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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): November 13, 2000
TeleCorp PCS, Inc.
(Exact Name of Registrant as Specified in Charter)
Delaware 333-36954 54-1988077
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
1010 N. Glebe Road, Suite 800
Arlington, VA 22201
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (703) 236-1100
TeleCorp-Tritel Holding Company
(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS
Effective 4:02 p.m., November 13, 2000, pursuant to the Agreement and Plan
of Reorganization and Contribution, dated as of February 28, 2000, as amended
(the "Merger Agreement"), among TeleCorp PCS, Inc. ("TeleCorp"), Tritel, Inc.
("Tritel") and AT&T Wireless Services, Inc. ("AT&T Wireless"), TeleCorp was
merged with TTHC First Merger Sub, Inc. ("First Merger Sub") and Tritel was
merged with TTHC Second Merger Sub, Inc. ("Second Merger Sub") (the "Mergers").
Each of First Merger Sub and Second Merger Sub were wholly owned subsidiaries
of TeleCorp-Tritel Holding Company ("Holding Company"). TeleCorp and Tritel
were the surviving entities of the Mergers. Immediately following the Mergers,
TeleCorp PCS, Inc. was renamed TeleCorp Wireless, Inc. and TeleCorp-Tritel
Holding Company was renamed TeleCorp PCS, Inc. A copy of Holding Company's
press release announcing the effectiveness of the Mergers was filed with the
TeleCorp PCS, Inc. (f/k/a TeleCorp-Tritel Holding Company) Current Report on
Form 8-K dated November 13, 2000 and is incorporated herein by reference.
At the time of the Mergers:
. each share of TeleCorp Class A Voting Common Stock, Class C Common
Stock, Class D Common Stock and Voting Preference Common Stock issued
and outstanding immediately prior to the Mergers was converted
automatically into and became exchangeable for one fully paid and non-
assessable share of Holding Company Class A Voting Common Stock, Class C
Common Stock, Class D Common Stock and Voting Preference Common Stock,
respectively;
. each share of TeleCorp Class B Non-Voting Common Stock issued and
outstanding immediately prior to the Mergers was converted automatically
into and became exchangeable for one fully paid and non-assessable share
of Holding Company Class A Voting Common Stock;
. each share of TeleCorp Series A Convertible Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and
Series F Preferred Stock issued and outstanding immediately prior to the
Mergers was converted automatically into and became exchangeable for one
fully paid and non-assessable share of Holding Company Series A
Convertible Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock,
respectively;
. each share of Tritel Class A Voting Common Stock and Class B Non-Voting
Common Stock issued and outstanding immediately prior to the Mergers was
converted automatically into and became exchangeable for 0.76 of one
share of Holding Company Class A Voting Common Stock and cash in lieu of
any fractional shares;
. each share of Tritel Class C Common Stock and Class D Common Stock
issued and outstanding immediately prior to the Mergers was converted
automatically into and became exchangeable for 0.0076 of one share of
Holding Company Class E Common Stock and Class F Common Stock,
respectively, and 0.7524 of one share of Holding Company Class A Voting
Common Stock and cash in lieu of any fractional shares;
. the Tritel Voting Preference Common Stock owned by E.B. Martin, Jr. was
converted into and became exchangeable for the right to receive an
aggregate amount of $10 million, which amount was paid to Mr. Martin by
Tritel;
. the Tritel Voting Preference Common Stock owned by William M. Mounger,
II was converted into three shares of Holding Company Voting Preference
Common Stock;
. each share of Tritel series A Convertible Preferred Stock and Series D
Convertible Preferred Stock issued and outstanding immediately prior to
the Mergers was converted automatically into and became exchangeable for
one share of Holding Company Series B Preferred Stock and Series G
Preferred Stock, respectively; and
. each share of TeleCorp stock and Tritel stock held in the treasury of
TeleCorp and Tritel, respectively, was canceled and extinguished without
any conversion thereof and no consideration was paid in exchange
therefor.
2
In connection with the Mergers, and pursuant to the Merger Agreement, on
November 13, 2000, AT&T Wireless contributed to Holding Company the right to
acquire certain wireless rights and commitments in the midwestern United States
and cash of approximately $20 million in exchange for 9,272,740 restricted
shares of Holding Company Class A Voting Common Stock.
Additionally, on November 13, 2000, the transactions contemplated by that
certain Asset Exchange Agreement, dated as of February 28, 2000, among AT&T
Wireless PCS, LLC, TeleCorp, TeleCorp PCS, LLC, TeleCorp Holding Corp, Inc.,
TeleCorp Communications, Inc., TeleCorp Equipment Leasing, L.P. and TeleCorp
Realty, LLC were consummated.
Reference is made to the joint proxy statement/prospectus forming a part of
the registration statement of TeleCorp PCS, Inc. (f/k/a/ TeleCorp-Tritel
Holding Company) on Form S-4, as amended (file no. 333-36954) for additional
information regarding the transactions described above.
3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired
1. The Financial Statements of TeleCorp are included herein beginning at
page F-2.
2. The Financial Statements of Tritel are included herein beginning at
page F-54.
(b) Pro Forma Financial Information
1. The Unaudited Pro Forma Condensed Combined Financial Statements
related to the transactions described above are included herein beginning
at page F-91.
(c) Exhibits
Exhibit 2.1 Agreement and Plan of Reorganization and Contribution, dated as
of February 28, 2000, as amended, among TeleCorp PCS, Inc.,
Tritel, Inc. and AT&T Wireless Services, Inc. (incorporated by
reference to Annex A, Annex B and Annex C of the joint proxy
statement/prospectus forming a part of the TeleCorp PCS, Inc.
registration statement on Form S-4 (file no. 333-36954)).
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP.
Exhibit 23.2 Consent of KPMG LLP.
Exhibit 99.1 Press Release of TeleCorp PCS, Inc. dated November 13, 2000
(incorporated by reference to the TeleCorp PCS, Inc. Current
Report on Form 8-K filed on November 13, 2000).
4
FINANCIAL STATEMENTS INDEX
Page
----
TELECORP PCS, INC.
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit)..... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-8
TRITEL, INC. AND SUBSIDIARIES
Independent Auditors' Report............................................. F-54
Consolidated Balance Sheets.............................................. F-55
Consolidated Statements of Operations.................................... F-56
Consolidated Statements of Members' and Stockholders' Equity............. F-57
Consolidated Statements of Cash Flows.................................... F-58
Notes to Consolidated Financial Statements............................... F-59
TELECORP PCS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Description of Unaudited Pro forma Condensed Combined Financial
Statements.............................................................. F-91
Unaudited Pro forma Condensed Combined Balance Sheet as of June 30,
2000.................................................................... F-92
Unaudited Pro forma Condensed Combined Statement of Operations for the
six months ended June 30, 2000.......................................... F-93
Unaudited Pro forma Condensed Combined Statement of Operations for the
year ended December 31, 1999............................................ F-94
Notes to Unaudited Pro forma Condensed Combined Financial Statements..... F-95
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
TeleCorp PCS, Inc.:
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. (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.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share data)
December 31,
------------------- June 30,
1998 1999 2000
-------- --------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................. $111,733 $ 182,330 $ 28,223
Accounts receivable, net.................. -- 23,581 36,514
Inventory................................. 778 15,802 20,604
Prepaid expenses and other current
assets................................... 3,404 3,828 6,344
-------- --------- ---------
Total current assets...................... 115,915 225,541 91,685
Property and equipment, net................ 197,469 400,450 531,034
PCS licenses and microwave relocation
costs, net................................ 118,107 267,682 277,275
Intangible assets--AT&T agreements, net.... 26,285 37,908 34,330
Deferred financing costs, net.............. 8,585 19,577 18,647
Other assets............................... 283 1,044 13,626
-------- --------- ---------
Total assets.............................. $466,644 $ 952,202 $ 966,597
======== ========= =========
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.......................... $ 14,592 $ 38,903 $ 6,654
Accrued expenses.......................... 94,872 51,977 110,876
Microwave relocation obligation, current
portion.................................. 6,636 36,122 21,973
Long-term debt, current portion........... -- 1,361 1,415
Accrued interest.......................... 4,491 1,387 1,555
Deferred revenue.......................... -- 1,709 2,617
-------- --------- ---------
Total current liabilities................. 120,591 131,459 145,090
Long-term debt............................. 243,385 639,210 728,129
Microwave relocation obligation............ 2,481 2,365 8,128
Accrued expenses and other................. 196 6,541 9,538
-------- --------- ---------
Total liabilities......................... 366,653 779,575 890,885
-------- --------- ---------
Mandatorily redeemable preferred stock,
issued 255,999, 382,539 and 383,339
shares, respectively; and outstanding,
255,215, 382,539 and 383,173 shares,
respectively, (liquidation preference
$404,779 as of June 30, 2000, unaudited).. 240,409 360,182 376,129
Deferred compensation...................... (4) -- --
Preferred stock subscriptions receivable... (75,914) (97,001) (97,001)
-------- --------- ---------
Total mandatorily redeemable preferred
stock, net............................... 164,491 263,181 279,128
-------- --------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Series F preferred stock, par value $.01
per share, 10,308,676, 14,912,778 and
14,912,778 shares issued and outstanding,
respectively (liquidation preference
$1 as of June 30, 2000, unaudited)....... 103 149 149
Common stock, par value $.01 per share
issued 49,357,658, 85,592,221 and
89,047,531, shares, respectively; and
outstanding 48,805,184, 85,592,221 and
88,942,943 shares, respectively.......... 493 856 890
Additional paid-in capital................ -- 267,442 313,107
Deferred compensation..................... (7) (42,811) (32,999)
Common stock subscriptions receivable..... (86) (191) (191)
Accumulated deficit....................... (65,003) (315,999) (484,372)
-------- --------- ---------
Total stockholders' equity (deficit)...... (64,500) (90,554) (203,416)
-------- --------- ---------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity
(deficit)................................ $466,644 $ 952,202 $ 966,597
======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
TELECORP PCS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
For the six months
For the year ended December 31, ended June 30,
---------------------------------- -------------------------
1997 1998 1999 1999 2000
-------- ----------- ----------- ----------- ------------
(unaudited) (unaudited)
Revenue:
Service................ $ -- $ -- $ 41,319 $ 6,232 $ 88,056
Roaming................ -- 29 29,010 9,487 26,151
Equipment.............. -- -- 17,353 5,649 13,250
-------- ----------- ----------- ----------- ------------
Total revenue.......... -- 29 87,682 21,368 127,457
-------- ----------- ----------- ----------- ------------
Operating expenses:
Cost of revenue........ -- -- 39,259 10,107 40,433
Operations and
development .......... -- 9,772 35,979 15,498 25,535
Selling and marketing.. 304 6,325 71,180 20,925 74,766
General and
administrative........ 2,637 26,239 92,585 22,441 74,347
Depreciation and
amortization.......... 11 1,584 55,110 16,491 50,383
-------- ----------- ----------- ----------- ------------
Total operating
expenses.............. 2,952 43,920 294,113 85,462 265,464
-------- ----------- ----------- ----------- ------------
Operating loss......... (2,952) (43,891) (206,431) (64,094) (138,007)
Other (income) expense:
Interest expense....... 396 11,934 51,313 17,107 34,263
Interest income and
other................. (13) (4,670) (6,748) (2,918) (3,897)
-------- ----------- ----------- ----------- ------------
Net loss............... (3,335) (51,155) (250,996) (78,283) (168,373)
Accretion of mandatorily
redeemable preferred
stock.................. (726) (8,567) (24,124) (9,896) (15,889)
-------- ----------- ----------- ----------- ------------
Net loss attributable
to common equity...... $ (4,061) $ (59,722) $ (275,120) $ (88,179) $ (184,262)
======== =========== =========== =========== ============
Net loss attributable to
common equity per
share--basic and
diluted................ $(111.74) $ (2.19) $ (3.58) $ (1.39) $ (1.84)
======== =========== =========== =========== ============
Weighted average common
equity shares
outstanding--basic and
diluted................ 36,340 27,233,786 76,895,391 63,293,065 100,414,647
======== =========== =========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
TELECORP PCS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
($ in thousands)
Common
Series F Addi- Stock
Preferred Stock Common Stock tional Deferred Subscrip- Treasury Stock
----------------- ------------------ Paid-in Compen- tions ----------------
Shares Amount Shares Amount Capital sation Receivable 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 -- -- (86) -- --
Accretion of
mandatorily
redeemable
preferred
stock.......... -- -- -- -- -- -- -- -- --
Noncash issuance
of restricted
stock to
employees...... -- -- 3,095,473 31 -- (10) -- -- --
Repurchase of
common stock
for cash....... -- -- -- -- -- 2 -- (552,474) --
Compensation
expense related
to restricted
stock awards... -- -- -- -- -- 1 -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ---- ---------- ---- -------- -------- ----- -------- ----
Balance,
December 31,
1998........... 10,308,676 103 49,357,658 493 -- (7) (86) (552,474) --
Issuance of
preferred stock
and common
stock for cash
and licenses... 4,604,102 46 23,231,331 233 21,550 -- (105) -- --
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 (73,049) -- -- --
Compensation
expense related
to stock option
grants and
restricted
stock awards... -- -- -- -- -- 31,817 -- -- --
Non-cash
issuance of
restricted
stock.......... -- -- 2,423,232 24 1,558 (1,573) -- 959,259 --
Repurchase of
common stock
for cash....... -- -- -- -- (1) 1 -- (406,785) --
Accretion of
mandatorily
redeemable
preferred
stock.......... -- -- -- -- (24,124) -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ---- ---------- ---- -------- -------- ----- -------- ----
Balance,
December 31,
1999........... 14,912,778 149 85,592,221 856 267,442 (42,811) (191) -- --
Issuance of
common stock
for PCS
licenses....... -- -- 1,201,772 12 2,694 -- -- -- --
Deferred
compensation in
connection with
Viper Wireless
closing........ -- -- -- -- 15,239 (15,239) -- -- --
Issuance of
common stock
for cash....... -- -- 2,245,000 22 41,847 -- -- -- --
Deferred
compensation
expense related
to stock option
grants and
restricted
stock awards... -- -- -- -- 4,455 (4,455) -- -- --
Compensation
expense related
to stock option
grants and
restricted
stock awards... -- -- -- -- -- 26,825 -- -- --
Forfeitures of
stock options.. -- -- -- -- (2,117) 2,117 -- -- --
Accretion of
mandatorily
redeemable
preferred
stock.......... -- -- -- -- (15,889) -- -- -- --
Repurchase of
stock for
cash........... -- -- (104,588) -- (564) 564 -- 104,588 --
Issuance of
common stock
related to
exercise of
options........ -- -- 8,538 -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ---- ---------- ---- -------- -------- ----- -------- ----
Balance, June 30, 2000 (unaudited).. 14,912,778 $149 88,942,943 $890 $313,107 $(32,999) $(191) 104,588 $--
========== ==== ========== ==== ======== ======== ===== ======== ====
Accumu-
lated
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
mandatorily
redeemable
preferred
stock.......... -- (24,124)
Net loss........ (250,996) (250,996)
---------- ----------
Balance,
December 31,
1999........... (315,999) (90,554)
Issuance of
common stock
for PCS
licenses....... -- 2,706
Deferred
compensation in
connection with
Viper Wireless
closing........ -- --
Issuance of
common stock
for cash....... -- 41,869
Deferred
compensation
expense related
to stock option
grants and
restricted
stock awards... -- --
Compensation
expense related
to stock option
grants and
restricted
stock awards... -- 26,825
Forfeitures of
stock options.. -- --
Accretion of
mandatorily
redeemable
preferred
stock.......... -- (15,889)
Repurchase of
stock for
cash........... -- --
Issuance of
common stock
related to
exercise of
options........ -- --
Net loss........ (168,373) (168,373)
---------- ----------
Balance, June 30, 2000 (unaudited).. $(484,372) $(203,416)
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
TELECORP PCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For the year ended For the six months
December 31, ended June 30,
---------------------------- ----------------------
1997 1998 1999 1999 2000
------- -------- --------- ----------- ----------
(unaudited) (unaudited)
Cash flows from operating
activities:
Net loss................ $(3,335) $(51,155) $(250,996) $(78,283) $(168,373)
Adjustment to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 11 1,584 55,110 16,491 50,383
Noncash compensation
expense related to
stock option grants and
restricted stock
awards................. -- 2 31,817 365 26,883
Noncash interest
expense................ 134 1,182 32,718 9,126 23,349
Bad debt expense........ -- -- 2,962 159 5,639
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) (12,337) (12,933)
Inventory............... -- (778) (15,024) (6,955) (4,802)
Prepaid expenses and
other current assets... (52) (3,331) (424) 994 (2,516)
Other assets............ 144 (1,184) (1,123) (1,155) (4,173)
Accounts payable........ 619 11,586 24,808 18,559 (32,249)
Accrued expenses........ -- 9,145 17,831 2,131 (5,817)
Accrued interest........ 258 2,046 (3,104) (411) 168
Deferred revenue........ -- -- 1,709 705 908
------- -------- --------- -------- ---------
Net cash used in
operating activities.. (2,221) (30,706) (127,297) (50,611) (123,533)
------- -------- --------- -------- ---------
Cash flows from investing
activities:
Expenditures for network
under development,
wireless network and
property and
equipment.............. (1,134) (107,542) (298,506) (203,235) (109,117)
Capitalized interest on
network under
development and
wireless network and
PCS licenses........... -- (227) (5,317) (4,153) (1,798)
Expenditures for
microwave relocation... -- (3,340) (5,654) (5,137) (4,279)
Purchase of PCS
licenses............... -- (21,000) (114,238) (72,188) (733)
Deposit on PCS
licenses............... -- -- -- (28,878) (12,368)
Partial refund of
deposit on PCS
licenses............... 1,561 -- -- 11,361 --
Purchase of
intangibles--AT&T
agreements............. -- -- (17,310) (16,145) --
Capitalized Tritel
acquisition costs...... -- -- -- -- (8,409)
------- -------- --------- -------- ---------
Net cash provided by
(used in) investing
activities............ 427 (132,109) (441,025) (318,375) (136,704)
------- -------- --------- -------- ---------
Cash flows from financing
activities:
Proceeds from sale of
mandatorily redeemable
preferred stock........ 1,500 26,661 70,323 60,411 --
Receipt of preferred
stock subscription
receivable............. -- -- 9,414 3,740 --
Direct issuance costs
from sale of
mandatorily redeemable
preferred stock........ -- (1,027) (2,500) (2,500) --
Proceeds from sale of
common stock and series
F preferred stock...... -- 38 21,724 5 41,869
Proceeds from long-term
debt................... 2,809 257,492 407,635 397,635 65,000
Proceeds associated with
initial public
offering............... -- -- 197,317 -- --
Direct issuance cost
from the initial public
offering............... -- -- (1,801) -- --
Payments on long term
debt................... -- (2,073) (50,451) (40,000) (675)
Payments of deferred
financing costs........ -- (9,110) (12,742) (10,600) (64)
------- -------- --------- -------- ---------
Net cash provided by
financing activities.. 4,309 271,981 638,919 408,691 106,130
------- -------- --------- -------- ---------
Net increase (decrease)
in cash and cash
equivalents........... 2,515 109,166 70,597 39,705 (154,107)
Cash and cash equivalents
at the beginning of
period.................. 52 2,567 111,733 111,733 182,330
------- -------- --------- -------- ---------
Cash and cash equivalents
at the end of period.... $ 2,567 $111,733 $ 182,330 $151,438 $ 28,223
======= ======== ========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
TELECORP PCS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
($ in thousands)
For the year ended For the six months
December 31, ended June 30,
----------------------- ----------------------
1997 1998 1999 1999 2000
------ -------- ------- ----------- ----------
(unaudited) (unaudited)
Supplemental disclosure of cash
flow Information:
Cash paid for interest........ $ -- $ 9,786 $24,342 $10,541 $12,880
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 9,141 55,957
Issuance of mandatorily
redeemable preferred stock
and preferred stock in
exchange for PCS licenses and
AT&T agreements.............. -- 100,900 2,674 2,706 --
Issuance of mandatorily
redeemable preferred stock
and common stock in exchange
for stock subscriptions
receivable................... -- 76,000 27,191 30,931 --
U.S. Government financing of
PCS licenses................. 9,193 -- 11,551 11,551 2,433
Discount on U.S. Government
financing.................... 1,600 -- 1,631 2,396 401
Conversion of notes payable to
stockholders into preferred
stock........................ 499 25,300 -- -- --
Accretion of preferred stock
dividends.................... 726 8,567 24,124 9,896 15,889
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 $ 4,601 $ 1,798
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except 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. 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 strategic alliance with AT&T Wireless and certain of
its affiliates (collectively AT&T), the Company is AT&T's exclusive provider of
wireless mobility services in its licensed 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 and AT&T Wireless' roaming partners provides coast-to-coast
coverage to its customers.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The unaudited consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for the six months ended June 30,
1999 and 2000, the unaudited consolidated balance sheet as of June 30, 2000,
and related footnotes, have been prepared in accordance with generally accepted
accounting principles for interim financial information and Article 10 of
Regulation S-X. In the opinion of management, the interim data includes all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair statement of the results for the interim period.
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
F-8
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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.
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 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, THC and TeleCorp-Tritel Holding Company. 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.
F-9
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
Concentration of Credit Risk
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, 1999 and the six months ended
June 30, 2000 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 15 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
F-10
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
licenses are issued conditionally for ten years. Historically, the FCC has
granted license renewals providing the licensees have complied with 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except 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.
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
F-12
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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, 1998, and 1999 consolidated financial
statements have been reclassified to conform with the presentations of the
consolidated financial statements as of and for the six months ended June 30,
2000.
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 30, 2000. The Company
is in the process of determining the effect of adopting this standard.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) Number 101, "Revenue Recognition in Financial
Statements." This bulletin will become effective for the Company no later than
the quarter ending December 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.
In March 2000, the FASB issued Interpretation (FIN) No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--An Interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB Opinion No. 25 and,
among other issues, clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a non-compensatory plan; the accounting consequence of
various modifications to the terms of previously fixed stock options or awards;
and the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The Company does not expect the application of FIN 44 to have
a material impact on its financial position or results of operations.
F-13
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
3. Accounts Receivable
Accounts receivables consists of the following:
December 31,
------------ June 30,
1998 1999 2000
---- ------- -----------
(unaudited)
Accounts receivable................................ $-- $26,203 $38,795
Allowance for doubtful accounts.................... -- (2,622) (2,281)
---- ------- -------
$-- $23,581 $36,514
==== ======= =======
Bad debt expense for the year ended December 31, 1999 and the six months
ended June 30, 2000 was $2,962 and $5,639 (unaudited), respectively.
4. Inventory
Inventory consists of the following:
December 31,
------------ June 30,
1998 1999 2000
---- ------- -----------
(unaudited)
Handsets............................................ $778 $15,090 $18,907
Accessories......................................... -- 712 1,697
---- ------- -------
$778 $15,802 $20,604
==== ======= =======
5. Property and Equipment
Property and equipment consists of the following:
December 31,
------------------ June 30,
1998 1999 2000
-------- -------- -----------
(unaudited)
Wireless network........................... $ -- $364,491 $509,816
Network under development.................. 170,886 21,758 33,076
Computer equipment......................... 10,115 16,888 23,636
Internal use software...................... 11,161 21,648 24,953
Leasehold improvements..................... 3,205 12,011 15,847
Furniture, fixtures, office equipment and
other..................................... 2,924 10,904 15,032
-------- -------- --------
198,291 447,700 622,360
Accumulated depreciation................... (822) (47,250) (91,326)
-------- -------- --------
$197,469 $400,450 $531,034
======== ======== ========
Depreciation expense for the years ended December 31, 1997, 1998, 1999 and
the six months ended June 30, 2000 was $11, $811, $46,428 and $44,076
(unaudited), respectively.
F-14
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
6. PCS Licenses and Microwave Relocation Costs
PCS licenses, microwave relocation costs, and capitalized interest consist
of the following:
December 31,
----------------- June 30,
1998 1999 2000
-------- -------- -----------
(unaudited)
PCS licenses.................................. $104,737 $221,650 $239,478
Microwave relocation costs.................... 12,457 47,835 41,797
Capitalized interest.......................... 913 1,005 1,522
-------- -------- --------
118,107 270,490 282,797
Accumulated amortization...................... -- (2,808) (5,522)
-------- -------- --------
$118,107 $267,682 $277,275
======== ======== ========
Amortization expense related to PCS licenses and microwave relocation costs
for the years ended December 31, 1997, 1998, 1999 and the six months ended June
30, 2000 was $0, $0, $2,808 and $2,714 (unaudited), respectively.
7. Accrued Expenses and Other
Accrued expenses and other consist of the following:
December 31,
----------------- June 30,
1998 1999 2000
-------- -------- -----------
(unaudited)
Property and equipment........................ $ 85,635 $ 32,725 $ 55,957
Sales taxes................................... -- 8,263 22,744
Bonuses and vacation.......................... 2,386 6,079 3,596
Selling and marketing......................... 347 3,496 8,166
Other accrued expenses........................ 6,700 7,955 29,951
-------- -------- --------
95,068 58,518 120,414
Less: non-current portion..................... 196 6,541 9,538
-------- -------- --------
$ 94,872 $ 51,977 $110,876
======== ======== ========
8. Long-term Debt
Long-term debt consists of the following:
December 31,
----------------- June 30,
1998 1999 2000
-------- -------- -----------
(unaudited)
Senior subordinated discount notes............. $ -- $354,291 $374,877
Senior credit facilities....................... 225,000 225,000 290,000
Lucent notes payable........................... 10,460 43,504 45,353
U.S. Government financing...................... 7,925 17,776 19,314
-------- -------- --------
243,385 640,571 729,544
Less: current portion.......................... -- 1,361 1,415
-------- -------- --------
$243,385 $639,210 $728,129
======== ======== ========
F-15
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
Senior Subordinated Discount Notes
On April 23, 1999, the Company completed the issuance and sale of 11 5/8%
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 were recorded as deferred financing
costs. 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). In October 1999,
the Company registered the Notes with the Securities and Exchange Commission to
become publicly traded securities. Offering expenses related to this
registration totaled $917 and were accounted for as deferred financing 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, 1999 and June 30, 2000. Additionally, a
total of $0, $0 and $65,000 (unaudited) of indebtedness from the Tranche A Term
Loan was outstanding as of December 31, 1998, 1999 and June 30, 2000,
respectively. The Senior Credit Facility also provides for an uncommitted
$40,000 senior term loan (the Expansion Facility).
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 $50,000 the amount of the
Tranche A Term Loan will be automatically reduced by such excess.
The interest rate applicable to the Senior Credit Facility is based on, at
the Company's option, (i) LIBOR (Eurodollar Loans) plus the Applicable Margin,
as defined, or (ii) the higher of the administrative agent's prime rate or the
Federal Funds Effective Rate (ABR Loans), plus the Applicable Margin, as
defined. The Applicable Margin for Eurodollar Loans will range from 125 to 325
basis points based upon certain events by the Company, as specified. The
Applicable Margin for ABR Loans will range from 25 to 225 basis points based
F-16
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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. At December 31, 1999,
the interest rate applicable to the Tranche B Term Loan was 9.12%, and for the
year ended December 31, 1999 interest incurred on the Tranche B Term Loan was
$19,110. At June 30, 2000, the interest rate applicable to the Tranche B Term
Loan was 9.12%, and for the six months ended June 30, 2000 interest incurred on
the Tranche B Term Loan was $9,174 (unaudited). At June 30, 2000, the interest
rate applicable to the Tranche A Term Loan was 8.62%, and for the six months
ended June 30, 2000 interest incurred on the Tranche A Term Loan was $405
(unaudited).
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, $3,817 and $1,850 (unaudited) for the years ended December 31,
1998, 1999 and the six months ended June 30, 2000, 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, 1999
and June 30, 2000, the Company hedged 100% of its Tranche B 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, 1999, and
June 30, 2000 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, 1999 and June 30, 2000 the Company
had $10,460, $43,504 and $45,353 (unaudited), 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, 1999 and the
six months ended June 30, 2000 was $460, $3,044, and $1,849 (unaudited),
respectively.
F-17
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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 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, 1999 and June 30, 2000 interest accrued under
the Series A Notes of $460, $3,504 and $5,353 (unaudited), 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, 1999 and June
30, 2000, 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 $50,000 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 $50,000 million of availability is subject
to a reduction up to $20,000 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, 1999 and June 30, 2000 the Company owes the U.S.
Government $9,192, $20,247 and $21,983 (unaudited) less a discount of $1,267,
$2,471 and $2,669 (unaudited) respectively, for the acquisition of PCS
licenses.
F-18
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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 nine 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.
The notes were discounted using management's best estimate of the prevailing
market interest rate at the time of issuance of 10.25%.
During the six months ended June 30, 2000, the Company completed the
acquisition of PCS licenses from Gulf Telecom. As part of this acquisition, the
Company assumed additional U.S. Government financing with the FCC amounting to
$2,433, less a discount of $401 (unaudited). The terms of the note include an
interest rate of 7.0%, quarterly interest payments through 2002, and then
quarterly principal and interest payments for the remaining four years. This
note was discounted using management's best estimate of the prevailing market
interest rate at the time of issuance of 11.8%.
Deferred Financing Costs
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, $12,742, and $64
(unaudited) during the years ended December 31, 1998, 1999 and the six months
ended June 30, 2000, 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, 1999 and the six months ended June 30, 2000, the
Company recorded interest expense related to the amortization of the deferred
financing costs of $525, $1,750 and $1,066 (unaudited), respectively.
Capitalized Interest
Interest is capitalized on all construction in progress which includes
network under development, wireless network, and PCS licenses using the
weighted average interest rate of all outstanding debt. The Company capitalized
interest amounting to $2,055, $5,409 and $1,798 during the years ended December
31, 1998, 1999 and the six months ended June 30, 2000.
F-19
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
Required Annual Undiscounted Principal Repayment
As of June 30, 2000, minimum required annual principal repayment
(undiscounted) under all of the Company's outstanding debt obligations were as
follows (unaudited):
July-December 2000................................................. $ 696
For the year ending December 31,
2001............................................................. 1,459
2002............................................................. 5,363
2003............................................................. 12,600
2004............................................................. 22,616
2005............................................................. 26,147
Thereafter....................................................... 890,819
--------
Total.......................................................... $959,700
========
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............................................................. $ 1,372
2001............................................................. 1,459
2002............................................................. 2,113
2003............................................................. 5,572
2004............................................................. 5,796
Thereafter....................................................... 876,701
--------
Total.......................................................... $893,013
========
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), 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 initial
investors other than AT&T Wireless of $128,000 to be paid over a three year
term plus an additional $5,000 upon the closing of the Digital PCS, Inc.
transaction (see Note 10).
The general terms of the operating agreements with AT&T are summarized
below:
AT&T Exclusivity: The Company will be AT&T's exclusive facilities-based
provider of mobile wireless telecommunications services within the
Company's BTAs for an initial ten year period. This
F-20
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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.
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.
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.
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 $325 in royalty payments to
reimburse Triton for the contributed SunCom marks.
10. Acquisitions
On April 20, 1999, the Company completed the acquisition of 10 MHz PCS
licenses covering the Baton Rouge, Houma, Hammond and Lafayette, Louisiana
BTA's from Digital PCS, LLC. The total purchase price
F-21
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
of $6,114 was 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 March 31, 2000 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 $650
in cash as reimbursement of microwave relocation costs and reimbursement of FCC
interest and legal costs. The entire purchase price has been allocated to the
PCS licenses acquired.
F-22
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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 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 Class A
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 $14,770 to the FCC on
September 13, 1999 with respect to these licenses and received the remaining
funding commitments from AT&T and the certain Cash Equity Investors on
September 29, 1999.
11. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
Holding
Holding's authorized capital stock consisted of 6,000 shares of no par value
mandatorily redeemable Series A preferred stock, 125,000 shares of no par value
Class A common stock, 175,000 shares of no par value Class B common stock and
175,000 shares of no par value Class C common stock. This capital stock was in
existence during 1996, 1997, and through July 1998, the closing of the AT&T
Transaction, at which time Holding became a wholly-owned subsidiary of the
Company. Subsequent to the AT&T Transaction, the authorized and outstanding
shares of Holding were cancelled and replaced with 1,000 authorized shares of
common stock of which 100 shares were issued to the Company.
F-23
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except 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 preferred and common
stock, consisting of the following:
Shares
Preferred Stock Par Value Authorized
--------------- --------- -----------
Mandatorily redeemable Series A........................ $0.01 100,000
Mandatorily redeemable Series B........................ $0.01 200,000
Mandatorily redeemable Series C........................ $0.01 215,000
Mandatorily redeemable Series D........................ $0.01 50,000
Mandatorily redeemable Series E........................ $0.01 30,000
Series F............................................... $0.01 15,450,000
-----------
Total................................................ 16,045,000
===========
Shares
Common Stock Par Value Authorized
------------ --------- -----------
Class A................................................ $0.01 608,550,000
Class B................................................ $0.01 308,550,000
Class C tracked........................................ $0.01 309,000
Class D tracked........................................ $0.01 927,000
Voting Preference...................................... $0.01 3,090
-----------
Total................................................ 918,339,090
===========
F-24
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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
Accretion of preferred stock dividends..................... -- 224
Recapitalization of Holding................................ (367) (4,368)
---- ------
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................... -- $-- -- $-- -- $ -- -- $-- $--
====== ==== ====== ==== ======= ==== ==== ==== ====
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 June 30, 2000.
Series A Series C Series D Series E
Preferred stock Preferred stock Preferred stock Preferred stock
--------------- ---------------- ---------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount Total
------ -------- ------- -------- ------- -------- ------- ------- --------
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 -- $ -- $100,866
Issuance of preferred
stock to initial
investors other than
AT&T Wireless, net of
issuance costs of
$1,028................. -- -- 128,000 126,848 -- -- -- -- 126,848
Accretion of preferred
stock dividends........ -- 3,040 -- 3,819 -- 946 -- 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...... -- -- 7,348 4,334 -- -- 14,156 10 4,344
------ -------- ------- -------- ------- -------- ------- ------- --------
Balance, December 31,
1998................... 66,723 69,763 135,348 135,001 34,267 35,089 18,877 556 240,409
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 -- -- 92,623
Issuance of preferred
stock for PCS licenses
and operating
agreements............. -- -- 2,878 2,674 -- -- -- -- 2,674
Accretion of preferred
stock dividends........ -- 9,124 -- 10,939 -- 2,646 -- 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................... 97,473 109,341 210,608 199,703 49,417 48,815 25,041 2,323 360,182
Accretion of preferred
stock dividends ....... -- 5,603 -- 7,725 -- 1,738 -- 823 15,889
Repurchase of shares for
cash................... -- -- -- -- -- -- (166) -- --
Issuance of shares for
property............... -- -- -- -- -- -- 800 58 58
------ -------- ------- -------- ------- -------- ------- ------- --------
Balance, June 30, 2000
(unaudited)............ 97,473 $114,944 210,608 $207,428 49,417 $ 50,553 25,675 $3,204 $376,129
====== ======== ======= ======== ======= ======== ======= ======= ========
F-25
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
Class C Class D Voting
Series F Class A tracked tracked Preference
Preferred stock Common stock Common stock Common 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 initial investors
other than AT&T
Wireless 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
Issuance of common stock
for PCS licenses....... -- -- 1,201,772 12 -- -- -- -- -- -- 12
Issuance of common stock
for cash............... -- -- 2,245,000 22 -- -- -- -- -- -- 22
Repurchase of stock for
cash................... -- -- (104,588) -- -- -- -- -- -- -- --
Issuance of common stock
related to exercise of
options................ -- -- 8,538 -- -- -- -- -- -- -- --
---------- ---- ---------- ---- ------- --- ------- --- ----- ---- ------
Balance, June 30, 2000,
(unaudited)............ 14,912,778 $149 87,804,611 $879 283,813 $ 3 851,429 $ 8 3,090 $-- $1,039
========== ==== ========== ==== ======= === ======= === ===== ==== ======
Stock Split
On August 27, 1999 and on November 5, 1999, the Company filed amendments to
its certificate of incorporation with the Delaware Secretary of State to effect
a 100 for 1 stock split and 3.09 for 1 stock split respectively, of its
outstanding and authorized Series F preferred stock and all classes of its
common stock. The stock splits have been retroactively reflected in the
financial statements for all periods presented. In addition, the amendment to
the Company's certificate of incorporation increased the authorized number of
shares of each
F-26
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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's initial public offering,
including a 300 million increase in the number of authorized shares of the
Company's class A common stock.
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 $14,283. 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 or June 30,
2000.
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 Series A conversion rate
the holders' option, into is equal to the liquidation
Class A 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
at the IPO price of A or B of the Series C preferred
common stock stock divided by the IPO
price of $20.00 per share.
Series D preferred Stock If Series C preferred stock The liquidation preference
is Converted then divided by the IPO price of
automatically at the IPO $20.00 per share.
date into Senior common
stock
Series E preferred Stock At the option of the Company The liquidation preference
at the IPO date into either of the Series E preferred
Class A or Class B common stock divided by the IPO
stock price of $20.00 per share.
Series F preferred stock and At the holders' option, into One share of Series F
Senior common stock Class A, Class B or Class D preferred stock or Senior
common stock, depending upon common stock for one share
the occurrence of certain of either Class A, Class B
defined events or Class D common stock.
Class A common Stock At the holders' option into One share of Class B common
Class B common stock stock for one share of Class
A Common stock.
F-27
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
Convertible Security Convertible Into Conversion Price
- -------------------- ---------------------------- ----------------------------
Class C tracked Common stock Subject to FCC constraints One share of Class A or
and Board approval, at the Class B common stock for one
holders' option and by share of Class C tracked
affirmative vote of at least common stock.
66 2/3% of Class A common
stock into Class A or Class
B common stock
Class D tracked Common stock Subject to FCC constraints One share of Class A or
and Board approval, at the Class B common stock for one
holders' option and by share of Class D tracked
affirmative vote of at least common stock.
66 2/3% of Class A common
stock into Class A or Class
B common stock
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
------------ ------------------------- --------------------------------------
First Series A and Series B $1,000 per share plus accrued and
preferred stock unpaid dividends.
Second Series C and Series D Series C: actual paid-in capital per
preferred stock 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: $0.000032 per
and Senior common stock share plus accrued and unpaid
dividends.
Dividends and voting rights
The holders of the Series A and Series B preferred stock are entitled to
cumulative quarterly cash dividends at an annual rate of 10% of the liquidation
preference of the then outstanding shares. The holders of the remaining shares
of preferred and common stock are entitled to dividends if and when declared.
The Class A common stock has 4,990,000 voting rights and the Voting
Preference common stock has 5,010,000 voting rights. The remaining shares of
preferred and common stock shall have no voting rights, except as provided by
law or in certain limited circumstances.
F-28
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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 TeleCorp
Management Company 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.
Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss
per share:
For the six months
For the year ended December 31, ended June 30,
---------------------------------- -------------------------
1997 1998 1999 1999 2000
-------- ----------- ----------- ----------- ------------
(unaudited) (unaudited)
Numerator:
Net loss.............. $ (3,335) $ (51,155) $ (250,996) $ (78,283) $ (168,373)
Less: accretion of
mandatorily redeemable
Preferred stock....... (726) (8,567) (24,124) (9,896) (15,889)
-------- ----------- ----------- ----------- ------------
Net loss attributable
to common equity..... $ (4,061) $ (59,722) $ (275,120) $ (88,179) $ (184,262)
======== =========== =========== =========== ============
Denominator:
Basic and diluted net
loss per share--
Weighted average
shares................. 36,340 27,233,786 76,895,391 63,293,065 100,414,647
======== =========== =========== =========== ============
Net loss attributable to
common equity per
Share--basic and
diluted................ $(111.74) $ (2.19) $ (3.58) $ (1.39) $ (1.84)
======== =========== =========== =========== ============
F-29
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
The following equity instruments were not included in the diluted net loss
per share calculation because their effect would be anti-dilutive:
For the year For the
ended December six months
31, ended June 30,
----------------- ----------------------
1997 1998 1999 1999 2000
---- ---- ------- ----------- ----------
(unaudited) (unaudited)
Mandatorily redeemable preferred
stock
series A........................ -- -- 97,473 97,473 97,473
Stock options.................... -- -- 545,497 -- 735,636
Contingently returnable Class A
common stock.................... -- -- -- -- 2,748,958
12. Restricted Stock Plan and Other Restricted Stock Awards
Restricted Stock Plan
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 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:
Estimated
Series E fair Estimated
preferred value per Class A fair value
stock share common stock per share
--------- ------------ ------------ ------------
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
Repurchases.................. (166) 72.98 (104,588) .003
----- ---------
Balance, June 30, 2000
(unaudited)................. 6,655 $1.00-$72.98 3,780,233 $.003-$20.00
===== =========
F-30
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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 and the six months ended June 30,
2000, the Company recorded compensation expense related to the restricted stock
awards of $15,299 and $7,291 (unaudited), respectively. The remaining deferred
compensation balance related to the restricted stock awards of $32,670 and
$24,179 (unaudited) at December 31, 1999 and June 30, 2000, respectively, will
be recognized as compensation expense over the remaining vesting period.
Outstanding fixed awards and variable awards as of December 31, 1998, 1999 and
June 30, 2000 are as follows:
December 31, December 31, June 30,
1998 1999 2000
------------ ------------ -----------
(unaudited)
Series E preferred stock:
Fixed awards............................ 3,664 6,821 6,655
Variable awards......................... 1,057 -- --
--------- --------- ---------
Total Series E awards................. 4,721 6,821 6,655
========= ========= =========
Class A common stock:
Fixed awards............................ 1,152,605 3,884,821 3,780,233
Variable awards......................... 1,390,394 -- --
--------- --------- ---------
Total Class A awards.................. 2,542,999 3,884,821 3,780,233
========= ========= =========
Other Restricted Stock Awards
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 $28,823 as deferred compensation related to these awards and will
recognize that as compensation expense over the related vesting periods, of
which $14,809 and $2,402 (unaudited) was recorded as compensation expense for
the year ended December 31, 1999 and the six months ended June 30, 2000,
respectively.
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 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 $20,000, (ii) the
sale of all or substantially all of the assets of the Company or (iii) the sale
of all or substantially all of the outstanding capital stock of the Company.
The Company has reserved 1,814,321 shares of Class A common stock for issuance
under this plan.
The 581,967 stock options awarded during the period from July 22, 1999 to
November 23, 1999 represented variable awards since their exercisability was
restricted until the completion of the initial public offering, sale of assets
or sale of the Company. Therefore, the measurement date occurred when the
F-31
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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 $1,709 and $1,893 (unaudited) was recorded as compensation
expense for the year ended December 31, 1999 and the six months ended June 30,
2000, respectively.
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 9.6 1.28
Exercised.................... -- -- -- --
Forfeited.................... (66,470) 0.0065 9.6 0.0065
-------
Outstanding at December 31,
1999.......................... 545,497 0.0065--$37.88 9.6 1.43
Granted...................... 247,500 20.00 9.8 20.00
Exercised.................... (8,538) 0.0065 9.1 0.0065
Forfeited.................... (48,823) 0.0065 9.1 0.0065
-------
Outstanding at June 30, 2000
(unaudited)................... 735,636 0.0065--$37.88 9.3 7.34
=======
Options vested at June 30, 2000
(unaudited)................... 68,251 $ 0.0065 9.1 $0.0065
No options were exercisable as of December 31, 1999 and 68,251 options were
exercisable as of June 30, 2000.
Options Outstanding at December 31, 1999
Weighted Average
Remaining
Weighted Average Contractual Life
Exercise Price Number of Shares (Years)
---------------- ---------------- ----------------
$0.0065 515,497 9.6
20.00 20,000 10.0
37.88 10,000 10.0
-------
$ 1.43 545,497 9.6
=======
Options Outstanding at June 30, 2000 (unaudited)
Weighted Average
Remaining
Weighted Average Contractual Life
Exercise Price Number of Shares (Years)
---------------- ---------------- ----------------
$0.0065 474,939 9.1
20.00 20,000 9.5
37.88 10,000 9.6
20.00 230,697 9.6
-------
$ 7.34 735,636 9.3
=======
F-32
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except 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.
During the six months ended June 30, 2000 the Company granted options to
purchase 247,500 shares of common stock, of which all was granted at an
exercise price below fair market value.
Options Granted for the Year Ended December 31, 1999
Market Price of Weighted Average
Weighted Average Stock on Fair Value Remaining
Shares Exercise Price Grant Date of Options Life (year)
------ ---------------- --------------- -------------- ----------------
581,967 $0.0065 $20.00 $20.00 9.6
10,000 20.00 20.00 18.34 10.0
10,000 20.00 36.97 34.82 10.0
10,000 37.88 39.25 36.09 10.0
-------
611,967 $ 1.28 $20.00--$39.25 $18.34--$36.09 9.6
=======
Options Granted for the six months Ended June 30, 2000 (unaudited)
Market Price Weighted Average
Weighted Average of Stock on Fair Value Remaining
Shares Exercise Price Grant Date of Options Life (year)
------ ---------------- ------------ ---------- ----------------
247,500 $20.00 $37.87 $35.70 9.8
-------
247,500 $20.00 $37.87 $35.70 9.8
=======
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
net loss per share basic and diluted would have been $184,902 and $1.84,
respectively, for the six months ended June 30, 2000. If compensation expense
had been recorded based on the fair value at the grant dates for awards under
the Plan for the years ended December 31, 1997, 1998 and 1999 and for the six
months ended June 30, 2000, 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 for such periods.
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 and the six months ended
June 30, 2000: 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 and the six months ended June 30, 2000 was $20.52 and $35.70
(unaudited), respectively.
F-33
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
14. Mandatorily Redeemable 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. The Company has recorded a
preferred stock subscription receivable of $75,914, $97,001 and $97,001
(unaudited) as of December 31, 1998, 1999 and June 30, 2000, respectively, as a
reduction to the mandatorily redeemable preferred stock and a common stock
subscription receivable of $86, $191 and $191 (unaudited) as of December 31,
1998, 1999 and June 30, 2000, respectively, as a reduction to stockholders'
equity (deficit) for the unpaid commitment.
As of December 31, 1999, the agreements require the initial investors other
than AT&T Wireless 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................................................................ 48,542
2002................................................................ 11,000
-------
Total............................................................. $97,192
=======
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, 1999 and June 30, 2000, respectively, are as follows:
December 31,
------------------ June 30,
1998 1999 2000
------- --------- -----------
(unaudited)
Capitalized start-up costs................... $17,599 $ 13,517 $ 11,828
Net operating losses......................... 3,635 92,579 147,887
Depreciation and amortization................ 289 (14,180) (19,098)
Original Issue Discount...................... 175 11,461 23,839
Other........................................ (843) 1,402 (252)
------- --------- ---------
20,855 104,779 164,204
Less valuation allowance..................... (20,855) (104,779) (164,204)
------- --------- ---------
$ -- $ -- $ --
======= ========= =========
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 June 30, 2000, the Company had approximately $295,000 (unaudited) of net
operating losses. The net operating losses will begin to expire in 2012. There
may be a limitation on the annual utilization of net operating losses and
capitalized start-up costs as a result of certain ownership changes that have
occurred since the Company's inception. A valuation allowance is recognized if,
based on the weight of available evidence, it is more likely than not that some
portion or all of the deferred tax asset will not be realized. Based on the
Company's financial results, management has concluded that a full valuation
allowance for all of the Company's deferred tax assets is appropriate.
F-34
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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, June 30,
1999 2000
------------ -----------
(unaudited)
Federal tax at statutory rates...................... 34.0% 34.0%
State tax expense................................... 3.5% 3.5%
Stock based compensation............................ (4.1%) (4.1)%
Change in valuation allowance....................... (33.4%) (33.4)%
------ -----
0.0% 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 radio, switching and related equipment and services for the
development of the Company's wireless communications network. At December 31,
1998, 1999, and June 30, 2000, the Company has purchased approximately $90,900,
$294,500, and $309,100 (unaudited), 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 expense on a straight-line
basis over the life of the lease, which establishes deferred rent on the
balance sheet.
As of June 30, 2000, the aggregate minimum rental commitments under non-
cancelable operating leases are as follows (unaudited):
For the Period July 1--December 31, 2000........................... $ 11,921
For the Year Ended December 31;
2001............................................................. 23,758
2002............................................................. 23,398
2003............................................................. 20,833
2004............................................................. 15,490
2005............................................................. 8,964
Thereafter....................................................... 26,869
--------
Total.......................................................... $131,233
========
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.......................................................... $120,740
========
F-35
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
Rental expense was approximately $157, $3,193, $13,792 and $11,809
(unaudited) for the years ended December 31, 1997, 1998, 1999, and the six
months ended June 30, 2000, 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, $1,576 and $2,176
(unaudited) at December 31, 1998, 1999 and June 30, 2000, 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, 1999 or the six months ended June 30, 2000.
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 its coverage area. The Company believes
it 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 it to
retain preferred pricing rates. The Company believes it will be able to meet
these minimum requirements.
17. Related Parties
The Company receives site acquisition, construction management, program
management, microwave relocation, and engineering services pursuant to a Master
Services Agreement with WFI (Wireless Facilities, Inc). The Chief Executive
Officer and Executive Vice President and Chief Financial Officer 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, 1999 and the six months
ended June 30, 2000. the Company paid $1,940, $30,720, $75,975 and $31,000
(unaudited), respectively, to WFI for these services. As of December 31, 1997,
1998, 1999 and June 30, 2000, the Company owed WFI $171, $21,178, $15,053 and
$589 (unaudited), respectively. Subsequent to December 31, 1997, the Chief
Executive Officer and Executive Vice President sold 100% of their interests in
WFI.
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 $2,725, of notes payable to those newly-formed THC entities.
As a result of this transfer, Holding no longer retains any ownership
interest in the THC entities. Because this transaction was non-monetary in
nature and occurred between entities with the same stockholder group, the
transaction was recorded at historical cost. Subsequent to the transfer, the
Company reduced the notes payable
F-36
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
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,
1999 and June 30, 2000, the combined amounts owed by the Company to THC
Houston, Inc., THC Tampa, Inc., THC Melbourne, Inc., and THC Orlando, Inc. were
$547, $0 and $0 (unaudited), respectively.
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 and $951 (unaudited) during the year ended December 31, 1999 and
the six months ended June 30, 2000, respectively, for related services
performed by the Firm and the Company owed the Firm $50 and $0 (unaudited) at
December 31, 1999 and June 30, 2000, 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, 1999 and the six months ended June 30, 2000, the
Company paid approximately $533, $1,665 and $552 (unaudited), 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, $77 and $421 (unaudited) expense for
the years ended December 31, 1998, 1999 and the six months ended June 30, 2000,
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, $888 and $904 (unaudited) for the years ended December 31,
1998, 1999 and the six months ended June 30, 2000, respectively.
F-37
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
19. Subsidiary Guarantee
On April 23, 1999, the Company completed the issuance and sale of 11 5/8%
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. Consolidating financial statements
of TeleCorp, TeleCorp Communications, Inc., the guarantor, the non-guarantor
subsidiaries of TeleCorp Communications, Inc. and the non-guarantor
subsidiaries of TeleCorp as of December 31, 1998, 1999 and June 30, 2000 and
for the years ended December 31, 1998, 1999 and for the six months ended June
30, 2000 have been included on the following pages.
Certain amounts in the 1998 and 1999 consolidating financial statements have
been reclassified to conform with the presentations of the consolidating
financial statements as of and for the six months ended June 30, 2000. These
reclassifications are eliminated upon consolidation and do not impact the
Company's consolidated financial statements.
F-38
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Consolidating Balance Sheet as of December 31, 1998:
TeleCorp Communications, Inc. TeleCorp PCS, Inc.
-------------------------------------------------- ---------------------------------------
TeleCorp Guarantor Non-Guarantor Non-Guarantor
PCS, Inc. Subsidiary Subsidiaries Eliminations Consolidated Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents....... $111,733 $ -- $ -- $ -- $ -- $ -- $ -- $111,733
Accounts
receivable, net... -- -- -- -- -- -- -- --
Inventory......... -- 778 -- -- 778 -- -- 778
Prepaid expenses
and other current
assets............ -- 2,035 1,369 -- 3,404 -- -- 3,404
-------- -------- -------- ------- -------- -------- --------- --------
Total current
assets............ 111,733 2,813 1,369 -- 4,182 -- -- 115,915
Property and
equipment, net..... -- 91,556 105,913 -- 197,469 -- -- 197,469
PCS licenses and
microwave
relocation costs,
net................ -- -- -- -- -- 118,107 -- 118,107
Intangible assets--
AT&T agreements,
net................ 26,285 -- -- -- -- -- -- 26,285
Deferred financing
costs, net......... 8,585 -- -- -- -- -- -- 8,585
Other assets....... -- -- 283 -- 283 -- -- 283
Intercompany
receivables........ 243,995 -- 3,432 (3,432) -- 927 (244,922) --
-------- -------- -------- ------- -------- -------- --------- --------
Total assets...... $390,598 $ 94,369 $110,997 $(3,432) $201,934 $119,034 $(244,922) $466,644
======== ======== ======== ======= ======== ======== ========= ========
LIABILITIES,
MANDATORILY
REDEEMABLE
PREFERRED STOCK AND
STOCKHOLDERS'
EQUITY (DEFICIT)
Current
liabilities:
Accounts payable.. $ -- $ 8,331 $ 6,261 $ -- $ 14,592 $ -- $ -- $ 14,592
Accrued expenses.. -- 19,074 75,798 -- 94,872 -- -- 94,872
Microwave
relocation
obligation,
current portion... -- -- -- -- -- 6,636 -- 6,636
Long-term debt,
current portion... -- -- -- -- -- -- -- --
Accrued interest.. 3,992 -- -- -- -- 499 -- 4,491
Deferred revenue.. -- -- -- -- -- -- -- --
-------- -------- -------- ------- -------- -------- --------- --------
Total current
liabilities....... 3,992 27,405 82,059 -- 109,464 7,135 -- 120,591
Long-term debt..... 235,460 -- -- -- -- 7,925 -- 243,385
Microwave
relocation
obligation......... -- -- -- -- -- 2,481 -- 2,481
Accrued expenses
and other.......... -- -- 196 -- 196 -- -- 196
Intercompany
payables........... -- 118,119 28,742 (3,432) 143,429 101,493 (244,922) --
-------- -------- -------- ------- -------- -------- --------- --------
Total
liabilities....... 239,452 145,524 110,997 (3,432) 253,089 119,034 (244,922) 366,653
-------- -------- -------- ------- -------- -------- --------- --------
Mandatorily
redeemable
preferred stock.... 240,409 -- -- -- -- -- -- 240,409
Preferred stock
subscriptions
receivable......... (75,918) -- -- -- -- -- -- (75,918)
-------- -------- -------- ------- -------- -------- --------- --------
Total mandatorily
redeemable
preferred stock,
net............... 164,491 -- -- -- -- -- -- 164,491
-------- -------- -------- ------- -------- -------- --------- --------
Commitments and
contingencies
Stockholders'
equity (deficit):
Series F preferred
stock............. 103 -- -- -- -- -- -- 103
Common stock...... 493 -- -- -- -- -- -- 493
Additional paid-in
capital........... -- -- -- -- -- -- -- --
Deferred
compensation...... (7) -- -- -- -- -- -- (7)
Common stock
subscriptions
receivable........ (86) -- -- -- -- -- -- (86)
Accumulated
deficit........... (13,848) (51,155) -- -- (51,155) -- -- (65,003)
-------- -------- -------- ------- -------- -------- --------- --------
Total
stockholders'
equity (deficit).. (13,345) (51,155) -- -- (51,155) -- -- (64,500)
-------- -------- -------- ------- -------- -------- --------- --------
Total liabilities,
mandatorily
redeemable
preferred stock
and stockholders'
equity (deficit).. $390,598 $ 94,369 $110,997 $(3,432) $201,934 $119,034 $(244,922) $466,644
======== ======== ======== ======= ======== ======== ========= ========
F-39
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Consolidating Balance Sheet as of December 31, 1999:
TeleCorp Communications, Inc. TeleCorp PCS, Inc.
--------------------------------------------------- ---------------------------------------
TeleCorp Guarantor Non-Guarantor Non-Guarantor
PCS, Inc. Subsidiary Subsidiaries Eliminations Consolidated Subsidiaries Eliminations Consolidated
----------- ---------- ------------- ------------ ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents..... $ 182,330 $ -- $ -- $ -- $ -- $ -- $ -- $ 182,330
Accounts
receivable,
net............. -- 23,581 -- -- 23,581 -- -- 23,581
Inventory....... -- 15,802 -- -- 15,802 -- -- 15,802
Prepaid expenses
and other
current assets.. -- 1,608 2,220 -- 3,828 -- -- 3,828
----------- --------- --------- -------- --------- -------- --------- ---------
Total current
assets.......... 182,330 40,991 2,220 -- 43,211 -- -- 225,541
Property and
equipment, net... -- 182,235 218,215 -- 400,450 -- -- 400,450
PCS licenses and
microwave
relocation costs,
net.............. -- -- -- -- -- 267,682 -- 267,682
Intangible
assets--AT&T
agreements, net.. 37,908 -- -- -- -- -- -- 37,908
Deferred
financing costs,
net.............. 19,577 -- -- -- -- -- -- 19,577
Other assets..... -- 1,044 -- -- 1,044 -- -- 1,044
Intercompany
receivables...... 858,279 -- 42,970 (42,970) -- 5,702 (863,981) --
----------- --------- --------- -------- --------- -------- --------- ---------
Total assets.... $ 1,098,094 $ 224,270 $ 263,405 $(42,970) $ 444,705 $273,384 $(863,981) $ 952,202
=========== ========= ========= ======== ========= ======== ========= =========
LIABILITIES,
MANDATORILY
REDEEMABLE
PREFERRED STOCK
AND
STOCKHOLDERS'
EQUITY (DEFICIT)
Current
liabilities:
Accounts
payable......... $ -- $ 12,318 $ 26,585 $ -- $ 38,903 $ -- $ -- $ 38,903
Accrued
expenses........ -- 48,960 3,017 -- 51,977 -- -- 51,977
Microwave
relocation
obligation,
current
portion......... -- -- -- -- -- 36,122 -- 36,122
Long-term debt,
current
portion......... -- -- -- -- -- 1,361 -- 1,361
Accrued
interest........ 521 -- -- -- -- 866 -- 1,387
Deferred
revenue......... -- 1,709 -- -- 1,709 -- -- 1,709
----------- --------- --------- -------- --------- -------- --------- ---------
Total current
liabilities..... 521 62,987 29,602 -- 92,589 38,349 -- 131,459
Long-term debt... 622,795 -- -- -- -- 16,415 -- 639,210
Microwave
relocation
obligation....... -- -- -- -- -- 2,365 -- 2,365
Accrued expenses
and other........ -- -- 6,541 -- 6,541 -- -- 6,541
Intercompany
payables......... -- 463,434 227,262 (42,970) 647,726 216,255 (863,981) --
----------- --------- --------- -------- --------- -------- --------- ---------
Total
liabilities..... 623,316 526,421 263,405 (42,970) 746,856 273,384 (863,981) 779,575
----------- --------- --------- -------- --------- -------- --------- ---------
Mandatorily
redeemable
preferred stock.. 360,182 -- -- -- -- -- -- 360,182
Preferred stock
subscriptions
receivable....... (97,001) -- -- -- -- -- -- (97,001)
----------- --------- --------- -------- --------- -------- --------- ---------
Total
mandatorily
redeemable
preferred stock,
net............. 263,181 -- -- -- -- -- -- 263,181
----------- --------- --------- -------- --------- -------- --------- ---------
Commitments and
contingencies
Stockholders'
equity (deficit):
Series F
preferred
stock........... 149 -- -- -- -- -- -- 149
Common stock.... 856 -- -- -- -- -- -- 856
Additional paid-
in capital...... 267,442 -- -- -- -- -- -- 267,442
Deferred
compensation.... (42,811) -- -- -- -- -- -- (42,811)
Common stock
subscriptions
receivable...... (191) -- -- -- -- -- -- (191)
Accumulated
deficit......... (13,848) (302,151) -- -- (302,151) -- -- (315,999)
----------- --------- --------- -------- --------- -------- --------- ---------
Total
stockholders'
equity
(deficit)....... 211,597 (302,151) -- -- (302,151) -- -- (90,554)
----------- --------- --------- -------- --------- -------- --------- ---------
Total
liabilities,
mandatorily
redeemable
preferred stock
and
stockholders'
equity
(deficit)....... $ 1,098,094 $ 224,270 $ 263,405 $(42,970) $ 444,705 $273,384 $(863,981) $ 952,202
=========== ========= ========= ======== ========= ======== ========= =========
F-40
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Consolidating Balance Sheet as of June 30, 2000 (unaudited):
TeleCorp Communications, Inc. TeleCorp PCS, Inc.
---------- --------------------------------------------------- ----------------------------------------
TeleCorp Guarantor Non-Guarantor Non-Guarantor
PCS, Inc. Subsidiary Subsidiaries Eliminations Consolidated Subsidiaries Eliminations Consolidated
---------- ---------- ------------- ------------ ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash
equivalents...... $ 28,223 $ -- $ -- $ -- $ -- $ -- $ -- $ 28,223
Accounts
receivable, net.. -- 36,514 -- -- 36,514 -- -- 36,514
Inventory........ -- 20,604 -- -- 20,604 -- -- 20,604
Prepaid expenses
and other current
assets........... -- 4,759 1,585 -- 6,344 -- -- 6,344
---------- --------- -------- -------- ---------- -------- ----------- ---------
Total current
assets........... 28,223 61,877 1,585 -- 63,462 -- -- 91,685
Property and
equipment, net.... -- 249,111 281,923 -- 531,034 -- -- 531,034
PCS licenses and
microwave
relocation costs,
net............... -- -- -- -- -- 277,275 -- 277,275
Intangible
assets--AT&T
agreements, net... 34,330 -- -- -- -- -- -- 34,330
Deferred financing
costs, net........ 18,647 -- -- -- -- -- -- 18,647
Other assets...... -- 5,217 -- -- 5,217 8,409 -- 13,626
Intercompany
receivables....... 1,176,496 -- 79,918 (79,918) -- 9,086 (1,185,582) --
---------- --------- -------- -------- ---------- -------- ----------- ---------
Total assets..... $1,257,696 $ 316,205 $363,426 $(79,918) $ 599,713 $294,770 $(1,185,582) $ 966,597
========== ========= ======== ======== ========== ======== =========== =========
LIABILITIES, MANDATORILY
REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current
liabilities:
Accounts
payable.......... $ -- $ 6,654 $ -- $ -- $ 6,654 $ -- $ -- $ 6,654
Accrued
expenses......... -- 75,297 35,579 -- 110,876 -- -- 110,876
Microwave
relocation
obligation,
current portion.. -- -- -- -- -- 21,973 -- 21,973
Long-term debt,
current portion.. -- -- -- -- -- 1,415 -- 1,415
Accrued
interest......... 1,230 -- -- -- -- 325 -- 1,555
Deferred
revenue.......... -- 2,617 -- -- 2,617 -- -- 2,617
---------- --------- -------- -------- ---------- -------- ----------- ---------
Total current
liabilities...... 1,230 84,568 35,579 -- 120,147 23,713 -- 145,090
Long-term debt.... 710,230 -- -- -- -- 17,899 -- 728,129
Microwave
relocation
obligation........ -- -- -- -- -- 8,128 -- 8,128
Accrued expenses
and other......... -- -- 9,538 -- 9,538 -- -- 9,538
Intercompany
payables.......... -- 702,161 318,309 (79,918) 940,552 245,030 (1,185,582) --
---------- --------- -------- -------- ---------- -------- ----------- ---------
Total
liabilities...... 711,460 786,729 363,426 (79,918) 1,070,237 294,770 (1,185,582) 890,885
---------- --------- -------- -------- ---------- -------- ----------- ---------
Mandatorily
redeemable
preferred stock... 376,129 -- -- -- -- -- -- 376,129
Preferred stock
subscriptions
receivable........ (97,001) -- -- -- -- -- -- (97,001)
---------- --------- -------- -------- ---------- -------- ----------- ---------
Total mandatorily
redeemable
preferred stock,
net.............. 279,128 -- -- -- -- -- -- 279,128
---------- --------- -------- -------- ---------- -------- ----------- ---------
Commitments and
contingencies
Stockholders'
equity (deficit):
Series F
preferred stock.. 149 -- -- -- -- -- -- 149
Common stock..... 890 -- -- -- -- -- -- 890
Additional paid-
in capital....... 313,107 -- -- -- -- -- -- 313,107
Deferred
compensation..... (32,999) -- -- -- -- -- -- (32,999)
Common stock
subscriptions
receivable....... (191) -- -- -- -- -- -- (191)
Accumulated
deficit.......... (13,848) (470,524) -- -- (470,524) -- -- (484,372)
---------- --------- -------- -------- ---------- -------- ----------- ---------
Total
stockholders'
equity
(deficit)........ 267,108 (470,524) -- -- (470,524) -- -- (203,416)
---------- --------- -------- -------- ---------- -------- ----------- ---------
Total
liabilities,
mandatorily
redeemable
preferred stock
and stockholders'
equity
(deficit)........ $1,257,696 $ 316,205 $363,426 $(79,918) $ 599,713 $294,770 $(1,185,582) $ 966,597
========== ========= ======== ======== ========== ======== =========== =========
F-41
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Consolidating Statement of Operations for the year ended December 31, 1998:
TeleCorp Communications, Inc. TeleCorp PCS, Inc.
-------------------------------------------------- ---------------------------------------
TeleCorp
PCS, Guarantor Non-Guarantor Non-Guarantor
Inc. Subsidiary Subsidiaries Eliminations Consolidated Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------ ------------- ------------ ------------
Revenue:
Service........... $ -- $ -- $ -- $ -- $ -- $-- $ -- $ --
Roaming........... -- 29 -- -- 29 -- -- 29
Equipment......... -- -- -- -- -- -- -- --
Intercompany...... 803 -- 3,432 (3,432) -- 927 (1,730) --
-------- -------- ------ ------- -------- ---- ------- --------
Total revenue... 803 29 3,432 (3,432) 29 927 (1,730) 29
-------- -------- ------ ------- -------- ---- ------- --------
Operating expenses:
Cost of revenue... -- 5,162 -- (3,432) 1,730 -- (1,730) --
Operations and
development...... -- 6,579 3,193 -- 9,772 -- -- 9,772
Selling and
marketing........ -- 6,325 -- -- 6,325 -- -- 6,325
General and
administrative... -- 26,239 -- -- 26,239 -- -- 26,239
Depreciation and
amortization..... 803 542 239 -- 781 -- -- 1,584
-------- -------- ------ ------- -------- ---- ------- --------
Total operating
expenses....... 803 44,847 3,432 (3,432) 44,847 -- (1,730) 43,920
-------- -------- ------ ------- -------- ---- ------- --------
Operating income
(loss)......... -- (44,818) -- -- (44,818) 927 -- (43,891)
Other (income)
expense:
Interest expense.. 11,007 6,337 -- -- 6,337 927 (6,337) 11,934
Interest income
and other........ (11,007) -- -- -- -- -- 6,337 (4,670)
-------- -------- ------ ------- -------- ---- ------- --------
Net loss........ -- (51,155) -- -- (51,155) -- -- (51,155)
Accretion of
mandatorily
redeemable
preferred stock.... (8,567) -- -- -- -- -- -- (8,567)
-------- -------- ------ ------- -------- ---- ------- --------
Net loss
attributable to
common equity...... $ (8,567) $(51,155) $ -- $ -- $(51,155) $-- $ -- $(59,722)
======== ======== ====== ======= ======== ==== ======= ========
F-42
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Consolidating Statement of Operations for the year ended December 31, 1999:
TeleCorp Communications, Inc. TeleCorp PCS, Inc.
--------------------------------------------------- ---------------------------------------
TeleCorp
PCS, Guarantor Non-Guarantor Non-Guarantor
Inc. Subsidiary Subsidiaries Eliminations Consolidated Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------ ------------- ------------ ------------
Revenue:
Service........... $ -- $ 41,319 $ -- $ -- $ 41,319 $ -- $ -- $ 41,319
Roaming........... -- 29,010 -- -- 29,010 -- -- 29,010
Equipment......... -- 17,353 -- -- 17,353 -- -- 17,353
Intercompany...... 37,475 -- 39,538 (39,538) -- 4,775 (42,250) --
-------- --------- ------- -------- --------- ----- -------- ---------
Total revenue... 37,475 87,682 39,538 (39,538) 87,682 4,775 (42,250) 87,682
-------- --------- ------- -------- --------- ----- -------- ---------
Operating expenses:
Cost of revenue... 1,472 89,230 -- (39,538) 49,692 -- (11,905) 39,259
Operations and
development...... 937 22,187 13,792 -- 35,979 -- (937) 35,979
Selling and
marketing........ 29,408 71,180 -- -- 71,180 -- (29,408) 71,180
General and
administrative... -- 92,585 -- -- 92,585 -- -- 92,585
Depreciation and
amortization..... 5,658 20,897 25,746 -- 46,643 2,809 -- 55,110
-------- --------- ------- -------- --------- ----- -------- ---------
Total operating
expenses....... 37,475 296,079 39,538 (39,538) 296,079 2,809 (42,250) 294,113
-------- --------- ------- -------- --------- ----- -------- ---------
Operating income
(loss)......... -- (208,397) -- -- (208,397) 1,966 -- (206,431)
Other (income)
expense:
Interest expense.. 49,347 42,599 -- -- 42,599 1,966 (42,599) 51,313
Interest income
and other........ (49,347) -- -- -- -- -- 42,599 (6,748)
-------- --------- ------- -------- --------- ----- -------- ---------
Net loss........ -- (250,996) -- -- (250,996) -- -- (250,996)
Accretion of
mandatorily
redeemable
preferred stock.... (24,124) -- -- -- -- -- -- (24,124)
-------- --------- ------- -------- --------- ----- -------- ---------
Net loss
attributable to
common equity...... $(24,124) $(250,996) $ -- $ -- $(250,996) $ -- $ -- $(275,120)
======== ========= ======= ======== ========= ===== ======== =========
F-43
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Consolidating Statement of Operations for the six months ended June 30, 1999
(unaudited):
TeleCorp Communications, Inc. TeleCorp PCS, Inc.
-------------------------------------------------- ---------------------------------------
TeleCorp
PCS, Guarantor Non-Guarantor Non-Guarantor
Inc. Subsidiary Subsidiaries Eliminations Consolidated Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------ ------------- ------------ ------------
Revenue:
Service........... $ -- $ 6,232 $ -- $ -- $ 6,232 $ -- $ -- $ 6,232
Roaming........... -- 9,487 -- -- 9,487 -- -- 9,487
Equipment......... -- 5,649 -- -- 5,649 -- -- 5,649
Intercompany...... 2,446 -- 13,178 (13,178) -- 1,336 (3,782) --
-------- -------- ------- -------- -------- ------ -------- --------
Total revenue... 2,446 21,368 13,178 (13,178) 21,368 1,336 (3,782) 21,368
-------- -------- ------- -------- -------- ------ -------- --------
Operating expenses:
Cost of revenue... -- 27,067 -- (13,178) 13,889 -- (3,782) 10,107
Operations and
development...... -- 9,715 5,783 -- 15,498 -- -- 15,498
Selling and
marketing........ -- 20,925 -- -- 20,925 -- -- 20,925
General and
administrative... 365 22,076 -- -- 22,076 -- -- 22,441
Depreciation and
amortization..... 2,081 6,377 7,395 -- 13,772 638 -- 16,491
-------- -------- ------- -------- -------- ------ -------- --------
Total operating
expenses....... 2,446 86,160 13,178 (13,178) 86,160 638 (3,782) 85,462
-------- -------- ------- -------- -------- ------ -------- --------
Operating income
(loss)......... -- (64,792) -- -- (64,792) 698 -- (64,094)
Other (income)
expense:
Interest expense.. 16,409 13,491 -- -- 13,491 698 (13,491) 17,107
Interest income
and other........ (16,409) -- -- -- -- -- 13,491 (2,918)
-------- -------- ------- -------- -------- ------ -------- --------
Net loss........ -- (78,283) -- -- (78,283) -- -- (78,283)
Accretion of
mandatorily
redeemable
preferred stock.... (9,896) -- -- -- -- -- -- (9,896)
-------- -------- ------- -------- -------- ------ -------- --------
Net loss
attributable to
common equity...... $ (9,896) $(78,283) $ -- $ -- $(78,283) $ -- $ -- $(88,179)
======== ======== ======= ======== ======== ====== ======== ========
F-44
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Consolidating Statement of Operations for the six months ended June 30, 2000
(unaudited):
TeleCorp Communications, Inc. TeleCorp PCS, Inc.
--------------------------------------------------- ---------------------------------------
TeleCorp
PCS, Guarantor Non-Guarantor Non-Guarantor
Inc. Subsidiary Subsidiaries Eliminations Consolidated Subsidiaries Eliminations Consolidated
-------- ---------- ------------- ------------ ------------ ------------- ------------ ------------
Revenue:
Service........... $ -- $ 88,056 $ -- $ -- $ 88,056 $ -- $ -- $ 88,056
Roaming........... -- 26,151 -- -- 26,151 -- -- 26,151
Equipment......... -- 13,250 -- -- 13,250 -- -- 13,250
Intercompany...... 30,460 -- 36,948 (36,948) -- 3,384 (33,844) --
-------- --------- ------ -------- --------- ------ -------- ---------
Total revenue... 30,460 127,457 36,948 (36,948) 127,457 3,384 (33,844) 127,457
-------- --------- ------ -------- --------- ------ -------- ---------
Operating expenses:
Cost of revenue... -- 84,342 -- (36,948) 47,394 -- (6,961) 40,433
Operations and
development...... 771 13,726 11,809 -- 25,535 -- (771) 25,535
Selling and
marketing........ 559 74,766 -- -- 74,766 -- (559) 74,766
General and
administrative... 25,553 74,347 -- -- 74,347 -- (25,553) 74,347
Depreciation and
amortization..... 3,577 19,526 25,139 -- 44,665 2,141 -- 50,383
-------- --------- ------ -------- --------- ------ -------- ---------
Total operating
expenses....... 30,460 266,707 36,948 (36,948) 266,707 2,141 (33,844) 265,464
-------- --------- ------ -------- --------- ------ -------- ---------
Operating income
(loss)......... -- (139,250) -- -- (139,250) 1,243 -- (138,007)
Other (income)
expense:
Interest expense.. 33,020 29,123 -- -- 29,123 1,243 (29,123) 34,263
Interest income
and other........ (33,020) -- -- -- -- -- 29,123 (3,897)
-------- --------- ------ -------- --------- ------ -------- ---------
Net loss........ -- (168,373) -- -- (168,373) -- -- (168,373)
Accretion of
mandatorily
redeemable
preferred stock.... (15,889) -- -- -- -- -- -- (15,889)
-------- --------- ------ -------- --------- ------ -------- ---------
Net loss
attributable to
common equity...... $(15,889) $(168,373) $ -- $ -- $(168,373) $ -- $ -- $(184,262)
======== ========= ====== ======== ========= ====== ======== =========
F-45
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Consolidating Statement of Cash Flows for the year ended December 31, 1998:
TeleCorp Communications, Inc.
-----------------------------------------------------------------
TeleCorp Guarantor Non-Guarantor Non-Guarantor
PCS, Inc. Subsidiary Subsidiaries Eliminations Consolidated Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------ ------------- ------------ ------------
Cash flows from
operating
activities:
Net loss........... $ -- $ (51,155) $ -- $ -- $ (51,155) $ -- $ -- $ (51,155)
Adjustment to
reconcile net loss
to net cash (used
in) provided by
operating
activities:
Depreciation and
amortization...... 803 542 239 -- 781 -- -- 1,584
Noncash
compensation
expense related to
stock option
grants and
restricted stock
awards............ -- 2 -- -- 2 -- -- 2
Noncash interest
expense........... 963 -- -- -- -- 219 -- 1,182
Noncash general
and administrative
change by
affiliate......... -- 197 -- -- 197 -- -- 197
Changes in cash
flow from
operations
resulting from
changes in assets
and liabilities:
Accounts
receivable........ -- -- -- -- -- -- -- --
Inventory......... -- (778) -- -- (778) -- -- (778)
Intercompany
receivables....... (166,015) -- -- -- -- -- 166,015 --
Prepaid expenses
and other current
assets............ -- (2,035) (1,296) -- (3,331) -- -- (3,331)
Other assets...... -- -- (1,184) -- (1,184) -- -- (1,184)
Accounts payable.. -- -- 11,586 -- 11,586 -- -- 11,586
Accrued expenses.. -- 4,115 5,030 -- 9,145 -- -- 9,145
Accrued interest.. 1,434 612 -- -- 612 -- -- 2,046
Deferred revenue.. -- -- -- -- -- -- -- --
Intercompany
payables.......... -- 98,196 43,698 -- 141,894 24,121 (166,015) --
--------- --------- -------- ----- --------- ------- -------- ---------
Net cash (used in)
provided by
operating
activities........ (162,815) 49,696 58,073 -- 107,769 24,340 -- (30,706)
--------- --------- -------- ----- --------- ------- -------- ---------
Cash flows from
investing
activities:
Expenditures for
network under
development,
wireless network
and property and
equipment......... -- (49,469) (58,073) -- (107,542) -- -- (107,542)
Capitalized
interest on
network under
development and
wireless network.. -- (227) -- -- (227) -- -- (227)
Expenditures for
microwave
relocation........ -- -- -- -- -- (3,340) -- (3,340)
Purchase of PCS
licenses.......... -- -- -- -- -- (21,000) -- (21,000)
Deposit on PCS
licenses.......... -- -- -- -- -- -- -- --
Purchase of
intangibles --
AT&T agreements... -- -- -- -- -- -- -- --
Capitalized
interest on PCS
licenses.......... -- -- -- -- -- -- -- --
Capitalized Tritel
acquisition
costs............. -- -- -- -- -- -- -- --
--------- --------- -------- ----- --------- ------- -------- ---------
Net cash used in
investing
activities........ -- (49,696) (58,073) -- (107,769) (24,340) -- (132,109)
--------- --------- -------- ----- --------- ------- -------- ---------
Cash flows from
financing
activities:
Proceeds from sale
of mandatorily
redeemable
preferred stock... 26,661 -- -- -- -- -- -- 26,661
Receipt of
preferred stock
subscription
receivable........ -- -- -- -- -- -- -- --
Direct issuance
costs from sale of
mandatorily
redeemable
preferred stock... (1,027) -- -- -- -- -- -- (1,027)
Proceeds from sale
of common stock
and series F
preferred stock... 38 -- -- -- -- -- -- 38
Proceeds from
long-term debt.... 257,492 -- -- -- -- -- -- 257,492
Payments of
deferred financing
costs............. (9,110) -- -- -- -- -- -- (9,110)
Payments on long-
term debt......... (2,073) -- -- -- -- -- -- (2,073)
--------- --------- -------- ----- --------- ------- -------- ---------
Net cash provided
by financing
activities........ 271,981 -- -- -- -- -- -- 271,981
--------- --------- -------- ----- --------- ------- -------- ---------
Net increase in
cash and cash
equivalents........ 109,166 -- -- -- -- -- -- 109,166
Cash and cash
equivalents at the
beginning of
period............. 2,567 -- -- -- -- -- -- 2,567
--------- --------- -------- ----- --------- ------- -------- ---------
Cash and cash
equivalents at the
end of period...... $ 111,733 $ -- $ -- $ -- $ -- $ -- $ -- $ 111,733
========= ========= ======== ===== ========= ======= ======== =========
F-46
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Consolidating Cash Flow Information for the year ended December 31, 1999:
TCI-- TCI Non- Other Non-
TeleCorp Guarantor Guarantor TCI Guarantor
PCS, Inc. Subsidiary Subsidiaries Eliminations Consolidated Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Cash flows from
operating
activities:
Net loss.......... $ -- $ (250,996) $ -- $-- $ (250,996) $ -- $ -- $ (250,996)
Adjustment to
reconcile net loss
to net cash (used
in) provided by
operating
activities:
Depreciation and
amortization...... 5,658 20,897 25,746 -- 46,643 2,809 -- 55,110
Noncash
compensation
expense related
to stock option
grants and
restricted stock
awards............ -- 31,817 -- -- 31,817 -- -- 31,817
Noncash interest
expense .......... 32,325 -- -- -- -- 393 -- 32,718
Bad debt
expense........... -- 2,962 -- -- 2,962 -- -- 2,962
Changes in cash
flow from
operations
resulting from
changes in assets
and liabilities:
Accounts
receivable........ -- (23,581) -- -- (23,581) -- -- (23,581)
Inventory......... -- (15,024) -- -- (15,024) -- -- (15,024)
Prepaid expenses
and other current
assets............ -- 427 (851) -- (424) -- -- (424)
Other assets...... -- (1,406) 283 -- (1,123) -- -- (1,123)
Intercompany
receivable........ (586,801) -- -- -- -- -- 586,801 --
Accounts
payable........... -- 11,163 13,645 -- 24,808 -- -- 24,808
Accrued
expenses.......... -- 8,202 9,629 -- 17,831 -- -- 17,831
Accrued
interest.......... (2,194) -- -- -- -- (910) -- (3,104)
Deferred
revenue........... -- 1,709 -- -- 1,709 -- -- 1,709
Intercompany
payable........... -- 354,967 114,234 -- 469,201 117,600 (586,801) --
--------- ---------- --------- ---- ---------- --------- -------- ----------
Net cash (used
in) provided by
operating
activities...... (551,012) 141,137 162,686 -- 303,823 119,892 -- (127,297)
--------- ---------- --------- ---- ---------- --------- -------- ----------
Cash flows from
investing
activities: --
Expenditures for
network under
development,
wireless network
and property and
equipment......... -- (135,820) (162,686) -- (298,506) -- -- (298,506)
Capitalized
interest on
network under
development and
Wireless Network
and PCS
licenses.......... -- (5,317) -- -- (5,317) -- -- (5,317)
Expenditures for
microwave
relocation........ -- -- -- -- -- (5,654) -- (5,654)
Purchase of
intangibles--AT&T
agreements........ (17,310) -- -- -- -- -- -- (17,310)
Purchase of PCS
licenses.......... -- -- -- -- -- (114,238) -- (114,238)
--------- ---------- --------- ---- ---------- --------- -------- ----------
Net cash used in
investing
activities...... (17,310) (141,137) (162,686) -- (303,823) (119,892) -- (441,025)
--------- ---------- --------- ---- ---------- --------- -------- ----------
Cash flows from
financing
activities:
Proceeds from
sale of
mandatorily
redeemable
preferred stock... 70,323 -- -- -- -- -- -- 70,323
Receipt of
preferred stock
subscription
receivable........ 9,414 -- -- -- -- -- -- 9,414
Direct issuance
costs from sale
of mandatorily
redeemable
preferred stock... (2,500) -- -- -- -- -- -- (2,500)
Proceeds from
sale of common
stock and series
F preferred
stock............. 21,724 -- -- -- -- -- -- 21,724
Proceeds from
long-term debt.... 407,635 -- -- -- -- -- -- 407,635
Payments of
deferred
financing costs... (12,742) -- -- -- -- -- -- (12,742)
Payments on long
term debt......... (50,451) -- -- -- -- -- -- (50,451)
Costs associated
with initial
public offering... (1,801) -- -- -- -- -- -- (1,801)
Proceeds
associated with
initial public
offering.......... 197,317 -- -- -- -- -- -- 197,317
--------- ---------- --------- ---- ---------- --------- -------- ----------
Net cash
provided by
financing
activities...... 638,919 -- -- -- -- -- -- 638,919
--------- ---------- --------- ---- ---------- --------- -------- ----------
Net increase in
cash and cash
equivalents........ 70,597 -- -- -- -- -- -- 70,597
Cash and cash
equivalents at the
beginning of
period............. 111,733 -- -- -- -- -- -- 111,733
--------- ---------- --------- ---- ---------- --------- -------- ----------
Cash and cash
equivalents at the
end of period...... $ 182,330 $ -- $ -- $-- $ -- $ -- $ -- $ 182,330
========= ========== ========= ==== ========== ========= ======== ==========
F-47
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Consolidating Statement of Cash Flows for the six months ended June 30, 1999
(unaudited):
TeleCorp Communications, Inc. TeleCorp PCS, Inc.
-------------------------------------------------- ----------------------------------------
TeleCorp Guarantor Non-Guarantor Non-Guarantor
PCS, Inc. Subsidiary Subsidiaries Eliminations Consolidated Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------ ------------- ------------ -------------
Cash flows from
operating
activities:
Net loss......... $ -- $(78,283) $ -- $ -- $ (78,283) $ -- $ -- $ (78,283)
Adjustment to
reconcile net
loss to net cash
(used in)
provided by
operating
activities:
Depreciation and
amortization.... 2,081 6,377 7,395 -- 13,772 638 -- 16,491
Noncash
compensation
expense related
to stock option
grants and
restricted stock
awards.......... -- 365 -- -- 365 -- -- 365
Noncash interest
expense......... 8,978 -- -- -- -- 148 -- 9,126
Bad debt
expense......... -- 159 -- -- 159 -- -- 159
Changes in cash
flow from
operations
resulting from
changes in
assets and
liabilities:
Accounts
receivable...... -- (12,337) -- -- (12,337) -- -- (12,337)
Inventory....... -- (6,955) -- -- (6,955) -- -- (6,955)
Intercompany
receivables..... (363,590) -- -- -- -- -- 363,590 --
Prepaid expenses
and other
current assets.. -- 1,095 (101) -- 994 -- -- 994
Other assets.... -- (599) (556) -- (1,155) -- -- (1,155)
Accounts
payable......... -- 8,537 10,022 -- 18,559 -- -- 18,559
Accrued
expenses........ -- 980 1,151 -- 2,131 -- -- 2,131
Accrued
interest........ (310) -- -- -- -- (101) -- (411)
Deferred
revenue......... -- 705 -- -- 705 -- -- 705
Intercompany
payables........ -- 177,498 91,935 -- 269,433 94,157 (363,590) --
--------- -------- --------- ------ --------- ------- -------- ---------
Net cash (used
in) provided by
operating
activities...... (352,841) 97,542 109,846 -- 207,388 94,842 -- (50,611)
--------- -------- --------- ------ --------- ------- -------- ---------
Cash flows from
investing
activities:
Expenditures for
network under
development,
wireless network
and property and
equipment....... -- (93,389) (109,846) -- (203,235) -- -- (203,235)
Capitalized
interest on
network under
development and
PCS licenses.... -- (4,153) -- -- (4,153) -- -- (4,153)
Expenditures for
microwave
relocation...... -- -- -- -- -- (5,137) -- (5,137)
Purchase of PCS
licenses........ -- -- -- -- -- (72,188) -- (72,188)
Deposit on PCS
licenses........ -- -- -- -- -- (28,878) -- (28,878)
Partial refund
of deposit on
PCS licenses.... -- -- -- -- -- 11,361 -- 11,361
Purchase of
intangibles-AT&T
agreements...... (16,145) -- -- -- -- -- -- (16,145)
Capitalized
Tritel
acquisition
costs........... -- -- -- -- -- -- -- --
--------- -------- --------- ------ --------- ------- -------- ---------
Net cash used in
investing
activities...... (16,145) (97,542) (109,846) -- (207,388) (94,842) -- (318,375)
--------- -------- --------- ------ --------- ------- -------- ---------
Cash flows from
financing
activities:
Proceeds from
sale of
mandatorily
redeemable
preferred
stock........... 60,411 -- -- -- -- -- -- 60,411
Receipt of
preferred stock
subscription
receivable...... 3,740 -- -- -- -- -- -- 3,740
Direct issuance
costs from sale
of mandatorily
redeemable
preferred
stock........... (2,500) -- -- -- -- -- -- (2,500)
Proceeds from
sale of common
stock and series
F preferred
stock........... 5 -- -- -- -- -- -- 5
Proceeds from
long-term debt.. 397,635 -- -- -- -- -- -- 397,635
Payments of
deferred
financing
costs........... (10,600) -- -- -- -- -- -- (10,600)
Payments on
long-term debt.. (40,000) -- -- -- -- -- -- (40,000)
--------- -------- --------- ------ --------- ------- -------- ---------
Net cash
provided by
financing
activities...... 408,691 -- -- -- -- -- -- 408,691
--------- -------- --------- ------ --------- ------- -------- ---------
Net increase in
cash and cash
equivalents...... 39,705 -- -- -- -- -- -- 39,705
Cash and cash
equivalents at
the beginning of
period........... 111,733 -- -- -- -- -- -- 111,733
--------- -------- --------- ------ --------- ------- -------- ---------
Cash and cash
equivalents at
the end of
period........... $ 151,438 $ -- $ -- $ -- $ -- $ -- $ -- $ 151,438
========= ======== ========= ====== ========= ======= ======== =========
F-48
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Consolidating Statement of Cash Flows for the six months ended June 30, 2000
(unaudited):
TeleCorp Communications, Inc. TeleCorp PCS, Inc.
-------------------------------------- ---------------------------------------
TeleCorp Guarantor Non-Guarantor Non-Guarantor
PCS, Inc. Subsidiary Subsidiaries Consolidated Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------- ------------ ------------
Cash flows from
operating activities:
Net loss................ $ -- $ (168,373) $ -- $ (168,373) $ -- $ -- $ (168,373)
Adjustment to reconcile
net loss to net cash
(used in) provided by
operating activities:
Depreciation and
amortization........... 3,577 19,526 25,139 44,665 2,141 -- 50,383
Noncash compensation
expense related to
stock option grants and
restricted stock
awards................. -- 26,883 -- 26,883 -- -- 26,883
Noncash interest
expense................ 23,092 -- -- -- 257 -- 23,349
Bad debt expense....... -- 5,639 -- 5,639 -- -- 5,639
Changes in cash flow
from operations
resulting from changes
in assets and
liabilities:
Accounts receivable.... -- (12,933) -- (12,933) -- -- (12,933)
Inventory.............. -- (4,802) -- (4,802) -- -- (4,802)
Intercompany
receivables............ (275,780) -- -- -- -- 275,780 --
Prepaid expenses and
other current assets... -- (3,151) 635 (2,516) -- -- (2,516)
Other assets........... -- (4,173) -- (4,173) -- -- (4,173)
Accounts payable....... -- (5,664) (26,585) (32,249) -- -- (32,249)
Accrued expenses....... -- (2,456) (3,361) (5,817) -- -- (5,817)
Accrued interest....... 567 -- -- -- (399) -- 168
Deferred revenue....... -- 908 -- 908 -- -- 908
Intercompany payables.. -- 199,497 64,186 263,683 12,097 (275,780)
--------- ---------- -------- ---------- ------- --------- ----------
Net cash (used in)
provided by operating
activities............. (248,544) 50,901 60,014 110,915 14,096 -- (123,533)
--------- ---------- -------- ---------- ------- --------- ----------
Cash flows from
investing activities:
Expenditures for
network under
development, wireless
network and property
and equipment.......... -- (49,103) (60,014) (109,117) -- -- (109,117)
Capitalized interest on
network under
development and
wireless network....... -- (1,798) -- (1,798) -- -- (1,798)
Expenditures for
microwave relocation... -- -- -- -- (4,279) -- (4,279)
Purchase of PCS
licenses............... -- -- -- -- (733) -- (733)
Deposit on PCS
licenses............... -- -- -- -- -- -- --
Purchase of
intangibles -- AT&T
agreements............. (12,368) -- -- -- -- -- (12,368)
Capitalized Tritel
acquisition costs...... -- -- -- -- (8,409) -- (8,409)
--------- ---------- -------- ---------- ------- --------- ----------
Net cash used in
investing activities... (12,368) (50,901) (60,014) (110,915) (13,421) -- (136,704)
--------- ---------- -------- ---------- ------- --------- ----------
Cash flows from
financing activities:
Proceeds from sale of
mandatorily redeemable
preferred stock........ -- -- -- -- -- -- --
Receipt of preferred
stock subscription
receivable............. -- -- -- -- -- -- --
Direct issuance costs
from sale of
mandatorily redeemable
preferred stock........ -- -- -- -- -- -- --
Proceeds from sale of
common stock and series
F preferred stock...... 41,869 -- -- -- -- -- 41,869
Proceeds from long-term
debt................... 65,000 -- -- -- -- -- 65,000
Payments of deferred
financing costs........ (64) -- -- -- -- -- (64)
Payments on long-term
debt................... -- -- -- -- (675) -- (675)
--------- ---------- -------- ---------- ------- --------- ----------
Net cash provided by
(used in) financing
activities............. 106,805 -- -- -- (675) -- 106,130
--------- ---------- -------- ---------- ------- --------- ----------
Net decrease in cash and
cash equivalents........ (154,107) -- -- -- -- -- (154,107)
Cash and cash
equivalents at the
beginning of period..... 182,330 -- -- -- -- -- 182,330
--------- ---------- -------- ---------- ------- --------- ----------
Cash and cash
equivalents at the end
of period............... $ 28,223 $ -- $ -- $ -- $ -- $ -- $ 28,223
========= ========== ======== ========== ======= ========= ==========
F-49
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
20. Subsequent Events
Tritel Merger and Contribution and Exchange with AT&T Wireless
On February 28, 2000, the Company agreed to merge with Tritel, Inc. (Tritel)
through a merger of each of the Company and Tritel into a newly formed
subsidiary of a new holding company (Holding Company). The merger will result
in 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. Both the Company and Tritel
will become subsidiaries of the holding company.
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 to 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 proposed merger has been unanimously approved by the Company's and
Tritel's board of directors, with three of the Company's 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, AT&T has agreed to
contribute certain assets and rights to the Company. This contribution will
result in the Company acquiring various assets in exchange for the
consideration issued as follows:
The Company acquires:
. $20,000 cash from AT&T Wireless Services.
. The right to acquire all of the common and preferred stock of Indus,
Inc. (Indus).
. The right to acquire additional wireless properties and assets from
Airadigm Communications, Inc. (Airadigm).
. The two year extension and expansion of the AT&T network membership
licenses agreement to cover all people in Holding Company's markets.
Consideration issued:
. 9,272,740 shares of class A common stock of the new holding company
formed from the Tritel merger to AT&T Wireless Services.
Separately, AT&T Wireless and the Company entered into an Asset Exchange
Agreement pursuant to which the Company has agreed to exchange certain assets
with AT&T Wireless, among other consideration.
F-50
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
The Company is receiving certain consideration in exchange for assets as
follows:
The Company acquires:
. $80,000 in cash from AT&T Wireless.
. AT&T Wireless 10 MHZ PCS licenses in the areas covering part of the
Wisconsin market, in addition to adjacent licenses.
. AT&T Wireless' existing 10 MHZ PCS 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 New England Market Segment to AT&T Wireless.
. Cash and/or class A common stock to Polycell and ABC Wireless.
Further, AT&T has agreed to extend the term of the roaming agreement and to
expand the geographic coverage of the AT&T operating agreements with TeleCorp
to include the new markets, either through amending TeleCorp's existing
agreements or by entering into new agreements with Holding Company on
substantially the same terms as TeleCorp's existing agreements. In addition,
TeleCorp has granted AT&T Wireless a "right of first refusal" with respect to
certain markets transferred by AT&T Wireless Services or AT&T Wireless
triggered in the event of a sale of the Company to a third party.
These transactions will be accounted for as an asset purchase and
disposition and recorded at fair value. The purchase price will be determined
based on cash paid, the fair value of the Class A common stock issued, and the
fair value of the assets relinquished. The purchase price will be
proportionately allocated to the noncurrent assets acquired based on their
estimated fair values. A gain is recognized as the difference between the fair
value of the New England assets disposed and their net book value. 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.
21. Subsequent events (unaudited)
Acquisitions
On April 7, 2000, the Company completed its acquisition of TeleCorp LMDS,
Inc. (TeleCorp LMDS) through an exchange of all of the outstanding stock of
TeleCorp LMDS for 878,400 shares of the Company's Class A common stock valued
at $45,896 on the closing date. TeleCorp LMDS had no operations and its only
assets were local multipoint distribution service licenses. By acquiring
TeleCorp LMDS, TeleCorp gained 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. TeleCorp LMDS's stockholders were
Mr. Vento, Mr. Sullivan and three of the Company's initial investors. As Mr.
Vento and Mr. Sullivan have voting control of the Company and TeleCorp LMDS,
the acquisition was accounted for as an acquisition between companies under
common control and recorded at historical cost. The licenses acquired have been
recorded by the Company at $2,707 which represents the historical cost of
TeleCorp LMDS.
On April 11, 2000, the Company completed its acquisition of the 15% of Viper
Wireless, Inc. (Viper Wireless) that it did not already own from Mr. Vento and
Mr. Sullivan in exchange for an aggregate of 323,372 shares of the Company's
Class A common stock and 800 shares of its Series E preferred stock. The
Company acquired 85% of Viper Wireless on March 1, 1999 in exchange for $32,286
contributed by AT&T and certain of the Company's other initial investors for
additional shares of the Company's preferred and common stock.
F-51
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
Viper Wireless used the proceeds to participate in the Federal Communications
Commission's reauction of PCS licenses. Viper Wireless was granted six PCS
licenses in the reauction. In connection with the completion of the
acquisition, the Company recognized compensation expense of $15,297 based on
the fair value of the Class A common stock and Series E preferred stock at the
closing date.
On April 27, 2000, the Company completed its acquisition of 15 MHz PCS
licenses in the Lake Charles, Louisiana basic trading area from Gulf Telecom,
LLC (Gulf Telecom). As consideration for the PCS licenses, the Company paid
Gulf Telecom $262 in cash, assumed approximately $2,433, less a discount of
$401, in Federal Communications Commission debt related to the license and
reimbursed Gulf Telecom $471 for interest it paid to the Federal Communications
Commission on the debt related to the license from June 1998 through March
2000. The entire purchase price has been allocated to acquired licenses.
Senior Subordinated Notes
On July 14, 2000, the Company completed the issuance and sale of 10 5/8%
Senior Subordinated Notes (Subordinated Notes) with an aggregate principal
amount of $450,000. The Subordinated Notes mature July 15, 2010 and the Company
is required to pay interest semi-annually beginning on January 15, 2001.
Offering expenses consisting of underwriting, printing, legal and accounting
fees totaled approximately $13,000. The Subordinated Notes are subject to
optional redemption, allowing the Company on or after July 15, 2005, to redeem
some or all of the Subordinated Notes together with accrued and unpaid interest
at redemption prices. The Company also has the option until July 15, 2003, to
redeem up to 35% of the original aggregate principal amount of these notes with
the net proceeds of certain types of qualified equity offerings at a redemption
price equal to 118.625% of the principal amount as long as at least 65% of the
original aggregate principal amount of the notes remains outstanding
immediately after redemption. If the Company experiences a change of control at
any time on or prior to July 15, 2005, the Company has the option to redeem all
of the Subordinated Notes at par plus a premium. If the Company has not
previously redeemed the Subordinated Notes and if the Company experiences a
change in control, the note holders may require the Company to make an offer to
repurchase all of the Subordinate Notes after July 15, 2005 at a price equal to
101% of the principal amount, plus accrued and unpaid interest, if any, to the
date of repurchase. The Company is required to comply with certain financial
covenants outlined in the indenture agreement. The Subordinated Notes are not
collateralized. The Subordinated Notes are subordinate to all of the Company's
existing and future senior debt, rank equally with all existing senior
subordinated debt and rank senior to all existing and future subordinated debt.
The Subordinated Notes are guaranteed by the Company's wholly owned subsidiary,
TCI.
Lucent Notes
On July 14, 2000, Holding Company entered into a commitment letter with
Lucent Technologies Inc. (Lucent). Under the terms of the commitment letter,
Lucent agreed that following the merger of TeleCorp and Tritel into
subsidiaries of Holding Company, Lucent will purchase from Holding Company,
should Holding Company issue, the Senior Subordinated Discount Notes (Lucent
Notes) with gross proceeds up to $350,000. The Lucent Notes mature 10 years
from the date of issuance, unless previously redeemed by the Holding Company.
As interest accrues, it will be added to the principal as an increase to
interest expense and to the carrying value of the notes for five years from the
date of issuance. After five years, interest on the Lucent Notes will become
payable semi-annually. The Lucent Notes are not collaterized. The Lucent Notes
would be senior subordinated unsecured obligations of the Holding Company,
ranking equivalent in right of payment to all of the Holding Company's future
senior subordinated debt. The Lucent Notes would be subordinate in right of
payment to any future senior debt incurred by the Holding Company or its
guarantor subsidiaries but senior in right of payment to any future
subordinated debt incurred by Holding Company or any of its guarantor
subsidiaries.
F-52
TELECORP PCS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
($ in thousands, except per share data)
Black Label Wireless, Inc. Credit Agreement
On July 14, 2000, Black Label Wireless, Inc. (Black Label), a company wholly
owned by Messrs. Sullivan and Vento, entered into a credit agreement with
Lucent, under which Lucent agreed to lend Black Label up to $175,000. Black
Label intends to use the proceeds of loans under the credit agreement to
develop the network related to the licenses being acquired from AT&T Wireless
in the Contribution and the Exchange. Upon consummation of the merger, Black
Label intends to transfer its assets to the Company and the Company intends to
satisfy Black Label's indebtedness to Lucent. Black Label is considered by the
Company to be a special purpose entity and the Company will include all of
Black Label's activities in its consolidated financial statements.
The obligations under the Black Label credit agreement must be repaid upon
the later to occur of the date six months after the consummation of the merger
of TeleCorp and Tritel and related At&T transactions and July 14, 2001.
Additionally, if, the obligations under the credit agreement are assumed by
TeleCorp, the commitments under the credit agreement shall immediately
terminate and all obligations due under the credit agreement shall immediately
become due and payable.
Senior Credit Facility
On July 14, 2000, the Company borrowed $35,000 on the Tranche A term loan.
The total principal outstanding on the Tranche A term loan was $100,000 as of
July 14, 2000.
Preferred Stock Subscription Receivable
On July 17, 2000, the Company received $37,650 from certain of its initial
institutional investors related to the preferred stock subscriptions
receivable.
F-53
INDEPENDENT AUDITORS' REPORT
The Board of Directors Tritel, Inc.:
We have audited the accompanying consolidated balance sheets of Tritel, Inc.
and subsidiaries (the Company) as of December 31, 1998 and 1999, and the
related consolidated statements of operations, members' and stockholders'
equity, and cash flows for each of the years in the three year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Tritel, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Jackson, Mississippi
February 18, 2000, except with
respect to Note 21 which is as of
February 28, 2000
F-54
TRITEL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999 and June 30, 2000 (unaudited)
(amounts in thousands, except share data)
December 31,
------------------- June 30,
1998 1999 2000
------- ---------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents................... $ 846 $ 609,269 $ 350,573
Due from affiliates......................... 241 2,565 3,719
Accounts receivable, net.................... -- 5,040 14,325
Inventory................................... -- 8,957 20,512
Prepaid expenses and other current assets... 719 4,733 6,255
------- ---------- ----------
Total current assets...................... 1,806 630,564 395,384
------- ---------- ----------
Restricted cash............................... -- 6,594 5,487
Property and equipment, net................... 13,816 262,343 415,651
Federal Communications Commission licensing
costs, net................................... 71,466 201,946 202,894
Intangible assets, net........................ -- 59,508 56,646
Other assets.................................. 1,933 35,407 33,689
------- ---------- ----------
Total assets.............................. $89,021 $1,196,362 $1,109,751
======= ========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................... $22,405 $ -- $ --
Current maturities of long-term debt........ -- 923 974
Accounts payable............................ 8,221 103,677 88,299
Accrued liabilities......................... 2,285 9,647 26,675
------- ---------- ----------
Total current liabilities................. 32,911 114,247 115,948
------- ---------- ----------
Non-current liabilities:
Long-term debt.............................. 51,599 557,716 571,464
Note payable to related party............... 6,270 -- --
Deferred income taxes and other
liabilities................................ 224 37,367 37,856
------- ---------- ----------
Total non-current liabilities............. 58,093 595,083 609,320
------- ---------- ----------
Total liabilities......................... 91,004 709,330 725,268
------- ---------- ----------
Series A 10% redeemable convertible preferred
stock........................................ -- 99,586 104,119
Stockholders' equity:
Preferred stock, 3,100,000 shares
authorized:
Series D, 46,374 shares outstanding at
December 31, 1999......................... -- 46,374 46,374
Common stock, 30 shares issued and
outstanding at December 31, 1998........... -- -- --
Common stock issued and outstanding at
December 31, 1999
Class A Voting--97,796,906 shares; Class B
Non-voting--2,927,120 shares; Class C--
1,380,448 shares; Class D--4,962,804
shares; Voting Preference--6 shares........ -- 1,071 1,071
Contributed capital--Predecessor Companies.. 13,497 -- --
Additional paid in capital.................. -- 611,277 748,432
Deferred compensation....................... -- -- (74,450)
Accumulated deficit......................... (15,480) (271,276) (441,063)
------- ---------- ----------
Total stockholders' equity (deficit)...... (1,983) 387,446 280,364
------- ---------- ----------
Total liabilities, redeemable preferred
stock and stockholders' equity........... $89,021 $1,196,362 $1,109,751
======= ========== ==========
See accompanying notes to consolidated financial statements.
F-55
TRITEL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1998 and 1999 and
the Six Months Ended June 30, 1999 and 2000
(amounts in thousands, except per share data)
Six Months Ended June
Years Ended December 31, 30,
----------------------------- ------------------------
1997 1998 1999 1999 2000
------- -------- ---------- ---------- ------------
(unaudited)
Revenues................ $ -- $ -- $ 6,759 $ -- $ 41,307
------- -------- ---------- ---------- ------------
Operating expenses:
Cost of services and
equipment............ -- -- 6,966 -- 29,111
Technical operations.. 104 1,939 18,459 3,946 21,987
General and
administrative....... 3,123 4,947 22,915 7,204 26,425
Sales and marketing... 28 452 20,404 2,724 28,603
Stock-based
compensation......... -- -- 190,664 -- 62,111
Depreciation and
amortization......... 20 348 12,839 3,474 24,875
------- -------- ---------- ---------- ------------
Total operating
expenses........... 3,275 7,686 272,247 17,348 193,112
------- -------- ---------- ---------- ------------
Operating loss........ (3,275) (7,686) (265,488) (17,348) (151,805)
Interest income......... 121 77 16,791 5,332 15,892
Financing cost.......... -- -- (2,230) (2,230) --
Interest expense........ -- (722) (24,970) (5,104) (30,416)
------- -------- ---------- ---------- ------------
Loss before
extraordinary item
and income taxes..... (3,154) (8,331) (275,897) (19,350) (166,329)
Income tax benefit...... -- -- 28,443 6,448 1,076
------- -------- ---------- ---------- ------------
Loss before
extraordinary items.. (3,154) (8,331) (247,454) (12,902) (165,253)
Extraordinary item--
Loss on return of
spectrum............. -- (2,414) -- -- --
------- -------- ---------- ---------- ------------
Net loss.............. (3,154) (10,745) (247,454) (12,902) (165,253)
Series A preferred
dividend requirement... -- -- (8,918) (4,347) (4,534)
------- -------- ---------- ---------- ------------
Net loss available to
common stockholders.... $(3,154) $(10,745) $ (256,372) $ (17,249) $ (169,787)
======= ======== ========== ========== ============
Basic and diluted net
loss per share......... $ (33.25) $ (5.68) $ (1.43)
========== ========== ============
Weighted average common
shares outstanding..... 7,710,649 3,034,681 118,451,248
========== ========== ============
See accompanying notes to consolidated financial statements.
F-56
TRITEL, INC.
CONSOLIDATED STATEMENTS OF MEMBERS' AND STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1998 and 1999 and
the Six Month Period Ended June 30, 2000
Additional Members' and
Preferred Common Contributed Paid in Deferred Accumulated Stockholders'
Stock Stock Capital Capital Compensation Deficit Equity
---------- ------ ----------- ---------- ------------ ----------- -------------
(amounts in thousands)
Balance at December 31, 1996... $ -- $ -- $ 7,255 $ -- $ -- $ (1,581) $ 5,674
Contributed capital, net of
expenses of $148.............. -- -- 5,437 -- -- -- 5,437
Conversion of debt to members'
equity........................ -- -- 805 -- -- -- 805
Net loss....................... -- -- -- -- -- (3,154) (3,154)
---------- ------ --------- -------- -------- --------- ----------
Balance at December 31, 1997... -- -- 13,497 -- -- (4,735) 8,762
Net loss....................... -- -- -- -- -- (10,745) (10,745)
---------- ------ --------- -------- -------- --------- ----------
Balance at December 31, 1998... -- -- 13,497 -- -- (15,480) (1,983)
Conversion of debt to members'
equity in Predecessor
Company....................... -- -- 8,976 -- -- -- 8,976
Series C Preferred Stock issued
to Predecessor Company,
including distribution of
assets and liabilities........ 17,193 -- (22,473) -- -- 576 (4,704)
Series C Preferred Stock issued
in exchange for cash.......... 163,370 -- -- -- -- -- 163,370
Payment of preferred stock
issuance costs................ (8,507) -- -- -- -- -- (8,507)
Series C Preferred Stock issued
to Central Alabama in exchange
for net assets................ 2,602 -- -- -- -- -- 2,602
Series D Preferred Stock issued
to AT&T Wireless in exchange
for
licenses and other agreements.. 46,374 -- -- -- -- -- 46,374
Grant of unrestricted rights in
common stock to officer....... -- -- -- 4,500 -- -- 4,500
Conversion of preferred stock
into common stock............. (174,658) 783 -- 173,875 -- -- --
Sale of common stock, net of
issuance costs of $15,338..... -- 288 -- 242,238 -- -- 242,526
Stock-based compensation....... -- -- -- 190,664 -- -- 190,664
Accrual of dividends on Series
A redeemable preferred stock.. -- -- -- -- -- (8,918) (8,918)
Net loss....................... -- -- -- -- -- (247,454) (247,454)
---------- ------ --------- -------- -------- --------- ----------
Balance at December 31, 1999... 46,374 1,071 -- 611,277 -- (271,276) 387,446
---------- ------ --------- -------- -------- --------- ----------
Unaudited:
Stock issuance costs.......... -- -- -- (195) -- -- (195)
Exercise of stock options..... -- -- -- 789 -- -- 789
Stock-based compensation...... -- -- -- 62,111 -- -- 62,111
Deferred compensation expense
related to restricted stock
awards....................... -- -- -- 74,450 (74,450) --
Accrual of dividends on
Series A redeemable
preferred stock.............. -- -- -- -- -- (4,534) (4,534)
Net loss...................... -- -- -- -- -- (165,253) (165,253)
---------- ------ --------- -------- -------- --------- ----------
Balance, June 30, 2000
(unaudited)................... $ 46,374 $1,071 $ -- $748,432 $(74,450) $(441,063) $ 280,364
========== ====== ========= ======== ======== ========= ==========
See accompanying notes to consolidated financial statements.
F-57
TRITEL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1998 and 1999, and
the Six Months Ended June 30, 1999 and 2000
(amounts in thousands)
Six Months
Years Ended December 31, Ended June 30,
---------------------------- -------------------
1997 1998 1999 1999 2000
------- -------- --------- -------- ---------
(unaudited)
Cash flows from operating
activities:
Net loss................... $(3,154) $(10,745) $(247,454) $(12,902) $(165,253)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Loss on return of
spectrum.................. -- 2,414 -- -- --
Financing costs............ -- -- 2,230 2,230 --
Depreciation and
amortization.............. 20 348 12,839 3,474 24,875
Stock-based compensation
and grant of unrestricted
rights in common stock to
officer................... -- -- 195,164 -- 62,111
Accretion of discount on
debt and amortization of
debt issue costs ......... -- -- 10,608 -- 13,705
Deferred income tax
benefit................... -- -- (28,443) (6,448) (1,076)
Provision for bad debts.... -- -- 42 -- 550
Changes in operating
assets and liabilities:
Accounts receivable....... -- -- (5,082) -- (9,835)
Inventory................. -- -- (8,957) -- (10,805)
Accounts payable and
accrued expenses......... 45 (180) 24,659 3,171 3,094
Other current assets and
liabilities.............. (814) (333) (6,681) (3,941) (2,384)
------- -------- --------- -------- ---------
Net cash used in
operating activities.... (3,903) (8,496) (51,075) (14,416) (85,018)
------- -------- --------- -------- ---------
Cash flows from investing
activities:
Capital expenditures....... (6) (5,970) (172,448) (44,687) (171,798)
Payment for Federal
Communications Commission
licenses.................. (3,935) -- -- -- --
Refund of Federal
Communications Commission
deposit................... 1,376 -- -- -- --
Advance under notes
receivable................ -- -- (7,550) (7,550) --
Capitalized interest on
network construction and
Federal Communications
Commission licensing
costs..................... (415) (2,905) (13,623) (5,896) (2,805)
(Increase) decrease in
restricted cash........... -- -- (6,594) (7,957) 1,107
Other...................... (72) -- (614) (325) (129)
------- -------- --------- -------- ---------
Net cash used in
investing activities.... (3,052) (8,875) (200,829) (66,415) (173,625)
------- -------- --------- -------- ---------
Cash flows from financing
activities:
Proceeds from notes
payable to related
parties................... 5,700 -- -- -- --
Proceeds from notes
payable................... 5,000 38,705 -- -- --
Proceeds from (repayment
of) long-term debt........ -- -- 300,000 200,000 (449)
Proceeds from senior
subordinated discount
notes..................... -- -- 200,240 200,240 --
Repayments of notes
payable................... (6,200) (21,300) (22,100) (22,100) --
Payment of preferred stock
issuance costs............ -- -- (8,507) (8,507) --
Payment of debt issuance
costs and other deferred
charges................... (1,251) (951) (30,202) (27,966) (198)
Proceeds from vendor
discount.................. -- -- 15,000 15,000 --
Issuance of preferred
stock..................... -- -- 163,370 113,623 --
Issuance of common stock,
net of issuance costs..... -- -- 242,526 -- 594
Capital contributions, net
of related expenses....... 5,437 -- -- -- --
------- -------- --------- -------- ---------
Net cash provided by
financing activities.... 8,686 16,454 860,327 470,290 (53)
------- -------- --------- -------- ---------
Net increase (decrease) in
cash and cash equivalents.. 1,731 (917) 608,423 389,459 (258,696)
Cash and cash equivalents at
beginning of period........ 32 1,763 846 846 609,269
------- -------- --------- -------- ---------
Cash and cash equivalents at
end of period.............. $ 1,763 $ 846 $ 609,269 $390,305 $ 350,573
======= ======== ========= ======== =========
See accompanying notes to consolidated financial statements.
F-58
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All information subsequent to December 31, 1999 is unaudited)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Principles of Consolidation
Airwave Communications, LLC ("Airwave Communications") (formerly Mercury
PCS, LLC) and Digital PCS, LLC ("Digital PCS") (formerly Mercury PCS II, LLC)
were formed on July 27, 1995 and July 29, 1996, respectively, to acquire for
development Personal Communications Services ("PCS") licenses in markets in the
south-central United States. Airwave Communications and Digital PCS are
referred to collectively as "the Predecessor Company" or "the Predecessor
Companies."
Tritel, Inc. ("Tritel") was formed on April 23, 1998 by the controlling
shareholders of Airwave Communications and Digital PCS to develop PCS markets
in the south-central United States. Tritel's 1998 activities consisted of $1.5
million in capital expenditures and $32,000 in net loss. On January 7, 1999,
the Predecessor Companies transferred substantially all of their assets and
liabilities at historical cost to Tritel in exchange for 18,262 shares of
series C preferred stock in Tritel. The controlling shareholders of the
Predecessor Companies control Tritel. Tritel will continue the activities of
the Predecessor Companies and, for accounting purposes, this transaction was
accounted for as a reorganization of the Predecessor Company into a C
corporation and a name change to Tritel. Tritel and the Predecessor Company,
together with Tritel's subsidiaries, are referred to collectively as "the
Company."
Tritel began commercial operations during the fourth quarter of 1999. Prior
to that time, Tritel and the Predecessor Companies were considered to be in the
development stage.
The consolidated accounts of the Company include its subsidiaries, Tritel
PCS, Inc. ("Tritel PCS"); Tritel A/B Holding Corp.; Tritel C/F Holding Corp.;
Tritel Communications, Inc.; Tritel Finance, Inc.; and others. All significant
intercompany accounts or balances have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of financial statement classification, the Company considers
all highly liquid investments with original maturities of three months or less
to be cash equivalents.
Accounts Receivable
Accounts receivable balances are presented net of allowances for losses. The
Company's allowance for losses was $42,000 and $379,000 as of December 31, 1999
and June 30, 2000, respectively.
Inventory
Inventory consisting primarily of wireless telephones and telephone
accessories is stated at cost.
Restricted Cash
On March 31, 1999, the Company entered into a deposit agreement with Toronto
Dominion (Texas), Inc., as administrative agent, on behalf of the depository
bank and the banks and other financial institutions who are a party to the bank
facility described in Note 8. Under the terms of the agreement, the Company has
placed on deposit $6,594,000 and $5,487,000 at December 31, 1999 and June 30,
2000, respectively, with the depository bank, which will be used for the
payment of interest and/or commitment fees due under the bank facility.
F-59
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
When assets are placed in service, depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, generally
seven years for wireless network assets and three years for information systems
assets. Leasehold improvements are amortized over the lease term. The Company
capitalizes interest on certain of its wireless network construction
activities. Routine expenditures for repairs and maintenance are charged to
expense as incurred.
Federal Communications Commission Licensing Costs
Licensing costs are accounted for in accordance with industry standards and
include the value of license fees at date of acquisition and the direct costs
incurred to obtain the licenses. Licensing costs also include capitalized
interest during the period of time necessary to build out the wireless network.
The Federal Communications Commission grants licenses for terms of up to ten
years, and generally grants renewals if the licensee has complied with its
license obligations. The Company believes it will be able to secure renewal of
its PCS licenses. Amortization of such license costs, which begins for each
geographic service area upon commencement of service, is over a period of 40
years. Accumulated amortization on Federal Communications Commission licensing
costs at December 31, 1999 and June 30, 2000 was $597,000 and $2,440,000,
respectively.
The Company evaluates the propriety of the carrying amounts of its Federal
Communications Commission licensing costs whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. There
have been no impairments through June 30, 2000.
Derivative Financial Instruments
Derivative financial instruments in the form of interest rate swap
agreements are entered into by the Company to manage interest rate exposure.
These are contractual agreements between counterparties to exchange interest
streams based on notional principal amounts over a set period of time. Interest
rate swap agreements normally involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying principal
amounts. The notional or principal amount does not represent the amount at
risk, but is used only as a basis for determining the actual interest cash
flows to be exchanged related to the interest rate contracts. Market risk, due
to potential fluctuations in interest rates, is inherent in swap agreements.
Amounts paid or received under these agreements are included in interest
expense during the period accrued or earned.
Interest Capitalization
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
34, Tritel capitalizes interest expense related to the construction or purchase
of certain assets including its Federal Communications Commission licenses
which constitute activities preliminary to the commencement of the planned
principal operations. Interest capitalized in the years ended December 31,
1997, 1998, and 1999 was $7,214,000, $10,545,000 and $23,685,000, respectively.
Interest capitalized in the six months ended June 30, 2000 was $5,106,000.
F-60
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Income Taxes
Because the Predecessor Company was a nontaxable entity, operating results
prior to January 7, 1999 were included in the income tax returns of its
members. Therefore, the accompanying consolidated financial statements do not
include any provision for income tax benefit for the years ended December 31,
1997 and 1998 or any deferred income taxes on any temporary differences in
asset bases as of December 31, 1998.
As of January 7, 1999, the Company accounts for income taxes in accordance
with SFAS No. 109, which requires the use of the asset and liability method in
accounting for deferred taxes.
Revenue Recognition
The Company earns revenue by providing wireless 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.
Generally, access fees, airtime and long distance are billed monthly and are
recognized as service is provided. Revenue from the sale of equipment is
recognized when sold to the customer.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs
totaled $6.2 million for the year ended December 31, 1999 and $8.2 million for
the six months ended June 30, 2000. No advertising costs were incurred prior to
1999.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but does
not require, companies to record compensation cost for stock-based compensation
plans at fair value. The Company has chosen to continue to account for stock-
based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
See Note 12.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. A significant estimate impacting the preparation of the
consolidated financial statements is the estimated useful life of Federal
Communications Commission licensing costs. Actual results could differ from
those estimates.
Per Share Amounts
The Company computes net loss per common 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 and diluted net loss per
common share is computed by dividing the net loss available to common
shareholders for the period by the weighted average number of shares of all
classes of common stock outstanding during the period. For purposes of this
calculation, common stock issued on January 7, 1999 was assumed to be
outstanding as of January 1, 1999. Series D preferred stock was included in the
computation of common shares outstanding after December 13, 1999, as 19,712,328
shares of common stock are issuable upon
F-61
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
the conversion of series D preferred stock. Such conversion can be made at any
time at the option of the holder and the number of shares to be received upon
conversion is fixed. In accordance with SFAS No. 128, outstanding stock options
and nonvested restricted stock grants have been excluded from these
calculations as the effect would be antidilutive.
Net loss per common share has not been reflected in the accompanying
financial statements for periods prior to 1999 because the Predecessor
Companies were limited liability corporations and did not have the existing
capital structure.
Comprehensive Income
Comprehensive income is the total of net income (loss) and all other non-
owner changes in stockholders' equity in a given period. The Company had no
comprehensive income components for the periods ended December 31, 1997, 1998,
and 1999 and June 30, 2000; therefore, comprehensive loss is the same as net
loss for all periods.
Segment Reporting
The Company presently operates in a single business segment as a provider of
wireless services in its licensed regions in the south-central United States.
Stock Split
On November 19, 1999, the board of directors approved a 400-for-1 stock
split for class A, class B, class C and class D common stock effective
immediately prior to the initial public offering. All common stock share data
have been retroactively adjusted to reflect this change.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 will
significantly change the accounting treatment of derivative instruments and,
depending upon the underlying risk management strategy, these accounting
changes could affect future earnings, assets, liabilities, and shareholders'
equity. The Company is closely monitoring the deliberations of the FASB's
derivative implementation task force. With the issuance of SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133, which delayed the effective date of
SFAS 133, the Company will be required to adopt SFAS 133 on January 1, 2001.
Presently, the Company has not yet quantified the impact that the adoption will
have on its consolidated financial statements.
(2) LIQUIDITY
As reflected in the accompanying consolidated financial statements, the
Company began commercial operations in certain of its markets late in 1999 and,
therefore, has limited revenues to fund expenditures. The Company expects to
grow rapidly while it develops and constructs its PCS network and builds its
customer
F-62
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Information subsequent to December 31, 1999 is unaudited)
base. The Company expects this growth to strain its financial resources and
result in significant operating losses and negative cash flows.
The planned high level of indebtedness could have a material adverse effect
on the Company, including the effect of such indebtedness on: (i) the Company's
ability to fund internally, or obtain additional debt or equity financing in
the future for capital expenditures, working capital, debt service
requirements, operating losses, acquisitions and other purposes; (ii) the
Company's ability to dedicate funds for the wireless network buildout,
operations or other purposes, due to the need to dedicate a substantial portion
of operating cash flow to fund interest payments; (iii) the Company's
flexibility in planning for, or reacting to, changes in its business and market
conditions; (iv) the Company's ability to compete with less highly leveraged
competitors; and (v) the Company's financial vulnerability in the event of a
downturn in its business or the economy.
The Company believes that the proceeds from the equity offerings in December
1999, together with the proceeds from the sale of senior subordinated discount
notes, the financing made available to it by the Federal Communications
Commission, borrowings under its bank credit facility and the equity investment
it has received, will provide it with sufficient funds to build out its
existing network as planned and fund operating losses until it completes its
planned network buildout and generate positive cash flow. There can be no
assurance that such funds will be adequate to complete the buildout of the
Company's PCS network. Under those circumstances, the Company could be required
to change its plans relating to the buildout of the network.
(3) PROPERTY AND EQUIPMENT
Major categories of property and equipment are as follows:
December 31,
----------------------- June 30,
1998 1999 2000
----------- ----------- -----------
(dollars in thousands) (unaudited)
Furniture and fixtures................. $ 1,779 $ 14,853 $ 19,573
Network construction and development... 11,416 230,777 391,966
Leasehold improvements................. 728 22,082 31,006
---------- ----------- --------
13,923 267,712 442,545
Less accumulated depreciation.......... (107) (6,834) (27,115)
Deposits on equipment.................. -- 1,465 221
---------- ----------- --------
$ 13,816 $ 262,343 $415,651
========== =========== ========
(4) FEDERAL COMMUNICATIONS COMMISSION LICENSING COSTS
During 1996 and 1997, the Federal Communications Commission granted to the
Predecessor Company as the successful bidder C-, D-, E- and F-Block licenses
with an aggregate license fee of $106,716,000 after deducting a 25% small
business discount.
The Federal Communications Commission provided below market rate financing
for a portion of the bid price of the C-and F-Block licenses. Based on the
Company's estimates of borrowing costs for similar debt, the Company discounted
the face amount of the debt to yield a market rate and the discount was applied
to reduce the carrying amount of the licenses and the debt. Accordingly, the
licenses were recorded at $90,475,000.
During July 1998, the Company took advantage of a reconsideration order by
the Federal Communications Commission allowing companies holding C-Block PCS
licenses several options to restructure their license holdings and associated
obligations. The Company elected the disaggregation option and returned one-
half of the broadcast spectrum originally acquired for each of the C-Block
license areas. As a result, the Company
F-63
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Information subsequent to December 31, 1999 is unaudited)
reduced the carrying amount of the related licenses by one-half, or
$35,442,000, and reduced the discounted debt and accrued interest due to the
Federal Communications Commission by $33,028,000. As a result of the
disaggregation election, the Company recognized an extraordinary loss of
approximately $2,414,000.
AT&T Wireless contributed certain A- and B-Block PCS licenses to the Company
on January 7, 1999 in exchange for preferred stock. The Company recorded such
licenses at $127,307,000 including related costs of the acquisition. Also, in
an acquisition of Central Alabama Partnership, LP 132, the Company acquired
certain C-Block licenses with an estimated fair value of $9,284,000, exclusive
of $6,072,000 of debt to the Federal Communications Commission.
Additionally on January 7, 1999, licenses with a carrying amount, including
capitalized interest and costs, totaling $21,874,000 were retained by the
Predecessor Company (see Note 15). The assets and liabilities retained by the
Predecessor Company have been reflected in these financial statements as a
distribution to the Predecessor Company.
Each of the Company's licenses is subject to an Federal Communications
Commission requirement that the Company construct wireless network facilities
offering coverage to certain percentages of the population within certain time
periods following the grant of such licenses. Failure to comply with these
requirements could result in the revocation of the related licenses or the
imposition of fines on the Company by the Federal Communications Commission.
(5) AT&T TRANSACTION
On May 20, 1998, the Predecessor Company and Tritel entered into a
Securities Purchase Agreement with AT&T Wireless and the other stockholders of
Tritel, whereby the Company agreed to construct a PCS network and provide
wireless services using the AT&T and SunCom brand names, giving equal emphasis
to each, in the south-central United States. On January 7, 1999, the parties
closed the transactions contemplated in the Securities Purchase Agreement.
At the closing, Tritel issued preferred stock to AT&T Wireless in exchange
for 20 MHz A- and B-Block PCS licenses which were assigned to the Company, and
for certain other agreements covering the Company's markets, including the
following agreements.
License Agreement
Pursuant to a Network Membership License Agreement, dated January 7, 1999
(the "License Agreement"), between AT&T Corp. and the Company, AT&T granted to
the Company a royalty-free, nontransferable, non-exclusive, nonsublicensable,
limited right, and license to use certain licensed marks solely in connection
with certain licensed activities. The licensed marks include the logo
containing AT&T and the globe design and the expression "Member of the AT&T
Wireless Network." The "Licensed Activities" include (i) the provision to end-
users and resellers, solely within the territory as defined in the License
Agreement, of Company communications services as defined in the License
Agreement on frequencies licensed to the Company for Commercial Mobile Radio
Services ("CMRS") provided in accordance with the License Agreement
(collectively, the "Licensed Services") and (ii) marketing and offering the
Licensed Services within the territory. The License Agreement also grants to
the Company the right and license to use licensed marks on certain permitted
mobile phones.
The License Agreement contains numerous restrictions with respect to the use
and modification of any of the licensed marks. Furthermore, the Company is
obligated to use commercially reasonable efforts to cause all
F-64
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Information subsequent to December 31, 1999 is unaudited)
Licensed Services marketed and provided using the licensed marks to be of
comparable quality to the Licensed Services marketed and provided by AT&T and
its affiliates in areas that are comparable to the territory taking into
account, among other things, the relative stage of development of the areas.
The License Agreement also sets forth specific testing procedures to determine
compliance with these standards, and affords the Company with a grace period to
cure any instances of alleged noncompliance therewith.
The Company may not assign or sublicense any of its rights under the License
Agreement; provided, however, that the License Agreement may be assigned to the
Company's lenders under the Bank Facility and after the expiration of any
applicable grace and cure periods under the Bank Facility, such lenders may
enforce the Company's rights under the License Agreement and assign the License
Agreement to any person with AT&T's consent.
The term of the License Agreement is for five years and renews for an
additional five-year period if each party gives the other notice to renew the
Agreement. The License Agreement may be terminated by AT&T at any time in the
event of a significant breach by the Company, including the Company's misuse of
any licensed marks, the Company's licensing or assigning any of the rights in
the License Agreement, the Company's failure to maintain AT&T's quality
standards or if a change in control of the Company occurs. After the initial
five-year term, AT&T may also terminate the License Agreement upon the
occurrence of certain transactions described in the Stockholders' Agreement.
The License Agreement, along with the exclusivity provisions of the
Stockholders' Agreement and the Resale Agreement will be amortized on a
straight-line basis over the ten-year term of the agreement. Accumulated
amortization related to these agreements at December 31, 1999 and June 30, 2000
was approximately $4.8 million and $7.3 million, respectively.
Roaming Agreement
Pursuant to the Intercarrier Roamer Service Agreement, dated as of January
7, 1999 (the "Roaming Agreement"), between AT&T Wireless, the Company, and
their affiliates, each party agrees to provide (each in its capacity as serving
provider, the "Serving Carrier") mobile wireless radio telephone service for
registered customers of the other party's (the "Home Carrier") customers while
such customers are out of the Home Carrier's geographic area and in the
geographic area where the Serving Carrier (itself or through affiliates) holds
a license or permit to construct and operate a mobile wireless radio/telephone
system and station. Each Home Carrier whose customers receive service from a
Serving Carrier shall pay to such Serving Carrier 100% of the Serving Carrier's
charges for wireless service and 100% of pass-through charges (i.e., toll or
other charges). Each Serving Carrier's service charges for use per minute or
partial minute for the first three years will be at a fixed rate, and
thereafter may be adjusted to a lower rate as the parties may negotiate from
time to time. Each Serving Carrier's toll charges per minute of use for the
first three years will be at a fixed rate, and thereafter such other rates as
the parties negotiate from time to time.
The Roaming Agreement has a term of 20 years, unless terminated earlier by a
party due to the other party's uncured breach of any term of the Roaming
Agreement.
Neither party may assign or transfer the Roaming Agreement or any of its
rights thereunder except to an assignee of all or part of its license or permit
to provide CMRS, provided that such assignee expressly assumes all or the
applicable part of the obligations of such party under the Roaming Agreement.
F-65
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Information subsequent to December 31, 1999 is unaudited)
The Roaming Agreement will be amortized on a straight-line basis over the
20-year term of the agreement. Accumulated amortization related to this
agreement at December 31, 1999 and June 30, 2000 was approximately $800,000 and
$1.2 million, respectively.
(6) NOTE RECEIVABLE
On March 1, 1999, the Company entered into agreements with AT&T Wireless,
Lafayette Communications Company L.L.C. ("Lafayette") and ABC Wireless L.L.C.
("ABC") whereby the Company, AT&T Wireless and Lafayette would lend $29,500,000
to ABC to fund its participation in the re-auction of Federal Communications
Commission licenses that were returned to the Federal Communications Commission
by various companies under the July 1998 reconsideration order. The Company's
portion of this loan was $7,500,000 and was recorded in Other Assets.
Subsequent to closing of the agreements, ABC was the successful bidder for
licenses covering the Tritel markets with an aggregate purchase price of
$7,789,000. The Company has agreed, subject to Federal Communications
Commission approval, to purchase these licenses for $7,789,000. If the licenses
are not purchased by March 1, 2004, the note will mature on that date. The note
has a stated interest rate of 16% per year. There are no required payments of
principal or interest on the note until maturity. The note is secured by all
assets of ABC, including, if permitted by the Federal Communications
Commission, the Federal Communications Commission licenses awarded in the re-
auction, and ranks pari passu with the notes to AT&T Wireless and Lafayette.
(7) INCOME TAXES
On January 7, 1999 the Company recorded a deferred tax liability of
$55,100,000 primarily related to the difference in asset bases on the assets
acquired from AT&T Wireless.
Because the Predecessor Company was a nontaxable entity, the results
presented below relate solely to the year ended December 31, 1999. Components
of income tax benefit for the year ended December 31, 1999 are as follows:
For the Year Ended
December 31, 1999
--------------------------
Current Deferred Total
------- -------- --------
(dollars in thousands)
Federal.......................................... $-- $(24,725) $(24,725)
State............................................ -- (3,718) (3,718)
---- -------- --------
Total.......................................... $-- $(28,443) $(28,443)
==== ======== ========
F-66
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Actual tax benefit differs from the "expected" tax benefit using the federal
corporate rate of 35% as follows:
December 31, 1999
-----------------
(dollars in
thousands)
Computed "expected" tax benefit........................... $(96,564)
Reduction (increase) resulting from:
Change in valuation allowance for deferred tax assets..... 1,020
Nondeductible compensation related expense................ 68,308
Nontaxable loss of Predecessor Company.................... 780
Nondeductible portion of discount accretion............... 557
State income taxes, net of federal tax benefit............ (2,496)
Other..................................................... (48)
--------
$(28,443)
========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax liability at December 31, 1999 are as follows:
December 31, 1999
-----------------
(dollars in
thousands)
Deferred tax assets:
Net operating loss carryforward........................ $25,232
Tax basis of capitalized start-up costs in excess of
book basis............................................ 11,533
Discount accretion in excess of tax basis.............. 5,700
Tax basis of property and equipment in excess of book
basis................................................. 1,865
Other.................................................. 785
-------
Total gross deferred tax assets.......................... 45,115
Less: valuation allowance.............................. (1,020)
-------
Net deferred tax assets.................................. 44,095
-------
Deferred tax liabilities:
Intangible assets book basis in excess of tax basis.... $22,646
Federal Communications Commission licenses book basis
in excess of tax basis................................ 32,245
Capitalized interest book basis in excess of tax
basis................................................. 12,779
Discount accretion book basis in excess of tax basis... 2,130
-------
Total gross deferred tax liabilities................. 69,800
-------
Net deferred tax liability........................... $25,705
=======
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of $65,965,000 which are available to offset future
federal taxable income, if any, through 2019.
F-67
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
The valuation allowance for the gross deferred tax asset at December 31,
1999 was $1,020,000. No valuation allowance has been provided for the remaining
gross deferred tax asset principally due to the existence of a deferred tax
liability which was recorded upon the closing of the AT&T Wireless transaction
on January 7, 1999. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the period in
which those temporary differences become deductible. Management considered the
scheduled reversal of deferred tax liabilities in making this assessment. Based
upon anticipated future taxable income over the periods in which the deferred
tax assets are realizable, management believes it is more likely than not the
Company will realize the benefits of these deferred tax assets.
(8) NOTES PAYABLE AND LONG-TERM DEBT
A summary of long-term debt is as follows:
December 31,
---------------- June 30,
1998 1999 2000
------- -------- -----------
(dollars in
thousands) (unaudited)
Bank facility.................................. $ -- $300,000 $300,000
Senior Subordinated Discount Notes............. -- 216,734 230,497
Federal Communications Commission debt......... 51,599 41,905 41,941
------- -------- --------
51,599 558,639 572,438
Less current maturities........................ -- (923) (974)
------- -------- --------
$51,599 $557,716 $571,464
======= ======== ========
Bank Facility
During 1999, the Company entered into a loan agreement (the "Bank
Facility"), which provides for (i) a $100,000,000 senior secured term loan (the
"Term Loan A"), (ii) a $200,000,000 senior secured term loan (the "Term Loan
B") and (iii) a $250,000,000 senior secured reducing revolving credit facility
(the "Revolver"). Tritel PCS Inc., Toronto Dominion (Texas), Inc., as
Administrative Agent, and certain banks and other financial institutions are
parties thereto.
The commitment to make loans under the Revolver automatically and
permanently reduces, quarterly beginning on December 31, 2002. The quarterly
reductions in the commitment are $6.25 million on December 31, 2002, $7.4
million for each quarter in 2003, $11.3 million for each quarter in 2004, $13.3
million for each quarter in 2005, $16.0 million for each quarter in 2006, and
$25.8 million for the first two quarters of 2007.
Interest on the Revolver, Term Loan A and Term Loan B accrues, at the
Company's option, either at a LIBOR rate plus an applicable margin or the
higher of the issuing bank's prime rate and the Federal Funds Rate (as defined
in the Bank Facility) plus 0.5%, plus an applicable margin. The borrowings
outstanding at June 30, 2000 carried a 10.89% average interest rate as of that
date. The Revolver requires an annual commitment fee ranging from 0.50% to
1.75% of the unused portion of the Bank Facility.
The Bank Facility also required the Company to purchase an interest rate
hedging contract covering an amount equal to at least 50% of the total amount
of the outstanding indebtedness of the Company (other than indebtedness which
bears interest at a fixed rate). In May 1999, Tritel entered into such interest
rate hedging contracts which are further described in Note 9.
F-68
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
The Term Loans are required to be prepaid and commitments under the
Revolving Bank Facility reduced in an aggregate amount equal to 50% of excess
cash flow of each fiscal year commencing with the fiscal year ending December
31, 2001; 100% of the net proceeds of asset sales, in excess of a yearly
threshold, outside the ordinary course of business or unused insurance
proceeds; and 50% of the net cash proceeds of issuances of equity by Tritel PCS
or its subsidiaries.
All obligations of the Company under the facilities are unconditionally and
irrevocably guaranteed by Tritel and all subsidiaries of Tritel PCS. The bank
facilities and guarantees, and any related hedging contracts provided by the
lenders under the Bank Facility, are secured by substantially all of the assets
of Tritel PCS and certain subsidiaries of Tritel PCS, including a first
priority pledge of all of the capital stock held by Tritel or any of its
subsidiaries, but excluding the Company's PCS licenses. The PCS licenses will
be held by one or more single purpose subsidiaries of the Company and, in the
future if the Company is permitted to pledge its PCS licenses, they will be
pledged to secure the obligations of the Company under the Bank Facility.
The Bank Facility contains covenants customary for similar facilities and
transactions, including covenants relating to the amounts of indebtedness that
the Company may incur, limitations on dividends and distributions on, and
redemptions and repurchases of, capital stock and other similar payments and
various financial maintenance covenants. The Bank Facility also contains
covenants relating to the population covered by the Company's network and
number of customers, as well as customary representations, warranties,
indemnities, conditions precedent to borrowing, and events of default.
Loans under the Bank Facility are available to fund capital expenditures
related to the construction of the Company's PCS network, the acquisition of
related businesses, working capital needs of the Company, and customer
acquisition costs. All indebtedness under the Bank Facility will constitute
senior debt.
The terms of the Bank Facility allow the Company to incur senior
subordinated debt with gross proceeds of not more than $250,000,000.
As of June 30, 2000, the Company has drawn $300,000,000 of advances under
Term Loan A and Term Loan B.
Senior Subordinated Discount Notes
On May 11, 1999, Tritel PCS, Inc. ("Tritel PCS"), a wholly-owned subsidiary
of the Company, issued unsecured senior subordinated discount notes with a
principal amount at maturity of $372,000,000. Such notes were issued at a
discount from their principal amount at maturity for proceeds of $200.2
million. No interest will be paid on the notes prior to May 15, 2004.
Thereafter, Tritel PCS will be required to pay interest semiannually at 12 3/4%
per annum beginning on November 15, 2004 until maturity of the notes on May 15,
2009.
The notes are fully unconditionally guaranteed on a joint and several basis
by the Company and by Tritel Communications, Inc. and Tritel Finance, Inc.,
both of which are wholly-owned subsidiaries of Tritel PCS. (See Note 20.) The
notes are subordinated in right of payment to amounts outstanding under the
Company's Bank Facility and to any future subordinated indebtedness of Tritel
PCS or the guarantors.
The indenture governing the notes limit, among other things, the Company's
ability to incur additional indebtedness, pay dividends, sell or exchange
assets, repurchase its stock, or make investments.
F-69
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Federal Communications Commission Debt
The Federal Communications Commission provided below market rate financing
for 90% of the bid price of the C-Block PCS licenses and 80% of the bid price
of the F-Block PCS licenses. Such Federal Communications Commission debt is
secured by all of the Company's rights and interest in the licenses financed.
The debt incurred in 1996 by the Company for the purchase of the C-Block PCS
licenses totaled $63,890,000 (undiscounted). The debt bears interest at 7%;
however, based on the Company's estimate of borrowing costs for similar debt, a
rate of 10% was used to determine the debt's discounted present value of
$52,700,000. As discussed in Note 4, the Company elected to disaggregate and
return one-half of the broadcast spectrum of the C-block licenses. The Federal
Communications Commission permitted such spectrum to be returned effective as
of the original purchase. As a result, the Company reduced the discounted debt
due to the Federal Communications Commission for such licenses by $27,410,000.
F-Block licenses were granted in 1997. The debt incurred by the Company for
the purchase of such licenses totaled $28,167,000 (undiscounted). The debt
bears interest at 6.125%, however; based on the Company's estimate of borrowing
costs for similar debt, a rate of 10% was used to determine the debt's
discounted present value of $23,116,000.
In the acquisition of Central Alabama Partnership, LP 132 on January 7,
1999, the Company assumed debt of $6,072,000 payable to the Federal
Communications Commission for the licenses acquired.
Additionally, certain licenses and the related Federal Communications
Commission debt for those licenses were retained by the Predecessor Company.
The discounted carrying amount of the debt for the licenses retained by the
Predecessor Company was $15,889,000.
All the scheduled interest payments on the Federal Communications Commission
debt were suspended for the period from January 1997 through March 1998 by the
Federal Communications Commission. Payments of such suspended interest resumed
in July 1998 with the total suspended interest due in eight quarterly payments
through April 30, 2000. The Company is required to make quarterly principal and
interest payments on the Federal Communications Commission debt.
Notes Payable
At December 31, 1998, the Company had $22,100,000 payable under a
$28,500,000 loan agreement with a supplier. The loan agreement was secured by a
pledge of the membership equity interests of certain members of Predecessor
Company management and the interest rate was 9%. Amounts outstanding under this
loan agreement were repaid in January 1999.
At December 31, 1998, the Predecessor Company had a $1,000,000 line of
credit with a commercial bank, that expired July 27, 1999 bearing interest at
the bank's prime rate of interest plus 1% at December 31, 1998. The amount
outstanding on the line of credit was $305,000 at December 31, 1998. This line
of credit related specifically to licenses that were retained by the
Predecessor Company. Amounts outstanding under this loan agreement were repaid
in January 1999.
F-70
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Notes Payable to Related Party
In March 1997, the Predecessor Company entered into a loan agreement for a
$5,700,000 long-term note payable to Southern Farm Bureau Life Insurance
Company ("SFBLIC"). SFBLIC was a member of Mercury Southern, LLC, which was a
member of the Predecessor Company. This note was secured by a pledge of the
membership equity interests of certain members of Predecessor Company
management and interest accrued annually at 10% on the anniversary date of the
note. At December 31, 1998, the balance of the note was $6,270,000 as a result
of the capitalization of the first year's interest. The indebtedness under the
note was convertible into equity at the face amount at any time at the option
of SFBLIC, subject to Federal Communications Commission equity ownership
limitations applicable to entrepreneurial block license holders. The
Predecessor Company and SFBLIC subsequently negotiated a revised arrangement
under which the amount due of $6,270,000 plus accrued interest of $476,000 was
not paid but instead was converted into $8,976,000 of members' equity in the
Predecessor Company on January 7, 1999. The $2,230,000 preferred return to the
investor was accounted for as a financing cost during the year ended December
31, 1999. The interest accrued at the contractual rate was capitalized during
the accrual period.
As of December 31, 1999, the following is a schedule of future minimum
principal payments of the Company's long-term debt due within five years and
thereafter:
December 31, 1999
-----------------
(dollars in
thousands)
December 31, 2000.......................................... $ 923
December 31, 2001.......................................... 1,004
December 31, 2002.......................................... 5,567
December 31, 2003.......................................... 23,548
December 31, 2004.......................................... 30,483
Thereafter................................................. 657,950
---------
719,475
Less unamortized discount.................................. (160,836)
---------
Total...................................................... $ 558,639
=========
(9) INTEREST RATE SWAP AGREEMENTS
As of December 31, 1999 and June 30, 2000, the Company was a party to
interest rate swap agreements with a total notional amount of $200 million. The
agreements establish a fixed effective rate of 9.05% on $200.0 million of the
current balance outstanding under the Bank Facility through the earlier of
March 31, 2002 or the date on which the Company achieves operating cash flow
breakeven.
(10) REDEEMABLE PREFERRED STOCK
Series A Preferred Stock
The series A preferred stock, with respect to dividend rights and rights on
liquidation, dissolution or winding up, ranks on a parity basis with the series
B preferred stock, and ranks senior to series C preferred stock, series D
preferred stock and common stock. The holders of series A preferred stock are
entitled to receive cumulative quarterly cash dividends at the annual rate of
10% multiplied by the liquidation preference,
F-71
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
which is equal to $1,000 per share plus declared but unpaid dividends. Tritel
may elect to defer payment of any such dividends until the date on which the
42nd quarterly dividend payment is due, at which time, and not earlier, all
deferred payments must be made. Except as required by law or in certain
circumstances, the holders of the series A preferred stock do not have any
voting rights. The series A preferred stock is redeemable, in whole but not in
part, at the option of Tritel on or after January 15, 2009 and at the option of
the holders of the series A preferred stock on or after January 15, 2019.
Additionally, on or after January 15, 2007, AT&T Wireless, and qualified
transferees, have the right to convert each share of series A preferred stock
into shares of class A common stock. The number of shares the holder will
receive upon conversion will be the liquidation preference per share divided by
the market price of class A common stock times the number of shares of series A
preferred stock to be converted.
The Company issued 90,668 shares of series A preferred stock with a stated
value of $90,668,000 to AT&T Wireless on January 7, 1999.
Series B Preferred Stock
The series B preferred stock ranks on a parity basis with the series A
preferred stock and is identical in all respects to the series A preferred
stock, except:
. the series B preferred stock is redeemable at any time at the option of
Tritel,
. the series B preferred stock is not convertible into shares of any other
security issued by Tritel, and
. the series B preferred stock may be issued by Tritel pursuant to an
exchange event as defined in the Restated Certification of
Incorporation.
No series B preferred stock has been issued by the Company.
(11) STOCKHOLDERS' EQUITY
The Predecessor Companies were organized as limited liability corporations
(LLC) and as such had no outstanding stock. Owners (members) actually held a
membership interest in the LLC. As a result, the investment of those members in
the Predecessor Companies is reflected as contributed capital--Predecessor
Company in the accompanying balance sheet.
On January 7, 1999, the Company issued stock to the Predecessor Company as
well as other parties as described herein.
Preferred Stock
Following is a summary of the preferred stock of the Company:
3,100,000 shares of authorized preferred stock, par value $.01 per share
(the "preferred stock"), 1,100,000 of which have been designated as follows:
. 200,000 shares designated "Series A Convertible Preferred Stock" (the
"series A preferred stock"), 10% redeemable convertible, $1,000 stated
and liquidation value (See Note 10);
. 300,000 shares designated "Series B Preferred Stock" (the "series B
preferred stock"), 10% cumulative, $1,000 stated and liquidation value
(See Note 10);
F-72
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
. 500,000 shares designated "Series C Convertible Preferred Stock" (the
"series C preferred stock"), 6.5% cumulative convertible, $1,000 stated
and liquidation value; and
. 100,000 shares designated "Series D Convertible Preferred Stock" (the
"series D preferred stock"), 6.5% cumulative convertible, $1,000 stated
and liquidation value.
Series C Preferred Stock
Series C preferred stock (1) ranks junior to the series A preferred stock
and the series B preferred stock with respect to dividend rights and rights on
liquidation, dissolution or winding up, (2) ranks junior to the series D
preferred stock with respect to rights on a statutory liquidation, (3) ranks on
a parity basis with the
series D preferred stock with respect to rights on liquidation, dissolution or
winding up, except a statutory liquidation, (4) ranks on a parity basis with
series D preferred stock and common stock with respect to dividend rights, and
(5) ranks senior to the common stock and any other series or class of the
Company's common or preferred stock, now or hereafter authorized, other than
series A preferred stock, series B preferred stock or series D preferred stock,
with respect to rights on liquidation, dissolution and winding up.
Holders of series C preferred stock are entitled to dividends in cash or
property when, as and if declared by the Board of Directors of Tritel. Upon any
liquidation, dissolution or winding up of Tritel, holders of series C preferred
stock are entitled to receive, after payment to any stock ranking senior to the
series C preferred stock, a liquidation preference equal to (1) the quotient of
the aggregate paid-in-capital of all series C preferred stock held by a
stockholder divided by the total number of shares of series C preferred stock
held by that stockholder plus (2) declared but unpaid dividends on the series C
preferred stock, if any, plus (3) an amount equal to interest on the invested
amount at the rate of 6 1/2% per annum, compounded quarterly. The holders of
the series C preferred stock have the right at any time to convert each share
of series C preferred stock, and upon the initial public offering in December
1999, each share of series C preferred stock automatically converted into
shares of class A common stock of and class D common stock. The number of
shares the holder received upon conversion was determined by dividing the
aforementioned liquidation preference by the conversion price in effect at the
time of $2.50. On all matters to be submitted to the stockholders of Tritel,
the holders of series C preferred stock shall have the right to vote on an as-
converted basis as a single class with the holders of the common stock.
Additionally, the affirmative vote of the holders of a majority of the series C
preferred stock is required to approve certain matters. The series C preferred
stock is not redeemable.
The Company issued 18,262 shares of series C preferred stock with a stated
value of $18,262,000 to the Predecessor Company on January 7, 1999 in exchange
for certain of its assets, liabilities and continuing operations. The stock was
recorded at the historical cost of the assets and liabilities acquired from the
Predecessor Company since, for accounting purposes, this transaction was
accounted for as a reorganization of the Predecessor Company into a C
corporation and a name change to Tritel.
The Company also issued 14,130 shares of series C preferred stock with a
stated value of $14,130,000 to the Predecessor Company on January 7, 1999 in
exchange for cash of $14,130,000. In the same transaction, the Company also
issued 149,239 shares of series C preferred stock with a stated value of
$149,239,000 to investors on January 7, 1999 in exchange for cash. The stock
was recorded at its stated value and the costs associated with this transaction
have been offset against equity.
Additionally, the Company issued 2,602 shares of series C preferred stock
with a stated value of $2,602,000 to Central Alabama Partnership, LP 132 on
January 7, 1999 in exchange for its net assets. The stock was recorded at its
stated value and the assets and liabilities were recorded at estimated fair
values.
F-73
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
All of the series C preferred stock outstanding converted into 73,349,620
shares of class A and 4,962,804 shares of class D common stock upon the closing
of the initial public offering on December 13, 1999.
Series D Preferred Stock
The series D preferred stock (1) ranks junior to the series A preferred
stock and the series B preferred stock with respect to dividend rights and
rights on liquidation, dissolution or winding up, (2) ranks senior to the
series C preferred stock with respect to rights on a statutory liquidation, (3)
ranks on a parity basis with series C preferred stock with respect to rights on
liquidation, dissolution and winding up, except a statutory liquidation, (4)
ranks on a parity basis with series C preferred stock and common stock with
respect to dividend
rights, and (5) ranks senior to the common stock and any other series or class
of Tritel's common or preferred stock, now or hereafter authorized, other than
series A preferred stock, series B preferred stock or series C preferred stock,
with respect to rights on liquidation, dissolution and winding up. Subject to
the preceding sentence, the series D preferred stock is identical in all
respects to the series C preferred stock, except:
. the series D preferred stock is convertible into an equivalent number of
shares of series C preferred stock at any time. This stock is then
convertible to common stock at the conversion rate of the original
series C preferred stock set forth on the date of the initial public
offering, or 18,463,121 shares of class A common stock and 1,249,207
shares of class D common stock;
. the liquidation preference for series D preferred stock equals $1,000
per share plus declared but unpaid dividends plus an amount equal to
interest on $1,000 at the rate of 6 1/2% per annum, compounded
quarterly, from the date of issuance of such share to and including the
date of the payment;
. the holders of series D preferred stock do not have any voting rights,
other than those required by law or in certain circumstances; and
. shares of series D preferred stock are not automatically convertible
upon an initial public offering of the Company's stock.
The Company issued 46,374 shares of series D preferred stock with a stated
value of $46,374,000 to AT&T Wireless on January 7, 1999.
Common Stock
Following is a summary of the common stock of the Company:
. 1,016,000,009 shares of common stock, par value $.01 per share (the
"common stock "), which have been designated as follows:
. 500,000,000 shares designated "Class A Voting Common Stock" (the "class
A common stock"),
. 500,000,000 shares designated "Class B Non-Voting Common Stock" (the
"class B common stock"),
. 4,000,000 shares designated "Class C Common Stock" (the "class C common
stock "),
. 12,000,000 shares designated "Class D Common Stock" (the "class D common
stock ") and
. nine shares designated "Voting Preference Common Stock" (the "voting
preference common stock ")
The common stock of Tritel is divided into two groups, the "non-tracked
common stock," which is comprised of the class A common stock, the class B
common stock and the voting preference common stock, and the "tracked common
stock," which is comprised of the class C common stock and class D common
stock.
F-74
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Each share of common stock is identical, and entitles the holder thereof to the
same rights, powers and privileges of stockholders under Delaware law, except:
. dividends on the tracked common stock track the assets and liabilities
of Tritel C/F Holding Corp., a subsidiary of Tritel;
. rights on liquidation, dissolution or winding up of Tritel of the
tracked common stock track the assets and liabilities of Tritel C/F
Holding Corp.;
. the class A common stock, together with the series C preferred stock,
has 4,990,000 votes, the class B common stock has no votes, the class C
common stock has no votes, the class D common stock has no votes and the
voting preference common stock has 5,010,000 votes, except that in any
matter requiring a separate class vote of any class of common stock or a
separate vote of two or more classes of common stock voting together as
a single class, for the purposes of such a class vote, each share of
common stock of such classes will be entitled to one vote per share;
. in the event the Federal Communications Commission indicates that the
class A common stock and the voting preference stock (1) may be voted as
a single class on all matters, (2) may be treated as a single class for
all quorum requirements and (3) may have one vote per share, then,
absent action by the Board of Directors and upon an affirmative vote of
66 2/3% or more of the class A common stock, Tritel must seek consent
from the Federal Communications Commission to permit the class A common
stock and the voting preference common stock to vote and act as a single
class in the manner described above;
. the holders of shares of class B common stock shall be entitled to vote
as a separate class on any amendment, repeal or modification of any
provision of the restated certificate of incorporation that adversely
affects the powers, preferences or special rights of the holders of the
class B common stock;
. each share of class B common stock may be converted, at any time at the
holder's option, into one share of class A common stock;
. each share of class A common stock may be converted, at any time at the
holder's option, into one share of class B common stock; and
. in the event the Federal Communications Commission indicates that it
will permit the conversion of tracked common stock into either class A
common stock or class B common stock, then, absent action by the Board
of Directors and upon an affirmative vote of 66 2/3% or more of the
class A common stock, such conversion will be allowed by Tritel at the
option of the holders of the tracked common stock.
As of December 31, 1999, the Company has issued 10,981,932 shares of class A
common stock, 1,380,448 shares of class C common stock and 6 shares of voting
preference common stock to certain members of management of the Company. The
class A and class C common stock issued to management are restricted shares
subject to repurchase agreements which require the holders to sell to the
Company at a $0.01 repurchase price per share, the number of shares that would
be equal to $2.50 per share on specified "Trigger Dates" including a change of
control, termination of employment, or the seventh anniversary of the
agreement. On the "Trigger Date," the holders must sell to the Company the
number of shares necessary, based on the then current fair value of the stock
based on the average closing price for the most recent ten trading days, to
reduce the number of shares of stock held by an amount equal to the number of
shares then held by the holder times $2.50 per share (in essence, requiring the
holders to pay $2.50 per share for their shares of stock). Also, in the event
the Company does not meet certain performance measurements, certain members of
management will be required to sell to the Company a fixed number of shares at
$0.01 per share.
F-75
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Based on the terms of the repurchase agreement, this plan is being accounted
for as a variable stock plan. Accordingly, the Company will record Stock-based
Compensation Expense over the vesting period for the difference between the
quoted market price of the Company's stock at each measurement date and the
current fair value of the stock to be repurchased from the individuals.
Subsequent to year end, the Board of Directors approved a plan to modify these
awards to remove the provision that requires management to surrender a portion
of their shares. This modification, which was completed during the second
quarter of 2000, established the measurement date upon which the value of the
awards were fixed. Based on the market price of Tritel's common stock at the
measurement date, Tritel will record additional non-cash compensation expense
related to these shares for the period from 2000 to 2004 of approximately $74.5
million. In addition, Tritel will record a maximum of $26.0 million in cash
compensation expense during the period from 2000 to 2004 to reimburse the
participants for the tax consequences of the modification of these awards.
In conjunction with the Company's agreement with Mr. Sullivan (see Note 17),
the Company agreed to repurchase 1,276,000 shares of the officer's stock at
$0.01 per share and allow the officer to become fully vested in his remaining
1.8 million shares without restriction or repurchase rights. As a result, the
Company recorded $4.5 million as compensation expense and additional paid in
capital. Such amount represents the fair value of the stock at the time of the
agreement without restrictions or repurchase rights.
(12) STOCK OPTION PLANS
In January 1999, the Company adopted a stock option plan for employees and a
stock option plan for non-employee directors.
Tritel's 1999 Stock Option Plan (the "Stock Option Plan") authorizes the
grant of certain tax-advantaged stock options, nonqualified stock options and
stock appreciation rights for the purchase of an aggregate of up to 10,462,400
shares of common stock of Tritel. The Stock Option Plan benefits qualified
officers, employee directors and other key employees of, and consultants to,
Tritel and its subsidiaries in order to attract and retain those persons and to
provide those persons with appropriate incentives. The Stock Option Plan also
allows grants or sales of common stock to those persons. The maximum term of
any stock option to be granted under the Stock Option Plan is ten years. Grants
of options under the Stock Option Plan are determined by the Board of Directors
or a compensation committee designated by the Board.
The exercise price of incentive stock options under the Stock Option Plan
must not be less than the fair market value of the common stock on the grant
date and the exercise price of all other options must not be less that 75% of
such fair market value. The Stock Option Plan will terminate in 2009 unless
extended by amendment.
As of December 31, 1999, 4,585,028 restricted shares and 2,081,422 stock
options with an average exercise price of $18.05 were granted under the Stock
Option Plan. The restricted stock is subject to the repurchase agreements as
discussed in Note 11. The restricted shares will vest in varying percentages,
up to 80% vesting, over five years. The remaining 20% will vest if the Company
meets certain performance benchmarks for development and construction of its
wireless PCS network. Stock options generally vest 25% on each of the first
four anniversaries of the date of the grant. A portion of the stock options
granted to employees in connection with the initial public offering vest 25% on
the thirty-first day after grant and 25% on each of the first three
anniversaries of the date of the grant. The stock options outstanding as of
December 31, 1999 vest 100% upon a change of control.
F-76
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Tritel's 1999 Stock Option Plan for Non-employee Directors (the "Non-
employee Directors Plan") authorizes the grant of certain nonqualified stock
options for the purchase of an aggregate of up to 100,000 shares of common
stock of Tritel. The Non-employee Directors Plan benefits non-employee
directors of Tritel in order to attract and retain those persons and to provide
those persons with appropriate incentives. The maximum term of any stock option
to be granted under the Non-employee Directors Plan is ten years. Grants of
options under the Non-employee Directors are determined by the Board of
Directors.
The exercise price of nonqualified stock options granted under the Non-
employee Directors Plan must not be less than the fair market value of the
common stock on the grant date. The Non-employee Directors Plan will terminate
in 2009 unless extended by amendment.
As of December 31, 1999, 45,000 options with an exercise price of $18 per
share were outstanding under the Non-employee Directors Plan. These options
vest 20% on the date of grant and an additional 20% on each of the first four
anniversaries of the date of the grant and fully vest upon a change of control.
The Company has adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation has
been recognized for the stock options. If compensation cost had been determined
based on the fair value at grant date for awards in 1999 in accordance with
SFAS No. 123, the Company's net loss and net loss per share would have
increased to the pro forma amounts indicated below (dollars in thousands):
Net loss--As reported.................................................. $247,454
Net loss--Pro forma.................................................... 250,608
Net loss per share--As reported........................................ 33.25
Net loss per share--Pro forma.......................................... 33.66
The fair value of each option on the date of grant is estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Expected life........................................................... 5 Years
Risk-free interest rate................................................. 6.16%
Expected volatility..................................................... 56%
Dividend yield.......................................................... 0%
The weighted average fair value of options granted during 1999 was $8.52 per
share. At December 31, 1999, 9,000 options were exercisable.
The following table summarizes information about stock options outstanding
at December 31, 1999:
Exercise Number of Options Remaining
Price Outstanding Contractual Life
-------- ----------------- ----------------
$18.00 2,119,572 10 years
31.69 6,850 10 years
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made pursuant to SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments." Fair value estimates are subject to inherent
F-77
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
limitations. Estimates of fair value are made at a specific point in time,
based on relevant market information and information about the financial
instrument. The estimated fair values of financial instruments are not
necessarily indicative of amounts the Company might realize in actual market
transactions. Estimates of fair value are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates. The carrying amounts at December 31, 1998 and 1999 for cash and
cash equivalents, accounts receivable, notes receivable, accounts payable,
accrued liabilities, notes payable, and variable rate long-term debt are
reasonable estimates of their fair values. The carrying amount of fixed-rate
long-term debt is believed to approximate fair value because such debt was
discounted to reflect market interest rate at inception and such discount is
believed to be approximate for valuation of this debt.
(14) RELATED PARTY TRANSACTIONS
On January 7, 1999, the Company entered into a secured promissory note
agreement under which it agreed to lend up to $2,500,000 to the Predecessor
Company. Interest on advances under the loan agreement is 10% per year. The
interest will compound annually and interest and principal are due at maturity
of the note. The note is secured by the Predecessor Company's ownership
interest in the Company. Any proceeds from the sales of licenses by the
Predecessor Company, net of the repayment of any Federal Communications
Commission debt, are required to be applied to the note balance. If the note
has not been repaid within five years, it will be repaid through a reduction of
the Predecessor Company's interest in the Company based on a valuation of the
Company's stock at that time. The balance of this note at December 31, 1999 was
approximately $2.3 million.
(15)ASSETS AND LIABILITIES RETAINED BY PREDECESSOR COMPANY
Certain assets and liabilities, with carrying amounts of $22,070,000 and
$17,367,000, respectively, principally for certain Federal Communications
Commission licenses and related Federal Communications Commission debt, which
were retained by the Predecessor Company have been reflected in these financial
statements as a distribution to the Predecessor Company. The Predecessor
Company is holding such assets and liabilities but is not currently developing
the PCS markets. Of the assets retained by the Predecessor Company, Tritel was
granted an option to acquire certain PCS licenses for approximately 1.2 million
shares of class A common stock. During May 1999, Tritel notified the
Predecessor Company of its intent to exercise this option. Such licenses will
be transferred to Tritel after approval by the Federal Communications
Commission. Tritel has committed to sell to AT&T Wireless or its designee such
licenses.
F-78
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
(16) LEASES
The Company leases office space, equipment, and co-location tower space
under noncancelable operating leases. Expense under operating leases was
$3,000, $334,000 and $7.2 million for 1997, 1998 and 1999, respectively.
Management expects that in the normal course of business these leases will be
renewed or replaced by similar leases. The leases extend through 2008.
Future minimum lease payments under these leases at December 31, 1999 are as
follows:
(dollars
in
thousands)
----------
2000.............................................................. $13,940
2001.............................................................. 13,846
2002.............................................................. 13,731
2003.............................................................. 13,239
2004.............................................................. 8,955
Thereafter........................................................ 8,881
-------
Total........................................................... $72,592
=======
(17) COMMITMENTS AND CONTINGENCIES
Effective September 1, 1999, Tritel, Inc. and Jerry M. Sullivan entered into
an agreement to redefine Mr. Sullivan's relationship with Tritel, Inc. and its
subsidiaries. Mr. Sullivan has resigned as an officer and a director of Tritel,
Inc. and all of its subsidiaries. Mr. Sullivan will retain the title Executive
Vice President of Tritel, Inc. through December 31, 2001; however, under the
agreement, he is not permitted to represent the Company nor will he perform any
functions for Tritel, Inc. As part of the agreement, Mr. Sullivan will also
receive an annual salary of $225,000 and an annual bonus of $112,500 through
December 31, 2002. Mr. Sullivan became fully vested in 1,800,000 shares of
class A common stock and returned all other shares held by him, including his
voting preference common stock to Tritel, Inc. Accordingly, the Company has
recorded $5.8 million in additional compensation expense during 1999. The $5.8
million was determined pursuant to the settlement of Mr. Sullivan's employment
relationship with the Company, and includes $4.5 million for the grant of
additional stock rights, $225,000 annual salary and $112,500 annual bonus
through December 31, 2002, and other related amounts.
Mr. Sullivan had served as Director, Executive Vice President and Chief
Operating Officer of Tritel, Inc. since 1993. The foregoing agreements
supersede the employment relationship between Tritel, Inc. and Mr. Sullivan
defined by the Management Agreement and Mr. Sullivan's employment agreement.
In December 1998, the Company entered into an acquisition agreement with an
equipment vendor whereby the Company agreed to purchase a minimum of
$300,000,000 of equipment, software and certain engineering services over a
five-year period in connection with the construction of its wireless
telecommunications network. The Company agreed that the equipment vendor would
be the exclusive provider of such equipment during the term of the agreement.
As part of this agreement, the vendor advanced $15,000,000 to the Company at
the closing of the transactions described herein. The $15,000,000 deferred
credit is accounted for as a reduction in the cost of the equipment as the
equipment is purchased.
F-79
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data is as follows:
For the Quarters Ended
---------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------- -------------- ----------------- ------------------
1998 1999 1998 1999 1998 1999 1998 1999
----- ------- ----- ------- ------- -------- ------- ---------
(dollars in thousands except per share data)
Revenues................ $ -- $ -- $ -- $ -- $ -- $ 179 $ -- $ 6,580
Operating loss.......... (763) (7,471) (997) (9,877) (1,390) (21,229) (4,536) (226,911)
Loss before
extraordinary item..... (743) (6,247) (990) (6,655) (1,398) (15,855) (5,200) (218,698)
Net loss................ (743) (6,247) (990) (6,655) (3,812) (15,855) (5,200) (218,698)
Net loss per common
share.................. $ (2.80) $ (2.94) $ (7.41) $ (9.20)
(19) SUPPLEMENTAL CASH FLOW INFORMATION
Six Months
Years Ended December 31, Ended June 30,
------------------------ --------------
1997 1998 1999 1999 2000
------- ------- -------- ------ -------
(unaudited)
(dollars in thousands)
Cash paid for interest, net of amounts
capitalized............................ $ -- $ -- $ 14,362 $5,104 $16,711
Significant non-cash investing and
financing activities:
Long-term debt incurred to obtain
Federal Communications Commission
licenses, net of discount............ 23,116 -- -- -- --
Capitalized interest and discount on
debt................................. 6,799 7,614 10,062 455 2,301
Deposits applied to purchase of
Federal Communications Commission
licenses............................. 5,000 -- -- -- --
Capital expenditures included in
accounts payable..................... -- 5,762 81,913 -- 80,469
Election of Federal Communications
Commission disaggregation option for
return of spectrum:
Reduction in Federal Communications
Commission licensing costs......... -- 35,442 -- -- --
Reduction in accrued interest
payable and long-term debt......... -- 33,028 -- -- --
Preferred stock issued in exchange for
assets and liabilities................. -- -- 156,837 -- --
F-80
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
(20)CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating financial statements as of December
31, 1999 and June 30, 2000 and for the year ended December 31, 1999 and for the
six months ended June 30, 1999 and 2000, are presented for Tritel, Tritel PCS,
those subsidiaries of Tritel PCS who serve as guarantors and those subsidiaries
who do not serve as guarantors of the senior subordinated discount notes.
Condensed Consolidating Balance Sheet
As of December 31, 1999
Tritel
Tritel, PCS, Guarantor NonGuarantor Consolidated
Inc. Inc. Subsidiaries Subsidiaries Eliminations Tritel, Inc.
-------- -------- ------------ ------------ ------------ ------------
(dollars in thousands)
Current assets:
Cash and cash
equivalents.......... $ -- $613,999 $ (4,730) $ -- $ -- $ 609,269
Other current assets.. 2,462 1,407 17,426 -- -- 21,295
Intercompany
receivables.......... 1,799 210,673 -- -- (212,472) --
-------- -------- -------- -------- --------- ----------
Total current
assets............. 4,261 826,079 12,696 -- (212,472) 630,564
Restricted cash......... -- 6,594 -- -- -- 6,594
Property and equipment,
net.................... -- -- 262,343 -- -- 262,343
Licenses and other
intangibles............ 59,508 -- -- 201,946 -- 261,454
Investment in
subsidiaries........... 445,301 73,286 -- -- (518,587) --
Other long term assets.. -- 62,633 82 -- (27,308) 35,407
-------- -------- -------- -------- --------- ----------
Total assets........ $509,070 $968,592 $275,121 $201,946 $(758,367) $1,196,362
======== ======== ======== ======== ========= ==========
Current liabilities:
Accounts payable,
accrued expenses and
other current
liabilities.......... $ 29 $ 1,240 $111,257 $ 1,721 $ -- $ 114,247
Intercompany
payables............. -- -- 196,950 15,522 (212,472) --
-------- -------- -------- -------- --------- ----------
Total current
liabilities........ 29 1,240 308,207 17,243 (212,472) 114,247
Non-current liabilities:
Long-term debt........ -- 516,734 27,121 40,982 (27,121) 557,716
Deferred income taxes
and other............ 22,009 5,318 (20,024) 30,251 (187) 37,367
-------- -------- -------- -------- --------- ----------
Total liabilities... 22,038 523,292 315,304 88,476 (239,780) 709,330
Series A redeemable
convertible preferred
stock.................. 99,586 -- -- -- -- 99,586
-------- -------- -------- -------- --------- ----------
Stockholders' equity
(deficit).............. 387,446 445,300 (40,183) 113,470 (518,587) 387,446
-------- -------- -------- -------- --------- ----------
Total liabilities
and equity......... $509,070 $968,592 $275,121 $201,946 $(758,367) $1,196,362
======== ======== ======== ======== ========= ==========
F-81
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Condensed Consolidating Balance Sheet
As of June 30, 2000
Tritel PCS, Guarantor NonGuarantor Consolidated
Tritel, Inc. Inc. Subsidiaries Subsidiaries Eliminations Tritel, Inc.
------------ ----------- ------------ ------------ ------------ ------------
(Dollars in thousands)
(unaudited)
Current assets:
Cash and cash
equivalents.......... $ -- $358,085 $ (7,512) $ -- $ -- $ 350,573
Other current assets.. 3,756 2,000 39,055 -- -- 44,811
Intercompany
receivables.......... -- 449,808 -- -- (449,808) --
-------- -------- -------- -------- --------- ----------
Total current
assets............. 3,756 809,893 31,543 -- (449,808) 395,384
Restricted cash......... -- 5,487 -- -- -- 5,487
Property and equipment,
net.................... -- -- 415,651 -- -- 415,651
Licenses and other
intangibles............ 56,646 -- -- 202,894 -- 259,540
Investment in
subsidiaries........... 348,281 (12,476) -- -- (335,805) --
Other long term assets.. -- 75,976 410 -- (42,697) 33,689
-------- -------- -------- -------- --------- ----------
Total assets........ $408,683 $878,880 $447,604 $202,894 $(828,310) $1,109,751
======== ======== ======== ======== ========= ==========
Current liabilities:
Accounts payable,
accrued expenses and
other current
liabilities.......... $ 2,010 $ 1,003 $111,355 $ 1,580 $ -- $ 115,948
Intercompany
payables............. 177 -- 432,417 17,214 (449,808) --
-------- -------- -------- -------- --------- ----------
Total current
liabilities........ 2,187 1,003 543,772 18,794 (449,808) 115,948
Non-current liabilities:
Long-term debt........ -- 530,497 42,409 40,967 (42,409) 571,464
Deferred income taxes
and other
liabilities.......... 22,013 (901) (13,213) 30,245 (288) 37,856
-------- -------- -------- -------- --------- ----------
Total liabilities... 24,200 530,599 572,968 90,006 (492,505) 725,268
-------- -------- -------- -------- --------- ----------
Series A redeemable
convertible preferred
stock.................. 104,119 -- -- -- -- 104,119
-------- -------- -------- -------- --------- ----------
Stockholders' equity
(deficit).............. 280,364 348,281 (125,364) 112,888 (335,805) 280,364
-------- -------- -------- -------- --------- ----------
Total liabilities
and equity......... $408,683 $878,880 $447,604 $202,984 $(828,310) $1,109,751
======== ======== ======== ======== ========= ==========
F-82
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 1999
Tritel Guarantor NonGuarantor Consolidated
Tritel, Inc. PCS, Inc. Subsidiaries Subsidiaries Eliminations Tritel, Inc.
------------ --------- ------------ ------------ ------------ ------------
(dollars in thousands)
Revenues................ $ -- $ -- $ 7,974 $1,038 $(2,253) $ 6,759
--------- ------- -------- ------ ------- ---------
Operating Expenses:
Cost of services and
equipment............ -- -- 6,966 -- -- 6,966
Technical operations.. -- -- 18,459 -- -- 18,459
General and
administrative....... 56 45 25,065 2 (2,253) 22,915
Sales and marketing... -- -- 20,404 -- -- 20,404
Stock-based
compensation......... 190,664 -- -- -- -- 190,664
Depreciation and
amortization......... 5,620 -- 6,621 598 -- 12,839
--------- ------- -------- ------ ------- ---------
Total operating
expenses........... 196,340 45 77,515 600 (2,253) 272,247
--------- ------- -------- ------ ------- ---------
Operating loss.......... (196,340) (45) (69,541) 438 -- (265,488)
Interest income......... 170 16,553 255 -- (187) 16,791
Financing cost.......... -- -- (2,230) -- -- (2,230)
Interest expense........ -- (24,924) (233) -- 187 (24,970)
--------- ------- -------- ------ ------- ---------
Income (loss) before
income taxes........... (196,170) (8,416) (71,749) 438 -- (275,897)
Income tax benefit
(expense).............. 2,051 3,135 23,420 (163) -- 28,443
--------- ------- -------- ------ ------- ---------
Net loss................ $(194,119) $(5,281) $(48,329) $ 275 $ -- $(247,454)
========= ======= ======== ====== ======= =========
F-83
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Condensed Consolidating Statement of Operations
For the Six-Months Ended June 30, 1999
Tritel
Tritel, PCS, Guarantor NonGuarantor Consolidated
Inc. Inc. Subsidiaries Subsidiaries Eliminations Tritel, Inc.
-------- -------- ------------ ------------ ------------ ------------
(Dollars in thousands)
(unaudited)
Revenues................ $ -- $ -- $ -- $ -- $ -- $ --
-------- -------- -------- ------ ------- ---------
Operating Expenses
Cost of services and
equipment............ -- -- -- -- -- --
Technical operations.. -- -- 3,946 -- -- 3,946
General and
administrative....... 2 44 7,156 2 -- 7,204
Sales and marketing... -- -- 2,724 -- -- 2,724
Depreciation and
amortization......... 2,829 -- 645 -- -- 3,474
-------- -------- -------- ------ ------- ---------
Total operating ex-
penses............. 2,831 44 14,471 2 -- 17,348
Operating loss........ (2,831) (44) (14,471) (2) -- (17,348)
Interest income....... 77 5,174 81 -- -- 5,332
Financing cost........ -- -- (2,230) -- -- (2,230)
Interest expense...... (5,104) -- -- -- (5,104)
-------- -------- -------- ------ ------- ---------
Income (loss) before
income taxes......... (2,754) 26 (16,620) (2) -- (19,350)
Income tax benefit
(expense).............. 954 (10) 5,504 -- -- 6,448
-------- -------- -------- ------ ------- ---------
Net loss.............. $ (1,800) $ 16 $(11,116) $ (2) $ -- $ (12,902)
======== ======== ======== ====== ======= =========
Condensed Consolidating Statement of Operations
For the Six-Months Ended June 30, 2000
Tritel
Tritel, PCS, Guarantor NonGuarantor Consolidated
Inc. Inc. Subsidiaries Subsidiaries Eliminations Tritel, Inc.
-------- -------- ------------ ------------ ------------ ------------
(Dollars in thousands)
(unaudited)
Revenues................ $ -- $ -- $ 41,307 $3,459 $(3,459) $ 41,307
-------- -------- -------- ------ ------- ---------
Operating Expenses
Cost of services and
equipment............ -- -- 29,111 -- -- 29,111
Technical operations.. -- -- 21,987 -- -- 21,987
General and
administrative....... 3,050 -- 26,834 -- (3,459) 26,425
Sales and marketing... -- -- 28,603 -- -- 28,603
Stock-based
compensation......... 62,111 -- -- -- -- 62,111
Depreciation and
amortization......... 2,861 -- 20,171 1,843 -- 24,875
-------- -------- -------- ------ ------- ---------
Total operating
expenses........... 68,022 -- 126,706 1,843 (3,459) 193,112
-------- -------- -------- ------ ------- ---------
Operating income
(loss)............... (68,022) -- (85,399) 1,616 -- (151,805)
Interest income....... 152 16,831 342 -- (1,433) 15,892
Interest expense...... -- (28,199) (1,447) (2,203) 1,433 (30,416)
-------- -------- -------- ------ ------- ---------
Income (loss) before
income taxes......... (67,870) (11,368) (86,504) (587) -- (166,329)
Income tax benefit...... (4) 112 962 6 -- 1,076
-------- -------- -------- ------ ------- ---------
Net loss................ $(67,874) $(11,256) $(85,542) $ (581) $ -- $(165,253)
======== ======== ======== ====== ======= =========
F-84
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 1999
Tritel PCS, Guarantor NonGuarantor Consolidated
Tritel, Inc. Inc. Subsidiaries Subsidiaries Elimination Tritel, Inc.
------------ ----------- ------------ ------------ ----------- ------------
(dollars in thousands)
Net cash provided by
(used in) operating
activities............. $ (3,648) $ 3,554 $ (50,981) $ -- $ -- $ (51,075)
--------- --------- --------- ------- ----- ---------
Cash flows from
investing activities:
Capital expenditures.. -- -- (172,448) -- -- (172,448)
Advance under notes
receivable........... -- (7,500) (50) -- -- (7,550)
Investment in
subsidiaries......... (376,718) 376,718 -- -- -- --
Capitalized interest
on debt.............. -- -- (3,863) (9,760) -- (13,623)
Decrease in other
assets............... (325) (6,883) -- -- -- (7,208)
--------- --------- --------- ------- ----- ---------
Net cash provided by
(used in) investing
activities:............ (377,043) 362,335 (176,361) (9,760) -- (200,829)
--------- --------- --------- ------- ----- ---------
Cash flows from
financing activities:
Proceeds from long
term debt............ -- 500,240 -- -- -- 500,240
Repayments of notes
payable.............. (22,100) -- -- -- -- (22,100)
Payment of debt
issuance costs and
other deferred
charges.............. (8,507) (30,202) -- -- -- (38,709)
Intercompany
receivable/payable... 4,556 (236,928) 222,612 9,760 -- --
Proceeds from vendor
discount............. -- 15,000 -- -- -- 15,000
Issuance of preferred
stock................ 163,370 -- -- -- -- 163,370
Issuance of common
stock, net........... 242,526 -- -- -- -- 242,526
--------- --------- --------- ------- ----- ---------
Net cash provided by
financing activities:.. 379,845 248,110 222,612 9,760 -- 860,327
--------- --------- --------- ------- ----- ---------
Net increase (decrease)
in restricted cash,
cash and cash
equivalents............ (846) 613,999 (4,730) -- -- 608,423
Cash and cash
equivalents at
beginning of period.... 846 -- -- -- -- 846
--------- --------- --------- ------- ----- ---------
Cash and cash
equivalents at End of
period................. $ -- $ 613,999 $ (4,730) $ -- $ -- $ 609,269
========= ========= ========= ======= ===== =========
F-85
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 1999
Tritel
Tritel, PCS, Guarantor NonGuarantor Consolidated
Inc. Inc. Subsidiaries Subsidiaries Elimination Tritel, Inc
------- -------- ------------ ------------ ----------- ------------
(dollars in thousands)
(unaudited)
Net cash provided by
(used in) operating
activities............. $ (94) $ 880 $(14,946) $ (256) $-- $(14,416)
------- -------- -------- ------ ---- --------
Cash flows from
investing activities:
Capital expenditures.. -- -- (44,687) -- -- (44,687)
Advance under notes
receivable........... -- (7,500) (50) -- -- (7,550)
Investment in
subsidiaries (69,386) 69,386
Increase in restricted
cash................. -- (7,957) -- -- -- (7,957)
Capitalized interest
on debt.............. -- -- (4,271) (1,625) -- (5,896)
Other (325) -- -- -- -- (325)
------- -------- -------- ------ ---- --------
Net cash provided by
(used in) investing
activities: (69,711) 53,929 (49,008) (1,625) -- (66,415)
------- -------- -------- ------ ---- --------
Cash flows from
financing activities:
Proceeds from long
term debt............ -- 400,240 -- -- -- 400,240
Repayments of notes
payable.............. (22,100) -- -- -- -- (22,100)
Payment of debt
issuance costs and
other deferred
charges.............. (22,198) (14,275) -- -- -- (36,473)
Intercompany
receivable/payable... 480 (70,044) 67,683 1,881 -- --
Proceeds from vendor
discount............. -- 15,000 -- -- -- 15,000
Issuance of preferred
stock................ 113,623 -- -- -- -- 113,623
------- -------- -------- ------ ---- --------
Net cash provided by
financing activities: 69,805 330,921 67,683 1,881 -- 470,290
------- -------- -------- ------ ---- --------
Net increase in cash and
cash equivalents....... -- 385,730 3,729 -- -- 389,459
Cash and cash
equivalents at
beginning of period.... -- -- 846 -- -- 846
------- -------- -------- ------ ---- --------
Cash and cash
equivalents at end of
period................. $ -- $385,730 $ 4,575 $ -- $-- $390,305
======= ======== ======== ====== ==== ========
F-86
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Condensed Consolidating Statement of Cash Flows
For the Six-Months Ended June 30, 2000
Tritel, Tritel Guarantor NonGuarantor Consolidated
Inc. PCS, Inc. Subsidiaries Subsidiaries Eliminations Tritel, Inc.
------- --------- ------------ ------------ ------------ ------------
(dollars in thousands)
(unaudited)
Net cash provided by
(used in)
operating activities... $(2,209) $ 1,379 $(84,188) $ -- $ -- $ (85,018)
------- --------- -------- ------- ------ ---------
Cash flows from
investing activities:
Capital expenditures.. -- -- (171,798) -- -- (171,798)
Capitalized interest
on debt.............. -- -- (1,533) (1,272) -- (2,805)
Decrease in restricted
cash................. -- 1,107 -- -- -- 1,107
Other................. -- -- (129) -- -- (129)
------- --------- -------- ------- ------ ---------
Net cash provided by
(used in)
investing activities: -- 1,107 (173,460) (1,272) -- (173,625)
------- --------- -------- ------- ------ ---------
Cash flows from
financing activities:
Repayment of long term
debt................. -- -- -- (449) -- (449)
Payment of debt
issuance costs
and other deferred
charges.............. -- (198) -- -- -- (198)
Intercompany
receivable/payable... 1,615 (258,202) 254,866 1,721 -- --
Payment of stock
issuance costs....... (195) -- -- -- -- (195)
Proceeds from exercise
of
stock options........ 789 -- -- -- -- 789
------- --------- -------- ------- ------ ---------
Net cash provided by
(used in)
financing activities: 2,209 (258,400) 254,866 1,272 -- (53)
------- --------- -------- ------- ------ ---------
Net decrease in cash and
cash equivalents....... -- (255,914) (2,782) -- -- (258,696)
Cash and cash
equivalents at
beginning of period.... -- 613,999 (4,730) -- -- 609,269
------- --------- -------- ------- ------ ---------
Cash and cash
equivalents at end of
period................. $ -- $ 358,085 $ (7,512) $ -- $ -- $ 350,573
======= ========= ======== ======= ====== =========
The condensed combining financial statements for 1998 of Tritel, Inc. and
the Predecessor Companies have been provided below to comply with the current
requirement to show consolidating data for guarantors and non-guarantors for
all periods presented. While Tritel, Inc. and its subsidiaries were formed
during 1998, their only activities in 1998 were the acquisition of property and
equipment approximating $1.5 million and losses totaling $32,000. The assets of
the Predecessor Companies and the assets acquired from AT&T Wireless and
Central Alabama were transferred to Tritel, Inc. and its subsidiaries during
1999. Therefore, the following statements do not correspond with the current
corporate structure and do not show data by guarantor and non-guarantor
relationship to the senior subordinated discount notes.
F-87
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Combining Balance Sheet
As of December 31, 1998
Predecessor
Companies Tritel Eliminations Combined
----------- ------ ------------ --------
(dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents......... $ 845 $ 1 $ -- $ 846
Due from affiliates............... 1,817 -- (1,576) 241
Other current assets.............. 719 -- -- 719
-------- ------ ------- --------
Total current assets............ 3,381 1 (1,576) 1,806
-------- ------ ------- --------
Property and equipment, net......... 12,263 1,553 -- 13,816
Federal Communications Commission
licensing costs.................... 71,466 -- -- 71,466
Other assets........................ 1,933 -- -- 1,933
-------- ------ ------- --------
Total assets.................... $ 89,043 $1,554 $(1,576) $ 89,021
======== ====== ======= ========
LIABILITIES AND MEMBERS' EQUITY
(DEFICIT)
Current liabilities:
Notes payable..................... $ 22,405 $ -- $ -- $ 22,405
Due to affiliates................. -- 1,576 (1,576) --
Accounts payable and accrued ex-
penses........................... 10,496 10 -- 10,506
-------- ------ ------- --------
Total current liabilities......... 32,901 1,586 (1,576) 32,911
-------- ------ ------- --------
Non-current liabilities:
Long-term debt.................... 51,599 -- -- 51,599
Note payable to related party..... 6,270 -- -- 6,270
Other liabilities................. 224 -- -- 224
-------- ------ ------- --------
Total non-current liabilities... 58,093 -- -- 58,093
-------- ------ ------- --------
Total liabilities............... 90,994 1,586 (1,576) 91,004
Contributed capital, net............ 13,497 -- -- 13,497
Deficit accumulated during
development stage.................. (15,448) (32) -- (15,480)
-------- ------ ------- --------
Total members' equity
(deficit)...................... (1,951) (32) -- (1,983)
-------- ------ ------- --------
Total liabilities and members'
equity (deficit)............... $ 89,043 $1,554 $(1,576) $ 89,021
======== ====== ======= ========
F-88
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
Combining Statement of Operations
For the Year Ended December 31, 1998
Predecessor
Companies Tritel Combined
----------- ------- --------
(dollars in thousands)
Revenues........................................ $ -- $ -- $ --
--------- ------- --------
Operating expenses:
Technical operations.......................... 1,918 21 1,939
General and administrative.................... 4,937 10 4,947
Sales and marketing........................... 451 1 452
Depreciation and amortization................. 348 -- 348
--------- ------- --------
7,654 32 7,686
--------- ------- --------
Operating loss.................................. (7,654) (32) (7,686)
Interest income................................. 77 -- 77
Interest expense................................ (722) -- (722)
--------- ------- --------
Loss before extraordinary item.................. (8,299) (32) (8,331)
Loss on return of spectrum...................... (2,414) -- (2,414)
--------- ------- --------
Net loss........................................ $ (10,713) $ (32) $(10,745)
========= ======= ========
Combining Statement of Cash Flows
For the Year Ended December 31, 1998
Predecessor
Companies Tritel Combined
----------- ------- --------
(dollars in thousands)
Net cash used in operating activities........... $ (10,039) $ 1,543 $ (8,496)
--------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment............ (4,428) (1,542) (5,970)
Capitalized interest on debt used to obtain
Federal Communications Commission licenses... (2,905) -- (2,905)
--------- ------- --------
Net cash used in investing activities........... (7,333) (1,542) (8,875)
--------- ------- --------
Cash flows from financing activities:
Proceeds from notes payable to others......... 38,705 -- 38,705
Repayments of notes payable to others......... (21,300) -- (21,300)
Payment of debt issuance costs and other
deferred charges............................. (951) -- (951)
--------- ------- --------
Net cash provided by financing activities....... 16,454 -- 16,454
--------- ------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (918) 1 (917)
Cash and cash equivalents at beginning of year.. 1,763 -- 1,763
--------- ------- --------
Cash and cash equivalents at end of year........ $ 845 $ 1 $ 846
========= ======= ========
Tritel, Inc. was formed during 1998. Therefore, the 1997 combining financial
information is identical to the Consolidated Financial Statements.
F-89
TRITEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information subsequent to December 31, 1999 is unaudited)
(21) SUBSEQUENT EVENT
On February 28, 2000, the Company announced an agreement to merge with
TeleCorp PCS, Inc., headquartered in Arlington, Virginia. This merger is
expected to take place during the second half of 2000 and is a tax-free
exchange of stock with Tritel shareholders receiving 0.76 shares of the new
entity's stock in exchange for each of their Tritel shares. The exchange ratio
is fixed regardless of future stock price movement. This transaction is
expected to be accounted for as a purchase business combination.
On the closing of the merger, AT&T will extend its initial five-year brand
sharing agreement for an additional two years.
F-90
TELECORP PCS, INC.
Description of Unaudited Pro Forma Condensed Combined Financial Statements
The following unaudited pro forma condensed combined financial statements
combine the historical consolidated balance sheets and consolidated statements
of operations of TeleCorp PCS, Inc. (the Company), Tritel, Indus and Airadigm.
These unaudited pro forma financial statements give effect to the merger with
Tritel, referred to as the Merger, the contribution from AT&T, the acquisition
of the common and preferred stock of Indus, the acquisition of additional
wireless properties and assets from Airadigm, referred to as the Contribution,
the exchange with AT&T which includes the acquisition of PCS licenses from ABC
Wireless and Polycell, referred to as the Exchange, the offering of Senior
Subordinated Notes and pro forma inter-company eliminations.
This information was derived from the audited consolidated financial
statements of the Company and Tritel as of and for the year ended December 31,
1999, the unaudited consolidated financial statements of the Company and Tritel
as of and for the six months ended June 30, 2000, and from the unaudited
financial statements of Indus and Airadigm as of December 31, 1999 and June 30,
2000 and for the year ended December 31, 1999 and the six months ended June 30,
2000, respectively. The Company's financial information is only a summary and
should be read in conjunction with the historical consolidated financial
statements and related notes of the Company elsewhere in this document.
Tritel's financial information is only a summary and should be read in
conjunction with their historical financial statements and related notes as
filed on Form 10-K and Form 10-Q with the Securities and Exchange Commission on
March 30, 2000 and August 11, 2000, respectively.
The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1999 and for the six months ended June 30, 2000 assumes
each of the transactions was effected on January 1, 1999. The unaudited pro
forma condensed combined balance sheet as of June 30, 2000, gives effect to
each transaction as if it had occurred on June 30, 2000. The accounting
policies of the Company, Tritel, Indus and Airadigm are substantially
comparable. Certain reclassifications have been made to Tritel's, Indus' and
Airadigm's historical presentation to conform to the Company's presentation.
These reclassifications do not materially impact Tritel's, Indus', or
Airadigm's operations or financial position for the period presented.
The unaudited pro forma condensed combined financial statements are provided
for illustrative purposes only. The companies may have performed differently
had they always been combined. The unaudited pro forma condensed combined
financial statements do not purport to be indicative of the historical results
that would have been achieved had the companies always been combined or the
future results that the combined company will experience.
F-91
TELECORP PCS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 2000
($ in thousands)
(unaudited)
Contribution and Exchange
--------------------------------
Pro forma
TeleCorp Offering Subtotal Indus Airadigm Adjustments Subtotal
---------- -------- ---------- ---------- -------- ----------- ----------
(Note (Note
(Note 1a.) 6.) (Note 1c.) 1d.) (Note 3.)
Assets
Current assets:
Cash and cash
equivalents..... $ 28,223 $437,000 $ 465,223 $ 548 $ 1,170 $ (20,656) 3d.(i) $ 446,285
Accounts
receivable,
net............. 36,514 -- 36,514 -- 647 -- 37,161
Other current
assets.......... 26,948 13,000 39,948 660 745 (1,405) 3d.(ii) 39,948
--------- -------- ---------- -------- -------- --------- ----------
Total current
assets.......... 91,685 450,000 541,685 1,208 2,562 (22,061) 523,394
Property and
equipment, net.. 531,034 -- 531,034 962 39,386 (102,954) 3d.(iii) 468,428
PCS licenses and
microwave
relocation
costs, net...... 277,275 -- 277,275 69,883 78,288 631,927 3d.(iv) 1,057,373
Intangible
assets, net..... 34,330 -- 34,330 -- -- 294,133 3d.(v) 328,463
Other assets.... 32,273 -- 32,273 1,123 -- (1,123) 3d.(vi) 32,273
Goodwill........ -- -- -- -- -- -- --
--------- -------- ---------- -------- -------- --------- ----------
Total assets.... $ 966,597 $450,000 $1,416,597 $ 73,176 $120,236 $ 799,922 $2,409,931
========= ======== ========== ======== ======== ========= ==========
Liabilities,
mandatorily
redeemable
preferred stock
and stockholders'
equity (deficit)
Current
liabilities:
Accounts payable
and accrued
liabilities..... $ 117,530 $ -- $ 117,530 $ 496 $ 8,106 $ (8,106) 3d.(vii) $ 118,026
Other current
liabilities..... 26,145 -- 26,145 14,772 32,583 (32,583) 3d.(viii) 40,917
Current portion
of long-term
debt............ 1,415 -- 1,415 -- 6,232 4,053 3d.(ix) 11,700
--------- -------- ---------- -------- -------- --------- ----------
Total current
liabilities..... 145,090 -- 145,090 15,268 46,921 (36,636) 170,643
Long-term debt.. 728,129 450,000 1,178,129 91,759 157,618 (110,928) 3d.(x) 1,316,578
Microwave
relocation
obligation...... 8,128 -- 8,128 -- -- -- 8,128
Other long term
liabilities..... 9,538 -- 9,538 1,643 2,708 97,982 3d.(xi) 111,871
--------- -------- ---------- -------- -------- --------- ----------
Total
liabilities..... 890,885 450,000 1,340,885 108,670 207,247 (49,582) 1,607,220
--------- -------- ---------- -------- -------- --------- ----------
Mandatorily
redeemable
preferred stock,
net............. 279,128 -- 279,128 -- -- -- 279,128
--------- -------- ---------- -------- -------- --------- ----------
Stockholders'
equity (deficit)
Preferred
stock........... 149 -- 149 450 -- (450) 3d.(xii) 149
Common stock,
net of
subscriptions
receivable...... 313,806 -- 313,806 25,426 10,011 338,370 3d.(xiii) 687,613
Deferred
compensation.... (32,999) -- (32,999) -- -- -- (32,999)
Accumulated
deficit......... (484,372) -- (484,372) (61,370) (97,022) 511,584 3d.(xiv) (131,180)
--------- -------- ---------- -------- -------- --------- ----------
Total
stockholders'
equity
(deficit)....... (203,416) -- (203,416) (35,494) (87,011) 849,504 523,583
--------- -------- ---------- -------- -------- --------- ----------
Total
liabilities,
mandatorily
redeemable
preferred stock
and
stockholders'
equity
(deficit)....... $ 966,597 $450,000 $1,416,597 $ 73,176 $120,236 $ 799,922 $2,409,931
========= ======== ========== ======== ======== ========= ==========
Merger
---------------------------------
Pro forma
Tritel Adjustments Total
----------- --------------------- -----------
(Note 1b.) (Note 2.)
Assets
Current assets:
Cash and cash
equivalents..... $ 350,573 $ (38,000) 2r.(i) $ 758,858
Accounts
receivable,
net............. 18,044 -- 55,205
Other current
assets.......... 26,767 -- 66,715
----------- --------------------- -----------
Total current
assets.......... 395,384 (38,000) 880,778
Property and
equipment, net.. 415,651 -- 884,079
PCS licenses and
microwave
relocation
costs, net...... 202,894 2,739,306 2r.(ii) 3,999,573
Intangible
assets, net..... 56,646 426,154 2r.(iii) 811,263
Other assets.... 39,176 (26,010) 2m. 45,439
Goodwill........ -- 2,296,139 2o 2,296,139
----------- --------------------- -----------
Total assets.... $1,109,751 $5,397,589 $8,917,271
=========== ===================== ===========
Liabilities,
mandatorily
redeemable
preferred stock
and stockholders'
equity (deficit)
Current
liabilities:
Accounts payable
and accrued
liabilities..... $ 114,974 $ -- $ 233,000
Other current
liabilities..... -- -- 40,917
Current portion
of long-term
debt............ 974 -- 12,674
----------- --------------------- -----------
Total current
liabilities..... 115,948 -- 286,591
Long-term debt.. 571,464 16,160 2i 1,904,202
Microwave
relocation
obligation...... -- -- 8,128
Other long term
liabilities..... 37,856 1,025,418 2r.(iv) 1,175,145
----------- --------------------- -----------
Total
liabilities..... 725,268 1,041,578 3,374,066
----------- --------------------- -----------
Mandatorily
redeemable
preferred stock,
net............. 104,119 (2,705) 2r.(v) 380,542
----------- --------------------- -----------
Stockholders'
equity (deficit)
Preferred
stock........... 46,374 670,176 2r.(vi) 716,699
Common stock,
net of
subscriptions
receivable...... 749,503 3,218,027 2r.(vii) 4,655,143
Deferred
compensation.... (74,450) 29,450 2r.(viii) (77,999)
Accumulated
deficit......... (441,063) 441,063 1b. (131,180)
----------- --------------------- -----------
Total
stockholders'
equity
(deficit)....... 280,364 4,358,716 5,162,663
----------- --------------------- -----------
Total
liabilities,
mandatorily
redeemable
preferred stock
and
stockholders'
equity
(deficit)....... $1,109,751 $5,397,589 $8,917,271
=========== ===================== ===========
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
F-92
TELECORP PCS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the six months ended June 30, 2000
($ in thousands, except per share data)
(unaudited)
Contribution and Exchange
---------------------------------
Pro forma
TeleCorp Offering Subtotal Indus Airadigm Adjustments Subtotal
------------ -------- --------- ---------- ---------- ----------- ---------
(Note 1a.) (Note 6) (Note 1c.) (Note 1d.) (Note 3)
Revenue:
Service......... $ 88,056 $ -- $ 88,056 $ -- $ 3,733 $ (7,804) 3a.(vii) $ 83,985
Roaming......... 26,151 -- 26,151 -- -- (4,654) 3a.(vii) 21,497
Equipment....... 13,250 -- 13,250 -- 783 (1,783) 3a.(vii) 12,250
------------ -------- --------- ------- -------- -------- ---------
Total revenue... 127,457 -- 127,457 -- 4,516 (14,241) 117,732
------------ -------- --------- ------- -------- -------- ---------
Operating
expenses:
Cost of
revenue......... 40,433 -- 40,433 -- 2,291 (5,320) 3a.(vii) 37,404
Operations and
development..... 25,535 -- 25,535 1,348 -- (4,311) 3a.(vii) 22,572
Selling and
marketing....... 74,766 -- 74,766 119 663 (5,504) 3a.(vii) 70,044
General and
administrative.. 74,347 -- 74,347 373 6,346 (2,050) 3a.(vii) 79,016
Depreciation and
amortization.... 50,383 -- 50,383 947 4,788 (1,030) 3c.(i) 55,088
------------ -------- --------- ------- -------- -------- ---------
Total operating
expenses........ 265,464 -- 265,464 2,787 14,088 (18,215) 264,124
------------ -------- --------- ------- -------- -------- ---------
Operating loss... (138,007) -- (138,007) (2,787) (9,572) 3,974 (146,392)
Other income
(expense):
Interest
expense.......... (34,263) (24,557) (58,820) (4,474) (6,584) (1,344) 3c.(ii) (71,222)
Interest income
and other........ 3,897 -- 3,897 12 (3,745) -- 164
------------ -------- --------- ------- -------- -------- ---------
Loss before
income taxes..... (168,373) (24,557) (192,930) (7,249) (19,901) 2,630 (217,450)
Income tax
benefit.......... -- -- -- -- -- -- --
------------ -------- --------- ------- -------- -------- ---------
Net loss......... (168,373) (24,557) (192,930) (7,249) (19,901) 2,630 (217,450)
Accretion of
mandatorily
redeemable
preferred stock.. (15,889) -- (15,889) -- -- -- (15,889)
------------ -------- --------- ------- -------- -------- ---------
Net loss
attributable to
common
stockholders..... $ (184,262) $(24,557) $(208,819) $(7,249) $(19,901) $ 2,630 $(233,339)
============ ======== ========= ======= ======== ======== =========
Net loss
attributable to
common equity per
share
outstanding--
basic and
diluted.......... $ (1.84)
============
Weighted average
common equity
shares
outstanding--
basic and
diluted.......... 100,414,647
============
Pro forma net
loss attributable
to common equity
per share--basic
and diluted......
Pro forma
weighted average
common equity
shares
outstanding--
basic and
diluted..........
Merger
----------------------------- Inter-
Pro forma Company
Tritel Adjustments Eliminations Total
-------------- -------------- ------------ -------------
(Note 1b.) (Note 2) (Note 4)
Revenue:
Service......... $ 21,435 $ -- $ -- $ 105,420
Roaming......... 15,240 -- (797) 35,940
Equipment....... 4,632 -- -- 16,882
-------------- -------------- ------------ -------------
Total revenue... 41,307 -- (797) 158,242
-------------- -------------- ------------ -------------
Operating
expenses:
Cost of
revenue......... 29,111 -- (797) 65,718
Operations and
development..... 27,712 -- -- 50,284
Selling and
marketing....... 32,014 -- -- 102,058
General and
administrative.. 79,401 11,250 2n. -- 169,667
Depreciation and
amortization.... 24,875 119,701 2q. -- 199,664
-------------- -------------- ------------ -------------
Total operating
expenses........ 193,113 130,951 (797) 587,391
-------------- -------------- ------------ -------------
Operating loss... (151,806) (130,951) -- (429,149)
Other income
(expense):
Interest
expense.......... (30,416) 516 2i. -- (101,122)
Interest income
and other........ 15,892 -- -- 16,056
-------------- -------------- ------------ -------------
Loss before
income taxes..... (166,330) (130,435) -- (514,215)
Income tax
benefit.......... 1,076 -- -- 1,076
-------------- -------------- ------------ -------------
Net loss......... (165,254) (130,435) -- (513,139)
Accretion of
mandatorily
redeemable
preferred stock.. (4,533) -- -- (20,422)
-------------- -------------- ------------ -------------
Net loss
attributable to
common
stockholders..... $ (169,787) $(130,435) $ -- $ (533,561)
============== ============== ============ =============
Net loss
attributable to
common equity per
share
outstanding--
basic and
diluted.......... $ (1.43)
==============
Weighted average
common equity
shares
outstanding--
basic and
diluted.......... 118,451,248
==============
Pro forma net
loss attributable
to common equity
per share--basic
and diluted...... Note 5 $ (2.79)
=============
Pro forma
weighted average
common equity
shares
outstanding--
basic and
diluted.......... Note 5 191,059,489
=============
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
F-93
TELECORP PCS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the year ended December 31, 1999
($ in thousands, except per share data)
(unaudited)
Contribution and Exchange
--------------------------------
Pro forma
TeleCorp Offering Subtotal Indus Airadigm Adjustments Subtotal
---------- -------- --------- ---------- -------- ----------- ---------
(Note
(Note 1a.) (Note 6) (Note 1c.) 1d) (Note 3)
Revenue:
Service.......... $ 41,319 $ -- $ 41,319 $ 339 $ 6,000 $(2,978) 3a.(vii) $ 44,680
Roaming.......... 29,010 -- 29,010 -- -- (5,887) 3a.(vii) 23,123
Equipment........ 17,353 -- 17,353 108 1,701 (1,749) 3a.(vii) 17,413
---------- -------- --------- -------- -------- ------- ---------
Total revenue... 87,682 -- 87,682 447 7,701 (10,614) 85,216
---------- -------- --------- -------- -------- ------- ---------
Operating
expenses:
Cost of
revenue.......... 39,259 -- 39,259 905 5,073 (3,855) 3a.(vii) 41,382
Operations and
development...... 35,979 -- 35,979 -- -- (7,573) 3a.(vii) 28,406
Selling and
marketing........ 71,180 -- 71,180 7,569 1,556 (5,581) 3a.(vii) 74,724
General and
administrative... 92,585 -- 92,585 -- 11,909 (1,905) 3a.(vii) 102,589
Depreciation and
amortization..... 55,110 -- 55,110 4,061 10,253 4,301 3b.(i) 73,725
Restructuring
charges.......... -- -- -- 32,000 -- -- 32,000
---------- -------- --------- -------- -------- ------- ---------
Total operating
expenses........ 294,113 -- 294,113 44,535 28,791 (14,613) 352,826
---------- -------- --------- -------- -------- ------- ---------
Operating loss... (206,431) -- (206,431) (44,088) (21,090) 3,999 (267,610)
Other income
(expense):
Interest
expense.......... (51,313) (49,113) (100,426) (5,944) (12,583) (2,668) 3b.(ii) (121,621)
Interest income
and other........ 6,748 -- 6,748 109 666 -- 7,523
---------- -------- --------- -------- -------- ------- ---------
Loss before
income taxes..... (250,996) (49,113) (300,109) (49,923) (33,007) 1,331 (381,708)
Income tax
benefit.......... -- -- -- 533 -- -- 533
---------- -------- --------- -------- -------- ------- ---------
Net loss......... (250,996) (49,113) (300,109) (49,390) (33,007) 1,331 (381,175)
Accretion of
mandatorily
redeemable
preferred stock.. (24,124) -- (24,124) -- -- -- (24,124)
---------- -------- --------- -------- -------- ------- ---------
Net loss
attributable to
common
stockholders..... $ (275,120) $(49,113) $(324,233) $(49,390) $(33,007) $ 1,331 $(405,299)
========== ======== ========= ======== ======== ======= =========
Net loss
attributable to
common equity per
share
outstanding--
basic and
diluted.......... $ (3.58)
==========
Weighted average
common equity
shares
outstanding--
basic and
diluted.......... 76,895,391
==========
Pro forma net
loss attributable
to common equity
per share--basic
and diluted......
Pro forma
weighted average
common equity
shares
outstanding--
basic and
diluted..........
Merger
--------------------------
Inter-
Pro forma Company
Tritel Adjustments Eliminations Total
----------- -------------- ------------ ------------
(Note 1b.) (Note 2) (Note 4)
Revenue:
Service.......... $ 1,186 $ -- $ -- $ 45,866
Roaming.......... 3,421 -- (2,000) 24,544
Equipment........ 2,152 -- -- 19,565
----------- -------------- ------------ ------------
Total revenue... 6,759 -- (2,000) 89,975
----------- -------------- ------------ ------------
Operating
expenses:
Cost of
revenue.......... 6,966 -- (2,000) 46,348
Operations and
development...... 29,113 -- -- 57,519
Selling and
marketing........ 32,790 -- -- 107,514
General and
administrative... 190,539 22,500 2n. -- 315,628
Depreciation and
amortization..... 12,839 164,862 2p. -- 251,426
Restructuring
charges.......... -- -- -- 32,000
----------- -------------- ------------ ------------
Total operating
expenses........ 272,247 187,362 (2,000) 810,435
----------- -------------- ------------ ------------
Operating loss... (265,488) (187,362) -- (720,460)
Other income
(expense):
Interest
expense.......... (27,200) 712 2i. -- (148,109)
Interest income
and other........ 16,791 -- -- 24,314
----------- -------------- ------------ ------------
Loss before
income taxes..... (275,897) (186,650) -- (844,255)
Income tax
benefit.......... 28,443 -- -- 28,976
----------- -------------- ------------ ------------
Net loss......... (247,454) (186,650) -- (815,279)
Accretion of
mandatorily
redeemable
preferred stock.. (8,918) -- -- (33,042)
----------- -------------- ------------ ------------
Net loss
attributable to
common
stockholders..... $(256,372) $(186,650) $ -- $ (848,321)
=========== ============== ============ ============
Net loss
attributable to
common equity per
share
outstanding--
basic and
diluted.......... $ (33.25)
===========
Weighted average
common equity
shares
outstanding--
basic and
diluted.......... 7,710,649
===========
Pro forma net
loss attributable
to common equity
per share--basic
and diluted...... Note 5 $ (5.06)
============
Pro forma
weighted average
common equity
shares
outstanding--
basic and
diluted.......... Note 5 167,540,233
============
The accompanying notes are an integral part of these unaudited pro forma
condensed combined financial statements.
F-94
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
($'s in thousands, except per share data)
1. Historical Financial Information
1a. Represents the historical consolidated balance sheet and consolidated
statement of operations of TeleCorp.
1b. Represents the historical consolidated balance sheet and consolidated
statement of operations of Tritel adjusted for certain reclassifications that
have been made to conform to TeleCorp's financial statement presentation. These
reclassifications do not materially impact Tritel's results of operations or
financial position.
1c. Represents the historical balance sheet and statement of operations of
Indus adjusted for certain reclassifications that have been made to conform to
TeleCorp's financial statement presentation. These reclassifications do not
materially impact Indus' results of operations or financial position.
1d. Represents the historical balance sheet and statement of operations of
Airadigm adjusted for certain reclassifications that have been made to conform
to TeleCorp's financial statement presentation. These reclassifications do not
materially impact Airadigm's results of operations or financial position.
2. Merger
On February 28, 2000, TeleCorp agreed to merge with Tritel through a merger
of each of TeleCorp and Tritel into a newly formed subsidiary of TeleCorp-
Tritel Holding Company "Holding Company". The merger will result in the
exchange of 100% of the outstanding common and preferred stock of TeleCorp and
Tritel for common and preferred stock of Holding Company. The new entity will
be controlled by TeleCorp's voting preference common stockholders, and TeleCorp
and Tritel will become subsidiaries of Holding Company.
The Merger 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 issued to the former shareholders of Tritel plus cash, the fair value
associated with the conversion of outstanding Tritel stock options, liabilities
assumed, and merger related costs. The fair value of the shares issued will be
determined based on the market price of TeleCorp'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 as determined by a valuation services company. The
excess of the purchase price over the assets acquired will be recorded as
goodwill and amortized over 20 years.
The proposed merger has been unanimously approved by TeleCorp's and Tritel's
board of directors, with three of TeleCorp's 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 unaudited pro forma condensed combined balance sheet and unaudited pro
forma condensed combined statements of operations have been adjusted for the
Merger which includes Holding Company's acquisition of Tritel in exchange for
stock in Holding Company. The Merger will result in an allocation of the
purchase price to the tangible and intangible assets and liabilities of Tritel.
Such allocation reflects the estimated fair value of the assets and liabilities
acquired by Holding Company based upon information available at the date of the
preparation of the accompanying unaudited pro forma condensed combined
financial statements. Such allocations will be adjusted upon the final
determination of such fair values. Management is not aware of any circumstance
that would cause the final purchase price allocation to be significantly
different from that which is reflected in the accompanying pro forma condensed
combined balance sheet. However,
F-95
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands except per share data)
actual valuations and allocation may differ from those reflected herein. The
aggregate purchase price was calculated as follows:
Tritel common shares outstanding--Note 2a......................... 107,005,121
Tritel common stock exchange ratio per share--Note 2b............. 0.76
Equivalent Holding Company trading common shares.................. 81,323,891
Tritel conversion price--Note 2c.................................. $ 47.84
-----------
Subtotal(1)....................................................... $ 3,890,535
-----------
Tritel non-trading common shares outstanding--Note 2d............. 63,432
Tritel common stock exchange ratio per share--Note 2b............. 0.76
Equivalent Holding Company non-trading common shares.............. 48,208
Tritel conversion price--Note 2f.................................. $ 31.10
-----------
Subtotal(2)....................................................... $ 1,499
-----------
Tritel Series A convertible preferred stock outstanding........... 90,668
Tritel Series A convertible preferred stock exchange ratio per
share--Note 2e................................................... 1.00
Equivalent Holding Company convertible preferred shares........... 90,668
Tritel conversion price--Note 2f.................................. $ 1,118.53
-----------
Subtotal(3)....................................................... $ 101,415
-----------
Tritel Series D preferred stock--Note 2g.(4)...................... $ 716,550
-----------
Fair value of Tritel shares exchanged for Holding Company shares
(items (1) through (4)).......................................... $ 4,709,999
Cash consideration--Note 2h.(i)................................... 10,000
Fair value of liabilities of Tritel at June 30, 2000--Note 2i..... 741,428
Option conversion costs--Note 2j.................................. 75,496
Put right--Note 2h.(ii)........................................... 10,000
Merger related costs--Note 2k..................................... 28,000
Assumed deferred tax liability--Note 2l........................... 1,015,418
-----------
Total consideration............................................... $ 6,590,341
Less: Fair value of assets acquired:
Fair value of tangible assets of Tritel--Note 2m.................. $ 824,202
Fair value of PCS licenses--Note 2m............................... 2,942,200
Fair value of AT&T operating agreements--Note 2m.................. 409,200
Fair value of other intangibles--Note 2m.......................... 73,600
Deferred compensation--Note 2n.................................... 45,000
-----------
Goodwill--Note 2o................................................. $ 2,296,139
-----------
2a. Tritel common shares outstanding used for purposes of this pro forma
presentation are as of February 28, 2000, the date of the announcement. The
common shares outstanding of Tritel for purposes of this pro forma include all
shares that will be converted into Holding Company trading Class A common
shares as follows:
Tritel Class A voting common stock............................... 97,798,181
Tritel Class B non voting common stock........................... 2,927,120
Tritel Class C voting/non voting common stock (i)................ 1,366,644
Tritel Class D voting/non voting common stock (ii)............... 4,913,176
-----------
Total Tritel common shares outstanding........................... 107,005,121
===========
F-96
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
(i) The terms of the Merger agreement provide that all of the
outstanding shares of Tritel Class C common stock will be converted into
Holding Company Class A common stock and Holding Company Class E common
stock at a ratio of 1.00 to 0.7524 and 1.00 to 0.0076, respectively. Note
that only the Tritel Class C common shares converted to Holding Company
Class A common stock are included in this chart as they are considered
Holding Company trading common shares. The Tritel Class C common stock
converted into Holding Company Class E common stock are included in the
chart below (2d.) as Holding Company non-trading common stock.
(ii) The terms of the Merger agreement provide that all of the
outstanding shares of Tritel Class D common stock will be converted into
Holding Company Class A common stock and Holding Company Class F common
stock at a ratio of 1.00 to 0.7524 and 1.00 to 0.0076, respectively. Note
that only the Tritel Class D common shares converted to Holding Company
Class A common stock are included in this chart as they are considered
Holding Company non-trading common shares. The Tritel Class D common stock
converted into Holding Company Class F common stock are included in the
chart below (2d.) as Holding Company non- trading common stock.
2b. The terms of the Merger agreement provide that the Tritel exchange ratio
for shares of Holding Company common stock shall be 1.00 to 0.76.
2c. The conversion price is based on TeleCorp's Class A public trading
securities two days before, the day of and two days after the date of the
announcement.
2d. Tritel non-trading common shares outstanding used for purposes of this pro
forma presentation are as of February 28, 2000, the date of the announcement.
The non-trading common shares outstanding of Tritel for purposes of this pro
forma presentation include all shares that will be converted into Holding
Company non-trading common shares and consist of the following:
Tritel Class C voting/nonvoting common stock (i).................... 13,804
Tritel Class D voting/nonvoting common stock (ii)................... 49,628
-------
Total Tritel non-trading common stock outstanding................... 63,432
=======
(i) The terms of the Merger agreement provide that all of the
outstanding shares of Tritel Class C common stock will be converted into
Holding Company Class A common stock and Holding Company Class E common
stock at a ratio of 1.00 to 0.7524 and 1.00 to 0.0076, respectively. Note
that only the Tritel Class C common shares converted to Holding Company
Class E common stock are included in this chart as they are considered
Holding Company non-trading common shares.
(ii) The terms of the Merger agreement provide that all of the
outstanding shares of Tritel Class D common stock will be converted into
Holding Company Class A common stock and Holding Company Class F common
stock at a ratio of 1.00 to 0.7524 and 1.00 to 0.0076, respectively. Tritel
Class D common shares converted to Holding Company Class F common stock are
included in this chart as they are considered Holding Company non-trading
common shares.
2e. The terms of the Merger provide that all of the outstanding Series A
convertible preferred shares of Tritel will be converted into Series B
convertible preferred shares of Holding Company at the exchange rate of 1.00 to
1.00.
2f. The conversion price is based on an independent valuation performed by an
investment banker.
F-97
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands except per share data)
2g. The terms of the agreement provide that all of the outstanding Series D
preferred shares of Tritel will be converted into Series G preferred shares of
Holding Company at the exchange ratio of 1.00 to 0.76. Based on the Holding
Company stockholders agreement, each share of Series G preferred stock can be
immediately converted into 14,971,876 shares of Holding Company Class A common
stock and 9,494 shares of Holding Company Class F common stock. For purposes of
this pro forma presentation the Tritel Series D preferred stock has been valued
based on the number of Holding Company Class A common shares and Holding
Company Class F common shares into which the shares will be ultimately
converted.
Holding Company Holding Company Total value of
Tritel Series D preferred Class A trading Class F non-trading Tritel Series D
stock common stock common stock preferred stock
- ------------------------- --------------- ------------------- ---------------
46,374 shares:
Pro forma shares
converted................ 14,971,876 9,494
Tritel conversion price
(note 2c and note 2f).... $ 47.84 $31.10
----------- ------ --------
$ 716,255 $ 295 $716,550
=========== ====== ========
2h. Tritel voting preference common stock
(i) The terms of the Merger provide that all of the outstanding shares
of Tritel voting preference common stock owned by E. B. Martin, Jr. shall
be converted into and become exchangeable for an aggregate amount of
$10,000 in cash.
(ii) The terms of the Merger provide that all of the outstanding shares
of Tritel voting preference common stock owned by William M. Mounger, II
shall be converted to 3 shares of Holding Company voting preference common
stock. Furthermore, Mr. Mounger received a put right (the "Put Right") to
sell his 3 shares of Holding Company voting preference common stock for
$10,000 at any time after the first anniversary of the closing of the
Merger.
2i. Represents the fair value of Tritel debt, increasing Tritel's historic
balance by $16,160 using TeleCorp's incremental borrowing rate of 11.1% at
February 28, 2000, the date of the announcement. A reduction of interest
expense of $712 was recorded as an adjustment to the unaudited pro forma
condensed combined statement of operations for the year ended December 31, 1999
to reflect the interest expense related to the incremental debt as if the
Merger had occurred on January 1, 1999. A reduction of interest expense of $516
was recorded as an adjustment to the unaudited pro forma condensed combined
statement of operations for the six months ended June 30, 2000 to reflect the
interest expense related to the incremental debt as if the Merger had occurred
on January 1, 1999.
2j. Represents the fair value, based on a Black-Scholes valuation, associated
with the conversion of outstanding Tritel stock options to equivalent stock
options of Holding Company at the time of the agreement based on the number of
Tritel stock options outstanding and the closing market price of TeleCorp as of
February 28, 2000, the date of the announcement. At the closing of the Merger,
each outstanding and unexercised option to purchase shares of Tritel's common
stock will be converted into an option to purchase shares of Holding Company
common stock. The estimated fair value of these options has been recorded as
additional purchase price.
F-98
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
2k. Anticipated costs of the transactions to Holding Company have been included
as additional purchase price and are:
Investment banking fees............................................. $18,000
Legal, accounting and printing fees................................. 8,000
Other costs......................................................... 2,000
-------
Total transaction cost.............................................. $28,000
=======
2l. A deferred tax liability has been recorded for the differences between the
estimated fair value and tax bases of the Tritel assets acquired and
liabilities assumed. The Merger is being accounted for using the purchase
method while for tax purposes, the merger is a tax free business combination.
The effective tax rate reflects TeleCorp's composite federal and state income
tax rate (net of federal tax benefit). The deferred tax liability has been
calculated as follows:
Tax Temporary
Fair value Basis Difference
---------- -------- ----------
Property and equipment.................... $ 415,651 $404,147 $ 11,504
PCS licenses.............................. 2,942,200 90,280 2,851,920
Identifiable intangible assets............ 482,800 26,262 456,538
Long-term debt............................ (571,464) (547,266) (24,198)
Deferred compensation..................... 45,000 -- 45,000
Net operating losses...................... -- 170,183 (170,183)
---------- -------- ----------
Total................................... $3,314,187 $143,606 $3,170,581
========== ========
Effective tax rate........................ 38%
----------
Net deferred tax liability................ $1,204,821
Tritel historical net deferred tax
liability................................ (25,199)
Reversal of TeleCorp historical valuation
allowance................................ (164,204)
----------
Net deferred tax liability related to
merger................................... $1,015,418
==========
2m. The fair value (based on an independent valuation performed by a valuation
services company) of Tritel's PCS licenses, AT&T operating agreements and other
intangible and tangible assets received by Holding Company as part of the
Merger are as follows:
PCS licenses...................................................... $2,942,200
AT&T operating agreements......................................... 409,200
Other assets...................................................... 824,202
Subscriber list................................................... 73,600
----------
Total fair value of assets acquired by Holding Company............ $4,249,202
==========
PCS licenses being acquired have an estimated fair value of $2,942,200. As
Tritel did not commence service in its BTAs until September 1999, a pro forma
adjustment has been made to the unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1999 to record four
months of amortization expense totaling $22,835 on these licenses. A pro forma
adjustment has been made to the unaudited pro forma condensed combined
statement of operations for the three months ended June 30, 2000 to record six
months of amortization expense totaling $34,238 on these licenses.
F-99
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Other assets being acquired have an estimated fair value of $824,202. The
components of this balance are the historical balances at June 30, 2000 of
Tritel's tangible assets as follows:
Cash and cash equivalents....................................... $350,573
Accounts receivable, net ....................................... 14,325
Inventory....................................................... 20,512
Other current assets............................................ 9,975
Restricted cash................................................. 5,487
Property and equipment.......................................... 415,651
Notes receivable................................................ 7,550
Other assets, long term......................................... 129
--------
$824,202
========
TeleCorp's management believes these historical balances at June 30, 2000
approximate fair value. Furthermore, Tritel's historical balance of deferred
financing costs of $26,010 are presented as a pro forma adjustment to reflect
its pro forma fair value of $0.
AT&T operating agreements (Network Membership License, Exclusivity, and
Roaming) being acquired have an estimated fair value of $409,200. The summary
of the characteristics of the AT&T operating agreements historically held by
Tritel and obtained by Holding Company is included in Note 4a. The amortization
of the Network Membership License Agreement will occur over its term of five
years. A pro forma adjustment of $15,400 is included as amortization expense in
the unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1999 to reflect the effect of the Merger as if it had
occurred on January 1, 1999. A pro forma adjustment of $7,700 is included as
amortization expense in the unaudited pro forma condensed combined statement of
operations for the six months ended June 30, 2000 to reflect the effect of the
Merger as if it had occurred on January 1, 1999. The amortization of the
Exclusivity and Roaming Agreements will commence once PCS service is provided
in the related BTAs. As Tritel did not commence service in these BTAs until
September 1999, amortization expense has been recorded on the Exclusivity and
Roaming agreements in the unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1999 for four months totaling
$7,440. Amortization expense has been recorded on the Exclusivity and Roaming
agreements in the unaudited pro forma condensed combined statement of
operations for the six months ended June 30, 2000 for six months totaling
$11,160.
Subscriber list held by Tritel has an estimated fair value of $73,600. The
subscriber list has an estimated life of four years. As Tritel did not commence
service in its BTAs until September 1999, amortization expense has been
recorded on the subscriber list in the unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1999 for four months
totaling $6,133. Amortization expense has been recorded on the subscriber list
in the unaudited pro forma condensed combined statement of operations for the
six months ended June 30, 2000 for six months totaling $9,200.
2n. Represents unvested restricted stock awards granted by Holding Company in
exchange for restricted stock awards held by certain employees of Tritel which
have been included in the purchase price. However, since service is required
subsequent to the consummation date of the merger in order to vest the
replacement restricted stock awards, $45,000 of the intrinsic value of the
unvested awards has been allocated to deferred compensation to be recognized
over a two year period. For the year ended December 31, 1999 and the six months
ended June 30, 2000, $22,500 and $11,250, of compensation has been recorded
respectively.
F-100
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
2o. Goodwill
The goodwill associated with the Merger of $2,296,139 is recorded as a pro
forma adjustment to the unaudited pro forma combined condensed balance sheet as
of June 30, 2000. Amortization of goodwill over a twenty year period results in
a pro forma adjustment of $57,403 in the unaudited pro forma condensed combined
statement of operation for the six months ended June 30, 2000 as if the Merger
occurred on January 1, 1999. Amortization of the December 31, 1999 goodwill of
$2,261,073 results in a pro forma adjustment of $113,054 in the unaudited pro
forma condensed combined statement of operation for the year ended December 31,
1999 as if the merger occurred on January 1, 1999.
2p. Summary of Merger adjustments to the unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1999.
The following table sets forth the depreciation and amortization pro forma
adjustment as presented on the unaudited pro forma condensed combined statement
of operations for the year ended December 31, 1999 related to the Merger:
Pro forma merger adjustment to amortization expense
Amortization of:
PCS licenses.......................................... Note 2m. $ 22,835
Network Membership License agreement.................. Note 2m. 15,400
Exclusivity and Roaming agreements.................... Note 2m. 7,440
Subscriber list....................................... Note 2m. 6,133
Goodwill.............................................. Note 2o. 113,054
--------
$164,862
========
2q. Summary of Merger adjustments to the unaudited pro forma condensed combined
statement of operations for the six months ended June 30, 2000.
The following table sets forth the depreciation and amortization pro forma
adjustment as presented on the unaudited pro forma condensed combined statement
of operations for the three months ended March 31, 2000 related to the Merger:
Pro forma merger adjustment to amortization expense:
PCS licenses.......................................... Note 2m. $ 34,238
Network Membership License agreement.................. Note 2m. 7,700
Exclusivity and Roaming agreements.................... Note 2m. 11,160
Subscriber list....................................... Note 2m. 9,200
Goodwill.............................................. Note 2o. 57,403
--------
$119,701
========
F-101
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
2r. Summary of Merger adjustments to the unaudited pro forma condensed combined
balance sheet at June 30, 2000.
The following tables set forth the summary of pro forma adjustments as
presented on the unaudited pro forma condensed combined balance sheet at June
30, 2000 related to the Merger:
(i) Cash
Pro forma Merger adjustment to cash
Cash consideration....................... Note 2h.(i) $ (10,000)
Transaction related costs................ Note 2k. (28,000)
----------
$ (38,000)
==========
(ii) PCS licenses
Pro forma Merger adjustment to PCS licenses
Fair value............................... Note 2m. $2,942,200
Historic cost of Tritel.................. Note 1b. (202,894)
----------
$2,739,306
==========
(iii) Intangible assets
Pro forma Merger adjustment to intangible
assets
Fair value--AT&T operating agreements.... Note 2m. $ 409,200
Subscriber list.......................... Note 2m. 73,600
Historic cost of Tritel.................. Note 1b. (56,646)
----------
$ 426,154
==========
(iv) Other long term payables
Pro forma Merger adjustment to other long
term payables
Deferred tax liability................... Note 2l. $1,015,418
William M. Mounger II put right.......... Note 2h.(ii) 10,000
----------
$1,025,418
==========
(v) Redeemable preferred stock
Pro forma Merger adjustment to redeemable
preferred stock
Fair value--redeemable preferred stock... Note 2 subtotal(3) $ 101,415
Historic cost of Tritel.................. Note 1b. (104,120)
----------
$ (2,705)
==========
(vi) Preferred stock
Pro forma Merger adjustment to preferred
stock
Fair value--preferred stock.............. Note 2g. $ 716,550
Historic cost of Tritel.................. Note 1b. (46,374)
----------
$ 670,176
==========
(vii) Common stock
Pro forma Merger adjustment to common stock
Fair value--common stock.................. Note 2 subtotal(1) $3,890,535
Fair value--common stock.................. Note 2 subtotal(2) 1,499
Fair value--option conversion cost........ Note 2j. 75,496
Historic cost of Tritel................... Note 1b. (749,503)
----------
$3,218,027
==========
F-102
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
(viii) Deferred compensation
Pro forma Merger adjustment to deferred compensation
Fair value.............................................. Note 2n. $(45,000)
Historic cost of Tritel................................. Note 1b. 74,450
--------
$ 29,450
========
3. Contribution and Exchange
In connection with the Merger, AT&T has agreed to contribute certain assets
and rights to Holding Company (the Contribution). The Contribution will result
in Holding Company acquiring various assets in exchange for the consideration
issued as follows:
Holding Company acquires:
. $20,000 cash from AT&T Wireless Services
. The right to acquire all of the common and preferred stock of Indus.
. The right to acquire additional wireless properties and assets from
Airadigm.
. The two year extension and expansion of the AT&T network membership
license agreement to cover all people in Holding Company's markets.
Consideration issued:
. 9,272,740 shares of Class A common stock of Holding Company formed from
the Tritel merger to AT&T Wireless Services.
Separately, AT&T Wireless and TeleCorp entered into an Asset Exchange
Agreement pursuant to which TeleCorp has agreed to exchange certain assets with
AT&T Wireless, among other consideration. TeleCorp is receiving certain
consideration in exchange for assets as follows:
TeleCorp acquires:
. $80,000 in cash from AT&T Wireless less $5,100 and $6,868 paid to
Polycell and ABC Wireless, respectively, on behalf of TeleCorp by AT&T
Wireless.
. AT&T Wireless' 10 MHZ PCS licenses in the areas covering part of the
Wisconsin market, in addition to adjacent licenses and AT&T Wireless
10MHZ licenses in Fort Dodge and Waterloo, Iowa.
. PCS licenses from Polycell.
. PCS licenses from ABC Wireless.
Consideration issued:
. TeleCorp's New England market segment to AT&T Wireless.
Further, AT&T has agreed to extend the term of the roaming agreement and to
expand the geographic coverage of the AT&T operating agreements with TeleCorp
to include the new markets, either through amending TeleCorp's existing
agreements or by entering into new agreements with Holding Company on
substantially the same terms as TeleCorp's existing agreements. In addition,
TeleCorp has granted AT&T Wireless a "right of first refusal" with respect to
certain markets transferred by AT&T Wireless Services or AT&T Wireless
triggered in the event of a sale of Holding Company to a third party.
F-103
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
These unaudited pro forma combined condensed financial statements are
presented as if TeleCorp exercised its rights to purchase Indus and Airadigm.
As such, the following incremental consideration will be given by TeleCorp in
exercising the right to purchase Indus and Airadigm:
. $34,688 in cash to the shareholders of Indus.
. An assumption of Indus' debt and other liabilities of $100,518.
. $74,000 in cash to Airadigm.
. An assumption of Airadigm's debt and other liabilities of $65,127.
The Contribution and Exchange from AT&T will be accounted for as an asset
purchase and disposition and recorded at fair value. The purchase price will be
determined based on cash paid, the fair value of the Class A common stock
issued, and the fair value of the assets relinquished. The purchase price will
be proportionately allocated to the noncurrent assets acquired based on their
estimated fair values. A gain is recognized as the difference between the fair
value of the New England assets disposed and their net book value.
For purposes of these unaudited pro forma combined condensed financial
statements, Holding Company exercised its rights to purchase Indus and Airadigm
based on incremental cash paid and liabilities assumed based on their estimated
fair values. These transactions will be accounted for as asset purchases. The
purchase price will be allocated to the assets acquired based on their
estimated fair values.
3a. Cost Basis of Assets Received and Gain on Disposal of New England
Operations
The cost basis of assets received is based on the fair value of the assets
relinquished:
Fair value of Holding Company consideration issued
Holding Company Class A common stock given to AT&T (i).......... $ 373,807
Fair value of the TeleCorp New England assets transferred to
AT&T (ii)...................................................... 434,900
Cash paid to Indus (iii)........................................ 34,688
Assumption of Indus' debt and other liabilities (iv)............ 100,518
Cash paid to Airadigm (v)....................................... 74,000
Assumption of Airadigm's debt and other liabilities (vi)........ 65,127
Cash paid to ABC Wireless....................................... 6,868
Cash paid to Polycell........................................... 5,100
Assumption of deferred tax liability............................ 100,690
----------
Total fair value.............................................. $1,195,698
==========
A gain is recognized as the difference between the fair value of the assets
relinquished related to TeleCorp New England assets transferred to AT&T and
those assets' net book value.
Fair value of the New England assets transferred to AT&T (ii).... $434,900
Net book value of the New England assets transferred to AT&T
(vii)........................................................... (81,708)
--------
Gain on disposal of New England assets (viii).................... $353,192
========
The contribution and the exchange represent the purchase of assets and the
disposition of a business. This transaction is accounted for at fair value for
book purposes. For tax purposes, these transactions are primarily tax-free and
recorded at historical cost. Therefore, this represents an asset purchase
whereby the fair value of acquired assets differs from the tax basis of the
assets resulting in an adjustment to the carrying amount of the acquired assets
and a deferred tax liability of $100,690.
F-104
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
The purchase price will be allocated to the assets acquired based on their
estimated fair values. The following table sets forth the fair values of the
assets received:
Fair value of assets Holding Company received
Cash from AT&T.................................................. $ 100,000
Cash from historic financial statements of Indus (Note 1c.)..... 548
Cash from historic financial statements of Airadigm (Note 1d.).. 1,170
Accounts receivable from historic financial statements of
Airadigm (Note 1d.)............................................ 647
PCS licenses from AT&T (ix)..................................... 191,554
AT&T network membership license agreement extension (x)......... 165,000
AT&T operating agreements (xi).................................. 118,400
PCS license from ABC Wireless, at cost (xii).................... 6,868
PCS licenses from Polycell, at cost (xii)....................... 5,100
PCS licenses from Airadigm (xiii)............................... 330,000
PCS licenses from Indus (xiv)................................... 225,200
----------
Total fair value of assets received........................... $1,144,487
==========
The difference of the fair value of the assets acquired as compared to the
consideration is allocated to increase proportionately the values assigned to
non-current assets in determining their cost basis. The following table sets
forth the difference of fair value of assets received as compared to the cost
and related increase to non-current assets.
Total fair value of consideration issued........................ $1,195,698
Total fair value of assets Holding Company received............. 1,144,487
----------
Difference...................................................... $ 51,211
==========
Proportionate allocation increasing the fair value of noncurrent
assets received
PCS licenses from AT&T (ix)..................................... $ 9,522
AT&T network membership license agreement extension (x)......... 8,203
AT&T operating agreements (xi).................................. 5,886
PCS license from ABC Wireless, at cost (xii).................... --
PCS licenses from Polycell, at cost (xii)....................... --
PCS licenses from Airadigm (xiii)............................... 16,405
PCS licenses from Indus (xiv)................................... 11,195
----------
Increase in fair value of non-current assets.................. $ 51,211
==========
Basis of assets Holding Company received
Cash (from AT&T and historic basis of Indus and Airadigm)....... $ 101,718
Accounts receivable (historical basis of Airadigm).............. 647
PCS licenses from AT&T (ix)..................................... 201,076
AT&T network membership license agreement extension (x)......... 173,203
AT&T operating agreements (xi).................................. 124,286
PCS license from ABC Wireless, at cost (xii).................... 6,868
PCS licenses from Polycell, at cost (xii)....................... 5,100
PCS license from Airadigm (xiii)................................ 346,405
PCS licenses from Indus (xiv)................................... 236,395
----------
Total basis of assets Holding Company received................ $1,195,698
==========
F-105
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands except per share data)
The unaudited pro forma condensed combined balance sheet and the unaudited
pro forma condensed combined statements of operations have been adjusted for
the Contribution and Exchange.
(i) Holding Company class A common stock given to AT&T
Holding Company will issue 9,272,740 shares of class A common stock with a
fair value of $373,807 as determined by TeleCorp's class A public trading
securities on June 30, 2000 which were priced at $40.3125 per share. As this is
an asset purchase, the fair value of the stock issued will be measured upon
close.
(ii) Fair value of the TeleCorp New England assets transferred to AT&T
Holding Company will issue to AT&T the New England market segment with a
fair value of $434,900 as determined by an independent appraiser. The table
below sets forth the components of the value as appraised:
PCS licenses.......................................................... $333,800
Property and equipment................................................ 79,000
Subscriber list....................................................... 22,100
--------
$434,900
========
(iii) Cash paid to Indus
For the purposes of the unaudited pro forma condensed combined financial
statements, we assume the right to purchase Indus was exercised. Of the cash
consideration to Indus, $4,000 may be paid as common stock at the option of
Indus. For the purpose of the pro forma combined financial statements it was
assumed this consideration was paid in cash.
(iv) Assumption of Indus' debt and other liabilities
For the purposes of the unaudited pro forma condensed combined financial
statements, we assume the right to purchase Indus was exercised. The fair value
of Indus long term debt is $83,607, net of a discount of $8,152 using
TeleCorp's incremental borrowing rate of 11.1% at February 28, 2000. The fair
value of other liabilities assumed by Holding Company from Indus totaled
$16,911. Interest expense of $1,237 and $628 was recorded as an adjustment to
the unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1999 and the six months ended June 30, 2000, respectively,
to reflect the amortization of the debt discount as if the Contribution and
Exchange had occurred on January 1, 1999.
(v) Cash paid to Airadigm
For the purposes of the unaudited pro forma condensed combined financial
statements, we assume the right to purchase Airadigm was exercised.
(vi) Assumption of Airadigm's debt and other liabilities
For the purposes of the unaudited pro forma condensed combined financial
statements, we assume the right to purchase Airadigm was exercised. In
consideration to Airadigm for assets received as part of the Contribution,
Holding Company will pay Airadigm cash and assume long term debt of $54,842,
net a discount of $9,432 and current liabilities with a fair value of
approximately $10,285. Interest expense of $1,431 and $716 was recorded as an
adjustment to the unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1999 and the six months ended June
30, 2000, respectively, to reflect the amortization of the debt discount as if
the Contribution and Exchange had occurred on January 1, 1999.
F-106
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
(vii) Net book value of the New England assets transferred to AT&T
The following table sets forth the historical carrying cost of New England's
assets at June 30, 2000
PCS licenses........................................................ $15,746
Property and equipment.............................................. 62,606
AT&T operating agreements........................................... 3,356
-------
$81,708
=======
Property and equipment
Property and equipment consist of the wireless network, computer equipment,
internal use software, furniture, fixtures, office equipment and leasehold
improvements related to the Holding Company's New England market. The net book
value of the assets recorded in TeleCorp's historical financial statements as
of June 30, 2000 was reduced as a pro forma adjustment to reflect the
disposition as if it had occurred on March 31, 2000. The related depreciation
expense incurred by TeleCorp and recorded in TeleCorp's historical financial
statements for the year ended December 31, 1999 and the six months ended June
30, 2000 was reduced as a pro forma adjustment to reflect the disposition as if
it had occurred on January 1, 1999.
PCS licenses
The four PCS licenses conveyed to AT&T are 20 megahertz (MHz) PCS licenses
in Manchester, NH, Worcester, Rockingham and, Stafford County and Hyannis, MA.
These licenses are currently being amortized over a 40 year life. The net book
value of the licenses recorded in TeleCorp's historical balance sheet as of
June 30, 2000 was reduced as a pro forma adjustment to reflect the disposition
as if it had occurred on June 30, 2000. The related amortization incurred by
TeleCorp was reduced in the statements of operations for the year ended
December 31, 1999 and the six months ended June 30, 2000 to reflect the
disposition as if it had occurred on January 1, 1999.
AT&T operating agreements
In January 1998, TeleCorp entered into a Securities Purchase Agreement with
AT&T Wireless and TWR Cellular, Inc. whereby TeleCorp, in exchange for
securities and cash, received licenses and operating agreements from AT&T. The
total value of the operating agreements was allocated to each of TeleCorp's
regions based on POP's.
In connection with this Exchange, as a pro forma adjustment, we removed the
net book value of each of the agreements from Holding Company's balance sheet
and removed $6,766 and $470 from the Holding Company's statements of operations
for the year ended December 31, 1999 and the six months ended June 30, 2000,
respectively.
Historical results of operations of New England BTAs
Services, roaming, and equipment revenues of $2,978, $5,887 and $1,749,
respectively, for the year ended December 31, 1999 recorded in TeleCorp's
historical financial statements have been eliminated as pro forma adjustments
to reflect the disposition of the BTAs underlying assets as if it had occurred
on January 1, 1999.
Cost of revenue, operations and development expense, selling and marketing,
general and administration expenses, and depreciation and amortization of
$3,855, $7,573, $5,581, $1,905 and $6,766 respectively, for the
F-107
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
year ended December 31, 1999 recorded in TeleCorp's historical financial
statements have been eliminated as pro forma adjustments to reflect the
disposition of the BTAs underlying assets as if it had occurred on January 1,
1999.
Services, roaming, and equipment revenues of $7,804, $4,654 and $1,783,
respectively, for the six months ended June 30, 2000 recorded in TeleCorp's
historical financial statements have been eliminated as pro forma adjustments
to reflect the disposition of the BTAs underlying assets as if it had occurred
on January 1, 1999.
Cost of revenue, operations and development expense, selling and marketing,
general and administration expenses, and depreciation and amortization of
$5,320, $4,311, $5,504, $2,050 and $6,289 respectively, for the six months
ended June 30, 2000 recorded in TeleCorp's historical financial statements have
been eliminated as pro forma adjustments to reflect the disposition of the BTAs
underlying assets as if it had occurred on January 1, 1999.
(viii) Gain on disposal of New England operations
The gain on the disposal of New England assets of $353,192 is presented
in the unaudited pro forma condensed combined balance sheet as if the
transaction had occurred on June 30, 2000. The gain is not included in the
unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1999 or the unaudited pro forma condensed combined
statement of operations for the six months ended June 30, 2000 as if the
transaction had occurred on January 1, 1999 due to its non-recurring
nature.
(ix) PCS licenses from AT&T
Holding Company acquired PCS licenses from AT&T; 14 D-Block 10 MHz and
one E-Block 10 MHz located in Wisconsin, Michigan and Iowa that have a
total fair value of $191,554. As part of the proportionate increase in the
fair value due to the difference of consideration given, PCS licenses from
AT&T were increased $9,522. The cost basis of the PCS licenses from AT&T
are recorded in the unaudited pro forma condensed combined balance sheet at
$201,076.
As Holding Company is not planning to commence service in these BTAs
within the twelve months following the February 28, 2000 announcement,
amortization expenses has not been recorded on these licenses in either of
the unaudited pro forma condensed combined statements of operations.
(x) AT&T network membership license agreement extension
Holding Company acquired a two year extension of its network membership
license agreement with AT&T (discussed elsewhere in this offering
memorandum) with a fair value of $165,000. As part of the proportionate
increase in the fair value due to the difference of consideration given the
AT&T network membership license extension was increased $8,203. The cost
basis of the AT&T network membership license extension agreement are
recorded in the unaudited pro forma condensed combined balance sheet at
$173,203.
Holding Company will begin amortization of the extension of the network
membership license agreement upon expiration of its existing network
membership license agreement over its extension term of two years. As the
current network membership license agreement will not expire within one
year of the February 28, 2000 announcement, no pro forma amortization
expense was included in the unaudited pro forma condensed combined
statements of operations for the year ended December 31, 1999 or the six
months ended June 30, 2000 to reflect the effect of the Contribution and
Exchange as if it had occurred on January 1, 1999.
(xi) AT&T operating agreements
Holding Company acquired operating agreements with AT&T (discussed
elsewhere in this prospectus) with a fair value $118,400. These operating
agreements are the same agreements held by
F-108
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
Holding Company for TeleCorp and Tritel extended to include the BTAs
associated with the PCS licenses of Airadigm, Indus, Polycell, ABC Wireless
and the licenses obtained from AT&T. As part of the proportionate increase
in the fair value due to the difference of consideration given the AT&T
operating agreements were increased $5,886. The cost basis of the AT&T
operating agreements are recorded in the unaudited pro forma condensed
combined balance sheet at $124,286.
The cost basis of these agreements are as follows:
Network membership license....................................... $ 52,591
Exclusivity...................................................... 36,950
Roaming.......................................................... 34,745
--------
$124,286
========
Holding Company's accounting policy will be to begin amortization of the
network membership license agreement upon close of the transaction over the
remainder of its term of five years. A pro forma adjustment of $11,067 and
$5,259 is included as amortization expense in the unaudited pro forma
condensed combined statements of operations for the year ended December 31,
1999 and the six months ended June 30, 2000, respectively to reflect the
effect of the transactions as if they had occurred on January 1, 1999.
Holding Company will commence amortization of the Exclusivity and
Roaming Agreements once PCS service is provided in the related BTAs. As
Holding Company is not projecting to commence service in theses BTAs within
the twelve months after the February 28, 2000 announcement, no amortization
expense has been recorded on these agreements in either of the unaudited
pro forma condensed combined statements of operations.
(xii) PCS licenses from ABC Wireless and Polycell
Holding Company obtained PCS licenses from ABC Wireless, a related party
controlled by shareholders who also control TeleCorp. Holding Company paid
ABC Wireless cash of $6,868 for these licenses (paid by AT&T on behalf of
Holding Company). Holding Company obtained PCS licenses from Polycell
through rights obtained by ABC Wireless, a related party controlled by
shareholders who also control TeleCorp. Holding Company paid Polycell cash
of $5,100 for these licenses (paid by AT&T on behalf of Holding Company).
The amounts paid on behalf of Holding Company by AT&T reduce the cash
consideration received by Holding Company from AT&T.
The licenses obtained from ABC Wireless were recorded on the unaudited
pro forma condensed combined balance sheet at the historic cost of ABC
Wireless which also equaled the cash consideration of $6,868. Furthermore,
the licenses obtained from Polycell were recorded on the unaudited pro
forma condensed combined balance sheet at a value equal to the cash
consideration paid of $5,100. As these licenses are recorded at cost, they
were not increased by the difference of fair value of consideration given.
As Holding Company is not projecting to commence service in these BTAs
within the twelve months following the February 28, 2000 announcement, no
amortization expense has been recorded on these licenses in either of the
unaudited pro forma condensed combined statements of operations.
(xiii) PCS licenses from Airadigm
For the purposes of the unaudited pro forma condensed combined financial
statements, we assume the right to purchase Airadigm was exercised.
Holding Company acquired PCS licenses from Airadigm that have a total
fair value of $330,000. As part of the proportionate increase in the fair
value due to the difference of consideration given, PCS
F-109
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
licenses from Airadigm were increased $16,405. The cost basis of the PCS
licenses from Airadigm are recorded in the unaudited pro forma condensed
combined balance sheet at $346,405.
As Holding Company is not planning to commence service in these BTAs
within the twelve months following the February 28, 2000 announcement,
amortization expense has not been recorded on these licenses in the
unaudited pro forma condensed combined statement of operations.
(xiv) PCS licenses from Indus
For the purposes of the unaudited pro forma condensed combined financial
statements, we assume the right to purchase Indus was exercised.
Holding Company acquired PCS licenses from Indus that have a total fair
value of $225,200. As part of the proportionate increase in the fair value
due to the difference of consideration given, PCS licenses from Indus were
increased $11,195. The cost basis of the PCS licenses from Indus are
recorded in the unaudited pro forma condensed combined balance sheet at
$236,395.
As Holding Company is not planning to commence service in these BTAs
within the twelve months following the February 28, 2000 announcement,
amortization expense has not been recorded on these licenses in either of
the unaudited pro forma condensed combined statements of operations.
3b. Summary of Contribution and Exchange adjustments to the unaudited pro forma
condensed combined statements of operations for the year ended December 31,
1999.
The following table sets forth the summary of the (i) depreciation and
amortization and (ii) interest expense pro forma adjustments as presented on
the unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1999 related to the Contribution and Exchange.
(i) Depreciation and amortization
Pro forma adjustment to amortization of:
New England historical results................... Note 3a.(vii) $(6,766)
Operating agreements............................. Note 3a.(xi) 11,067
-------
$ 4,301
=======
(ii) Interest expense
Pro forma adjustment to interest expense
Incremental interest related to Indus debt....... Note 3a.(iv) $ 1,237
Incremental interest related to Airadigm debt.... Note 3a.(vi) 1,431
-------
$ 2,668
=======
3c. Summary of Contribution and Exchange adjustments to the unaudited pro forma
condensed combined statement of operations for the six months ended June 30,
2000.
The following table sets forth the summary of the (i) depreciation and
amortization and (ii) interest expense pro forma adjustments as presented on
the unaudited pro forma condensed combined statement of operations for the six
months ended June 30, 2000 related to the Contribution and Exchange.
(i) Depreciation and amortization
Pro forma adjustment to amortization of:
New England historical results................... Note 3a.(vii) $(6,289)
Operating agreements............................. Note 3a.(xi) 5,259
-------
$(1,030)
=======
F-110
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
(ii) Interest expense
Pro forma adjustment to interest expense
Incremental interest related to Indus debt.......... Note 3a.(iv) $ 628
Incremental interest related to Airadigm debt....... Note 3a.(vi) 716
------
$1,344
======
3d. Summary of Contribution and Exchange adjustments to the unaudited pro forma
condensed combined balance sheet.
The following tables set forth the summary of pro forma adjustments as
presented on the unaudited Pro forma condensed combined balance sheet related
to the Contribution and Exchange.
(i) Cash
Pro forma adjustment to cash
Cash from AT&T................................ Note 3a. $ 100,000
Cash to ABC Wireless.......................... Note 3a.(xii) (6,868)
Cash to Polycell.............................. Note 3a.(xii) (5,100)
Cash to Indus................................. Note 3a.(iii) (34,688)
Cash to Airadigm.............................. Note 3a.(v) (74,000)
---------
$ (20,656)
=========
(ii) Other current assets
Pro forma adjustment to other current assets
Fair value of other current assets received as
consideration................................ $ --
Historic cost of Indus' other current assets.. Note 1c. (660)
Historic cost of Airadigm's other current
assets....................................... Note 1d. (745)
---------
$ (1,405)
=========
(iii) Property and equipment
Pro forma adjustment to property and equipment
Fair value received as consideration.......... $ --
Historic cost of New England property and
equipment.................................... Note 3a.(vii) (62,606)
Historic cost of Indus' property and
equipment.................................... Note 1c. (962)
Historic cost of Airadigm's property and
equipment.................................... Note 1d. (39,386)
---------
$(102,954)
=========
(iv) PCS licenses
Pro forma adjustment to PCS licenses
Cost basis of New England PCS licenses....... Note 3a.(vii) $(15,746)
Fair value as adjusted of PCS licenses from
AT&T........................................ Note 3a.(ix) 201,076
Fair value as adjusted of PCS licenses from
ABC Wireless................................ Note 3a.(xii) 6,868
Fair value as adjusted of PCS licenses from
Polycell.................................... Note 3a.(xii) 5,100
Fair value as adjusted of PCS licenses
received from Indus......................... Note 3a.(xiv) 236,395
Historic cost of Indus' PCS licenses......... Note 1c. (69,883)
Cost basis PCS license received from
Airadigm.................................... Note 3a.(xiii) 346,405
Historic cost of Airadigm's PCS licenses..... Note 1d. (78,288)
--------
$631,927
========
F-111
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
(v) Intangible assets
Pro forma adjustment to intangible assets
AT&T network membership license agreement
extension.................................... Note 3a.(x) $173,203
AT&T operating agreements..................... Note 3a.(xi) 124,286
Historic cost of AT&T operating agreements in
New England.................................. Note 3a.(vii) (3,356)
--------
$294,133
========
(vi) Other assets
Pro forma adjustment to other assets
Fair value of other assets received as
consideration................................ $ --
Historic cost of Indus' other assets.......... Note 1c. (1,123)
--------
$ (1,123)
========
(vii) Accounts payable and accrued expenses
Pro forma adjustment to accounts payable and
accrued liabilities
Fair value of Airadigm accounts payable and
accrued liabilities........................... $ --
Historic cost of Airadigm's accounts payable
and accrued expenses.......................... Note 1d. (8,106)
---------
$ (8,106)
=========
(viii) Other current liabilities
Pro forma adjustment to other current liabilities
Fair value of Airadigm's other current
liabilities................................... $ --
Historic cost of Airadigm's other current
liabilities................................... Note 1d. (32,583)
---------
$ (32,583)
=========
(ix) Long term debt, current portion
Pro forma adjustment to long term debt, current
portion
Fair value of long term debt, current portion,
assumed from Airadigm......................... Note 3a.(vi) $ 10,285
Historic cost of Airadigm's long term debt,
current portion............................... Note 1d. (6,232)
---------
$ 4,053
=========
(x) Long term debt
Pro forma adjustment to long term debt
Fair value of Indus' long term debt assumed.... Note 3a.(iv) $ 83,607
Historic cost of Indus' long term debt......... Note 1c. (91,759)
Fair value of Airadigm's long term debt
assumed....................................... Note 3a.(vi) 54,842
Historic cost of Airadigm's long term debt..... Note 1d. (157,618)
---------
$(110,928)
=========
F-112
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands)
(xi) Other long term payables
Pro forma adjustment to other long term payables
Fair value of other long term payables assumed.. $ --
Deferred tax liability.......................... Note 3a. 100,690
Historic cost of Airadigm's other long term
payables....................................... Note 1d. (2,708)
--------
$ 97,982
========
(xii) Preferred stock
Pro forma adjustment to preferred stock
Elimination of historic cost of Indus' preferred
stock.......................................... Note 1c. $ (450)
--------
$ (450)
========
(xiii) Common stock
Pro forma adjustment to common stock
Fair value of common stock given to AT&T........ Note 3a.(i) $373,807
Elimination of historic cost of Indus' common
stock.......................................... Note 1c. (25,426)
Elimination of historic cost of Airadigm's
common stock................................... Note 1d. (10,011)
--------
$338,370
========
(xiv) Accumulated deficit
Pro forma adjustment to accumulated deficit on
disposal of New England operations............... Note 3a.(viii) $353,192
Elimination of historic cost of Indus'
accumulated deficit............................ Note 1c. 61,370
Elimination of historic cost of Airadigm's
accumulated deficit............................ Note 1d. 97,022
--------
$511,584
========
4. Inter-Company Eliminations
4a. Roaming revenue and cost of revenue of $1,000 and $1,000, respectively
included on the historical consolidated statement of operations of TeleCorp for
the year ended December 31, 1999 relate to amounts earned and expensed by
Tritel during 1999. As such, roaming revenue and cost of revenue of $1,000 and
$1,000 included on the historical consolidated statement of operations for the
year ended December 31, 1999 of Tritel relates to amounts earned and expensed
directly with TeleCorp. The pro forma inter-company eliminations adjustment of
revenue and cost of revenue for the year ended December 31, 1999 of $2,000 is
the reduction of such balances as if the transaction occurred on January 1,
1999.
4b. Roaming revenue and cost of revenue of $238 and $559, respectively included
on the historical consolidated statement of operations of TeleCorp for the six
months ended June 30, 2000 of TeleCorp relate to amounts earned and expensed by
Tritel during the six months ended June 30, 2000. As such, roaming revenue and
cost of revenue of $238 and $559 included on the historical consolidated
statement of operations of Tritel for the six months ended June 30, 2000
relates to amounts earned and expensed directly with TeleCorp. The pro forma
inter-company eliminations adjustment of revenue and cost of revenue for the
six months ended June 30, 2000 of $797 is the reduction of such balances as if
the transaction occurred on January 1, 1999.
F-113
TELECORP PCS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS--(Continued)
($ in thousands except per share data)
No payables, receivables or inter-company investments existed between any of
the companies at June 30, 2000. No inter-company eliminations were necessary
for the June 30, 2000 unaudited pro forma condensed combined balance sheet.
5. Calculation of Pro Forma Net Loss Per Share
For purposes of calculating pro forma net loss per share for the year ended
December 31, 1999, all share issuances and conversions, other than TeleCorp
historical weighted average common shares, have been calculated as if the
Transaction and other pending transactions occurred on January 1, 1999.
Additionally, for pro forma purposes, an assumption was made that all payments
to Indus were satisfied in cash (Note 3a.(iv)).
TeleCorp weighted average common shares......... Note 1a. 76,895,391
Conversion of Tritel common stock to Holding
Company trading common stock................... Note 2 81,323,891
William M. Mounger, II voting preference stock.. Note 2h.(ii) 3
Conversion of Tritel outstanding common stock... Note 2 48,208
Issuance of common stock to AT&T................ Note 3a.(i) 9,272,740
------------
Total weighted average common shares.......... 167,540,233
------------
Holding Company pro forma net loss.............. $ (848,321)
------------
Basic and diluted net loss per common share..... $ (5.06)
============
For purposes of calculating pro forma net loss per share for the six months
ended June 30, 2000, all share issuances and conversions, other than TeleCorp
historical weighted average common shares, have been calculated as if the
Transaction and other pending transactions occurred on January 1, 1999.
Additionally, for pro forma purposes, an assumption was made that all payments
to Indus were satisfied in cash (Note 3a.(iv)).
TeleCorp weighted average common shares......... Note 1a. 100,414,647
Conversion of Tritel common stock to Holding
Company trading common stock................... Note 2 81,323,891
William M. Mounger, II voting preference stock.. Note 2h.(ii) 3
Conversion of Tritel outstanding common stock... Note 2 48,208
Issuance of common stock to AT&T................ Note 3a.(i) 9,272,740
------------
Total weighted average common shares.......... 191,059,489
------------
Holding Company pro forma net loss.............. $ (533,561)
------------
Basic and diluted net loss per common share..... $ (2.79)
============
6. Offering
Adjustment to the unaudited condensed combined balance sheet reflects the
receipt of $437,000 of proceeds for the sale of the Subordinated Notes from the
Offering, net of pro forma deferred financing costs of estimated underwriting
discounts and offering expenses of $13,000. Adjustments to interest expense,
inclusive of amortization of pro forma deferred financing costs, of $49,113 and
$24,557 to the unaudited condensed combined statements of operations for the
year ended December 31, 1999 and the six months ended June 30, 2000,
respectively, assume the offering had occurred on January 1, 1999.
F-114
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Telecorp PCS, Inc.
Date: November 13, 2000
/s/ Thomas H. Sullivan
By: _________________________________
Thomas H. Sullivan
Executive Vice President--
Chief Financial Officer
5
EXHIBIT INDEX
Exhibition Description
---------- -----------
Exhibit 2.1 Agreement and Plan of Reorganization and Contribution, dated as
of February 28, 2000, as amended, among TeleCorp PCS, Inc.,
Tritel, Inc. and AT&T Wireless Services, Inc. (incorporated by
reference to Annex A, Annex B and Annex C of the joint proxy
statement/prospectus forming a part of the TeleCorp PCS, Inc.
registration statement on Form S-4 (file no. 333-36954)).
Exhibit 23.1 Consent of PricewaterhouseCoopers LLP.
Exhibit 23.2 Consent of KPMG LLP.
Exhibit 99.1 Press Release of TeleCorp PCS, Inc. dated November 13, 2000
(incorporated by reference to the TeleCorp PCS, Inc. Current
Report on Form 8-K filed on November 13, 2000).