SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM ________ TO _______.
Commission File number: 000-27901
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TeleCorp PCS, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1872248
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
and the following subsidiary:
TeleCorp Communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-2105807
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
____________________
1010 N. Glebe Road, Suite 800
Arlington, VA 22201
(703) 236-1100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ____ No X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 15, 1999, the outstanding shares of each class of common
stock are as follows:
Class A Common Stock, $.01 par value per share 73,873,889
Class B Common Stock, $.01 par value per share 0
Class C Common Stock, $.01 par value per share 283,813
Class D Common Stock, $.01 par value per share 851,429
Voting Preference Common Stock, $.01 par value per share 3,090
(TeleCorp Communications, Inc. is a direct, wholly-owned subsidiary of
TeleCorp PCS, Inc.)
This Form 10-Q, future filings of the registrant, press releases of the
registrant, and oral statements made with the approval of an authorized
executive officer of the Company may contain forward looking statements. In
connection therewith, please see the cautionary statements and risk factors
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations - Forward Looking Statements; Risk Factors" and elsewhere
in this report which identify important factors which could cause actual results
to differ materially from those in any such forward-looking statements.
Index
Page
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PART I. Financial Information
Item 1. Financial Statements ......................................................... 1
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999 (unaudited)......................................................... 1
Consolidated Statements of Operations for the Three and Nine Months ended ,
September 30 1998 (unaudited) and September 30, 1999 (unaudited)...................... 2
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 1998 (unaudited) and September 30, 1999 (unaudited)...................... 3
Notes to Consolidated Financial Statements ............................................ 4
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of
Operations ................................................................... 21
PART II. Other Information
Item 2 Changes in Securities......................................................... 32
Item 4 Submission of Matters to Vote of Security Holders............................. 32
Item 6 Exhibits and Report on Form 8-K............................................... 33
INDEX TO EXHIBITS........................................................................ 35
Part I -- Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
ASSETS
As of
As of September 30,
December 31, 1999
Current assets: 1998 (unaudited)
------------------ ------------------
Cash and cash equivalents $ 111,732,841 $ 80,410,108
Accounts receivable, net - 17,852,412
Inventory 778,235 12,125,650
Prepaid expenses 2,185,444 2,268,836
Other current assets 1,218,263 231,747
------------------ ------------------
Total current assets 115,914,783 112,888,753
Property and equipment, net 197,468,622 347,348,394
PCS licenses and microwave relocation costs 118,107,256 235,759,502
Intangible assets - AT&T agreements and other, net 26,285,612 39,696,161
Deferred financing costs, net 8,584,753 18,384,404
Other assets 283,006 705,964
------------------ ------------------
Total assets $ 466,644,032 $ 754,783,178
================== ==================
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 14,591,922 $ 21,962,774
Accrued expenses 94,872,262 38,794,385
Microwave relocation obligation, current portion 6,636,369 5,297,484
Long term debt, current portion - 1,340,378
Accrued interest 4,490,553 3,635,106
Deferred revenue - 1,133,018
------------------ ------------------
Total current liabilities 120,591,106 72,163,145
Long-term debt 243,385,066 628,409,693
Microwave relocation obligation 2,481,059 2,364,544
Accrued expenses - 5,028,943
Deferred rent 196,063 605,496
------------------ ------------------
Total liabilities 366,653,294 708,571,821
------------------ ------------------
Mandatorily redeemable preferred stock, issued 255,999,
and 382,478 shares, respectively and outstanding 255,215
and 382,478 shares, respectively (liquidation preference
$382,802,874 as of September 30,1999) 240,408,879 353,014,125
Deferred compensation (4,111) (9,482)
Treasury stock, 784 and no shares, at cost (8) -
Preferred stock subscriptions receivable (75,914,054) (103,000,543)
------------------ ------------------
Total mandatorily redeemable preferred stock, net 164,490,706 250,004,100
------------------ ------------------
Commitments and contingencies
Stockholders' equity (deficit):
Series F preferred stock, par value $.01 per share,
10,308,676 and 14,912,778 shares issued and outstanding,
respectively (liquidation preference; $443 as of
September 30, 1999) 103,087 149,128
Common stock, par value $.01 per share, issued 49,357,658
and 74,973,595 shares respectively, and outstanding
48,805,184 and 74,973,595 shares, respectively 493,576 749,704
Additional paid-in capital - 5,379,062
Deferred compensation (7,177) (801,083)
Common stock subscriptions receivable (86,221) (190,991)
Treasury stock, 552,474 and no shares, at cost (18) -
Accumulated deficit (65,003,215) (209,078,563)
------------------ ------------------
Total stockholders' equity (deficit) (64,499,968) (203,792,743)
------------------ ------------------
Total liabilities, mandatorily redeemable preferred stock
and stockholders' equity (deficit) $ 466,644,032 $ 754,783,178
================== ==================
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the three months ended For the nine months ended
September 30 September 30
---------------------------------- ---------------------------------
1998 1999 1998 1999
---------------------------------- ---------------------------------
Revenue:
Service revenue $ - $ 12,704,676 $ - $ 18,937,031
Equipment revenue - 4,672,628 - 10,321,594
Roaming revenue - 9,455,164 - 18,942,080
-------------- -------------- -------------- --------------
Total revenue - 26,832,468 - 48,200,705
-------------- -------------- -------------- --------------
Operating expenses:
Cost of revenue - 12,979,848 - 23,086,816
Operations and development 2,930,301 10,426,905 4,144,673 25,925,009
Selling and marketing 1,393,136 18,795,152 2,488,497 39,719,864
General and administrative 7,681,572 16,501,559 15,576,108 38,942,446
Depreciation and amortization 212,608 19,507,679 308,753 35,999,053
-------------- -------------- -------------- --------------
Total operating expenses 12,217,617 78,211,143 22,518,031 163,673,188
-------------- -------------- -------------- --------------
Operating loss (12,217,617) (51,378,675) (21,518,031) (115,472,483)
Other (income) expense:
Interest expense 4,271,488 16,140,296 5,500,733 33,247,810
Interest income (2,490,238) (1,740,527) (2,630,576) (4,805,133)
Other expense 803,416 13,513 23,193 160,188
-------------- -------------- -------------- --------------
Net loss (14,802,283) (65,791,957) (25,411,381) (144,075,348)
Accretion of mandatorily redeemable
preferred stock (4,026,459) (7,063,918) (4,026,459) (16,959,618)
-------------- -------------- -------------- --------------
Net loss attributable to common
equity $ (18,828,742) $ (72,855,875) $ (29,437,840) $ (161,034,966)
============== ============== ============== ==============
Net loss attributable to common
equity par share - basic and diluted $ (0.39) $ (0.88) $ (1.45) $ (2.30)
============== ============== ============== ==============
Weighted average common equity shares
outstanding-basic and diluted 48,523,467 82,331,434 20,367,373 70,089,141
============== ============== ============== ==============
The accompanying notes are an integral part
of these consolidated financial statements
2
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the nine months ended
September 30,
1998 1999
-----------------------------------------
Cash flows from operating activities:
Net loss $ (25,411,381) $ (144,075,348)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 739,171 34,799,411
Noncash compensation expense associated with the issuance
of common stock and preferred stock - -
Noncash interest expense 247,900 19,533,603
Allowance for bad debt 1,022,267
Amortization of deferred financing costs 232,398 1,199,642
Amortization of discount on notes payable 142,696 261,796
Changes in cash flow from operations resulting from changes in assets and liabilities:
Accounts receivable - (17,923,554)
Inventory - (11,347,415)
Prepaid expenses (885,463) (83,392)
Other current assets (135,573) 997,337
Other assets (210,413) 715,246
Accounts payable 7,831,768 11,137,988
Accrued expenses 7,636,992 15,591,175
Deferred rent 105,388 409,433
Accrued interest 569,409 (946,588)
Deferred revenue - 1,133,018
---------------- ----------------
Net cash used in operating activities (9,137,108) (87,575,383)
---------------- ----------------
Cash flows from investing activities:
Expenditures for network under development, wireless network and property
and equipment (38,599,088) (245,528,171)
Capitalized interest on network under development and wireless network - (4,478,356)
Expenditures for microwave relocation (1,966,669) (5,678,837)
Purchase of PCS licenses (21,000,000) (72,390,417)
Deposit on PCS licenses - (43,647,343)
Refund of deposit on PCS licenses - 11,361,351
Purchase of intangibles for AT&T agreements - (16,144,725)
---------------- ----------------
Net cash used in investing activities (61,565,757) (376,506,498)
---------------- ----------------
Cash flows from financing activities:
Proceeds from sale of mandatorily redeemable preferred stock 14,036,700 64,520,902
Receipt of preferred stock subscription receivable - 3,740,068
Direct issuance costs from sale of mandatorily redeemable preferred stock (1,027,694) (2,500,000)
Proceeds from sale of common stock 38,305 21,724,314
Proceeds from long-term debt 255,390,954 397,635,000
Purchases of treasury shares (7) (19)
Payments on notes payable (2,072,573) (40,223,611)
Payments of deferred financing costs (9,109,677) (10,999,293)
Net decrease in amounts due to affiliates (824,164) (1,138,213)
---------------- ----------------
Net cash provided by financing activities 256,431,844 432,759,148
---------------- ----------------
Net increase in cash and cash equivalents 185,728,979 (31,322,733)
Cash and cash equivalents at the beginning of period 2,566,685 111,732,841
---------------- ----------------
Cash and cash equivalents at the end of period $ 188,295,664 $ 80,410,108
================ ================
The accompanying notes are an integral part
of these consolidated financial statements
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
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 exchanges for investment units consisting of Class A, B and C
common stock and Series A preferred stock in August 1997. Concurrently, Holding
distributed the investment units, on a pro rata basis, in a partial stock
redemption to Holding's existing stockholder group and issued an aggregate of
approximately $2.7 million in affiliate notes payable to the newly-formed
entities. As a result of this distribution, Holding no longer retains any
ownership equity interest in the newly-formed entities. Because the above
transaction was non-monetary in nature and occurred between entities with the
same stockholder group, the transaction was accounted for at historical cost.
TeleCorp PCS, Inc. (TeleCorp) was incorporated in the State of Delaware on
November 14, 1997 by the controlling stockholders of Holding. TeleCorp will be
the exclusive provider of wireless mobility services in its licensed regions in
connection with a strategic alliance with AT&T Corporation and its affiliates
(collectively AT&T). Upon finalization of the AT&T transaction in July 1998,
Holding became a wholly-owned subsidiary of TeleCorp (see Management's
Discussion and Analysis of Financial Condition and Results of Operations).
2. Basis of Presentation: Unaudited Interim Financial Information
The unaudited consolidated balance sheet as of September 30, 1999, and the
unaudited consolidated statements of operations and cash flows for the three and
nine months ended September 30, 1998 and 1999, and related footnotes, have been
prepared in accordance with generally accepted accounting principles for interim
financial information and Article 10 of Regulation S-X. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles. In the opinion of management the interim data includes,
all adjustments (consisting of only normally recurring adjustments) necessary
for a fair statement of the results for the interim periods. Operating results
for the nine months ended September 30, 1998 and 1999 are not necessarily
indicative of results that may be expected for the years ending December 31,
1998 and 1999, respectively.
-4-
3. Property and Equipment
Property and equipment consists of the following:
December 31, September 30,
1998 1999
(unaudited)
------------------ ------------------
Wireless network $ - $ 306,052,853
Network under development 170,885,628 17,736,768
Computer equipment 10,115,063 14,999,193
Internal use software 11,161,142 19,421,145
Leasehold improvements 3,204,623 10,516,173
Furniture, fixtures and office equipment 2,924,233 8,574,678
Land - 48,800
------------------ ------------------
198,290,689 377,349,610
Accumulated depreciation (822,067) (30,001,216)
------------------ ------------------
$ 197,468,622 $ 347,348,394
================== ==================
4. Long-term Debt
Long-term debt consists of the following:
December 31, September 30,
1998 1999
(unaudited)
---------------- ----------------
Senior subordinated discount notes $ - $ 344,351,212
Senior credit facility 225,000,000 225,000,000
Lucent notes payable 10,460,400 42,515,924
U.S. Government financing 7,924,666 17,882,935
---------------- ----------------
$ 243,385,066 $ 629,750,071
Less current portion - (1,340,378)
---------------- ----------------
$ 243,385,066 $ 628,409,693
================ ================
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 $575,000,000. The total gross proceeds from the sale
of the Notes were $327,635,000. Offering expenses consisting of
underwriting, printing, legal and accounting fees totaled $10,999,293. 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 on April 15 and
October 15 of each year 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. As of September 30, 1999 accrued
interest added to the principal was $16,716,212.
-5-
Senior Credit Facility
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 $525,000,000, in the aggregate, consisting of (i) up to
$150,000,000 in revolving loans (the Senior Revolving Credit Facility) with
a maturity date of January 2007, (ii) a $150,000,000 term loan (the Tranche
A Term Loan) with a maturity date of January 2007, and (iii) a $225,000,000
term loan (the Tranche B Term Loan) with a maturity date of January 2008. A
total of $225,000,000 of indebtedness from the Tranche B Term Loan was
outstanding as of December 31, 1998 and September 30, 1999. The Senior
Credit Facility also provides for an uncommitted $75,000,000 senior term
loan (the Expansion Facility) with a maturity date of January 2008.
Beginning in September 2002, principal repayments will be made in 18
quarterly installments for the Tranche A Term Loan and 22 quarterly
installments for the Tranche B Term Loan. Quarterly principal repayments
for the Tranche A Term Loan are as follows: first six, $3,750,000; next
four, $9,375,000; last eight, $11,250,000. Quarterly principal repayments
for the Tranche B Term Loan are as follows: first 18, $562,500, last four,
$53,718,750. 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, $12,500,000; last four reductions
$25,000,000. 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 $50,000,000 the amount of the Tranche A Term Loan will be
automatically reduced by such excess.
The interest rate applicable to the Senior Credit Facility is based on, at
the Company's option, (i) LIBOR (Eurodollar Loans) plus the Applicable
Margin, as defined, or (ii) the higher of the administrative agent's prime
rate or the Federal Funds Effective Rate (ABR Loans), plus the Applicable
Margin, as defined. The Applicable Margin for Eurodollar Loans will range
from 125 to 325 basis points based upon certain events by the Company, as
specified. The Applicable Margin for ABR Loans will range from 25 to 225
basis points based upon certain events by the Company, as specified. At
December 31, 1998, the interest rate applicable to the Tranche B Term Loan
was 8.41%. At September 30, 1998 and 1999, the interest rate applicable to
the Tranche B Term Loan was 8.84% and 8.48%, respectively. For the nine
months ended September 30, 1998 and 1999, interest incurred on the Tranche
B Term Loan was $3.4 million and $14.1 million of which $3.2 million and
$9.9 million was expensed and $0.2 million and $4.2 million was
capitalized, respectively.
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 $2,351,714 and $2,863,252 for the nine month periods
ended September 30, 1998 and 1999 respectively, related to these bank
commitment fees. The Senior Credit Facility requires the Company to
purchase interest rate hedging contracts covering amounts equal to at least
50% of the total amount of the outstanding indebtedness of the Company. As
of December 31, 1998 and September 30, 1999, the Company hedged 100% of its
outstanding indebtedness of $225,000,000 to take advantage of favorable
interest rate swaps.
-6-
Initially, borrowings under the Senior Credit Facility are subject to a
maximum Senior Debt to Total Capital ratio, as defined, of 50%. This ratio
is increased to 55% if certain specified operating benchmarks are achieved.
In addition, the Company must comply with certain financial and operating
covenants. The financial covenants include various debt to equity, debt to
EBITDA, interest coverage, and fixed charge coverage ratios, as defined in
the Senior Credit Facility. The operating covenants include minimum
subscribers, minimum aggregate service revenue, minimum coverage of
population and maximum capital expenditure thresholds. As of December 31,
1998 and September 30, 1999, the Company was in compliance with these
covenants.
The Company may utilize the Expansion Facility as long as the Company is
not in default of the Senior Credit Facility and is in compliance with each
of the financial covenants. However, none of the lenders are required to
participate in the Expansion Facility.
The Senior Credit Facility is collateralized by substantially all of the
assets of the Company. In addition, the Senior Credit Facility has been
guaranteed by the Company's subsidiaries and shall be guaranteed by
subsequently acquired or organized domestic subsidiaries of the Company.
Lucent Note Agreement
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 $80,000,000. 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,
the Company had $10,460,400 outstanding under the Series A Notes. As of
September 30, 1999, the Company had $42,515,925 outstanding under the
Series A Notes. During the nine months ended September 30, 1999, the
Company borrowed and repaid $40,000,000 on the Lucent Series B notes plus
$227,778 of accrued interest.
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, interest accrued under the Series A Notes of $460,400 has been
included in long-term debt. As of September 30, 1999, interest accrued
under the Series A Notes of $2,515,924 has been included in long-term debt.
-7-
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 September 30, 1999 are
held by Lucent. The Company must comply with certain operating covenants.
As of December 31, 1998 and September 30, 1999, the Company was in
compliance with these operating covenants.
In addition, Lucent has agreed to make available up to an additional
$80,000,000 of junior subordinated vendor financing in amounts up to 30% of
the value of the equipment, software and services provided by Lucent in
connection with any additional markets the Company acquires, subject to
certain conditions as specified (the Vendor Expansion Facility). The
expiration date for any notes issued pursuant to the Vendor Expansion
Facility is the date which is six months after the scheduled maturity of
the Notes, subject to mandatory prepayment if certain future events occur.
U.S. Government financing
In 1996, the Company placed $7,500,000 on deposit with the FCC in order to
bid on F Block broadband PCS licenses. In April 1997, the Company's
application for the PCS licenses was approved. The Company made a down
payment of $5,942,835 using the funds from the FCC deposit and issued
promissory notes to the FCC for $23,771,342. The balance of the Company's
deposit of $1,557,165 was refunded in April 1997. In April 1997, certain of
the PCS licenses with a cost of $15,678,814 and related US. Government
financing in the amount of $12,034,212, net of a discount of $2,544,192,
was transferred to four newly-formed entities created by the Company's
existing stockholder group in August 1997. The terms of the notes include:
an interest rate of 6.25%, quarterly interest payments which commenced in
July 1998 and continue for the one year thereafter, then quarterly
principal and interest payments for the remaining 9 years. The promissory
notes are collateralized by the underlying PCS licenses.
During the nine months ended September 30, 1999, the Company completed the
acquisition of additional PCS licenses from Digital PCS, Inc. and Wireless
2000, Inc. (Note 5). As part of these acquisitions, the Company assumed
additional U.S. Government financing with the FCC amounting to $11,327,034,
less a discount of $1,368,765. The terms of the notes include an interest
rate of 6.125% for Notes assumed from Digital PCS, Inc. 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.
These notes are net of a discount of $1,268,272, and $1,368,765 as of
December 31, 1998 and September 30, 1999, respectively. The notes were
discounted using management's best estimate of the prevailing market
interest rate at the time of issuance of 10.25%.
-8-
As of September 30, 1999, minimum required annual principal repayment
(undiscounted) under all of the Company's outstanding debt obligations
were as follows:
Quarter ended December 31, 1999 $ 327,389
2000 1,361,193
2001 1,447,737
2002 2,102,284
2003 5,560,835
2004 5,785,195
Thereafter 843,935,332
----------------
$ 860,519,965
================
5. Acquisitions
On April 20, 1999, the Company completed the acquisition of 10 MHz PCS
licenses covering the Baton Rouge, Houma, Hammond and Lafayette, Louisiana
BTA's from Digital PCS, LLC. The total purchase price of $6,113,889 was
comprised of $2,334,819 of mandatorily redeemable preferred stock and
common stock of the Company, the assumption of U.S. Government financing
with the FCC of $4,101,455, less a discount of $608,941, and $286,556 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 licenses acquired.
As a result of completing the transaction with Digital PCS, LLC, the Cash
Equity Investors have irrevocably committed to contribute $5,000,000 in
exchange for mandatorily redeemable preferred stock and common stock over a
two year period from the close of this transaction. As of September 30,
1999 the Company has received $2,200,000 of the $ 5,000,000 commitment.
On May 24, 1999, the Company sold mandatorily redeemable preferred stock
and preferred stock to AT&T for $40,000,000. 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 $ 99,694,055 in cash. In addition, the Company incurred
legal fees of $252,340 related to this acquisition. The purchase price has
been allocated to the assets acquired, as follows:
-9-
PCS licenses $ 70,421,295
Intangible assets - AT&T Agreements 17,310,000
Cell sites, site acquisition, switching 9,015,100
facility assets, and other assets
Microwave relocation costs 3,200,000
-------------
$ 99,946,395
=============
As a result of completing this transaction, the Company's available
borrowings under the Lucent Note Agreement increased by $15,000,000
($7,500,000 of Series A and $7,500,000 of Series B) and certain Cash Equity
Investors have committed $39,996,600 in cash in exchange for mandatorily
redeemable preferred and common stock. As a part of the financing, the
Company paid $2,000,000 to a Cash Equity Investor upon closing the
transaction. The Cash Equity Investors cash commitment of $39,996,600 will
be funded over a three year period from the close of this transaction. As
of September 30, 1999, the Company received $11,998,980 of this cash
commitment. In addition, certain officers, the Chief Executive Officer and
the Executive Vice President and Chief Financial Officer of the Company
were issued a total of 5,318 and 2,380,536 restricted shares of mandatorily
redeemable Series E preferred stock and Class A common stock, respectively.
The estimated fair value of these shares has been recorded as deferred
compensation and is being amortized over the related vesting periods.
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 $7,448,318 was comprised of $370,810 of mandatorily
redeemable preferred stock and common stock of the Company, the assumption
of U.S. Government financing with the FCC of $7,449,190, less a discount of
$1,021,621, and $649,939 in cash as reimbursement of microwave relocation
costs and reimbursement of FCC interest and legal costs. The entire
purchase price has been allocated to the PCS licenses acquired.
In February 1999, Viper Wireless, Inc. (Viper), was formed to participate
in the C-Block PCS license re-auction for additional spectrum in most of
the Company's markets. Viper was initially capitalized with $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 re-
auction, the company paid the FCC an initial deposit of $17,818,549, 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.
-10-
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 a 30 MHz license in Beaumont, Texas. The
total auction price for these licenses is approximately $32,286,000 plus
legal costs of $46,566. During the nine months ended September 30, 1999,
the FCC refunded $11,361,351 of the initial deposit; however, the Company
was required to pay the FCC $11,059,194 as a final deposit on behalf of
Viper. As of and for the nine months ended September 30, 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 $32,300,000 in exchange for additional
shares of mandatorily redeemable preferred stock, Series F preferred stock
and common stock of the Company. As part of this financing, the Company
paid approximately $500,000 to an affiliate of a Cash Equity Investor for
closing this preferred and common stock financing. In May and July 1999,
AT&T and the certain Cash Equity Investors funded approximately $17,516,000
of their commitment to the Company. The Company made its final payment of
$14,769,600 to the FCC on September 13, 1999 with respect to these licenses
and received the remaining funding commitments from AT&T and certain Cash
Equity Investors on September 29, 1999.
6. Commitments
In May 1998, the Company entered into a vendor procurement contract (the
Vendor Procurement Contract) with Lucent, pursuant to which the Company may
purchase up to $285,000,000 of radio, switching and related equipment and
services for the development of the Company's wireless communications
network. Through September 30, 1999, the Company has purchased
approximately $140,000,000 of equipment and services from Lucent.
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
-11-
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 September 30, 1999, the aggregate minimum rental
commitments under non-cancelable operating leases are as follows:
1999 $ 3,794,049
2000 18,786,811
2001 18,587,171
2002 18,311,199
2003 5,976,624
2004 8,982,627
Thereafter 24,347,399
-----------------
Total $ 108,785,880
=================
Rental expense, which is recorded ratably over the lease terms, was
approximately $9,700,000 for the nine months ended September 30, 1999.
The Company has entered into a series of agreements for software licenses,
consulting, transition support and maintenance with various vendors. The
total future commitments under the agreements are approximately $4,000,000
as of September 30, 1999.
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 $1,476,000 at September
30, 1999. The outstanding letters of credit reduce the amount available to
be drawn under the Senior Credit Facility. The Company is unaware of any
events that would have resulted in nonperformance of a contract during the
nine months ended September 30, 1999.
7. 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. Summarized financial
information of TeleCorp, TeleCorp Communications, Inc. and non-guarantor
subsidiaries as of September 30, 1999, and for the three months ended
September 30, 1999 and for the nine months ended September 30, 1999 as
follows:
Balance Sheet Information as of December 31, 1998:
TeleCorp
Communications, Inc.-- Non-Guarantor
TeleCorp Guarantor Subsidiary Subsidiaries Eliminations Consolidated
------------ ---------------------- ------------- ------------- ------------
ASSETS
Current assets:
Cash and cash
equivalents........... $ 93,046,614 $ 21,440,720 $ (2,754,493) $ -- $111,732,841
Accounts receivable.... -- -- -- -- --
Inventory.............. -- 778,235 -- -- 778,235
Intercompany
receivables........... 279,077,565 -- -- (279,077,565) --
Prepaid expenses....... -- 811,999 1,373,445 -- 2,185,444
Other current assets... 637,102 581,161 -- -- 1,218,263
------------ ------------ ------------ ------------- -------------
Total current
assets ............. 372,761,281 23,612,115 (1,381,048) (279,077,565) 115,914,783
Property and equipment,
net.................... 1,500,000 90,072,502 105,912,651 (16,531) 197,468,622
PCS licenses and
microwave relocation
costs.................. -- 12,456,838 105,650,418 -- 118,107,256
Intangible assets--AT&T
agreements............. -- -- 26,285,612 -- 26,285,612
Deferred financing
costs, net............. 8,584,753 -- -- -- 8,584,753
FCC deposit............. -- -- -- -- --
Other assets............ 4,369,680 6,944 276,062 (4,369,680) 283,006
------------ ------------ ------------ ------------- ------------
Total assets......... $387,215,714 $126,148,399 $236,743,695 $(283,463,776) $466,644,032
============ ============ ============ ============= ============
LIABILITIES, MANDATORILY
REDEEMABLE PREFERRED
STOCK AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Due to affiliates...... $ -- $ 92,923,096 $186,154,469 $(279,077,565) $ --
Accounts payable....... 11 8,331,045 6,260,866 -- 14,591,922
Accrued expenses....... 13,403 41,644,524 53,214,335 -- 94,872,262
Microwave relocation
obligation............ -- 6,636,369 -- -- 6,636,369
Long-term debt......... -- -- -- -- --
Accrued interest....... 3,991,500 -- 499,053 -- 4,490,553
Deferred revenue....... -- -- -- -- --
------------ ------------ ------------ ------------- ------------
Total current
liabilities......... 4,004,914 149,535,034 246,128,723 (279,077,565) 120,591,106
------------ ------------ ------------ ------------- ------------
Long-term debt.......... 235,460,400 -- 7,924,666 -- 243,385,066
Microwave relocation
obligation............. -- 2,481,059 -- -- 2,481,059
Accrued expenses........ -- -- -- -- 196,063
Deferred rent........... -- -- 196,063 -- --
------------ ------------ ------------ ------------- ------------
Total liabilities.... 239,465,314 152,016,093 254,249,452 (279,077,565) 366,653,294
------------ ------------ ------------ ------------- ------------
Mandatorily redeemable
preferred stock........ 240,408,879 -- -- -- 240,408,879
Deferred compensation... -- (4,111) -- -- (4,111)
Treasury stock.......... (8) -- -- -- (8)
Preferred stock
subscriptions
receivable............. (75,914,054) -- -- -- (75,914,054)
------------ ------------ ------------ ------------- ------------
Total mandatorily
redeemable preferred
stock............... 164,494,817 (4,111) -- -- 164,490,706
------------ ------------ ------------ ------------- ------------
Series F preferred
stock.................. 103,087 -- -- -- 103,087
Common stock............ 493,576 -- -- -- 493,576
Additional paid in
capital................ -- -- 4,369,680 (4,369,680) --
Deferred compensation... -- (7,177) -- -- (7,177)
Common stock
subscriptions
receivable............. (86,221) -- -- -- (86,221)
Treasury stock.......... (18) -- -- -- (18)
Accumulated deficit..... (17,254,841) (25,856,406) (21,875,437) (16,531) (65,003,215)
------------ ------------ ------------ ------------- ------------
Total shareholders'
equity (deficit).... (16,744,417) (25,863,583) (17,505,757) (4,386,211) (64,499,968)
------------ ------------ ------------ ------------- ------------
Total liabilities and
shareholders' equity
(deficit)........... $387,215,714 $126,148,399 $236,743,695 $(283,463,776) $466,644,032
============ ============ ============ ============= ============
-12-
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet as of September 30, 1999 (unaudited):
TeleCorp
Communications, Inc.- Non-Guarantor
TeleCorp Guarantor Subsidiary Subsidiaries
-------------- ---------------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 93,203,433 $ (10,164,328) $ (2,628,997)
Accounts receivable, net - 17,823,462 28,950
Inventory - 12,125,650 -
Intercompany receivables 701,489,565 - -
Prepaid expenses - 784,848 1,483,988
Other current assets 31,053 196,248 4,446
-------------- -------------- -------------
Total current assets 794,724,051 20,765,880 (1,111,613)
Property and equipment, net 5,513,458 163,707,122 178,198,908
PCS licenses and microwave relocation
Costs 1,292,605 117,306,326 117,160,571
Intangible assets-AT&T agreements - - 39,696,161
Deferred financing costs, net 18,080,655 303,749 -
FCC deposit - (32,285,994) 32,285,994
Other assets 4,369,680 322,671 17,899,686
-------------- -------------- -------------
Total assets $ 823,980,449 $ 270,119,754 $ 384,129,707
============== ============== =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Due to affiliates $ - $ 327,455,847 $ 374,033,718
Accounts payable - 8,069,648 13,893,126
Accrued expenses 24,751 35,078,700 3,690,934
Long-term debt, current portion - - 1,340,378
Microwave relocation obligation - 5,297,484 -
Accrued interest 3,163,174 - 471,932
Deferred Revenue - 1,133,018 -
-------------- -------------- -------------
Total current liabilities 3,187,925 377,034,697 393,430,088
-------------- -------------- -------------
Long-term debt 611,867,136 - 17,882,935
Microwave relocation obligation - 2,364,544 -
Accrued expenses - - 5,028,943
Deferred rent - - 605,496
--------------- -------------
Total liabilities 615,055,061 379,399,241 415,607,084
--------------- -------------
Mandatorily redeemable preferred stock 353,014,125 - -
Deferred compensation (5,371) (4,111) -
Treasury stock - - -
Preferred stock subscriptions receivable (103,000,543) - -
-------------- -------------- -------------
Total MRPS 250,008,211 (4,111) -
-------------- -------------- -------------
Shareholders' equity (deficit):
Series F preferred stock 149,128 - -
Common stock 749,704 - -
Additional paid in capital 5,379,060 - 21,886,075
Deferred compensation (793,906) (7,177) -
Common stock subscriptions receivable (190,991) - -
Treasury stock - - -
Accumulated deficit (46,375,818) (109,268,199) (53,363,452)
-------------- -------------- -------------
Total shareholders' equity (deficit) (41,082,823) (109,275,376) (31,477,377)
-------------- -------------- -------------
Total liabilities and shareholders'
equity (deficit) $ 823,980,449 $ 270,119,754 $ 384,129,707
=============== ============== =============
Eliminations Consolidated
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ 80,410,108
Accounts receivable, net - 17,852,412
Inventory - 12,125,650
Intercompany receivables (701,489,565) -
Prepaid expenses - 2,268,836
Other current assets - 231,747
-------------- -------------
Total current assets (701,489,565) 112,888,753
Property and equipment, net (71,094) 347,348,394
PCS licenses and microwave relocation
Costs - 235,759,502
Intangible assets-AT&T agreements - 39,696,161
Deferred financing costs, net - 18,384,404
FCC deposit - -
Other assets (21,886,073) 705,964
-------------- -------------
Total assets $ (723,446,732) $ 754,783,178
============== =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Due to affiliates $ (701,489,565) $ -
Accounts payable - 21,962,774
Accrued expenses - 38,794,385
Long-term debt, current portion - 5,297,484
Microwave relocation obligation - 1,340,378
Accrued interest - 3,635,106
Deferred Revenue - 1,133,018
-------------- -------------
Total current liabilities (701,489,565) 72,163,145
-------------- -------------
Long-term debt - 628,409,693
Microwave relocation obligation - 2,364,544
Accrued expenses - 5,028,943
Deferred rent - 605,496
-------------- -------------
Total liabilities (701,489,565) 708,571,821
-------------- -------------
Mandatorily redeemable preferred stock - 353,014,125
Deferred compensation - (9,482)
Treasury stock - -
Preferred stock subscriptions receivable - (103,000,543)
-------------- -------------
Total MRPS - 250,004,100
-------------- -------------
Shareholders' equity (deficit):
Series F preferred stock - 149,128
Common stock - 749,704
Additional paid in capital (21,886,073) 5,379,062
Deferred compensation - (801,083)
Common stock subscriptions receivable - (190,991)
Treasury stock - -
Accumulated deficit (71,094) (209,078,563)
-------------- -------------
Total shareholders' equity (deficit) (21,957,167) (203,792,743)
-------------- -------------
Total liabilities and shareholders'
equity (deficit) $ (723,446,732) $ 754,783,178
============== =============
-13-
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Operations Information for the three months ended September 30, 1999 (unaudited):
TeleCorp
Communications,
Inc. - Guarantor Non-Guarantor
TeleCorp Subsidiary Subsidiaries Eliminations Consolidated
------------ ---------------- ----------------- ---------------- ----------------
Revenue:
Service revenue $ - $ 12,704,676 $ - $ - $ 12,704,676
Equipment revenue - 4,672,628 (1,547,786) 1,547,786 4,672,628
Roaming revenue - 9,366,731 2,791,385 (2,702,952) 9,455,164
------------ --------------- ----------------- --------------- ----------------
Total Revenue - 26,744,035 1,243,599 (1,155,166) 26,832,468
------------ --------------- ----------------- --------------- ----------------
Operating expenses:
Cost of revenue - 12,979,848 - - 12,979,848
Operations and development - 8,220,425 3,361,646 (1,155,166) 10,426,905
Selling and marketing - 18,627,088 168,064 - 18,795,152
General and administrative 389,296 15,407,542 704,721 - 16,501,559
Depreciation and amortization 1,069,857 7,204,795 11,233,027 - 19,507,679
------------ --------------- ----------------- --------------- ----------------
Total operating expense 1,459,153 62,439,698 15,467,488 (1,155,166) 78,211,143
------------ --------------- ----------------- --------------- ----------------
Operating loss (1,459,153) (35,695,663) (14,223,859) - (51,378,675)
Other (income) expense:
Interest expense 15,384,859 76 755,361 - 16,140,296
Interest income (1,675,738) (63,431) (1,358) - (1,740,527)
Other expense - 6,644 6,869 - 13,513
------------ --------------- ----------------- --------------- ----------------
Net loss $(15,168,274) $ (35,638,952) $ (14,984,731) $ - $ (65,791,957)
============ =============== ================= =============== ================
-14-
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statement of Operations Information for the nine months ended September 30, 1999 (unaudited):
TeleCorp
Communications, Inc.- Non-Guarantor
TeleCorp Guarantor Subsidiary Subsidiaries Eliminations Consolidated
------------- -------------------- --------------- -------------- --------------
Revenue:
Service revenue $ - $ 18,937,031 $ - $ - $ 18,937,031
Equipment revenue - 10,321,594 - - 10,321,594
Roaming revenue - 18,853,647 2,791,385 (2,702,952) 18,942,080
------------- ---------------- --------------- -------------- --------------
Total Revenue - 48,112,272 2,791,385 (2,702,952) 48,200,705
------------- ---------------- --------------- -------------- --------------
Operating expenses:
Cost of revenue 23,086,816 - - 23,086,816
Operations and development - 20,019,859 8,553,540 (2,648,390) 25,925,009
Selling and marketing - 39,237,880 481,984 - 39,719,864
General and administrative 742,888 36,077,088 2,122,470 - 38,942,446
Depreciation and amortization 1,742,387 12,959,402 21,297,264 - 35,999,053
------------- ---------------- --------------- -------------- --------------
Total operating expense 2,485,275 131,381,045 32,455,258 (2,648,390) 163,673,188
------------- ---------------- --------------- -------------- --------------
Operating loss (2,485,275) (83,268,773) (29,663,873) (54,562) (115,472,483)
Other (income) expense:
Interest expense 31,449,866 76 1,797,868 - 33,247,810
Interest income (4,625,686) (173,111) (6,336) - (4,805,133)
Other expense 8,089 144,200 7,899 - 160,188
------------- ---------------- --------------- -------------- --------------
Net loss $ (29,317,544) $ (83,239,938) $ (31,463,304) $ (54,562) $ (144,075,348)
============= ================ =============== ============== ==============
-15-
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Information for the nine months ended September 30, 1999 (unaudited):
- -------------------------------------------------------------------------------
TeleCorp Communications,
TeleCorp Inc.-Guarantor Subsidiary
--------------------- --------------------------
Cash flows from operating activities:
Net loss $ (29,317,544) $ (83,239,938)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 542,744 13,049,536
Noncash compensation expense associated with the
issuance of restricted common stock and preferred
stock - -
Noncash interest expense associated with Lucent
notes and senior subordinated debt 19,033,533 -
Allowance for bad bebt - 932,267
Amortization of deferred financing costs 1,199,642 -
Amortization of discount on notes payable - -
Changes in cash flow from operations resulting from
changes in assets and liabilities:
Accounts receivable 56,689 (17,058,748)
Inventory - (11,347,415)
Prepaid expenses - 31,172
Other current assets 549,360 (80,858)
Other assets 395,025 220,262
Accounts payable - 5,810,780
Accrued expenses 950,237 12,715,386
Deferred rent - -
Accrued interest (1,103,686) 427,657
Deferred revenue - -
--------------------- ----------------------
Net cash used in operating activities (7,694,000) (78,539,898)
--------------------- ----------------------
Cash flows from investing activities:
Expenditures for network under development,
wireless network and property and equipment (325,655) (111,663,204)
Capitalized interest on network under development
and wireless network (3,876,641) -
Expenditures for microwave relocation - (5,679,738)
Purchase of PCS licenses (1,371,153) (69,690,000)
Deposit on PCS licenses (28,877,743) -
Partial refund of deposit on PCS licenses 11,361,350 -
--------------------- ----------------------
Net cash used in investing activities (23,089,842) (187,032,942)
--------------------- ----------------------
Cash flows from financing activities:
Proceeds from sale of mandatorily redeemable
preferred stock 64,364,415 -
Receipt of preferred stock subscription receivable 3,740,068 -
Direct issuance costs from sale of mandatorily
redeemable preferred stock (2,500,000) -
Proceeds from sale of common stock 21,880,791 -
Proceeds from long-term debt 397,635,000 -
Purchases of treasury shares (19) -
Payments on notes payable (40,938,898) -
Payments of deferred financing costs (10,738,044) (261,249)
Proceeds from cash transfers from and expenses
paid by affiliates 4,171,365 315,780,445
Payments on behalf of and transfers to affiliates (406,674,017) (81,551,403)
--------------------- ----------------------
Net cash provided by financing activities 30,940,661 233,967,793
--------------------- ----------------------
Net increase in cash and cash equivalents 156,819 (31,605,048)
Cash and cash equivalents at the beginning of
period 93,046,614 21,440,720
--------------------- ----------------------
Cash and cash equivalents at the end of period $ 93,203,433 $ (10,164,328)
===================== ======================
-17-
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Subsequent events
Initial Public Offering
On November 2, 1999, the Company filed a preliminary prospectus with the
Securities and Exchange Commission for an initial public offering of
7,800,000 shares of class A common stock with an estimated price range of
$16 to $18 per share.
Deferred Compensation
Upon an initial public offering, the certain variable stock option awards
will reach their measurement date. At that date, the Company will record
deferred compensation expense cased on the difference between the estimated
fair value and the exercise price of the award. Deferred compensation has
been estimated to be $9,400,000 and will be recognized as compensation
expense over the related vesting periods, or which approximately $1,700,000
will be recorded as compensation expense in the fourth quarter of 1999.
In addition, certain variable restricted stock awards will become fixed
upon effectiveness of an initial public offering. This will result in
estimated deferred compensation of approximately $53,300,000 of which
$17,600,000 will be recorded as compensation expense in the fourth quarter
of 1999.
In connection with the Viper Wireless transaction (see Note 5), certain
employees, the Chief Executive Officer and the Executive Vice President-
Chief Financial Officer will be issued a total of 1,111 and 503,022 shares
of mandatorily redeemable Series E preferred stock and Class A common
stock, respectively, pending final FCC approval of the share issuance. The
Chief Executive Officer and the Executive Vice President-Chief Financial
Officer's share's vest immediately and the employees' shares vest ratably
over five years. The total estimated fair value of the shares is
approximately $8,600,000 which will be recorded as deferred compensation,
of which $5,500,000 will be recorded as deferred compensation expense in
the fourth quarter of 1999 if final share transfer approval is received for
the FCC.
Stock Split
On November 8, 1999, the Company filed an amendment to its certificate of
incorporation with the Delaware Secretary of State to effect a 3.09-for-1
stock split of its outstanding and authorized Series F preferred stock and
all classes of its common stock. The stock split has been retroactively
reflected in the financial statements for all periods presented. In
addition, the amendment to the Company's certificate of incorporation
increased the authorized number of shares of each of the Class A common
stock and the Class B common stock by 15 million. In addition, the Board of
Directors and the stockholders approved further amendments and restatements
to the Company's certificate of incorporation to become effective upon the
closing of the Company's pending initial public offering, including a 300
million increase in the number of authorized shares of the Company's class
A common stock.
-18-
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pending Acquisitions
On October 18, 1999, the Company agreed to acquire TeleCorp LMDS, Inc.,
(TeleCorp LMDS) through an exchange of all of the outstanding stock of
TeleCorp LMDS for an estimated aggregate purchase price of approximately
$16,900,000. The consideration will be comprised of 2,700 shares of our
Series C preferred stock and 834,300 shares of our Class A common stock.
TeleCorp LMDS' only assets are LMDS licenses. The purchase price has been
preliminarily allocated to the acquired licenses, subject to adjustment,
based on a final valuation. TeleCorp LMDS' stockholders are Mr. Vento, Mr.
Sullivan and three of the Company's Cash Equity Investors. By acquiring
TeleCorp LMDS, the Company will gain local multipoint distribution service,
or LMDS, licenses covering 1100 MHz of spectrum in the Little Rock,
Arkansas basic trading area (BTA) and 150 MHz of spectrum in each of the
Beaumont, Texas, New Orleans, Louisiana, San Juan and Mayeguez Puerto Rico,
and the U.S. Virgin Islands BTAs. The LMDS licenses will provide the
Company with additional spectrum to use to use as back-haul portions of PCS
network traffic in these markets.
On October 14, 1999, the Company agreed to purchase 15 MHz of additional
spectrum in the Lake Charles, Louisiana basic trading area (BTA) from
Gulfstream Telecomm, LLC. Total consideration approximates $2,700,000 and
consists of $362,844 in cash plus the assumption of approximately
$2,300,000 in debt related to the license. Additionally, the Company will
reimburse Gulf Telecomm for all interest it paid to the FCC on debt related
to the license from June 1998 until the date the transaction is completed.
Each of these agreements are subject to governmental approvals and other
customary conditions to closing, and they may not close on schedule or at
all.
Vendor Financing
In October 1999, the Company entered into an amended and restated note
purchase agreement with Lucent for the issuance of up to $12,500,00 of new
series A and up to $12,500,00 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 Lucent note purchase
agreement, Lucent has agreed to make available up to an additional $50.0
million of new vendor financing not to exceed an amount equal to 30% of the
value of equipment, software and services provided by Lucent in connection
with any additional markets we acquire. This $50.0 million of availability
is subject to a reduction up to $20.0 million on a dollar for dollar basis
of any additional amounts Lucent otherwise lends to the Company for such
purposes under our senior credit facility (see Note 4). Any notes purchased
under this vendor financing 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.
-19-
TELECORP PCS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, any Lucent series B notes issued under the vendor expansion
facility will mature and will be subject to a 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.
-20-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and
related notes included elsewhere in this Form 10-Q and the financial statements
and related notes and Management Discussion and Analysis of Financial Condition
and Results of Operations included in our registration statements on Form S-4
initially filed on October 13, 1999 (file no. 333-81313), as amended, and our
Form S-1 initially filed on October 20, 1999 (file no. 333-89393),as amended.
Overview
Our predecessor, TeleCorp Holding Corp., Inc., was incorporated on July
29, 1996 to participate in the FCC's auction of PCS licenses in April 1997, as a
designated entity and very small business, as defined by the FCC. TeleCorp
Holding obtained PCS licenses in the New Orleans, Memphis, Beaumont and Little
Rock basic trading areas, as well as other licenses that were subsequently
transferred to unrelated entities. The FCC has divided the country into major
trading areas which are each further subdivided into basic trading areas for the
purposes of PCS licensing.
We were incorporated on November 14, 1997 by the controlling
stockholders of TeleCorp Holding, which subsequently became our wholly-owned
subsidiary. In January 1998, we entered into a venture with AT&T under which
AT&T contributed PCS licenses to us in exchange for an equity interest in us and
sold additional PCS licenses to us for $21.0 million. In July 1998, we received
final FCC approval for the venture and, in connection with the completion of the
venture, we entered into exclusivity, licensing, roaming and long distance
agreements with AT&T Wireless. We are AT&T's exclusive provider of PCS in our
licensed markets subject to AT&T's right to resell services on our network. We
use the AT&T brand name and logo together with the SunCom name and logo, giving
equal emphasis to each. We have acquired PCS licenses in a total of eight major
trading areas covering approximately 16.5 million people. See "Acquisition
History" below.
For periods prior to 1999 we were a development stage company. In the
first quarter of 1999, we commenced commercial operations in each of our major
mainland U.S. markets, after having launched our New Orleans market for roaming
services in late December 1998. We launched our service in our Puerto Rico
markets on June 30, 1999.
Revenue
We derive our revenue from:
. Service. We sell wireless personal communications services. The various
types of service revenue associated with personal communications services
for our subscribers include monthly recurring charges and monthly non-
recurring airtime charges for local, long distance and roaming airtime used
in excess of pre-subscribed usage. Our customers' charges are rate plan
dependent, based on the number of pooled minutes included in their plans.
Service revenue also includes monthly non-recurring airtime usage
associated with our prepaid subscribers and non-recurring activation and
de-activation service charges.
. Equipment. We sell wireless personal communications handsets and
accessories that are used by our customers in connection with our wireless
services.
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. Roaming. We charge monthly, non-recurring, per minute fees to other wireless
companies whose customers use our network facilities to place and receive
wireless services.
Roaming revenue constituted the largest component of our revenue during the
first six months of this year. We expect that as our customer base grows, there
will be a significant change in our gross revenue mix. As a result, service
revenue is expected to increase while roaming revenues and equipment sales are
expected to decrease, as a percent of gross revenue. Roaming minutes on our
network are expected to increase as AT&T and other carriers increase the number
of subscribers on their networks. Under our reciprocal roaming agreement with
AT&T, our largest roaming partner, the amount we will receive and pay for
roaming minutes declines for each of the next several years.
It appears that the wireless industry is experiencing a general trend
towards offering rate plans containing larger buckets of minutes. This is
expected to result in decreases in gross revenue per minute.
We have autonomy in determining our pricing plans. We have developed our
pricing plans to be competitive and to emphasize the advantages of our service.
We may discount our pricing in order to obtain customers or in response to
downward pricing in the market for wireless communications services.
Cost of Revenue
Equipment. We purchase personal communications handsets and accessories
from third party vendors to resell to our customers for use in connection with
our services. The cost of handsets is, and is expected to remain, higher than
the resale price to the customer. We record as cost of revenue an amount
approximately equal to our revenue on equipment sales. We record the excess cost
of handsets as a sales and marketing operating expense. We do not manufacture
any of this equipment.
Roaming Fees. We pay fees to other wireless communications companies based
on airtime usage of our customers on other communications networks. It is
expected that reciprocal roaming rates charged between us and other carriers
will decrease. We do not have any significant minimum purchase requirements
other than our obligation to purchase at least 15 million roaming minutes from
July 1999 to January 2002 from another wireless provider in Puerto Rico relating
to customers roaming outside our coverage area. We believe we will be able to
meet these minimum requirements.
Clearinghouse Fees. We pay fees to an independent clearinghouse for
processing our call data records and performing monthly inter-carrier financial
settlements for all charges that we pay to other wireless companies when our
customers use their network, and that other wireless companies pay to us when
their customers use our network. We do not have any significant minimum purchase
requirements. These fees are based on the number of transactions processed in a
month.
Variable Interconnect. We pay monthly charges associated with the
connection of our network with other carriers' networks. These fees are based on
minutes of use by our customers. This is known as interconnection. We do not
have any significant minimum purchase requirements.
Variable Long Distance. We pay monthly usage charges to other
communications companies for long distance service provided to our customers.
These variable charges are based on our subscribers' usage, applied at pre-
negotiated rates with the other carriers. We do not have any significant minimum
purchase requirements other than an obligation to AT&T Wireless to purchase a
minimum number of minutes of traffic annually over a specified time period and a
specified number of dedicated voice and data leased lines in order for us to
retain preferred pricing rates. We believe we will be able to meet these minimum
requirements.
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Operating Expense
Operations and development. Our operations and development expense includes
engineering operations and support, field technicians, network implementation
support, product development, and engineering management. This expense also
includes monthly recurring charges directly associated with the maintenance of
network facilities and equipment. Operations and development expense is expected
to increase as we expand our coverage and add subscribers. In future periods, we
expect that this expense will decrease as a percentage of gross revenues.
Selling and marketing. Our selling and marketing expense includes brand
management, external communications, retail distribution, sales training,
direct, indirect, third party and telemarketing support. We also record the
excess cost of handsets over the resale price as a cost of selling and
marketing. Selling and marketing expense is expected to increase as we expand
our coverage and add subscribers. In future periods, we expect that this expense
will decrease as a percentage of gross revenues.
General and administrative. Our general and administrative expense includes
customer support, billing, information technology, finance, accounting and legal
services. Although we expect general and administrative expense to increase in
future periods we expect this expense will decrease significantly as a
percentage of gross revenues.
Upon the closing of our pending initial public offering ("IPO") the value
of some outstanding stock option and restricted stock awards will become fixed,
although most of the awards will remain subject to vesting requirements over
approximately four years. Accordingly, we expect to record approximately $71.3
million on our balance sheet as deferred compensation and additional paid-in
capital, based on an assumed public offering price in the IPO of $17.00 per
share (the mid point of the estimated offering range). The actual amount will be
amortized in the statement of operations as additional compensation expense as
the vesting requirements are met. Because some of these awards will be vested
upon the closing of the IPO, we expect to record a charge of approximately $24.8
million of the $71.3 million based on such assumed public offering price in the
IPO on our statement of operations as compensation expense for the fourth
quarter of 1999.
Depreciation and amortization. Depreciation of property and equipment is
computed using the straight-line method, generally over three to ten years,
based upon estimated useful lives. Leasehold improvements are amortized over the
lesser of the useful lives of the assets or the term of the lease. Network
development costs incurred to ready our network for use are capitalized.
Amortization of network development costs begins when the network equipment is
ready for its intended use and will be amortized over its estimated useful life
ranging from five to ten years. We began amortizing the cost of the PCS
licenses, microwave relocation costs, and capitalized interest in the first
quarter of 1999, when PCS services commenced in some of our basic trading areas.
Microwave relocation entails transferring business and public safety companies
from radio airwaves that overlap with the portion of the airwaves covered by our
business to other portions of the airwaves. Amortization is calculated using the
straight-line method over 40 years. The AT&T agreements are amortized on a
straight-line basis over the related contractual terms, which range from three
to ten years. Amortization of the AT&T exclusivity agreement, long distance
agreement and the inter-carrier roamer services agreement began once wireless
services were available to its customers. Amortization of the network membership
license agreement began on July 17, 1998, the date of the finalization of the
AT&T transaction.
Capital expenditures. Our principal capital requirements for deployment of
our wireless network include installation of equipment and, to a lesser extent,
site development work.
-23-
Interest Income (Expense). Interest income is earned primarily on our cash
and cash equivalents. Interest expense through September 30, 1999 consists of
interest due on our senior credit facilities, vendor financing, and debt owed to
the U.S. government related to our licenses. Interest payable on the Lucent
series A notes and the Lucent series B notes on or prior to May 11, 2004 will be
payable in additional series A and series B notes. Thereafter, interest will be
paid in arrears in cash on each six month and yearly anniversary of the series A
and series B closing date or, if cash interest payments are prohibited under the
senior credit facilities or a qualifying high yield debt offering, in additional
series A and series B notes. The U.S. government financing receives quarterly
interest payments, which commenced in July 1998 and continued for one year
thereafter, then quarterly principal and interest payments for the remaining
nine years.
Results of Operations
Nine Months ended September 30, 1999 Compared to Nine Months ended
September 30, 1998
The Company, which launched commercial service in the first quarter of
1999, grew its customer base to 75,723 at September 30, 1999.
For the nine months ended September 30, 1999, service revenue was $18.9
million, equipment revenue totaled $10.3 million and roaming revenue was $18.9
million. We began offering wireless services in each of our major mainland U.S.
markets in the first quarter of 1999, and in Peurto Rico on June 30, 1999. We
generated no revenue for the nine months ended September 30, 1998.
Cost of revenue, consisting mainly of cost of equipment and roaming fees,
for the nine months ended September 30, 1999 was $23.1 million. We did not
generate any cost of revenue for the nine months ended September 30, 1998.
Operations and development expense for the nine months ended September 30,
1999 was $25.9 million. This expense was primarily related to the engineering
and operating staff required to implement and operate our network. For the nine
months ended September 30, 1998, operations and development expense was $4.1
million as the Company was preparing for commercial launch.
Selling and marketing expense for the nine months ended September 30, 1999
was $39.7 million, as compared to $2.5 million for the nine months ended
September 30, 1998. This increase was due to salary and benefits for a
substantially larger sales and marketing staff, and all other direct sales
costs, including advertising, related to acquiring customers and providing
wireless services. During the nine months ended September 30, 1998 the Company
was preparing for commercial launch.
General and administrative expense for the nine months ended September 30,
1999 was $38.9 million, as compared to $15.6 million for the nine months ended
September 30, 1998. The increase was due to the growth of billing expense
related to our increasing 1999 customer base, as well as the growth of our
infrastructure and staffing related to information technology, customer care,
finance and legal functions incurred in conjunction with the development and
rapid expansion of our markets. During the nine months ended September 30, 1998
the Company was preparing for commercial launch.
Depreciation and amortization expense for the nine months ended September
30, 1999 was $36.0 million, as compared to $0.3 million for the nine months
ended September 30, 1998. This increase was related to the amortization on
personal communications services licenses and AT&T agreements, as well as the
depreciation of our fixed assets subsequent to the commercial launch of our
wireless service markets.
-24-
Interest expense, net of interest income, for the nine months ended
September 30, 1999 was $28.4 million, as compared to $4.7 million for the nine
months ended September 30, 1998. This increase in net interest expenses was
related to borrowings under our senior subordinated discount notes of $344.3
million, our senior credit facilities of $225 million and the issuance of $42.5
million aggregate principal amount of notes under the vendor financing provided
by Lucent.
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
The Company grew its customer base to 75,723 at September 30, 1999. For the
three months ended September 30, 1999 we added 44,753 customers, primarily
related to our continued network build-out in our mainland U.S. markets and the
launch of our Puerto Rico market on June 30, 1999.
For the three months ended September 30, 1999, service revenue was $12.7
million, equipment revenue was $4.7 million and roaming revenue was $9.5
million. Our revenue growth is driven by our increasing customer base in
conjunction with our network build-out. We generated no revenue for the three
months ended September 30, 1998.
Cost of revenue for the three months ended September 30, 1999 was $12.9
million. We did not generate any cost of revenue during these three months of
1998.
Operations and development expense for the three months ended September 30,
1999 was $10.4 million, as compared to $2.9 million for the three months of
1998. The increase was attributable to the commercial launch of our networks
during 1999.
Selling and marketing expenses for the three months ended September 30,
1999 was $18.7 million, as compared to $1.4 million for the three months ended
September 30, 1998. This increase was due to salary and benefits for a
substantially larger sales and marketing staff and all other direct sales costs,
including advertising, related to acquiring customers and providing wireless
services. During the three months ended September 30, 1998 the Company was
preparing for commercial launch.
General and administrative expense for the three months ended September 30,
1999 was $16.5 million, as compared to $7.7 million for the three months ended
September 30, 1998. The increase was due to the growth of billing expense
related to our increasing 1999 customer base, as well as the growth of our
infrastructure and staffing related to information technology, customer care,
finance and legal functions incurred in conjunction with the development and
rapid expansion of our markets.
Depreciation and amortization expense for the three months ended September
30, 1999 was $19.5 million, as compared to $0.2 million for the three months
ended September 30, 1998. This increase is due to the commercial launch of our
wireless network resulting in the depreciation of our fixed assets, as well as
the amortization on personal communications services licenses and AT&T
agreements.
Interest expense, net of interest income, for the three months ended
September 30, 1999 was $14.4 million, as compared to $1.8 million for the three
months ended September 30, 1998. This increase in net interest expenses was
related to borrowings under our senior subordinated discount notes of $344.3
million, our senior credit facilities of $225 million and the issuance of $42.5
million aggregate principal amount of notes under the vendor financing provided
by Lucent.
-25-
Acquisition History
Following approval of our venture with AT&T by the FCC, we completed the
following acquisitions:
On April 20, 1999, we completed the acquisition of PCS licenses covering
the Baton Rouge, Houma, Hammond and Lafayette, Louisiana basic trading areas
from Digital PCS. As consideration for these licenses, we issued to Digital PCS
$2.3 million of our common and preferred stock, paid Digital PCS approximately
$0.3 million in reimbursement of interest paid on U.S. Government debt related
to the licenses and assumed $4.1 million of debt owed to the U.S. government
related to these licenses. This debt is shown on our balance sheet net of a
discount of $0.6 million reflecting the below market interest rate on the debt.
These licenses cover a population of approximately 1.6 million, including a
population of 1.2 million in Baton Rouge and Lafayette covered by licenses we
already owned. These licenses also cover areas contiguous to our existing
licensed area, including travel corridors, which provide us with opportunities
to expand our covered area.
On May 25, 1999, we completed the acquisition of a PCS license and related
assets covering the San Juan major trading area from AT&T. On May 24, 1999, we
sold to AT&T $40.0 million of our series A and F preferred stock. On May 25,
1999, we purchased the license and related assets from AT&T for $95.0 million in
cash. In addition, we reimbursed AT&T $3.2 million for microwave relocation and
$1.5 million for other expenses it incurred in connection with the acquisition.
This license covers a population of approximately 3.9 million in Puerto Rico and
the U.S. Virgin Islands.
On June 2, 1999, we completed the acquisition of PCS licenses covering the
Alexandria, Lake Charles and Monroe, Louisiana basic trading areas from Wireless
2000. As consideration for these licenses, we issued to Wireless 2000
approximately $0.4 million of common and preferred stock, paid Wireless 2000
$0.2 million for its costs for microwave relocation related to the Monroe
license and $0.4 million in reimbursement of interest paid on government debt
related to their licenses, and assumed $7.4 million of debt owed to the U.S.
government related to these licenses. This debt is shown on our balance sheet
net of a discount of $1.0 million reflecting the below market interest rate on
the debt. These licenses cover a population of approximately 0.8 million. These
licenses also cover areas contiguous to our existing licensed area, including
travel corridors, which provide us with opportunities to expand our covered
area. We cannot, without AT&T's consent, develop the markets covered by the
Monroe license.
Our agreements with AT&T were extended to cover these markets, except for a
portion of the Monroe basic trading area, upon the closing of the Louisiana and
Puerto Rico acquisitions.
We participated in the FCC's reauction of PCS licenses for additional
licenses through Viper Wireless. On April 15, 1999, the FCC announced that the
reauction ended, and Viper Wireless was the high bidder for additional airwaves
in New Orleans, Houma and Alexandria, Louisiana, San Juan, Puerto Rico, Jackson,
Tennessee and Beaumont, Texas. The FCC granted us all of these licenses. At
present, TeleCorp Holding owns 85% of Viper Wireless, and Mr. Vento and Mr.
Sullivan together own the remaining 15%. Mr. Vento and Mr. Sullivan together
have voting control over Viper Wireless. On September 30, 1999, we solicited the
approval of the FCC for the transfer of shares of Viper Wireless we do not yet
own to TeleCorp Holding for 503,022 shares of our class A common stock and 1,111
shares of our series E preferred stock. Any consolidation of Viper Wireless into
us will be subject to a final FCC order approving the transaction. In order to
finance the acquisition of Viper Wireless, AT&T and some of our other initial
investors paid $32.3 million for additional shares of our preferred and common
stock.
-26-
Recent Developments
Since September 30, 1999, we have entered into the following agreements:
On October 18, 1999, we agreed to acquire TeleCorp LMDS, Inc. through an
exchange of all of the outstanding stock of TeleCorp LMDS for 834,300 shares of
our class A common stock and 2,700 shares of our series C preferred stock.
TeleCorp LMDS's stockholders are Mr. Vento, Mr. Sullivan and three of our
initial investors. By acquiring TeleCorp LMDS, we will gain local multipoint
distribution service licenses covering 1100 MHz of airwaves in the Little Rock,
Arkansas basic trading area and 150 MHz of airwaves in each of the Beaumont,
Texas, New Orleans, Louisiana, San Juan and Mayaguez, Puerto Rico, and U.S.
Virgin Islands basic trading areas. These licenses will provide us with
additional airwaves that we can use to carry portions of our PCS network traffic
in these markets.
On October 14, 1999, we agreed to purchase 15 MHz of additional airwaves in
the Lake Charles, Louisiana basic trading area from Gulf Telecomm, LCC. As
consideration for the additional airwaves we will pay Gulf Telecomm $362,844 in
cash, assume approximately $2.3 million in FCC debt related to the license and
reimburse Gulf Telecomm for all interest it paid to the FCC on debt related to
the license from June, 1998 until the date the transaction is completed.
Each of these agreements are subject to governmental approvals and other
customary conditions to closing and they may not close on schedule or at all.
From time to time, we enter into discussions regarding the acquisition of other
licenses, including swapping our licenses for those of other license holders.
Liquidity and Capital Resources
Since inception, our activities have consisted principally of hiring a
management team, raising capital, negotiating strategic business relationships,
planning and participating in the personal communications services auction,
initiating research and development, conducting market research and developing
our wireless services offering and network. We have been relying on the proceeds
from borrowings and issuances of capital stock, rather than revenues, for our
primary sources of cash flow. We began commercial operations in December 1998
and began earning recurring revenues by the end of the first quarter of 1999.
Cash and cash equivalents totaled $80.4 million at September 30, 1999, as
compared to $111.7 million at December 31, 1998. This decrease was the result of
cash provided by financing activities of $432.8 million, offset by $87.6 million
of cash used in operating activities and $376.5 million of cash used in network
development, expenditures for microwave relocation, purchase of and deposits on
PCS licenses and investing activities.
During the nine months ended September 30,1999, we increased long-term debt
by $386.4 million, and we received $87.4 million of preferred stock proceeds and
receipts of preferred stock subscription receivables, net of direct issuance
costs. Cash outlays for capital expenditures required to develop and construct
our network totaled $245.5 million and we were required to deposit $32.3 million
with the FCC for personal communications services licenses during the nine
months ended September 30, 1999. Cash used in operating activities of $87.6
million for the nine months ended September 30, 1999 resulted from a net loss of
$144.1 million that was partially offset by non-cash charges of $56.8 million.
Net change in assets and liabilities was a reduction of $0.6 million.
-27-
From inception through September 1998, our primary source of financing was
notes issued to our stockholders. In July 1996, we issued $0.5 million of
subordinated promissory notes to our stockholders. We converted these notes into
50 shares of our series A preferred stock in April 1997. In December 1997, we
issued various promissory notes to our stockholders. We converted these notes
into mandatorily redeemable preferred stock. From January 1 to September 30,
1998, we borrowed approximately $22.5 million in the form of promissory notes to
existing and prospective stockholders to satisfy working capital needs. We
converted these notes into equity of TeleCorp in July 1998 in connection with
the completion of the venture with AT&T.
In connection with completion of the venture with AT&T, we received
unconditional and irrevocable equity commitments from our stockholders in the
aggregate amount of $128.0 million in return for the issuance of preferred and
common stock. As of September 30, 1999, approximately $55.5 million of the
equity commitments had been funded. The remaining equity commitments will be
funded in an installment of $36.3 million in July 2000 and $36.2 million in July
2001.
We received additional irrevocable equity commitments from our stockholders
in the aggregate amount of $5.0 million in return for the issuance of preferred
and common stock in connection with the Digital PCS, Inc. acquisition. Our
stockholders funded $2.2 million of these equity commitments on April 30, 1999,
and will fund $1.4 million on each of July 2000 and July 2001.
We have received additional irrevocable equity commitments from our
stockholders in the aggregate amount of approximately $40.0 million in return
for the issuance of preferred and common stock in connection with the Puerto
Rico acquisition. We received $12.0 million of these commitments on May 24,
1999, and $6.0 million will be funded in December 1999 and $11.0 million will be
funded on each of March 30, 2001 and March 30, 2002.
We also received irrevocable equity commitments from our stockholders in
the amount of $32.3 million in connection with Viper Wireless' participation in
the FCC's re-auction of C-Block licenses. We received $6.5 million of these
equity commitments on May 14, 1999 and $11.0 million on July 15, 1999, and $14.8
million on September 29, 1999. In the aggregate, we have obtained $205.3 million
of cash equity commitments, of which 102.0 million had been funded as of
September 30, 1999.
In July 1998, we entered into senior credit facilities with a group of
lenders for an aggregate amount of $525.0 million. In October 1999 we entered
into amendments to the senior credit facilities under which the amount of credit
available to us was increased to $560.0 million. Our senior credit facilities
provide for:
. a $150.0 million senior secured term loan that matures in January
2007,
. a $225.0 million senior secured term loan that matures in January
2008,
. a $150.0 million senior secured revolving credit facility that
matures in January 2007,
. a $35.0 million senior secured term loan that matures in May 2009
and
. an uncommitted $40.0 million senior secured term loan in the form
of an expansion facility.
We must repay the term loans in quarterly installments, beginning in
September 2002, and the commitments to make loans under the revolving credit
facility are automatically and permanently reduced
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beginning in April 2005. As of September 30, 1999, $225.0 million had been drawn
under the senior credit facilities.
In May 1998, we entered into a vendor procurement contract with Lucent,
under which we agreed to purchase radio, switching and related equipment and
services for the development of our network. Lucent agreed to provide us with
$80.0 million of junior subordinated vendor financing. This $80.0 million
consisted of $40.0 million aggregate principal amount of increasing rate Lucent
series A notes due 2012 and $40.0 million aggregate principal amount of
increasing rate Lucent series B notes due 2012.
As of September 30, 1999, we had outstanding approximately $40.0 million of
the Lucent series A notes, including $1.6 million of Lucent series A notes
issued as payment in kind, plus $2.5 million of additional accrued interest. The
$40 million principal amount of Lucent series A notes is subject to mandatory
prepayment on a dollar for dollar basis out of the proceeds of future equity
offerings in excess of $130.0 million.
In October 1999, the Company entered into an amended and restated note
purchase agreement with Lucent for the issuance of up to $12.5 million of new
series A and up to $12.5 million 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 Lucent note purchase
agreement, Lucent has agreed to take available up to an additional $50.0 million
of new vendor financing not to exceed an amount equal to 30% of the value of
equipment, software and services provided by Lucent in connection with any
additional markets we acquire. This $50.0 million of availability is subject to
a reduction up to $20 million on a dollar for dollar basis of any additional
amounts Lucent otherwise lends to the Company for such purposes under our senior
credit facility. Any notes purchased under this vendor financing facility would
be divided equally between Lucent series A and series B notes.
As of September 30, 1999, we have $20.5 million of debt owed to the U.S.
government related to our C-Block and F-Block licenses. This debt is shown on
our balance sheet at $17.9 million net of discounts of $2.6 million reflecting
the below market interest rates on the debt. We assumed $4.1 million of debt to
the U.S. government in connection with the Digital PCS, LLC acquisition. This
debt is shown on our balance sheet net of a discount of $0.7 million reflecting
the below market interest rate on the debt. In addition, we assumed $7.4 million
of debt to the U.S. government in connection with the Wireless 2000 acquisition.
This debt is shown on our balance sheet net of a discount of $1.3 million
reflecting the below market interest rate on the debt.
-29-
From inception through December 31, 1998, cash outlays for capital
expenditures were $108.7 million. The continued construction of our network and
the marketing and distribution of wireless communications products and services
will require substantial additional capital. We will incur significant amounts
of debt to implement our business plan and will therefore be highly leveraged.
We estimate that our total capital requirements from our inception until
December 31, 2002 will be approximately $1.2 billion. These requirements include
license acquisition costs, capital expenditures for network construction,
operating cash flow losses and other working capital costs, debt service and
closing fees and expenses. Cash outlays for capital expenditures from inception
to September 30, 1999 were $354.2 million. We estimate that cash outlays for
capital expenditures will total approximately $299.5 million for the year ended
December 31, 1999.
Year 2000
The year-2000 issue is the result of computer programs being written using
two digits, rather than four digits, to define the applicable year. Programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations, including an inability to process transactions, send invoices
or engage in similar normal business activities. Because we rely on computer
hardware and software, telecommunications and related service industries are
highly susceptible to the year-2000 issue. Over the past two years, as we
purchased the various components that comprise our internal information
technology systems, we received representations from our vendors that these
components were year-2000 compliant. We have begun the process of evaluating our
information technology systems to verify the accuracy of the representations
made by our vendors. Our costs to date have been immaterial, and we anticipate
that our total costs in evaluating our information technology system will not
exceed $5.0 million, including costs to build the necessary redundancy into our
systems.
Our non-information technology systems may also be susceptible to the year-
2000 issues. In particular, our network switches contain embedded components
that are date sensitive. We have received assurances from Lucent that all of our
network hardware purchased from them is year-2000 compliant. The failure of our
network switches would have a material adverse effect on our business.
We also depend upon the ability of AT&T, AT&T's roaming partners and EDS to
ensure that their software and equipment are year-2000 compliant. We rely on
AT&T to provide our customers with over-the-air activation and roaming. We rely
on EDS to provide clearinghouse services. There can be no guarantee that their
systems will be year-2000 compliant on a timely basis or that their systems will
be compatible with our systems. Year-2000 noncompliance or incompatible systems
could have a material adverse effect on our business.
Forward Looking Statements; Cautionary Statement
Statements in this report expressing our expectations and beliefs of the
Company regarding our future results or performance are forward-looking
statements that involve a number of risks and uncertainties. In particular,
certain statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical facts
constitute "forward-looking statements." Our actual future results may differ
significantly from those stated in any forward-looking statements.
Factors that may cause or contribute to such differences include, but are
not limited to, risks discussed in our Registration Statement on Form S-1 (Reg.
No. 333-89393) and from time to time in our other filings with the Securities
and Exchange Commission, including, without
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limitation, the following: (1) we depend on our agreements with AT&T for our
success, and under certain circumstances AT&T could terminate its exclusive
relationship with us and our use of the AT&T brand name and logo, (2) we may not
be able to manage the construction of our network or the growth of our business
successfully, (3) we have substantial existing debt, and may incur substantial
additional debt, that we may be unable to service, (4) we may not be able to
obtain the additional financing we may need to complete our network and fund
operating losses, (5) we have many competitors that have substantial coverage of
our licensed areas, (6) difficulties in obtaining infrastructure equipment or
sites may affect our ability to construct our network and meet our development
requirements, (7) potential acquisitions may require us to incur substantial
additional debt and integrate new technologies, operations and services, which
may be costly and time consuming, (8) we may experience a high rate of customer
turnover, (9) our association with the other SunCom companies may harm our
reputation if consumers react unfavorably to them, (10) we depend upon
consultants and contractors for our network services, (11) we may become subject
to new health and safety regulations, which may result in a decrease in demand
for our services, (12) changes in our licenses or other governmental action or
regulation could affect how we do business, (13) we could lose our PCS licenses
or incur financial penalties if the FCC determines we are not a very small
business or if we do not meet the FCC's minimum construction requirements, (14)
the technologies that we use may become obsolete, which would limit our ability
to compete effectively, (15) we expect to incur operating costs due to fraud,
and (16) we depend on our third party service providers to become year-2000
compliant and we can not assure that this will occur.
As a result of the foregoing and other factors, we may experience material
fluctuations in future operating results on a quarterly or annual basis which
could materially and adversely affect our business, financial condition,
operating results and stock price. We specifically decline any obligation to
publicly release the result of any revisions which may be made to forward-
looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statement.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are not exposed to fluctuations in currency exchange rates since all of
our services are invoiced in U.S. dollars. We are exposed to the impact of
interest rate changes on our short-term cash investments, consisting of U.S.
Treasury obligations and other investments in respect of institutions with the
highest credit ratings, all of which have maturities of three months or less.
These short-term investments carry a degree of interest rate risk. We believe
that the impact of a 10% increase or decline in interest rates would not be
material to our investment income.
We use interest rate swaps to hedge the effects of fluctuations in interest
rates on our senior credit facilities. These transactions meet the requirements
for hedge accounting, including designation and correlation. These interest rate
swaps are managed in accordance with our policies and procedures. We do not
enter into these transactions for trading purposes. The resulting gains or
losses, measured by quoted market prices, are accounted for as part of the
transactions being hedged, except that losses not expected to be recovered upon
the completion of hedged transactions are expensed. Gains or losses associated
with interest rate swaps are computed as the difference between the interest
expense per the amount hedged using the fixed rate compared to a floating rate
over the term of the swap agreement. As of September 30, 1999, we have entered
into six interest rate swap agreements totaling $225 million to convert our
variable rate debt to fixed rate debt. The interest rate swaps had no material
impact on our consolidated financial statements as of and for the year ended
December 31, 1998 or the nine month period ended September 30, 1999.
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Part II--Other Information
Item 2. Changes in Securities and Use of Proceeds
(a) In August we amended and restated our Certificate of Incorporation
to effect a 100-for-1 stock split of the Class A Common Stock, Class B Common
Stock, Class C Common Stock, Class D Common Stock, Voting Preference Common
Stock, Series F Preferred Stock, and Senior Common Stock and a corresponding
increase of the authorized shares of Class A Common Stock, Class B Common Stock,
Class C Common Stock, Class D Common Stock, Voting Preference Common Stock,
Series F Preferred Stock and Senior Common Stock to account for the split.
In November we further amended our Certificate of Incorporation to effect a
3.09-for-1 stock split of the Class A Common Stock, Class B Common Stock, Class
C Common Stock, Class D Common Stock, Voting Preference Common Stock, Series F
Preferred Stock and Senior Common Stock and a corresponding increase of the
authorized shares of Class A Common Stock, Class B Common Stock, Class C Common
Stock, Class D Common Stock, Voting Preference Common Stock, Series F Preferred
Stock and Senior Common Stock to account for the split, plus an increase of an
additional 15 million shares of each of the Class A Common Stock and Class B
Common Stock. Our Fourth Amended and Restated Certificate of Incorporation, as
amended, is attached as an exhibit to this Form 10-Q.
(b) During the third quarter ended September 30, 1999, we sold shares of
our common stock and preferred stock in the amounts (restated to account for our
100-for-1 and 3.09-for-1 stock splits), at the times, and for the aggregate
amounts of consideration listed below without registration under the Securities
Act of 1933. Exemption from registration under the Securities Act for each of
the following sales is claimed under Section 4(2) of the Securities Act because
such transactions were by an issuer and did not involve a public offering.
(i) On July 15, 1999 we issued 1,678.44 shares of Series D Preferred
Stock, 518,638 shares of Series F Preferred Stock, 9,380.75 shares of Series C
Preferred Stock and 2,898,652 shares of Class A Common Stock to 15 entities for
an aggregate consideration of $11,059,190.
(ii) On September 29, 1999, we issued 2,241.56 shares of Series D
Preferred Stock, 692,642 shares of Series F Preferred Stock, 12,528.05 shares of
Series C Preferred Stock and 3,871,168 shares of Class A Common Stock to 15
entities for an aggregate consideration of $14,769,610.
Item 4. Submission of Matters to a Vote of Security Holders
On August 27, 1999, the holders of 94% of the Class A Common Stock and all
of the holders of the Voting Preference Common Stock, by written consent,
approved amendments to our Certificate of Incorporation effecting a 100-for-1
stock split of all of the classes of Common Stock, the Series F Preferred Stock
and Senior Common Stock and a corresponding increase of the authorized shares of
all of the classes of Common Stock, Series F Preferred Stock and Senior Common
Stock. The holders of 6% of the Class A Common Stock took no action with respect
to such consent.
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Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed with this report:
3.1 Fourth Amended and Restated Certificate of Incorporation, as amended,
of Telecorp PCS, Inc.
27.1 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELECORP PCS, INC.
Dated: November 15, 1999 By: /s/ Thomas H. Sullivan
____________________________________________
Thomas H. Sullivan,
Executive Vice President and Chief Financial
Officer
SUBSIDIARY
TELECORP COMMUNICATIONS, INC.
Dated: November 15, 1999 By: /s/ Thomas H. Sullivan
____________________________________________
Thomas H. Sullivan,
Executive Vice President and Chief Financial
Officer
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INDEX TO EXHIBITS
3.1 Fourth Amended and Restated Certificate of Incorporation, as amended,
of TeleCorp PCS, Inc.
27.1 Financial Data Schedule.
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