier
financial settlements for all charges that we pay to other wireless
companies when our customers use their network, and that other
wireless companies pay to us when their customers use our network. We
do not have any significant
21
minimum purchase requirements. These fees are based on the number of
transactions processed in a month.
o Variable Interconnect. We pay monthly charges associated with the
connection of our network with other carriers' networks. These fees
are based on minutes of use by our customers. This is known as
interconnection. We do not have any significant minimum purchase
requirements.
o Variable Long Distance. We pay monthly usage charges to other
communications companies for long distance service provided to our
customers. These variable charges are based on our customers' usage,
applied at pre-negotiated rates with the other carriers. We do not
have any significant minimum purchase requirements other than an
obligation to AT&T Wireless to purchase a minimum number of minutes of
traffic annually over a specified time period and a specified number
of dedicated voice and data leased lines in order for us to retain
preferred pricing rates. We believe we will be able to meet these
minimum requirements.
Operating Expense
Operations and development. Our operations and development expense includes
engineering operations and support, field technicians, network implementation
support, product development, engineering management and non cash stock
compensation related to employees whose salaries are recorded within operations
and development. This expense also includes monthly recurring charges directly
associated with the maintenance of network facilities and equipment. Operations
and development expense is expected to increase as we expand our coverage and
add customers. In future periods, we expect that this expense will decrease as a
percentage of gross revenues.
Selling and marketing. Our selling and marketing expense includes brand
management, external communications, retail distribution, sales training,
direct, indirect, third party and telemarketing support and non cash stock
compensation related to employees whose salaries are included within selling and
marketing. We also record the excess cost of handsets over the resale price as a
cost of selling and marketing. Selling and marketing expense is expected to
increase as we expand our coverage and add customers. In future periods, we
expect that this expense will decrease as a percentage of gross revenues.
General and administrative. Our general and administrative expense includes
customer support, billing, information technology, finance, accounting and legal
services and non cash stock compensation related to employees whose salaries are
included within general and administrative. Although we expect general and
administrative expense to increase in future periods we expect this expense will
decrease as a percentage of gross revenues.
Depreciation and amortization. Depreciation of property and equipment is
computed using the straight-line method, generally over three to ten years,
based upon estimated useful lives. Leasehold improvements are amortized over the
lesser of the useful lives of the assets or the term of the lease. Network
development costs incurred to ready our network for use are capitalized.
Amortization of network development costs begins when the network equipment is
ready for its intended use and will be amortized over its estimated useful life
ranging from five to ten years. We began amortizing the cost of the PCS
licenses, microwave relocation costs, and capitalized interest in the first
quarter of 1999, when PCS services commenced in some of our basic trading areas.
Microwave relocation entails transferring business and public safety companies
from radio airwaves that overlap with the portion of the airwaves covered by our
business to other portions of the airwaves. Amortization of PCS licenses and
microwave relocation is calculated using the straight-line method over 40 years.
The AT&T agreements are amortized on a straight-line basis over the related
contractual terms,
22
which range from three to ten years. Amortization of the AT&T exclusivity
agreement, long distance agreement and the intercarrier roamer services
agreement began once wireless services were available to our customers.
Amortization of the network membership license agreement began on July 17, 1998,
the date of the finalization of the AT&T transaction.
Capital expenditures. Our principal capital requirements for deployment of
our wireless network include installation of equipment and, to a lesser extent,
site development work.
Interest income (expense). Interest income is earned primarily on our cash
and cash equivalents. Interest expense through December 31, 1999 consists of
interest due on our senior credit facilities, senior subordinated discount
notes, vendor financing, and debt owed to the U.S. government related to our
licenses, less interest capitalized.
Results of Operations
Year ended December 31, 1999 Compared to Year ended December 31, 1998
Customer Analysis
We began launching commercial service in the first quarter of 1999, and by
December 31, 1999, grew our customer base to over 142,000 customers and launched
commercial service in 26 of our markets with our networks covering approximately
66% of the population where we held licenses.
Revenue
Service revenue was approximately $41.3 million for the year ended December
31, 1999 and resulted from our launch of commercial service in 26 of our markets
in 1999. We generated no service revenue for the year ended December 31, 1998.
Equipment revenue was approximately $17.4 million for the year ended December
31, 1999 and resulted from our customers' purchase of handsets and other
equipment in connection with the use of our service. We generated no equipment
revenue for the year ended December 31, 1998. Roaming revenue was $29.0 million
for the year ended December 31, 1999, as compared to $29,000 for the year ended
December 31, 1998. The increase was due to our significant increase in cell
sites which provided service to AT&T Wireless' roaming customers in our markets.
Cost of Revenue
Cost of revenue for the year ended December 31, 1999 was approximately
$39.3 million, consisting of equipment costs, roaming and clearinghouse fees
and variable interconnect and long distance charges. We did not generate any
cost of revenue for the year ended December 31, 1998.
Operations and Development
Operations and development expense was $36.0 million for the year ended
December 31, 1999, as compared to $9.8 million for the year ended December 31,
1998. The increase in operations and development was primarily due to the
engineering and implementation support and maintenance expense related to the
significant increase of our PCS network.
Selling and Marketing
23
Selling and marketing expense for the year ended December 31, 1999, was
approximately $71.2 million, as compared to $6.3 million for the year ended
December 31, 1998. This increase was primarily due to the increase in salary and
benefit expenses for new corporate and regional sales staff, advertising and
promotion expenses associated with our launch of 26 markets in 1999, and the
expense associated with the excess cost of handsets over the retail price.
General and Administrative
General and administrative expense was approximately $92.6 million,
including $29.4 million in non cash stock compensation, for the year ended
December 31, 1999, as compared to approximately $26.2 million and no non cash
stock compensation for the year ended December 31, 1998. The increase was
primarily due to the development and growth of infrastructure and staffing
related to information technology, customer care and other administrative
functions incurred in conjunction with the commencement of our service offering,
as well as the stock based compensation charge related to vested stock options
and vested restricted stock awards measured in 1999.
Depreciation and Amortization
Depreciation and amortization expense was approximately $55.1 million for
the year ended December 31, 1999, as compared to approximately $1.6 million for
the year ended December 31, 1998. The increase was primarily due to depreciation
of our fixed assets, as well as the amortization on personal communications
services licenses and the AT&T agreements.
Interest Income and Expense
Interest expense was $51.3 million, net of capitalized interest income of
$5.4 million, for the year ended December 31, 1999, as compared to $11.9
million, net of capitalized interest of $1.5 million, for the year ended
December 31, 1998. The increase in interest expense was primarily due to the
increase in debt of approximately $397,000 including the issuance of the senior
subordinated discount notes of $327.6 million. The increase in capitalized
interest of $3.8 million was attributable to the increased capital expenditure
in 1999.
Year ended December 31, 1998 Compared to Year ended December 31, 1997
Revenue
Revenue for the year ended December 31, 1998 was approximately $29,000.
This revenue resulted from servicing AT&T Wireless' roaming customers in our
Louisiana markets. We began offering wireless services in most of our major
markets in the first quarter of 1999. We generated no revenue for the year ended
1997.
Operations and Development
Operations and development expense for the year ended December 31, 1998,
was approximately $9.8 million. This expense was primarily related to an
increase in engineering and operating staff devoted to the implementation of
future operations of our network. There was no operations and development
expense for the year ended December 31, 1997.
24
Selling and Marketing
Selling and marketing expenses for the year ended December 31, 1998, was
approximately $6.3 million, as compared to approximately $0.3 million for the
year ended December 31, 1997. The year-over-year increase was due to the
increase in corporate and regional sales and marketing staff in order to prepare
for domestic market launches in the first quarter of 1999.
General and Administrative
General and administrative expense for the year ended December 31, 1998,
was approximately $26.2 million, as compared to approximately $2.6 million for
the year ended December 31, 1997. The year-over-year increase was due to the
development and growth of infrastructure and staffing related to information
technology, customer care and other administrative functions incurred in the
preparation for commercial launch of our markets in the first quarter of 1999.
Depreciation and Amortization
Depreciation and amortization expense for the year ended December 31, 1998,
was approximately $1.6 million, as compared to approximately $11,000 for the
year ended December 31, 1997. This expense was related to depreciation of
furniture, fixtures and office equipment, as well as the initiation of
amortization on AT&T Wireless agreements.
Interest Income and Expense
Interest expense, net of interest income, for the year ended December 31,
1998, was approximately $7.2 million, as compared to approximately $0.4 million
for the year ended December 31, 1997. This interest expense was related to notes
payable to shareholders and affiliates. This increase in interest expense was
related to borrowings under the senior credit facilities of $225.0 million since
July 1998 and the issuance of $10.0 million aggregate principal amount of notes
under the vendor financing provided by Lucent.
Liquidity and Capital Resources
We have been relying on the proceeds from borrowings and issuances of
capital stock, rather than revenues, for our primary sources of cash flow. We
began commercial operations in December 1998 and began earning recurring
revenues by the end of the first quarter of 1999.
Cash and cash equivalents totaled $182.3 million at December 31, 1999, as
compared to $111.7 million at December 31, 1998. This increase was the result of
incoming cash provided by financing activities of $638.6 million, offset by
$126.9 million of cash used in operating activities and $441.0 million of cash
used in network development and investing activities.
During the year ended December 31, 1999, we received proceeds from
long-term debt, net of repayments of $357.2 million. Additionally, we received
net proceeds from our initial public offering of $195.5 million, and received
$79.7 million of preferred stock proceeds and receipt of preferred stock
subscriptions receivable net of direct issuance costs. Cash outlays for capital
expenditures required to develop and construct our network totaled $298.5
million. We spent $114.2 million to purchase PCS licenses and $17.3 million for
the purchase of additional AT&T agreements. Cash used in operating activities of
$126.9 million
25
for the year ended December 31, 1999 resulted from a net loss of $251.0 million
that was partially offset by non-cash charges of $122.6 million.
During the year ended December 31, 1998, we received proceeds from
long-term debt, net of repayments of $255.4 million. Additionally, we received
$26.7 million of preferred stock proceeds net of direct issuance costs. Cash
outlays for capital expenditures required to develop and construct our network
totaled $107.5 million and we spent $21.0 million to purchase PCS licenses. Cash
used in operating activities of $29.8 million for the year ended December 31,
1998 resulted from a net loss of $51.2 million that was partially offset by
non-cash charges of $3.0 million.
During the year ended December 31, 1997, we received proceeds from
long-term debt, net of repayments of $2.8 million. Additionally, we received
$1.5 million of preferred stock proceeds net of direct issuance costs. Cash
outlays for capital expenditures required to develop and construct our network
totaled $1.1 million. Cash used in operating activities of $2.4 million for the
year ended December 31, 1997 resulted from a net loss of $3.3 million that was
partially offset by non-cash charges of $0.1 million.
Our preferred stock is convertible into shares of our common stock at
various times and following various events as follows:
o our series A preferred stock is convertible into shares of our class A
common stock after July 17, 2006 at a conversion rate equal to the
liquidation preference, which was approximately $109.6 million as of
December 31, 1999, divided by the market price of the class A common
stock at the time of conversion;
o our series F preferred stock is convertible at any time into shares of
our class A, class B or, if certain FCC restrictions have not been
lifted, Class D common stock, on a share for share basis.
We may redeem:
o shares of our series A preferred stock after the tenth anniversary of
its issuance; and
o shares of our series B, series C and series D preferred stock at any
time at the liquidation preference for the shares being redeemed.
The holders of our series A, series B, series C, series D and series E
preferred stock have the right to require us to redeem their shares after the
twentieth anniversary of their issuance time at the liquidation preference for
the shares being redeemed.
Holders of our series A preferred stock are entitled to a quarterly
dividend equal to 10% per annum of that stock's accumulated liquidation
preference. The accumulated liquidation preference of our series A preferred
stock was approximately $109.6 million in aggregate as of December 31, 1999. We
may defer payment of this dividend until December 31, 2008, and we are currently
doing so.
Holders of our series C, D and E preferred stock are not entitled to a
dividend except to the extent declared by our board. Those series of stock,
however, are entitled to an accumulated liquidation preference, which was
approximately $280.3 million in aggregate as of December 31, 1999. The
liquidation preference accretes at a rate of 6% per annum, compounded quarterly.
26
Equity Commitments
In connection with completion of the venture with AT&T, we received
unconditional and irrevocable equity commitments from our stockholders in the
aggregate amount of $128.0 million in return for the issuance of preferred and
common stock. As of December 31, 1999, approximately $55.5 million of the equity
commitments had been funded. The remaining equity commitments will be funded in
an installment of $36.3 million in July 2000 and $36.2 million in July 2001.
We received additional irrevocable equity commitments from our stockholders
in the aggregate amount of $5.0 million in return for the issuance of preferred
and common stock in connection with the Digital PCS acquisition. Our
stockholders funded $2.2 million of these equity commitments on April 30, 1999,
and will fund $1.4 million in each of July 2000 and July 2001.
We have received additional irrevocable equity commitments from our
stockholders in the aggregate amount of approximately $40.0 million in return
for the issuance of preferred and common stock in connection with the Puerto
Rico acquisition. We received $12.0 million of these commitments on May 24, 1999
and an additional $6.0 million on December 15, 1999. Our stockholders will fund
the remaining commitments in two installments of $11.0 million on March 30, 2001
and March 30, 2002.
We also received irrevocable equity commitments from our stockholders in
the amount of approximately $32.3 million in connection with Viper Wireless'
participation in the FCC's reauction of PCS licenses. We received approximately
$6.5 million of these equity commitments on May 14, 1999, approximately $11.0
million on July 15, 1999 and approximately $14.8 million on September 29, 1999.
In the aggregate, we have obtained $205.3 million of equity commitments, of
which $108 million had been funded as of December 31, 1999.
These equity commitments cannot be amended without our consent and the
consent of AT&T and all of the other initial investors. In addition, the terms
of our senior subordinated discount notes and our bank and vendor credit
facilities restrict us from waiving or amending these commitments. The foregoing
equity commitments are also collateralized by pledges of the shares of our
capital stock issued to each initial investor, other than certain shares of
preferred stock. Those pledges have been assigned to our senior lenders as
collateral for our senior credit facilities. Transfers of shares of our capital
stock pledged to collateralize an equity commitment remain subject to such
pledge until the equity commitment is funded in full.
In addition, pursuant to the stockholders' agreement between our initial
investors, Mr. Vento and Mr. Sullivan and us, the initial investors are
restricted from transferring their shares of common stock prior to July 2001,
except to affiliates. Any transfers by them of class A common stock are subject
to rights of first offer and tag-along and drag-along rights in favor of AT&T
Wireless and the other initial investors. In addition to the approval of our
senior lenders, the terms of the stockholders' agreement may be amended only if
agreed to in writing by us and the beneficial holders of a majority of the class
A common stock party to the stockholders' agreement, including AT&T Wireless, 66
2/3% of the class A common stock beneficially owned by our initial investors
other than AT&T Wireless, and 66 2/3% of the class A common stock beneficially
owned by Mr. Vento and Mr. Sullivan. Following the expiration or waiver of the
180 day restrictions on transfer imposed in connection with our initial public
offering of 9,200,000 shares of our class A common stock, shares of our
preferred stock may be transferred, subject, however, to the pledge described
above and the continuing obligations of the investors to fund its Commitments.
27
Senior Subordinated Discount Notes
On April 20, 1999, we sold $575.0 million aggregate principal amount at
maturity of 11 5/8% senior subordinated discount notes due April 15, 2009. Cash
interest on these notes will not accrue or be payable prior to April 15, 2004.
From April 15, 2004, cash interest will accrue at a rate of 11 5/8% per annum on
the principal amount at maturity of the notes through and including the maturity
date and will be payable semi-annually on April 15 and October 15 of each year.
In connection with the sale of these notes, we received net proceeds of
approximately $317 million after deducting initial purchasers' discount and
issuance expenses of approximately $11 million.
The indenture under which the notes were issued restricts, among other
things, our ability to:
o incur debt;
o create levels of debt that are senior to the notes but junior to our
senior debt;
o pay dividends on or redeem capital stock;
o make some investments or redeem other subordinated debt;
o make particular dispositions of assets;
o engage in transactions with affiliates;
o engage in particular business activities; and
o engage in mergers, consolidations and particular sales of assets.
Senior Credit Facilities
In July 1998, we entered into senior credit facilities with a group of
lenders for an aggregate amount of $525.0 million. In October 1999 we entered
into amendments to the senior credit facilities under which the amount of credit
available to us was increased to $560.0 million. Our senior credit facilities
currently provide for:
o a $150.0 million senior secured term loan that matures in January
2007,
o a $225.0 million senior secured term loan that matures in January
2008,
o a $150.0 million senior secured revolving credit facility that
matures in January 2007, and
o a $35.0 million senior secured term loan that matures in May
2009.
We must repay the term loans in quarterly installments, beginning in
September 2002, and the commitments to make loans under the revolving credit
facility automatically and permanently reduce beginning in April 2005. As of
December 31, 1999, $225.0 million had been drawn under the senior credit
facilities and was then accruing interest at an annual rate of 9.12%. The senior
credit agreement contains financial and other covenants customary for senior
agreements.
28
We entered into a note purchase agreement with Lucent under which Lucent
agreed to provide us with $80.0 million of junior subordinated vendor financing.
This $80.0 million consisted of $40.0 million aggregate principal amount of
increasing rate Lucent series A notes and $40.0 million aggregate principal
amount of increasing rate Lucent series B notes. We borrowed $40.0 million under
the series B note facility and repaid this amount and accrued interest thereon
in April 1999 from proceeds of our sale of senior subordinated discount notes.
This amount cannot be reborrowed. As of December 31, 1999, we had outstanding
approximately $43.5 million of our Lucent series A notes, including $3.6 million
of accrued interest and accruing interest at a rate per annum of 8.5% as of
December 31, 1999. The amount outstanding under these series A notes and any
future series A note borrowings is subject to mandatory prepayment in an amount
equal to 50% of the excess of $198.0 million in net proceeds we receive from an
equity offering other than the issuance of capital stock used to acquire related
business assets.
In October 1999 we entered into an amended and restated note purchase
agreement with Lucent under which Lucent has agreed to purchase up to $12.5
million of new series A notes and up to $12.5 million of new series B notes
under a vendor expansion facility in connection with our prior acquisition of
licenses in the San Juan, Puerto Rico, Evansville Indiana, Paducah, Kentucky and
Alexandria and Lake Charles, Louisiana markets. The obligation of Lucent to
purchase notes under this vendor expansion facility is subject to a number of
conditions, including that we commit to purchase one wireless call connection
equipment site and 50 network equipment sites for each additional market from
Lucent.
In addition, pursuant to the amended and restated note purchase agreement
Lucent has agreed to make available up to an additional $50.0 million of new
vendor financing not to exceed an amount equal to 30% of the value of equipment,
software and services provided by Lucent in connection with any additional
markets we acquire. This $50.0 million of availability is subject to a reduction
up to $20 million on a dollar for dollar basis of any additional amounts Lucent
otherwise lends to us for such purposes under our senior credit facilities,
exclusive of amounts Lucent lends to us under its existing commitments under our
senior credit facilities. Any notes purchased under this facility would be
divided equally between Lucent series A and series B notes.
The terms of Lucent series A and series B notes issued under these
expansion facilities would be identical to the terms of the original Lucent
series A and series B notes as amended, including a maturity date of October 23,
2009.
Any Lucent series B notes issued under these expansion facilities will
mature and will be subject to mandatory prepayment on a dollar for dollar basis
out of the net proceeds of any future public or private offering or sale of debt
securities, exclusive of any private placement notes issued to finance any
additional market and borrowings under the senior credit facilities or any
replacement facility.
Interest payable on the Lucent series A notes and the Lucent series B notes
on or prior to May 11, 2004 will be payable in additional series A and series B
notes. Thereafter, interest will be paid in arrears in cash on each six month
and yearly anniversary of the series A and series B closing date or, if cash
interest payments are prohibited under the senior credit facilities or a
qualifying high yield debt offering, in additional series A and series B notes.
The U.S. government financing requires quarterly interest payments, which
commenced in July 1998 and continued for one year thereafter, then quarterly
principal and interest payments for the remaining nine years.
Vendor Financing
In May 1998, we entered into a vendor procurement contract with Lucent
under which we are required to purchase up to $285.0 million of radio, call
connecting and related equipment and services for the development of our
wireless communications network. At December 31, 1999, we had satisfied our
purchase requirements under this contract through our purchase of approximately
$294.5 million of equipment and services from Lucent.
29
FCC Debt
In completing acquisitions of PCS licenses during the year ended December
31, 1999, we assumed U.S. government financing with the FCC. At December 31,
1999 our FCC debt was $20.2 million less a discount of $2.5 million. The terms
of the notes include interest rates ranging from 6.125% to 7.00% and have
quarterly and principal interest payments over the remaining nine years of the
debt.
Commitments
We have operating leases primarily related to retail store locations,
distribution outlets, office space and rent for our network development. The
terms of some of the leases include a reduction of rental payments and scheduled
rent increases at specified intervals during the term of the leases. We are
recognizing rent expense on a straight-line basis over the life of the lease,
which establishes deferred rent on the balance sheet. As of December 31, 1999,
the aggregate minimum rental commitments under non-cancelable operating leases
are as follows:
For the year ending December 31: (dollars in thousands)
2000........................................ $ 21,605
2001........................................ 21,375
2002........................................ 21,057
2003........................................ 18,374
2004........................................ 10,330
Thereafter..................................... 27,999
--------
Total $120,740
========
Rental expense, which is recorded ratably over the lease terms, was
approximately $157,000, $3.2 million and $13.8 million for the years ended
December 31, 1997, 1998, and 1999, respectively.
We have communications towers situated on leased sites in all of our
markets and we are considering entering into sale/leaseback transactions and may
do so if we can obtain terms acceptable to us.
We have entered into letters of credit to facilitate local business
activities. We are liable under the letters of credit for nonperformance of
certain criteria under the individual contracts. The total amount of outstanding
letters of credit was approximately $1.6 million at December 31, 1999. The
outstanding letters of credit reduce the amount available to be drawn under our
senior credit facility.
We have minimum purchase commitments of 15 million roaming minutes from
July 1999 to January 2002 from another wireless provider in Puerto Rico relating
to customers roaming outside our coverage area. We believe we will be able to
meet these minimum requirements.
We believe that the capital we have raised to date and the other capital
resources currently available to us, which includes the funding of the
irrevocable equity commitments from our initial investors, will be sufficient to
meet our projected capital requirements through December 31, 2001. If we acquire
additional licenses or properties, we may need to incur substantial additional
debt to complete the acquisitions and construct and operate the acquired
properties. The network development requirements imposed by our agreements with
AT&T create significant capital requirements, much of which will be covered by
indebtedness we incur.
30
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters ended December 31, 1999. This data
has been prepared on the same basis as the audited financial statements, and in
management's opinion, includes all adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the information
for the periods presented. Results for any previous fiscal quarter are not
necessarily indicative of results for the full year or for any future quarter.
Quarterly Financial Data (unaudited)
($ in thousands expect per share amounts)
Quarter ended,
---------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
-------- -------- --------- --------
1999
----
Revenue $ 4,240 $ 17,128 $ 26,833 $ 39,481
Operating loss (26,944) (37,150) (50,179) (92,158)
Net loss (32,293) (45,990) (65,792) (106,921)
Accretion of manditorily redeemable
preferred stock (4,267) (5,629) (7,064) (7,164)
-------- -------- --------- ---------
Net loss attributable to common
equity $(36,560) $(51,619) $(72,856) $(114,085)
======== ======== ======== =========
Net loss attributable to common
equity per share - basic and diluted $( 0.62) $( 0.75) $(0.89) $( 1.29)
======== ======== ======== =========
1998
----
Revenue $ 0 $ 0 $ 0 $ 29
Operating loss (2,655) (6,624) (12,239) (21,373)
Net loss (2,745) (6,843) (15,823) (25,744)
Accretion of manditorily redeemable
preferred stock (17) (190) (3,819) (4,541)
-------- -------- --------- ---------
Net loss attributable to common
equity $( 2,762) $( 7,033) $( 19,643) $( 30,285)
======== ======== ========= =========
Net loss attributable to common
equity per share - basic and diluted(a) $(142.85) $(363.75) $( 1.23) $( 0.51)
======== ======== ========= =========
(a) Net loss attributable to common equity per share - basic and diluted for the
first and second quarter of 1998 was computed based on the common equity
structure of the predecessor company.
Forward Looking Statements: Cautionary Statements
Statements in this report expressing our expectations and beliefs of the
Company regarding our future results or performance are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that involve a number of risks and uncertainties. In particular, certain
statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical facts constitute
forward-looking statements. Although we believe that the expectations expressed
in such forward-looking statements are based on reasonable assumptions within
the bounds of our knowledge of our business, our actual future results may
differ significantly from those stated in any forward-looking statements.
Factors that may cause or contribute to such differences include, but are not
limited to, risks
31
discussed in our Registration Statement on Form S-1 (Reg. No. 333-89393) and in
our other filings with the Securities and Exchange Commission, including,
without limitation, the following: (1) we depend on our agreements with AT&T for
our success, and under certain circumstances AT&T could terminate its exclusive
relationship with us and our use of the AT&T brand name and logo, (2) we may not
be able to manage the construction of our network or the growth of our business
successfully, (3) we have substantial existing debt, and may incur substantial
additional debt, that we may be unable to service, (4) we may not be able to
obtain the additional financing we may need to complete our network and fund
operating losses, (5) we have many competitors that have substantial coverage of
our licensed areas, (6) difficulties in obtaining infrastructure equipment or
sites may affect our ability to construct our network and meet our development
requirements, (7) potential acquisitions may require us to incur substantial
additional debt and integrate new technologies, operations and services, which
may be costly and time consuming, (8) we may experience a high rate of customer
turnover, (9) our association with the other SunCom companies may harm our
reputation if consumers react unfavorably to them, (10) we depend upon
consultants and contractors for our network services, (11) we may become subject
to new health and safety regulations, which may result in a decrease in demand
for our services, (12) changes in our licenses or other governmental action or
regulation could affect how we do business, (13) we could lose our PCS licenses
or incur financial penalties if the FCC determines we are not a very small
business or if we do not meet the FCC's minimum construction requirements, (14)
the technologies that we use may become obsolete, which would limit our ability
to compete effectively and (15) we expect to incur operating costs due to fraud.
As a result of the foregoing and other factors, we may experience material
fluctuations in future operating results on a quarterly or annual basis which
could materially and adversely affect our business, financial condition,
operating results and stock price.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are not exposed to fluctuations in currency exchange rates because all
of our services are invoiced in U.S. dollars. We are exposed to the impact of
interest rate changes on our short-term cash investments, consisting of U.S.
Treasury obligations and other investments in respect of institutions with the
highest credit ratings, all of which have maturities of three months or less.
These short-term investments carry a degree of interest rate risk. We believe
that the impact of a 10% increase or decline in interest rates would not be
material to our investment income.
We use interest rate swaps to hedge the effects of fluctuations in interest
rates on our senior credit facilities. These transactions meet the requirements
for hedge accounting, including designation and correlation. These interest rate
swaps are managed in accordance with our policies and procedures. We do not
enter into these transactions for trading purposes. The resulting gains or
losses, measured by quoted market prices, are accounted for as part of the
transactions being hedged, except that losses not expected to be recovered upon
the completion of hedged transactions are expensed. Gains or losses associated
with interest rate swaps are computed as the difference between the interest
expense per the amount hedged using the fixed rate compared to a floating rate
over the term of the swap agreement. As of December 31, 1999, we had entered
into six interest rate swap agreements totaling $225 million to convert our
variable rate debt to fixed rate debt. The interest rate swaps had no material
impact on our consolidated financial statements as of and for the year ended
December 31, 1999.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the consolidated financial statements listed under the
heading "(a) (1) Consolidated Financial Statements" of Item 14 hereof, which
financial statements are incorporated herein by reference in response to this
Item 8.
32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Board of Directors," and "Section 16(a)
Beneficial Ownership Reporting" in our Proxy Statement for the 2000 Annual
Meeting of Stockholders to be held on May 24, 2000.
Item 11. Executive Compensation.
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Compensation of Executive Officers" in our
Proxy Statement for the 2000 Annual Meeting of Stockholders to be held on May
24, 2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Stock Ownership of Certain Beneficial
Owners and Management" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held on May 24, 2000.
Item 13. Certain Relationships and Related Transactions.
The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Certain Transactions", "Compensation of
Executive Officers -- Management Agreement" and "Compensation of Executive
Officers -- Employment Agreement" in our Proxy Statement for the 2000 Annual
Meeting of Stockholders to be held on May 24, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Financial Statements, Schedules and Exhibits
(1) Consolidated Financial Statements.
The following consolidated financial statements and the Report of
Independent Accountants related thereto are included in Item 8 above.
Page
----
Report of Independent Accountants ....................................... F-2
Consolidated Balance Sheets ............................................. F-3
Consolidated Statements of Operations ................................... F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficit) ..... F-5
Consolidated Statements of Cash Flows ................................... F-6
Notes to Consolidated Financial Statements .............................. F-8
33
(2) Financial Statement Schedules.
None.
(3) Exhibits.
The following exhibits are filed with this report or incorporated by
reference as set forth below.
Exhibit
Number Description of Document
------ -----------------------
2.1 Stock Purchase Agreement by and among TeleCorp PCS, Inc., TeleCorp
Holding Corp., Inc., Gerald T. Vento, Thomas H. Sullivan, and certain
other investors identified therein, dated as of October 18, 1999.
3.1 Fifth Amended and Restated Certificate of Incorporation of TeleCorp
PCS, Inc.
3.2 Second Amended and Restated Bylaws of TeleCorp PCS, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
(b) Reports on Form 8-K:
None.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 28, 2000 TELECORP PCS, INC.
By: /s/ Gerald T. Vento
------------------------------
Gerald T. Vento
Chairman of the Board and Chief
Executive Officer
Signature Title Date
--------- ----- ----
/s/ Gerald T. Vento
- -------------------- Chief Executive Officer March 28, 2000
Gerald T. Vento (Principal Executive Officer)
and Chairman
/s/ Thomas H. Sullivan
- ---------------------- Executive Vice President, Chief March 28, 2000
Thomas H. Sullivan Financial Officer (Principal
Financial and Accounting Officer)
and Director
- -------------------- Director March __, 2000
Michael R. Hannon
/s/ Scott Anderson
- -------------------- Director March 28, 2000
Scott Anderson
/s/ Rohit M. Desai
- --------------------
Rohit M. Desai Director March 28, 2000
/s/ James M. Hoak
- -------------------- Director March 28, 2000
James M. Hoak
- -------------------- Director March ___, 2000
Mary Hawkins-Key
/s/ William Kussell
- --------------------
William Kussell Director March 28, 2000
- -------------------- Director March ___, 2000
Michael Schwartz
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 28, 2000 TeleCorp Communications, Inc.
By: /s/ Gerald T. Vento
------------------------------
Gerald T. Vento
Chairman of the Board and
Chief Executive Officer
Signature Title Date
--------- ----- ----
/s/ Gerald T. Vento
- -------------------- Chief Executive Officer March 28, 2000
Gerald T. Vento (Principal Executive Officer)
and Chairman
/s/ Thomas H. Sullivan
- ---------------------- Director and President March 28, 2000
Thomas H. Sullivan
36
INDEX TO FINANCIAL STATEMENTS
TELECORP PCS, INC. AND SUBSIDIARIES
AND PREDCESSOR COMPANY
Page
----
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets............................................. F-3
Consolidated Statements of Operations................................... F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficit)..... F-5
Consolidated Statements of Cash Flows................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders
TeleCorp PCS, Inc. and Subsidiaries and Predecessor Company:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the financial
position of TeleCorp PCS, Inc. and Subsidiaries and Predecessor Company (the
Company) at December 31, 1999 and 1998 and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
McLean, Virginia
March 10, 2000
F-2
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share data)
December 31,
-----------------------
1998 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents .......................................................................... $ 111,733 $ 182,330
Accounts receivable, net ........................................................................... -- 23,581
Inventory .......................................................................................... 778 15,802
Prepaid expenses ................................................................................... 2,186 3,031
Other current assets ............................................................................... 1,218 797
--------- ---------
Total current assets ......................................................................... 115,915 225,541
Property and equipment, net ........................................................................ 197,469 400,450
PCS licenses and microwave relocation costs, net ................................................... 118,107 267,682
Intangible assets-- AT&T agreements, net ........................................................... 26,285 37,908
Deferred financing costs, net ...................................................................... 8,585 19,577
Other assets ....................................................................................... 283 1,044
--------- ---------
Total assets ................................................................................. $ 466,644 $ 952,202
========= =========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................................................... $ 14,592 $ 38,903
Accrued expenses ................................................................................... 94,872 51,977
Microwave relocation obligation, current portion ................................................... 6,636 36,122
Long-term debt, current portion .................................................................... -- 1,361
Accrued interest ................................................................................... 4,491 1,387
Deferred revenue ................................................................................... -- 1,709
--------- ---------
Total current liabilities .................................................................... 120,591 131,459
Long-term debt ......................................................................................... 243,385 639,210
Microwave relocation obligation ........................................................................ 2,481 2,365
Accrued expenses and other ............................................................................. 196 6,541
--------- ---------
Total liabilities ............................................................................ 366,653 779,575
--------- ---------
Mandatorily redeemable preferred stock, issued 255,999 and 382,539 shares,
respectively; and outstanding, 255,215 and 382,539 shares, respectively,
(liquidation preference $389,966 as of December 31, 1999) ................................... 240,409 360,182
Deferred compensation ............................................................................ (4) --
Treasury stock, 784 shares and none, respectively, at cost ....................................... -- --
Preferred stock subscriptions receivable ......................................................... (75,914) (97,001)
--------- ---------
Total mandatorily redeemable preferred stock, net ...................................... 164,491 263,181
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Series F preferred stock, par value $.01 per share, 10,308,676 and 14,912,778
shares issued and outstanding, respectively (liquidation preference $1 as of
December 31, 1999) ........................................................................ 103 149
Common stock, par value $.01 per share issued 49,357,658 and 85,592,221 shares, .............. 493 856
respectively; and outstanding 48,805,184 and 85,592,221 shares, respectively
Additional paid-in capital ................................................................... -- 267,442
Deferred compensation ........................................................................ (7) (42,811)
Common stock subscriptions receivable ........................................................ (86) (191)
Treasury stock, 552,474 shares and none, respectively, at cost ............................... -- --
Accumulated deficit .......................................................................... (65,003) (315,999)
--------- ---------
Total stockholders' equity (deficit) ................................................... (64,500) (90,554)
--------- ---------
Total liabilities, mandatorily redeemable preferred stock and stockholders' equity
(deficit) ........................................................................... $ 466,644 $ 952,202
========= =========
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
For the year ended December 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
Revenue:
Service revenue ...................................... $ -- $ -- $ 41,319
Roaming revenue ...................................... -- 29 29,010
Equipment revenue .................................... -- -- 17,353
------------ ------------ ------------
Total revenue ............................ -- 29 87,682
------------ ------------ ------------
Operating expenses:
Cost of revenue ...................................... -- -- 39,259
Operations and development (including non cash stock
compensation of $1,472 in 1999) .............. -- 9,772 35,979
Selling and marketing (including non cash stock
compensation of $937 in 1999) ................ 304 6,325 71,180
General and administrative (including non cash stock
compensation of $29,408 in 1999) ............. 2,637 26,239 92,585
Depreciation and amortization ........................ 11 1,584 55,110
------------ ------------ ------------
Total operating expenses ................. 2,952 43,920 294,113
------------ ------------ ------------
Operating loss ........................... (2,952) (43,891) (206,431)
Other (income) expense:
Interest expense ..................................... 396 11,934 51,313
Interest income ...................................... (13) (4,697) (6,464)
Other expense (income) ............................... -- 27 (284)
------------ ------------ ------------
Net loss ............................. (3,335) (51,155) (250,996)
Accretion of mandatorily redeemable preferred stock ...... (726) (8,567) (24,124)
------------ ------------ ------------
Net loss attributable to common equity $ (4,061) $ (59,722) $ (275,120)
============ ============ ============
Net loss attributable to common equity per share--
basic and diluted .................................... $ (111.74) $ (2.19) $ (3.58)
============ ============ ============
Weighted average common equity shares outstanding--
basic and diluted .................................... 36,340 27,233,786 76,895,391
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
($ in thousands)
Additional
Series F Paid-in
Preferred stock Common stock capital
------------------------- -------------------------- ----------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Balance, December 31, 1996 ................................. -- $ -- 43,124 $ 2 $ --
Issuance of common stock for cash .......................... -- -- 6,875 -- --
Accretion of mandatorily redeemable preferred
stock ...................................................... -- -- -- -- --
Noncash redemption of equity interests ..................... -- -- (30,664) (1) --
Net loss ................................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 ................................. -- -- 19,335 1 --
Noncash redemption of equity interests ..................... -- -- (19,335) (1) --
Issuance of preferred and common stock for cash,
licenses and AT&T agreements ............................... 10,308,676 103 46,262,185 462 --
Accretion of mandatorily redeemable preferred
stock ...................................................... -- -- -- -- --
Noncash issuance of restricted stock to
employees .................................................. -- -- 3,095,473 31 --
Repurchase of common stock for cash ........................ -- -- -- -- --
Compensation expense related to restricted stock awards .... -- -- -- -- --
Net loss ................................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 ................................. 10,308,676 103 49,357,658 493 --
Issuance of preferred stock and common stock for
cash and licenses .......................................... 4,604,102 46 23,231,331 233 21,550
Issuance of common stock in initial public offering ........ -- -- 10,580,000 106 197,211
Costs associated with initial public offering .............. -- -- -- -- (1,801)
Deferred compensation expense related to stock option grants
and restricted stock awards ................................ -- -- -- -- 73,049
Compensation expense related to stock option grants and
restricted stock awards .................................... -- -- -- -- --
Non-cash issuance of restricted stock ...................... -- -- 2,423,232 24 1,558
Repurchase of common stock for cash ........................ (1)
Accretion of manditorily redeemable preferred
stock ...................................................... -- -- -- -- (24,124)
Net loss ................................................... -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 ................................. 14,912,778 $ 149 85,592,221 $ 856 $ 267,442
=========== =========== =========== =========== ===========
Common stock
Deferred Subscriptions
Compensation Receivable Treasury stock
------------ ----------- -------------------------
Shares Amount
----------- -----------
Balance, December 31, 1996 ................................. $ -- $ -- -- $ --
Issuance of common stock for cash .......................... -- -- -- --
Accretion of mandatorily redeemable preferred
stock ...................................................... -- -- -- --
Noncash redemption of equity interests ..................... -- -- -- --
Net loss ................................................... -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1997 ................................. -- -- -- --
Noncash redemption of equity interests ..................... -- -- -- --
Issuance of preferred and common stock for cash,
licenses and AT&T agreements ............................... -- (86) -- --
Accretion of mandatorily redeemable preferred
stock ...................................................... -- -- -- --
Noncash issuance of restricted stock to
employees .................................................. (10) -- -- --
Repurchase of common stock for cash ........................ 2 -- (552,474) --
Compensation expense related to restricted stock awards .... 1 -- -- --
Net loss ................................................... -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1998 ................................. (7) (86) (552,474) --
Issuance of preferred stock and common stock for
cash and licenses .......................................... -- (105) -- --
Issuance of common stock in initial public offering ........ -- -- -- --
Costs associated with initial public offering .............. -- -- -- --
Deferred compensation expense related to stock option grants
and restricted stock awards ................................ (73,049) -- -- --
Compensation expense related to stock option grants and
restricted stock awards .................................... 31,817 -- -- --
Non-cash issuance of restricted stock ...................... (1,573) -- 959,259 --
Repurchase of common stock for cash ........................ 1 (406,785) --
Accretion of manditorily redeemable preferred
stock ...................................................... -- -- -- --
Net loss ................................................... -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 1999 ................................. $ (42,811) $ (191) -- $ --
=========== =========== =========== ===========
Accumulated
Deficit Total
----------- -----------
Balance, December 31, 1996 ................................. $ (814) $ (812)
Issuance of common stock for cash .......................... -- --
Accretion of mandatorily redeemable preferred
stock ...................................................... (726) (726)
Noncash redemption of equity interests ..................... -- (1)
Net loss ................................................... (3,335) (3,335)
----------- -----------
Balance, December 31, 1997 ................................. (4,875) (4,874)
Noncash redemption of equity interests ..................... -- (1)
Issuance of preferred and common stock for cash,
licenses and AT&T agreements ............................... (383) 96
Accretion of mandatorily redeemable preferred
stock ...................................................... (8,567) (8,567)
Noncash issuance of restricted stock to
employees .................................................. (21)
Repurchase of common stock for cash ........................ (2) --
Compensation expense related to restricted stock awards .... -- 1
Net loss ................................................... (51,155) (51,155)
----------- -----------
Balance, December 31, 1998 ................................. (65,003) (64,500)
Issuance of preferred stock and common stock for
cash and licenses .......................................... -- 21,724
Issuance of common stock in initial public offering ........ -- 197,317
Costs associated with initial public offering .............. -- (1,801)
Deferred compensation expense related to stock option grants -- --
and restricted stock awards
Compensation expense related to stock option grants and
restricted stock awards .................................... -- 31,817
Non-cash issuance of restricted stock ...................... -- 9
Repurchase of common stock for cash ........................ --
Accretion of manditorily redeemable preferred
stock ...................................................... -- (24,124)
Net loss ................................................... (250,996) (250,996)
----------- -----------
Balance, December 31, 1999 ................................. $ (315,999) $ (90,554)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For the year ended December 31,
-------------------------------------------
1997 1998 1999
--------- --------- ---------
Cash flows from operating activities:
Net loss .................................................................... $ (3,335) $ (51,155) $(250,996)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................................ 11 1,584 55,110
Noncash compensation expense related to stock option ..................... -- 2 31,817
grants and restricted stock awards
Noncash interest expense ................................................. 134 1,182 32,718
Bad debt expense ......................................................... -- -- 2,962
Noncash general and administrative expense charge
by affiliates ......................................................... -- 197 --
Changes in cash flow from operations resulting from
changes in assets and liabilities:
Accounts receivable ...................................................... -- -- (23,581)
Inventory ................................................................ -- (778) (15,024)
Prepaid expenses ......................................................... -- (2,186) (845)
Other current assets ..................................................... (52) (1,145) 421
Other assets ............................................................. (27) (256) (761)
Accounts payable ......................................................... 619 11,586 24,808
Accrued expenses ......................................................... -- 9,145 17,831
Accrued interest ......................................................... 258 2,046 (3,104)
Deferred revenue ......................................................... -- -- 1,709
--------- --------- ---------
Net cash used in operating activities ................................. (2,392) (29,778) (126,935)
--------- --------- ---------
Cash flows from investing activities:
Expenditures for network under development, wireless
network and property and equipment ....................................... (1,134) (107,542) (298,506)
Capitalized interest on network under development
and wireless network ..................................................... -- (227) (5,317)
Expenditures for microwave relocation ....................................... -- (3,340) (5,654)
Purchase of PCS licenses .................................................... -- (21,000) (114,238)
Partial refund of deposit on PCS licenses ................................... 1,561 -- --
Purchase of intangibles--AT&T agreements .................................... -- -- (17,310)
--------- --------- ---------
Net cash provided by (used in) investing activities ................... 427 (132,109) (441,025)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from sale of mandatorily redeemable
preferred stock .......................................................... 1,500 26,661 70,323
Receipt of preferred stock subscription receivable .......................... -- -- 9,414
Direct issuance costs from sale of mandatorily
redeemable preferred stock ............................................... -- (1,027) (2,500)
Proceeds from sale of common stock and series F preferred stock ............. -- 38 21,724
Proceeds from long-term debt ................................................ 2,809 257,492 407,635
Proceeds associated with initial public offering ............................ -- -- 197,317
Direct issuance cost from the initial public offering ....................... -- -- (1,801)
Purchases of treasury shares ................................................ -- -- --
Payments on long term debt .................................................. -- (2,073) (50,451)
Payments of deferred financing costs ........................................ -- (9,110) (12,742)
Net increase in amounts due to affiliates .................................. 171 (928) (362)
--------- --------- ---------
Net cash provided by financing activities ............................. 4,480 271,053 638,557
--------- --------- ---------
Net increase in cash and cash equivalents ....................................... 2,515 109,166 70,597
Cash and cash equivalents at the beginning of period ............................ 52 2,567 111,733
--------- --------- ---------
Cash and cash equivalents at the end of period .................................. $ 2,567 $ 111,733 $ 182,330
========= ========= =========
The accompanying notes are an integral part of these financial statements.
F-6
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
($ in thousands, except for per share data)
For the year ended
December 31,
------------------------------
1997 1998 1999
-------- -------- --------
Supplemental disclosure of cash flow Information:
Cash paid for income taxes ........................ $ -- $ -- $ --
Cash paid for interest ............................ -- 9,786 24,342
Supplemental disclosure of non-cash investing and financing
activities:
Network under development and
microwave relocation costs
included in accounts payable
and accrued expenses .......................... 2,485 98,092 32,424
Issuance of mandatorily
redeemable preferred stock
and preferred stock in
exchange for PCS licenses and
AT&T agreements ............................... -- 100,900 2,674
Issuance of mandatorily
redeemable preferred stock
and common stock in
exchange for stock
subscriptions receivable ...................... -- 76,000 27,191
U.S. Government financing of
PCS licenses .................................. 9,193 -- 11,551
Discount on U.S. Government
financing ..................................... 1,600 -- 1,631
Conversion of notes payable to
stockholders into preferred
stock ......................................... 499 25,300 --
Accretion of preferred stock
dividends ..................................... 726 8,567 24,124
Redemption of equity interests .................... 6,370 -- --
Distribution of net assets to
Affiliates .................................... 3,645 -- --
Notes payable to affiliates ....................... 2,725 -- --
Capitalized interest .............................. $ 131 $ 2 ,055 $ 5,409
The accompanying notes are an integral part of these financial statements.
F-7
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
1. Organization and Business
TeleCorp Holding Corp., Inc. (Holding) was incorporated in the State of
Delaware on July 29, 1996 (date of inception). Holding was formed to participate
in the Federal Communications Commission's (FCC) Auction of F-Block Personal
Communications Services (PCS) licenses (the Auction) in April 1997. Holding
successfully obtained licenses in the New Orleans, Memphis, Beaumont, Little
Rock, Houston, Tampa, Melbourne and Orlando Basic Trading Areas (BTAs). Holding
qualifies as a Designated Entity and Very Small Business under Part 24 of the
rules of the FCC applicable to broadband PCS.
In April 1997, Holding entered into an agreement to transfer the PCS
licenses for the Houston, Tampa, Melbourne and Orlando BTAs to four newly-formed
entities created by Holding's existing stockholder group: THC of Houston, Inc.;
THC of Tampa, Inc.; THC of Melbourne, Inc.; and THC of Orlando, Inc. These
licenses were transferred along with the related operating assets and
liabilities in exchange for investment units consisting of Class A, B and C
common stock and Series A preferred stock in August 1997.
TeleCorp PCS, Inc. (TeleCorp) was incorporated in the State of Delaware on
November 14, 1997 by the controlling stockholders of Holding. TeleCorp is the
exclusive provider of wireless mobility services using equal emphasis
co-branding with AT&T in its licensed regions in connection with a strategic
alliance with AT&T Wireless and its affiliates (collectively AT&T). Upon
finalization of the AT&T Transaction, Holding became a wholly-owned subsidiary
of TeleCorp (see Note 9). TeleCorp and Holding are hereafter referred to as the
Company.
TeleCorp PCS, Inc. is the largest AT&T Wireless affiliate in the United
States in terms of licensed population, with licenses covering markets where
approximately 16.7 million people reside. The Company provides wireless personal
communication services, or PCS, in selected markets in the south-central and
northeast United States and in Puerto Rico, encompassing eight of the 100
largest metropolitan areas in the United States.
Under the terms of the AT&T strategic alliance, the Company is AT&T's
exclusive provider of wireless mobility services in the eight covered markets,
using equal emphasis co-branding with AT&T subject to AT&T's right to resell
services on the Company's network. The Company has the right to use the AT&T
brand name and logo together with the SunCom brand name and logo, giving equal
emphasis to each in its covered markets. The Company is AT&T's preferred roaming
partner for digital customers in the Company's markets. Additionally, the
Company's relationship with AT&T Wireless provides coast-to-coast coverage to
TeleCorp customers.
2. Summary of Significant Accounting Policies
Basis of presentation
Holding was formed to explore various business opportunities in the
wireless telecommunications industry. TeleCorp was formed to continue the
activity of Holding through its strategic alliance with AT&T. For purposes of
the accompanying financial statements, Holding has been treated as a
"predecessor" entity. Therefore, the financial statements for the year ended
December 31, 1997 include the historical financial information of Holding, the
predecessor entity. The financial statements as of and for the year ended
December 31, 1998 and for all periods thereafter, include the historical
financial information of Holding and TeleCorp. The Chief Executive Officer and
President of Holding maintain the positions of Chief Executive Officer and
Executive Vice President and Chief Financial Officer, respectively, of TeleCorp.
In addition, these officers own a majority of the voting stock of TeleCorp and,
prior to the finalization of the AT&T Transaction, owned a majority of the
voting stock of Holding. As a result of this relationship, certain financing
relationships and the similar nature of business activities, Holding and
TeleCorp were considered companies under common control.
F-8
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
Risks and uncertainties
The Company expects to continue to incur significant operating losses and
to generate negative cash flow from operating activities for at least the next
several years while it constructs its network and develops its customer base.
The Company's ability to eliminate operating losses and to generate positive
cash flow from operations in the future will depend upon a variety of factors,
many of which it is unable to control. These factors include: (1) the cost of
constructing its network, (2) changes in technology, (3) changes in governmental
regulations, (4) the level of demand for wireless communications services, (5)
the product offerings, pricing strategies and other competitive factors of the
Company's competitors and (6) general economic conditions. If the Company's is
unable to implement its business plan successfully, it may not be able to
eliminate operating losses, generate positive cash flow or achieve or sustain
profitability which would materially adversely affect its business, operations
and financial results as well as its ability to make payments on its debt
obligations.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, which includes TeleCorp Communications, Inc.,
TeleCorp LLC and Holding. All intercompany accounts and transactions have been
eliminated in consolidation.
Development Stage Company
Prior to January 1, 1999, the Company's activities principally were
planning and participation in the Auction, initiating research and development,
conducting market research, securing capital and developing its proposed service
and network. Since the Auction, the Company has been relying on the borrowing of
funds and the issuance of common and preferred stock rather than recurring
revenues, for its primary sources of cash flow. Accordingly, the Company's
financial statements for all periods prior to January 1, 1999 were presented as
a development stage enterprise, as prescribed by Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises." In the first quarter of 1999, the Company commenced operations and
began providing wireless mobility services for its customers. As a result, the
Company exited the development stage in the quarter ended March 31, 1999.
Fair Value of Financial Instruments
The Company believes that the carrying amount of its financial instruments
approximate fair value.
Use of 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 on the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk
F-9
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. The Company sells products and services to various
customers throughout many regions in the United States and Puerto Rico. The
Company routinely assesses the strength of its customers and maintains
allowances for anticipated losses.
For the years ended December 31, 1997, 1998 and 1999, no one customer
accounted for 10% or more of total revenues or accounts receivable.
Cash Equivalents
The Company considers all highly liquid instruments with a maturity from
purchase date of three months or less to be cash equivalents. Cash equivalents
consist of overnight sweep accounts and U.S. Treasury obligations.
Inventory
Inventory, consisting of handsets and accessories, is valued at the lower
of average cost or market and is recorded net of an allowance for obsolescence,
if required.
Property and Equipment and Network Under Development
Property and equipment are recorded at cost and depreciation is computed
using the straight-line method over the following estimated useful lives:
Computer equipment............................................... 3 to 5 years
Network under development and wireless network................... 5 to 10 years upon commencement of service
Internal use software............................................ 3 years
Furniture, fixtures and office equipment......................... 5 years
Leasehold improvements........................................... Lesser of useful life or lease term
Expenditures for repairs and maintenance are charged to operations when
incurred. Gains and losses from disposals, if any, are included in the
statements of operations. Network under development includes all costs related
to engineering, cell site acquisition, site development, interest expense and
other development costs being incurred to ready the Company's wireless network
for use.
Internal and external costs incurred to develop the Company's billing,
financial systems and other internal applications during the application
development stage are capitalized as internal use software. All costs incurred
prior to the application development stage are expensed as incurred. Training
costs and all post implementation internal and external costs are expensed as
incurred.
PCS Licenses and Microwave Relocation Costs
PCS licenses include costs incurred, including capitalized interest related
to the U.S. Government financing, to acquire FCC licenses in the 1850-1990 MHz
radio frequency band. Interest capitalization on the U.S. Government financing
began when the activities necessary to get the Company's network ready for its
intended use were initiated and concluded when the wireless networks were ready
for intended use. The PCS licenses are issued conditionally for ten years.
Historically, the FCC has granted license renewals providing the licensees have
complied with
F-10
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
applicable rules, policies and the Communications Act of 1934, as amended. The
Company believes it has complied with and intends to continue to comply with
these rules and policies.
As a condition of each PCS license, the FCC requires each license-holder to
relocate existing microwave users (Incumbents) within the awarded spectrum to
microwave frequencies of equal capacity. Microwave relocation costs include the
actual and estimated costs incurred to relocate the Incumbent's microwave links
affecting the Company's licensed frequencies.
The Company began amortizing the cost of the PCS licenses, microwave
relocation costs, and capitalized interest in March 1999, when PCS services
commenced in certain BTAs. Amortization is calculated using the straight-line
method over 40 years.
Intangible assets--AT&T Agreements
The AT&T Agreements consist of the fair value of various agreements with
AT&T exchanged for mandatorily redeemable preferred stock and Series F preferred
stock (see Notes 9 and 10). The AT&T Agreements are amortized on a straight-line
basis over the related contractual terms, which range from three to ten years.
Long-Lived Assets
The Company periodically evaluates the recoverability of the carrying value
of property and equipment, network under development, intangible assets, PCS
licenses and microwave relocation costs. The Company considers historical
performance and anticipated future results in its evaluation of potential
impairment. Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of these assets in relation to the operating
performance of the business and future and undiscounted cash flows expected to
result from the use of these assets. Impairment losses are recognized when the
sum of the present value of expected future cash flows are less than the assets'
carrying value. No such impairment losses have been recognized to date.
Deferred Financing Costs
Deferred finance costs are capitalized and amortized as a component of
interest expense over the term of the related debt.
Revenue Recognition
The Company earns revenue by providing wireless mobility services to both
its subscribers and subscribers of other wireless carriers traveling in the
Company's service area, as well as sale of equipment and accessories.
Wireless mobility services revenue consists of monthly recurring and
non-recurring charges for local, long distance, roaming and airtime used in
excess of pre-subscribed usage. Generally, access fees, airtime roaming and long
distance charges are billed monthly and are recognized when service is provided.
Prepaid service revenue is collected in advance, recorded as deferred revenue,
and recognized as service is provided.
Roaming revenue consists of the airtime and long distance charged to the
subscribers of other wireless carriers for use of the Company's network while
traveling in the Company's service area and is recognized when the service is
provided.
F-11
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
Equipment revenue is recognized upon delivery of the equipment to the
customer and when future obligations are no longer significant.
Advertising Costs
The Company expenses production costs of print, radio and television
advertisements and other advertising costs as such costs are incurred.
Income Taxes
The Company accounts for income taxes in accordance with the liability
method. Deferred income taxes are recognized for tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce net deferred tax assets to the amount expected to be
realized. The provision for income taxes consists of the current tax provision
and the change during the period in deferred tax assets and liabilities.
Accounting for Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", requires
disclosure of the fair value method of accounting for stock options and other
equity instruments. Under the fair value method, compensation cost is measured
at grant date based on the fair value of the award and is recognized over the
service period which is usually the vesting period. The Company has chosen,
under provisions of SFAS No. 123, to continue to account for employee
stock-based compensation under Accounting Principles Board (APB) No. 25,
"Accounting for Stock Issued to Employees". The Company discloses in Note 11 to
the financial statements the pro forma net loss and the pro forma basic and
diluted net loss per share as if the Company had applied the method of
accounting prescribed by SFAS No. 123.
The Company periodically issues restricted stock awards and stock option
grants to its employees. Upon reaching a measurement date, the Company records
deferred compensation equal to the difference between the strike price and the
estimated fair value of the stock award. Deferred compensation is amortized to
compensation expense over the related vesting period.
Interest Rate Swaps
The Company uses interest rate swaps to hedge the effects of fluctuations
in interest rates from their Senior Credit Facility (see Note 8). These
transactions meet the requirements for hedge accounting, including designation
and correlation. The interest rate swaps are managed in accordance with the
Company's policies and procedures. The Company does not enter into these
transactions for trading purposes. The resulting gains or losses, measured by
quoted market prices, are accounted for as part of the transactions being
hedged, except that losses not expected to be recovered upon the completion of
hedged transactions are expensed. Gains or losses associated with interest rate
swaps are computed as the difference between the interest expense per the amount
hedged using the fixed rate compared to a floating rate over the term of the
swap agreement.
F-12
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
Net Loss Attributable to Common Equity Per Share
The Company computes net loss attributable to common equity per share in
accordance with SFAS No. 128, "Earnings Per Share," and SEC Staff Accounting
Bulletin No. 98 (SAB 98). Under the provisions of SFAS No. 128 and SAB 98, basic
net loss attributable to common equity per share is computed by dividing the net
loss attributable to common equity for the period by the weighted average number
of common equity shares outstanding during the period. The weighted average
number of common shares outstanding includes the Series F Preferred Stock, which
is a participating stock and has no preferential rights over Common Stock, and
all classes of Common Stock. Diluted net loss attributable to common equity per
share is computed by dividing the net loss attributable to common equity for the
period by the weighted average number of common and dilutive common equivalent
shares outstanding during the period. As the Company had a net loss attributable
to common equity in each of the periods presented, basic and diluted net loss
attributable to common equity per share are the same.
Segment Reporting
The Company presently operates in a single business segment as a provider
of wireless mobility services in its licensed regions primarily in the
south-central and northeastern United States and Puerto Rico. The Company
operates in various MTAs including New Orleans, LA, Memphis, TN, Little Rock,
AR, Boston, MA and San Juan, Puerto Rico.
Reclassifications
Certain amounts in the 1997 and 1998 consolidated financial statements have
been reclassified to conform with the presentations of the 1999 consolidated
financial statements.
Recently Issued Accounting Standards
In July 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 137, "Deferral of the Effective
Date of FAS 133" which defers the effective date of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
is in thee process of determining the effect of adopting this standard.
In December 1999, the SEC released Staff Accounting Bulletin (SAB) Number
101, "Revenue Recognition in Financial Statements." This bulletin will become
effective for the Company for the quarter ended March 31, 2000. This bulletin
establishes more clearly defined revenue recognition criteria than previously
existing accounting pronouncements, and specifically addresses revenue
recognition requirements for nonrefundable fees, such as activation fees,
collected by a company upon entering into an arrangement with a customer, such
as an arrangement to provide telecommunications services. The Company is
currently evaluating the full impact of this bulletin to determine the impact on
its financial position and results of operations.
F-13
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
3. Accounts Receivable
Accounts receivables consists of the following:
December 31,
---------------------
1998 1999
------ --------
Accounts receivable ..................... $ -- $ 26,203
Allowance for doubtful accounts ......... -- (2,622)
====== ========
$ -- $ 23,581
====== ========
Bad debt expense for the year ended December 31, 1999 was $2,962.
4. Inventory
Inventory consists of the following:
December 31,
------------------------
1998 1999
------- -------
Handsets ........................... $ 778 $15,090
Accessories ........................ -- 712
======= =======
Total inventory .................... $ 778 $15,802
======= =======
5. Property and Equipment
Property and equipment consists of the following:
December 31,
----------------------
1998 1999
--------- ---------
Wireless network ........................... $ -- $ 364,491
Network under development .................. 170,886 21,758
Computer equipment ......................... 10,115 16,888
Internal use software ...................... 11,161 21,648
Leasehold improvements ..................... 3,205 12,011
Furniture, fixtures and office equipment ... 2,924 10,855
Land ....................................... -- 49
--------- ---------
198,291 447,700
Accumulated depreciation ................... (822) (47,250)
========= =========
$ 197,469 $ 400,450
========= =========
Depreciation expense for the years ended December 31, 1997, 1998 and 1999
was $11, $811, and $46,428, respectively.
F-14
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
6. PCS Licenses and Microwave Relocation Costs
PCS licenses, microwave relocation costs, and capitalized interest consist
of the following:
December 31,
-------------------------
1998 1999
--------- ---------
PCS licenses ........................ $ 104,737 $ 221,650
Microwave relocation costs .......... 12,457 47,835
Capitalized interest ................ 913 1,005
--------- ---------
118,107 270,490
Accumulated amortization ............ -- (2,808)
$ 118,107 $ 267,682
========= =========
Amortization expense related to PCS licenses, its related capitalized
interest, and microwave relocation costs for the years ended December 31, 1997,
1998 and 1999 was $0, $0, and $2,808, respectively.
7. Accrued Expenses
Accrued expenses consist of the following:
December 31,
-----------------------
1998 1999
------- -------
Property and equipment ................. $85,635 $32,725
Sales taxes ............................ -- 8,263
Bonuses and vacation ................... 2,386 6,079
Selling and marketing .................. 347 3,496
Other .................................. 6,700 7,955
------- -------
95,068 58,518
Less: non-current portion .............. 196 6,541
------- -------
$94,872 $51,977
======= =======
8. Long-term Debt
Long-term debt consists of the following:
December 31,
---------------------
1998 1999
-------- --------
Senior subordinated discount notes ......... $ -- $354,291
Senior credit facilities ................... 225,000 225,000
Lucent notes payable ....................... 10,460 43,504
U.S. Government financing .................. 7,925 17,776
-------- --------
243,385 640,571
Less: current portion ...................... -- 1,361
-------- --------
$243,385 $639,210
======== ========
F-15
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
Senior Subordinated Discount Notes
On April 23, 1999, the Company completed the issuance and sale of 115/8%
Senior Subordinated Discount Notes (the Notes) with an aggregate principal
amount at maturity of $575,000. The total gross proceeds from the sale of the
Notes were $327,635. Offering expenses consisting of underwriting, printing,
legal and accounting fees totaled $10,999. The Notes mature April 15, 2009,
unless previously redeemed by the Company. As interest accrues, it will be added
to the principal as an increase to interest expense and the carrying value of
the Notes until April 15, 2004. The Company will begin paying interest
semi-annually beginning October 15, 2004. The Notes are not collateralized. The
Notes are subordinate to all of the Company's existing and future senior debt
and ranks equally with all other senior subordinated debt, and ranks senior to
all of the Company's existing and future subordinated debt. The Notes are
guaranteed by the Company's wholly owned subsidiary, TeleCorp Communications,
Inc. (see Note 19). As of December 31, 1999 accrued interest added to the
principal was $26,656. In October 1999, the Company registered the Notes with
the Securities and Exchange Commission to become publicly traded securities.
Offering expenses totaled $917 and are accounted for as debt issuance costs.
Senior Credit Facilities
In July 1998, the Company entered into a credit facility (the Senior Credit
Facility) with a group of commercial lenders, under which the Company may borrow
up to $525,000, in the aggregate, consisting of (i) up to $150,000 in revolving
loans (the Senior Revolving Credit Facility) with a maturity date of January
2007, (ii) a $150,000 term loan (the Tranche A Term Loan) with a maturity date
of January 2007, and (iii) a $225,000 term loan (the Tranche B Term Loan) with a
maturity date of January 2008. In October 1999, the Company entered into
amendments to increase the amount of credit available to $560,000. A total of
$225,000 of indebtedness from the Tranche B Term Loan was outstanding as of
December 31, 1998 and 1999. The Senior Credit Facility also provides for an
uncommitted $75,000 senior term loan (the Expansion Facility) with a maturity
date of January 2008.
Beginning in September 2002, principal repayments will be made in 18
quarterly installments for the Tranche A Term Loan and 22 quarterly installments
for the Tranche B Term Loan. Quarterly principal repayments for the Tranche A
Term Loan are as follows: first six, $3,750; next four, $9,375; last eight,
$11,250. Quarterly principal repayments for the Tranche B Term Loan are as
follows: first 18, $562, last four, $53,721. Interest payments on the senior
credit facility are made quarterly. The Senior Credit Facility contains a
prepayment provision whereby certain amounts borrowed must be repaid upon the
occurrence of certain specified events.
The commitment to make loans under the Tranche A Term loan will terminate
in July 2001, or earlier if elected by the Company. Beginning in April 2005, the
commitment to make loans under the Senior Revolving Credit Facility will be
permanently reduced on a quarterly basis through April 2007 as follows: first
four reductions, $12,500; last four reductions $25,000. The unpaid principal on
the Senior Revolving Credit Facility is due January 2007. In July 2000, if the
undrawn portion of the Tranche A Term Loan exceeds $50,000 the amount of the
Tranche A Term Loan will be automatically reduced by such excess.
The interest rate applicable to the Senior Credit Facility is based on, at
the Company's option, (i) LIBOR (Eurodollar Loans) plus the Applicable Margin,
as defined, or (ii) the higher of the administrative agent's prime rate or the
Federal Funds Effective Rate (ABR Loans), plus the Applicable Margin, as
defined. The Applicable Margin for Eurodollar Loans will range from 125 to 325
basis points based upon certain events by the Company, as specified. The
Applicable Margin for ABR Loans will range from 25 to 225 basis points based
upon certain events by the Company, as specified. At December 31, 1998, the
interest rate applicable to the Tranche B Term Loan was 8.75% and interest
incurred for the year ended December 31, 1998 was $9,210 of which $7,710 was
expensed and $1,500 was capitalized. At December 31, 1999, the interest rate
applicable to the Tranche B Term Loan was 9.12%,
F-16
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
and for the year ended December 31, 1999 interest incurred on the Tranche B Term
Loan was $19,110 of which $13,793 was expensed and $5,317 was capitalized.
The loans from the Senior Credit Facility are subject to an annual
commitment fee which ranges from 0.50% to 1.25% of the available portion of the
Tranche A Term Loan and the Senior Revolving Credit Facility. The Company has
expensed $3,306 and $3,817, for the year ended December 31, 1998 and 1999,
respectively, related to these bank commitment fees. The Senior Credit Facility
requires the Company to purchase interest rate hedging contracts covering
amounts equal to at least 50% of the total amount of the outstanding
indebtedness of the Company. As of December 31, 1998 and 1999, the Company
hedged 100% of its outstanding indebtedness of $225,000 to take advantage of
favorable interest rate swaps. The six outstanding interest rate swap contracts
fix LIBOR at annual interest rates from 5.20% to 5.26%. The contracts mature in
September of 2003.
Initially, borrowings under the Senior Credit Facility are subject to a
maximum Senior Debt to Total Capital ratio, as defined, of 50%. This ratio has
been increased to 55% because certain specified operating benchmarks have been
achieved. In addition, the Company must comply with certain financial and
operating covenants. The financial covenants include various debt to equity,
debt to EBITDA, interest coverage, and fixed charge coverage ratios, as defined
in the Senior Credit Facility. The operating covenants include minimum
subscribers, minimum aggregate service revenue, minimum coverage of population
and maximum capital expenditure thresholds. As of December 31, 1998 and 1999,
the Company was in compliance with these covenants.
The Company may utilize the Expansion Facility as long as the Company is
not in default of the Senior Credit Facility and is in compliance with each of
the financial covenants. However, none of the lenders are required to
participate in the Expansion Facility.
The Senior Credit Facility is collateralized by substantially all of the
assets of the Company. In addition, the Senior Credit Facility has been
guaranteed by the Company's subsidiaries and shall be guaranteed by subsequently
acquired or organized domestic subsidiaries of the Company.
Lucent Notes Payable
In May 1998, the Company entered into a Note Purchase Agreement (the Lucent
Note Agreement) with Lucent Technologies, Inc. (Lucent) which provides for the
issuance of increasing rate 8.5% Series A (the Series A Notes) and 10.0% Series
B (the Series B Notes) junior subordinated notes (the Subordinated Notes) with
an aggregate face value of $80,000. The aggregate face value of the Subordinated
Notes shall decrease dollar for dollar, upon the occurrence of certain events as
defined in the Lucent Note Agreement. The proceeds of the Subordinated Notes are
to be used to develop the Company's network in certain designated areas. As of
December 31, 1998 and 1999, the Company had $10,460 and $43,504, respectively
outstanding under the Series A Notes. During the year ended December 31, 1999,
the Company borrowed and repaid $40,000 on the Lucent Series B Notes plus $228
of accrued interest. Interest expense for the years ended December 31, 1998 and
1999 was $460 and $3,044, respectively.
The Series A and Series B Notes will not amortize and will have a maturity
date six months after the final maturity of the Company's high yield debt
offering, but in no event later than May 1, 2012. The Series A Notes will have a
mandatory redemption at par plus accrued interest from the proceeds of a
subsequent equity offering to the extent the net proceeds exceed an amount
identified in the Lucent Note Agreement. If the Series A Notes and Series B
Notes are not redeemed in full by January 2001 and January 2000, respectively,
the interest rate on each note will increase by 1.5% per annum on January 1.
However, the interest rate applicable to the Subordinated Notes shall not exceed
12.125%. Interest payable on the Series A Notes and the Series B Notes on or
prior to May 11, 2004 shall be payable in additional Series A and Series B
Notes. Thereafter, interest shall be paid in arrears in cash on each six month
and yearly anniversary of the Series A and Series B closing date or, if cash
interest payments are prohibited
F-17
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
under the Senior Credit Facility and/or the Senior Subordinated Discount Notes,
in additional Series A and Series B Notes. As of December 31, 1998 and 1999,
interest accrued under the Series A Notes of $460 and $3,504, respectively has
been included in long-term debt.
The Company may redeem the Subordinated Notes held by Lucent or any of its
affiliates at any time. The Series A Notes that are not held by Lucent or any of
its affiliates may be redeemed by the Company prior to May 2002 and after May
2007. The Series B Notes that are not held by Lucent or any of its affiliates
may be redeemed by the Company prior to May 2000 and after May 2005. Any
redemption after May 2007, in the case of the Series A Notes, and May 2005, in
the case of the Series B Notes, shall be subject to an interest rate premium, as
specified. All of the outstanding notes under the Lucent Note Agreement as of
December 31, 1998 and 1999 are held by Lucent. The Company must comply with
certain operating covenants. As of December 31, 1998 and 1999, the Company was
in compliance with these operating covenants.
In October 1999, the Company entered into an amended and restated note
purchase agreement with Lucent for the issuance of up to $12,500 of new series A
notes and up to $12,500 of new series B notes under a vendor expansion facility
in connection with prior acquisitions of licenses in certain markets. The terms
of these notes issued under these facilities are identical to the original
Lucent series A and series B notes.
In addition, pursuant to the amended and restated note purchase agreement,
Lucent has agreed to make available up to an additional $50.0 million of new
vendor financing not to exceed an amount equal to 30% of the value of equipment,
software and services provided by Lucent in connection with any additional
markets the Company acquires. This $50.0 million of availability is subject to a
reduction up to $20 million on a dollar for dollar basis of any additional
amounts Lucent otherwise lends to the Company for such purposes under the
Company's senior credit facilities. Any notes purchased under this facility
would be divided equally between Lucent series A and series B notes. The terms
of Lucent series A and series B notes issued under these expansion facilities
would be identical to the terms of the original Lucent series A and series B
notes as amended, including a maturity date of October 23, 2009.
In addition, any Lucent series B notes issued under the vendor expansion
facility will mature and will be subject to mandatory prepayment on a dollar for
dollar basis out of the net proceeds of any future public or private offering or
sale of debt securities, exclusive of any private placement of notes issued to
finance any additional markets and borrowings under the senior credit facilities
or any replacement facility.
U.S. Government financing
As of December 31, 1998 and 1999, the Company owes the U.S. Government
$9,192 and $20,247, less a discount of $1,268 and $2,471, respectively, for the
acquisition of PCS licenses.
The terms of the notes related to the PCS licenses in New Orleans, Memphis,
Beaumont and Little Rock obtained during the 1997 F-Block auction include: an
interest rate of 6.25%, quarterly interest payments which commenced in July 1998
and continue for the one year thereafter, then quarterly principal and interest
payments for the remaining 9 years. The promissory notes are collateralized by
the underlying PCS licenses.
During the year ended December 31, 1999, the Company completed the
acquisition of additional PCS licenses from Digital PCS, LLC and Wireless 2000,
Inc. (see Note 10). As part of these acquisitions, the Company assumed
additional U.S. Government financing with the FCC amounting to $11,551, less a
discount of $1,631. The terms of the notes include an interest rate of 6.125%
for notes assumed from Digital PCS, LLC and 7.00% for notes assumed from
Wireless 2000, Inc., quarterly interest payments for a two-year period and then
quarterly principal and interest payments for the remaining eight years.
F-18
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
The notes were discounted using management's best estimate of the
prevailing market interest rate at the time of issuance of 10.25%.
In connection with entering into the senior credit facilities and the
senior-subordinated discount notes, the Company incurred certain debt issuance
costs. The Company capitalized debt issuance costs of $9,110 and $12,742, during
the years ended December 31, 1998 and 1999, respectively. The financing costs
are being amortized using the straight-line method over the term of the related
debt. For the years ended December 31, 1998 and 1999, the Company recorded
interest expense related to the amortization of the deferred financing costs of
$525 and $1,750, respectively.
As of December 31, 1999, minimum required annual principal repayment
(undiscounted) under all of the Company's outstanding debt obligations were as
follows:
For the year ending December 31,
2000 ............................................ $ 1,361
2001 ............................................ 1,448
2002 ............................................ 2,102
2003 ............................................ 5,561
2004 ............................................ 5,785
Thereafter ...................................... 847,494
--------
Total ........................................... $863,751
========
9. AT&T Transaction
In January 1998, the Company entered into a Securities Purchase Agreement
(the Securities Purchase Agreement) with AT&T Wireless PCS, Inc. and TWR
Cellular, Inc. (both subsidiaries of AT&T Corporation and collectively referred
to as AT&T PCS), the stockholders of Holding and various venture capital
investment firms (the Cash Equity Investors). The Securities Purchase Agreement
allows the Company to be a provider of wireless mobility services in its
licensed regions utilizing the AT&T brand name.
Upon the receipt of FCC approval in July 1998, the Company finalized the
transaction contemplated in the Securities Purchase Agreement (the AT&T
Transaction). As a result, the Company (i) issued preferred stock and paid AT&T
$21,000 in exchange for 20 MHz PCS licenses with a fair value of $94,850 and
certain operating agreements with AT&T for exclusivity, network membership, long
distance and roaming with a fair value of $27,050 (ii) issued preferred and
common stock for 100% of the outstanding ownership interests in Holding, which
includes 10 MHz PCS licenses which was recorded at historical cost; and (iii)
issued preferred and common stock for a cash commitment from the Cash Equity
Investors of $128,000 to be paid over a three year term plus an additional
$5,000 upon the closing of the Digital PCS, Inc. transaction (see Note 10).
The general terms of the operating agreements with AT&T are summarized
below:
AT&T Exclusivity: The Company will be AT&T's exclusive
facilities-based provider of mobile wireless telecommunications
services within the Company's BTAs for an initial ten year period.
This agreement will automatically renew for a one-year term and then
operate on a year-to-year basis unless one party terminates at least
ninety (90) days prior to the end of any one-year term.
F-19
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
The Company has determined the fair value of this agreement to be
$11,870 and is amortizing this value over the initial 10 year term.
Network Membership License Agreement: The Network Membership License
Agreement (the License Agreement) defines that AT&T will make
available to the Company use of the AT&T logo and the right to refer
to itself as a "Member of the AT&T Wireless Network" to market its PCS
services. Through the use of these rights, the Company expects to
participate in and benefit from AT&T promotional and marketing
efforts. The License Agreement has an initial five-year term with a
five-year renewal term if both the Company and AT&T elect to renew at
least ninety 90 days prior to the expiration of the initial term. The
Company determined the fair value of this agreement to be $8,480 and
is amortizing this value over the initial five-year term.
o Intercarrier Roamer Services Agreement: AT&T and the Company have
entered into a twenty-year reciprocal roaming agreement provided that
their customers who own tri-mode phones will roam on the other's
mobile wireless systems at commercially reasonable rates to the extent
commercially and technologically feasible. Thereafter, this agreement
shall renew automatically on a year-to-year basis unless either the
Company or AT&T terminates this agreement by written notice at least
90 days prior to the conclusion of the original or any subsequent
term. After ten years, this agreement may be terminated by the Company
or AT&T at any time upon 90 days prior written notice.
The Company has determined the value of this roaming agreement to be
$3,500 and is amortizing this value over the initial 10-year term.
o Long Distance Agreement: The long distance agreement provides that
AT&T will be the exclusive provider for long distance services to the
Company's customers within the Company's licensed regions for an
initial three year period. The long distance agreement requires that
the Company meet a minimum traffic volume commitment during the term
of the agreement. If the Company fails to meet such volume
commitments, the Company must pay to AT&T the difference between the
expected fee based on the volume of the commitment and the fees based
on actual volume.
The Company had determined the fair value of this agreement to be
$3,200 and is amortizing this value over the initial three-year term.
Triton PCS, Inc. (Triton), Tritel Communications (Tritel), and the Company
have adopted a common brand, SunCom, which is co-branded with equal emphasis
with the AT&T brand name and logo. On April 16, 1999, Triton, Tritel and
TeleCorp Communications formed a new company, Affiliate License Co., L.L.C., to
own, register and maintain the marks SunCom, SunCom Wireless and other SunCom
and Sun formative marks (SunCom Marks) and to license the SunCom marks to
Triton, Tritel and the Company. Triton, Tritel and TeleCorp Communications each
have a 33% membership interest in Affiliate License Co., L.L.C. On April 16,
1999, Triton entered into an agreement to settle a potential dispute regarding
prior use of the SunCom brand. In connection with this settlement, Triton agreed
to pay $975 to acquire the SunCom Marks that were contributed to Affiliate
License Co., L.L.C. The Company paid $325 in royalty payments to reimburse
Triton for the contributed SunCom marks.
10. Acquisitions
On April 20, 1999, the Company completed the acquisition of 10 MHz PCS
licenses covering the Baton Rouge, Houma, Hammond and Lafayette, Louisiana BTA's
from Digital PCS, LLC. The total purchase price of $6,114 was
F-20
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
comprised of $2,335 of mandatorily redeemable preferred stock and common stock
of the Company, the assumption of U.S. Government financing with the FCC of
$4,102 less a discount of $609, and $286 in cash as reimbursement to Digital
PCS, LLC, for interest due to the FCC incurred prior to close and legal costs.
The entire purchase price has been allocated to the PCS license.
As a result of completing the transaction with Digital PCS, LLC, the Cash
Equity Investors have irrevocably committed to contribute $5,000 in exchange for
mandatorily redeemable preferred stock and common stock over a two year period
from the close of this transaction. As of December 31, 1999 the Company has
received $2,200 of the $5,000 commitment.
On May 24, 1999, the Company sold mandatorily redeemable preferred stock
and preferred stock to AT&T for $40,000. On May 25, 1999, the Company acquired
from AT&T 20 MHz PCS licenses covering the San Juan MTA, 27 constructed cell
sites, a switching facility, leases for additional cell sites, the extension of
the Network Membership License Agreement, Long Distance Agreement, Intercarrier
Roamer Services Agreement and AT&T Exclusivity Agreement and the reimbursement
of AT&T for microwave relocation costs, salary and lease payments (the Puerto
Rico Transaction) incurred prior to acquisition. The total purchase price of
this asset acquisition was $99,694 in cash plus legal fees of $252. The purchase
price has been allocated to the assets acquired, based upon their estimated fair
value as follows:
PCS licenses ..................................................... $70,421
Intangible assets--AT&T Agreements ............................... 17,310
Cell sites site acquisition, switching facility assets
and other assets ............................................... 9,015
Microwave relocation costs ....................................... 3,200
-------
$99,946
As a result of completing this transaction, the Company's available
borrowings under the Lucent Note Agreement increased by $15,000 ($7,500 of
Series A and $7,500 of Series B) and certain Cash Equity Investors committed
$39,997 in cash in exchange for mandatorily redeemable preferred and common
stock. The Cash Equity Investors cash commitment of $39,997 will be funded over
a three-year period from the close of this transaction. As of December 31, 1999,
the Company received $17,999 of this cash commitment. As a part of obtaining
this additional preferred and common stock financing, the Company paid $2,000 to
a Cash Equity Investor upon the closing of the transaction. In addition, certain
officers, the Chief Executive Officer and the Executive Vice President and Chief
Financial Officer of the Company were issued fixed and variable awards of 5,318
and 2,380,536 restricted shares of mandatorily redeemable Series E preferred
stock and Class A common stock, respectively, in exchange for their interest in
Puerto Rico Acquisition Corporation. Puerto Rico Acquisition Corporation was a
special purpose entity wholly-owned by the Company's Chief Executive Officer and
Executive Vice President and Chief Financial Officer. The fixed awards typically
vest over a five-year period. The estimated fair value of these shares has been
recorded as deferred compensation and is being amortized over the related
vesting periods. The variable awards vested based upon the completion of the
Company's initial public offering.
On June 2, 1999 the Company acquired from Wireless 2000, Inc. 15 MHz PCS
licenses in the Alexandria, Lake Charles and Monroe, Louisiana BTAs. The total
purchase price of $7,448 was comprised of $371 of mandatorily redeemable
preferred stock and common stock of the Company, the assumption of U.S.
Government financing with the FCC of $7,449 less a discount of $1,022 and $650
in cash as reimbursement of microwave relocation costs and reimbursement of FCC
interest and legal costs. The entire purchase price has been allocated to the
PCS licenses acquired.
In February 1999, Viper Wireless, Inc. (Viper), was formed to participate
in the C-Block PCS license reauction for additional spectrum in most of the
Company's markets. Viper was initially capitalized for $100 and was
equally-owned by the Company's Chief Executive Officer and Executive Vice
President-Chief Financial Officer. In order to
F-21
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
participate in the reauction, the Company paid the FCC an initial deposit of
$17,819, on behalf of Viper. Simultaneously, the Company transferred this
initial deposit to Viper in exchange for an 85% ownership interest which
represented a 49.9% voting interest.
On April 15, 1999, the FCC announced Viper was the high bidder for 15 MHz
licenses in New Orleans, Houma and Alexandria, Louisiana, San Juan, Puerto Rico
and Jackson, Tennessee and 30 MHz licenses in Beaumont, Texas. The total auction
price is $32,286 plus legal fees of $47. During the year ended December 31,
1999, the FCC refunded $11,361 of the initial deposit; however, the Company was
required to pay the FCC $11,059 as a final deposit on behalf of Viper. As of and
for the year ended December 31, 1999, Viper had no financial activity other than
its capitalization which includes the transfer of the initial deposit to Viper.
The Company received final regulatory approval of the license transfer from the
FCC on September 9, 1999. The entire purchase price has been allocated to the
PCS licenses acquired.
AT&T and certain of the Company's other stockholders have committed an
aggregate of up to approximately $32,300 in exchange for additional shares of
mandatorily redeemable preferred stock, Series F preferred stock and common
stock of the Company. As part of this financing, the Company paid approximately
$500 to an affiliate of a Cash Equity Investor for closing this preferred and
common stock financing. In May and July 1999, AT&T and certain Cash Equity
Investors funded approximately $17,516 of their commitment to the Company. The
Company made its final payment of $14,770 to the FCC on September 13, 1999 with
respect to these licenses and received the remaining funding commitments from
AT&T and the certain Cash Equity Investors on September 29, 1999.
11. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
Holding
Holding's authorized capital stock consisted of 6,000 shares of no par
value mandatorily redeemable Series A preferred stock, 125,000 shares of no par
value Class A common stock, 175,000 shares of no par value Class B common stock
and 175,000 shares of no par value Class C common stock. This capital stock was
in existence during 1996, 1997, and through July 1998, the closing of the AT&T
Transaction, at which time Holding became a wholly-owned subsidiary of the
Company. Subsequent to the AT&T Transaction, the authorized and outstanding
shares of Holding were cancelled and replaced with 1,000 authorized shares of
common stock of which 100 shares were issued to the Company.
F-22
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
TeleCorp
On May 14, 1999, TeleCorp restated its Certificate of Incorporation, which
was subsequently amended. The Restated Certificate of Incorporation, as amended,
provides the Company with the authority to issue 918,339,090 shares of stock,
consisting of the following:
Par Shares Par Shares
Preferred Stock Value Authorized Common Stock Value authorized
----- ---------- ------------ ----- ----------
Mandatorily redeemable
Series A .................. $0.01 100,000 Class A ................. $0.01 608,550,000
Mandatorily redeemable
Series B .................. $0.01 200,000 Class B ................. $0.01 308,550,000
Mandatorily redeemable
Series C .................. $0.01 215,000 Class C tracked ......... $0.01 309,000
Mandatorily redeemable
Series D .................. $0.01 50,000 Class D tracked ......... $0.01 927,000
Mandatorily redeemable
Series E .................. $0.01 30,000 Voting Preference ....... $0.01 3,090
Series F ...................... $0.01 15,450,000
---------- -----------
Total ................. 16,045,000 Total ................ 918,339,090
========== ===========
The following schedules represent the transactions that took place with
respect to Holding's mandatorily redeemable preferred stock and common stock for
the year ended December 31, 1998.
Series A preferred stock
----------------------------
Shares Amount
----------- -----------
Balance, December 31, 1997 ................... 367 $ 4,144,340
Accretion of preferred stock dividends ....... -- 224,484
Recapitalization of Holding .................. (367) (4,368,824)
----------- -----------
Balance, December 31, 1998 ................... -- $ --
=========== ===========
Class A Class B Class C
Common stock Common stock Common stock Common stock
------------------ ------------------ ------------------ --------------------
Shares Amount Shares Amount Shares Amount Shares Amount Total
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1997 .. 4,834 856 1,974 -- 12,527 856
Recapitalization of Holding . (4,834) (856) (1,974) -- (12,527) -- 100 -- (856)
Elimination of 100% of equity
interests in Holding .... -- -- -- -- -- -- (100) -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1998 .. -- $ -- -- $ -- -- $ -- -- $ -- $ --
======== ======== ======== ======== ======== ======== ======== ======== ========
F-23
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
($ in thousands, except for per share data)
The following schedule represents the transactions that took place with
respect to TeleCorp's mandatorily redeemable preferred stock, Series F preferred
stock and common stock for the period July 1998 to December 31, 1999:
Series A Series C Series D
Preferred stock Preferred stock Preferred stock
Shares Amount Shares Amount Shares Amount
------ -------- ------- -------- ------ --------
Mandatorily redeemable
preferred stock
Issuance of preferred stock to AT&T PCS for
licenses
and AT&T Agreements ................... 66,723 $ 66,723 -- $ -- 34,267 $ 34,143
Issuance of preferred stock to cash Equity
Investors, net of issuance costs of
$1028 ................................. -- -- 128,000 126,848 -- --
Accretion of preferred stock
dividends ............................. -- 3,040 -- 3,819 -- 946
Noncash issuance of
restricted stock ...................... -- -- -- -- -- --
Repurchase of restricted stock for cash ... -- -- -- -- -- --
Noncash issuance of preferred stock for
equity of
Holding ................................... -- -- 7,348 4,334 -- --
------ -------- ------- -------- ------ --------
Balance, December 31, 1998 ................ 66,723 69,763 135,348 135,001 34,267 35,089
Issuance of preferred stock
for cash, net of issuance
costs of $2,500 ....................... 30,750 30,454 72,382 51,089 15,150 11,080
Issuance of preferred stock
for PCS licenses and
operating agreements .................. -- -- 2,878 2,674 -- --
Accretion of preferred stock
dividends ............................. -- 9,124 -- 10,939 -- 2,646
Noncash issuance of
restricted stock ...................... -- -- -- -- -- --
Repurchase of restricted stock or cash .... -- -- -- -- -- --
------ -------- ------- -------- ------ --------
Balance, December 31,
1999 .................................. 97,473 $109,341 210,608 $199,703 49,417 $ 48,815
====== ======== ======= ======== ====== ========
Series E
Preferred stock
Shares Amount Total
------- --------- ---------
Mandatorily redeemable
preferred stock
Issuance of preferred stock to AT&T PCS for
licenses
and AT&T Agreements ................... -- $ -- $ 100,866
Issuance of preferred stock to cash Equity
Investors, net of issuance costs of
$1,028 ................................ -- -- 126,848
Accretion of preferred stock
dividends ............................. -- 541 8,346
Noncash issuance of
restricted stock ...................... 5,505 6 6
Repurchase of restricted stock for cash ... (784) (1) (1)
Noncash issuance of preferred stock for
equity of
Holding ................................... 14,156 10 4,344
------- --------- ---------
Balance, December 31, 1998 ................ 18,877 556 240,409
Issuance of preferred stock
for cash, net of issuance
costs of $2,500 ....................... -- -- 92,623
Issuance of preferred stock
for PCS licenses and
operating agreements .................. -- -- 2,674
Accretion of preferred stock
dividends ............................. -- 1,415 24,124
Noncash issuance of
restricted stock ...................... 6,741 353 353
Repurchase of restricted stock or cash .... (577) (1) (1)
------- --------- ---------
Balance, December 31,
1999 .................................. 25,041 $ 2,323 $ 360,182
======= ========= =========
F-24
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
Class C Class D Voting
tracked tracked Preference
Series F Class A Common stock Common stock Common stock
Preferred stock Common stock --------------- -------------- -------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Total
---------- ------ ----------- ------ ------- ------ ------- ------ ------ ------ -----
Series F preferred and
Common stock
Issuance of common
Stock to Cash Equity
Investors for cash ............. -- $ -- 37,540,390 $375 110,549 $1 827,487 $8 -- $ -- $ 384
Issuance of preferred
Stock to AT&T PCS
For licenses and
AT&T agreements ................ 10,308,676 103 -- -- -- -- -- -- -- -- 103
Exchange of 100% of
Equity interests in
Predecessor Company
For equity in the
Company ........................ -- -- 7,583,463 76 173,264 2 23,942 -- 3,090 -- 78
Noncash issuance of
Restricted stock ............... -- -- 3,095,473 31 -- -- -- -- -- -- 31
Repurchase of restricted
Stock for cash ................. -- -- (552,474) -- -- -- -- -- -- -- --
---------- ---- ----------- ---- ------- -- ------- -- ----- ---- ------
Balance, December 31,
1998 ........................... 10,308,676 103 47,666,852 482 283,813 3 851,429 8 3,090 596
Issuance of common
Stock and preferred
Stock for cash ................. 4,604,102 46 22,366,242 224 -- -- -- -- -- -- 270
Issuance of Common
Stock in Initial
Public Offering ................ -- -- 10,580,000 106 106
Issuance of common
Stock for PCS
Licenses and operating
Agreements ..................... -- -- 865,089 9 -- -- -- -- -- -- 9
Noncash issuance of-
Restricted stock ............... -- -- 3,382,493 24 -- -- -- -- -- -- 24
Repurchase of restricted
Stock for cash ................. -- -- (406,787) -- -- -- -- -- -- -- --
---------- ---- ----------- ---- ------- -- ------- -- ----- ---- ------
Balance, December 31,
1999 ........................... 14,912,778 $149 84,453,889 $845 283,813 $3 851,429 $8 3,090 $ -- $1,005
========== ==== =========== ==== ======= == ======= == ===== ==== ======
Stock Split
On August 27, 1999 and on November 5, 1999, the Company filed amendments to
its certificate of incorporation with the Delaware Secretary of State to effect
a 100 for 1 stock split and 3.09 for 1 stock split respectively, of its
outstanding and authorized Series F preferred stock and all classes of its
common stock. The stock splits have been retroactively reflected in the
financial statements for all periods presented. In addition, the amendment to
the Company's certificate of incorporation increased the authorized number of
shares of each of the Class A common stock and the Class B common stock by 15
million. In addition, the Board of Directors and the stockholders approved
further amendments and restatements to the Company's certificate of
incorporation becoming effective upon the closing of the Company' initial public
offering, including a 300 million increase in the number of authorized shares of
the Company's class A common stock.
F-25
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
Initial Public Offering and Concurrent Offering
On November 23, 1999 in an initial public offering of 10.58 million shares
of Class A common stock for $20.00 per share, the Company raised proceeds of
approximately $197,317, net of underwriter's discount of $3,703. Offering costs,
including legal, accounting and printing costs associated with the offering
totaled $1,801, and these costs were charged directly against paid-in capital.
In a concurrent offering to AT&T Wireless, the Company issued 2,245,000
shares of Class A common stock for $18.65 per share. The Company raised proceeds
of $41,869, which was received on January 18, 2000.
There are no issued or outstanding shares of Series B preferred stock,
Senior common stock or Class B common stock as of December 31, 1999.
F-26
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
The conversion features and conversion prices of the Company's issued stock
are summarized below:
Convertible Security Convertible Into Conversion Price
-------------------- ---------------- ----------------
Series A preferred stock After July 2006, at the The Series A conversion rate
holders' option, into Class A is equal to the liquidation
common stock Preference of the Series A
preferred stock on the
conversion date Divided by the
market price of the Class A
common stock on the Conversion
date.
Series C preferred stock At the option of the Company The liquidation preference of
at the IPO date into either the Series C preferred stock
Class A or B common stock divided By the IPO price of
$20.00 per share.
Series D preferred stock If Series C preferred stock is The liquidation preference
Converted then automatically divided by the IPO price of
at the IPO date into Senior $20.00 per share.
common stock
Series E preferred stock At the option of the Company The liquidation preference of
at the IPO date into either the Series E preferred stock
Class A or Class B common divided By the IPO price of
stock $20.00 per share.
Series F preferred stock and At the holders' option, into One share of Series F
Senior common stock Class A, Class B or Class D preferred stock or Senior
common stock, Depending upon common stock for One share of
the occurrence of certain either Class A, Class B or
defined events Class D common stock.
Class A common stock At the holders' option into One share of Class B common
Class B common stock stock for one share of Class A
Common stock.
Class C tracked common Subject to FCC constraints and One share of Class A or Class
Stock Board approval, at the B common stock for one share
holders' option and by of Class C tracked common
affirmative vote of at least stock.
66 2/3% of Class A common stock
into Class A or Class B common
stock
Class D tracked common Subject to FCC constraints and One share of Class A or Class
Stock Board approval, at the B common stock for one share
holders' option and by of Class D tracked common
affirmative vote of at least stock.
66 2/3% of Class A common stock
into Class A or Class B common
stock
F-27
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
The conversion features and conversion prices of the Company's issued stock
are summarized below:
Liquidation rights
In the event of any liquidation, dissolution or winding up of the Company,
as defined, the stockholders of the Company are entitled to liquidation
preferences as follows:
Order of
Distribution Stock Classification Distribution Preference
- ------------ -------------------- -----------------------
Second Series C and Series D Series C: actual paid-in
preferred stock capital per share plus accrued
and unpaid dividends plus
interest of 6% per annum on
the actual paid-in capital,
compounded quarterly, less
amount of dividends declared
and paid.
Series D: $1,000 per share
plus accrued and unpaid
dividends plus an amount equal
to interest on $1,000 per
share at a rate of 6% per
annum, compounded quarterly,
less amount of dividends
declared and paid.
Third Series E preferred stock Accrued and unpaid dividends,
plus an amount equal to
interest on $1,000 per share
at 6% per annum, compounded
quarterly, less dividends
declared and paid.
Fourth Series F preferred stock Series F preferred: $0.000032
and Senior per share plus accrued and
common stock unpaid dividends.
Senior common stock: The sum
of the liquidation preference
of each share of Series D and
Series F preferred stock
converted in Senior common
stock divided by the aggregate
number of shares of Senior
common stock issued upon
conversion of shares of Series
D and Series F preferred stock
Dividends and voting rights
The holders of the Series A and Series B preferred stock are entitled to
cumulative quarterly cash dividends at an annual rate of 10% of the liquidation
preference of the then outstanding shares. The holders of the remaining shares
of preferred and common stock are entitled to dividends if and when declared.
F-28
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
The Class A common stock has 15,419,100 voting rights and the Voting
Preference common stock has 15,480,900 voting rights. The remaining shares of
preferred and common stock shall have no voting rights, except as provided by
law or in certain limited circumstances.
Call and Redemption features
The preferred stock is callable at the option of the Company at a price
equal to the liquidation preference on the redemption date. The Series A
preferred stock is callable thirty days after the 10th anniversary of the
issuance of such shares. The Series B preferred stock is callable at any time.
The Series C and Series D preferred stock are callable at any time, provided
that the Series C and Series D Preferred Stock are called concurrently.
The Series A, Series B, Series C, Series D and Series E preferred stock are
redeemable thirty days after the 20th anniversary of the issuance of such shares
at the option of the holder at a price equal to the liquidation preference on
the redemption date. The Series F preferred stock is not redeemable. Pursuant to
a Management Agreement, the Company may redeem certain shares of Class A common
stock and Series E preferred stock held by the Company's Chief Executive Officer
and Executive Vice President (the TMC officers). For the period from the
finalization of the AT&T Transaction to December 31, 1998, the Company accreted
$8,345 of dividends in connection with this redemption feature.
Tracked common stock
The Class C and Class D common stock have been designated as Tracked common
stock. The holders of the Tracked common stock are entitled to a dividend, when
available, equal to the excess of the fair value of the net assets of Holding
over the aggregate par value of the outstanding shares of the Tracked common
stock. After all other preferential liquidating distributions have been made,
the holders of the Tracked common stock will be entitled to a liquidation
preference equal to the excess of the fair value of the net assets of Holding.
Participating stock
The Series F preferred stock, the Senior common stock and the Class A and B
common stock are participating stock, and the Board of Directors may not declare
dividends on or redeem, purchase or otherwise acquire for consideration any
shares of the Participating Stock, unless the Board of Directors makes such
declaration or payment on the same terms with respect to all shares of
participating stock, ratably in accordance with each class and series of
participating stock then outstanding.
F-29
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per
share:
For the Year Ended December 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
Numerator:
Net loss $ (3,335) $ (51,155) $ (250,996)
Less: accretion of manditorily
redeemable preferred stock (726) (8,567) (24,124)
------------ ------------ ------------
Net loss attributable to common equity $ (4,061) $ (59,722) $ (275,120)
============ ============ ============
Denominator:
Basic and diluted net loss per share-
weighted average shares 36,340 27,233,786 76,895,391
============ ============ ============
Net loss attributable to common equity per
share - basic and diluted $ (111.74) $ (2.19) $ (3.58)
============ ============ ============
The following equity instruments were not included in the diluted net loss per
share calculation because their effect would be anti-dilutive.
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Manditorily redeemable preferred stock series A -- -- 97,473
Stock options -- -- 545,497
12. Restricted Stock Plan and Restricted Stock Awards
In July 1998, the Company adopted a Restricted Stock Plan (the Plan) to
attract and retain key employees and to reward outstanding performance. Key
employees selected by management may elect to become participants in the Plan by
entering into an agreement which provides for issuance of fixed and variable
units consisting of Series E mandatorily redeemable preferred stock and Class A
common stock. The fixed units typically vest over a five or six year period. The
variable units vest based upon certain events taking place, such as buildout
milestones, Pop coverage, the completion of an initial public offering and other
events. Unvested shares are forfeited upon termination of employment. The shares
issued under the Plan shall consist of units transferred to participants without
payment as additional compensation for their services to the Company. The total
number of units that may be awarded to key employees shall not exceed 7,085
units and 4,000,000 shares of Series E preferred stock and Class A common stock,
respectively, as determined upon award. Any units not granted on or prior to
July 17, 2003 shall be awarded to two officers of the Company. Each participant
has voting, dividend and distribution rights with respect to all shares of both
vested and unvested common stock. After the Class A shares become publicly
traded, the right of first offer will no longer exist for the Series E preferred
shares. In addition the shares contain rights of inclusion and first
negotiation. The Company may repurchase unvested shares, and under certain
circumstances, vested shares of
F-30
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
participants whose employment with the Company
terminates. The repurchase price is equal to $0.01 and $0.00003 per share for
the Series E preferred and common stock, respectively.
Activity under the Plan is as follows:
Series E Estimated Estimated
preferred fair value Class A fair value
--------- ---------- ------- ----------
Shares awarded ................................. 5,505 $ 1.00 3,095,473 $ .003
Repurchases .................................... (784) -- (552,474) --
----- ------------- --------- ------------
Balance, December 31, 1998 ..................... 4,721 $ 1.00 2,542,999 $ .003
Shares awarded ................................. 2,677 $52.00-$72.98 1,748,609 $.003-$20.00
Repurchases .................................... (577) -- (406,787) --
----- ------------- --------- ------------
Balance, December 31, 1999 ..................... 6,821 $ 1.00-$72.98 3,884,821 $.003-$20.00
===== =========
Deferred compensation and compensation expense related to the issuance of
restricted stock to employees, based on the estimated fair value of the
preferred and common stock, was immaterial for the year ended December 31, 1998.
Certain awards granted under the Plan were variable awards. Upon the
initial offering, the variable stock awards became fixed. At that point, the
Company recorded deferred compensation expense based on the difference between
the estimated fair value and the exercise price of the award in the amount of
$61,999. For the year ended December 31, 1999, the Company recorded compensation
expense related to those restricted stock awards of $29,997. The remaining
deferred compensation balance related to the restricted stock awards of $32,000
will be recognized as compensation expense over the remaining vesting period.
Outstanding fixed awards and variable awards as of December 31, 1998 and 1999
are as follows:
December 31, December 31,
1998 1999
--------- ---------
Series E preferred stock:
Fixed awards ........................... 3,664 6,821
Variable awards ........................ 1,057 --
--------- ---------
Total Series E awards .......... 4,721 6,821
========= =========
Class A common stock:
Fixed awards ........................... 1,152,605 3,884,821
Variable awards ........................ 1,390,394 --
--------- ---------
Total Class A awards ........... 2,542,999 3,884,821
========= =========
The Chief Executive Officer and the Executive Vice President were issued
variable restricted stock awards outside of the Restricted Stock Plan. Upon the
initial public offering, the variable stock awards became fixed. At that point,
the Company recorded deferred compensation expense based the difference between
the estimated fair value and the exercise price of the award. The company
recorded $19,613 as deferred compensation related to these awards and will
recognize that as compensation expense over the related vesting periods, of
which $14,809 was recorded as compensation expense for the year ended December
31, 1999.
13. Employee and Director Stock Option Plan
On July 22, 1999, the Company implemented the 1999 Stock Option Plan to
allow employees and members of the Board of Directors to acquire shares of Class
B common stock. The options have an option term of 10 years, ratable vesting
over a three to four year period, exercise prices equal to the estimated fair
value of the underlying
F-31
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
Class B common stock on the date of award and restrictions on exercisability
until (i) a qualified initial public offering (IPO) to which the Class A voting
common stock has been registered under the Securities Act of 1933 for aggregate
proceeds of $20,000, (ii) the sale of all or substantially all of the assets of
the Company or (iii) the sale of all or substantially all of the outstanding
capital stock of the Company. The Company has reserved 1,814,321 shares of Class
A common stock for issuance under this plan.
The 581,967 stock options awarded during the period from July 22, 1999 to
November 23, 1999 represented variable awards since their exercisability was
restricted until the completion of the initial public offering, sale of assets
or sale of the Company. Therefore, the measurement date occurred when the
exercisability restrictions were relieved, upon the initial public offering. At
that point, the Company recorded deferred compensation expense based on the
difference between the initial public offering of $20.00 per share and the
exercise price of the award. All awards after the initial public offering are
fixed awards. The Company recorded $11,050 as deferred compensation related to
the stock option awards and will recognize expense over the related vesting
periods, of which $1,473 was recorded as compensation expense for the year ended
December 31, 1999.
A summary of the status of the Company's stock option plan is presented below:
Weighted
Average Weighted
Remaining Average
Option Price Contractual Exercise
Shares Range per share Life (Years) Price
------------------ ------------------ ------------------ ------------------
Outstanding at December 31, 1998 -- $ -- -- $ --
Granted 611,967 0.0065 - $37.88 3.2 $ 128
Exercised -- -- -- --
Forfeited (66,470) $ 0.0065 3.1 $ 0.0065
------------------ ------------------ ------------------ ------------------
Outstanding at December 31, 1999 545,497 $ 0.0065 - $37.88 3.2 $ 1.43
================== ================== ================== ==================
Options vested at December 31, 1999 76,801 $ 0.0065 3.1 $ 0.0065
================== ================== ================== ==================
No options were exercisable as of December 31, 1999.
Options Outstanding at December 31, 1999
------------------------------------------------------
Weighted Average
Remaining
Weighted Average Contractual Life
Exercise Price Number of Shares Remaining
-------------- ---------------- ---------
$ .0065 515,497 3.1
$ 20.00 20,000 4.0
$ 37.88 10,000 4.0
--------- --------- ---------
$ 1.43 545,497 3.2
========= ========= =========
F-32
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
During the year ended December 31, 1999, the Company granted options to purchase
611,967 shares of common stock, of which options to purchase 601,967 shares of
common stock were granted at exercise prices below fair market value.
Options Granted for the Year Ended December 31, 1999
-------------------------------------------------------------------------------------------
Market Price Weighted average
Weighted Average of Stock on Fair Value of remaining
Shares Exercise Price Grant Date options life (year)
-------------- -------------- -------------- -------------- --------------
581,967 $ 0.0065 $20.00 $20.00 3.1
10,000 $ 20.00 $20.00 $18.34 3.9
10,000 $ 20.00 $36.97 $34.82 4.0
10,000 $ 37.88 $39.25 $36.09 4.0
-------------- -------------- -------------- -------------- --------------
611,967 $ 1.28 $20.00- $39.25 $18.34 - $36.09 3.2
============== ============== ============== ============== ==============
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to continue to follow the provisions of Accounting Principle
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and
to adopt the disclosure only provision of SFAS No. 123. If compensation expense
had been recorded based on the fair value at the grant dates for awards under
the Plan, the Company's pro forma net loss, pro forma basic net loss per share
and pro forma diluted net loss per share would have been the same as their
respective reported balances disclosed in the financial statements.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants issued during the year ended December 31, 1999: volatility factor of
100%, weighted average expected life of 10 years, weighted -average risk free
interest rate of 6%, and no dividend yield. The weighted average fair value of
grants made during the year ended December 31, 1999 was $20.52.
14. Preferred and Common Stock Subscriptions Receivable
In connection with the AT&T Transaction described in Note 9 and the
acquisitions described in Note 10, the Company received various cash commitments
from the Cash Equity Investors in exchange for Series C preferred stock and
various classes of common stock. Through December 31, 1998 and 1999 the Company
received $52,000 and $23,696 of the commitment. The Company has recorded a
preferred stock subscription receivable of $75,914 and $97,001 as of December
31, 1998 and 1999, respectively, as a reduction to the mandatorily redeemable
preferred stock and a common stock subscription receivable of $86 and $191 as of
December 31, 1998 and 1999, respectively, as a reduction to stockholders' equity
(deficit) for the unpaid commitment.
As of December 31, 1999, the agreements require the Cash Equity Investors
to fund their unconditional and irrevocable obligations in installments in
accordance with the following schedules:
For the year ended December 31, Amount
------------------------------- ------
2000 ................................................. $37,650
2001 ................................................. 48,351
2002 ................................................. 11,000
-------
Total ................................................ $97,001
=======
F-33
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
15. Income Taxes
There was no provision for income tax for the years ended December 31,
1997, 1998 and 1999, respectively. The tax effect of temporary differences which
gives rise to significant portions of the deferred tax assets as of December 31,
1998 and 1999, respectively, are as follows:
December 31,
---------------------------
1998 1999
--------- ---------
Capitalized start-up costs ................. $ 17,599 $ 13,517
Net operating losses ....................... 3,635 92,579
Depreciation and amortization .............. 289 (14,180)
Original Issue Discount .................... 175 11,461
Other ...................................... (843) 1,402
--------- ---------
20,855 104,779
Less valuation allowance ................... (20,855) (104,779)
========= =========
$ -- $ --
========= =========
For federal income tax purposes, start-up costs are being amortized over
five years starting January 1, 1999 when active business operations commenced.
As of December 31, 1999, the Company had approximately $244,000 of net operating
losses. The net operating losses will begin to expire in 2012. There may be a
limitation on the annual utilization of net operating losses and capitalized
start-up costs as a result of certain ownership changes that have occurred since
the Company's inception. A valuation allowance is recognized if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the deferred tax asset will not be realized. Based on the Company's
financial results, management has concluded that a full valuation allowance for
all of the Company's deferred tax assets is appropriate.
A reconciliation between income taxes from operations computed using the
federal statutory income tax rate and the Company's effective tax rate is as
follows:
December 31,
1999
------------
Federal tax at statutory rates ............................ 34.0%
State tax expense
3.5%
Stock based compensation .................................. (4.1%)
Change in valuation allowance ............................. (33.4%)
====
0.0%
====
16. Commitments
In May 1998, the Company entered into a vendor procurement contract (the
Vendor Procurement Contract) with Lucent, pursuant to which the Company may
purchase up to $285,000 of radio, switching and related equipment and services
for the development of the Company's wireless communications network. At
December 31, 1998 and 1999, the Company has purchased approximately $90,900 and
$294,500, respectively, of equipment and services from Lucent since the
inception of the Vendor Procurement Contract.
The Company has operating leases primarily related to retail store
locations, distribution outlets, office space, and rent for the Company's
network build-out. The terms of some of the leases include a reduction of rental
payments and scheduled rent increases at specified intervals during the term of
the leases. The Company is recognizing rent
F-34
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
expense on a straight-line basis over the life of the lease, which establishes
deferred rent on the balance sheet. As of December 31, 1999, the aggregate
minimum rental commitments under non-cancelable operating leases are as follows:
For the Year Ended December 31;
2000 ................................ $ 21,605
2001 ................................ 21,375
2002 ................................. 21,057
2003 ................................. 18,374
2004 ................................. 10,330
Thereafter ........................... 27,999
--------
Total ........................ $120,740
========
Rental expense was approximately $157, $3,193 and $13,792 for the years
ended December 31, 1997, 1998, and 1999, respectively.
The Company has entered into letters of credit to facilitate local business
activities. The Company is liable under the letters of credit for nonperformance
of certain criteria under the individual contracts. The total amount of
outstanding letters of credit was $1,425 and $1,576 at December 31, 1998 and
1999, respectively. The outstanding letters of credit reduce the amount
available to be drawn under the Senior Credit Facility (see Note 8). The Company
is unaware of any events that would have resulted in nonperformance of a
contract during the years ended December 31, 1998 and 1999.
The Company has minimum purchase commitments of 15 million roaming minutes
from July 1999 to January 2002 from another wireless provider in Puerto Rico
relating to customers roaming outside our coverage area. We believe we will be
able to meet these minimum requirements.
Additionally, the Company has an obligation to AT&T Wireless to purchase a
minimum number of minutes of traffic annually over a specified time period and a
specified number of dedicated voice and data leased lines in order for us to
retain preferred pricing rates. We believe we will be able to meet these minimum
requirements.
17. Related Parties
The Executive Vice President serves as a consultant to ML Strategies, a
division of the law firm, Mintz, Levin, Cohn, Ferris, Glozsky, and Popeo, PC
(the Firm). The Firm also provides services for the Company. The Company
incurred $506 during the year ended December 31, 1999 related services performed
by the Firm and the Company owed the Firm $50 at December 31, 1999.
The Company receives site acquisition, construction management, program
management, microwave relocation, and engineering services pursuant to a Master
Services Agreement with WFI. The Chief Executive Officer and Executive Vice
President and Chief Financial Office of the Company were formerly stockholders
and senior officers of WFI. Fees for the above services are as follows: $12 per
site for site acquisition services, $7 per site for construction management
services, $9 per site for program management and $1 for microwave relocation
services for all of the Company's existing regions. Fees for engineering
services are based upon WFI's customary hourly rates. For the years ended
December 31, 1997, 1998 and 1999, the Company paid $1,940, $30,720 and $75,975,
respectively, to WFI for these services. As of December 31, 1997, 1998 and 1999,
the Company owed WFI $171, $21,178 and $15,053, respectively. Subsequent to
December 31, 1997, the Chief Executive Officer and Executive Vice President sold
100% of their interests in WFI.
F-35
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
In April 1997, Holding entered into an agreement to transfer PCS licenses,
operating assets, liabilities and U.S. Government financing, for the Houston,
Tampa, Melbourne and Orlando BTAs to four newly-formed entities created by
Holding's existing stockholder group: THC of Houston, Inc.; THC of Tampa, Inc.;
THC of Melbourne, Inc.; and THC of Orlando, Inc. (the THC entities). These
assets and liabilities were transferred in exchange for investment units of the
newly-formed THC entities which consisted of Class A, B and C common stock and
Series A preferred stock in August 1997. The carrying amount of the total assets
and liabilities transferred was $15,679 and $12,034, respectively.
Simultaneously, Holding reacquired shares of its preferred and common stock in a
$6,370 partial stock redemption through the exchange of the investment units in
the newly-formed companies of $3,645, which represented the net difference
between the cost of the assets and liabilities transferred and the issuance of
an aggregate of $2,725,of notes payable to those newly-formed THC entities.
As a result of this transfer, Holding no longer retains any ownership
interest in the THC entities. Because this transaction was non-monetary in
nature and occurred between entities with the same stockholder group, the
transaction was recorded at historical cost. Subsequent to the transfer, the
Company reduced the notes payable by $653 which represented certain costs
incurred by the Company on behalf of the THC entities for the year ended
December 31, 1997 pursuant to Transfer Agreements and Management Agreements. The
combined amounts owed THC Houston, Inc., THC Tampa, Inc., THC Melbourne, Inc.,
and THC Orlando, Inc. of $2,073 as of December 31, 1997 were repaid in full
during 1998. As of December 31, 1998 and December 31, 1999, the combined amounts
owed by the Company to THC Houston, Inc., THC Tampa, Inc., THC Melbourne, Inc.,
and THC Orlando, Inc. were $547 and $0, respectively.
As of December 31, 1997, the Company had amounts payable of $824, to
TeleCorp WCS, Inc. (WCS), an affiliate, formerly TeleCorp Management
Corporation, Inc. The amount payable to WCS represented $1,200 of funds received
by the Company on behalf of WCS related to wireless communications service
licenses owned by WCS reduced by expenses and other payments owed by WCS to the
Company. The entire balance due WCS as of December 31, 1997 was repaid during
1998.
Pursuant to a Management Agreement, TeleCorp Management Corp. (TMC)
provides assistance to the Company in the form of administrative, operational,
marketing, regulatory and general business services. For these services,
beginning in July 1998, the Company pays a management fee to TMC of $550 per
year plus reimbursement of certain business expenses, payable in equal monthly
installments, plus an annual bonus. The management agreement has a five-year
term, but may be terminated by the Company upon the occurrence of certain
defined events. TMC may terminate the agreement at any time with proper notice.
The Officers of TMC own all of the ownership interest in TMC. For the years
ended December 31, 1998 and 1999, the Company paid approximately $533 and 1,665
respectively, to TMC for these services.
The Company has entered into a Master Site Lease Agreement with American
Towers, Inc., a company partially owned by certain stockholders of the Company.
Under this arrangement American Towers provides network site leases for PCS
deployment. The Company has incurred $17 and $77 expense for the years ended
December 31, 1998 and 1999, respectively.
18. Defined Contribution Plan
During 1998, the Company established the TeleCorp Communications, Inc.
401(k) Plan (the 401(k) Plan), a defined contribution plan in which all
employees over the age of 21 are immediately eligible to participate in the
401(k) Plan. TeleCorp Communications, Inc. is a wholly-owned subsidiary of the
Company. Under the 401(k) Plan, participants may elect to withhold up to 15% of
their annual compensation, limited to $160 of total compensation as adjusted for
inflation. The Company may make a matching contribution based on a percentage of
the participant's contributions. Participants vest in the Company's matching
contributions as follows: 20% after one year; 60% after two years and 100% after
three years. Total Company contributions to the 401(k) Plan were $505 and $888
for the years ended December 31, 1998 and 1999, respectively.
F-36
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
19. Subsidiary Guarantee
On April 23, 1999, the Company completed the issuance and sale of 115/8% Senior
Subordinated Discount Notes. The Notes are fully and unconditionally guaranteed
on a joint and several basis by TeleCorp Communications, Inc., one of the
Company's wholly-owned subsidiaries. Summarized financial information of
TeleCorp, TeleCorp Communications, Inc. and non-guarantor subsidiaries as of
December 31, 1998 and 1999, and for the years ended December 31, 1998 and 1999
are as follows:
F-37
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
Balance Sheet Information as of December 31, 1998:
TeleCorp
Communications,
Inc.--
Guarantor Non-Guarantor
TeleCorp Subsidiary Subsidiaries Eliminations Consolidated
--------- --------- ------------- ------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ 93,047 $ 21,441 $ (2,755) $ -- $ 111,733
Accounts receivable ......................... -- -- -- -- --
Inventory ................................... -- 778 -- -- 778
Intercompany receivables .................... 279,078 -- -- (279,078) --
Prepaid expenses ............................ -- 812 1,374 -- 2,186
Other current assets ........................ 637 581 -- -- 1,218
--------- --------- --------- --------- ---------
Total current assets .................. 372,762 23,612 (1,381) (279,078) 115,915
Property and equipment, net ........................ 1,499 90,072 105,915 (17) 197,469
PCS licenses and microwave relocation
Costs .......................................... -- 12,457 105,650 -- 118,107
Intangible assets--AT&T agreements ................. -- -- 26,285 -- 26,285
Deferred financing costs, net ...................... 8,585 -- -- -- 8,585
Other assets ....................................... 4,370 7 276 (4,370) 283
--------- --------- --------- --------- ---------
Total assets .......................... $ 387,216 $ 126,148 $ 236,745 $(283,465) $ 466,644
========= ========= ========= ========= =========
LIABILITIES, MANDATORILY
REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Due to affiliates ........................... $ -- $ 92,923 $ 186,155 $(279,078) $ --
Accounts payable ............................ -- 8,331 6,261 -- 14,592
Accrued expenses ............................ 13 41,645 53,214 -- 94,872
Microwave relocation obligation ............. -- 6,636 -- -- 6,636
Accrued interest ............................ 3,992 -- 499 -- 4,491
--------- --------- --------- --------- ---------
Total current liabilities ............. 4,005 149,535 246,129 (279,078) 120,591
Long-term debt ..................................... 235,460 -- 7,925 -- 243,385
Microwave relocation obligation .................... -- 2,481 -- -- 2,481
Accrued expenses and other ......................... -- -- 196 -- 196
--------- --------- --------- ---------
Total liabilities ..................... 239,465 152,016 254,250 (279,078) 366,653
--------- --------- --------- --------- ---------
Mandatorily redeemable preferred
stock .......................................... 240,409 -- -- -- 240,409
Deferred compensation .............................. -- (4) -- -- (4)
Treasury stock ..................................... -- -- -- -- --
Preferred stock subscriptions
Receivable ..................................... (75,914) -- -- -- (75,914)
--------- --------- --------- --------- ---------
Total mandatorily redeemable
preferred stock .................... 164,495 (4) -- -- 164,491
--------- --------- --------- --------- ---------
Series F preferred stock ........................... 103 -- -- -- 103
Common stock ....................................... 493 -- -- -- 493
Additional paid in capital ......................... -- -- 4,370 (4,370) --
Deferred compensation .............................. -- (7) -- -- (7)
Common stock subscriptions
Receivable ..................................... (86) -- -- -- (86)
Treasury stock ..................................... -- -- -- -- --
Accumulated deficit ................................ (17,254) (25,856) (21,875) (17) (65,003)
--------- --------- --------- --------- ---------
Total shareholders' equity
(deficit) .......................... (16,744) (25,864) (17,505) (4,387) (64,500)
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity
(deficit) .......................... $ 387,216 $ 126,148 $ 236,745 $(283,465) $ 466,644
========= ========= ========= ========= =========
F-38
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except for per share data)
Balance Sheet Information as of December 31, 1999:
TeleCorp
Communications,
Inc.--
Guarantor Non-Guarantor
TeleCorp Subsidiary Subsidiaries Eliminations Consolidated
----------- ----------- ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................... $ 186,110 $ (2,724) $ (1,056) $ -- $ 182,330
Accounts receivable ......................... -- 23,443 138 -- 23,581
Inventory ................................... -- 15,802 -- -- 15,802
Intercompany receivables .................... 831,623 (415,728) (415,895) -- --
Prepaid expenses ............................ -- 1,099 1,932 -- 3,031
Other current assets ........................ 146 226 425 -- 797
----------- ----------- ----------- ----------- -----------
Total current assets .................. 1,017,879 (377,882) (414,456) -- 225,541
Property and equipment, net ........................ 6,058 176,116 218,347 (71) 400,450
PCS licenses and microwave relocation
costs .......................................... 2,119 47,835 217,728 -- 267,682
Intangible assets--AT&T agreements ................. -- -- 37,908 -- 37,908
Deferred financing costs, net ...................... 19,389 188 -- -- 19,577
Other assets ....................................... 4,385 601 17,944 (21,886) 1,044
----------- ----------- ----------- ----------- -----------
Total assets .......................... $ 1,049,830 $ (153,142) $ 77,471 $ (21,957) $ 952,202
=========== =========== =========== =========== ===========
LIABILITIES, MANDATORILY
REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................ $ 96 $ 12,222 $ 26,585 $ -- $ 38,903
Accrued expenses ............................ (23) 48,983 3,017 -- 51,977
Microwave relocation obligation ............. -- 36,122 -- -- 36,122
Long-term debt, current portion ............. -- -- 1,361 -- 1,361
Accrued interest ............................ 675 -- 712 -- 1,387
Deferred revenue ............................ -- 1,709 -- -- 1,709
----------- ----------- ----------- ----------- -----------
748 99,036 31,675 -- 131,459
Total current liabilities
Long-term debt ..................................... 622,795 -- 16,415 -- 639,210
Microwave relocation obligation .................... -- 2,365 -- -- 2,365
Accrued expenses ................................... -- -- 6,541 -- 6,541
----------- ----------- ----------- ----------- -----------
Total liabilities ..................... 623,543 101,401 54,631 -- 779,575
----------- ----------- ----------- ----------- -----------
Mandatorily redeemable preferred
Stock .......................................... 360,182 -- -- -- 360,182
Preferred stock subscriptions
Receivable ..................................... (97,001) -- -- -- (97,001)
----------- ----------- ----------- ----------- -----------
Total MRPS ........................... 263,181 -- -- -- 263,181
----------- ----------- ----------- ----------- -----------
Stockholders' equity (deficit):
Series F preferred stock ........................... 149 -- -- -- 149
Common stock ....................................... 856 -- -- -- 856
Additional paid in capital ......................... 267,442 -- 21,886 (21,886) 267,442
Deferred compensation .............................. (42,811) -- -- -- (42,811)
Common stock subscriptions
Receivable ..................................... (191) -- -- -- (191)
Treasury stock
Accumulated deficit ................................ (62,339) (254,543) 954 (71) (315,999)
----------- ----------- ----------- ----------- -----------
Total shareholders' equity
(deficit) .......................... 163,106 (254,543) 22,840 (21,957) (90,554)
----------- ----------- ----------- ----------- -----------
Total liabilities, mandatorily
redeemable preferred stock and
shareholders' equity (deficit) ........ $ 1,049,830 $ (153,142) $ 77,471 $ (21,957) $ 952,202
=========== =========== =========== =========== ===========
F-39
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
Notes to Consolidated Financial Statements
($ in thousands, except for per share data)
Statement of Operations Information for the year ended December 31, 1998:
TeleCorp
Communications,
Inc.--
Guarantor Non-Guarantor
TeleCorp Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------ ------------ ------------
Revenue:
Service revenue .................................. $ -- $ -- $ -- $ -- $ --
Roaming revenue .................................. -- 29 -- -- 29
Equipment revenue ................................ -- 777 261 (1,038) --
-------- -------- -------- -------- --------
Total revenue .................................... -- 806 261 (1,038) 29
-------- -------- -------- -------- --------
Operating expenses:
Cost of revenue .................................. -- -- -- -- --
Operations and development ....................... -- 5,218 4,675 (121) 9,772
Selling and marketing ............................ -- 4,920 1,405 6,325
General and administrative ....................... 975 16,137 10,027 (900) 26,239
Depreciation and amortization .................... -- 459 1,125 -- 1,584
-------- -------- -------- -------- --------
Total operating expense .................... 975 26,734 17,232 (1,021) 43,920
-------- -------- -------- -------- --------
Operating loss ............................. (975) (25,928) (16,971) (17) (43,891)
Other (income) expense:
Interest expense ................................. 11,923 -- 11 -- 11,934
Interest income .................................. (4,427) (87) (183) -- (4,697)
Other expense .................................... 21 5 1 -- 27
-------- -------- -------- -------- --------
Net loss ................................... (8,492) (25,846) (16,800) (17) (51,155)
Accretion of mandatorily redeemable
Preferred stock ..................................... (8,567) -- -- -- (8,567)
-------- -------- -------- -------- --------
Net loss attributable to common
equity .................................. $(17,059) $(25,846) $(16,800) $ (17) $(59,722)
======== ======== ======== ======== ========
F-40
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
Description of Unaudited Proforma
Condensed Consolidated Financial Statements
($ in thousands, except for per share data)
Statement of Operations Information for the year ended December 31, 1999:
TeleCorp
Communications,
Inc.-
Guarantor Non-Guarantor
TeleCorp Subsidiary Subsidiaries Eliminations Consolidated
-------- ---------- ------------ ------------ ------------
Revenue:
Service revenue ........................ $ -- $ 41,100 $ 4,282 $ (4,063) $ 41,319
Equipment revenue ...................... -- 29,010 -- -- 29,010
Roaming revenue ........................ -- 17,353 -- -- 17,353
--------- --------- --------- --------- ---------
Total Revenue .................... -- 87,463 4,282 (4,063) 87,682
Operating expenses:
Cost of revenue ........................ -- 39,259 -- -- 39,259
Operations and development ............. 1,472 26,833 11,682 (4,008) 35,979
Selling and marketing .................. 937 69,514 729 -- 71,180
General and administrative ............. 30,579 59,296 2,710 -- 92,585
Depreciation and amortization .......... 787 20,910 33,413 -- 55,110
--------- --------- --------- --------- ---------
Total operating expense .......... 33,775 215,812 48,534 (4,008) 294,113
--------- --------- --------- --------- ---------
Operating loss ................... (33,775) (128,349) (44,252) (55) (206,431)
Other (income) expense:
Interest expense ....................... 49,356 15 1,942 -- 51,313
Interest income ........................ (6,200) (243) (21) -- (6,464)
Other expense .......................... -- (147) (137) -- (284)
--------- --------- --------- --------- ---------
Net loss ......................... (76,931) (127,974) (46,036) (55) (250,996)
Accretion of mandatorily redeemable
Preferred stock ........................... (24,124) -- -- -- (24,124)
Net loss attributable to
common equity ................. $(101,055) $(127,974) $ (46,036) $ (55) $(275,120)
========= ========= ========= ========= =========
F-41
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
Description of Unaudited Proforma
Condensed Consolidated Financial Statements
($ in thousands, except for per share data)
December 31, 1998 Cash Flow Information:
TeleCorp
Communications,
Inc.--
Guarantor
TeleCorp Subsidiary
--------- ---------
Cash flows from operating activities:
Net loss ..................................................................................... $ (8,496) $ (26,645)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................................. -- 581
Noncash interest expense associated with Lucent notes and senior subordinated debt ........ 460 --
Amortization of deferred financing costs .................................................. 525 --
Changes in cash flow from operations resulting from changes in assets and
liabilities:
Accounts receivable ....................................................................... (57) (473)
Inventory ................................................................................. -- (778)
Prepaid expenses .......................................................................... -- (816)
Other current assets ...................................................................... (580) (104)
Other assets .............................................................................. -- (7)
Accounts payable .......................................................................... -- 2,260
Accrued expenses .......................................................................... 13 16,211
Accrued interest .......................................................................... 3,992 --
--------- ---------
Net cash used in operating activities ............................................... (4,143) (9,771)
--------- ---------
Cash flows from investing activities:
Expenditures for network under development, wireless network and property and
Equipment .............................................................................. -- (58,205)
Capitalized interest on network under development and wireless network .................... (227) --
Expenditures for microwave relocation ..................................................... -- (3,339)
Purchase of PCS licenses .................................................................. (21,000) --
Partial refund of deposit on PCS licenses ................................................. -- (61,544)
--------- ---------
Net cash used in investing activities ............................................... 21,227) (61,544)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of mandatorily redeemable preferred stock .............................. 26,661 --
Direct issuance costs from sale of mandatorily redeemable preferred stock ................. (1,027) --
Proceeds from sale of common stock ........................................................ 38 --
Proceeds from long-term debt .............................................................. 235,000 --
Payments of deferred financing costs ...................................................... (9,109) --
Proceeds from cash transfers from and expenses paid by affiliates ......................... 1,065 121,750
Payments on behalf of and transfers to affiliates ......................................... (134,215) (28,994)
--------- ---------
Net cash provided by financing activities ........................................... 118,417 92,756
--------- ---------
Net increase in cash and cash equivalents ................................................. 93,047 21,440
Cash and cash equivalents at the beginning of period ...................................... -- --
--------- ---------
Cash and cash equivalents at the end of period ............................................ $ 93,047 $ 21,441
========= =========
F-42
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
Description of Unaudited Proforma
Condensed Consolidated Financial Statements
($ in thousands, except for per share data)
December 31, 1999 Flow Information:
TeleCorp
Communications,
Inc.--
Guarantor
TeleCorp Subsidiary
-------- ----------
Cash flows from operating activities:
Net loss ........................................................................................ $ (76,931) $(127,974)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................................ 787 18,102
Noncash compensation expense associated with the issuance of restricted common stock and
preferred stock ........................................................................... 31,817 --
Noncash accretion of Series E preferred stock
Noncash interest expense associated with Lucent Notes and High Yield facility ................ 26,895
Noncash general and administrative expense charged by affiliates ............................. 2,962
Amortization of deferred financing costs .....................................................
Amortization of discount on notes payable ....................................................
Changes in cash flow from operations resulting from changes in assets and
liabilities:
Accounts receivable .......................................................................... -- (23,443)
Inventory .................................................................................... -- (15,024)
Prepaid expenses ............................................................................. -- (287)
Other current assets ......................................................................... 491 355
Other assets ................................................................................. (15) 6,343
Accounts payable ............................................................................. 96 3,891
Accrued expenses ............................................................................. (36) 7,338
Accrued interest ............................................................................. (3,317) --
Deferred revenue ............................................................................. -- 1,709
--------- ---------
Net cash used in operating activities ..................................................... (20,213) (126,028)
--------- ---------
Cash flows from investing activities:
Expenditures for network under development, wireless network and property and equipment ...... (5,016) (92,575)
Capitalized interest on network under development and wireless network ....................... (5,317) --
Expenditures for microwave relocation ........................................................ -- (5,654)
Purchase of PCS licenses ..................................................................... (2,146) --
--------- ---------
Net cash used in investing activities ..................................................... (12,479) (98,229)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of mandatorily redeemable preferred stock ................................. 70,323 --
Proceeds from sale of common stock and series F preferred stock .............................. 21,725 --
Receipt of preferred stock subscription receivable ........................................... 9,414 --
Direct issuance costs from sale of mandatorily redeemable preferred stock .................... 0 --
Redeemable Preferred stock ................................................................... (2,500) --
Proceeds associated with IPO ................................................................. 197,317 --
Costs associated with IPO .................................................................... (1,801) --
Proceeds from long-term debt ................................................................. 236,502 --
Purchases of treasury shares ................................................................. -- --
Payments on notes payable
Payments of deferred financing costs ......................................................... (12,742) --
Proceeds from cash transfers from and expenses paid by affiliates ............................ (392,483) 200,092
--------- ---------
Net cash provided by financing activities ................................................. 125,755 200,092
--------- ---------
Net increase in cash and cash equivalents ................................................. 93,063 (24,165)
Cash and cash equivalents at the beginning of period ...................................... 93,047 21,441
--------- ---------
Cash and cash equivalents at the end of period ............................................... $ 186,110 $ (2,724)
========= =========
F-43
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ In thousands, except for per share data)
20. Subsequent Events
Deferred Compensation
Certain employees, the Chief Executive Officer and the Executive Vice
President of the Company will be issued a total of 1,111 shares and 503,022
shares of mandatorily redeemable Series E preferred stock and Class A common
stock, respectively, pending final FCC approval of the share issuance related to
the Viper Wireless transaction. The Chief Executive Officer's and the Executive
Vice President's shares vest immediately and the employees' shares vest ratably
over five years. The total fair value of these shares will be based on fair
market value of the stock when issued. As of December 31, 1999, the estimated
fair value of the Series E preferred stock was $72.98 per share and the fair
value of the class A common stock was $38.00 per share.
Pending Acquisitions
On October 18, 1999, the Company agreed to acquire TeleCorp LMDS, Inc.
(TeleCorp LMDS) through a purchase of all of the outstanding stock of TeleCorp
LMDS for an estimated aggregate purchase price of approximately $19,200. The
consideration will be comprised of Series C preferred stock and Class A common
stock. TeleCorp LMDS' only assets are LMDS licenses. The purchase price has been
preliminarily allocated to the acquired licenses, subject to adjustment, based
on a final valuation. TeleCorp LMDS' stockholders are Mr. Vento, Mr. Sullivan
and three of our Cash Equity Investors. By acquiring TeleCorp LMDS, the Company
will gain local multipoint distribution service, or LMDS. The LMDS licenses will
provide the Company with additional airwaves to use as back-haul portions of the
Company's PCS network traffic in several of the Company's markets.
On October 14, 1999, the Company agreed to purchase 15 MHz of additional
airwaves in the Lake Charles, Louisiana basic trading area from Gulfstream
Telecomm, L.L.C. Total consideration approximates $2,700 and consists of
approximately $400 in cash plus the assumption of approximately $2,300 in debt
related to the license. Additionally, the Company will reimburse Gulf Telecomm
for all interest it paid to the FCC on debt related to the license from June
1998 until the date the transaction is completed.
Each of these agreements are subject to governmental approvals and other
customary conditions to closing, but no assurance can be given that they will be
closed on schedule or at all.
Tritel Merger and Concurrent Property Swap with AT&T Wireless
On February 28, 2000, the Company agreed to merge with Tritel, Inc. through
a merger of each of us and Tritel into a newly formed subsidiary of a new
holding company. The merger will result in the exchange of 100% of the
outstanding common and preferred stock of the Company and Tritel for common and
preferred stock of the newly-formed entity, to be called TeleCorp PCS, Inc. The
new entity will be controlled by the Company's voting preference common
stockholders, and the Company and Tritel will become subsidiaries of the holding
company.
F-44
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ In thousands, except for per share data)
This transaction will be accounted for using the purchase method of
accounting. The purchase price for Tritel will be determined based on the fair
value of the shares of the new holding company issued to the former shareholders
of Tritel plus cash, the fair value associated with the conversion of
outstanding Tritel options and warrants, holding company options and warrants,
liabilities assumed, and merger related costs. The fair value of the shares
issued will be determined based on the existing market price of the Company's
Class A common stock, which is publicly traded, and, for those shares that do
not have a readily available market price, through valuation by an investment
banking firm. The purchase price for this transaction will be allocated to the
assets acquired based on their estimated fair values. The excess of the purchase
price over the assets acquired will be recorded as goodwill and amortized over
20 years. The purchase price and the excess of the purchase price over the
assets acquired has not yet been determined.
The proposed merger has been unanimously approved by the Company's and
Tritel's boards of directors, with three of our directors abstaining. In
addition, shareholders with greater than 50% of the voting power of each company
have agreed to vote in favor of the merger. The merger is subject to regulatory
approval and other conditions and is expected to close in the last quarter of
2000.
In connection with the Company's merger with Tritel, the Company has agreed to
exchange certain other assets with AT&T Wireless Services. This exchange will
result in the Company acquiring various assets in exchange for the consideration
issued as follows:
The Company acquires:
$20 million cash from AT&T Wireless Services and a two year extension
of the Company's and AT&T's brand sharing and limited exclusivity
rights agreements.
The right to acquire all of the common and preferred stock of Indus,
Inc. (Indus).
The right to acquire additional wireless properties and assets from
Airadigm, Inc. (Airadigm).
Consideration issued:
9.3 million shares of Class A common stock of the new holding company
formed from the Tritel merger to AT&T Wireless Services.
F-45
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ In thousands, except for per share data)
Cash to the shareholders of Indus.
Cash to Airadigm.
Separately, AT&T Wireless and the Company entered into an Asset Exchange
Agreement pursuant to which the Company has agreed to exchange certain assets
with AT&T Wireless, among other consideration.
The Company is receiving certain consideration in exchange for assets as
follows:
The Company acquires:
$80 million in cash from AT&T Wireless.
AT&T Wireless' 10MHz licenses in the areas covering part of the Wisconsin
market, in addition to adjacent licenses.
AT&T Wireless' existing 10MHz licenses in Fort Dodge and Waterloo, Iowa.
The right to acquire additional wireless properties from Polycell
Communications, Inc. (Polycell) and ABC Wireless, L.L.C. (ABC Wireless).
Consideration issued:
The Company's markets and infrastructure in the Boston-Providence MTA to
AT&T Wireless.
A "right of first refusal" with respect to certain markets contributed by
AT&T Wireless triggered in the event of a sale of the Company to a third
party.
Cash or class A common stock to Polycell and cash to ABC Wireless.
These transactions will be accounted for using the purchase method of
accounting. The purchase price will be determined based on cash paid, the fair
value of the shares issued, and the net book value of the assets relinquished.
The purchase price will be allocated to the assets acquired and liabilities
assumed based on their estimated fair values. The excess of the purchase price
over the assets acquired will be recorded as goodwill and amortized over 20
years. This transaction is also subject to regulatory approval and other
conditions and is expected to close in the second half of 2000. The failure of
these transactions to occur does not prevent the Tritel merger from occurring.
F-46