<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1996.
REGISTRATION NO. 333-07161
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
GENERAL WIRELESS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 4812 75-2550006
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION)
----------------
8144 WALNUT HILL LANE
SUITE 600
DALLAS, TEXAS 75231
(214) 265-2550
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ROGER D. LINQUIST
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GENERAL WIRELESS, INC.
8144 WALNUT HILL LANE
SUITE 600
DALLAS, TEXAS 75231
(214) 265-2550
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
COPIES TO:
EDWARD M. LEONARD, ESQ. JOHN D. WATSON, JR., ESQ.
BROBECK, PHLEGER & HARRISON LLP LATHAM & WATKINS
TWO EMBARCADERO PLACE 1001 PENNSYLVANIA AVE., N.W.
2200 GENG ROAD SUITE 1300
PALO ALTO, CALIFORNIA 94303 WASHINGTON, D.C. 20004-2505
(415) 424-0160 (202) 637-2200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 23, 1996
PROSPECTUS
SHARES
GENERAL WIRELESS, INC.
CLASS C COMMON STOCK
All of the shares of the Company's Class C Common Stock offered hereby (the
"Stock Offering") are being sold by General Wireless, Inc. ("General Wireless"
or the "Company"). Prior to the Stock Offering, there has been no public market
for the Class C Common Stock of the Company. It is currently estimated that the
initial public offering price will be between $ and $ per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. Application has been made to have the
Company's Class C Common Stock approved for quotation on the Nasdaq National
Market under the symbol "GWIR."
Upon completion of the Stock Offering, the Company will have two classes of
common stock outstanding: Class A Common Stock and Class C Common Stock
(collectively, the "Common Stock"). The economic rights of each class of Common
Stock are identical but the voting rights are different. Under the Company's
Amended and Restated Certificate of Incorporation, each outstanding share of
Class C Common Stock has a voting interest in the voting power of the Common
Stock as a whole equal to the quotient derived from dividing 49.9% by the
number of shares of Class C Common Stock issued and outstanding on all matters
except the election of directors or as otherwise provided by law, and each
outstanding share of Class A Common Stock has a voting interest in the voting
power of the Common Stock as a whole equal to the quotient derived from
dividing 50.1% by the number of shares of Class A Common Stock issued and
outstanding on all matters except the election of directors or as otherwise
provided by law. Upon completion of the Stock Offering and assuming no exercise
of options or warrants, each share of Class C Common Stock outstanding will
carry a voting interest of %. With respect to the election of directors, the
Class C Common Stock, voting together as a separate class, is entitled to elect
members to the Company's Board of Directors who collectively will represent
three of the seven votes of the Company's Board of Directors, and the Class A
Common Stock, voting together as a separate class, is entitled to elect members
to the Company's Board of Directors who collectively will represent four of the
seven votes of the Company's Board of Directors. See "Description of Capital
Stock."
Concurrently with the Stock Offering and pursuant to a separate prospectus,
the Company is making a public offering of units (the "Units"), each
consisting of $1,000 principal amount at maturity of % Senior Discount Notes
due , 2007 (the "Senior Discount Notes") and warrants (the
"Warrants") to purchase shares of Class C Common Stock, sufficient to
generate approximately $220 million in gross proceeds to the Company (the "Unit
Offering"). The Stock Offering and the Unit Offering are collectively referred
to herein as the "Offerings." The closing of the Unit Offering and the closing
of the Stock Offering are each conditioned upon the closing of the other.
----------
INVESTMENT IN THE CLASS C COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share............................... $ $ $
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Total(3)................................ $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of additional
shares of Class C Common Stock at the price to the public less underwriting
discounts and commissions for the purpose of covering over-allotments, if
any. If the Underwriters exercise such option in full, the total price to
the public, underwriting discounts and commissions and proceeds to Company
will be $ , , and $ , respectively. See "Underwriting."
----------
The shares of Class C Common Stock are offered subject to prior sale, when,
as and if delivered to and accepted by the Underwriters, and subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares will be made on or about at the office of Bear,
Stearns & Co. Inc., New York, N.Y.
----------
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
SALOMON BROTHERS INC
J.P. MORGAN & CO.
, 1996
<PAGE>
GENERAL WIRELESS PCS MARKETS
19.8 MILLION POPS
[GRAPHIC OF MAP OF UNITED STATES WITH ENLARGEMENTS DEPICTING
THE COMPANY'S MARKETS IN THE SAN FRANCISCO CLUSTER,
THE MIAMI CLUSTER AND
THE ATLANTA CLUSTER APPEARS HERE.]
<TABLE>
<CAPTION>
SAN FRANCISCO CLUSTER MIAMI CLUSTER ATLANTA CLUSTER
- --------------------------------- ------------------------ -----------------
<S> <C> <C>
(10.0 million POPs) (5.6 million POPs) (4.1 million POPs)
.San Francisco--Oakland--San Jose .Miami--Fort Lauderdale .Atlanta
.Sacramento .West Palm Beach .Gainesville
.Monterey--Salinas .Fort Myers .Athens
.Stockton .Naples
.Chico--Oroville .Fort Pierce--Vero Beach
.Yuba City--Marysville
</TABLE>
IN CONNECTION WITH THE STOCK OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS
C COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
General Wireless, Inc. and the General Wireless logo are trademarks of the
Company. This Prospectus also includes trademarks of companies other than the
Company.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus, other than the
historical financial information, (i) assumes and gives effect to the
completion of the Offerings, (ii) does not give effect to the exercise of the
Underwriters' over-allotment option, (iii) gives effect to the grant on ,
(the "License Grant Date") of the personal communications services ("PCS")
licenses for which the Company was the high bidder in the 30 MHz C-Block
auction (the "C-Block Auction") conducted by the Federal Communications
Commission ("FCC"), which grant has not occurred as of December 23, 1996, (iv)
reflects a 10-for-1 stock split to be effected prior to the effective date of
the Stock Offering and (v) reflects the conversion of Class B Common Stock into
Class C Common Stock on a one-to-one basis, which will occur upon the closing
of the Stock Offering. As used in this Prospectus with respect to a given area,
the term "POPs" refers to the aggregate number of persons located in such area,
based on the 1995 estimated U. S. population data in the 1995 PCS Atlas and
Data Book published by Paul Kagan Associates, Inc. ("Kagan Associates"). Unless
the context otherwise requires, references to the "Company" or "General
Wireless" herein refer to General Wireless, Inc. and its consolidated
subsidiaries. See the "Glossary" beginning on page 83 for a definition of
certain terms used herein. Certain of the information contained in this summary
and elsewhere in this Prospectus, including information with regard to the
Company's business, are forward-looking statements. For a discussion of
important factors that could affect such matters, see "Risk Factors" beginning
on page 10.
THE COMPANY
General Wireless intends to become a leading provider of affordable wireless
communications services. The Company holds PCS licenses to serve the rapidly
growing metropolitan areas of San Francisco, Atlanta and Miami (the
"Metropolitan Areas"), as well as 11 selected high-growth contiguous markets.
In total, the Company's markets contain 19.8 million POPs, approximately 71% of
which are located in the Metropolitan Areas. The Company believes that this is
the highest percentage of total POPs located in densely populated urban markets
(markets having at least three million POPs) of any PCS or cellular operator in
the United States. Additionally, the Company believes its markets are
particularly attractive because of their high historical and projected
population growth rates, as well as other desirable demographic
characteristics, such as high population densities, favorable business
climates, high median household income levels and long commute times. From 1990
through 1995, the aggregate population of the Company's markets has grown at
over 150% of the national rate and is expected to continue to grow at a rate
above the national average. The Company plans to launch commercial service on
its PCS networks during the first half of 1998.
The demand for wireless communications services in the United States has
grown dramatically during the last five years, notwithstanding the technical
limitations of existing analog cellular technology. The number of cellular
subscribers has grown from 5.3 million at December 31, 1990 to 33.8 million at
December 31, 1995, representing a compound annual growth rate of 45%. Over the
same time period, the wireless telephony penetration rate has grown from
approximately 3% to approximately 13%, and is forecasted by Kagan Associates to
reach approximately 47% by 2006.
The Company believes that, due to relatively high per minute airtime charges
and unpredictable monthly bills, there is a price-sensitive mass consumer
market that refrains from subscribing to or extensively using cellular
services. The Company believes that if the mass consumer market were offered
significantly lower per minute airtime charges and more predictable and
affordable pricing plans, mass consumers would increase their use of wireless
communications services, contributing to a new phase of growth in the industry.
The Company also believes that business customers who are high-volume users of
wireless communications services will be attracted to lower priced airtime
service, as such high-volume users would realize substantial aggregate savings.
3
<PAGE>
STRATEGY
The Company intends to become a leading provider of affordable wireless
communications services. The Company's strategy to achieve this objective is
based upon the following:
OPERATE IN LARGE, RAPIDLY GROWING MARKETS WITH ATTRACTIVE DEMOGRAPHIC
PROFILES. The Company believes there are significant advantages created by
focusing on densely populated major metropolitan markets. First, cell site
efficiencies can be maximized in densely populated areas, thereby reducing
network build-out costs per subscriber and providing greater pricing
flexibility. Accordingly, the Company can achieve a higher ratio of population
coverage to geographic coverage relative to PCS and cellular operators in less
densely populated markets. Second, these markets have multiple business centers
and residential areas that generally have a high demand for mobile
communications services. Third, cellular operators typically face significant
capacity constraints in high traffic areas due to the analog technology used in
a majority of their networks. Fourth, major markets have numerous local,
regional and national retailers as well as agents and resellers that can
facilitate rapid growth by new wireless entrants.
USE A FOCUSED NETWORK BUILD-OUT TO ACHIEVE LOW COSTS. General Wireless
intends to achieve lower operating costs and capital requirements relative to
its PCS and cellular competitors by concentrating its network build-out in
"high-usage areas" rather than building out wide-area cellular-like networks.
The Company defines "high-usage areas" as those areas where the majority of the
population lives, commutes, works and shops. These areas primarily include
densely populated urban areas, commuting corridors and high-growth suburban
areas. The Company plans to limit the construction of its networks outside of
these high-usage areas because it believes the incremental cost of building out
such network coverage is substantial and is inconsistent with the Company's
objective to be the low-cost provider of wireless communications services.
Based on network design analysis completed by the Company and Lucent
Technologies Inc. ("Lucent"), the Company plans to spend approximately $11 per
POP through the end of 1997 for the build-out of its PCS networks, which, once
commercial service is launched during the first half of 1998, would provide
coverage to approximately 80% of the aggregate population of its markets.
Additionally, the Company intends to spend approximately $3 per POP in 1998 to
provide additional capacity on its PCS networks. The Company believes its per
POP network build-out costs will be significantly less than those of its
competitors. The Company believes its focused build-out strategy differs from
the strategy of many existing cellular operators and from the expected strategy
of many PCS operators that are expected to compete by placing greater emphasis
on coverage area rather than on airtime prices. The Company's strategy
parallels those used by certain competitive local exchange carriers ("CLECs")
and interexchange carriers ("IXCs") that have targeted specific coverage areas
of major markets and are interconnected to other carriers' facilities for
expanded coverage. Additionally, the Company intends to use what it believes is
the most cost-effective digital technology, code division multiple access
("CDMA"), and outsource selected technical and administrative functions.
LEVERAGE TURNKEY RELATIONSHIP WITH LUCENT TO CONSTRUCT A HIGH QUALITY
NETWORK. The Company has entered into a definitive agreement with Lucent (the
"Lucent Equipment Agreement") under which the Company has selected Lucent to be
its primary network vendor to undertake the construction and implementation of
the Company's PCS networks. Lucent is a leading provider of telecommunications
equipment and has significant experience building 1900 MHz CDMA-based PCS
networks, including portions of the networks being used by PrimeCo Personal
Communications L.P. ("PrimeCo") and Sprint PCS L.P. ("Sprint PCS"). Under the
"turnkey" arrangement, Lucent will have broad responsibilities for program
management, radio frequency ("RF") engineering, site acquisition, network
design, spectrum clearing and microwave removal, and site construction and
equipment procurement. The Company's networks will be built with Lucent mini-
cell equipment, 5ESS(R)-2000 switches, transmission equipment and power
systems, and will have CDMA technology that the Company believes will allow it
to offer wireless telephone voice quality comparable to wireline telephone
voice quality. The Company believes that through future innovations expected to
be developed by Lucent's Bell Laboratories research unit, Lucent will be able
to provide next-generation products to enhance the functionality and
performance of the Company's networks. The Lucent Equipment Agreement enables
the Company to monitor and control the major activities of the network build-
out.
4
<PAGE>
IMPLEMENT AN INNOVATIVE AND AFFORDABLE PRICING STRUCTURE. General Wireless
plans to implement an innovative and affordable pricing structure to capitalize
on wireless customers' demand sensitivity to price. The Company believes that a
substantial market opportunity exists to narrow the pricing gap between
existing cellular airtime and wireline telephone rates, which approximate 45
cents and 5 cents per minute of use, respectively. Relative to current cellular
service packages, General Wireless expects to offer service packages that
include larger blocks of prepaid minutes consisting of both peak and off-peak
airtime at significantly lower effective prices per minute. Based on this
pricing strategy, General Wireless expects to realize average revenue per unit
("ARPU") similar to that currently achieved by cellular operators without
negatively impacting its operating margins. Additionally, the Company believes
that its cost structure will better support more affordable pricing relative to
PCS competitors that provide wide-area cellular-like coverage.
MAXIMIZE CUSTOMER REACH THROUGH EXTENSIVE USE OF INDIRECT DISTRIBUTION
CHANNELS. The Company's distribution strategy will emphasize indirect channels
in general, and retailers in particular. The Company believes it will realize
several important advantages from this distribution strategy. First, the
Company believes that the use of multiple indirect channels will enable the
Company to achieve a fast ramp-up of subscribers through representation at
numerous points of purchase. Second, the Company believes that indirect
distribution channels will cost-effectively focus the Company's sales and
marketing resources directly on customer creation, as opposed to investment in
Company stores and related infrastructure. Third, the focus on retailers and
agents, rather than resellers, will better allow the Company to maintain a
direct relationship with its customer base through billing and customer
service. The Company believes that direct contact with its customers will allow
it to realize better customer satisfaction and achieve lower customer turnover.
FINANCING PLAN
The Company expects its financing plan to fund the Company's business through
at least the end of 1998. In the C-Block Auction, the Company bid in the
aggregate approximately $1.1 billion for its PCS licenses. By the terms of the
C-Block Auction, the Company will receive financing from the U.S. government
(the "Government Financing") for 90% of the purchase price of the licenses
(approximately $954 million) for a 10-year period commencing on the License
Grant Date at a fixed interest rate equal to %, representing the coupon rate
on the 10-year Treasury Notes at the auction most recently completed prior to
the License Grant Date. Under the terms of the Government Financing,
subsidiaries of the Company holding PCS licenses (the "License Subsidiaries")
are required to make quarterly payments of interest only for the first six
years of the licenses and quarterly payments of interest and principal over the
remaining four years of the license terms. The Company raised the remaining 10%
of the purchase price of its PCS licenses from private equity and debt
investors. See "Risk Factors--Government Regulation" and "Description of
Certain Indebtedness."
In aggregate, the Company estimates that it will require $542 million of
financing to fund its business plan from the effective date of the Offerings
through the end of 1998. The Company will require funding for capital
expenditures, interest expense payments, operating losses, working capital and
other general corporate purposes. Such capital expenditures include network
infrastructure equipment, site selection and acquisition and other costs
related to the buildout of the Company's PCS networks. To the extent unexpected
expenditures arise or the Company's estimates prove to be inaccurate, the
Company may require additional financing. After 1998, the Company may also
require substantial additional capital to fund growth, debt service
requirements and anticipated future operating losses. Due to its highly
leveraged capital structure, there can be no assurance that the Company will be
able to obtain such financing or that any such financing will be on terms
favorable to the Company. See "Risk Factors--Significant Capital Requirements;
Financing Risks" and "Certain Transactions."
5
<PAGE>
In aggregate, the Company intends to have raised or have available $615
million to fund the Company's business plan from the effective date of the
Offerings through the end of 1998. The Company expects sources of funding to
include the Stock Offering, the Unit Offering and drawdowns on vendor financing
to be provided by Lucent. The Company has received a commitment from Lucent to
provide vendor financing of up to $300 million of senior secured loans (the
"Lucent Financing") for the purchase of infrastructure equipment and certain
related network buildout costs. The Lucent Financing provides for an initial
$200 million credit facility with an eight-year term ("Tranche A") and a
subsequent $100 million credit facility available commencing January 1, 1998
with a seven-year term ("Tranche B"). The Company anticipates that funding
provided by Tranche A will allow the Company to construct PCS networks by the
end of 1997, which, once commercial service is launched during the first half
of 1998, would provide coverage to approximately 80% of the aggregate
population of its markets and that Tranche B will allow for financing of
additional equipment needed to support future growth in the Company's
subscriber base. The Lucent Financing is subject to the parties negotiating and
entering into an agreement in definitive form and the satisfaction of certain
conditions. There can be no assurance that the Company and Lucent will enter
into such a definitive agreement or that the conditions to the Lucent Financing
will be met. See "Risk Factors--Significant Capital Requirements; Financing
Risks," "--PCS Network Construction and Implementation Risks" and "Description
of Certain Indebtedness."
The following table sets forth the Company's estimated sources and uses of
funds on an aggregate basis from the effective date of the Offerings through
the end of 1998:
<TABLE>
<S> <C>
AMOUNTS
(IN MILLIONS)
SOURCES OF FUNDS:
Lucent Financing.......................................... $251
Unit Offering net proceeds................................ 211
Stock Offering net proceeds............................... 153
----
Total.................................................... $615
====
USES OF FUNDS:
Capital expenditures...................................... $273
Interest expense payments on Government Financing and Lu-
cent Financing........................................... 157
Operating losses and working capital...................... 112
Other, including general corporate purposes............... 73
----
Total.................................................... $615
====
</TABLE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of the Offerings, the Company will have two classes of Common
Stock outstanding: Class A Common Stock and Class C Common Stock. The economic
rights of each class of Common Stock are identical but the voting rights are
different. Under the Company's Amended and Restated Certificate of
Incorporation, each outstanding share of Class C Common Stock has a voting
interest in the voting power of the Common Stock as a whole equal to the
quotient derived from dividing 49.9% by the number of shares of Class C Common
Stock issued and outstanding on all matters except the election of directors or
as otherwise provided by law, and each outstanding share of Class A Common
Stock has a voting interest in the voting power of the Common Stock as a whole
equal to the quotient derived from dividing 50.1% by the number of shares of
Class A Common Stock issued and outstanding on all matters except the election
of directors or as otherwise provided by law. Upon completion of the Stock
Offering and assuming no exercise of options or warrants, each share of Class C
Common Stock outstanding will carry a voting interest of %. With respect to
the election
6
<PAGE>
of directors, the Class C Common Stock, voting together as a separate class, is
entitled to elect members to the Company's Board of Directors who collectively
will represent three of the seven votes of the Company's Board of Directors,
and the Class A Common Stock, voting together as a separate class, is entitled
to elect members to the Company's Board of Directors who collectively will
represent four of the seven votes of the Company's Board of Directors.
The Company's capital structure has been designed to meet FCC and other
government rules and requirements. Failure to comply with FCC and other
government rules and requirements could have a material adverse effect upon the
Company. See "Risk Factors--Substantial Debt Obligations to the U.S.
Government; Implications of Accounting Treatment," "--Government Regulation,"
"--C-Block License Requirements," "--Effect of Control by Certain
Stockholders," "--Dilution," "Legislation and Government Regulation" and
"Description of Capital Stock."
----------------
7
<PAGE>
THE STOCK OFFERING
Class C Common Stock offered.... shares
Capital Stock to be outstanding
after the Stock Offering(1)
Class A Common Stock........
30 shares
shares(2)
Total...................
Class C Common Stock........
shares
Use of proceeds.................
The net proceeds of the Offerings will be
used to finance interest expense payments on
the Government Financing and the Lucent
Financing, operating losses, working capital
requirements, capital expenditures not funded
by the Lucent Financing and for general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market GWIR
symbol.........................
Unit Offering................... Concurrently with the Stock Offering and
pursuant to a separate prospectus, the
Company is making the Unit Offering of
Units, each consisting of $1,000 principal
amount at maturity of Senior Discount Notes
and Warrants to purchase shares of Class
C Common Stock, sufficient to generate
approximately $220 million in gross proceeds
to the Company. The Warrants, when exercised,
would entitle the holders thereof to purchase
shares of Class C Common Stock representing
% of the Class C Common Stock of the Company
on a fully diluted basis after giving effect
to the Offerings. The closing of the Unit
Offering and the closing of the Stock
Offering are each conditioned upon the
- -------- closing of the other.
(1) Based on the number of shares outstanding as of September 30, 1996.
Excludes (i) stock options to purchase 2,093,310 shares of Class C Common
Stock with an exercise price of $5.00 per share, all of which are
exercisable, 1,316,780 of which are fully vested and the remainder of which
vest over a five-year period from the grant date and (ii) warrants to
purchase (a) 105,000 shares of Class C Common Stock with an exercise price
of $5.00 per share, (b) 3,386,750 shares of Class C Common Stock with an
exercise price of $10.00 per share and (c) 400,000 shares of Class C Common
Stock with an exercise price of $0.001 per share, all of which are fully
vested and exercisable. Also excludes (i) stock options to purchase (a)
shares of Class C Common Stock to be granted to the General Wireless
Employee Trust and (b) 90,300 shares of Class C Common Stock to be granted
to certain non-employee directors, such options to be granted on the
effective date of the Stock Offering at the fair market value of such
shares on such date; and (ii) 500,000 shares of Class C Common Stock
reserved for issuance under the Company's Employee Stock Purchase Plan.
Also excludes warrants to purchase (i) 250,000 shares of Class C Common
Stock at an exercise price of $10.00 per share issued or to be issued to
Hyundai Electronics America ("Hyundai"), (ii) shares of Class C Common
Stock at an exercise price equal to the initial public offering price to be
issued to Lucent in connection with the Lucent Financing and (iii)
shares of Class C Common Stock at an exercise price of per share to be
offered in the Unit Offering. See "Management--1996 Stock Option Plan," "--
Employee Stock Purchase Plan," "Certain Transactions," "Description of
Certain Indebtedness" and Note 3 of Notes to Consolidated Financial
Statements for a description of the completion of pro forma net loss per
share and pro forma weighted average number of shares outstanding.
(2) Includes 5,000,000 shares of Class C Common Stock to be purchased by
Hyundai, of which 70,000 was purchased shortly after the License Grant Date
and 4,930,000 is expected to be purchased on or about the closing date of
the Stock Offering.
8
<PAGE>
SUMMARY AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ----------------------------
1994 1995 1995 1996
--------- ---------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues.................. $ -- $ -- $ -- $ --
Gross profits............. -- -- -- --
Loss from operations...... (448) (791) (540) (1,342)
Net loss.................. $ (433) $ (744) $ (512) $ (1,225)
Net loss per share(1).....
Weighted average number of
shares
outstanding(1)...........
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1996
-------------------- ----------------------------
PRO FORMA AS
1994 1995 HISTORICAL ADJUSTED (2)
--------- ---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equiva-
lents.................... $ 918 $ 2,688 $ 6,569 $ 364,986
PCS license deposits ..... -- 53,982 -- --
PCS license down pay-
ments.................... -- -- 52,983 --
PCS licenses.............. -- -- -- 717,877
Total assets.............. 937 56,693 59,634 1,091,945
Government Financ-
ing(3)................... -- -- -- 611,911
Lucent Financing(4)....... -- -- -- --
Senior Discount Notes(5).. -- -- -- 220,000
Total stockholders' equi-
ty....................... 868 54,977 57,579 257,979
</TABLE>
- --------
(1) See Note 3 of Notes to Consolidated Financial Statements.
(2) The pro forma as adjusted column gives effect to certain events that
occurred or are expected to occur subsequent to September 30, 1996: (i) the
grant of the Company's PCS licenses, (ii) the payment to the FCC of $53.0
million representing five percent of the purchase price of the PCS
licenses, (iii) the drawdown of $49.3 million of debt from Hyundai (the
"Hyundai Loan"), (iv) the purchase by Hyundai of 70,000 units consisting of
one share of Class C Common Stock and a warrant to purchase 0.05 shares of
Class C Common Stock at an exercise price of $10.00 per share ("Hyundai
Unit") at a price of $10 per Hyundai Unit, for an aggregate price of
$700,000 (the "Initial Hyundai Stock Purchase") and (v) the incurrence of
$953.7 million (face amount) of Government Financing. The pro forma as
adjusted column also reflects the following events expected to occur upon
the consummation of the Offerings: (i) net proceeds to the Company of
$152.9 million from the sale of shares of Class C Common Stock offered
hereby at an assumed offering price of $ per share, (ii) net proceeds to
the Company of an aggregate of $211.0 million from the issuance of the
Units, (iii) the purchase by Hyundai of an additional $49.3 million in
Hyundai Units (together with the Initial Hyundai Stock Purchase referred to
as the "Hyundai Stock Purchase"), net of $2.5 million in fees and expenses
related to such purchase. The Hyundai Stock Purchase will be financed
through the surrender of the Hyundai Loan. See "Use of Proceeds" and
"Certain Transactions."
(3) The Government Financing has been recorded at its estimated fair market
value of approximately $612 million based on an estimated fair market
borrowing rate of 14%, as estimated by management and assuming an actual
interest rate of 6.5% under the Government Financing. The actual total
aggregate obligation under the Government Financing for the License
Subsidiaries is $953.7 million. See "Risk Factors--Substantial Debt
Obligations to the U.S. Government; Implications of Accounting Treatment."
(4) The Company has received a commitment from Lucent for the Lucent Financing.
See "Description of Certain Indebtedness--Lucent Financing."
(5) The Company expects gross proceeds from the Unit Offering of approximately
$220 million. The pro forma as adjusted balance sheet data of the Company
reflects the Senior Discount Notes at face value. In the Company's
financial statements, the estimated value of the Warrants will be reflected
both as a debt discount and an element of additional paid-in capital.
9
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of certain of
the risk factors set forth below and elsewhere in this Prospectus. In addition
to the other information contained in this Prospectus, investors should
carefully consider the following risk factors:
DEVELOPMENT STAGE COMPANY; HISTORICAL AND EXPECTED FUTURE OPERATING LOSSES
The Company was incorporated in 1994, is at an early stage of development
and has no operating history. Consequently, the Company does not have any
meaningful historical financial information upon which a prospective investor
could evaluate an investment in the Class C Common Stock offered hereby. The
Company is subject to all risks typically associated with a start-up entity.
These risks include the Company's ability to implement its business plan in
the manner set forth herein, which requires attracting and retaining qualified
individuals as managers and employees and developing business infrastructure.
As such, no assurance can be given as to the timing and extent of revenues and
expenses or the Company's ability to successfully manage all the tasks
associated with developing and maintaining a successful enterprise. Any
failure by management to guide and control growth effectively, which includes
implementing adequate systems, procedures and controls in a timely manner,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has incurred cumulative net losses through September 30, 1996 of
approximately $2.4 million. These losses resulted primarily from expenditures
associated with organizational and start-up activities and the Company's
pursuit of PCS licenses in the C-Block Auction. The Company expects to launch
commercial service on its PCS networks during the first half of 1998 and does
not expect to generate any revenues until such time or later. The Company will
incur significant operating losses and generate negative cash flow from
operating activities during the next several years while it seeks to develop
and construct its PCS networks and build a customer base. These losses and
negative cash flow are expected to be substantial and to increase during the
initial years of the build-out and operation of its PCS networks. There can be
no assurance that the Company will successfully launch its services, or that
it will achieve or sustain profitability or positive cash flow from operating
activities in the future. If the Company cannot achieve operating
profitability or positive cash flow from operating activities, it may not be
able to meet its debt service or working capital requirements and the Class C
Common Stock may have little or no value. See "--Potential Fluctuations in
Future Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SUBSTANTIAL DEBT OBLIGATIONS TO THE U.S. GOVERNMENT; IMPLICATIONS OF
ACCOUNTING TREATMENT
Each of the License Subsidiaries will serve as the obligor on the payments
to be made for the C-Block PCS license held by such License Subsidiary and
must execute a note to the United States Treasury Department documenting the
License Subsidiary's installment payment obligations and a security agreement
creating a first priority security interest in favor of the FCC in the license
(and the proceeds of any sale thereof) in the event of a default. The
aggregate debt obligation of the License Subsidiaries to the U.S. Government
pursuant to the Government Financing will be approximately $954 million. The
License Subsidiaries will be required to make interest expense payments based
on an interest rate of %. The License Subsidiaries will be required to make
quarterly payments of interest only for the first six years of the license and
payments of interest and principal over the remaining four years of the
license term. Although the obligation of the License Subsidiaries under the
Government Financing will be recorded on the Company's consolidated financial
statements at an estimated fair market value of approximately $612 million,
based on an estimated fair market borrowing rate of 14% and assuming an actual
interest rate of 6.5% under the Government Financing, the amount that would be
owed to the U.S. Government by the License Subsidiaries if all Government
Financing were declared immediately due and payable for all licenses would be
$954 million plus accrued interest. In the event that a License Subsidiary
becomes unable to meet its obligations under the Government Financing or
otherwise violates regulations applicable to holders of FCC licenses, the FCC
could take a variety of actions, including requiring immediate repayment of
amounts due under the Government Financing, repayment of certain bidding
credits, revoking the
10
<PAGE>
Company's PCS licenses and fining the Company an amount equal to the
difference between the price at which the Company acquired the licenses and
the amount of the winning bid at their reauction, plus an additional penalty
of three percent of the lesser of the subsequent winning bid and the Company's
bid amount. There can be no assurance that the Company or the License
Subsidiaries will be able to meet their obligations under the Government
Financing or that in the event of a failure to meet such obligations, the FCC
will not require immediate repayment of amounts due under the Government
Financing or revoke the Company's PCS licenses. In either such event the
Company or the License Subsidiaries may be unable to meet their obligations to
other creditors, including Lucent and the holders of the Senior Discount
Notes.
In addition, if the Government Financing were reflected at its aggregate
total face value of $954 million, the Company's pro forma total debt (as
adjusted for the Offerings) may exceed the total "enterprise value" of the
Company implied by the initial public offering price of the Class C Common
Stock (as determined by adding the market value of the Common Stock, the
estimated fair market value of the Government Financing and the gross proceeds
from the Unit Offering). The estimated fair market value of the Government
Financing is based on an estimated fair market borrowing rate of 14%, as
estimated by management. If a different fair market borrowing rate were used
to estimate the fair market value of the Government Financing, the allocation
of the Company's "enterprise value" between the Government Financing and the
Common Stock would be correspondingly affected. See "--Ability to Service
Debt; Substantial Leverage; Restrictive Covenants," "--Government Regulation"
and "Legislation and Government Regulation."
ABILITY TO SERVICE DEBT; SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
The Company's leverage is substantial in relation to its equity. As of
September 30, 1996, on a pro forma basis after giving effect to the Stock
Offering, the Unit Offering, the Hyundai Stock Purchase and the Government
Financing, the Company's total indebtedness would have been $832 million
($1.17 billion on a face-amount basis) and its stockholders' equity would have
been $258 million. In addition, the Company will be entitled to draw down up
to $200 million under Tranche A of the Lucent Financing. Furthermore, the
indenture governing the Senior Discount Notes (the "Indenture") and the
agreement related to the Lucent Financing (the "Lucent Financing Agreement")
each have provisions allow the Company, under certain circumstances, to incur
substantial additional indebtedness, including up to $100 million under
Tranche B of the Lucent Financing. On a pro forma basis after giving effect to
the Offerings, the Company's deficiency of earnings before fixed charges to
cover fixed charges for the months ended , 1996 and the year ended
December 31, 1995 would have been $ million and $ million, respectively.
The Indenture and the Lucent Financing Agreement will contain, and any
additional financing agreements are likely to contain, certain restrictive
covenants. The restrictions contained in the Indenture and the Lucent
Financing Agreement will affect, and in some cases will significantly limit or
prohibit, among other things, the ability of the Company to incur
indebtedness, make prepayments of certain indebtedness, pay dividends, make
investments, engage in transactions with stockholders and affiliates, issue
capital stock, create liens, sell assets and engage in mergers and
consolidations. If the Company fails to comply with the restrictive covenants
in the Indenture, the Company's obligation to repay such obligations may be
accelerated. In addition to the restrictive covenants described above, the
Lucent Financing Agreement will require the Company to maintain certain
financial ratios. The failure of the Company and its subsidiaries to maintain
such ratios would constitute events of default under the Lucent Financing
Agreement, notwithstanding the ability of the Company to meet its debt service
obligations. An event of default under the Lucent Financing Agreement would
allow Lucent to accelerate the maturity of such indebtedness. In such event, a
significant portion of the Company's other indebtedness (including the Senior
Discount Notes) may become immediately due and payable.
The successful implementation of the Company's strategy, among other things,
is necessary for the Company to be able to meet its debt service and
significant capital requirements. In addition, the Company's ability to
satisfy its debt service obligations once its PCS networks are operational
will be dependent upon the Company's future performance, which is subject to a
number of factors that are beyond the Company's control. There can be no
assurance that the Company's PCS networks can be completed or that, once
completed, the Company will generate sufficient cash flow from operating
activities to meet its debt service and working capital requirements. Any
failure or delay in meeting these debt service requirements, and in
particular, the requirements
11
<PAGE>
of the Government Financing, could have a material adverse effect upon the
Company's business, results of operations and financial condition. See "--
Substantial Debt Obligations to the U.S. Government; Implications of
Accounting Treatment" and "--Significant Capital Requirements; Financing
Risks."
SIGNIFICANT CAPITAL REQUIREMENTS; FINANCING RISKS
The development, construction and implementation of the Company's PCS
networks will require substantial capital. The Company currently estimates
that the funds required for financing its business plan, including capital
expenditures relating to the construction of its PCS networks, will total
approximately $542 million through the end of 1998. Although the Company
expects that, as a result of the Offerings and the Lucent Financing, it will
have sufficient funding through at least the end of 1998, there can be no
assurance that the Company's financing plan will be adequately achieved or
that no additional capital requirements will emerge. After 1998, the Company
may also require capital for additional growth, other capital expenditures for
existing and new license acquisitions (if any), debt service requirements
(including debt service relating to the Government Financing, the Lucent
Financing and the Senior Discount Notes) and anticipated future operating
losses. Actual amounts of financing required may vary materially from these
estimates and additional financing may be required in the event of significant
unforeseen delays in implementation, cost overruns, unanticipated expenses,
regulatory changes, engineering design changes and other technological risks.
The Lucent Financing is subject to the parties negotiating and executing the
Lucent Financing Agreement in definitive form and the satisfaction of certain
conditions. The Lucent Financing provides for an initial tranche of $200
million with an eight-year term and a subsequent tranche of $100 million to be
available commencing January 1, 1998 with a seven-year term, with undrawn
availability under both tranches terminating on December 31, 1999. Under the
Lucent Financing Agreement, the availability of each of Tranche A and Tranche
B would be conditioned upon the satisfaction of certain minimum financing
requirements, which will be met upon completion of the Offerings. The
availability of Tranche B would also be subject to (1) the Company's PCS
networks (excluding that of the Chico market) providing service to
geographical areas with at least 14 million POPs, and (2) the Company having
secured at least 20,000 subscribers (excluding those from the Chico market).
There can be no assurance that the Company and Lucent will successfully
negotiate and enter into a definitive form of the Lucent Financing Agreement.
Even if the Lucent Financing Agreement is entered into, there can be no
assurance that any of the conditions precedent, including the build-out and
minimum subscriber requirements applicable to Tranche B, will be satisfied or
waived. The inability of the Company to access such funds would likely have a
material adverse effect on the Company, and there can be no assurance that the
Company will be able to obtain replacement financing from other sources. See
"Business--Infrastructure and Network Build-out" and "Description of Certain
Indebtedness."
The Company's ability to obtain any additional necessary financing or
refinancing will depend on, among other things, its financial condition, any
restrictions governing its indebtedness and other factors, including market
conditions, that are beyond the control of the Company. Further, in the event
the implementation of its PCS networks is delayed or the Company does not
generate sufficient cash flow to meet its debt service or capital
requirements, the Company may need to seek additional financing. There can be
no assurance that any such financing or refinancing could be obtained on terms
that are favorable to the Company, or at all. In the absence of such financing
or refinancing, the Company could be forced to dispose of assets in order to
make up for any shortfall in the payments due on its indebtedness under
circumstances that might not be favorable to realizing the highest price for
such assets. A substantial portion of the Company's assets consist of
intangible assets, principally PCS licenses granted by the FCC, the value of
which will depend upon a variety of factors. Such licenses may only be
transferred to other entities that meet the FCC requirements for C-Block
license holders during the first five years of the initial license term, which
will significantly impact the ability of the Company to realize the value of
such licenses. Further, transfers to entities not meeting such requirements in
years six through 10 of the initial license term will subject the Company to
substantial unjust enrichment penalties. There can be no assurance that the
Company's assets could be sold, or sold quickly enough, or for a sufficient
amount, to enable the Company to meet its obligations. See "--Ability to
Service Debt; Substantial Leverage; Restrictive Covenants," "--C-Block License
Requirements" and "--Foreign Ownership Limitations."
12
<PAGE>
MANAGEMENT OF GROWTH; NEED TO ESTABLISH INFRASTRUCTURE
Implementation of the Company's business plan will place substantial demands
on the Company's managerial, operational and financial resources. As of
November 30, 1996, the Company had 11 employees and will need to hire a
significant number of new employees in the near future. In addition, the
Company will need to expand its headquarters, establish regional facilities
and establish management information and financial control systems adequate to
support its operations and expected growth. There can be no assurance that the
Company will be able to manage effectively the expansion of its operations and
facilities, that the Company will be able to attract and retain qualified
personnel, that its management team augmented by new management hires will
work together effectively, that the Company's systems, procedures or controls
will be adequate to support the Company's operations or that Company
management will be able to achieve the rapid execution necessary to exploit
fully the market opportunity for the Company's wireless communications
services. Any inability to manage growth effectively could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "--Dependence on Key Personnel," "Business--Employees" and
"Management."
PCS NETWORK CONSTRUCTION AND IMPLEMENTATION RISKS
The Company's proposed construction and implementation of its PCS networks
involve a high degree of risk including, but not limited to, network design,
site selection and acquisition, equipment availability and microwave
relocation. See "--Relocation of Incumbent Fixed Microwave Licenses." The
Company intends to rely on third parties to undertake substantially all of the
construction and implementation of its PCS networks. In particular, pursuant
to the Lucent Equipment Agreement, the Company has selected Lucent to provide
a turnkey solution for these services, including the supply of network
construction equipment. Lucent, in turn, will likely engage other third
parties to provide certain of such services and equipment. There can be no
assurance that Lucent will be able to engage such other third parties, or that
if engaged, such third parties, together with Lucent, will successfully
develop and implement the Company's PCS networks. Any failure to do so will
have a material adverse effect upon the Company.
The Company expects to complete substantially the build-out of its PCS
networks by the end of 1997 and to launch commercial service during the first
half of 1998. Each phase of the construction and implementation process
involves various risks and contingencies, most of which are not within the
control of the Company and many of which are not within the control of Lucent
or other third parties to be engaged by the Company or Lucent. Any of these
risks or contingencies could adversely affect the construction of the
Company's PCS networks. There can be no assurance that the Company and, in
particular, Lucent, will be able to construct the Company's PCS networks in
any of the Company's markets in accordance with the Company's current
construction plan and schedule. If the Company's construction plan is not
properly implemented on a timely basis, the Company may not be able to provide
services competitive with those provided by the cellular and other PCS
operators in its markets. In such event, the Company's PCS subscriber growth
would be limited and the Company's business, results of operations and
financial condition would be materially adversely affected.
In addition, each of the Company's PCS licenses is subject to an FCC
requirement that the Company construct PCS networks that offer coverage to at
least one-third of the population in each such PCS market within five years of
the License Grant Date of the applicable license and to at least two-thirds of
the population within 10 years of such date. There can be no assurance that
this required coverage will be achieved by the Company or Lucent in accordance
with FCC requirements, and failure to comply with these requirements in any
market could cause revocation of the Company's PCS licenses or the imposition
of fines or other sanctions by the FCC. See "--Government Regulation" and
"Legislation and Government Regulation." In addition, winners of A-Block and
B-Block PCS licenses, which were granted in June 1995, have a significant
head-start in constructing their networks. Likewise, the incumbent cellular
licensees in each market have been operating their networks for five-to-10
years, and are upgrading their networks to use digital technology. Thus, the
construction and implementation of the Company's PCS networks must be
completed on a timely basis, and any delays could have a material adverse
effect on the Company.
13
<PAGE>
Under the Lucent Equipment Agreement, Lucent has good faith obligations to
provide equipment and services in accordance with time and budget projections,
but Lucent's liability for failure to meet such projections may be limited to
the extent of the liquidated damages provided for in the Lucent Equipment
Agreement. There can be no assurance that Lucent will meet the projections set
forth in the Lucent Equipment Agreement or that the liquidated damages
provided thereunder would adequately compensate the Company for any such
failure.
Network Design. The Company will rely upon Lucent to design the Company's
PCS networks. Although the Company will be actively involved in the design
process, there can be no assurance that Lucent, or any other parties that the
Company or Lucent may engage, will provide a design on a timely basis, or that
such design can be achieved. Furthermore, the Company has selected Code
Division Multiple Access ("CDMA") technology, which has been implemented only
on a limited basis in the United States and abroad. Accordingly, like many new
or developing technologies, the design of the Company's networks may have
undetected flaws. Such design flaws, if any, may result in delay of
commencement of service or in problems in the delivery of service, and could
have a material adverse effect upon the Company.
Site Selection and Acquisition. The successful construction of the Company's
PCS networks will depend, to a significant degree, on the lease or acquisition
of sites for the location of its base station transmitter equipment. The site
selection process will initially require the negotiation of lease or
acquisition agreements for approximately 500 sites for the Company's PCS
networks, and will likely require the Company to obtain zoning variances or
other state and local governmental approvals or permits for certain of these
sites. The Company has engaged Lucent and may engage other third parties to
provide site identification and acquisition services in each of the Company's
markets. There can be no assurance that lease or acquisition agreements will
be negotiated on terms favorable to the Company or that necessary approvals or
permits will be obtained.
Equipment Availability. The implementation of the construction plan is
subject to the availability from suppliers of the infrastructure equipment the
Company plans to use. There is considerable demand for PCS infrastructure
equipment. Lucent may experience backlogs of orders and lead times for
delivery of such equipment may be long. There can be no assurance that Lucent
or any other suppliers the Company or Lucent may engage will be able to supply
on a timely basis, if at all, equipment that meets the requirements of the
Company, or that any equipment purchased will perform in accordance with the
Company's needs or will otherwise be acceptable to the Company's customers.
There can be no assurance that the Company will be able to deploy
successfully its networks to achieve optimal population coverage in its
targeted markets within the expected time frame and an acceptable construction
budget. See "--Dependence on Other Third Parties," "--Risks Relating to
Selection of Digital Technology; Availability of Handsets" and "--Limited
Territorial Coverage."
DEPENDENCE ON OTHER THIRD PARTIES
In addition to the Company relying on Lucent as described above, the Company
will rely significantly upon third parties to provide equipment and services,
to distribute the Company's products and services and to provide certain
nonstrategic functions such as customer billing. There can be no assurance
that such third parties will provide acceptable equipment and services on a
timely basis and any failure to do so will have a material adverse effect upon
the Company's business, results of operations and financial condition. See "--
PCS Network Construction and Implementation Risks," "Business--Strategy" and
"--Marketing and Distribution."
RISKS RELATING TO SELECTION OF DIGITAL TECHNOLOGY; AVAILABILITY OF HANDSETS
CDMA technology has been implemented only on a limited basis in the United
States and abroad. The first commercial cellular service using CDMA technology
began in October 1995 in Hong Kong and this service had approximately 45,000
subscribers on this CDMA network at September 30, 1996. Additionally, two CDMA
cellular networks have been constructed in South Korea, which are expected to
have approximately 700,000 and 300,000 subscribers on their networks,
respectively, by the end of 1996. In November 1996, PrimeCo, a mobile
telephone joint venture of AirTouch Communications, Inc. and three RBOCs,
became the first operator to offer significant commercial service on a 1900
MHz CDMA PCS network in the United States, launching service in
14
<PAGE>
16 U.S. cities. In December 1996, Sprint PCS, a joint venture of Sprint
Corporation and three large cable companies, launched commercial CDMA PCS
service in four U.S. markets, with a planned expansion into 65 U.S. cities by
mid-1997. There can be no assurance that CDMA technology will be successful,
and certain networks implementing CDMA have experienced problems in their
early trials and development, including poor hand-offs (the transfer of a
subscriber from one cell to another as the subscriber travels through
geographic areas) and problems with analog interference with dual-mode CDMA
handsets for 800 MHz cellular operations. While the Company believes that some
of the problems, such as analog interference, are unique to 800 MHz cellular
operations, and that solutions for other problems have been identified and are
in the process of being resolved, there can be no assurance that the Company
will not encounter the same or other technological problems. See "Wireless
Communications Industry."
A risk associated with the Company's selection of CDMA technology is the
ability of the Company to offer PCS roaming service to its subscribers when
they are in other markets or in the Company's markets outside of the Company's
coverage area. In order for the Company's subscribers to roam outside of the
Company's network coverage area, another PCS licensee with network coverage in
the other market or in the Company's market outside of the Company's coverage
area must utilize CDMA technology and enter into a roaming agreement with the
Company, or the subscriber must use a dual-band/dual-mode phone that would
permit use of analog cellular networks when roaming. While the Company
believes that dual-band/dual-mode handsets that allow a user to access both
PCS networks and analog cellular networks will be commercially available in
1997, there can be no assurance that such handsets can be successfully
manufactured or that consumers can obtain such handsets at competitive prices.
In addition, the Company expects dual-band/dual-mode full digital handsets to
be larger and more expensive than single-mode handsets.
Based on public announcements and network implementation by A- and B-Block
PCS licensees and public announcements by C-Block PCS licensees, the Company
believes that CDMA will be widely deployed in the United States. Nevertheless,
such PCS licensees are under no regulatory obligation to use any particular
digital technology. There can be no assurance that PCS licensees planning to
use CDMA technology will not instead elect to use other available digital
technology, such as Time Division Multiple Access ("TDMA") or Groupe Speciale
Mobile ("GSM"), or other technologies that may become available in the future.
Currently there are few suppliers of CDMA handsets. The Company believes
that additional suppliers are scheduled to deliver CDMA handsets commencing in
1997. There can be no assurance, however, that those suppliers will commence
production or, if they do commence production, that they will be able to
deliver quality handsets in sufficient quantities and at desirable prices.
Handsets used for PCS networks cannot currently be used with analog cellular
networks and vice versa. The lack of interoperability or the comparatively
higher cost of dual-band/dual-mode handsets may impede the Company's ability
to attract certain customers. See "Business--Digital Technology Selection."
RELOCATION OF INCUMBENT FIXED MICROWAVE LICENSEES
For a period of up to five years after the grant of a PCS license, PCS
licensees may be required to share spectrum with existing fixed microwave
licensees operating on the C-Block spectrum. To secure a sufficient amount of
unencumbered spectrum to operate its PCS networks efficiently, the Company may
need to pay to relocate as many as approximately 85 existing paths to
alternate spectrum locations or transmission technologies. In an effort to
balance the competing interests of existing microwave users and newly
authorized PCS licensees, the FCC has adopted (i) a transition plan to
relocate such microwave incumbents and (ii) a cost sharing plan so that if the
relocation of an incumbent benefits more than one PCS licensee, the benefiting
PCS licensees are required to share the costs of the relocation. The
transition and cost sharing plans expire on April 4, 2005, at which time
remaining microwave incumbents in the PCS spectrum will be responsible for
their costs to relocate to alternate spectrum locations. There can be no
assurance that the Company will be able to reach timely agreements to relocate
these incumbents on terms acceptable to the Company. Any delay in the
relocation of such licensees may adversely affect the Company's ability to
commence timely commercial operation of its PCS networks. Furthermore,
depending on the terms of such agreements, if any, the Company's ability to
operate its PCS networks profitably may be adversely affected. See
"Legislation and Government Regulation."
15
<PAGE>
COMPETITION
PCS is a new technology and service and, as a result, the level and timing
of development of a customer base for PCS applications, on which the Company's
future revenues depend significantly, is uncertain. In the development of the
PCS market, the Company and other PCS licensees will be competing with the
more established cellular industry, as well as other wireless communications
technologies, existing and future, with similar service offerings. Many of the
Company's PCS and cellular telephone competitors, including joint ventures
involving the nation's largest local and long distance telephone carriers and
cable television companies, have substantially greater access to capital than
the Company, substantially greater financial, technical, marketing, sales and
distribution resources than those of the Company, and significantly more
experience than the Company in providing wireless services. Several of the
Company's competitors are expected to market other services, such as cable
television service, landline telephone service and Internet access with their
wireless communications service offerings. In addition, several competitors
are operating, or planning to operate, through joint ventures and affiliation
arrangements, wireless communications networks that cover most of the United
States.
The Company will compete directly with up to five other PCS providers in
each of its markets. Providers holding the A- and B-Block licenses auctioned
by the FCC will have an advantage over the C-Block licensees because the A-
and B-Block licenses were granted on June 23, 1995, giving these companies a
significant headstart in building out and operating their PCS networks. In
addition, on August 26, 1996 the FCC began the D-, E- and F-Block auctions.
Each of the licenses to be granted in these auctions is for 10 MHz of
spectrum. Principal PCS competitors in the Company's markets are PrimeCo,
Pacific Telesis Mobile Services, Sprint PCS, Intercel, Inc. and AT&T Wireless
Services, Inc. The FCC recently modified its rules to permit the partitioning
and disaggregation of broadband PCS licenses into licenses to serve smaller
service areas, which could allow other new entrants to enter wireless markets
served by the Company. Additionally, the Company will compete with existing
cellular providers in its markets, most of which have infrastructure in place,
have an established brand identity, have generated positive cash flow and have
been operational for as many as 10 years or more. The Company expects that
many cellular operators will upgrade their networks to provide comparable
digital services in competition with the Company. The Company also expects
that many cellular licensees will attempt to acquire one or two additional 10
MHz PCS licenses in the D- or E-Block auctions in areas in which they
currently provide cellular telephone services, as permitted by the FCC under
its PCS licensing rules. This would provide the cellular operators additional
capacity and potentially allow them to add additional customers and to offer
digital services in their markets in the near term. Principal cellular
providers in the Company's PCS markets are AT&T Wireless Services, Inc.,
BellSouth Mobility, Inc., GTE Mobile Communications Inc., AirTouch
Communications Inc., Centennial Cellular Corp., U.S. Cellular Corp.,
Independent Cellular Network Inc. and Palmer Wireless, Inc.
The success of the Company's PCS service business will depend upon its
ability to compete, especially with respect to pricing, service, reliability
and availability of features, such as data and voice transmission, call
waiting, call forwarding and short messaging capability. In addition to PCS
and cellular operators, the Company may also face competition from other
existing communications technologies, such as conventional mobile telephone
services, specialized mobile radio ("SMR") service, enhanced SMR ("ESMR")
service, paging services (including two-way digital paging), and domestic and
global mobile satellite service ("MSS"). In the future, cellular and PCS
service will also compete more directly with traditional landline telephone
service operators, energy utilities, local multipoint distribution service
("LMDS") providers, and cable and wireless cable operators seeking to offer
communications services by leveraging their existing infrastructure. The FCC
is scheduled to begin auctions for 30 MHz of spectrum in the 2.3 GHz band for
Wireless Communications Service ("WCS") by April 15, 1997. The FCC has
proposed that WCS providers be permitted to offer a broad range of fixed,
mobile, radio location and satellite broadcast services, some of which could
be in competition with the Company's service offerings. The Company may also
face competition from new technologies. See "Business--Competition."
POTENTIAL FLUCTUATIONS IN FUTURE RESULTS
The Company has no significant operating history and expects to incur
significant operating losses and to generate negative cash flow from operating
activities during the next several years. The Company believes that
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its future operating results will be subject to annual and quarterly
fluctuations due to several factors, some of which are beyond the Company's
control. These factors include the cost of constructing the Company's PCS
networks (including any unanticipated costs associated therewith), the cost of
relocating microwave licensees, the establishment of a market for PCS, pricing
strategies for competitive services, new offerings of competitive services,
changes in the regulatory environment, changes in technology, the cost and
availability of PCS infrastructure and subscriber equipment, delays in the
introduction of the Company's services resulting from any of such factors and
general and local economic conditions. In addition, the extent of the
potential demand for PCS cannot be estimated with any degree of certainty. Due
to the foregoing factors, it is likely that in some future period, the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of the Class C Common Stock
would likely be materially adversely affected. See "--Development Stage
Company; Historical and Expected Future Operating Losses," "--Significant
Capital Requirements; Financing Risks," "--PCS Network Construction and
Implementation Risks," "--Risks Relating to Selection of Digital Technology;
Availability of Handsets," "--Relocation of Incumbent Fixed Microwave
Licensees," "--Competition" and "--Government Regulation."
LIMITED OPERATING HISTORY FOR PCS NETWORKS
PCS networks have an extremely limited operating history in the United
States and there can be no assurance that operation of these networks will
become profitable. In addition, the extent of potential demand for PCS in the
Company's markets cannot be estimated with any degree of certainty. The
wireless communications industry is experiencing significant technological
changes, as evidenced by the increasing pace of digital upgrades in existing
analog wireless systems, evolving industry standards, ongoing improvements in
the capacity and quality of digital technology, shorter development cycles for
new products and enhancements, and changes in end-user requirements and
preferences. There is also uncertainty as to the extent of customer demand. As
a result, the future prospects of the industry and the Company and the success
of PCS and other competitive services remain uncertain.
GOVERNMENT REGULATION
The spectrum licensing, construction, operation, sale and interconnection
arrangements of wireless communications networks are regulated to varying
degrees by state regulatory agencies, the FCC, Congress, the courts and other
governmental bodies. There can be no assurance that any of these governmental
bodies having jurisdiction over the Company will not adopt or change
regulations or take other actions that would adversely affect the Company's
business, financial condition or results of operations. Although the FCC has
issued rules regarding the C-Block Auction and numerous other matters relevant
to the PCS industry, these rules are ambiguous on certain key matters and not
all of them have been subject to FCC or judicial interpretation. Accordingly,
for certain matters, the Company is relying on public and private informal
interpretation of the rules from the staff of the FCC. The FCC is not bound by
such informal interpretation of FCC staff and there can be no assurance that
the FCC or the courts will agree with the staff's interpretation. Many of
these rules also require ongoing compliance that the Company may not be able
to satisfy despite diligent efforts. A failure to comply with FCC rules could
subject the Company to serious penalties and have a material adverse effect
upon the Company's business, results of operations and financial condition. In
addition, although the Company's PCS licenses are renewable after the
expiration of their 10-year terms, there can be no assurance that the
Company's licenses will be renewed.
The Telecommunications Act of 1996 (the "1996 Act") mandates significant
changes in existing regulation of the telecommunications industry that are
intended by Congress to promote competitive development of new service
offerings, to expand public availability of telecommunications services and to
streamline regulation of the industry. Included in these mandates are
requirements that local exchange carriers ("LECs") must: (i) permit other
competitive carriers, which may include PCS licensees, to interconnect to
their networks; (ii) establish reciprocal compensation agreements with
competitive carriers to terminate traffic on each other's networks and (iii)
offer resale of their telecommunications services. In addition, incumbent LECs
are required to offer interconnection and access to unbundled network elements
at cost-based rates (plus a reasonable profit), as well
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as significant resale discounts. The implementation of these mandates by the
FCC and state authorities potentially involves numerous changes in established
rules and policies that could adversely affect the Company's business,
financial condition and results of operations.
The FCC has proceedings in process that could open up other frequency bands
for wireless telecommunications and PCS-like services. There can be no
assurance that these proceedings will not adversely affect the Company and the
Company's ability to offer a full range of PCS services. See "--Substantial
Debt Obligations to the U.S. Government; Implications of Accounting
Treatment," "--C-Block License Requirements," "--Foreign Ownership
Limitations," "--Effect of Control by Certain Stockholders" and "Legislation
and Government Regulation."
C-BLOCK LICENSE REQUIREMENTS
When the FCC allocated spectrum to public auction for PCS, it designated the
C-Block as an "Entrepreneurs' Block." FCC rules require C-Block applicants and
licensees (collectively, "Entrepreneurs") to meet various qualifications.
The FCC has determined that Entrepreneurs that qualify as a Small Business
and win PCS licenses are eligible to receive a loan from the federal
government for 90% of the dollar amount of their winning bids in the C-Block
Auction (a "C-Block Loan"). The Government Financing provided to the License
Subsidiaries are C-Block Loans. See "Description of Certain Indebtedness." In
order to ensure continued compliance with the FCC rules, the FCC has announced
its intention to conduct random audits during the initial 10-year PCS license
terms. There can be no assurance that the Company will continue to satisfy any
of the C-Block license requirements, and the failure to do so would have a
material adverse effect on the Company.
Entrepreneurs Requirements. In order to hold a C-Block license, an entity
must have: (i) less than $125 million in gross revenues (the "Entrepreneurs
Revenues Limit") and (ii) less than $500 million in total assets (the
"Entrepreneurs Asset Limit" and, together with the Entrepreneurs Revenues
Limit, the "Entrepreneurs Requirements"). To qualify for the C-Block Auction,
an entity had to have met the Entrepreneurs Revenues Limit for each of the two
years prior to the auction and the Entrepreneurs Asset Limit at the time it
filed its application to qualify for the C-Block Auction on FCC Form 175 (the
"Short Form"). For at least five years after winning a C-Block license, a
licensee must continue to meet the Entrepreneurs Requirements, which are
modified for such five-year period to exclude certain assets and revenues from
being counted toward the Entrepreneurs Asset Limit and the Entrepreneurs
Revenues Limit, respectively. Additional amounts are excluded if the licensee
maintains an organizational structure that satisfies the Control Group
Requirements described below. In calculating a licensee's gross revenues for
purposes of the Entrepreneurs Requirements, the FCC includes the gross
revenues of the licensee's affiliates, those persons or entities that hold
interests in the licensee, and the affiliates of such persons or entities.
By claiming status as an Entrepreneur, the Company qualified for the C-Block
Auction. If the FCC were to determine that the Company did not satisfy the
Entrepreneurs Requirements at the time it participated in the C-Block Auction
or that the Company fails to meet the ongoing Entrepreneurs Requirements, the
FCC could revoke the Company's PCS licenses, fine the Company or take other
enforcement actions, including imposing the Unjust Enrichment Penalties
described below. See "Legislation and Government Regulation--C-Block License
Requirements--Transfer Restrictions--Unjust Enrichment." Although the Company
believes it has met the Entrepreneurs Requirements, there can be no assurance
that it will continue to meet such requirements or that, if it fails to
continue to meet such requirements, the FCC will not take action against the
Company, which could include revocation of its PCS licenses.
Small Business Requirements. An entity that meets the Entrepreneurs
Requirements may also apply to receive certain preferential financing terms if
it meets certain requirements to qualify as a Small Business (the "Small
Business Requirements"). These preferential financing terms include a 25%
bidding credit (the "Bidding Credit") and the ability to make quarterly
interest-only payments on its C-Block Loan for the first six years of the
license term. To meet the Small Business Requirements, a licensee must have
had annual average gross
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revenues of not more than $40 million for the three calendar years preceding
the date it filed its Short Form. In calculating a licensee's gross revenues
for purposes of the Small Business Requirements, the FCC includes the gross
revenues of the licensee's affiliates, those persons or entities that hold
interests in the licensee, and the affiliates of such persons or entities.
By claiming status as a Small Business, the Company qualified for the
Bidding Credit. If the FCC were to determine that the Company does not qualify
as a Small Business, the Company could, at a minimum, be forced to repay the
full value of the Bidding Credit. Further, the FCC could revoke the Company's
PCS licenses, fine the Company or take other enforcement actions, including
imposing the Unjust Enrichment Penalties. Although the Company has structured
itself to meet the Small Business Requirements, there can be no assurance that
it will remain in compliance with these requirements or that, if it fails to
continue to meet such requirements, the FCC will not take action against the
Company, which could include revocation of its PCS licenses.
Control Group Requirements. If a C-Block licensee maintains an
organizational structure in which at least 25% of its total equity on a fully
diluted basis is held by a control group (the "Control Group") that meets
certain requirements (the "Control Group Requirements"), the FCC excludes
certain assets and revenues from such licensee's total revenues and assets,
making it easier for the licensee to meet the Entrepreneurs Requirements and
the Small Business Requirements. The Control Group Requirements mandate that
the Control Group, among other things, have both actual and legal control of
the licensee. Further, the FCC permits licensees to qualify under the Control
Group Requirements pursuant to an alternative structural option (the
"Qualifying Investor Option"), in which: (i) an established group of investors
meeting certain financial qualifications (the "Qualifying Investors") that own
at least 15% of the equity interest on a fully diluted basis and 50.1% of the
voting power in the C-Block licensee and (ii) additional members ("Additional
Control Group Members") that hold at least 10%, on a fully diluted basis, of
the equity interest in the C-Block licensee. Additional Control Group Members
must be either: (a) the same Qualifying Investors in the Control Group, (b)
members of the licensee's management or (c) non-controlling institutional
investors, including venture capital firms. To take advantage of the FCC's
Qualifying Investor Option, a C-Block licensee must have met the Qualifying
Investor Option requirements at the time it filed its Short Form and must
continue to meet the Qualifying Investor Option requirements for three years
following the License Grant Date. Commencing the fourth year of the license
term, the FCC rules (i) eliminate the requirement that the Additional Control
Group Members hold any of the licensee's equity interest and (ii) allow the
licensee to reduce the minimum required equity interest held by the Qualifying
Investors from 15% to 10%.
In order to meet the Control Group Requirements, the Company's Certificate
of Incorporation provides that the Company's Class A Common Stock, as a class,
must constitute 50.1% of the voting power of the Company. In addition, the
Company's Bylaws provide for certain restrictions on transfer relating to
certain shares of the Company's capital stock held by Qualifying Investors.
See "Description of Capital Stock." There can be no assurance that the Company
will remain in compliance with the Control Group Requirements or, if it fails
to continue to meet such requirements, that the FCC will not take action
against the Company, which could include revocation of its PCS licenses.
Although the Company has taken these and other steps to meet the Control Group
Requirements, there can be no assurance that the Company has or will continue
to meet the Control Group Requirements, and the failure to meet such
requirements would have a material adverse effect on the Company.
Asset and Revenue Calculation. In determining whether an entity qualifies as
an Entrepreneur and/or as a Small Business, the FCC counts the gross revenues
and assets of the entity's "financial affiliates" toward the entity's total
gross revenues and total assets. Financial affiliation can arise from common
investments, familial or spousal relationships, contractual relationships,
voting trusts, joint venture agreements, stock ownership, stock options,
convertible debentures and agreements to merge. Affiliates of noncontrolling
investors with ownership interests that do not exceed the applicable FCC
"passive" investor ownership thresholds are not attributed to C-Block
licensees for purposes of determining whether such licensees financially
qualify for the applicable C-Block Auction preferences. The Entrepreneurs
Requirements and the Small Business Requirements provide that, to qualify as
passive investor, an entity may not own more than 25% of the Company's total
equity on a fully diluted basis. There can be no assurance that the Company
will not exceed these passive investor limits or otherwise violate the
Entrepreneur Requirements and/or the Small Business Requirements.
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In addition, if an entity makes bona fide loans to a C-Block licensee, the
assets and revenues of the creditor would not be attributed to the licensee
unless the creditor is otherwise deemed an affiliate of the licensee, or the
loan is treated by the FCC as an equity investment and such treatment would
cause the creditor/investor to exceed the applicable ownership interest
thresholds (for purposes of both the financial affiliation and foreign
ownership rules). Although the FCC permits a creditor/investor to use standard
terms to protect its investment in C-Block licensees, such as covenants,
rights of first refusal and super-majority voting rights on specified issues,
the FCC has stated that it will be guided but not bound by criteria used by
the Internal Revenue Service to determine whether a debt investment is bona
fide debt. The FCC's application of its financial affiliation rules is largely
untested and there can be no assurance that the FCC or the courts will not
treat certain of the Company's lenders or investors as financial affiliates of
the Company.
Transfer Restrictions. In addition, the FCC prohibits C-Block licensees from
assigning or transferring control of any of their C-Block licenses for a
period of at least five years from the License Grant Date to any entity that
fails to satisfy the Entrepreneurs Requirements during such period. After the
fifth year, all transfers and assignments remain subject to the Unjust
Enrichment Penalties. The effect of this prohibition will likely deter or
delay unsolicited changes in control of the Company. See "Legislation and
Government Regulation--C-Block License Requirements--License Transfer
Restrictions--Unjust Enrichment" and "Description of Capital Stock--
Antitakeover Effects of Provisions of the Certificate of Incorporation,
Bylaws, Delaware Law and Control Group Requirements."
The Company (i) believes that it has structured itself to satisfy the
Entrepreneurs Requirements, (ii) intends to diligently pursue and maintain its
qualification as a Small Business and (iii) has structured the securities
being offered, including certain restrictions on ownership and transfer, in a
manner intended to ensure compliance with the applicable FCC Rules. The
Company has relied on representations of its investors to determine its
compliance with the FCC's rules applicable to C-Block licensees. There can be
no assurance, however, that the Company's investors or the Company itself will
continue to satisfy these requirements during the term of any PCS license
granted to the Company or that the Company will be able to successfully
implement divestiture or other mechanisms included in the Company's
Certificate of Incorporation that are designed to ensure compliance with FCC
rules. Any non-compliance with FCC rules could subject the Company to serious
penalties, including revocation of its PCS licenses. See "--Substantial Debt
Obligations to the U.S. Government; Implications of Accounting Treatment," "--
Effect of Control by Certain Stockholders," "--Foreign Ownership Limitations"
and "Legislation and Government Regulation."
FOREIGN OWNERSHIP LIMITATIONS
The FCC can revoke PCS licenses if it finds that it would not be in the
public interest for more than 25% of the capital contribution to the parent of
a PCS licensee to be owned, directly or indirectly, or voted by non-U.S.
citizens or their representatives, by a foreign government or its
representatives or by a foreign corporation (and such licenses are so held).
The restrictions on foreign ownership could also adversely affect the ability
of the Company to attract additional equity financing from entities that are,
or are owned by, non-U.S. entities. The FCC Form 600 (the "Long Form") filed
by the Company with the FCC after the completion of the C-Block Auction
indicates that the Company's foreign ownership does not exceed 25%. However,
if the foreign ownership of the Company were to exceed 25% in the future, the
FCC could revoke the Company's PCS licenses. Further, the Company's
Certificate of Incorporation enables the Company to redeem shares from holders
of the Common Stock whose acquisition of shares results in a violation of such
limitation. The restrictions on foreign ownership could adversely affect the
Company's ability to attract additional equity financing from entities that
are, or are owned by, non-U.S. entities. See "Description of Capital Stock--
Common Stock--Redemption by the Company" and "Legislation and Government
Regulation."
EFFECT OF CONTROL BY CERTAIN STOCKHOLDERS
In accordance with the Control Group Requirements, the Qualifying Investors
of the Company currently own at least 15% of the outstanding equity of the
Company on a fully diluted basis and 50.1% of the total voting power and will
continue to do so following the Stock Offering. In particular, Mr. Roger
Linquist holds 20 of the 30 shares of Class A Common Stock outstanding, and
Mr. Frederic Hamilton holds the remaining 10 shares.
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Accordingly, Messrs. Linquist and Hamilton together have the right to vote
50.1% of the voting power of the outstanding equity of the Company and will be
entitled to elect four members (the "Class A Directors") to the Company's
Board of Directors, each with one full vote. Pursuant to the terms of a
Stockholders Agreement, with respect to the four Class A Directors, Mr.
Linquist is entitled to designate two Class A Directors, Mr. Hamilton one
Class A Director, and Messrs. Linquist and Hamilton, together, one Class A
Director. The remaining members of the Board of Directors, as elected by the
holders of Class C Common Stock, will have fractional votes comprising a total
of three full votes. Other investors that meet the requirements of the
Additional Control Group Members collectively hold in excess of 50% of the
total equity of the Company currently and, following the Stock Offering, will
hold at least 10% of the total equity of the Company. There can be no
assurance that the Company has met or will continue to meet the Control Group
Requirements. See "--C-Block License Requirements."
Such control by the holders of Class A Common Stock and other Qualifying
Investors will likely deter and delay unsolicited changes in control of the
Company. In addition, other provisions of the Company's Certificate of
Incorporation and Bylaws as well as provisions under Delaware Law may
discourage potential acquisition proposals. See "Description of Capital
Stock--Antitakeover Effects of Provisions of the Certificate of Incorporation,
Bylaws, Delaware Law and Control Group Requirements."
LIMITED TERRITORIAL COVERAGE
A core element to the Company's strategy is to concentrate its network
build-out on "high-usage areas" rather than building out wide-area cellular-
like networks. The Company defines "high-usage areas" as those areas where the
majority of the population lives, commutes, works and shops. These areas
primarily include densely populated urban areas, commuting corridors and high-
growth suburban areas. The Company plans to limit the construction of its
networks outside of these high-usage areas because it believes the incremental
cost of building out such network coverage is substantial and is inconsistent
with the Company's objective to be the low-cost provider of wireless
communications services. Based on network design analysis completed to date,
the Company plans to spend approximately $11 per POP through the end of 1997
for the build-out of its PCS networks, which, once commercial service is
launched during the first half of 1998, would provide coverage to
approximately 80% of the aggregate population of its markets. Additionally,
the Company intends to spend approximately $3 per POP in 1998 to provide
additional capacity on its PCS networks. Subscribers to the Company's service
will not obtain direct service from the Company when traveling outside of the
Company's network coverage area. In order for the Company's subscribers to
roam outside of the Company's network coverage area, another PCS licensee with
network coverage in the other market or in the Company's market outside of the
Company's coverage area must utilize CDMA technology and enter into a roaming
agreement with the Company, or the subscriber must use a dual-band/dual-mode
phone that would permit use of analog cellular networks when roaming. There
can be no assurance that this strategy, which will effectively limit Company
revenues generated by subscribers traveling outside the Company's coverage
area but within its markets, will be successful or that the Company will
achieve a significant penetration of its markets. Any failure to do so will
materially adversely affect the Company's business, results of operations and
financial condition. See "--Risks Relating to Selection of Digital Technology;
Availability of Handsets" and "Business--Strategy."
DEPENDENCE ON KEY PERSONNEL
The Company's future performance depends in substantial part upon the
continued contributions of its key senior management personnel, in particular,
Mr. Roger D. Linquist and Mr. Malcolm M. Lorang. Mr. Linquist is a founder,
director, the Company's President and Chief Executive Officer, and a
Qualifying Investor, and holds a significant percentage of the outstanding
equity of the Company. Mr. Lorang is a founder and the Company's Vice
President of Engineering and Chief Technical Officer. Neither Mr. Linquist nor
Mr. Lorang is bound by an employment agreement and the loss of the services of
Mr. Linquist or Mr. Lorang would have a material adverse effect upon the
Company's business, results of operations and financial condition. The
Company's future success also depends substantially upon its ability to
attract and retain highly qualified technical and management personnel. The
Company believes there is and will continue to be intense competition for
personnel with experience in the wireless industry as the emerging PCS market
develops. There can be no assurance that the Company can retain its key
personnel or that it can attract, assimilate or retain other highly qualified
technical and management personnel in the future. See "--Management of Growth;
Need to Establish Infrastructure" and "--Effect of Control by Certain
Stockholders."
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HEALTH RISKS
Allegations have been raised that the use of hand-held cellular/PCS phones
may pose health risks to humans due to RF emissions from the handsets. Studies
performed by wireless telephone equipment manufacturers dispute these
allegations, and a major industry trade association and certain governmental
agencies have stated publicly that the use of such phones poses no undue
health risk. Regardless of the truth of these allegations, they could have an
adverse effect on the Company. In addition, digital wireless telephones have
been shown to cause interference to some electronic devices, such as hearing
aids and pacemakers.
Concerns over RF emissions also may have the effect of discouraging the use
of wireless communications devices, such as the PCS phones to be used with the
Company's networks. The FCC currently is conducting a rulemaking proceeding to
update the guidelines and methods used for evaluating RF emissions from radio
equipment, including wireless telephones. The FCC's proposal, if adopted,
would impose more restrictive standards on RF emissions from devices such as
hand-held PCS telephones. Although CDMA handsets operate at lower power than
other wireless handsets and therefore would comply with the proposed
standards, if adopted, the same concerns about RF emissions could remain
present with CDMA handsets. These concerns could have an adverse effect on the
Company's financial condition and the results of its operations.
DILUTION
Investors participating in the Stock Offering will incur immediate,
substantial dilution. In addition, Qualifying Investors must own at least 15%
of the equity of the Company for at least the first three years of the initial
10-year license term and 10% for the remainder of the license term and
Additional Control Group Members must own 10% of the equity of the Company for
the first three years. In connection with the Stock Offering, the Company
expects to issue a significant number of options to purchase shares of Class C
Common Stock to Qualifying Investors. The Company may also need to issue
additional shares of Class C Common Stock or options to purchase shares of
Class C Common Stock to Qualifying Investors or Additional Control Group
Members before or simultaneous with future equity offerings or other dilutive
events. To the extent such shares are issued, such options are granted and
exercised, or outstanding options and warrants to purchase the Class C Common
Stock are exercised, there will be further dilution. See "--Effect of Control
by Certain Stockholders," "Dilution," "Business--Government Regulation" and
"Management--1996 Stock Option Plan."
UNCERTAINTY OF C-BLOCK LICENSE AWARDS
Before granting licenses won by a successful bidder, the FCC requires that
such bidder submit a long-form application for each market in which it has
submitted a winning bid. The Company filed its long-form application on May
22, 1996. This submission began an administrative process in which parties had
an opportunity to challenge the winning bidders' qualifications to be FCC
licensees. Two C-Block applicants who were unsuccessful in winning any markets
in the auction, Antigone Communications Limited Partnership and PCS Devco,
Inc. ("Objectioners"), jointly filed an Informal Objection against the
Company's license applications alleging: (i) the Company violated the FCC's
anti-collusion rules prohibiting certain communications between bidders in the
same market; (ii) the Company exceeded the FCC's foreign ownership limit; and
(iii) the Company withheld material information from the FCC in its long-form
application. The Company filed an Opposition with the FCC asserting that
Objectioners lacked standing and challenging the Objectioners' allegations as
frivolous and supplemented the record as appropriate in response to further
FCC inquiry.
Assuming the Objection is dismissed and C-Block licenses are granted by the
FCC, such license grants will not become final until after the expiration of a
30- or 40-day reconsideration period following the License Grant Date. The
license grant by the FCC will not become final if during such 30- or 40-day
reconsideration period one or more of the following occurs: (i) the FCC staff
reconsiders the license grant on its own motion; (ii) a petition is filed for
reconsideration of the license grant or (iii) an application is filed for
review or judicial appeal in cases where a petition to deny the underlying
license application was filed. At the License Grant Date, the Company will
have authorization to commence construction of its PCS network for the
licensed service area. However, parties, including the Objectioners, can file
for reconsideration or review of the FCC's license grant or the FCC can
reconsider the grant on its own motion. Parties can also petition a federal
court to overturn a license grant.
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Any preparation for PCS network construction prior to the final grant (e.g.,
negotiation with incumbent microwave licensees, site acquisition activities
and equipment procurement and construction) will be performed at the Company's
risk and expense. If any PCS licenses are subsequently not finally granted to
the Company, the Company would have to attempt to sell the benefits of such
activities, to the extent possible, to the entity that ultimately wins a PCS
license for that service area.
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends and currently intends to
retain any future earnings to develop and operate its PCS networks, for
working capital and for other corporate purposes. In addition, the Indenture
and the Lucent Financing Agreement will prohibit the payment of dividends to
the Company's stockholders for the foreseeable future. To the extent the
Company requires additional funding currently not provided for in its
financing plan, such funding sources may likely prohibit the payment of
dividends. See "--Significant Capital Requirements; Financing Risks."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Application has been made for listing of the Class C Common Stock on the
Nasdaq National Market under the symbol "GWIR." Prior to the Stock Offering,
there has been no public market for the Class C Common Stock. There can be no
assurance that an active trading market will develop or that the purchasers of
the Class C Common Stock will be able to resell their Class C Common Stock at
prices equal to or greater than the initial public offering price. The initial
public offering price of the Class C Common Stock will be determined through
negotiations between the Company and the representatives of the Underwriters
and may not reflect the market price of the Class C Common Stock after the
Stock Offering. See "Underwriting" for a discussion of factors to be
considered in determining the initial public offering price. The trading price
of the Class C Common Stock could be subject to wide fluctuations in response
to quarterly variations in operating results, announcements of technical
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts and other events or factors. In
addition, the stock market has experienced volatility that has particularly
affected the market prices of equity securities of many emerging
telecommunications companies and that often has been unrelated to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of the Class C Common Stock. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICES
Sales of substantial amounts of Class C Common Stock (including shares
issued upon the exercise of outstanding options or warrants) in the public
market after the Stock Offering could materially adversely affect the market
price of the Class C Common Stock. Such sales also might make it more
difficult for the Company to sell equity securities or equity-related
securities in the future at a time and price that the Company deems
appropriate. In addition to the shares of Class C Common Stock offered
hereby, upon completion of the Stock Offering and the Hyundai Stock Purchase,
the Company will have 12,147,140 shares of Common Stock outstanding, all of
which are restricted shares ("Restricted Shares") under the Securities Act of
1933, as amended (the "Securities Act"). The number of outstanding shares that
will be available for sale in the public market, after giving effect to lock-
up agreements, will be as follows: (i) no shares of Class C Common Stock will
be eligible for sale as of the effective date of the Stock Offering (the
"Effective Date") and (ii) 569,720 shares of Class C Common Stock will be
eligible for sale beginning 180 days after the Effective Date, subject in some
cases to certain volume and other limitations. The 11,577,420 remaining
Restricted Shares will not be eligible for sale pursuant to Rule 144 until the
expiration of their two-year holding periods. In addition, following the
closing of the Stock Offering, the holders of 11,092,390 Restricted Shares and
warrants to purchase 4,036,750 shares will be entitled to certain rights with
respect to registration of such shares for sale in the public market.
On or about the Effective Date, the Company intends to register
approximately shares reserved for issuance under its stock plans. As of
September 30, 1996, options to purchase a total of 2,093,310 shares were
outstanding (although all of the shares issuable upon exercise of such options
will be subject to lock-up restrictions on sale for 180 days after the
Effective Date) and shares were reserved for future issuance under the
stock plans. See "Shares Eligible for Future Sale."
23
<PAGE>
THE COMPANY
The Company was incorporated in Delaware in June 1994. The Company's C-Block
PCS licenses are held in 14 indirect wholly-owned subsidiaries (collectively,
the "License Subsidiaries"). The License Subsidiaries each hold a C-Block
license and each is an obligor for that portion of the Government Financing
attributable to such C-Block license. The License Subsidiaries are expected to
have no other assets or liabilities other than their C-Block licenses and
their obligations under the Government Financing and the Lucent Financing.
The Company has two directly and wholly-owned subsidiaries, GWI PCS, Inc.
and GWI PCS Chico, Inc. GWI PCS, Inc. has two directly and wholly-owned
subsidiaries, GWI PCS California/Florida, Inc. and GWI PCS Georgia, Inc. GWI
PCS California/Florida, Inc. has 10 directly and wholly-owned License
Subsidiaries, GWI PCS1, Inc., GWI PCS3, Inc. through GWI PCS6, Inc. and GWI
PCS10, Inc. through GWI PCS14, Inc. GWI PCS Georgia, Inc. has three directly
and wholly-owned License Subsidiaries, GWI PCS7 Inc. through GWI PCS9, Inc.
GWI PCS Chico, Inc. has one directly and wholly-owned License Subsidiary, GWI
PCS2, Inc.
The following chart sets forth the corporate structure of the Company.
License Subsidiaries are identified in italics. The Company's principal
executive offices are located at 8144 Walnut Hill Lane, Suite 600, Dallas,
Texas 75231, and its telephone number is (214) 265-2550.
[ART]
24
<PAGE>
USE OF PROCEEDS
In total, net proceeds to the Company from the Offerings are estimated to be
$363.9 million. The net proceeds to the Company from the Stock Offering are
estimated to be approximately $152.9 million ($ if the Underwriters' over-
allotment option is exercised in full), at an assumed initial public offering
price of $ per share to the public and after deducting estimated
underwriting discounts and commissions and the offering expenses. The net
proceeds to the Company from the Unit Offering are estimated to be
approximately $211.0 million after deducting estimated underwriting discounts
and commissions and the offering expenses.
The Company intends to use the net proceeds of the Offerings to fund
interest expense payments on the Government Financing, the Lucent Financing,
operating losses, working capital requirements, capital expenditures not
funded by the Lucent Financing and for general corporate purposes. The closing
of the Unit Offering and the closing of the Stock Offering are each
conditioned upon the closing of the other. Pending use of the net proceeds,
the Company intends to invest the funds in short-term, interest-bearing, U.S.
government and other highly rated securities. For a summary of the Company's
capital expenditures and financing plan, see "Prospectus Summary--Financing
Plan." See also "Certain Transactions" and "Description of Certain
Indebtedness."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock, and does not expect to pay cash dividends on its Common Stock in the
foreseeable future. In addition, the Company will effectively be prohibited
from paying cash dividends for the foreseeable future pursuant to restrictions
that will be contained in the Indenture and the Lucent Financing Agreement. To
the extent the Company requires additional funding currently not provided for
in its financing plan, such funding sources may prohibit the payment of
dividends. The Company currently intends to retain its earnings, if any, for
use in its business. See "Risk Factors--Absence of Dividends" and "Description
of Certain Indebtedness."
25
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
September 30, 1996 was $ , or approximately $ per share. Pro forma net
tangible book value per share represents the amount of the Company's
stockholders' equity, less intangible assets, divided by the shares of Common
Stock outstanding after giving effect to the Stock Offering and the Hyundai
Stock Purchase.
Dilution per share represents the difference between the amount per share
paid by purchasers of shares of Class C Common Stock in the Stock Offering and
the as adjusted net tangible book value per share of Common Stock immediately
after completion of the Stock Offering. After giving effect to the sale of
shares of Class C Common Stock offered by the Company in the Stock Offering at
an assumed offering price of $ per share to the public and after deducting
the underwriting discount and estimated offering expenses, the as adjusted net
tangible book value of the Company as of September 30, 1996 would have been
$ , or $ per share. This represents an immediate increase in net tangible
book value of $ per share to existing stockholders and an immediate dilution
in net tangible book value of $ per share to purchasers of Class C Common
Stock in the Stock Offering, as illustrated in the following table:
<TABLE>
<CAPTION>
PER SHARE
---------
<S> <C> <C>
Assumed public offering............................................... $
----
Net tangible book value at September 30, 1996....................... $
----
Increase in net tangible book value attributable to new investors...
Pro forma net tangible book value after the Stock Offering............
----
Dilution to new investors............................................. $
====
</TABLE>
The following table sets forth on a pro forma basis as of September 30, 1996
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by new public investors (assuming an initial public offering
price of $ per share to the public before deduction of estimated
underwriting discounts and commissions and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 7,147,140 % $67,598,790 % $9.46
Hyundai..................... 5,000,000 50,000,000 10.00
New stockholders............
--- ----------- --- -----
Total................... % $ % $
=== =========== === =====
</TABLE>
The foregoing computations do not include, as of September 30, 1996,
2,093,310 shares of Common Stock issuable upon exercise of outstanding stock
options at a weighted average exercise price of $5.00 per share, 3,891,750
shares of Common Stock issuable upon exercise of outstanding warrants at a
weighted average exercise price of $8.72 per share, shares of Common Stock
issuable upon exercise of a warrant to be issued to Lucent in connection with
the Lucent Financing at an exercise price equal to the initial public offering
price, shares of Common Stock issuable upon exercise of the Warrants to be
offered in the Unit Offering at an exercise price of per share,
additional shares of Common Stock reserved for issuance and available for
grant under the Company's 1995 Stock Option Plan, additional shares
reserved for issuance under the Company's 1996 Stock Option Plan and 500,000
shares reserved for issuance under the Company's Employee Stock Purchase Plan.
To the extent options or warrants are exercised, there will be further
dilution to new investors in the Offering. See "Management--1996 Stock Option
Plan," "Description of Certain Indebtedness--Lucent Financing," "--Senior
Discount Notes" and Note of Notes to Consolidated Financial Statements.
26
<PAGE>
CAPITALIZATION
The following table sets forth the historical and pro forma as adjusted
capitalization of the Company at September 30, 1996. This table should be read
in conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
---------------------------
PRO FORMA AS
HISTORICAL ADJUSTED(1)
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents......................... $ 6,569 $ 364,986
========== =============
Indebtedness:
Government Financing(2)......................... $ -- $ 611,911
Lucent Financing(3)............................. -- --
Senior Discount Notes(4)........................ -- 220,000
---------- -------------
Total debt.................................... -- 831,911
Stockholders' equity:
Class A Common Stock; 0.0001 par value; 50
shares authorized; 30 shares issued and out-
standing; actual and pro forma, as adjusted.... -- --
Class B Common Stock; 0.0001 par value;
10,000,000 shares authorized; 1,054,720 shares
issued and outstanding, actual; none issued and
outstanding pro forma, as adjusted............. -- --
Class C Common Stock; 0.0001 par value;
39,999,950 shares authorized, actual; 6,092,390
shares issued and outstanding actual;
shares issued and
outstanding pro forma, as adjusted............. 1 1
Preferred Stock; 0.0001 par value; none autho-
rized, issued or outstanding,
actual; 5,000,000 shares authorized, none is-
sued or outstanding, pro forma,
as adjusted.................................... -- --
Additional paid-in capital...................... 63,316 263,716
Less subscriptions receivable................... (3,336) (3,336)
Losses accumulated during the development
stage.......................................... (2,402) (2,402)
---------- -------------
Total stockholders' equity.................... 57,579 257,979
---------- -------------
Total capitalization......................... $ 57,579 $ 1,089,890
========== =============
</TABLE>
- --------
(1) The pro forma as adjusted column gives effect to certain events that
occurred or are expected to occur subsequent to September 30, 1996; (i) the
grant of the Company's PCS licenses, (ii) the payment to the FCC of $53.0
million representing five percent of the purchase price of the PCS
licenses, (iii) the drawdown of $49.3 million of debt from the Hyundai
Loan, (iv) the purchase by Hyundai of 70,000 Hyundai Units for an aggregate
price of $700,000 and (v) the incurrence of $953.7 million (face amount) of
Government Financing. The pro forma as adjusted column also reflects the
following events expected to occur upon the consummation of the Offerings:
(i) net proceeds to the Company of $152.9 million from the sale of
shares of Class C Common Stock offered hereby at an assumed offering price
of $ per share, (ii) net proceeds to Company of an aggregate of $211.0
million from the issuance of the Units, (iii) the purchase by Hyundai of an
additional $49.3 million in Hyundai Units, net of $2.5 million in fees and
expenses related to such purchase and (iv) conversion of Class B Common
Stock into Class C Common Stock on a one-for-one basis. The Hyundai Stock
Purchase will be financed through the surrender of the Hyundai Loan. See
"Use of Proceeds" and "Certain Transactions."
(2) The Government Financing has been recorded at its estimated fair market
value of approximately $612 million based on an estimated fair market
borrowing rate of 14%, as estimated by management and assuming an actual
interest rate of 6.5% under the Government Financing. The actual total
aggregate obligation under the Government Financing for the License
Subsidiaries is $953.7 million. See "Risk Factors--Substantial Debt
Obligations to the U.S. Government; Implications of Accounting Treatment."
(3) The Company has received a commitment from Lucent for the Lucent Financing.
See "Description of Certain Indebtedness--Lucent Financing."
(4) The Company expects gross proceeds from the Unit Offering of approximately
$220 million. The pro forma as adjusted capitalization of the Company
reflects the Senior Discount Notes at face value. In the Company's
financial statements, the estimated value of the Warrants will be reflected
both as a debt discount and an element of additional paid-in capital.
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and related
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Prospectus. The
Consolidated Statements of Operations Data for the years ended December 31,
1994 and 1995 and the consolidated balance sheet data as of December 31, 1994
and 1995, have been derived from, and should be read in conjunction with, the
consolidated financial statements of the Company, which have been audited by
Arthur Andersen LLP, independent public accountants, and are included herein.
The consolidated statements of operations data for the nine-month periods
ended September 30, 1995 and 1996 and the consolidated balance sheet data as
of September 30, 1996 have been derived from the unaudited consolidated
financial statements of the Company included elsewhere herein and, in
management's opinion, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information.
The results for the nine months ended September 30, 1996, are not indicative
of the results that may be expected for the year ending December 31, 1996.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------------------
1994 1995 1995 1996
--------- ---------- ---------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OP-
ERATIONS DATA:
Revenues..................... $ -- $ -- $ -- $ --
Gross profits................ -- -- -- --
Loss from operations......... (448) (791) (540) (1,342)
Net loss..................... $ (433) $ (744) $ (512) $ (1,225)
Net loss per share(1)........
Weighted average number of
shares
outstanding(1)..............
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1996
-------------------- -------------------------
PRO FORMA
1994 1995 HISTORICAL AS ADJUSTED(2)
--------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DA-
TA:
Cash and cash equivalents.... $ 918 $ 2,688 $ 6,569 $ 364,986
PCS license deposits......... -- 53,982 -- --
PCS license down payments.... -- -- 52,983 --
PCS licenses ................ -- -- -- 717,877
Total assets................. 937 56,693 59,634 1,091,945
Government Financing(3)...... -- -- -- 611,911
Lucent Financing(4).......... -- -- -- --
Senior Discount Notes(5)..... -- -- -- 220,000
Total stockholders' equity... 868 54,977 57,579 257,979
</TABLE>
- --------
(1) See Note 3 of Notes to Consolidated Financial Statements.
(2) The pro forma as adjusted column gives effect to certain events that
occurred or are expected to occur subsequent to September 30, 1996; (i)
the grant of the Company's PCS licenses, (ii) the payment to the FCC of
$53.0 million representing five percent of the purchase price of the PCS
licenses, (iii) the drawdown of $49.3 million of debt from the Hyundai
Loan, (iv) the purchase by Hyundai of 70,000 Hyundai Units for an
aggregate price of $700,000 and (v) the incurrence of $953.7 million (face
amount) of Government Financing. The pro forma as adjusted column also
reflects the following events expected to occur upon the consummation of
the Offerings: (i) net proceeds to the Company of $152.9 million from the
sale of shares of Class C Common Stock offered hereby at an assumed
offering price of $ per share, (ii) net proceeds to Company of an
aggregate of $211.0 million from the issuance of the Units, (iii) the
purchase by Hyundai of an additional $49.3 million in Hyundai Units, net
of $2.5 million in fees and expenses related to such purchase and (iv)
conversion of Class B Common Stock into Class C Common Stock on a one-for-
one basis. The Hyundai Stock Purchase will be financed through the
surrender of the Hyundai Loan. See "Use of Proceeds" and "Certain
Transactions."
(3) The Government Financing has been recorded at its estimated fair market
value of approximately $612 million based on an estimated fair market
borrowing rate of 14%, as estimated by management and assuming an actual
interest rate of 6.5% under the Government Financing. The actual total
aggregate obligation under the Government Financing for all of the License
Subsidiaries is $953.7 million. See "Risk Factors--Substantial Debt
Obligations to the U.S. Government; Implications of Accounting Treatment."
(4) The Company has received a commitment from Lucent for the Lucent
Financing. See "Description of Certain Indebtedness--Lucent Financing."
(5) The Company expects gross proceeds from the Unit Offering of approximately
$220 million. The pro forma as adjusted balance sheet data of the Company
reflects the Senior Discount Notes at face value. In the Company's
financial statements, the estimated value of the Warrants will be
reflected both as a debt discount and an element of additional paid-in
capital.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Prospectus, including the following discussion, contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual
results could differ materially from those projected in the forward-looking
statements as a result of certain of the risk factors commencing on page 10 as
well as other factors described below and elsewhere in this Prospectus.
General Wireless intends to become a leading provider of affordable wireless
communications services. The Company holds PCS licenses to serve the rapidly
growing metropolitan areas of San Francisco, Atlanta and Miami, as well as 11
selected high-growth contiguous markets. In total, the Company's markets
contain 19.8 million POPs, approximately 71% of which are located in the
Metropolitan Areas. The Company believes that this is the highest percentage
of total POPs located in densely populated urban markets (markets having at
least three million POPs) of any PCS or cellular operator in the United
States. Additionally, the Company believes its markets are particularly
attractive because of their high historical and projected population growth
rates, as well as other desirable demographic characteristics, such as high
population densities, favorable business climates, high median household
income levels and long commute times. From 1990 through 1995, the aggregate
population of the Company's markets has grown at over 150% of the national
rate and is expected to continue to grow at a rate significantly above the
national average. The Company plans to initiate service on its PCS networks by
the end of 1997.
Through the Lucent Equipment Agreement, the Company has selected Lucent to
be its primary network vendor to undertake a substantial portion of the
construction and implementation of the Company's PCS networks. Lucent is a
leading provider of telecommunications equipment and has significant
experience building 1900 MHz CDMA-based PCS networks, including portions of
the networks being used by PrimeCo and Sprint PCS. In addition, the Company
has received a commitment from Lucent to provide the Lucent Financing,
consisting of vendor financing of up to $300 million of senior secured loans
for the purchase of infrastructure equipment and certain related network
buildout costs. The Lucent Financing is subject to the negotiation and
execution of a definitive agreement and the satisfaction of certain
contingencies. There can be no assurance that the Company and Lucent will
enter into such definitive agreement or that such contingencies will be
satisfied.
The Company was incorporated in June 1994, is at an early stage of
development and has no operating history. Consequently, the Company does not
have any meaningful historical financial information upon which a prospective
investor could evaluate an investment in the Class C Common Stock offered
hereby. The Company is subject to all risks typically associated with a start-
up entity. The Company has incurred cumulative net losses through September
30, 1996 of approximately $2.4 million. These losses resulted primarily from
expenditures associated with organizational and start-up activities and the
Company's pursuit of PCS licenses in the C-Block Auction. The Company expects
to launch wireless communication services during the first half of 1998 and
does not expect to generate any revenues until such time or later. The Company
will incur significant operating losses and generate negative cash flow from
operating activities during the next several years, while it seeks to develop
and construct its PCS networks and build a PCS customer base. These losses and
negative cash flow are expected to be substantial and to increase during the
initial years of the PCS networks build-out and operation. The Company is
substantially leveraged in relation to its equity and it has significant debt
service obligations. In addition, the Company believes that its future
operating results will be subject to annual and quarterly fluctuations due to
several factors, some of which are beyond the control of the Company. These
factors include the cost of constructing the Company's PCS networks (including
any unanticipated costs associated therewith), the cost of relocating
microwave licensees, the establishment of a market for PCS, pricing strategies
for competitive services, new offerings of competitive services, changes in
the regulatory environment, changes in technology, the cost and availability
of PCS infrastructure and subscriber equipment, delays in the introduction of
the Company's services resulting from any of such factors and general and
local economic conditions. In addition, the extent of the potential demand for
PCS cannot be estimated with any degree of certainty. See "Risk Factors--
Development Stage Company; Historical and Expected Future Operating Losses."
29
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
General and Administrative Expense
General and administrative expenses were $1,342,000 and $540,000 for the
nine months ended September 30, 1996 and 1995, respectively, representing an
increase of 149%. The increase is primarily due to increased expenditures
relating to obtaining the Company's PCS licenses, the hiring of additional
personnel to manage the start-up of the Company's operations and costs
associated with the Company's procurement agreement and annual retainer with
Mitsui as well as costs associated with a purchasing consultant provided by
Mitsui.
Other Income
Other income was $152,000 and $33,000 for the nine months ended September
30, 1996 and 1995, respectively, representing an increase of 361%. The
increase reflects increased interest income due to higher average investment
balances.
Provision for Income Taxes
For federal income tax purposes, the Company had taxable income of
approximately $152,000 and $33,000 for the nine months ended September 30,
1996 and 1995, respectively resulting in provisions for income taxes $35,000
and $5,000, respectively for such periods. The increase in the provision for
income taxes reflects the increase in interest income.
Net Loss
Net losses were $1,125,000 and $3,512,000 for the nine months ended
September 30, 1996 and 1995, respectively, representing an increase of 120%.
The increase is primarily associated with increased expenditures related to
obtaining the Company's PCS licenses and the hiring of additional personnel to
manage the start-up of the Company's operations. The Company anticipates that
net losses will continue to increase over the next year due to expenditures
associated with the construction of the Company's wireless network.
FISCAL YEARS 1995 AND 1994
General and Administrative Expenses
General and administrative expenses were $791,000 and $448,000 for the years
ended 1995 and 1994, respectively, representing an increase of 77%. The 1995
increase is primarily due to increased expenditures relating to payroll and
travel which is reflective of the 12-month period in 1995 compared to the six-
month period in 1994.
Other Income
Other income was $54,000 and $18,000 for the years ended 1995 and 1994,
respectively, representing an increase of 200%. The 1995 increase is
reflective of the 12-month period in 1995 compared to the six-month period in
1994 and higher average investment balances in 1995 compared to 1994.
Provision for Income Taxes
Provisions for income taxes were $7,000 and $3,000 for the years ended 1995
and 1994, respectively. Although the Company has net deferred tax assets
related to net losses incurred during the development stage, the Company has
recorded a valuation allowance equal to the net deferred tax assets due to the
uncertainty of future operating results. However, for federal income tax
purposes, all expenses incurred by the Company prior to the Company earning
any revenues are capitalized for tax purposes. Therefore the Company had
taxable income in 1995 and 1994 of approximately $54,000 and $18,000,
respectively. The increase reflects the increase in interest income.
30
<PAGE>
Net Loss
Net losses were $744,000 and $433,000 for the years ended 1995 and 1994,
respectively, representing an increase of 72%. The 1995 increase is reflective
of the 12-month period in 1995 compared to the six-month period in 1994 and
the increased expenditures related to obtaining the Company's PCS licenses and
the hiring of additional personnel to manage the start-up of the Company's
operations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1996, the Company has raised net
proceeds of approximately $63 million from the sale of equity securities.
Subsequent to September 30, 1996, and shortly after the License Grant Date,
the Company drew down $49.3 million under the Hyundai Loan. The term of the
note issued under the Hyundai Loan is one year, with a fixed interest rate of
6.5% per annum during the term of the note. In addition, the Company received
$700,000 in connection with Hyundai's purchase of 70,000 Hyundai Units. After
giving effect to the foregoing, the Company has raised a total of
approximately $118 million, which has been used primarily to fund the payment
of 10% of the purchase price of the Company's PCS licenses. The Hyundai Loan
will be surrendered to finance Hyundai's purchase of 4,930,000 Hyundai Units
at a price of $10 per Hyundai Unit, to be effected upon the closing date of
the Stock Offering. See "Certain Transactions--Hyundai Relationship."
The Company bid approximately $1.1 billion in the C-Block Auction to qualify
as the high bidder for its PCS licenses. To date, the Company has paid an
aggregate of $106.0 million to the FCC representing the first and second five
percent payments of the purchase price of its PCS licenses. The remaining 90%
of the purchase price of the licenses, or $953.7 million, will be financed
with the Government Financing, and will be carried on the Company's financial
statements at $ . The Company will be required to make interest expense
payments based on an interest rate of %. The Company will be required to
make quarterly payments of interest only for the first six years of the
license and quarterly payments of interest and principal over the remaining
four years of the license term.
In aggregate, the Company estimates that it will require $542 million of
financing to fund its business plan from the effective date of the Offerings
through the end of 1998. The Company will require funding for capital
expenditures, interest expense payments, operating losses, working capital and
other general corporate purposes. Based on network design analysis completed
by the Company and Lucent, the Company plans to spend approximately $11 per
POP through the end of 1997 for the build-out of its PCS networks, which, once
commercial service is launched during the first half of 1998, would provide
coverage to approximately 80% of the aggregate population of its markets.
Additionally, the Company intends to spend approximately $3 per POP through
the end of 1998 to provide additional capacity on its PCS networks. To the
extent unexpected expenditures arise or the Company's estimates prove to be
inaccurate, the Company may require additional financing. See "Risk Factors--
Significant Capital Requirements; Financing Risks" and "Certain Transactions."
In aggregate, the Company intends to have raised or have available $615
million to fund the Company's business plan from the effective date of the
Offerings through the end of 1998. The Company expects sources of funding to
include the Stock Offering, the Unit Offering and drawdowns on the Lucent
Financing. The Company has received a commitment from Lucent to provide the
Lucent Financing for the purchase of infrastructure equipment and certain
related network buildout costs. The Lucent Financing provides for an initial
tranche of $200 million with an eight-year term and a subsequent tranche of
$100 million to be available commencing January 1, 1998 with a seven-year
term, with undrawn availability under both tranches terminating on December
31, 1999. The Company anticipates that Tranche A of the Lucent Financing will
allow the Company to construct PCS networks providing coverage to
approximately 80% of the aggregate population of its markets and that Tranche
B of the Lucent Financing will allow for financing of additional equipment
needed to support the projected growth in the Company's subscriber base. All
principal amounts loaned under the Lucent Financing would be repayable in
equal quarterly installments commencing March 31, 2001 and ending December 31,
2004.
31
<PAGE>
The Lucent Financing is subject to the parties negotiating and executing a
definitive agreement and the satisfaction of certain contingencies. There can
be no assurance that the Company and Lucent will enter into such a definitive
agreement or that the conditions to the Lucent Financing will be met. See
"Risk Factors--Significant Capital Requirements; Financing Risks" and
"Description of Certain Indebtedness." See "Risk Factors--PCS Network
Construction and Implementation Risks" and "Certain Transactions."
The following table sets forth the Company's estimated sources and uses of
funds on an aggregate basis from the effective date of the Offerings through
the end of 1998. Actual amounts of financing required may vary materially from
these estimates and additional financing may be required in the event of
significant unforseen delays in implementation, cost overruns, unanticipated
expenses, regulatory changes, engineering design changes and other
technological risks.
<TABLE>
<CAPTION>
AMOUNTS
-------------
(IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Lucent Financing......................................... $251
Unit Offering net proceeds............................... 211
Stock Offering net proceeds.............................. 153
----
Total.................................................. $615
====
USES OF FUNDS:
Capital expenditures..................................... $273
Interest expense payments on Government Financing and Lu-
cent Financing.......................................... 157
Operating losses and working capital..................... 112
Others, including general corporate purposes............. 73
----
Total.................................................. $615
====
</TABLE>
32
<PAGE>
THE WIRELESS COMMUNICATIONS INDUSTRY
GROWING DEMAND FOR WIRELESS SERVICES
Demand for wireless communications has grown rapidly over the past decade
and has been driven by technological advancements and increased competition.
Wireless communication products and services have evolved from basic tone-only
paging services to mass-market cellular technology services and are now
entering the next generation of development with the evolution of wireless
communication technology. Each new generation of wireless communication
products and services has generally been characterized by improved product
quality, broader service offerings and enhanced features.
The Company believes that the demand for wireless communications will
continue to grow dramatically and that PCS will capture a significant share of
the wireless market. Currently, wireless telephony penetration in the United
States is estimated to be 13% and, according to Kagan Associates, is expected
to grow to 47% by 2006. As reported by the Cellular Telecommunications
Industry Association ("CTIA"), the compound annual growth rate of cellular
subscribers exceeded 45% from 1990 through 1995. Despite this rapid growth in
the number of cellular subscribers, wireless minutes of use only represent
approximately one percent of total telecommunications switched minutes of
traffic, due in part to capacity constraints which discourage cellular
operators from aggressively pricing their services.
INDUSTRY OVERVIEW
General. Wireless communications networks use a variety of radio frequencies
to transmit voice and data signals. Wireless communications technologies
include one-way radio applications, such as paging or beeper services, and
two-way radio applications, such as cellular telephone, SMR networks and
emerging PCS services. Each application operates on a distinct portion of
radio frequency spectrum. Although the principal wireless voice application to
date has been cellular telephony, PCS is expected to develop rapidly.
Cellular. The cellular telephone industry commenced in 1983 when the FCC
began granting two 20 MHz licenses per market throughout the United States. In
1986, the FCC granted an additional 5 MHz of spectrum per cellular license to
provide a total of 25 MHz for each cellular operator. Today, there are two
cellular operators in each market.
PCS. In order to increase competition in wireless communications, promote
improved quality and service, and make available the widest possible range of
wireless services to U.S. consumers, Federal legislation was enacted in 1993
directing the FCC to allocate radio frequency spectrum for PCS by competitive
bidding. The FCC established PCS service areas in the United States based upon
Rand McNally & Co.'s market definition of 51 major trading areas ("MTAs") and
493 basic trading areas ("BTAs"), which are the geographic territories for
which PCS licenses have been or will be auctioned.
PCS licenses differ from existing cellular licenses in three basic ways:
location of the licensed frequencies on the radio spectrum, amount of spectrum
allocated per license and geographic area licensed. PCS networks will operate
at higher frequencies (140 MHz in the 1850-1990 MHz frequency band) compared
to cellular frequencies (50 MHz in the 800-900 MHz frequency band). Also, PCS
licenses will permit the use of spectrum blocks of 30 MHz (like those of the
Company) or 10 MHz versus spectrum blocks of 25 MHz for cellular licenses.
Finally, the geographic areas for PCS licenses are divided differently than
for cellular licenses. PCS is segmented among 51 MTAs for A- and B-Block
licenses and 493 BTAs for other PCS licenses, including C-Block licenses, as
opposed to cellular's 306 metropolitan statistical areas and 428 rural service
areas.
In March 1995, the FCC completed the A- and B-Block PCS auction, resulting
in the award of two 30 MHz licenses in each of the MTAs. In May 1996, the FCC
completed the C-Block Auction, resulting in the award of one license for 30
MHz of spectrum in each of the BTAs. In July 1996, the FCC reauctioned 18 C-
Block licenses for which the high bidders failed to make initial post-auction
down payments. On August 26, 1996, the FCC began the auction of D-, E- and F-
Block licenses, which will be for licenses of only 10 MHz of spectrum in each
of the BTAs. Although the F-Block licenses are reserved for Entrepreneurs, the
D- and E-Block licenses are not reserved for any specific class of applicants.
33
<PAGE>
LIMITATIONS OF CELLULAR TELEPHONE INDUSTRY
Despite its widespread availability and growth to date, cellular services
have several limitations, including inconsistent service quality, lack of
privacy, limited capacity and, currently, the inability to transfer data
without a modem. Most current cellular services transmit voice and data
signals over analog-based systems, which use one continuous electronic signal
that varies in amplitude or frequency over a single radio channel
accommodating one conversation. In contrast, digital networks, including PCS
networks, convert voice or data signals into a stream of digits and typically
use voice compression techniques to allow a single radio channel to carry
multiple simultaneous signal transmissions. This enhanced capacity, along with
improvements in digital protocols, allows PCS and other digital wireless
technologies to offer greater call privacy and single number service, and more
robust data transmission features.
The Company believes that due to relatively high per minute airtime charges
and unpredictable monthly bills, there is a price-sensitive mass consumer
market that refrains from subscribing to or extensively using cellular
services. The Company believes that if the mass consumer market were offered
significantly lower per minute airtime charges and more predictable and
affordable pricing plans, mass consumers would increase their use of wireless
communications services, contributing to a new phase of growth in the
industry. The Company also believes that business customers who are high-
volume users of wireless communications will be attracted to lower priced
airtime service, as they would realize substantial aggregate savings. The
Company believes that PCS operators have the opportunity to capture a
substantial market share due to technical and other advantages that they will
have relative to incumbent cellular operators, including (i) greater
flexibility to reduce per minute airtime usage charges, (ii) increased network
capacity, (iii) enhanced voice quality and (iv) the ability to include
enhanced capabilities such as advanced calling features, data transmissions to
and from portable computers, and short messaging and facsimile services
without need of a modem.
THE PCS SOLUTION
PCS operators plan to construct all-digital wireless telephony networks and
will compete primarily with existing cellular telephone operators. PCS
operators using digital technology will have several technical and capacity
related advantages relative to analog cellular providers. The Company believes
that the enhanced capacity of PCS networks will allow PCS operators to offer
wireless communications services at per minute airtime prices significantly
below the per minute airtime prices currently being charged by cellular
operators. As a result PCS subscribers are expected to use more airtime
minutes per month than cellular subscribers due to both lower effective
airtime pricing and enhanced features. The Company believes that PCS operators
will realize substantial revenue growth from broad penetration and greater
levels of usage.
PCS was introduced in the United States in the Washington, D.C. MTA in late
1995. Despite the PCS network having a much smaller geographic coverage area
than existing cellular competitors and no current roaming capability,
approximately 90,000 customers subscribed for PCS services in the first seven
months of commercial availability. The Company believes that the experience in
international markets where PCS has already been introduced provides
additional support for the potential growth of PCS in the United States. For
example, in approximately three years, the two PCS operators in the United
Kingdom have gained over 1.1 million subscribers. In Japan, approximately
600,000 new PCS subscriptions were activated during the first year of
operations.
INDUSTRY OUTLOOK
Industry sources expect the wireless telecommunications market in general
and the PCS market in particular to grow at a rapid rate in the United States.
Kagan Associates forecasts wireless telephony penetration at approximately 47%
by 2006. Wireless communication technology developments are expected to evolve
and continue to drive mass consumer growth as users demand more sophisticated
services and products. The Company believes that wireless communications
penetration rates will increase as prices fall and greater emphasis is placed
on the development and use of mass retail distribution channels.
34
<PAGE>
BUSINESS
THE COMPANY
General Wireless intends to become a leading provider of affordable wireless
communications services. The Company holds PCS licenses to serve the rapidly
growing metropolitan areas of San Francisco, Atlanta and Miami, as well as 11
selected high-growth contiguous markets. In total, the Company's markets
contain 19.8 million POPs, approximately 71% of which are located in the
Metropolitan Areas. The Company believes that this is the highest percentage
of total POPs located in densely populated urban markets (markets having at
least three million POPs) of any PCS or cellular operator in the United
States. Additionally, the Company believes its markets are particularly
attractive because of their high historical and projected population growth
rates, as well as other desirable demographic characteristics, such as high
population densities, favorable business climates, high median household
income levels and long commute times. From 1990 through 1995, the aggregate
population of the Company's markets has grown at over 150% of the national
rate and is expected to continue to grow at a rate above the national average.
The Company plans to launch commercial service on its PCS networks during the
first half of 1998.
The demand for wireless communications services in the United States has
grown dramatically during the last five years, notwithstanding the technical
limitations of existing analog cellular technology. The number of cellular
subscribers has grown from 5.3 million at December 31, 1990 to 33.8 million at
December 31, 1995, representing a compound annual growth rate of 45%. Over the
same time period, the wireless telephony penetration rate has grown from
approximately 3% to approximately 13%, and is forecasted by Kagan Associates
to reach approximately 47% by the year 2006.
The Company believes that due to relatively high per minute airtime charges
and unpredictable monthly bills, there is a price-sensitive mass consumer
market that refrains from subscribing to or extensively using cellular
services. The Company believes that if the mass consumer market were offered
significantly lower per minute airtime charges and more predictable and
affordable pricing plans, mass consumers would increase their use of wireless
communications services, contributing to a new phase of growth in the
industry. The Company also believes that business customers who are high-
volume users of wireless communications services will be attracted to lower
priced airtime service, as such high-volume users would realize substantial
aggregate savings.
STRATEGY
The Company intends to become a leading provider of affordable wireless
communications services. The Company's strategy to achieve this objective is
based upon the following:
Operate in large, rapidly growing markets with attractive demographic
profiles. The Company has acquired PCS licenses in densely populated, high
growth major metropolitan areas. These licenses will enable the Company to
provide wireless communications services in the San Francisco, Atlanta and
Miami BTAs, all of which are among the 12 largest BTAs in the United States,
Sacramento, which is the 26th largest BTA, and 10 selected BTAs that are
contiguous to these major cities. Approximately 71% of the Company's 19.8
million POPs are located in the Metropolitan Areas, which the Company believes
is the highest concentration of POPs located in densely populated urban
markets (markets having at least three million POPs) of any PCS or cellular
operator in the United States. The remaining 29% of the Company's POPs are
located in selected contiguous markets that represent commuting corridors and
rapidly growing suburban areas that have a high level of commerce and
interaction with the Metropolitan Areas.
The Company believes there are significant advantages created by focusing on
densely populated major metropolitan markets. First, cell site efficiencies
can be maximized in densely populated areas, thereby reducing network build-
out costs per subscriber and providing greater pricing flexibility.
Accordingly, the Company can achieve a higher ratio of population coverage to
geographic coverage relative to PCS and cellular operators in less densely
populated markets. Second, these markets have multiple business centers and
residential areas that generally have a high demand for mobile communications
services. Third, cellular operators typically face
35
<PAGE>
significant capacity constraints in high traffic areas due to the analog
technology used in the majority of their networks. Fourth, major markets have
numerous local, regional and national retailers as well as agents and
resellers that can facilitate rapid growth by new wireless entrants.
The Company also believes it will benefit from the continued population
growth of its markets. The aggregate population of the Company's markets has
grown at over 150% of the national rate over the last five years and is
projected to continue to grow at rates significantly above the national
average. This rapid growth will provide the Company with an expanding base of
potential customers, which the Company believes will allow the Company to
leverage significantly its infrastructure and reduce per POP operating and
network build-out costs.
Furthermore, the Company's markets have attractive demographic
characteristics. Relative to national averages, the Company's markets have
above-average population densities, favorable business climates, high median
household income levels and long commute times. The Company's Metropolitan
Areas were all ranked in the top 10 U.S. markets in terms of the number of
cellular subscribers as of December 31, 1995. The Company believes that these
attractive demographic characteristics will enable it to achieve higher-than-
average penetration rates.
Use a focused network build-out to achieve low costs. General Wireless
intends to achieve lower operating costs and capital requirements relative to
its PCS and cellular competitors by concentrating its network build-out in
"high-usage" areas rather than building out wide-area cellular-like networks.
Additionally, the Company intends to use the most cost-effective digital
technology and outsource selected technical and administrative functions.
The Company plans to offer high quality network coverage in the "high-usage"
areas of its markets, which the Company defines as those areas where the
majority of the population lives, commutes, works and shops. These areas
primarily include densely populated urban areas, commuting corridors and high-
growth suburban areas. The Company plans to limit the construction of its
networks outside of these high-usage areas because it believes the incremental
cost of building out such network coverage is substantial and is inconsistent
with the Company's objective to be the low cost provider of wireless
communications services. Based on network design analysis completed to date,
the Company plans to spend approximately $11 per POP through the end of 1997
for the build-out of its PCS networks, which, once commercial service is
launched during the first half of 1998, would provide coverage to
approximately 80% of the aggregate population of its markets. Additionally,
the Company intends to spend approximately $3 per POP in 1998 to provide
additional capacity on its PCS networks. The Company believes its per POP
network build-out costs will be significantly less than its competitors. The
Company believes its focused build-out strategy differs from the strategy of
many existing cellular operators and from the expected strategy of many PCS
operators that are expected to compete by placing greater emphasis on coverage
area rather than on airtime prices. The Company's strategy parallels those
used by certain CLECs and IXCs that have targeted specific coverage areas of
major markets and are interconnected to other carriers' facilities for
expanded coverage.
The Company believes it will further reduce network build-out and operating
costs by using CDMA digital technology. The Company believes that CDMA is the
most efficient and cost-effective network technology that is capable of
delivering high-quality network service. CDMA is expected to enable greater
privacy and fraud prevention, as well as fewer dropped calls than competing
technologies. CDMA technology allows increased capacity within the allocated
frequency by reusing the entire frequency in each cell rather than using only
a fraction of the frequency in each cell as is typically the case with analog
cellular, TDMA and GSM technologies. In addition, CDMA technology requires
fewer cells than these other technologies in order to provide coverage over
the same geographic area, thereby reducing the overall infrastructure, and
operating costs of the Company's networks. See "--Digital Technology
Selection."
The Company intends to maintain a low level of corporate overhead while
maintaining high quality standards and a rapid build-out schedule by
outsourcing certain engineering and non-strategic administrative
36
<PAGE>
functions. The Company has contracted with Lucent for project management of a
turnkey network solution including program management, RF engineering, site
acquisition, network design, spectrum clearing and microwave removal, and site
construction and equipment procurement. In addition, the Company plans to take
advantage of existing third-party vendors of such administrative services as
billing, collection and customer service. The Company believes that specialized
third-party vendors can deliver such non-strategic services at high quality and
low costs, and that outsourcing will enable management to focus on the
implementation of its core business strategy. The Company may, in the future,
internalize these non-strategic services to the extent that increased operating
scale allows it to do so on a cost-effective basis.
Leverage turnkey relationship with Lucent to construct a high-quality
network. The Company has entered into a definitive agreement with Lucent (the
"Lucent Equipment Agreement"), under which the Company has selected Lucent to
be its primary network vendor to undertake the turnkey construction and
implementation of the Company's PCS networks. Lucent is a leading provider of
telecommunications equipment and has significant experience building 1900 MHz
CDMA-based PCS networks, including portions of the networks being used by
PrimeCo and Sprint PCS. Under the "turnkey" arrangement, Lucent will have broad
responsibilities for program management, network deployment, including RF
engineering, site acquisition, network design, spectrum clearing and microwave
removal, and site construction and equipment procurement. The Company's
networks will be built with Lucent mini-cell equipment, 5ESS(R)-2000 switches,
transmission equipment and power systems, and will have CDMA technology that
the Company believes will allow it to offer wireless telephone voice quality
comparable to wireline telephone voice quality. The Company believes that
through future innovations expected to be developed by Lucent's Bell
Laboratories research unit, Lucent will be able to provide next-generation
products to enhance the functionality and performance of the Company's
networks. The Lucent Equipment Agreement enables the Company to monitor and
control the major activities of the network build-out.
Implement an innovative and affordable pricing structure. General Wireless
plans to implement an innovative and affordable pricing structure to capitalize
on wireless customers' demand sensitivity to price. The Company believes that a
substantial market opportunity exists to narrow the pricing gap between
existing cellular airtime and wireline telephone rates, which approximate 45
cents and 5 cents per minute of use, respectively. Relative to current cellular
service packages, General Wireless expects to offer service packages that
include larger blocks of prepaid minutes consisting of both peak and off-peak
airtime at significantly lower effective prices per minute. Based on this
pricing strategy, General Wireless expects to realize ARPU similar to that
currently achieved by cellular operators without negatively impacting operating
margins. Additionally, the Company believes that its cost structure will better
support more affordable pricing relative to PCS competitors that provide wide-
area cellular-like coverage.
The Company believes that its service packages will provide enhanced value to
both business customers and the mass consumer market. Business customers who
are heavy-volume users and account for a disproportionate amount of current
cellular usage and airtime revenue would realize substantial aggregate savings
from airtime price reductions. Also, the Company believes that the mass
consumer market will be attracted by the prospect of an affordable and
predictable monthly bill at high usage levels.
Maximize customer reach through extensive use of indirect distribution
channels. The Company's distribution strategy will emphasize indirect channels
in general, and retailers in particular. The Company believes it will realize
several important advantages from this distribution strategy. First, the
Company believes that the use of multiple indirect channels will enable the
Company to achieve a fast ramp-up of subscribers through representation at
numerous points of purchase. Second, the Company believes that indirect
distribution channels will cost-effectively focus the Company's sales and
marketing resources directly on customer creation, as opposed to investment in
Company stores and related infrastructure. Third, the focus on retailers and
agents, rather than resellers, will better allow the Company to maintain a
direct relationship with its customer base through billing and customer
service. The Company believes that direct contact with its customers will allow
it to realize better customer satisfaction and achieve lower customer turnover.
37
<PAGE>
MARKETS
As part of its bidding strategy in the C-Block Auction, the Company has
selectively acquired PCS licenses serving the Metropolitan Areas and other
contiguous BTAs, creating three market clusters: the San Francisco cluster,
the Miami cluster and the Atlanta cluster. Each of these clusters consists of
an anchor market containing a major urban center and two to five contiguous
BTAs. The Company believes that these market clusters represent densely
populated urban areas, commuting corridors and high growth communities that
have a high level of intercity commerce with the Metropolitan Areas. The
Company believes its markets are particularly attractive because of their high
historical and projected population growth rates, as well as other desirable
demographic characteristics, such as favorable business climates, high median
household income levels and long commute times. Over the past five years, the
aggregate population of the Company's markets has grown at over 150% of the
national rate and is expected to continue to grow at a rate significantly
above the national average.
<TABLE>
<CAPTION>
1995 POPULATION
POPS GROWTH RATE(1)
----------- --------------
(THOUSANDS)
<S> <C> <C>
SAN FRANCISCO CLUSTER:
San Francisco--Oakland--San Jose.............. 6,840 1.3%
Sacramento.................................... 1,879 2.5%
Stockton...................................... 575 2.3%
Monterey--Salinas............................. 383 1.5%
Chico--Oroville............................... 230 2.1%
Yuba City--Marysville......................... 141 2.8%
------ ----
Subtotal POPs/Weighted Average Growth Rate... 10,048 1.6%
MIAMI CLUSTER:
Miami--Fort Lauderdale........................ 3,495 1.3%
West Palm Beach............................... 1,012 2.5%
Fort Meyers................................... 554 3.0%
Fort Pierce--Vero Beach....................... 385 2.5%
Naples........................................ 185 4.0%
------ ----
Subtotal POPs/Weighted Average Growth Rate... 5,631 1.9%
ATLANTA CLUSTER:
Atlanta....................................... 3,712 3.0%
Gainesville................................... 193 2.6%
Athens........................................ 179 1.5%
------ ----
Subtotal POPs/Weighted Average Growth Rate... 4,084 2.9%
------ ----
Total POPs/Weighted Average Growth Rate.......... 19,763 1.9%
U.S. Average..................................... -- 1.3%
</TABLE>
- --------
(1) Average compound annual growth rates in population between 1990 through
1995, based upon the 1990 U.S. Census and the 1995 PCS Atlas and Databook.
MARKETING AND DISTRIBUTION
The Company will use a wide range of indirect distribution channels,
including mass retailers, agents and resellers, to market and sell its service
offerings. The Company believes that a focus on indirect channels for the
majority of its sales and customer activations will provide it with the most
cost effective distribution reaching the largest percentage of potential
customers. In particular, the Company intends to target those indirect
channels, such as retailers and agents, that allow the Company to maintain a
direct relationship with customers. In addition to indirect distribution
channels, the Company will also employ direct marketing targeted to specific
customer segments using its own sales force, telemarketing and direct mail.
38
<PAGE>
The Company believes that the mass consumer and business segments can be
best accessed through retailers and other non-exclusive indirect distribution
channels. Currently, many cellular operators distribute their products and
services through direct sales channels and exclusive agents. General Wireless
believes that wireless products and services will be purchased increasingly
from retailers, which will sell such products on a non-exclusive basis where
consumers and businesses are accustomed to purchasing other electronic
products such as wireline telephones, pagers, personal computers and
televisions. In addition to its differentiation based on affordable prices for
large amounts of monthly minutes of use, General Wireless intends to provide
incentives to retailers to insure that its brands are prominently displayed
and effectively promoted at the point of purchase. These incentives include
traditional upfront commission payments and airtime revenue sharing
arrangements.
In addition to retailers, the Company plans to use agents that can cost-
effectively penetrate important segments of the target market. These agents
include direct marketing organizations that represent third-party products and
services and ethnic marketing companies focused on particular nationalities in
major cities. In addition, the Company believes that resellers of other
telecommunications services such as long distance and paging services will
find the Company's agent program attractive. As with retailers, General
Wireless plans to compensate agents through upfront commission payments and
airtime revenue sharing arrangements.
To a lesser extent than retailers and agents, the Company will also use
resellers to distribute its wireless products and services. Resellers
typically purchase wholesale airtime and consequently perform all services
otherwise performed by the operator. As a result, resellers are typically able
to negotiate substantial retail airtime discounts as their sole compensation.
Many wireless service providers employ resellers to distribute their products
and services. General Wireless believes that undue reliance on resellers can
lead to their gaining bargaining power over rates that can limit the
operators' flexibility and impair margins. Further, General Wireless believes
that the value of directly billing, servicing and maintaining its own customer
base can be a source of competitive advantage. As a result, the Company does
not intend to rely heavily on resellers.
In addition to its indirect distribution channels, the Company plans to
utilize a direct sales force to target existing high-volume cellular
subscribers. The Company expects such subscribers to be the most attracted to
lower airtime rates, higher quality and additional features that digital
technology provides and that are most likely to purchase digital telephones
from the service operator. The Company may also market directly to potential
customers through Company-owned kiosks, direct mail, the Internet and other
forms of direct marketing.
PRODUCTS AND SERVICES
The Company expects to offer a variety of commercialized wireless services
through state-of-the-art wireless CDMA technology, which the Company intends
to support with Advanced Intelligent Network ("AIN") capability. The Company's
planned services and features are designed to increase usage and provide
consumers with greater capabilities in call management, including the
following:
High Quality Voice Service. CDMA networks have more powerful error
correction, less susceptibility to fading and reduced interference relative
to competing digital technologies. CDMA networks achieve voice quality that
is comparable to the typical wireline telephone. CDMA technology also
employs adaptive equalization which filters out background noise more
effectively than existing wireline or analog cellular phones.
Advanced Handsets. In addition to supporting high-quality voice
transmissions, the Company expects that CDMA handsets will allow digital
data transmission without a phone line modem and will have advanced power
management to maximize handset battery life.
Short Messaging Services. This allows alphanumeric incoming messages to
the handset to be received, stored and displayed on demand.
Caller ID. This displays the telephone number and directory name of the
incoming call on the customer's handset, allowing the customer to decide
whether or not to accept the call.
39
<PAGE>
Allowable Called Number Table. This limits the outgoing calls to the
phone numbers on the allowable call number table in order to limit
unauthorized use.
Over-the-Air Activation. This allows the subscriber to initiate and
obtain feature changes in services by over-the-air activation or
deactivation via handset entry.
Message Waiting Notification. This initiates a voice message waiting
indicator on the handset that notifies the subscriber of a new message.
Custom Calling Features. Additional features that the Company anticipates
offering include call waiting, call forwarding, distinctive ringing and
call blocking.
The Company believes that new features and services will be developed to
take advantage of CDMA's expected position as the most widely deployed digital
wireless protocol in the United States. The Company intends to offer a
portfolio of products to accommodate the growth in data and image transmission
as well as other new applications for wireless data services that are
currently envisioned (e.g., facsimile, wireless local area network and point
of sale terminal connections).
DIGITAL TECHNOLOGY SELECTION
There are three prominent network technologies that provide digital service
in the 1850-1990 MHz frequency band: CDMA, TDMA and GSM. The Company has
selected CDMA as the digital technology for its PCS networks based on several
key advantages relative to other digital protocols:
Broader availability of CDMA to facilitate roaming. Numerous cellular
operators and PCS licensees have announced that they plan to use CDMA
technology in their market areas, which cover more than 90% of the U.S.
population. PrimeCo, for example, which recently begin operating its CDMA PCS
network in November 1996, has announced plans to offer PCS service using CDMA
technology in 40 markets covering more than 70 million people. Sprint PCS,
which began operating its CDMA PCS system in December 1996, plans to offer a
CDMA service footprint covering 65 cities and 190 million people. Conversely,
GSM and TDMA have been chosen by other wireless service providers whose
markets cover only 54% and 45%, respectively, of the U.S. population. The
Company believes the widespread selection of the CDMA standard by wireless
telephony operators will facilitate roaming outside of its service areas by
its subscribers, and also roaming in its service areas by other companies'
subscribers. The table below lists certain major cellular operators and PCS
licensees who have selected CDMA technology.
CELLULAR PCS A- AND B-BLOCK PCS C-BLOCK
--------------------------- --------------------- ---------------------
AirTouch Communications Ameritech General Wireless
Centennial Cellular Chase
Corp. Telecommunications,
ALLTEL Mobile Communications Inc. Inc.
GTE MobilNet Mercury PCS, LLC
Ameritech Cellular Communications
Inc.
NextWave Telecom
PrimeCo Inc.
Bell Atlantic NYNEX Mobile Inc.
Urban Communications
Comcast Cellular Corp. Sprint PCS
GTE MobilNet
360(degrees) Communications
Southern New England Telephone
Company
U S WEST NewVector Group, Inc.
Higher network capacity. CDMA technology allows increased capacity within
the allocated frequency by reusing the entire frequency in each cell rather
than using only a fraction of the frequency in each cell as is typically the
case with analog cellular, TDMA and GSM technologies. The Company believes
that the use of CDMA technology will increase capacity with fewer cells
relative to other digital technologies.
Lower infrastructure costs. Cells using CDMA technology can achieve a
greater range of coverage or subscriber density per base station because of
the more efficient modulation of CDMA technology. As a result, CDMA networks
can achieve the same level of coverage as the current analog, TDMA or GSM
networks with fewer cells, which is expected to reduce the overall
infrastructure and operational costs of CDMA networks.
40
<PAGE>
Greater privacy and fraud prevention. One of the benefits of CDMA technology
is that it combines a constantly changing coding scheme with a low power
signal to enhance security and privacy. Vendors are currently developing
additional encryption capabilities to enhance further overall network
security. Partly because of its security and privacy features, spread spectrum
technology (upon which CDMA is based) has been used by government, military
and intelligence agencies for over 30 years.
Longer handset battery life. Power control characteristics of CDMA reduce
interference levels. The power regulating nature of CDMA establishes a
communication link with a subscriber handset at the lowest possible power
level suitable for high quality voice transmission. Average power output from
subscriber handsets for CDMA is 200 milliwatts compared to 600 milliwatts for
analog cellular and TDMA and 1,000 milliwatts for GSM. Not only is co-channel
and adjacent channel interface minimized, but battery life in subscriber
handsets can be proportionately extended to provide longer periods between
recharge.
Fewer dropped calls. CDMA technology is designed, unlike other technologies,
so that the mobile telephone will generally not switch frequencies during
hand-off from one cell to another. Therefore, CDMA networks are able to use
the "soft hand-off" where the original cell site of a mobile user does not
discontinue handling a call until the mobile user has established connection
in a new cell, resulting in a decreased number of dropped calls relative to
other technologies. See "Risk Factors--Risks Relating to Selection of Digital
Technology; Availability of Handsets."
Simplified frequency planning. Frequency planning is the process by which
wireless service providers analyze and test alternative patterns of frequency
use within their systems to minimize interference and maximize capacity.
Currently, cellular service providers spend considerable time and money on
frequency planning. Because TDMA and GSM networks have frequency reuse
constraints similar to present analog systems, frequency reuse planning for
TDMA and GSM networks is expected to be comparable to planning for the current
analog systems. With CDMA technology, however, the same subset of allocated
frequencies can be reused in every cell, substantially reducing the need for
costly frequency reuse patterning and constant frequency plan management.
INFRASTRUCTURE AND NETWORK BUILD-OUT
The Company has outsourced its network build-out in substantially all of its
markets to Lucent under the turnkey Lucent Equipment Agreement, which
capitalizes on Lucent's expertise in managing highly skilled professional
personnel in RF engineering, network design and construction. The Lucent
Equipment Agreement is structured to enable management to monitor and control
the major activities of the network build-out, which include (i) program
management, (ii) RF engineering, (iii) site acquisition, (iv) network design,
(v) spectrum clearing and microwave removal and (vi) site construction and
equipment procurement.
Program Management. Day-to-day management of the network build-out process
will be performed by Lucent under the monitoring and control of the Company.
The Company's management has defined the economic limits and network coverage
requirements within which Lucent will operate. The Company's management also
monitors and manages progress in order to anticipate potential delays and
exceptional cost variances.
RF Engineering. The RF engineering process utilized by Lucent employs both
empirically-derived models and advanced computer models containing
topographic, demographic and building structure data for the Company's
markets, along with the Company's specific design criteria and coverage plan,
to develop optimal solutions for cell site locations. To facilitate this
process and to reduce site acquisition costs, RF engineers incorporate
information on pre-identified potential cell sites, such as existing rental
sites and sites whose owners are willing to co-locate with other wireless
operators. The Company works closely with Lucent to insure that the most cost
effective RF engineering plan is developed, and manages directly the process
of balancing geographic coverage, population coverage and system activation
schedules.
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Site Acquisition. Lucent, pursuant to the Lucent Equipment Agreement, is
responsible for site acquisition on behalf of the Company. The Company's site
selection process will require the negotiation of lease or acquisition
agreements for approximately 500 sites for the Company's PCS networks over a
five-year period. The Company has identified a significant number of sites for
lease in its service area to form an inventory of potential sites for rent on
existing structures being offered by wireless providers, high-rise office
building owners, utility companies and other site managers representing tower
owners. Lucent will utilize pre-existing sites to the fullest extent possible
and fill in any gaps with sites constructed for the Company to meet its
coverage needs. Earlier experience by PrimeCo has shown that up to 75% of its
commercial coverage was provided by pre-existing structures that were
available for lease.
Network Design. The Company intends to leverage Lucent's extensive expertise
in optimizing network design to minimize the investment and operating costs of
its "backhaul" network. Deregulation of LEC services has reduced prices for
backhaul services and this, coupled with the economic use of microwave links,
is expected to provide significant savings to the Company as compared to past
cellular experience.
Spectrum Clearing and Microwave Removal. For a period of up to five years
after the grant of a PCS license, PCS licensees may be required to share
spectrum with existing fixed microwave licensees operating on the
C-Block spectrum. To secure a sufficient amount of unencumbered spectrum to
operate its PCS networks efficiently, the Company may need to pay to relocate
as many as approximately 85 existing paths to alternate spectrum locations or
transmission technologies. The Company believes that more than 50 of these
microwave paths are eligible for cost sharing between the Company and other
affected licensees, which the Company believes will reduce the Company's cost
of relocating these microwave paths.
Site Construction and Equipment Procurement. Lucent is expected to outsource
site construction activities once sites are acquired and network design has
been completed. In addition, the Company will work closely with Lucent to
identify and select certain key system elements that affect system
performance, such as antennas, to insure that both cost and performance
objectives are met. See "Risk Factors--PCS Network Construction and
Implementation Risks" and "--Relocation of Incumbent Fixed Microwaves
Licensees."
The Company's selection of Lucent as its infrastructure vendor was based on
the Company's evaluation of the reliability and performance of Lucent's
5ESS(R)-2000 switching platform and on the Company's evaluation of Lucent's
performance in delivering 1900 MHz CDMA base stations and software to other
large CDMA users such as PrimeCo and Sprint PCS. The Company also believes
that Lucent, through its research and development team at Bell Laboratories,
will remain a leading innovator in the effective use of the 1900 MHz spectrum.
Over the five-year term of the Lucent Equipment Agreement, the Company may
purchase up to $400 million in equipment and services from Lucent. Through the
Lucent Financing, the Company has received a commitment from Lucent for vendor
financing for up to $300 million of such equipment and services. The Lucent
Equipment Agreement provides for certain minimum quantities of equipment to be
purchased by the Company once the Company secures sufficient financing for
such purchases. The Company expects that the Lucent Financing will enable it
to complete such minimum purchase. The Lucent Equipment Agreement also
provides for certain credits for volume purchases, which the Company expects
to receive based upon its PCS network build-out plans. Warranties provided
under the Lucent Equipment Agreement are generally 12 to 60 months for
equipment, six to 12 months for services and three to 24 months for licensed
software. Liquidated damages are provided in the event that Lucent is unable
to deliver certain products and services on schedule. Such damages are subject
to a maximum liability cap. See "Description of Certain Indebtedness--Lucent
Financing."
In addition, the Company has entered into an agreement with Hyundai for the
purchase of certain infrastructure and subscriber equipment once Hyundai is
able to supply equipment that meets certain specifications and is compatible
with that of Lucent's network infrastructure. See "Certain Transactions--
Hyundai Relationship--Equipment Purchase Agreement."
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COMPETITION
The wireless communications market in the United States is expected to become
increasingly competitive. Cellular operators and other wireless services
providers are already exploiting existing wireless technology and have
established and continue to augment wireless telecommunications networks that
will directly compete with many of the services to be offered by the Company.
Additionally, other PCS operators are expected to compete with the Company in
each market. The success of the Company will depend largely upon its ability to
satisfy the mass consumer and business markets, which the Company believes have
not been adequately served by existing cellular service operators. The Company
plans to compete with cellular and other PCS operators on the basis of
affordable pricing, predictable monthly bills and voice transmission quality.
Cellular Operators. The Company will compete with established cellular
telephone service operators in the markets it intends to enter. Principal
cellular providers in the Company's markets are AT&T Wireless Services, Inc.,
BellSouth Mobility, Inc., GTE Mobile Communications Inc., AirTouch
Communications, Inc., Centennial Cellular Corp., U.S. Cellular Corp.,
Independent Cellular Network Inc. and Palmer Wireless, Inc. Under FCC rules,
cellular telephone service licensees have enjoyed a duopoly because the FCC
only permits two licensees in each market. Cellular licensees to date have
faced limited competition from businesses that "resell" cellular telephone
service to customers, but the Company could face additional competition from
resellers of cellular and PCS networks.
The introduction of digital transmission technologies to supplant traditional
analog cellular systems will increase the capacity and quality of existing
cellular telephone systems once deployed. However, the Company believes that
upgrading from analog to digital is expensive and that it will likely be
several years before cellular networks are fully converted to digital
technology. The Company expects the analog infrastructure to continue to be
used for the foreseeable future due in part to a lack of a national digital
technology standard. The Company further expects that many cellular licensees
will also attempt to acquire an additional 10 MHz PCS license in the D- and E-
Block auctions in areas in which they currently provide cellular telephone
services, as permitted by the FCC under its PCS licensing rules. This would
provide the cellular operators with greater capacity and potentially allow them
to add additional customers and offer more advanced services in their markets
in the near term. The Company believes that by providing low-priced services
and new wireless features on its digital PCS networks, it will be competitive
with cellular services.
Other PCS Operators. The Company will compete with A- and B-Block licensees,
many of whom are cellular-affiliated companies that will utilize PCS spectrum
in new markets to expand their national or regional coverage. Principal A- and
B-Block licensees in the Company's markets are PrimeCo, Pacific Telesis Mobile
Services, Sprint PCS, InterCel, Inc. and AT&T Wireless Services, Inc. These
parties, whose licenses were granted on June 23, 1995, have all had substantial
lead-time to develop their networks and have significantly greater financial,
technical, marketing and other resources than the Company.
In addition, the Company will compete with the D-, E- and F-Block license
winners to the extent that such licenses are not acquired by existing cellular
or A- or B-Block PCS licenses. Although the D-, E- and F-Block licenses are for
only 10 MHz, entities can, subject to the Entrepreneur Requirements and the
FCC's rules limiting entities to 45 MHz of cellular, broadband PCS and SMR
spectrum in a given market, acquire two or three of the 10 MHz licenses and
consolidate them so as to design a 20 MHz or 30 MHz PCS system similar to that
of the Company.
SMR and "Enhanced" SMR Services. As a result of advances in digital
technology, some service providers have begun to design and deploy digital
mobile networks, which are referred to as "Enhanced SMR" or "ESMR." ESMR
networks increase the capacity of SMR system frequencies to a level that may be
competitive with that of analog cellular networks. SMR service providers offer
or plan to offer fleet dispatch services, short messaging, data services and
interconnected voice telephony services over wide geographic service areas.
Given similar developments in the deployment of digital technology in the
cellular operators' networks, it is unclear at this time whether the quality
and capacity of SMR-based digital mobile networks will be able to compete
effectively with analog and digital cellular and PCS networks.
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Other Competition. The FCC has proposed or adopted final rules to authorize
additional wireless mobile services. First, the FCC has proposed to authorize
the use of the 37 and 39 GHz bands for the provision of fixed and mobile
communications services. The FCC is scheduled to begin auctions for 30 MHz of
spectrum in the 2.3 GHz band for WCS by April 15, 1997. The FCC has proposed
that WCS providers be permitted to offer a broad range of fixed, mobile, radio
location and satellite broadcast services, some of which could be in
competition with the Company's service offerings. Second, in May 1996 the FCC
adopted final rules to permit Interactive Video and Data Service ("IVDS")
licensees to provide mobile two-way data services. Because of the limited
amount of spectrum allocated for IVDS, however, it is expected to be
technically infeasible to provide voice services to IVDS customers for the
foreseeable future. Third, the FCC authorized the use of LMDS licenses to
provide certain fixed and mobile services. Fourth, the FCC has proposed to
reallocate former federal government spectrum located at 4 GHz for a broad
range of wireless fixed and mobile services, and is expected to reallocate
additional former federal government spectrum for wireless mobile services in
the future. The Company may also face competition from MSS. Finally, the FCC
recently modified its rules to permit the partitioning and disaggregation of
broadband PCS licenses into licenses to serve smaller service areas, and/or
use smaller spectrum blocks. The purpose of the FCC's rule change was to
permit existing PCS licensees and new PCS entrants to have greater flexibility
to determine how much spectrum and geographic area they need or desire in
order to provide PCS service. The FCC's action thus will give the Company
greater flexibility to partition or disaggregate its C-Block licenses to other
PCS providers, but could also result in A-, B-, D-, E- and/or F-Block PCS
licensees in the Company's PCS markets also partitioning or disaggregating
their licenses in a manner that provides increased competition to the Company.
See "Legislation and Government Regulation."
In addition, as a result of the enactment of the 1996 Act, regional energy
utility companies are expected to enter the wireless and wireline
telecommunications markets by leveraging their significant capital assets,
brand-name value, existing customer base and infrastructure advantages in
their geographical areas of operation. Similarly, the 1996 Act also eliminates
barriers for cable television system operators to provide wireline local loop
services over their existing wireline infrastructure. See "Risk Factors--
Competition."
EMPLOYEES
As of November 30, 1996, the Company had a total of 11 employees. The
Company's future success depends in substantial part upon its ability to
attract and retain highly qualified technical and managerial personnel, and
upon the continued service of Mr. Roger D. Linquist and Mr. Malcolm M. Lorang.
Prior to the conclusion of the C-Block Auction and the grant of its PCS
licenses, the Company has maintained a small management group to make the most
efficient use of resources. Going forward, the Company plans to expand the
senior management team and other corporate staff significantly. In addition,
following the grant of its PCS licenses and as the Company approaches the
commercial launch of its services, the Company expects to hire field personnel
in its markets including operations management, field technicians,
administration staff, customer service representatives and sales and marketing
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key technical, managerial or other
employees or that it can attract, assimilate or retain other highly qualified
technical, managerial or other personnel in the future. See "Risk Factors--
Management of Growth; Need to Establish Infrastructure" and "--Dependence on
Key Personnel."
FACILITIES
The Company's principal administrative facility is located in Dallas, Texas.
In connection with the Company's expansion, the Company intends to relocate to
larger facilities for its corporate headquarters functions. In addition, the
Company intends to establish regional facilities in each of the Metropolitan
Areas. There can be no assurance that the Company will be able to locate
adequate facilities on terms favorable to the Company. See "Risk Factors--
Management of Growth; Need to Establish Infrastructure."
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LEGISLATION AND GOVERNMENT REGULATION
As a recipient of licenses acquired through the C-Block Auction, the
Company's ownership structure and operations are and will be subject to
substantial FCC regulation.
OVERVIEW
FCC Authority. The Communications Act of 1934, as amended (the
"Communications Act"), grants the FCC the authority to regulate the licensing
and operation of all non-federal government radio-based services in the United
States. The scope of the FCC's authority includes (i) allocating radio
frequencies, or spectrum, for specific services, (ii) establishing
qualifications for applicants seeking authority to operate such services,
including PCS applicants, (iii) approving initial licenses, modifications
thereto, license renewals, and the transfer or assignment of such licenses,
(iv) promulgating and enforcing rules and policies that govern the operation
of spectrum licensees, (v) the technical operation of wireless services,
interconnection responsibilities between and among PCS, other wireless
services such as cellular, and landline carriers, and (vi) imposition of fines
and forfeitures for any violations of those rules and regulations. Under its
broad oversight authority with respect to market entry and the promotion of a
competitive marketplace for wireless providers, the FCC regularly conducts
rulemaking and adjudicatory of proceedings to determine and enforce rules and
policies potentially affecting broadband PCS operations.
Regulatory Parity. The FCC has adopted rules designed to create symmetry in
the manner in which it and the states regulate similar types of mobile service
providers. According to these rules, all "commercial mobile radio service"
("CMRS") providers that provide substantially similar services will be subject
to similar regulation. A CMRS service is one in which the mobile radio service
is provided for a profit, interconnected to the public switched telephone
networks, and made available to the public. Under these rules, providers of
PCS, SMR, and ESMR services are subject to regulations similar to those
governing cellular carriers if they offer an interconnected commercial mobile
service. The FCC announced that it would forbear from applying several
regulations to these services, including its rules concerning the filing of
tariffs for the provision of interstate services. Congress specifically
authorized the FCC to forbear from applying such regulation in the Omnibus
Budget Reconciliation Act of 1993. With respect to PCS, the FCC has stated its
intent to continue monitoring competition in the PCS service marketplace. The
FCC also concluded that Congress intended to preempt state and local rate and
entry regulation of all CMRS providers, including PCS, but established
procedures for state and local governments to petition the FCC for authority
to continue or initiate such regulation.
Commercial Mobile Radio Service Spectrum Ownership Limit. The FCC has
limited the amount of broadband CMRS spectrum (including cellular, broadband
PCS and SMR) in which an entity may hold an attributable interest in a given
geographic area to 45 MHz. For these purposes only PCS and other CMRS licenses
are attributed to an entity where its investments exceed certain thresholds or
the entity is an officer or director of a broadband PCS, cellular or SMR
licensee. Thus, entities with attributable interests in cellular licenses
(which are for 25 MHz) in certain markets cannot hold more than 20 MHz of PCS
spectrum in the same markets. The Company's ability to raise capital from
entities with attributable broadband CMRS interests in certain geographic
areas is likely to be limited by this restriction.
Other FCC Requirements. The FCC had been conducting rulemakings to address
interconnection issues among CMRS carriers and between CMRS and LECs. These
proceedings were significantly affected by the 1996 Act and FCC rulemakings
conducted pursuant to the 1996 Act. See "--1996 Act" and "--FCC
Interconnection Proceedings."
The FCC has adopted rules that prohibit broadband PCS, cellular and certain
SMR licensees from unreasonably restricting the resale of their services. The
FCC has determined that the availability of resale will increase competition
at a faster pace by allowing new entrants to the wireless market quickly
through the resale of their competitors' services while they are building out
their own facilities. This prohibition will expire five years after the FCC
concludes its initial licensing of broadband PCS spectrum, which is expected
to conclude in
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1997. Additionally, the FCC requires such carriers to provide manual roaming
service to subscribers of other such carriers, through which traveling
subscribers of other carriers may make calls after establishing a method of
payment with a host carrier.
The FCC has revised its rules to permit CMRS operators, including PCS
licensees, to use their assigned spectrum to provide fixed local loop and
other services on a co-primary basis with mobile services. The FCC is
continuing its rulemaking proceeding to determine the extent to which such
fixed services fall within the scope of CMRS regulation.
The FCC has imposed number portability requirements on broadband PCS,
cellular, and certain SMR providers. By December 31, 1998, such licensees, as
well as LECs, must provide their customers with the ability to change carriers
while retaining phone numbers. CMRS providers subject to the number
portability requirements must have the capability of delivering calls from
their networks to ported numbers anywhere in the United States. By June 30,
1999, such providers must be able to offer number portability without
impairment of quality, reliability, or convenience when switching service
providers, including the ability to support roaming throughout their networks.
The FCC has solicited further comment on the appropriate cost-recovery methods
regarding long-term number portability.
FCC rules that will take effect in October 1997 require cellular, PCS, and
certain SMR carriers to transmit 911 emergency calls from handsets that
transmit mobile identification numbers to Public Safety Answering Points
("PSAPs") without any credit checks or validation and require that such
carriers must be capable of transmitting 911 calls from individuals with
speech or hearing disabilities through means such as text telephone devices.
By April 1988 such carriers must relay the mobile telephone number of the
originator of a 911 call as well as the location of the cell that is handling
the call. By October 2001, such carriers must be able to provide the PSAP with
the location of the mobile caller within a radius of 125 meters. Several
parties filed petitions currently pending at the FCC requesting, among other
things, that the FCC reconsider the requirement that wireless carriers
transmit calls that do not have a code identification of PSAPs. The FCC has
issued a Further Notice seeking additional comment on the future of mobile
emergency calling technology and capabilities.
In August 1996 the FCC adopted new guidelines and methods for evaluating the
effects of radiofrequency emmissions from transmitters including PCS mobile
telephones and base stations. The new guidelines, which are generally more
stringent than previous requirements, were effective immediately for hand-held
devices and will otherwise become effective January 1, 1997.
Other Federal Regulations. Wireless networks are subject to certain Federal
Aviation Administration and FCC guidelines regarding the location, lighting
and construction of transmitter towers and antennas. In addition, the FCC has
authority to enforce certain provisions of the National Environmental Policy
Act as they would apply to the Company's facilities. The Company intends to
use common carrier point-to-point microwave and traditional landline
facilities to connect base station sites and to link them to their respective
main switching offices. These microwave facilities have historically been
separately licensed by the FCC on a first-come, first-served basis (although
the FCC has proposed to auction certain such licenses) and are subject to
specific service rules.
Wireless providers also must satisfy a variety of FCC requirements relating
to technical and reporting matters. One such requirement is the coordination
of proposed frequency usage with adjacent wireless users, permittees and
licensees in order to avoid electrical interference between adjacent networks.
In addition, the height and power of base station transmitting facilities and
the type of signals they emit must fall within specified parameters.
State and Local Regulation. The scope of state regulatory authority covers
such matters as the terms and conditions of interconnection between LECs and
wireless carriers under FCC oversight, customer billing information and
practices, billing disputes, other consumer protection matters, certain
facilities construction issues, transfers of control, the bundling of services
and equipment and requirements relating to making capacity
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available to third party carriers on a wholesale basis. In these areas,
particularly the terms and conditions of interconnection between LECs and
wireless providers, the FCC and state regulatory authorities share regulatory
responsibilities with respect to interstate and intrastate issues,
respectively.
The FCC and a number of state regulatory authorities have initiated
proceedings or indicated their intention to examine access charge obligations,
mutual compensation arrangements for interconnections between LECs and
wireless providers, the pricing of transport and switching facilities provided
by LECs to wireless providers, the implementation of "number portability"
rules to permit telephone customers to retain their telephone numbers when
they change telephone service providers, and alterations in the structure of
universal service funding, among other matters.
The Company and its subsidiaries have been and intend to remain active
participants in rulemaking and other administrative policy proceedings before
the FCC and before state regulatory authorities. Proceedings with respect to
the foregoing policy issues before the FCC and state regulatory authorities
could have a significant impact on the competitive market structure among
wireless providers and the relationships between wireless providers and other
carriers.
GENERAL PCS REGULATIONS
In June 1994 the FCC allocated spectrum for broadband PCS services between
the 1850 to 1990 MHz bands. Of the 140 MHz available for PCS services, the FCC
created six separate blocks of spectrum identified as the A-, B-, C-, D-, E-
and F-Blocks. The A-, B- and C-Blocks are each allocated 30 MHz of spectrum,
the D-, E- and F-Blocks are allocated 10 MHz each. For each block, the FCC
adopted a 10-year PCS license term with an opportunity to renew. 20 MHz of
spectrum within the PCS band is reserved for unlicensed use.
The FCC adopted a "rebuttable presumption" that all PCS licensees are common
carriers, subject to Title II of the Communications Act. Accordingly, each PCS
licensee deemed to be a common carrier must provide services upon reasonable
request and the rates, terms and conditions of service must not be unjustly or
unreasonably discriminatory.
Structure of PCS Block Allocations. The FCC defines the geographic contours
of the licenses within each PCS block based on the MTAs and BTAs developed by
Rand McNally & Co. The FCC awarded A- and B-Block licenses in 51 MTAS. The C-,
D-, E- and F-Block spectrum were allocated on the basis of 493 smaller BTAS.
In addition, there are spectrum aggregation caps on PCS licensees limiting
them to 45 MHz of broadband CMRS spectrum (e.g., no more than one 30 MHz PCS
license and one 10 MHz license) in any given market.
All but three of the 102 total A-Block licenses and all B-Block licenses
were auctioned in 1995. The three A-Block licenses were awarded separately
pursuant to the FCC's "pioneer's preference" program. The auctioned A- and B-
Block licenses were awarded in June 1995. The C- and F-Block spectrums are
reserved for Entrepreneurs. See "--C-Block License Requirements." The FCC
completed its initial auction for the C-Block on May 6, 1996 and reallocated
18 C-Block licenses on which initial auction winners defaulted in a reauction
that ended on July 16, 1996. The D-, E-, and F-Block licenses are being
auctioned simultaneously, beginning on August 26, 1996.
In December 1996 the FCC adopted rules permitting broadband PCS carriers to
partition any service areas within their license areas and/or disaggregate any
amount of spectrum within their spectrum blocks to entities that meet the
eligibility requirements for the spectrum blocks. The purpose of the FCC's
rule change was to permit existing PCS licensees and new PCS entrants to have
greater flexibility to determine how much spectrum and geographic area they
need or desire in order to provide PCS service. Thus, A-, B-, D-, and E-Block
licensees may sell or lease partitioned or disaggregated portions of their
licenses at any time to entities that meet the minimum eligibility
requirements of the Communications Act. Entrepreneur (C- and F-) Block
licensees, such as the Company, may only sell or lease partitioned or
disaggregated portions of their licenses to other qualified entrepreneurs
during the first five years of their license terms. Thereafter, if
Entrepreneur Block licensees partition or disaggregate to non-entrepreneurs,
they must repay a proportional share of the outstanding balance on their
installment payments and a share of any bidding credits that they received.
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PCS Licensing Auctions. Before granting licenses won by a successful bidder,
the FCC requires that such bidder submit a Long Form for each market in which
it has submitted a winning bid. The Company filed its Long Form on May 22,
1996. This submission began an administrative process in which parties have an
opportunity to challenge the winning bidders' qualifications to be FCC
licensees. Two C-Block applicants who were unsuccessful in winning any markets
in the auction, Antigone Communications Limited Partnership and PCS Devco,
Inc. ("Objectioners"), jointly filed an Informal Objection against the
Company's subject license applications alleging: (i) the Company violated the
FCC's anti-collusion rules (from November 6, 1995, the filing deadline for the
short-form applications to participate in the auction, until May 15, 1996, the
payment deadline for the first post-auction deposit, applicants bidding for
the same markets were prohibited from discussing with each other in any manner
the substance of their bids or bidding strategies); (ii) the Company exceeded
the FCC's foreign ownership limit; and (iii) the Company withheld material
information from the FCC in its long-form application. The Company filed an
Opposition with the FCC asserting that Objectioners lacked standing and
challenging the Objectioners' allegations as frivolous and supplemented the
record as appropriate in response to further FCC inquiry. Assuming the
Objection is dismissed, the Company may proceed with the construction and
operation of its system under the license grants; however, Objectioners may
file Petitions for Reconsideration of the decision with the FCC or appeal the
decision in federal court, requesting that the license grant be overturned.
1996 ACT
On February 8, 1996, the President signed the 1996 Act, which effected a
sweeping overhaul of the Communications Act. In particular, the 1996 Act
substantially amended Title II of the Communications Act, which governs
telecommunications common carriers. The policy underlying this legislative
reform was the opening of the telephone exchange service markets to full
competition. The 1996 Act makes all state and local barriers to competition
unlawful, whether they are direct or indirect. It directs the FCC to initiate
rulemaking proceedings on local competition matters and to preempt all
inconsistent state and local laws and regulations. The 1996 Act requires
incumbent wireline LECs to open their networks to competition through
interconnection and access to unbundled network elements and prohibits state
and local barriers to the provision of interstate and intrastate
telecommunications services.
The 1996 Act prohibits state and local governments from enforcing any law,
rule or legal requirement that prohibits or has the effect of prohibiting any
person from providing interstate or intrastate telecommunications services.
States retain jurisdiction under the 1996 Act to adopt laws necessary to
preserve universal service, protect public safety and welfare, ensure the
continued quality of telecommunications services and safeguard the rights of
consumers.
Implementation of the provisions of the 1996 Act will be the task of the
FCC, the state public utility commissions and a joint federal-state board.
Much of the implementation of the 1996 Act is being completed in numerous
rulemaking proceedings with short statutory deadlines. These proceedings
address issues and proposals that were already before the FCC in pending
rulemaking proceedings affecting the wireless industry as well as additional
areas of telecommunications regulation not previously addressed by the FCC and
the states.
Some specific provisions of the 1996 Act which are expected to affect
wireless providers are summarized below:
Expanded Interconnection Obligations: The 1996 Act establishes a general
duty of all telecommunications carriers, including C-Block PCS licensees, to
interconnect with other carriers, directly or indirectly. The 1996 Act also
contains a detailed list of requirements with respect to the interconnection
obligations of LECs. These "interconnect" obligations include resale, number
portability, dialing parity, access to rights-of-way and reciprocal
compensation.
LECs designated as "incumbents" (i.e., those providing landline local
exchange telephone service at the time the 1996 Act was adopted) have
additional obligations including: to negotiate in good faith; to interconnect
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on terms that are reasonable and non-discriminatory at any technically
feasible point at cost-based rates (plus a reasonable profit); to provide non-
discriminatory access to facilities and network elements on an unbundled
basis; to offer for resale at wholesale rates any service that LECs provide on
a retail basis; and to provide actual co-location of equipment necessary for
interconnection or access.
The 1996 Act establishes a framework for state commissions to mediate and
arbitrate negotiations between incumbent LECs and carriers requesting
interconnection, services or network elements. The 1996 Act establishes
deadlines, policy guidelines for state commission decision making and federal
preemption in the event a state commission fails to act.
Review of Universal Service Requirements. The 1996 Act contemplates that
interstate telecommunications providers, including CMRS providers, will "make
an equitable and non-discriminatory contribution" to support the cost of
providing universal service, although the FCC can grant exemptions in certain
circumstances.
Prohibition Against Subsidized Telemessaging Services. The 1996 Act
prohibits incumbent LECs from subsidizing telemessaging services (i.e., voice
mail, voice storage/retrieval, live operator services and related ancillary
services) from their telephone exchange service or exchange access and from
discriminating in favor of its own telemessaging operations.
Conditions on RBOC Provision of In-Region InterLATA Services. The 1996 Act
generally requires that before engaging in landline long distance services in
the states in which they provide landline local exchange service referred to
as in-region interLATA services, the Regional Bell Operating Companies
("RBOCs") must (1) provide access and interconnection to one or more
unaffiliated competing facilities-based providers of telephone exchange
service, or after 10 months after enactment of the 1996 Act, no such provider
requested such access and interconnection more than three months before the
RBOCs has applied for authority and (2) demonstrate to the FCC its
satisfaction of the 1996 Act's "competitive checklist."
The specific interconnection requirements contained in the competitive
checklist, which the RBOCs must offer on a non-discriminatory basis, include
interconnection and unbundled access; access to poles, ducts, conduits and
rights-of-way owned or controlled by the RBOCs; unbundled local loops,
unbundled transport and unbundled switching; access to emergency 911,
directory assistance, operator call completion and white pages; access to
telephone numbers, databases and signaling for call routing and completion;
number portability; local dialing parity; reciprocal compensation; and resale.
The 1996 Act eliminates the previous prohibition on RBOC provision of out-
of-region, interLATA services and all interLATA services associated with the
provison of CMRS service, including in-region CMRS service.
RBOC Commercial Mobile Joint Marketing. The RBOCs are permitted to market
jointly and sell wireless services in conjunction with telephone exchange
service, exchange access, intraLATA and interLATA telecommunications and
information services.
CMRS Facilities Siting. The 1996 Act limits the rights of states and
localities to regulate placement of CMRS facilities so as to "prohibit" or
prohibit effectively the provision of wireless services or to "discriminate"
among providers of such services. It also eliminates environmental effects
from RF emissions (provided the wireless system complies with FCC rules) as a
basis for states and localities to regulate the placement, construction or
operation of wireless facilities. The FCC's implementation of these provisions
and the scope thereof have neither been adopted by the agency nor reviewed by
the courts.
Equal Access. The 1996 Act provides that wireless providers are not required
to provide equal access to common carriers for toll services. The FCC is
authorized to require unblocked access subject to certain conditions.
Deregulation. The FCC is required to forebear from applying any statutory or
regulatory provision that is not necessary to keep telecommunications rates
and terms reasonable or to protect consumers. A state may not apply a
statutory or regulatory provision that the FCC decides to forebear from
applying. In addition, the FCC must review its telecommunications regulations
every two years and change any that are no longer necessary.
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FCC INTERCONNECTION PROCEEDINGS
In August 1996 the FCC adopted rules to implement the interconnection
provisions of the 1996 Act. In its interconnection order, the FCC determined
that CMRS-to-CMRS interconnection may be accomplished indirectly through the
interconnection of each CMRS provider to an incumbent LEC's network. The FCC
determined that LECs are required to enter into reciprocal compensation
arrangements with all CMRS providers for the transport and termination of LEC-
originated traffic. Additionally, the FCC established default "proxy" rates
for reciprocal compensation, interconnection and unbundled network elements to
be used unless or until a state develops rates for these items based on the
Total Element Long Run Incremental Cost ("TELRIC"). The proxy rates for CMRS-
to-LEC interconnection would result in significant savings when compared with
rates that CMRS providers, principally cellular carriers, have been paying to
LECs.
On October 15, 1996 the U.S. Court of Appeals for the Eighth Circuit, acting
on consolidated petitions for review of the FCC's interconnection order,
issued a stay of the rate-related portions of the order. The court found that
the petitioners, primarily LECs and state regulatory boards, had demonstrated
that they will likely succeed on the merits of their arguments that the FCC is
without jurisdiction to establish pricing regulations regarding intrastate
telephone service. The petitioners additionally argued that TELRIC pricing
does not permit a LEC to recover a substantial portion of its investment in
its network and therefore constitutes an unconstitutional "taking." In
response to petitions by the FCC and potential LEC competitors, the U.S.
Supreme Court refused to dissolve the Eighth Circuit's stay order.
The portions of the FCC's interconnection order that are not related to
pricing issues when into effect on the date of the Eighth Circuit's decision.
In addition to the appeal in federal circuit court, several parties have
petitioned the FCC for reconsideration of its decision. It is not possible to
determine the final outcome of the court proceedings or the petitions for
reconsideration or the effect such outcome will have on CMRS carriers,
including the Company.
RELOCATION OF INCUMBENT FIXED MICROWAVE LICENSEES
In an effort to balance the competing interests of existing microwave users
and newly authorized PCS licensees in the spectrum allocated for PCS use, the
FCC has adopted (i) a transition plan to relocate fixed microwave operators
that currently are operating in the PCS spectrum, and (ii) a cost sharing plan
so that if the relocation of an incumbent benefits more than one PCS licensee,
the benefiting PCS licensees will help defray the costs of the relocation. PCS
licensees will only be required to relocate fixed microwave incumbents if they
cannot share the same spectrum. The transition and cost sharing plans expire
on April 4, 2005, at which time remaining incumbents in the PCS spectrum will
be responsible for their costs to relocate to alternate spectrum locations.
Relocation generally involves a PCS operator compensating an incumbent for
costs associated with system modifications and new equipment required to move
to alternate, readily available spectrum. This transition plan allows most
microwave users to operate in the PCS spectrum for a two-year voluntary
negotiation period and an additional one-year mandatory negotiation period.
For public safety entities dedicating a majority of their system
communications for police, fire, or emergency medical service operations, the
voluntary negotiation period is three years. The FCC currently is considering
whether to shorten the voluntary negotiation period by one year. Parties
unable to reach agreement within these time periods may refer the matter to
the FCC for resolution, but the existing microwave user is permitted to
continue its operations until final FCC resolution of the matter.
The FCC's cost-sharing plan allows PCS licensees that relocate fixed
microwave links outside of their license areas to receive reimbursements from
later-entrant PCS licensees that benefit from the clearing of their spectrum.
A non-profit clearinghouse will be established to administer the FCC's cost-
sharing plan.
C-BLOCK LICENSE REQUIREMENTS
When the FCC allocated spectrum to PCS, it designated the C-Block as an
"Entrepreneurs' Block." FCC rules require C-Block Entrepreneurs to meet
various qualifications to hold C-Block licenses or to receive certain
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financing preferences. Among these are: (i) the various structural
requirements governing equity investments, including the Entrepreneurs
Requirements, Small Business Requirements and Control Group Requirements, all
of which apply specifically to Entrepreneurs, and the Foreign Ownership
Limitations, which apply to all communications entities governed by the FCC;
(ii) transfer restrictions limiting, among other things, the sale of C-Block
licenses; and (iii) other ongoing requirements that mandate network build-out
schedules and limit cross-ownership of cellular and other wireless
investments. The Company was the winning bidder for 14 licenses in the C-Block
Auction. The FCC also determined that Entrepreneurs that qualify as a Small
Business would be eligible to receive a C-Block Loan from the federal
government for 90% of the dollar amount of their winning bids in the C-Block
Auction. The Government Financing provided to the License Subsidiaries are C-
Block Loans. See "Description of Certain Indebtedness." In order to ensure
continued compliance with the FCC rules, the FCC has announced its intention
to conduct random audits during the initial 10-year PCS license terms. There
can be no assurance that the Company will continue to satisfy any of the FCC's
qualifications or requirements, and the failure to do so would have a material
adverse effect on the Company. See "Risk Factors--C-Block License
Requirements" and "--Foreign Ownership Limitations."
Structural Requirements
Entrepreneurs Requirements. In order to hold a C-Block license, an entity
must: (i) meet the Entrepreneurs Revenues Limit by having less than $125
million in gross revenues and (ii) meet the Entrepreneurs Asset Limit by
having less than $500 million in total assets. To qualify for the C-Block
Auction, an entity had to have met the Entrepreneurs Revenues Limit for each
of the two years prior to the auction and the Entrepreneurs Asset Limit at the
time it filed its Short Form. For at least five years after winning a C-Block
license, a licensee must continue to meet the Entrepreneurs Requirements,
which are modified for such five-year period to exclude certain assets and
revenues from being counted toward the Entrepreneurs Asset Limit and the
Entrepreneurs Revenues Limit, respectively. Additional amounts are excluded if
the licensee maintains an organizational structure that satisfies the Control
Group Requirements described below. In calculating a licensee's gross revenues
for purposes of the Entrepreneurs Requirements, the FCC includes the gross
revenues of the licensee's affiliates, those persons or entities that hold
interests in the licensee and the affiliates of such persons or entities.
By claiming status as an Entrepreneur, the Company qualified to enter the C-
Block Auction. If the FCC were to determine that the Company did not satisfy
the Entrepreneur Requirements at the time it participated in the C-Block
Auction or that the Company fails to meet the ongoing Entrepreneurs
Requirements, the FCC could revoke the Company's PCS licenses, fine the
Company or take other enforcement actions, including imposing the Unjust
Enrichment Penalties. Although the Company believes it has met the
Entrepreneurs Requirements, there can be no assurance that it will continue to
meet such requirements or that, if it fails to continue to meet such
requirements, the FCC will not take action against the Company, which could
include revocation of its PCS licenses. See "Risk Factors--C-Block License
Requirements--Entrepreneurs Requirements."
Small Business Requirements. An entity that meets the Entrepreneurs
Requirements may also receive certain preferential financing terms if it meets
the Small Business Requirements. These preferential financing terms include
the 25% Bidding Credit and the ability to make quarterly interest-only
payments on its C-Block Loan for the first six years of the license term. To
meet the Small Business Requirements, a licensee must have had annual average
gross revenues of not more than $40 million for the three calendar years
preceding the date it filed its Short Form. In calculating a licensee's gross
revenues for purposes of the Small Business Requirements, the FCC includes the
gross revenues of the licensee's affiliates, those persons or entities that
hold interests in the licensee, and the affiliates of such persons or
entities.
By claiming status as a Small Business, the Company qualified for the
Bidding Credit. If the FCC were to determine that the Company does not qualify
as a Small Business, the Company would, at a minimum, be forced to repay the
full value of the Bidding Credit. Further, the FCC could revoke the Company's
PCS licenses, fine the Company or take other enforcement actions, including
imposing the Unjust Enrichment Penalties. Although the Company has structured
itself to meet the Small Business Requirements, there can be no assurance that
it
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will remain in compliance with these requirements or that, if it fails to
continue to meet such requirements, the FCC will not take action against the
Company, which could include revocation of its PCS licenses. See "Risk
Factors--C-Block Requirements--Small Business Requirements."
Control Group Requirements. If a C-Block licensee meets the Control Group
Requirements, the FCC excludes certain assets and revenues from such
licensee's total revenues and assets, making it easier for the licensee to
meet the Entrepreneurs Requirements and the Small Business Requirements. The
Control Group Requirements mandate that the Control Group, among other things,
have both actual and legal control of the licensee. Further, the FCC permits
licensees to qualify under the Control Group Requirements pursuant to the
Qualifying Investor Option if its Control Group is comprised of the following:
(i) Qualifying Investors that own at least 15% of the equity interest on a
fully diluted basis and 50.1% of the voting power in the C-Block licensee and
(ii) Additional Control Group Members that hold at least 10% of the equity
interest in the C-Block licensee. Additional Control Group Members must be
either: (a) the same Qualifying Investors in the Control Group, (b) members of
the licensee's management or (c) non-controlling institutional investors,
including venture capital firms. To take advantage of the FCC's Qualifying
Investor Option, a C-Block licensee must have met the Qualifying Investor
Option requirements at the time it filed its Short Form and must continue to
meet the Qualifying Investor Option requirements for three years following the
License Grant Date. Commencing the fourth year of the license term, the FCC
rules (i) eliminate the requirement that the Additional Control Group Members
hold any of the licensee's equity interest and (ii) allow the licensee to
reduce the minimum required equity interest held by the Qualifying Investors
from 15% to 10%.
In order to meet the Control Group Requirements, the Company's Certificate
of Incorporation provides that the Company's Class A Common Stock, as a class,
must constitute 50.1% of the voting power of the Company. In addition, the
Company's Bylaws provide for certain restrictions on transfer relating to
certain shares of the Company's capital stock held by Qualifying Investors.
See "Description of Capital Stock." There can be no assurance that the Company
will remain in compliance with the Control Group Requirements or, if it fails
to continue to meet such requirements, that the FCC will not take action
against the Company, which could include revocation of its PCS licenses.
Although the Company has taken these and other steps to meet the Control Group
Requirements, there can be no assurance that the Company has or will continue
to meet the Control Group Requirements, and the failure to meet such
requirements would have a material adverse effect on the Company. See "Risk
Factors--C-Block Requirements--Control Group Requirements."
Asset and Revenue Calculation. In determining whether an entity qualifies as
an Entrepreneur and/or as a Small Business, the FCC counts the gross revenues
and assets of the entity's "financial affiliates" toward the entity's total
gross revenues and total assets. Financial affiliation can arise from common
investments, familial or spousal relationships, contractual relationships,
voting trusts, joint venture agreements, stock ownership, stock options,
convertible debentures and agreements to merge. Affiliates of noncontrolling
investors with ownership interests that do not exceed the applicable FCC
"passive" investor ownership thresholds are not attributed to C-Block
licensees for purposes of determining whether such licensees financially
qualify for the applicable C-Block Auction preferences. The Entrepreneurs
Requirements and the Small Business Requirements provide that, to qualify as a
passive investor, an entity may not own more than 25% of the Company's total
equity on a fully diluted basis. There can be no assurance that the Company
will not exceed these passive investor limits or otherwise violate the
Entrepreneur Requirements and/or the Small Business Requirements.
In addition, if an entity makes bona fide loans to a C-Block licensee, the
assets and revenues of the creditor would not be attributed to the licensee
unless the creditor is otherwise deemed an affiliate of the licensee, or the
loan is treated by the FCC as an equity investment and such treatment would
cause the creditor/investor to exceed the applicable ownership interest
thresholds (for purposes of both the financial affiliation and foreign
ownership rules). Although the FCC permits a creditor/investor to use standard
terms to protect its investment in C-Block licensees, such as covenants,
rights of first refusal and super-majority voting rights on specified issues
(such as those for which the holders of the Company's Class C Common Stock
have voting rights), the FCC has stated that it will be guided but not bound
by criteria used by the Internal Revenue Service to determine whether a debt
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investment is bona fide debt. The FCC's application of its financial
affiliation rules is largely untested and there can be no assurance that the
FCC or the courts will not treat certain of the Company's lenders or investors
as financial affiliates of the Company.
Foreign Ownership Limitations. The Communications Act requires that non-U.S.
citizens, their representatives, foreign governments or corporations otherwise
subject to domination and control by non-U.S. citizens may not own of record
or vote (i) more than 20% of the capital contribution to a common carrier
directly, or (ii) more than 25% of the capital contribution to the parent
corporation of a common carrier licensee if the FCC determines such holding
are not within the public interest. Because the FCC classifies PCS as a common
carrier offering, PCS licensees are subject to the foreign ownership limits.
Congress recently eliminated restrictions on non-U.S. citizens serving as
members on the board of directors and officers of a common carrier radio
licensee or its parent. The FCC also recently adopted rules that, subject to a
public interest finding by the FCC, could allow additional indirect foreign
ownership of CMRS companies to the extent that the relevant foreign states
extend reciprocal treatment to U.S. investors. The Company's Long Form filed
by the Company with the FCC after the completion of the C-Block Auction
indicates that the Company is in compliance with the FCC foreign-ownership
rules. However, if the foreign ownership of the Company were to exceed 25% in
the future, the FCC could revoke the Company's PCS licenses or impose other
penalties. Further, the Company's Certificate of Incorporation enables the
Company to redeem shares from holders of Common Stock whose acquisition of
such shares results in a violation of such limitation. The restrictions on
foreign ownership could adversely affect the Company's ability to attract
additional equity financing from entities that are, or are owned by, non-U.S.
entities. See "Risk Factors--Foreign Ownership Limitations."
Transfer Restrictions
License Transfer Restrictions. During the first five years after the License
Grant Date, transfer or assignment of a C-Block license is prohibited to any
entity that fails to satisfy the Entrepreneurs Requirements. If such a
transfer occurs to an entity that does not qualify for bidding credits, such a
sale would be subject to full payment of the bidding credit and the license
must adjust its installment payments to the FCC to effect the payment plan
applicable to the new entity (e.g., an enterprise that is not a Small Business
or an Entrepreneur). After five years, all such transfers and assignments of
the licenses remain subject to the Unjust Enrichment Penalties.
Unjust Enrichment. Any transfer during the full license term (10 years) may
require certain costs and reimbursements to the government of bidding credits
and/or outstanding principal and interest payments (the "Unjust Enrichment
Penalties"). In addition, if the Company wishes to make any change in
ownership structure during the initial license term involving the de facto and
de jure control of the Company, it must seek FCC approval and may be subject
to the same costs and reimbursement conditions indicated above.
F-Block Rules.
The FCC has for the most part extended its C-Block eligibility requirements
and auction rules to the F-Block, with the following exceptions. For the
purposes of determining the Entrepreneur's asset limit, F-Block applicants do
not count the value of C-Block licenses, although they must count other CMRS
licenses, including A-Block and B-Block PCS licenses. F-Block auction
participants did not receive the discount on upfront payments that was
available to C-Block bidders. Participants in the F-Block auction could
qualify for either of two bidding credit levels: applicants with average gross
revenues of not more than $40 million of the previous three years received a
15% bidding credit, while applicants with average gross revenues of not more
than $15 million for the same period are referred to as "Very Small
Businesses" and received a 25% bidding credit. Post auction down payments for
F-Block winners are the same 20% required for D-Block and E-Block winners. The
most favorable F-Block installment plan provides interest-only payments for
two years, compared with the six-year interest-only period available for the
C-Block. Furthermore, F-Block licenses that fall more than 15 days behind in
scheduled installment payments will incur a 5% late payment fee.
The Company (i) believes that it has structured itself to satisfy the
Entrepreneurs Requirements, (ii) intends to diligently pursue and maintain its
qualification as a Small Business and (iii) has structured the securities
being
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offered, including certain restrictions on ownership and transfer, in a matter
intended to ensure compliance with the applicable FCC Rules. The Company has
relied on representations of its investors to determine its compliance with
the FCC's rules applicable to C-Block licenses. There can be no assurance,
however, that the Company's investors or the Company itself will continue to
satisfy these requirements during the term of any PCS license granted to the
License Subsidiaries or that the Company will be able to successfully
implement divestiture or other mechanisms included in the Company's
Certificate of Incorporation that are designed to ensure compliance with FCC
rules. Any non-compliance with FCC rules could subject the Company to serious
penalties, including revocation of its PCS licenses. See "Risk Factors--C-
Block License Requirements," "--Effect of Control by Certain Stockholders,"
"--Substantial Debt Obligations to the U.S. Government; Implications of
Accounting Treatment," "--Foreign Ownership Limitations" and "Legislation and
Government Regulation."
OTHER ONGOING REQUIREMENTS
Build-Out Requirements. The FCC has mandated that recipients of PCS licenses
adhere to five year and 10-year build-out requirements. Under both five- and
10-year build-out requirements, all 30 MHz PCS licensees (such as C-Block
licensees) must construct facilities provide offer coverage to at least one-
third of the population in their service area within five years from the date
of initial license grants. Service must be provided to two-thirds of the
population within 10 years. Violations of these regulations could result in
license revocations or forfeitures or fines.
Additional Requirements. As a C-Block licensee, the Company will be subject
to certain restrictions that limit, among other things, the number of PCS
licenses it may hold as well as certain cross-ownership restrictions
pertaining to cellular and other wireless investments.
Penalties for Payment Default. In the event that the License Subsidiaries
become unable to meet their obligations under the Government Financing, the
FCC could in such instances reclaim some or possibly all of the Company's PCS
licenses, reauction them, and subject the Company to a penalty comprised of
the difference between the price at which it acquired its license and the
amount of the winning bid at reauction, plus an additional penalty of three
percent of the lesser of the subsequent winning bid and the defaulting bidders
bid amount. See "Risk Factors--Government Regulation" and "--Substantial Debt
Obligations to the U.S. Government; Implications of Accounting Treatment."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
November 30, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Roger D. Linquist................ 58 President and Chief Executive Officer,
Chairman of the Board of Directors and
Secretary
Malcolm M. Lorang................ 63 Vice President, Chief Technical Officer
Robert Fugate.................... 36 Vice President of Corporate Development
Dennis G. Spickler............... 45 Vice President of Finance, Chief
Financial Officer
John R. Lister................... 58 Vice President and General Manager
(Northern California)
Albert S. Loverde................ 56 Vice President and General Manager
(Georgia/Florida)
Robert G. Barrett(1)............. 52 Director
Ralph M. Baruch(2)............... 73 Director
Frederic C. Hamilton(1).......... 69 Director
Joseph T. McCullen, Jr.(2)....... 61 Director
Arthur Patterson(1).............. 52 Director
John Sculley(2).................. 57 Director
Toshihiro Soejima................ 49 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Roger D. Linquist founded the Company and has served as President, Chief
Executive Officer and a director since its inception. Prior to working at the
Company, Mr. Linquist was President and Chief Executive Officer of PacTel
Personal Communications, a subsidiary of Pacific Telesis, and Communications
Industries Inc. from 1982 through 1988. In 1989, Mr. Linquist founded PageMart
Wireless, Inc. ("PageMart"), a major U.S. paging company. Mr. Linquist served
as PageMart's Chief Executive Officer from 1989 to 1993, and as Chairman
through March 1994, when he resigned to form General Wireless. Mr. Linquist
presently serves as a director of PageMart. Mr. Linquist has experience in
management consulting with McKinsey & Company and has held various management
positions at Texas Instruments Research Laboratories. Mr. Linquist was a
founding director of the CTIA.
Malcolm M. Lorang has served as the Vice President of Engineering since the
Company's inception. Mr. Lorang has a broad background in RF communications
systems and systems engineering, most recently serving as Vice President of
Engineering for PageMart from 1989 to 1994. Previously, Mr. Lorang served as a
corporate scientist at PacTel Teletrac, Inc. ("PacTel Teletrac") from 1988 to
1989, Texas Instruments Research Laboratories from 1972 to 1988 and Magnavox
Research Laboratories from 1958 to 1972. Mr. Lorang has authored numerous
patents, including patents in the RF communication systems area, and was
heavily involved in the military applications for spread spectrum, upon which
CDMA is based.
Robert Fugate has served as the Vice President of Corporate Development
since June 1996. In addition, Mr. Fugate served as Chief Financial Officer of
the Company from June 1996 to September 1996 and was employed as a consultant
to the Company from March 1996 to June 1996. From September 1988 to February
1996, Mr. Fugate was employed at Mobile Telecommunication Technologies Corp.
where he served as Senior Vice President, Finance and Chief Financial Officer.
Prior to 1988, Mr. Fugate was employed in the investment banking division of
Prudential-Bache Securities and at Mobile Communications Corporation of
America, where he held a variety of operational and financial
responsibilities.
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Dennis G. Spickler joined the Company as Vice President of Finance and Chief
Financial Officer in September 1996. Previously he served as Vice President,
Chief Financial and Information Technology Officer for PrimeCo from its
inception in March 1995 through September 1996. Prior to joining PrimeCo, Mr.
Spickler served in various management positions for Bell Atlantic Corporation
including Managing Director, Mergers and Acquisitions from April 1991 to March
1995 and Vice President, Financial Operations for Bell Atlantic TriCon Leasing
Corporation from 1988 to 1991. From 1973 to 1986 Mr. Spickler worked in public
accounting principally for Coopers & Lybrand L.L.P. where he specialized in
serving a variety of telecommunications clients.
John R. Lister joined the Company as Vice President and General Manager
(Northern California) in July 1996. Prior to joining the Company, from
February 1996 to June 1996, Mr. Lister was self employed. From April 1993
through February 1996, Mr. Lister served as President and Co-Chief Executive
Officer of PacTel Teletrac, which later became AirTouch Teletrac, Inc.
("AirTouch"). Prior to joining PacTel Teletrac, from July 1987 to April 1993,
Mr. Lister served in various management positions for PacTel Personal
Communications ("PacTel"), including President and Chief Operating Officer,
Vice President and General Manager of its Los Angeles cellular market and Vice
President of Corporate Development.
Albert S. Loverde joined the Company as Vice President and General Manager
(Georgia/Florida) in July 1996. Prior to joining the Company, from February
1995 to July 1996, Mr. Loverde served as Director of Engineering for
PriCellular Wireless. From January 1995 to February 1995, Mr. Loverde served
as Director of Marketing at Haddcomm. From August 1990 to January 1995, Mr.
Loverde served as Vice President and General Manager for Sterling Cellular,
Inc. ("Sterling"). Prior to joining Sterling, Mr. Loverde served as Executive
Director of Mobile Systems for Bell South International, Inc. from 1989 to
1990, Vice President and General Manager for PacTel Cellular, Inc. (AirTouch)
operations in Atlanta and Athens, Georgia from 1987 to 1989, and President and
CEO of BBL Industries, Inc. from 1985 to 1987. From 1961 to 1985, Mr. Loverde
designed and developed various telecommunications systems at Bell Telephone
Laboratories, Incorporated.
Robert G. Barrett, a director of the Company since December 1995, has been a
Managing Partner of Battery Ventures, a venture capital firm specializing in
communications and software investment since 1984. Mr. Barrett serves on the
Board of Directors of Brooktrout Technology, Inc., Marcam Corporation and
several privately held high technology companies.
Ralph M. Baruch, a director of the Company since December 1995, was a
founder of Viacom International, Inc. ("Viacom") and served as its President
and Chief Executive Officer from 1971 to 1983, and as Chairman and a member of
the Office of the Chief Executive Officer from 1983 until July 1987. Mr.
Baruch has served as a consultant to Viacom since July 1987. Mr. Baruch also
is a director of Orange & Rockland Utilities, Inc., and several privately held
corporations and not-for-profit organizations.
Frederic C. Hamilton, a director of the Company since December 1995, has
been Chairman, President and Chief Executive Officer of the Hamilton Companies
since January 1995. Mr. Hamilton currently serves as the Chairman of the Board
of Directors of Tejas Gas Corporation, BHP Petroleum (Americas) and Hamilton
Oil Company, Inc. and as a director for the United States Trust Corp. and
several other privately held companies, Mr. Hamilton has also served as a
director of several other companies, including BHP Petroleum (Americas) Inc.,
Celanese Corporation, ITT Corp., Volvo International and Norwest Corporation.
Joseph T. McCullen, Jr., a director of the Company since December 1995, has
been a General Partner of OneLiberty Ventures, a venture capital firm
specializing in developing early stage technology companies, since September
1986. Mr. McCullen is also a director of several privately held companies.
Arthur Patterson, a director of the Company since its inception, is a
founder and Managing Partner of Accel Partners, a venture capital firm
specializing in developing telecommunications companies, established in 1983.
Mr. Patterson is also a director of several other telecommunication services
companies including PageMart,
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UUNet Technologies, Inc. and GT Global Group of Investment Companies, and
software companies including Axtent Technologies, Inc., Unify Corp. and
VIASOFT, Inc.
John Sculley, a director of the Company since December 1995, is Chief
Executive Officer of Sculley Associates, Inc., a high technology and marketing
consulting and investment firm specializing in new companies and emerging
markets that Mr. Sculley founded in June 1994. From February 1994 to June
1994, Mr. Sculley was self-employed. From November 1993 to February 1994, Mr.
Sculley served as Chief Executive Officer of Spectrum Information Technologies
Inc. From April 1983 to October 1993, Mr. Sculley served as Chairman and Chief
Executive Officer of Apple Computer Inc. ("Apple"). Prior to joining Apple,
Mr. Sculley served in various marketing and management positions for Pepsico
Inc. for 16 years, including serving as President and Chief Executive Officer
for five years. Mr. Sculley is a director of NFO, Inc., Professional Sports
Care Management, Inc. and several privately held companies.
Toshihiro Soejima, a director of the Company since December 1995, is
President and Chief Executive Officer of Mitsui Comtek Corp. as well as Senior
Vice President and General Manager of the Electronics & Information Business
Division of Mitsui & Co. (U.S.A.), Inc. Both companies are wholly-owned
subsidiaries of Mitsui & Co., Ltd. of Japan. Mr Soejima joined Mitsui Comtek
Corp. in Tokyo in 1970.
The Company currently has authorized 11 directors, with the current number
set at eight. Each director holds office until the next annual meeting of
stockholders or until his or her successor is duly elected and qualified. The
Company's Board of Directors is divided into two classes, the Class A Common
Stock directors and the Class C Common Stock directors. Pursuant to the
Stockholders Agreement among the Company and the holders of Class A Common
Stock and Class C Common Stock (the "Stockholders Agreement"), there are four
Class A Common Stock directors, each with one vote and all of whom are elected
by the holders of the Class A Common Stock, and seven Class C Common Stock
directors who collectively have three votes, all of whom are elected by the
holders of the Class C Common Stock and each of whom have a fractional vote.
All of the Company's directors have been elected pursuant to the terms of the
Stockholders Agreement. Under the terms of the Hyundai Loan and the Hyundai
stock purchase agreement between Hyundai and the Company (the "Hyundai Stock
Purchase Agreement"), the Company has agreed to amend the Stockholders
Agreement so that Hyundai may appoint a designee as a Class C Common Stock
director to the Board of Directors. There are no family relationships among
any of the directors and executive officers of the Company. See "Certain
Transactions" and "Description of Capital Stock."
COMPENSATION OF DIRECTORS
Members of the Company's Board of Directors who are neither employees of the
Company nor representatives of investors will receive a retainer of $1,000 per
meeting attended in person or by video conference ($500 if attended by
telephone), which may be applied to an option as described below under "1996
Stock Option Plan," as compensation for serving on the Board of Directors.
Other directors receive no compensation for serving on the Board of Directors,
but are reimbursed for expenses incurred to attend Board and committee
meetings. Messrs. Baruch, Hamilton and Sculley have each received options to
purchase 30,100 shares of Class C Common Stock, each with an exercise price of
$5.00 per share. Upon completion of this Offering, Messrs. Barrett, McCullen
and Patterson will each receive an option to purchase 30,100 shares of Class C
Common Stock at the initial public offering price.
57
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the other executive officer (collectively, the
"Named Officers") whose salary and bonus for fiscal 1995 were in excess of
$100,000 for services rendered in all capacities to the Company and its
subsidiaries for that fiscal year:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND PRESENT ----------------------- AWARDS
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#)
------------------ ---- --------- -------- ------------
<S> <C> <C> <C> <C>
Roger D. Linquist
President and Chief Executive Officer..... 1995 $240,000 $ -- 1,031,900
Malcolm M. Lorang
Vice President of Engineering............. 1995 $110,000 -- 115,350
</TABLE>
- --------
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning stock option grants made
to each of the Named Officers during fiscal 1995. No stock appreciation rights
were granted any persons in fiscal 1995.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
---------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES STOCK
UNDERLYING % OF TOTAL PRICE APPRECIATION
OPTIONS OPTIONS GRANTED EXERCISE FOR OPTION TERM(3)
GRANTED TO EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (#) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
---- ---------- --------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Roger D. Linquist....... 1,031,900 78.4% $5.00 12/1/2010 $5,566,730 $6,557,205
Malcolm M. Lorang....... 115,350 8.7% $5.00 12/1/2010 $ 622,272 $ 732,991
</TABLE>
- --------
(1) Each of the options listed in the table is fully vested and immediately
exercisable for shares of Class C Common Stock.
(2) The exercise price may be paid in cash, in shares of the Company's Class C
Common Stock valued at fair market value on the exercise date or through a
cashless exercise procedure involving a same-day sale of the purchased
shares. The Company may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased
shares, together with any federal and state income tax liability incurred
by the optionee in connection with such exercise.
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There is
no assurance that the actual stock price appreciation over the 15-year
option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Class C Common Stock
appreciates over the option term, no value will be realized from the
option grants made to the executive officers.
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<PAGE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information concerning option holdings as of
the end of fiscal 1995 with respect to each of the Named Officers. No options
were exercised by any option holder as of such date. No stock appreciation
rights were exercised during fiscal 1995 and no stock appreciation rights were
outstanding as of the end of fiscal 1995.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS
AT FY-END(#) AT FY-END($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Roger D. Linquist.......... 1,031,900 -- $ 0 --
Malcolm M. Lorang.......... 115,350 -- $ 0 --
</TABLE>
- --------
(1) Based on the fair market value of the Company's Class C Common Stock at
December 31, 1995, $5.00 per share (as determined by the Company's Board
of Directors), less the exercise price payable for such shares.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board is currently comprised of
Messrs. Barrett, Hamilton and Patterson. None of these individuals has been at
any time an officer or employee of the Company. No member of the Compensation
Committee of the Company serves as a member of the Board of Directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "1996 Plan") is intended to serve
as the successor equity incentive program to the Company's 1995 Option Plan
(the "Predecessor Plan"). The 1996 Plan was adopted by the Board of Directors
on September 18, 1996 and approved by the stockholders on , 1996. The 1996
Plan will become effective upon the effectiveness of the Stock Offering.
shares of Class C Common Stock have been authorized for issuance under the
1996 Plan. The share reserve is comprised of (i) the shares which remained
available for issuance under the Predecessor Plan, including the shares
subject to outstanding options thereunder, plus (ii) an additional increase of
shares, which amount will represent approximately 18% of the shares of
Class C Common Stock to be sold in this Stock Offering. Such amount was
established so that sufficient option shares may be issued to Qualifying
Investors to satisfy the Control Group Requirements. The share reserve under
the 1996 Plan will automatically increase from time to time as options are to
be granted to the Trust (as described below to satisfy the Small Business
Requirement). Except as otherwise described below, the terms of the
Predecessor Plan are similar to the terms of the options granted under the
Option Grant Program.
The 1996 Plan is comprised of two programs: (i) the Option Grant Program
under which eligible individuals may, at the discretion of the Plan
Administrator, be granted options to purchase shares of Common Stock at an
exercise price not less than 85% of their fair market value on the grant date
and (ii) the Director Fee Option Program under which eligible non-employee
Board members may elect to apply all or a part of the retainer fee otherwise
payable them to the purchase of and option at a discounted price.
The Option Grant Program will be administered by the Compensation Committee.
The Compensation Committee as Plan Administrator will have complete discretion
to determine which eligible individuals are to receive option grants, the time
or times when such option grants are to be made, the number of shares subject
to
59
<PAGE>
each such grant, the vesting schedule to be in effect for the option grant and
the maximum term for which any granted option is to remain outstanding.
Upon an acquisition of the Company by merger or asset sale, each outstanding
option granted by the Plan Administrator under the Option Grant Program will
be subject to accelerated vesting under certain circumstances.
Stock appreciation rights are authorized for issuance under the Option Grant
Program which provide the holders with the election to surrender their
outstanding options for an appreciation distribution from the Company equal to
the excess of (i) the fair market value of the vested shares of Common Stock
subject to the surrendered option over (ii) the aggregate exercise price
payable for such shares. Such appreciation distribution may be made in cash or
in shares of Common Stock.
Under the Director Fee Option Grant Program, non-employee Board members who
are not affiliated with or related to any party that receives compensation or
have entered into an arrangement with the Company to receive compensation from
the Company are eligible to receive option grants in lieu of their retainer
fees. Under this program, each eligible non-employee Board member will have
the right to apply all or a portion of his total retainer fee otherwise
payable in cash each year (expected to be $ for 1997) to the acquisition of
a special option grant under the Director Fee Option Grant Program. The
program will become effective on the date of the Stock Offering and the first
option grants will be made on that date to those eligible non-employee Board
members who have filed their option-in-lieu-of-cash election and will have an
exercise price equal to the initial public offering price of the Class C
Common Stock. Beginning in 1998, the grant will automatically be made on the
first trading day in January following the filing of the option-in-lieu-of-
cash election and will have an exercise price per share equal to the fair
market value of the option shares on the grant date. The number of shares
subject to the option will be determined by dividing three (3) times the
retainer fee by the fair market value per share of Common Stock on the grant
date.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Option Grant Program in return for the grant of
new options for the same or different number of option shares with an exercise
price per share based upon the fair market value of the Common Stock on the
new grant date.
The 1996 Plan will terminate on , 2016, unless sooner terminated by the
Board.
On September 18, 1996, the Company approved the creation of the General
Wireless, Inc. Employee Trust (the "Trust") for the benefit of employees, non-
employee Board members and consultants and other independent advisors who
provide services to the Company and are eligible to receive options under the
1996 Plan (collectively, the "Beneficiaries"). The Trust has been structured
to meet the requirements of a Qualifying Investor under FCC rules.
Accordingly, all trustees and Beneficiaries of the Trust must also meet the
requirements of a Qualifying Investor. The Trust has a term of 15 years.
The Board of Directors has approved the grant of an immediately exercisable
option to the Trust (a "Trust Option") to purchase such number of shares of
Class C Common Stock as may be required to meet the FCC's Control Group
requirements. Such Trust Option will be granted upon the effectiveness of the
Stock Offering and will have an exercise price equal to the initial public
offering price of the Class C Common Stock. The Trust Option will have a 15
year term and will be subject to vesting for 10 years, both measured from the
date of effectiveness of the Stock Offering.
Based upon an initial public offering price of $ per share, and assuming
no further issuances of options or other equity securities of the Company, the
Company estimates that the Trust Option will be for shares of Class C
Common Stock.
60
<PAGE>
The 1996 Plan provides that so long as the Board of Directors desire to
maintain the Small Business Requirements, additional options will be
automatically granted to the Trust so that the Small Business Requirements are
satisfied at all times. Such additional options will have provisions similar
to those described with respect to the Trust Option (except that the exercise
price of any such option grant will be equal to the fair market value of such
shares on the date of grant).
At the end of the term of the Trust, the Trust Options will be allocated to
the persons who are Beneficiaries at such time.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors on September 18, 1996 and approved by the
stockholders on , 1996. The Purchase Plan is designed to allow eligible
employees of the Company and participating subsidiaries to purchase shares of
Class C Common Stock, at semi-annual intervals, through their periodic payroll
deductions under the Purchase Plan, and a reserve of 500,000 shares of Class C
Common Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering
period will begin on the day the Underwriting Agreement is executed and priced
in connection with this Offering and will end on the last business day in
, 1998. Each offering period will be comprised of consecutive purchase
intervals, each of a duration of six months. Shares of Class C Common Stock
will be purchased for each participant at the end of each purchase interval
during the offering period.
Payroll deductions may not exceed 15% of base salary for each purchase
interval. The purchase price per share will be 85% of the lower of (i) the
fair market value of the Common Stock on the participant's entry date into the
offering period or (ii) the fair market value on the semi-annual purchase
date.
The Board may terminate the Purchase Plan at any time. The Purchase Plan
will terminate in all events on the last business day in , 2016.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company does not presently have any employment contracts in effect with
the Chief Executive Officer or the other executive officer named in the
Summary Compensation Table.
The Trustees as Plan Administrator of the 1996 Plan will have the authority
to provide for the accelerated vesting of the shares of Class C Common Stock
subject to outstanding options held by the Chief Executive Officer and any
other executive officer in connection with certain changes in control of the
Company or the subsequent termination of the officer's employment following
the change in control event.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law ("Delaware Law"),
the Company has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act. The Company's Certificate of Incorporation provides that
directors and officers of the Company shall be indemnified to the fullest
extent of Delaware law.
The Delaware Law provides that a corporation may limit the liability of each
director to the corporation or its stockholders for monetary damages except
for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii) in
respect of certain unlawful dividend payments or stock redemptions or
repurchases and (iv) for any transaction which the director derives an
improper personal benefit. The Certificate of Incorporation provides for the
elimination and limitation of the personal liability of directors
61
<PAGE>
of the Company for monetary damages to the fullest extent permitted by
Delaware Law. In addition, the Certificate of Incorporation provides that if
Delaware Law is amended to authorize the further elimination or limitation of
the liability of a director, then the liability of the directors shall be
eliminated or limited to the fullest extent permitted by Delaware Law, as so
amended. The effect of this provision is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on behalf
of the Company) to recover monetary damages against a director for breach of
the fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described in
clauses (i) through (iv) above. This provision does not limit or eliminate the
rights of the Company or any stockholder to seek non-monetary relief such as
an injunction or recision in the event of a breach of a director's duty of
care. The Company's Certificate of Incorporation also provides that the
Company shall, to the full extent permitted by Delaware Law, as amended from
time to time, indemnify and advance expenses to each of its currently acting
and former directors, officers, employees and agents.
The Company has and intends to expand its directors and officers liability
insurance to insure each person who was, is, or will be a director or officer
of the Company against specified losses and wrongful acts of such director or
officer in his or her capacity as such, including breaches of duty, trust,
neglect, error and misstatement. In accordance with the directors and officers
insurance policy, each insured party will be entitled to receive advances of
specified defense costs.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
CERTAIN TRANSACTIONS
Initial Equity Capital
The Company has raised approximately $67.6 million (net of repurchases)
through private sales of equity securities. From inception to December 1995,
the Company raised approximately $2.3 million (net of repurchases) through the
sale of equity securities to Mr. Roger Linquist, Mr. Malcolm Lorang and the
Accel Entities (consisting of Accel IV, L.P., Accel Investors '94, L.P., Accel
Keiretsu L.P., Ellmore C. Patterson Partners and Prosper Partners). In June
1994, such parties acquired (after adjusting for stock splits,
reclassifications and exchanges), respectively, 72,270, 7,550 and 184,830
shares of Class B Common Stock at a purchase price of $2.74 per share. In
September 1994, Mr. Linquist, Mr. Lorang and the Accel Entities acquired
(after adjusting for stock splits, reclassifications and exchanges) 121,720,
12,170 and 365,170 shares of Class B Common Stock at the same price. In
addition, the Accel Entities received warrants to purchase an aggregate of
574,990 shares of Class C Common Stock in connection with the exchanges and
the private placement effected in December 1995 described below. In June 1995,
Battery Ventures III, L.P. acquired 275,000 (after adjusting for stock splits
and reclassifications) shares of Class B Common Stock at the same price. Mr.
Arthur Patterson and Mr. Robert Barrett, both directors of the Company, are
affiliated with the Accel Entities and Battery Ventures III, L.P.,
respectively. Messrs. Linquist and Lorang purchased a portion of their stock
through the issuance of promissory notes to the Company as follows: in June
1994, five year notes in the principal amounts of $166,750 and $16,675 at an
interest rate of seven percent issued by Messrs. Linquist and Lorang,
respectively; and in September 1994, five year notes in the principal amounts
of $333,400 and $33,340 at an interest rate of 7.05%. In December 1995, the
Company repurchased all 193,990 shares sold to Mr. Linquist at a purchase
price equal to the price paid by Mr. Linquist plus any interest due under the
promissory notes issued by Mr. Linquist to the Company. Also on December 12,
1995, Mr. Lorang refinanced his notes with a new promissory note having a
principal amount of $54,415, term of 12 years and an interest rate of 6.36%.
Since December 1995, the Company has raised approximately $65.3 million
through the sale of Common Stock and warrants to purchase Common Stock. The
following table summarizes the securities purchased by directors, officers and
five percent stockholders of the Company and persons associated with them in
connection with the private placements of the Company's Class B and Class C
Common Stock effected in December 1995
62
<PAGE>
and May 1996. Except as otherwise noted, Class B units consisting of two
shares of Class B Common Stock and a warrant to purchase one share of Class B
Common Stock with an exercise price of $5.00 per share were sold at a price of
$10.00 per unit and Class C units consisting of two shares of Class C Common
Stock and a warrant to purchase one share of Class C Common Stock with an
exercise price of $10.00 per share were sold at a price of $20.00 per unit.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS B CLASS C CLASS C
INVESTOR(1) STOCK STOCK WARRANTS STOCK WARRANTS
- ------------------------------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Roger D. Linquist(2)........... 20 -- -- 310,000 155,000
Frederic C. Hamilton/The
Hamilton Companies (3)........ 10 100,000 50,000 2,340 1,170
Ralph M. Baruch Revocable Trust
dated January 26, 1996........ -- -- -- 52,340 26,170
John Sculley................... -- 50,000 25,000 -- --
Accel Entities(4).............. -- -- -- 955,340 477,670
Battery Ventures III, L.P.
(5)........................... -- -- -- 525,000 262,500
Mitsui Entities(6)............. -- -- -- 1,000,000 50,000
Chancellor Capital Management
Entities(7)................... -- -- -- 900,000 450,000
Mellon Bank, N.A., as Trustee
for First Plaza Group Trust... -- -- -- 600,000 900,000
OneLiberty Ventures Enti-
ties(8)....................... -- -- -- 314,000 157,000
Primus Capital Fund III Limited
Partnership(9)................ -- -- -- 300,000 150,000
Trailhead Ventures, L.P.(10)... -- -- -- 250,000 125,000
</TABLE>
- --------
(1) Shares held by affiliated persons and entities have been aggregated. See
"Principal Stockholders."
(2) Mr. Linquist paid for the Class C units by issuing a 12 year promissory
note in the principal amount of $2,809,375 with an interest rate of 6.36%,
secured by shares of PageMart common stock.
(3) The shares of Class A Common Stock are held by Mr. Hamilton in his name.
All other shares are held by The Hamilton Companies, LLC.
(4) Mr. Patterson is affiliated with and is the Board designee of the Accel
Entities. Includes 33,460 shares of Class C Common Stock owned by and
16,730 shares subject to warrants to purchase Class C Common Stock issued
to Accel Investors '94 L.P.; 875,080 shares of Class C Common Stock owned
by and 937,540 shares subject to warrants to purchase Class C Common Stock
issued to Accel IV, L.P.; 20,060 shares of Class C Common Stock owned by
and 10,030 shares subject to warrants to purchase Class C Common Stock
issued to Accel Keiretsu L.P.; 21,020 shares of Class C Common Stock owned
by and 10,510 shares subject to warrants to purchase Class C Common Stock
issued to Ellmore C. Patterson Partners; and 5,720 shares of Class C
Common Stock owned by and 2,860 shares subject to warrants to purchase
Class C Common Stock issued to Prosper Partners.
(5) Mr. Barrett is affiliated with and is the Board designee of Battery
Ventures III, L.P.
(6) Toshihiro Soejima is affiliated with and is the Board designee of the
Mitsui Entities. The 500,000 units purchased by Mitsui consist of two
shares of Class C Common Stock and 0.01 of a warrant per unit. Includes
750,000 shares of Class C Common Stock owned by and 37,500 shares subject
to warrants to purchase Class C Common Stock issued to Mitsui & Co., Ltd.;
25,000 shares of Class C Common Stock owned by and 1,750 shares subject to
warrant to purchase Class C Common Stock issued to Mitsui & Co. (U.S.A.),
Inc.; and 225,000 shares of Class C Common Stock owned by and 11,250
shares subject to warrants to purchase Class C Common Stock issued to
Mitsui Comtek Corp. In March 1996, Mitsui & Co., Inc. sold 200,000 shares
of Class C Common Stock, and a warrant to purchase 10,000 shares of Class
C Common Stock to Kenwood Corporation.
(7) Chancellor Capital Management designated a member of the Board of
Directors from December 1995 to June 1996. Includes 500,000 shares of
Class C Common Stock owned by and 250,000 shares subject to warrants to
purchase Class C Common Stock issued to Los Angeles County Employees
Retirement Association; 313,450 shares of Class C Common Stock owned by
and 151,700 shares subject to warrants to purchase Class C Common Stock
issued to Drake & Co., for the account of Citiventure III; and 86,550
shares of Class C Common Stock owned by and 43,280 shares subject to
warrants to purchase Class C Common Stock issued to other Chancellor
Capital Management entities.
(8) Joseph McCullen is affiliated with and is the Board designee of the
OneLiberty Ventures Entities. Includes 311,000 shares of Class C Common
Stock owned by and 155,000 shares subject to warrants to purchase
63
<PAGE>
Class C Common Stock issued to OneLiberty Fund III, L.P.; and 3,000 shares
of Class C Common Stock owned by and 1,500 shares subject to warrants to
purchase Class C Common Stock issued to Gilde Investment Fund, B.V.
(9) Primus Capital Fund III Limited Partnership designated a member of the
Board of Directors from December 1995 to June 1996.
(10) Trailhead Ventures, L.P. designated a member of the Board of Directors
from December 1995 to June 1996.
Mitsui Relationship
In December 1995, Mitsui & Co., Ltd., Mitsui & Co. (U.S.A.), Inc. and Mitsui
Comtek Corp. (collectively, "Mitsui") and the Company entered into a
Procurement Agreement (the "Procurement Agreement") pursuant to which Mitsui
agreed to act as the exclusive procurement consultant to search for and obtain
agreements with eight certain equipment manufacturers of U.S., European and
Japanese origin for the supply of certain network equipment, handsets and
other products and materials that the Company, at its discretion, may
authorize Mitsui to procure from time to time. Mitsui may solicit vendor
proposals from vendors other than the eight listed in the agreement provided
that Mitsui gives prior written notice to the Company. Mitsui is not
authorized to accept any vendor proposal or otherwise bind the Company, and
any equipment purchased from vendors shall be directly by the Company. In
addition, Mitsui agreed to appoint one Mitsui employee to work at the
Company's facilities during the term of the Agreement as the designated
procurement consultant. This procurement consultant is not authorized to
accept any proposal or otherwise bind or make any representation, warranty or
commitment on behalf of the Company.
As partial consideration for the covenants of Mitsui contained in the
Agreement, the Company will pay Mitsui a flat retainer fee and a personnel
fee. As further compensation for the services rendered by Mitsui, the Company
will pay Mitsui a commission of the total purchase price paid for vendor
equipment purchased and accepted by the Company or any subsidiary or affiliate
of the Company in accordance with the Agreement. The Company is also required
to pay an annual fee of $150,000 to Mitsui for its onsite procurement
consulting services. The Procurement Agreement has a term of five years and is
automatically renewable for one year periods unless either party provides
written notice of its intention not to renew such Agreement. Mr. Soejima, a
director of the Company, is the President of Mitsui Comtek Corp. and is a
senior officer of Mitsui & Co. (U.S.A.), Inc.
Hyundai Relationship
In March 1996, Hyundai and the Company entered into a Stock Purchase
Agreement (the "Stock Purchase Agreement") and a Loan Agreement (the "Loan
Agreement"). In addition, in connection with the Stock Purchase Purchase
Agreement, the Company, Hyundai and Hyundai's parent company, Hyundai
Electronics Industries Co., Ltd. ("Parent") entered into an Equipment Purchase
Agreement ("Equipment Purchase Agreement") and an Employee Training Agreement
("Employee Training Agreement").
Under the Loan Agreement, Hyundai agreed to loan up to $50,000,000 to the
Company upon the satisfaction of certain conditions. Such conditions included
(i) the grant of PCS licenses for at least 10 million POPs within the top 50
BTAs and (ii) approval of any required U.S. and foreign governmental agencies.
Pursuant to the terms of the Loan Agreement, Hyundai loaned the $49,300,000 to
the Company within three business days after the License Grant Date. The
Hyundai Loan is evidenced by a Senior Promissory Note (the "Hyundai Note").
The Hyundai Note accrues interest at a fixed rate of 6.5% per annum. However,
if the Hyundai Note is not paid at maturity, interest on amounts outstanding
will accrue at a fixed rate equal to nine percent per annum thereafter. The
Hyundai Note contains restrictive covenants, including, among other things,
restrictions on the issuance of additional debt, liens, the declaration of
dividends and the redemption or repurchase of any capital stock.
At any time within 90 days prior to the scheduled maturity date of the Loan
or within five days after any notice of prepayment by the Company pursuant to
the Loan, the Company will have the right to pay such amount in full in cash.
If such cash payments are not made by the Company on the due date or
prepayment date,
64
<PAGE>
however, Hyundai will have the right to require the Company to pay the amount
in question in the form of warrants for Class C Common Stock having fair
market value equal to the amount of principal to be paid or repaid, rather
than cash, subject to the meeting FCC restrictions, including the Control
Group Requirements and limitations on foreign ownership.
At any time when $10,000,000 in principal amount of the Hyundai Loan is
outstanding, Hyundai shall have the right, in lieu of any other board
representation rights which may be available to it, to designate one director
to the Company's board of directors who shall have the right to vote one vote
out of the three available to the Company's Class C directors. At any time
when the outstanding principal amount of the Hyundai Loan is less than
$10,000,000, Hyundai shall have no special board rights, and shall have such
board representation rights, if any, as are available to any other stockholder
holding the same number of shares.
The Loan Agreement also provides that so long as there is principal and
interest outstanding under the Hyundai Loan, Hyundai shall tender principal
and accrued unpaid interest, rather than cash, to the Company in payment of
the purchase price of the securities purchased under the Stock Purchase
Agreement. In any such tender, Hyundai shall pay to the Company, for each
dollar of the purchase price, one dollar of principal together with interest
thereunder at a fixed rate of 6.5% per annum. The Company expects that the
entire amount of the Hyundai Loan will be cancelled in connection with
Hyundai's purchase of equity securities of the Company in accordance with the
Stock Purchase Agreement, which stock purchase is expected to occur on or
about the closing of the Stock Offering. The Loan Agreement also provides that
to the extent Hyundai elects to extend the term of the Stock Purchase
Agreement to up to three years, it must consent to any request for an
extension of the term of the Hyundai Loan for the same period.
Stock Purchase Agreement. Under the Stock Purchase Agreement, the Company
agreed to sell and issue to Hyundai, and Hyundai agreed to purchase from the
Company, up to 5,000,000 Hyundai Units, each Unit consisting of one share of
Class C Common Stock and a warrant of 0.05 shares of Class C Common Stock at
an exercise price of $10 per share, at a purchase price of $10.00 per Hyundai
Unit. Shortly after the License Grant Date, Hyundai purchased 70,000 Hyundai
Units for $700,000 in accordance with the Stock Purchase Agreement.
The total number of Hyundai Units saleable under the Stock Purchase
Agreement will be determined at the time of closing of the Offerings, but will
not be less than 1,000,000 Hyundai Units. Currently, FCC regulations and rules
provide that, in general, if more than 25% of the capital contribution to
companies acquiring licenses in the C-Block Auction is from foreign entities,
then the FCC can revoke such licenses if warranted in the public interest.
Based upon the Company's capitalization as of March 31, 1996, approximately
24% of the capital contribution to the Company has been from foreign sources.
Thereafter, the Hyundai Units will automatically be purchased by Hyundai to
the extent permissible under such FCC restrictions. To the extent additional
foreign capital contribution to the Company is permissible under FCC
restrictions, the Company has agreed that any such amounts would be sold first
to Hyundai under the Stock Purchase Agreement, until all the Hyundai Units
saleable under the Stock Purchase Agreement (as determined on the Closing
Date) are sold to Hyundai (or until the Stock Purchase Agreement is
terminated). Based upon the size of the Stock Offering, the Company expects
that the amount of capital contribution permissible by foreign entities will
increase such that the remaining 4,930,000 Hyundai Units may be sold to
Hyundai. Accordingly, the Company expects that all Hyundai Units will be sold
on or about the closing date of the Stock Offering. In accordance with the
terms of the Loan Agreement, the purchase price for the purchase of the
Hyundai Units will be paid through the cancellation of the Hyundai Loan.
Consequently, the Hyundai Loan will not be outstanding shortly after the Stock
Offering. Any such stock purchase is conditioned upon conditions similar to
those set forth in the Loan Agreement, and in particular, the sale of the
entire amount of the Hyundai Units will require the expiration of the waiting
period under the Hart-Scott-Rodino applications that the Company and Hyundai
have made with the Federal Trade Commission and approval of the Republic of
Korea. Further, Hyundai will be granted certain rights to register the shares
of Class C Common Stock issuable as part of the Hyundai Units and will become
a party to the Stockholders Agreement. See "Description of Capital Stock--
Registration Rights."
65
<PAGE>
Equipment Purchase Agreement. The Equipment Purchase Agreement, the Company
is obligated to purchase certain specified amounts and types of Hyundai's
manufactured telecommunications products and equipment and/or to promote
certain specified amounts and types of Hyundai's manufactured
telecommunications products and equipment over a period of 10 years. Under the
Equipment Purchase Agreement, the Company agreed to order a significant
percentage of its infrastructure equipment requirements in product categories
where Hyundai and the Parent offer products that meet the Company's
specifications and are compatible with equipment supplied by Lucent. In
addition, the Company agreed to make available to Hyundai an opportunity to
participate in its initial network buildout. To meet the Company's
specifications, Hyundai must provide financing that is comparable to that
obtained by the Company from Lucent. The Company also agreed to purchase a
significant percentage of its handset requirements sold through its direct
sales channels in handset categories where Hyundai and the Parent offer
products that meet the Company's specifications. For handsets sold through its
indirect sales channels, the Company agreed to assist Hyundai and its Parent
to meet their sales goals, with such assistance to include promotional
programs and marketing certain Hyundai products at a preferred level. The
price for each products ordered by the Company shall be competitive with
prices generally offered by the Company's other contracted vendors of
competing products, and shall not be greater than the price then being offered
by Hyundai or its Parent for the same Hyundai product for sale to, or to
customers of, another PCS carrier competing with the Company in the same BTA,
other than any carrier whose order volume level for the same product category
is at least twice the level of the Company's orders. To date, no
infrastructure or other equipment has been ordered by the Company under this
Agreement and Hyundai does not currently offer any products that meet the
Company's specifications.
Employee Training Agreement. Under the Employee Training Agreement, the
Company agreed to train, through establishing a training program designed to
enable each Employee to participate actively in the designated operations of
the Company and to acquire knowledge and experience in such operations, a
limited number of personnel of the Parent for a period of two years. Effective
upon the closing of the Stock Purchase Agreement, the Company agrees to train
between 10 and 18 personnel designated by the Parent each year for certain
technical and operational positions or such other positions as may be mutually
agreed upon by the parties. Each such employee shall remain an employee of the
Parent and is expected to return to the Parent following his/her training
period.
Other
The holders of shares of Class C Common Stock are entitled to certain
registration rights and rights of first offer. In addition, the existing
stockholders of the Company have entered into a voting arrangement under the
terms of the Stockholders Agreement. See "Description of Capital Stock--
Registration Rights" and "--Voting Rights."
The Company has granted options to certain of its directors. See
"Management--Compensation of Directors" and "Principal Stockholders."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested outside directors on the Board
of Directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 30, 1996 and as
adjusted to reflect the sale of shares offered hereby, by (i) each person who
is known by the Company to own beneficially more than five percent of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Officers and (iv) all current executive officers and directors as a
group.
<TABLE>
<CAPTION>
BEFORE OFFERING
--------------------------------------------------------------------------------------
CLASS A TOTAL
BENEFICIALLY CLASS B CLASS C BENEFICIALLY
OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED OWNED
---------------- ------------------- ------------------- ------------------- VOTING
SHARES PERCENT SHARES PERCENT SHARES PERCENT SHARES PERCENT PERCENT
(1)(2) (1)(2)(3) (1)(2) (1)(2)(3) (1)(2) (1)(2)(3) (1)(2) (1)(2)(3) (1)(2)(3)
------ --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accel Entities(4)....... -- -- 550,000 52.2% 2,008,000 28.1% 2,558,000 31.2% 7.8%
Battery Ventures III,
L.P.(5)................ -- -- 275,000 26.1% 787,500 12.4% 1,062,500 14.3% 4.3%
Chancellor Capital
Management
Entities(6)............ -- -- -- -- 1,350,000 20.6% 1,350,000 20.6% 7.4%
Mellon Bank, N.A. as
Trustee for First Plaza
Group Trust(7)......... -- -- -- -- 1,500,000 21.5% 1,500,000 18.6% 4.9%
Mitsui Entities(8)...... -- -- -- -- 840,000 13.7% 840,000 11.7% 6.6%
OneLiberty Ventures
Entities(9)............ -- -- -- -- 474,000 7.5% 474,000 6.5% 2.6%
Roger D. Linquist(10)... 20 66.7% 1,503,330 58.8% 465,000 7.4% 1,968,350 22.4% 36.6%
Malcolm M. Lorang(11)... -- -- 187,350 15.3% -- -- 187,350 2.6% *
Robert G. Barrett(5).... -- -- 275,000 26.1% 787,500 12.4% 1,062,500 14.3% 4.3%
Ralph M. Baruch(12)..... -- -- 30,100 2.8% 78,510 1.3% 108,610 1.5% *
Frederic C. Hamilton/The
Hamilton
Companies(13).......... 10 33.3% 180,100 15.9% 3,510 -- 183,620 2.5% 17.1%
Joseph T. McCullen,
Jr.(9)................. -- -- -- -- 474,000 7.5% 474,000 6.5% 2.6%
Arthur C. Patterson(4).. -- -- 550,000 52.2% 2,008,000 28.1% 2,558,000 31.2% 7.8%
John Sculley(14)........ -- -- 105,100 9.5% -- -- 105,100 1.5% *
Toshihira Soejima(8).... -- -- -- -- 840,000 13.7% 840,000 11.7% 6.6%
All Officers and
Directors as a Group
(11 persons)(8)(9)(10)
(11)(12)(13)(14)(26)... 30 100% 3,050,980 98.1% 6,003,520 73.0% 9,057,530 79.8% 82.7%
</TABLE>
<TABLE>
<CAPTION>
AFTER OFFERING
-------------------------------------------------------------------------
CLASS A CLASS C TOTAL SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED BENEFICIALLY OWNED
--------------------- ------------------- ------------------- VOTING
SHARES PERCENT SHARES PERCENT SHARES PERCENT PERCENT
(1)(2) (1)(2)(3) (1)(2) (1)(2)(3) (1)(2) (1)(2)(3) (1)(2)(3)
-------- ---------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Hyundai Electronics America(15)....... -- -- 5,250,000 % 5,250,000 % %
Accel Entities(16).................... -- -- 2,558,000 % 2,558,000 % %
Battery Ventures III, L.P.(17)........ -- -- 1,062,500 % 1,062,500 % %
Chancellor Capital Management
Entities(18)......................... -- -- 1,350,000 % 1,350,000 % %
Mellon Bank, N.A. as Trustee for First
Plan Group Trust(19)................. -- -- 1,500,000 % 1,500,000 % %
Mitsui Entities(20)................... -- -- 840,000 % 840,000 % %
OneLiberty Ventures Entities(21)...... -- -- 474,000 % 474,000 % %
Roger D. Linquist(22)................. 20 66.7% 1,968,330 % 1,968,350 % %
Malcolm M. Lorang(23)................. -- -- 187,350 % 187,350 % %
Robert G. Barrett(17)................. -- -- 1,092,600 % 1,062,500 % %
Ralph M. Baruch(24)................... -- -- 108,610 * 108,610 % %
Frederic C. Hamilton(25).............. 10 33.3% 183,610 % 183,620 % %
Joseph T. McCullen, Jr.(21)........... -- -- 504,100 % 474,000 % %
Arthur C. Patterson(16)............... -- -- 2,588,000 % 2,558,000 % %
John Sculley(26)...................... -- -- 105,100 * 105,100 % %
Toshihira Soejima(20)................. -- -- 840,000 % 840,000 % %
All Officers and Directors as a Group
(10
persons)(20)(21)(22)(23)(24)(25)(26).. 30 100% 9,057,500 % 9,057,530 % %
</TABLE>
67
<PAGE>
- --------
* Less than 1%.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) The number of shares of Common Stock beneficially owned includes the
shares issuable pursuant to stock options that may be exercised within 60
days after November 30, 1996. Shares issuable pursuant to such options are
deemed outstanding for computing the percentage of the person holding such
options but are not deemed outstanding for computing the percentage of any
other person. The number of shares of Common Stock outstanding after the
Stock Offering includes the shares of Class C Common Stock being
offered for sale by the Company in the Stock Offering.
(3) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
(4) The address for this stockholder is One Palmer Square, Princeton, N.J.
08542, Attn: Carter Sednaoui. Includes 33,460 shares beneficially owned by
and 38,000 shares subject to warrants to purchase shares of Class C Common
Stock issued to Accel Investors '94 L.P., 20,350 shares of Class B Common
Stock beneficially owned by Accel Investors '94 L.P., 875,080 shares
beneficially owned by and 964,240 shares subject to warrants to purchase
shares of Class C Common Stock issued to Accel IV, L.P., 503,800 shares of
Class B Common Stock beneficially owned by Accel IV L.P., 20,060 shares
beneficially owned by and 20,095 shares subject to warrants to purchase
shares of Class C Common Stock issued to Accel Keiretsu L.P., 10,450
shares of Class B Common Stock beneficially owned by Accel Keiretsu L.P.,
21,020 shares beneficially owned by and 23,160 shares subject to warrants
to purchase shares of Class C Common Stock issued to Ellmore C. Patterson
Partners, 12,100 shares of Class B Common Stock beneficially owned by
Ellmore C. Patterson Partners, 5,720 shares beneficially owned by and
6,310 shares subject to warrants to purchase shares of Class C Common
Stock issued to Prosper Partners and 3,300 shares of Class B Common Stock
beneficially owned by Prosper Partners. Mr. Patterson, a director of the
Company, is affiliated with the Accel Partners Entities, and may be deemed
to share voting and investment power with respect to such shares. Mr.
Patterson disclaims beneficial ownership of such shares, except to the
extent of his interest in such shares arising from his interests in the
entities referred to above.
(5) The address for this stockholder is 200 Portland Street, Boston, MA 02114,
Attn: Robert Barrett. Includes 525,000 shares beneficially owned by and
262,500 shares subject to a warrant to purchase shares of Class C Common
Stock. Mr. Barrett, a director of the Company, is affiliated with Battery
Ventures III, L.P., and may be deemed to share voting and investment power
with respect to such shares. Mr. Barrett disclaims beneficial ownership of
such shares, except to the extent of his interest in such shares arising
from his interests in the entities referred to above.
(6) The address for this stockholder is 1166 Avenue of the Americas, New York,
NY 10036, Attn: Parag Saxena. Includes 500,000 shares beneficially owned
by and 250,000 shares subject to a warrant to purchase shares of Class C
Common Stock issued to the Los Angeles County Employees Retirement
Association, 313,450 shares beneficially owned by and 156,720 shares
subject to a warrant to purchase shares of Class C Common Stock issued to
Drake & Co., for the account of Citiventure III, 10,000 shares
beneficially owned by and 5,000 shares subject to a warrant to purchase
shares of Class C Common Stock issued to Evermore Corporation, 20,000
shares beneficially owned by and 10,000 shares subject to a warrant to
purchase shares of Class C Common Stock issued to Mellon Bank, N.A., for
the account of Michael A. Wall, 16,550 shares beneficially owned by and
8,280 shares subject to a warrant to purchase shares of Class C Common
Stock issued to Northpass & Co., for the account of KME Ventures III,
L.P., 10,000 shares beneficially owned by and 5,000 shares subject to a
warrant to purchase shares of Class C Common Stock issued to Carol Wong
Chiu Yee, 10,000 shares beneficially owned by and 5,000 shares subject to
a warrant to purchase shares of Class C Common Stock issued to Shirley
Wong Shun Yee, 10,000 shares beneficially owned by and 5,000 shares
subject to a warrant to purchase shares of Class C Common Stock issued to
Sophia Wong Wai Yee, and 10,000 shares beneficially owned by and 5,000
shares subject to a warrant to purchase shares of Class C Common Stock
issued to Claire Wong Yuk Yee. Mr. Saxena, a former director of the
Company, is affiliated with the Chancellor Capital Management Entities,
and may be deemed to share voting and investment power with respect to
such shares. Mr Saxena disclaims beneficial ownership of such shares,
except to the extent of his interest in such shares arising from his
interests in the entities referred to above.
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<PAGE>
(7) The address for this stockholder is One Mellon Bank Center, Pittsburgh, PA
15258-0001, Attn: Bernadette Rist. Represents shares held as Trustee for
the First Plaza Group Trust.
(8) The address for this stockholder is 12980 Saratoga Avenue, Saratoga, CA
95070, Attn: Toshihiro Soejima. Includes 25,000 shares beneficially owned
by and 1,250 shares subject to a warrant to purchase shares of Class C
Common Stock issued to Mitsui & Co. (U.S.A.), Inc., 550,000 shares
beneficially owned by and 27,500 shares subject to a warrant to purchase
shares of Class C Common Stock issued to Mitsui & Co., Ltd., and 225,000
shares beneficially owned by and 11,250 shares subject to a warrant to
purchase shares of Class C Common Stock issued to Mitsui Comtek Corp. Mr.
Soejima, a director of the Company, is affiliated with the Mitsui
Entities, and may be deemed to share voting and investment power with
respect to such shares. Mr. Soejima disclaims beneficial ownership of such
shares, except to the extent of his interest in such shares arising from
his interests in the entities referred to above.
(9) The address for this stockholder is One Liberty Square, 2nd Floor, Boston,
MA 02109, Attn: Joseph T. McCullen, Jr. Includes 311,000 shares
beneficially owned by and 155,500 shares subject to a warrant to purchase
shares of Class C Common Stock issued to OneLiberty Fund III, L.P. and
3,000 shares beneficially owned by and 1,500 shares subject to a warrant
to purchase shares of Class C Common Stock issued to Gilde Investment
Fund, B.V. Mr. McCullen, a director of the Company, is affiliated with the
foregoing entities and may be deemed to share voting and investment power
with respect to such shares. Mr. McCullen disclaims beneficial ownership
of such shares, except to the extent of his interest in such shares
arising from his interests in the entities referred to above.
(10) Includes 20 shares of Class A Common Stock, 310,000 shares beneficially
owned by and 155,000 shares subject to a warrant to purchase shares of
Class C Common Stock, and options exercisable for 1,503,330 shares of
nonvoting Class B Common Stock. Pursuant to the terms of a Stockholders
Agreement, with respect to the four Class A Directors to serve on the
Company's Board of Directors, Mr. Linquist is entitled to nominate two
Class A Directors, and, together with Mr. Hamilton, one additional Class
A Director.
(11) Includes 19,720 shares of nonvoting Class B Common Stock and options
exercisable for 167,630 shares of Class B Common Stock.
(12) Includes 52,340 shares of Class C Common Stock beneficially owned by and
26,170 shares subject to a warrant to purchase Class C Common Stock
issued to Ralph M. Baruch Revocable Trust dated January 26, 1996, and
options exercisable for 30,100 shares of Class B Common Stock granted to
Mr. Baruch.
(13) Includes 10 shares of Class A Common Stock, 100,000 shares of Class B
Common Stock and 2,340 shares of Class C Common Stock beneficially owned
by, and 50,000 and 1,170 shares subject to warrants to purchase Class B
Common Stock and Class C Common Stock, respectively, issued to, The
Hamilton Companies LLC, and options exercisable for 30,100 shares of
Class B Common Stock granted to Mr. Hamilton. Pursuant to the terms of a
Stockholders Agreement, with respect to the four Class A Directors to
serve on the Company's Board of Directors, Mr. Hamilton is entitled to
nominate one Class A Director, and, together with Mr. Linquist, one
additional Class A Director.
(14) Includes 50,000 shares of nonvoting Class B Common Stock, options
exercisable for 30,100 shares of nonvoting Class B Common Stock and
25,000 shares subject to a warrant to purchase shares of nonvoting Class
B Common Stock.
(15) The address for this stockholder is 510 Cottonwood Drive, Milpitas,
California 95035. Includes 250,000 shares subject to warrants to purchase
shares of Class C Common Stock.
(16) The address for this stockholder is One Palmer Square, Princeton, N.J.
08542, Attn: Carter Sednaoui. Includes 53,810 shares beneficially owned
by and 38,000 shares subject to warrants to purchase shares of Class C
Common Stock issued to Accel Investors '94 L.P., 1,378,880 shares
beneficially owned by and 964,240 shares subject to warrants to purchase
shares of Class C Common Stock issued to Accel IV, L.P., 30,510 shares
beneficially owned by and 20,950 shares subject to warrants to purchase
shares of Class C Common Stock issued to Accel Keiretsu L.P., 33,120
shares beneficially owned by and 23,160 shares subject to warrants to
purchase shares of Class C Common Stock issued to Ellmore C. Patterson
Partners and 9,020 shares beneficially owned by and 6,310 shares subject
to warrants to purchase shares of Class C Common Stock issued to Prosper
Partners. Mr. Patterson, a director of the Company, is affiliated with
the Accel Partners Entities, and may be deemed to share voting and
investment power with respect to such shares. Mr. Patterson disclaims
beneficial ownership of such shares, except to the extent of his interest
in such shares arising from his interests in the entities referred to
above. In addition,
69
<PAGE>
the shares beneficially owned by Mr. Patterson includes an option to
purchase 30,100 shares of Class C Common Stock issued upon the
effectiveness of the Stock Offering.
(17) The address for this stockholder is 200 Portland Street, Boston, MA
02114, Attn: Robert Barrett. Includes 800,000 shares beneficially owned
by and 262,500 shares subject to a warrant to purchase shares of Class C
Common Stock issued to Battery Ventures III, L.P. Mr. Barrett, a director
of the Company, is affiliated with Battery Ventures III, L.P., and may be
deemed to share voting and investment power with respect to such shares.
Mr. Barrett disclaims beneficial ownership of such shares, except to the
extent of his interest in such shares arising from his interests in the
entities referred to above. In addition, the shares beneficially owned by
Mr. Barrett includes an option to purchase 30,100 shares of Class C
Common Stock issued upon the effectiveness of the Stock Offering.
(18) The address for this stockholder is 1166 Avenue of the Americas, New
York, NY 10036, Attn: Parag Saxena. Includes 500,000 shares beneficially
owned by and 250,000 shares subject to a warrant to purchase shares of
Class C Common Stock issued to the Los Angeles County Employees
Retirement Association, 313,450 shares beneficially owned by and 156,720
shares subject to a warrant to purchase shares of Class C Common Stock
issued to Drake & Co., for the account of Citiventure III, 10,000 shares
beneficially owned by and 5,000 shares subject to a warrant to purchase
shares of Class C Common Stock issued to Evermore Corporation, 20,000
shares beneficially owned by and 10,000 shares subject to a warrant to
purchase shares of Class C Common Stock issued to Mellon Bank, N.A., for
the account of Michael A. Wall, 16,550 shares beneficially owned by and
8,280 shares subject to a warrant to purchase shares of Class C Common
Stock issued to Northpass & Co., for the account of KME Ventures III,
L.P., 10,000 shares beneficially owned by and 5,000 shares subject to a
warrant to purchase shares of Class C Common Stock issued to Carol Wong
Chiu Yee, 10,000 shares beneficially owned by and 5,000 shares subject to
a warrant to purchase shares of Class C Common Stock issued to Shirley
Wong Shun Yee, 10,000 shares beneficially owned by and 5,000 shares
subject to a warrant to purchase shares of Class C Common Stock issued to
Sophia Wong Wai Yee, and 10,000 shares beneficially owned by and 5,000
shares subject to a warrant to purchase shares of Class C Common Stock
issued to Claire Wong Yuk Yee. Mr. Saxena, a former director of the
Company, is affiliated with the Chancellor Capital Management Entities,
and may be deemed to share voting and investment power with respect to
such shares. Mr. Saxena disclaims beneficial ownership of such shares,
except to the extent of his interest in such shares arising from his
interests in the entities referred to above.
(19) The address for this stockholder is One Mellon Bank Center, Pittsburgh,
PA 15258-0001, Attn: Bernadette Rist. Represents shares held as Trustee
for the First Plaza Group Trust.
(20) The address for this stockholder is Saratoga Avenue, Saratoga, CA 95070,
Attn: Toshihiro Soejima. Includes 25,000 shares beneficially owned by and
1,250 shares subject to a warrant to purchase shares of Class C Common
Stock issued to Mitsui & Co. (U.S.A.), Inc., 550,000 shares beneficially
owned by and 27,500 shares subject to a warrant to purchase shares of
Class C Common Stock issued to Mitsui & Co., Ltd., and 225,000 shares
beneficially owned by and 11,250 shares subject to a warrant to purchase
shares of Class C Common Stock issued to Mitsui Comtek Corp. Mr. Soejima,
a director of the Company, is affiliated with the Mitsui Entities, and
may be deemed to share voting and investment power with respect to such
shares. Mr. Soejima disclaims beneficial ownership of such shares, except
to the extent of his interest in such shares arising from his interest in
the entities referred to above.
(21) The address for this stockholder is One Liberty Square, 2nd Floor,
Boston, MA 02109, Attn: Joseph T. McCullen, Jr. Includes 331,000 shares
beneficially owned by and 155,500 shares subject to a warrant to purchase
shares of Class C Common Stock issued to One Liberty Fund III, L.P. and
3,000 shares beneficially owned by and 1,500 shares subject to a warrant
to purchase shares of Class C Common Stock issued to Glide Investment
Fund, B.V. Mr. McCullen, a director of the Company, is affiliated with
the foregoing entities, and may be deemed to share voting and investment
power with respect to such shares. Mr. McCullen disclaims beneficial
ownership of such shares, except to the extent of his interest in such
shares arising from his interests in the entities referred to above. In
addition, the shares beneficially owned by Mr. McCullen includes an
option to purchase 30,100 shares of Class C Common Stock issued upon the
effectiveness of the Stock Offering.
(22) Includes 20 shares of Class A Common Stock, 310,000 shares of Class C
Common Stock, and options to purchase 1, 658,330 shares of Class C Common
Stock exercisable within 60 days of September 30, 1996. Pursuant to the
terms of a Stockholders Agreement, with respect to the four Class A
Directors to serve on the Company's Board
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<PAGE>
of Directors, Mr. Linquist is entitled to nominate two Class A Directors,
and, together with Mr. Hamilton, one additional Class A Director.
(23) Includes 19,720 shares of Class C Common Stock and options to purchase
167,630 shares of Class C Common Stock exercisable within 60 days of
September 30, 1996.
(24) Includes 52,340 shares beneficially owned by and 26,170 shares subject to
a warrant to purchase shares of Class C Common Stock issued to the Ralph
M. Baruch Revocable Trust dated 1/26/96, and options to purchase 30,100
shares of Class C Common Stock exercisable within 60 days of September
30, 1996 that are issued to Mr. Baruch personally.
(25) Includes 102,340 shares of Class C Common Stock issued to and warrants to
purchase 51,170 shares of Class C Common Stock issued to The Hamilton
Companies, LLC, and 10 shares of Class A Common Stock and options to
purchase 30,100 shares of Class C Stock exercisable within 60 days of
September 30, 1996 that are held by Mr. Hamilton personally. Pursuant to
the terms of a Stockholders Agreement, with respect to the four Class A
Directors to serve on the Company's Board of Directors, Mr. Hamilton is
entitled to nominate one Class A Director, and, together with Mr.
Linquist, one additional Class A Director.
(26) Represents options exercisable within 60 days of November 30, 1996.
71
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offerings, the Company will be authorized to issue
95,000,000 shares of Common Stock, $.0001 par value, and 5,000,000 shares of
undesignated Preferred Stock, $.0001 par value. The following description of
the Company's capital stock does not purport to be complete and is subject to
and qualified in its entirety by the Company's Amended and Restated
Certificate of Incorporation and Bylaws, which are included as exhibits to the
Registration Statement of which this Prospectus forms a part, and by the
provisions of applicable Delaware law.
COMMON STOCK
The Company has three classes of Common Stock authorized: Class A Common
Stock, Class B Common Stock and Class C Common Stock. The authorized capital
stock of the Company upon the closing of the Offerings will consist of 50
shares of Class A Common Stock, 10,000,000 shares of Class B Common Stock, and
84,999,950 shares of Class C Common Stock. Upon the completion of the
Offerings (and giving effect to the conversion of all outstanding shares of
Class B Common Stock into Class C Common Stock), there will be 30 shares of
Class A Common Stock outstanding held of record by two stockholders (20 shares
held by Mr. Roger D. Linquist and 10 shares held by Mr. Frederic Hamilton), no
shares of Class B Common Stock outstanding and 7,147,110 shares of Class C
Common Stock outstanding held of record by approximately 42 stockholders. The
holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, if any, then outstanding. The Class C Common Stock has no
preemptive or conversion rights or other subscription rights. All outstanding
shares of Common Stock are fully paid and nonassessable, and the shares of
Class C Common Stock to be issued upon completion of the Stock Offering will
be fully paid and nonassessable.
Conversion Rights
Each share of Class A Common Stock is automatically converted into one share
of Class C Common Stock upon the tenth anniversary of the date of grant of
license(s) to the Company by the FCC. No conversion will be permitted to the
extent such conversion would cause the Company to be in violation of any
requirement, rule or regulation of the FCC.
Voting Rights
Collectively, the shares of Class A Common Stock represent 50.1% of the
Company's voting interest, with each share of Class A Common Stock issued and
outstanding having a voting interest equal to the quotient derived from
dividing 50.1% by the number of shares of Class A Common Stock issued and
outstanding, on all matters except the election of directors or as otherwise
provided by law. With respect to the election of directors, the Class A Common
Stock, voting together as a class, elects four members of the Company's Board
of Directors (the "Class A Directors"). Pursuant to the terms of a
Stockholders Agreement, with respect to the four Class A Directors, Mr.
Linquist is entitled to nominate two Class A Directors, Mr. Hamilton, one
Class A Director, and Messrs. Linquist and Hamilton, together, one Class A
Director. Each Class A Director shall have one vote on each matter submitted
to a vote of the Board of Directors, and collectively represent four of the
seven votes of the Company's Board of Directors.
Class B Common Stock carries no voting rights, except as otherwise required
by law.
Collectively, the shares of Class C Common Stock represent 49.9% of the
Company's voting interest, with each share of Class C Common Stock issued and
outstanding having a voting interest equal to the quotient derived from
dividing 49.9% by the number of shares of Class C Common Stock issued and
outstanding, on all
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matters except the election of directors or as otherwise provided by law. The
holders of the Class C Common Stock as a class will be entitled to elect
members to the Company's Board of Directors (the "Class C Directors") who
collectively will represent three of the seven votes of the Company's Board of
Directors. In addition, the affirmative vote of a majority of holders of
Series C Common Stock, voting separately as a class shall be required for the
Company (i) where stockholder approval is required under Delaware Law, to
amend the Company's Certificate of Incorporation or Bylaws, unless such
amendment is necessary to comply with FCC rules and regulations or other
federal communications laws and such amendment without the affirmative vote of
the holders of each class of Common Stock voting separately is permitted under
Delaware law, (ii) to conduct a sale, lease, mortgage, transfer or other
disposal or encumbrance of all or substantially all of the Company's assets,
(iii) to enter into a merger or other business combination with any other
entity, except for a merger of a wholly-owned subsidiary of the Company with
and into the Company, (iv) to conduct a liquidation, dissolution or winding up
of the Company, and (v) to effect any capital reorganization of the Company or
any reclassification or recapitalization of the capital stock of the Company.
Redemption By the Company
If a holder of Class C Common Stock acquires additional shares of Class C
Common Stock or otherwise is attributed with ownership of such shares that
would cause the Company to violate the Entrepreneurs Requirements or the
Foreign Ownership Restrictions (collectively, "FCC Violations"), the Company,
at its option, may redeem that number of such shares necessary to eliminate
the FCC Violation at a redemption price equal to (i) 75% of the fair market
value of such shares where such holder caused the FCC Violation or (ii) 100%
of the fair market value where the FCC Violation was caused by no fault of the
holder.
PREFERRED STOCK
Effective upon the closing of the Offerings, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix or alter the dividend rights, dividend rate, conversion rights,
voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price or prices, and the liquidation preferences
of any wholly unissued series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, without further vote
or action by the stockholders. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of Common Stock. The issuance of Preferred
Stock with voting and conversion rights may adversely affect the voting power
of the holders of Common Stock, including the loss of voting control to
others. At present, the Company has no plans to issue any of the Preferred
Stock.
OPTIONS AND WARRANTS
As of September 30, 1996 and assuming the conversion of Class B Common Stock
into Class C Common Stock, options to purchase 2,093,310 shares of Class C
Common Stock, each at an exercise price of $5.00 per share, were outstanding,
1,316,780 of which are fully vested. The Company also had outstanding warrants
to purchase 105,000 shares of Class C Common Stock, each at an exercise price
of $5.00 per share, and warrants to purchase 3,386,750 shares of Class C
Common stock, each at an exercise price of $10.00 per share. In addition, the
Company has outstanding warrants to purchase 400,000 shares of Class C Common
Stock, each at an exercise price of $0.001 per share. Such warrants expire on
various dates, the latest of which is 10 years from May 20, 1996. See "Certain
Transactions."
REGISTRATION RIGHTS
After the Stock Offering, the holders of 6,092,390 shares of Class C Common
Stock and holders of warrants to purchase 3,786,750 shares of Class C Common
Stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act. Under the terms of the agreement between
the Company and the holders of such registrable securities, if the Company
proposes to register any of its securities under the
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Securities Act, either for its own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of such Class C
Common Stock therein. Certain of such stockholders benefiting from these
rights may also require the Company to file a registration statement under the
Securities Act at the Company's expense with respect to their shares of Class
C Common Stock, and the Company is required to use its diligent reasonable
efforts to effect such registration. Further, holders may require the Company
to file additional registration statements on Form S-3 at the Company's
expense. These rights are subject to certain conditions and limitations, among
them the right of the underwriters of an offering to limit the number of
shares included in such registration in certain circumstances.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION,
BYLAWS, DELAWARE LAW AND CONTROL GROUP REQUIREMENTS
Certificate of Incorporation and Bylaws
Several provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws could deter or delay unsolicited changes in control
of the Company. The Bylaws provide that the Company's stockholders may call a
special meeting of stockholders only upon a request of stockholders owning at
least a majority of the Company's capital stock. In addition, the Company's
Board of Directors has the authority, without further action by the
stockholders, to fix the rights and preferences of and issue preferred stock.
These provisions and others that could be adopted in the future could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. These provisions are intended to (i) enhance the
likelihood of continuity and stability in the composition of the Board of
Directors , (ii) in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company, (iii) to reduce the vulnerability
of the Company to an unsolicited acquisition proposal and (iv) to discourage
certain tactics that may be used in proxy fights. However, such provisions
could have the effect of discouraging others from making tender offers for the
Company's shares and, as a consequence, they also may inhibit fluctuations in
the market price of the Company's shares that could result from actual or
rumored takeover attempts. Such provisions also may have the effect of
preventing changes in the management of the Company.
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the
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proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Control Group Requirements
In order to meet the Control Group Requirements, the Company's Certificate
of Incorporation provides that the Company's Class A Common Stock, as a class,
must constitute 50.1% of the voting power of the Company. In addition, the
Company's Bylaws provide for certain restrictions on transfer relating to
certain shares of the Company's capital stock held by Qualifying Investors.
The structure that the Company has adopted to ensure compliance with the
Control Group Requirements will likely deter and delay unsolicited changes in
control of the Company. See "Risk Factors--Government Regulation--Control
Group Requirements" and "--Effect of Control by Certain Stockholders."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class C Common Stock is Boston
EquiServe, L.P.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Government Financing
Each of the License Subsidiaries will serve as the obligor on installment
payments to be made for the C-Block PCS license held by such License
Subsidiary. The aggregate debt obligation of the License Subsidiaries to the
U.S. Government pursuant to the Government Financing will be approximately $954
million. Although the obligation of the License Subsidiaries under the
Government Financing will be recorded on the Company's consolidated financial
statements at an estimated fair market value of $ , based on an estimated fair
market borrowing rate of 14%, the amount that would be owed to the U.S.
Government if all Government Financing were declared immediately due and
payable for all licenses would be $954 million plus accrued interest. The
License Subsidiaries will be required to make interest expense payments based
on an interest rate of %. The License Subsidiaries will be required to make
quarterly payments of interest only for the first six years of the license and
quarterly payments of interest and principal over the remaining four years of
the license term. In the event that a License Subsidiary becomes unable to meet
its obligations under the Government Financing or otherwise violates
regulations applicable to holders of FCC licenses, the FCC could take a variety
of actions, including requiring immediate repayment of amounts due under the
Government Financing, repayment of certain bidding credits, revoking the
Company's PCS licenses and fining the Company an amount equal to the difference
between the price at which the Company acquired the licenses and the amount of
the winning bid at their reauction, plus an additional penalty of three percent
of the lesser of the subsequent winning bid and the Company's bid amount. There
can be no assurance that the Company or the License Subsidiaries will be able
to meet their obligations under the Government Financing or that in the event
of a failure to meet such obligations, the FCC will not require immediate
repayment of amounts due under the Government Financing or revoke the Company's
PCS licenses. In either such event the Company or the License Subsidiaries may
be unable to meet their obligations to other creditors, including Lucent and
the holders of the Senior Discount Notes.
In connection with serving as the obligor on the payments to be made for the
C-Block PCS license it holds, each License Subsidiary must execute a note to
the United States Treasury Department documenting such License Subsidiary's
payment obligations and a security agreement creating a first priority security
interest in favor of the FCC in the license (and the proceeds of any sale
thereof) in the event of a default. The security agreement permits the License
Subsidiary to grant a subordinated security interest in the license to a third
party.
In addition, if the Government Financing were reflected at its aggregate
total face value of $954 million, the Company's pro forma total debt (as
adjusted for the Offerings) may exceed the total "enterprise value" of the
Company implied by the initial public offering price of the Class C Common
Stock (as determined by adding the market value of the Common Stock, the
estimated fair market value of the Government Financing and the gross proceeds
from the Unit Offering). The estimated fair market value of the Government
Financing is based on an estimated fair market borrowing rate of 14%, as
estimated by management. If a different fair market borrowing rate were used to
estimate the fair market value of the Government Financing, the allocation of
the Company's "enterprise value" between the Government Financing and the
Common Stock would be correspondingly affected. See "--Ability to Service Debt;
Substantial Leverage; Restrictive Covenants," "--Ability to Service Debt," "--
Government Regulation" and "Legislation and Government Regulation."
Lucent Financing
The Company has received a commitment from Lucent to provide vendor financing
of up to $300 million of senior secured loans (the "Lucent Financing") for the
purchase of infrastructure equipment and certain related network buildout
costs. The Lucent Financing is subject to the parties negotiating and executing
the Lucent Financing Agreement in definitive form and the satisfaction of
certain other contingencies. The Lucent Financing provides for an initial
tranche of $200 million with an eight-year term and a subsequent tranche of
$100 million to be available commencing January 1, 1998 with a seven-year term,
with undrawn availability under both tranches terminating on December 31, 1999.
All principal amounts loaned under the Lucent Financing would be repayable in
equal quarterly installments commencing March 31, 2001 and ending December 31,
2004. GWI PCS, Inc. will be the borrower under the Lucent Financing. The
Company and all other subsidiaries are required to guaranty the obligations of
GWI PCS, Inc. under the Lucent Financing.
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Under the Lucent Financing Agreement, the availability of each of Tranche A
and Tranche B would be conditioned upon satisfaction of certain minimum
financing requirements, which will be met upon completion of the Offerings. The
availability of Tranche B would also be subject to (1) the Company's PCS
networks (excluding that of the Chico market) providing service to geographical
areas with at least 14 million POPs and (2) the Company having secured 20,000
subscribers (excluding those from the Chico market). There can be no assurance
that the Company and Lucent will successfully negotiate and enter into
definitive agreements. Even if such agreements are entered into, there can be
no assurance that any of the conditions precedent, including the buildout and
minimum subscriber requirements applicable to Tranche B, will be satisfied or
waived. The inability of the Company to access such funds would likely have a
material adverse effect on the Company, and there can be no assurance that the
Company will be able to obtain replacement financing from other sources.
Loans under the Lucent Financing will be secured by a perfected first
priority lien on all the assets of GWI PCS, Inc. and its subsidiaries,
including the stock of GWI PCS, Inc. held by the Company and the stock of all
other subsidiaries, all investments or loans to GWI PCS, Inc., as well all FCC
licenses held by the subsidiaries of the Company (to the extent permitted under
applicable law and subject to the terms and conditions under which such FCC
licenses were granted and any prior lien securing deferred payments due to the
United States under the Government Financing). The FCC license and the assets
related to the Chico BTA are excluded from security interest to be granted to
Lucent to the extent Lucent does not provide any equipment or services in
connection with the buildout of the Chico BTA.
Proceeds from the Lucent Financing may only be used to pay (i) Lucent under
the Lucent Purchase Agreement or (ii) third parties for up to $35 million of
equipment purchases as directed by Lucent under the Lucent Equipment Agreement.
Loans under the Lucent Financing will bear interest at a rate per annum equal
to either (i) LIBOR plus an applicable margin or (ii) a Base Rate plus an
applicable margin. The Base Rate is the higher of (a) the prime rate as
publicly announced by one or more commercial banks to be determined and (b) the
federal funds rate plus 0.5%. The Lucent Financing also requires the payment of
certain commitment, arrangement and administrative agent fees. Certain
prepayment fees will be assessed for prepayments made prior to certain
amortization repayment dates. Such prepayment fees shall not apply if Lucent or
another party that does not typically receive prepayment fees in the normal
course of business is the holder of the Lucent Financing at the time of
prepayment. GWI PCS, Inc. will be required to make mandatory prepayments of
100% of the net proceeds of any sale or other disposition of the assets of any
of its subsidiaries that are not reinvested within 180 days or 50% of certain
excess cashflow.
As part of its fees, Lucent will receive warrants ("Lucent Warrants") to
purchase Class C Common Stock or such other equity securities that may be
issued in connection with the Company's equity financings that satisfy the
minimum equity financing required to draw upon Tranche A ("Tranche A Required
Equity Offerings"). The Lucent Warrants will have an exercise price equal to
the initial public offering price under the Stock Offering or such other price
of the equity securities issued in the Tranche A Required Equity Offerings. The
total number of shares purchasable under the Lucent Warrants will equal $6
million divided by the exercise price of the Warrants. Lucent will also receive
registration rights substantially similar to those granted to the Company's
current stockholders.
The Lucent Financing will contain a number of significant covenants that,
among other things, limit the ability of GWI PCS, Inc. and its subsidiaries to
incur additional indebtedness (beyond specified amounts), create liens and
other encumbrances (except specified liens), make guarantee obligations, merge
or consolidate with another entity, sell or otherwise dispose of assets,
declare dividends, make distributions to stockholders and repurchases of
equity, make investments, loans and advances, its business line, prepay its
indebtedness and amending other material agreements. In addition, the Lucent
Financing is expected to require the maintenance of certain specified financial
and operating covenants, including, without limitation, ratios of total debt to
total capitalization, total debt to EBITDA, EBITDA to interest expense and
capital expenditure limitations.
The Lucent Financing will contain representations, warranties, covenants,
conditions and events of default customary for such senior credit facilities of
similar size and nature.
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There can be no assurance that the Company and Lucent will negotiate and
enter into definitive agreements. Even if such agreements are entered into,
there can be no assurance that any of the conditions precedent, including the
minimum capital or build-out requirements, will be satisfied or waived. The
inability of the Company to access such funds would likely have a material
adverse effect on the Company, and there can be no assurance that the Company
will be able to obtain replacement financing from other sources. See "Risk
Factors--Ability to Service Debt; Substantial Leverage; Restrictive Covenants"
and "--Significant Capital Requirements; Financing Risks."
Senior Discount Notes
Concurrently with the Stock Offering and pursuant to a separate prospectus
the Company will make a public offering of Units, each consisting of $1,000
principal amount of Senior Discount Notes which will mature on , 2007 and
Warrants to purchase shares of Class C Common Stock, sufficient to
generate approximately $220 million in gross proceeds to the Company. The
Senior Discount Notes will be issued pursuant to the Indenture related to the
Senior Discount Notes. From and after , 2001, interest on the Senior
Discount Notes will accrue from , 2001 or from the most recent interest
payment date to which interest has been paid or provided for, payable
semiannually. The Senior Discount Notes are redeemable at the Company's option
after , 2001 and prior thereto under certain circumstances. See "Use of
Proceeds."
The Senior Discount Notes will rank pari passu in right of payment with all
existing and future unsecured, unsubordinated indebtedness of the Company and
will be senior in right of payment to all existing and future subordinated
indebtedness of the Company. The Senior Discount Notes will be effectively
subordinated to all liabilities of the Company's subsidiaries, including trade
payables and indebtedness that may be incurred by the Company's subsidiaries
under certain vendor financing arrangements.
The Indenture relating to the Senior Discount Notes contains covenants with
respect to among other things incurrence of indebtedness, restricted payments,
consensual limitations on distributions and transfers, issuance of guarantees
by subsidiaries, transactions with stockholders and affiliates, liens and
asset dispositions.
The closing of the Unit Offering and the closing of the Stock Offering are
each conditioned upon the closing of the other.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Stock Offering, there has been no market for the Class C Common
Stock of the Company. Therefore, future sales of substantial amounts of Class
C Common Stock in the public market could adversely affect market prices
prevailing from time to time. Furthermore, since only a limited number of
shares will be available for sale shortly after the Stock Offering because of
certain contractual and legal restrictions on resale (as described below),
sales of substantial amounts of Class C Common Stock of the Company in the
public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of the Stock Offering and the Hyundai Stock Purchase, the
Company will have outstanding an aggregate of shares of Common Stock. Of
these outstanding shares of Common Stock, the shares of Class C Common
Stock sold in the Stock Offering will be freely tradeable without restriction
or further registration under the Securities Act, unless purchased by an
"affiliate" of the Company, as that term is defined in Rule 144 under the
Securities Act (an "Affiliate"). The remaining 12,147,140 shares of Common
Stock, consisting of 30 shares of Class A Common Stock and 12,147,110 shares
of Class C Common Stock, are "restricted securities" as that term is defined
in Rule 144 under the Act ("Restricted Shares"). Restricted Shares may be sold
in the public market only if registered or if they qualify for an exemption
from registration under Section 4(1) or Rules 144, 144(k), 145 or 701
promulgated under the Securities Act, which are summarized below. Sales of the
Restricted Shares in the public market, or the availability of such shares for
sale, could adversely affect the market price of the Class C Common Stock.
All holders of Common Stock and options to purchase Common Stock have agreed
pursuant to certain "lock-up" agreements that they will not offer, sell,
contract to sell or grant any option to purchase or otherwise dispose of the
shares of Class C Common Stock owned by them or that could be purchased by
them through the exercise of options to purchase Class C Common Stock of the
Company for a period of 180 days after the effective date of this offering
without the prior written consent of Bear, Stearns & Co. Inc. As a result of
these contractual restrictions, notwithstanding possible earlier eligibility
for sale under the provisions of Section 4(1) or Rules 144, 144(k), 145 and
701, shares subject to lock-up agreements will not be saleable until the
agreements expire. The number of outstanding shares that will be available for
sale in the public market, after giving effect to lock-up agreements, will be
as follows: (i) no shares of Class C Common Stock will be eligible for sale as
of the Effective Date and (ii) 569,720 shares of Class C Common Stock will be
eligible for sale beginning 180 days after the Effective Date, subject in some
cases to certain volume and other limitations. The 11,577,420 remaining
Restricted Shares will not be eligible for sale pursuant to Rule 144 until the
expiration of their two-year holding periods.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years (including
the holding period of any prior owner except an Affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) one percent of the number of shares of Class C Common
Stock then outstanding; or (ii) the average weekly trading volume of the Class
C Common Stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice and broker/dealer requirements and
to the availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least three years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
In addition, any employee, officer or director of or consultant to the
Company who purchased his or her shares pursuant to a written compensatory
plan or contract may be entitled to rely on the resale provisions of Rule 701.
Rule 701 permits an Affiliate to sell their Rule 701 shares under Rule 144
without complying with the holding period requirements of Rule 144. Rule 701
further provides that non-affiliates may sell such shares in
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reliance on Rule 144 without having to comply with the public information,
volume limitation or notice provisions of Rule 144. In both cases, a holder of
Rule 701 shares is required to wait until 90 days after the date of this
Prospectus before selling such shares. The Company's 1995 Stock Option Plan
and 1996 Stock Option Plan require that the holders of shares issued upon
exercise of options under such plan will not offer, sell, contract to sell or
grant any option to sell or grant any option to purchase or otherwise dispose
of the shares of Class C Common Stock owned by them for a period of 180 days
after the effective date of this offering.
The Company has agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Class C Common Stock or any securities convertible
into or exercisable or exchangeable for Class C Common Stock or any rights to
acquire Class C Common Stock for a period 180 days after the date of this
Prospectus, without the prior written consent of the Representatives of the
Underwriters, subject to certain limited exceptions.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding stock options and Common Stock issued or issuable pursuant to the
Company's 1995 Stock Option Plan, Class C Common Stock issuable pursuant to
the Company's Employee Stock Purchase Plan and Common Stock issuable pursuant
to the 1996 Stock Option Plan. See "Management--1995 Stock Option Plan," "--
1996 Stock Option Plan" and "--Employee Stock Purchase Plan." Accordingly,
shares registered under such registration statements will, subject to Rule 144
volume limitations applicable to an Affiliate and the lapsing of the Company's
repurchase options, be available for sale in the open market, except to the
extent that such shares are subject to vesting restrictions with the Company
or the contractual restrictions described above. As of November 30, 1996,
options to purchase a total of 2,093,310 shares of Class C Common Stock were
outstanding (although all of the shares issuable upon exercise of such options
will be subject to lock-up restrictions on sale for 180 days after the
Effective Date) and shares were reserved for future issuance under the
stock plans.
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UNDERWRITING
The Underwriters named below, for whom Bear, Stearns & Co. Inc., Lehman
Brothers Inc., Salomon Brothers Inc and J.P. Morgan Securities Inc. are acting
as representatives (the "Representatives"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement (the form of which is
filed as an exhibit to the Registration Statement, of which this Prospectus is
a part), to purchase from the Company the aggregate number of shares of Class
C Common Stock set forth opposite their names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Bear, Stearns & Co. Inc.........................................
Lehman Brothers Inc.............................................
Salomon Brothers Inc............................................
J.P. Morgan Securities Inc......................................
---
Total.......................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that, if any of the foregoing
shares of Class C Common Stock are purchased by the Underwriters pursuant to
the Underwriting Agreement, all such shares must be so purchased. The Company
has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the Underwriters may be required to make in respect thereof.
The Company has advised that the Underwriters propose to offer the shares of
Class C Common Stock to the public initially at the public offering price set
forth on the cover page of this Prospectus and to certain selected dealers
(who may include the Underwriters) at such public offering price less a
concession not to exceed $ per share. The selected dealers may re-allow a
concession to certain other dealers not to exceed $ per share. After the
initial offering to the public, the concession to selected dealers and the re-
allowance to other dealers may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of additional
shares of Class C Common Stock at the public price to the public less
underwriting discounts and commissions set forth on the cover page of this
Prospectus, for the purpose of covering over-allotments, if any. To the extent
that the Underwriters exercise this option, each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of additional
shares proportionate to such Underwriter's initial commitment as indicated in
the preceding table.
In connection with the Offering, the Company, its directors and executive
officers have agreed that they will not sell, contract to sell or otherwise
dispose of any shares of Class C Common Stock of the Company for a period of
180 days after the date of this Prospectus without the prior written consent
of the Underwriters, except for the shares offered hereby.
Bear, Stearns & Co. Inc. acted as the placement agent in connection with the
private placements of the Company's equity and debt securities that closed in
1995 and 1996. In addition, Bear, Stearns & Co. Inc. has from time to time,
provided, and may in the future provide, financial advisory services to the
Company for which it has received, and may in the future receive, customary
compensation.
LEGAL MATTERS
The validity of the issuance of the shares of Class C Common Stock offered
hereby will be passed upon for the Company by Brobeck, Phleger & Harrison LLP,
Palo Alto, California. Federal communications matters will be passed upon for
the Company by Skadden, Arps, Slate, Meagher & Flom, Washington, D.C. Certain
legal matters in connection with the Stock Offering will be passed upon for
the Underwriters by Latham & Watkins, Washington, D.C.
81
<PAGE>
EXPERTS
The Consolidated Financial Statements of the Company at December 31, 1994
and 1995 and for the period from inception (June 24, 1994) to December 31,
1994, the year ended December 31, 1995, and the period from inception (June
24, 1994) to December 31, 1995 included in this Prospectus have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the Class C Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules to the Registration
Statement. For further information with respect to the Company and such Class
C Common Stock offered hereby, reference is made to the Registration Statement
and the exhibits and schedules filed as a part of the Registration Statement.
Statements contained in this Prospectus concerning the contents of any
contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Securities and Exchange Commission's principal office in
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from such office after payment of fees prescribed by the Securities and
Exchange Commission.
The Company intends to furnish its stockholders annual reports containing
consolidated financial statements examined and reported on by its independent
auditors and quarterly reports containing unaudited consolidated financial
information for the first three quarters of each year.
82
<PAGE>
GLOSSARY
1996 Act..................... Telecommunications Act of 1996.
AIN.......................... Advanced Intelligent Network. The means by
which a telecommunications network will provide
call control. Database structure and signal
transfer points facilitate call management
maintenance and control.
Analog....................... A method of storing, processing and
transmitting information through the use of a
continuous (rather than pulsed or digital)
electrical signal that varies in amplitude or
frequency.
Applicant.................... An "applicant" generally refers to an entity
that submits an application to the FCC for a
license and also generally includes parties to
the application, including holders of
partnership and other ownership interests and
any stock interest amounting to 5 percent or
more of the equity, outstanding stock, or
outstanding voting stock of such an entity, and
all officers and directors of that entity.
ARPU......................... Average Revenue Per Unit.
Base Station................. Transmitter, receiver, signaling and related
equipment located at each cell site.
Broadband PCS................ An allocation of 120 MHz spectrum at 2 GHz
authorized for advanced wireless communications
services, including voice, data, paging,
facsimile and other innovative broadband
applications.
BTA.......................... Basic Trading Area, as set forth in the Rand
McNally Commercial Atlas & Marketing Guide
(123d ed. 1992).
C-Block Auction.............. The FCC Auction of 493 30 MHz BTA licenses,
restricted to entities meeting certain
financial and other criteria.
Carrier...................... A third party provider of communications
services by wire or radio.
Cellular..................... The domestic public cellular radio
telecommunications service authorized by the
FCC in the 824-893 MHz band, in which each of
two licenses per market employs 25 MHz of
spectrum to provide service to the public.
Cellular systems are based on multiple base
stations, or "cells," that permit efficient
frequency reuse and on software that permits
the system to hand mobile calls from cell to
cell as subscribers move through the cellular
service area.
CDMA......................... Code Division Multiple Access. One of the three
leading PCS and digital cellular technology
platforms.
CDPD.........................
Cellular Digital Packet Data.
83
<PAGE>
CLEC.........................
Competitive Local Exchange Carrier.
CMRS......................... Commercial Mobile Radio Service. A provider of
mobile telecom-munications services that
provides communications services (1) to the
public (2) for profit, that are
(3) interconnected to the public switched
telephone network. The FCC has adopted rules to
regulate all similarly situated CMRS providers
under similar regulations.
Common Carriers.............. Companies which own or operate transmission
facilities and offer telecommunication services
to the general public on a non-discriminatory
basis.
CTIA......................... The Cellular Telecommunications Industry
Association. A trade association in North
America comprised primarily of cellular and PCS
telephone service providers and some mobile
satellite service providers.
Digital...................... A method of storing, processing and
transmitting information through the use of
distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital
transmission/switching technologies employ a
sequence of discrete, distinct pulses to
represent information, as opposed to the
continuously variable analog signal. Digital
PCS networks will utilize digital transmission.
ESMR......................... Enhanced Specialized Mobile Radio Service, an
SMR service that contemplates expanded digital
telephony service offerings to the public in
general rather than local dispatch services to
specialized business subscribers.
FCC.......................... The Federal Communications Commission.
GHz.......................... Gigahertz. A unit of frequency equal to one
billion cycles (or hertz) per second.
GSM.......................... Groupe Speciale Mobile. One of the three
leading PCS and digital cellular technology
platforms, currently widely deployed in Europe.
Handsets..................... Portable, fixed, mobile, wireless or
transportable devices used for the reception
and transmission of voice communications.
IVDS......................... Interactive video and data service.
IXC.......................... Interexchange Carrier.
LATA......................... Local Access and Transport Areas.
LEC.......................... Local Exchange Carrier.
LMDS......................... Local Multipoint Distribution Service.
MHz.......................... Megahertz. A unit of frequency equal to one
million cycles (or hertz) per second.
MSS..........................
Mobile Satellite Service.
84
<PAGE>
MTA..........................
Major Trading Area, as set forth in the Rand
McNally Commercial Atlas & Marketing Guide
(123d ed. 1992).
PCS.......................... Personal Communications Services.
POPs......................... Persons in the U.S. population based upon the
1995 PCS Atlas & Databook, Paul Kagan
Associates, Inc., unless stated otherwise.
PSAP.........................
Public Safety Answering Point.
RBOC......................... Regional Bell Operating Company.
RF........................... Radio Frequency.
Roaming...................... A service offered by wireless communications
network carriers which allows subscribers to
use their radio or phone while outside their
carrier's service area. Roaming usually entails
an agreement between participating carriers.
SMR..........................
Specialized Mobile Radio, a two-way mobile
radio telephone system used traditionally
mostly for local dispatch services.
Soft Hand-Off................ Cell transfer method which establishes a new
cell communications channel prior to
disconnecting the existing cell channel.
Spectrum.....................
The electromagnetic radio spectrum. The FCC
grants authorizations and licenses to private
and governmental entities to use specified
portions under certain conditions.
TDMA......................... Time Division Multiple Access. One of the three
leading PCS and digital cellular technology
platforms.
WCS.......................... Wireless Communications Services.
85
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and Septem-
ber 30, 1996 (unaudited)................................................ F-3
Consolidated Statements of Operations for the period from inception (June
24, 1994) to December 31, 1994, the year ended December 31, 1995, the
period from inception (June 24, 1994) to December 31, 1995, and for the
nine months ended September 30, 1995 and 1996 (unaudited)............... F-4
Consolidated Statements of Stockholders' Equity for the period from in-
ception (June 24, 1994) to
December 31, 1994, the year ended December 31, 1995, and the nine months
ended September 30, 1996 (unaudited).................................... F-5
Consolidated Statements of Cash Flows for the period from inception (June
24, 1994) to December 31, 1994, the year ended December 31, 1995, the
period from inception (June 24, 1994) to December 31, 1995, and for the
nine months ended September 30, 1995 and 1996 (unaudited)............... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
After the 10 for 1 stock split discussed in Note 11 to the Company's
Consolidated Financial Statements is effected, we expect to be in a position
to render the following audit report.
Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
General Wireless, Inc.:
We have audited the accompanying consolidated balance sheets of General
Wireless, Inc. (a Delaware corporation in the development stage) and
subsidiary (the "Company") as of December 31, 1994 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the period from inception (June 24, 1994) to December 31, 1994, for the
year ended December 31, 1995, and for the period from inception (June 24,
1994) to December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of General Wireless, Inc. and
subsidiary as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for the period from inception (June 24, 1994)
to December 31, 1994, for the year ended December 31, 1995, and for the period
from inception (June 24, 1994) to December 31, 1995, in conformity with
generally accepted accounting principles.
Dallas, Texas,
April 26, 1996 (except with
respect to the matters
discussed in Note 10, as to
which the date is May 20, 1996,
Note 11, as to which the date
is December 6, 1996, and Note
12, as to which the date is
, 1996)
F-2
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
SEPTEMBER 30,
1994 1995 1996
ASSETS ------ ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................... $ 918 $ 2,688 $ 6,569
Prepaid expenses.............................. -- -- 34
------ ------- -------
Total current assets........................ 918 2,688 6,603
------ ------- -------
OFFICE EQUIPMENT, net........................... 19 23 48
OTHER ASSETS
PCS license deposits.......................... -- 53,982 52,983
------ ------- -------
Total other assets.......................... -- 53,982 52,983
------ ------- -------
Total assets................................ $ 937 $56,693 $59,634
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses......... $ 69 $ 81 $ 405
Accrued offering costs........................ -- 1,635 1,650
------ ------- -------
Total current liabilities................... 69 1,716 2,055
------ ------- -------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, par value $.0001,
per share, 10,000,000 shares authorized--
Series A, 102,500 shares authorized, issued,
and outstanding, with aggregate liquidation
preference of $933,800 at December 31,
1994; none authorized or outstanding at
December 31, 1995, and September 30, 1996.. -- -- --
Series B, 205,000 shares authorized, issued,
and outstanding, with aggregate liquidation
preference of $1,867,040 at December 31,
1994; none authorized or outstanding at
December 31, 1995, and September 30, 1996.. -- -- --
Common stock, par value $.0001 per share;
20,000,000 shares authorized 1,030,000 shares
issued and outstanding at December 31, 1994.. -- -- --
Common stock, par value $.0001 per share--
Class A, 50 shares authorized, 30 shares
issued and outstanding at December 31,
1995, and September 30, 1996............... -- -- --
Class B, 10,000,000 shares authorized,
1,054,720 shares issued and outstanding at
December 31, 1995, and September 30, 1996.. -- -- --
Class C, 39,999,950 shares authorized,
5,563,330 and 6,092,390 shares issued and
outstanding at December 31, 1995, and
September 30, 1996, respectively........... -- 1 1
Additional paid-in capital...................... 1,864 59,032 63,316
Less--Subscriptions receivable.................. (563) (2,879) (3,336)
Losses accumulated during the development
stage.......................................... (433) (1,177) (2,402)
------ ------- -------
Total stockholders' equity.................. 868 54,977 57,579
------ ------- -------
Total liabilities and stockholders' equi-
ty....................................... $ 937 $56,693 $59,634
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM NINE MONTHS
INCEPTION INCEPTION ENDED
(JUNE 24, 1994) TO YEAR ENDED (JUNE 24, 1994) TO SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, --------------
1994 1995 1995 1995 1996
------------------ ------------ ------------------ ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................ $ -- $ -- $ -- $ -- $ --
----- ----- ------- ----- -------
OPERATING EXPENSES:
General and adminis-
trative.............. 448 791 1,239 540 1,342
----- ----- ------- ----- -------
Total operating ex-
penses............. 448 791 1,239 540 1,342
----- ----- ------- ----- -------
LOSS FROM OPERATIONS.... 448 791 1,239 540 1,342
OTHER INCOME:
Interest income....... (18) (54) (72) (33) (152)
----- ----- ------- ----- -------
Total other income.. (18) (54) (72) (33) (152)
----- ----- ------- ----- -------
NET LOSS BEFORE INCOME
TAXES.................. (430) (737) (1,167) (507) (1,190)
----- ----- ------- ----- -------
PROVISION FOR INCOME
TAXES.................. 3 7 10 5 35
----- ----- ------- ----- -------
NET LOSS................ $(433) $(744) $(1,177) $(512) $(1,225)
===== ===== ======= ===== =======
NET LOSS PER SHARE--
Primary and Fully Di-
luted................
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING--
Primary and Fully Di-
luted................
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK LOANS
---------------- ----------------- ACCUMULATED
NUMBER ADDITIONAL DURING THE
OF NUMBER OF PAID-IN SUBSCRIPTIONS DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE STAGE TOTAL
-------- ------ --------- ------ ---------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE June 24, 1994
(date of inception).... -- $-- -- $-- $ -- $ -- $ -- $ --
Issuance of common
stock at $.04 per
share on July 18,
1994.................. -- -- 1,030,000 -- 41 -- -- 41
Issuance of Series A
Preferred Stock at
$6.67 per share on
July 18, 1994, net of
issuance costs........ 102,500 -- -- -- 680 (184) -- 496
Issuance of Series B
Preferred Stock at
$6.67 per share on
September 30, 1994,
net of issuance
costs................. 205,000 -- -- -- 1,360 (367) -- 993
Accrued interest on
subscriptions
receivable............ -- -- -- -- 12 (12) -- --
Costs incurred to raise
additional capital.... -- -- -- -- (229) -- -- (229)
Net loss............... -- -- -- -- -- -- (433) (433)
-------- ---- --------- ---- ------- ------- ------- -------
BALANCE December 31,
1994................... 307,500 -- 1,030,000 -- 1,864 (563) (433) 868
Issuance of common
stock at $.04 per
share on June 2,
1995.................. -- -- 75,000 -- 3 -- -- 3
Issuance of Series A
Preferred Stock at
$6.67 per share on
June 2, 1995.......... 37,500 -- -- -- 250 -- -- 250
Issuance of Series B
Preferred Stock at
$6.67 per share on
June 2, 1995.......... 75,000 -- -- -- 500 -- -- 500
Purchase of common
stock at $.04 per
share on December 1,
1995.................. -- -- (780,000) -- (31) -- -- (31)
Purchase of Series A
Preferred Stock at
$7.32 per share on
December 1, 1995...... (25,000) -- -- -- (183) 183 -- --
Purchase of Series B
Preferred Stock at
$7.22 per share on
December 1, 1995...... (50,000) -- -- -- (362) 362 -- --
Recapitalization....... (345,000) -- 519,720 -- -- -- -- --
Issuance of Class A
Common Stock at $10.00
per share on December
1, 1995, net of
issuance costs........ -- -- 30 -- -- -- -- --
Issuance of Class B
Common Stock and
105,000 Class B Common
Stock Warrants at
$5.00 per share of
stock on December 1,
and December 28, 1995,
net of issuance
costs................. -- -- 210,000 -- 990 -- -- 990
Issuance of Class C
Common Stock and
2,297,220 Class C
Common Stock Warrants
at $10.00 per share of
stock on December 1
and December 28, 1995,
net of issuance
costs ................ -- -- 5,563,330 1 52,195 (2,809) -- 49,387
Issuance of Class C
Common Stock
Warrants.............. -- -- -- -- 3,754 -- -- 3,754
Accrued interest on
subscriptions
receivable............ -- -- -- -- 52 (52) -- --
Net loss............... -- -- -- -- -- -- (744) (744)
-------- ---- --------- ---- ------- ------- ------- -------
BALANCE December 31,
1995................... -- -- 6,618,080 1 59,032 (2,879) (1,177) 54,977
Issuance of Class C
Common Stock and
264,530 Class C Common
Stock Warrants at
$10.00 per share of
stock, net of issuance
costs................. -- -- 529,060 -- 4,118 (291) -- 3,827
Accrued interest on
subscriptions
receivable............ -- -- -- -- 166 (166) -- --
Net loss............... -- -- -- -- -- -- (1,225) (1,225)
-------- ---- --------- ---- ------- ------- ------- -------
BALANCE, September 30,
1996 (unaudited)....... -- $-- 7,147,140 $ 1 $63,316 $(3,336) $(2,402) $57,579
======== ==== ========= ==== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM NINE MONTHS
INCEPTION INCEPTION ENDED
(JUNE 24, 1994) TO YEAR ENDED (JUNE 24, 1994) TO SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, -------------
1994 1995 1995 1995 1996
------------------ ------------ ------------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $ (433) $ (744) $ (1,177) $(512) $(1,225)
Adjustments to
reconcile net loss to
net cash used by
operating activities--
Depreciation.......... 2 8 10 8 14
Changes in assets and
liabilities--
Prepaid expenses..... -- -- -- -- (34)
Accounts payable and
accrued expenses.... 69 250 319 (11) 324
------ -------- -------- ----- -------
Net cash used in
operating
activities.......... (362) (486) (848) (515) (921)
------ -------- -------- ----- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Payment for PCS license
deposits.............. -- (53,982) (53,982) -- 999
Purchase of office
equipment............. (21) (12) (33) (11) (39)
------ -------- -------- ----- -------
Net cash provided by
(used in) investing
activities.......... (21) (53,994) (54,015) (11) 960
------ -------- -------- ----- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from sale of
common stock.......... 41 51,452 51,493 3 4,437
Proceeds from issuance
of warrants........... -- 3,850 3,850 -- --
Proceeds from sale of
preferred stock....... 1,489 750 2,239 750 --
Payment for repurchase
of common stock....... -- (31) (31) -- --
Costs incurred to raise
additional capital.... (229) 229 -- (165) (595)
------ -------- -------- ----- -------
Net cash provided by
financing
activities.......... 1,301 56,250 57,551 588 3,842
------ -------- -------- ----- -------
INCREASE IN CASH AND
CASH EQUIVALENTS....... 918 1,770 2,688 62 3,881
CASH AND CASH
EQUIVALENTS, beginning
of period.............. -- 918 -- 918 2,688
------ -------- -------- ----- -------
CASH AND CASH
EQUIVALENTS, end of
period................. $ 918 $ 2,688 $ 2,688 $ 980 $ 6,569
====== ======== ======== ===== =======
SUPPLEMENTAL CASH FLOW
DISCLOSURES:
Cash paid for
interest.............. $ -- $ -- $ -- $ -- $ --
====== ======== ======== ===== =======
Cash paid for income
taxes................. $ -- $ 3 $ 3 $ 2 $ 7
====== ======== ======== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
General Wireless, Inc. was incorporated on June 24, 1994, as a Delaware
corporation for the purpose of securing broadband Personal Communications
Services ("PCS") licenses and becoming a leading provider of affordable
wireless communications services. The consolidated financial statements
include the accounts of General Wireless, Inc. and its wholly owned subsidiary
GWI PCS, Inc., which was formed to hold any PCS licenses secured. GWI PCS,
Inc., currently has no assets or operations of its own. General Wireless, Inc.
and its subsidiary are herein referred to as the Company. The Company is in
the development stage and, to date, has devoted substantially all of its
efforts to developing its business strategy, raising capital, and securing PCS
licenses. Accordingly, the Company has recognized no operating revenues and
has incurred, and continues to incur, monthly operating losses and operating
cash flow deficits.
The Company is attempting to secure PCS licenses in densely populated urban
markets with high population growth rates as well as other desirable
demographic characteristics, such as favorable business climates, high median
household income levels, and long commute times. The Federal Communications
Commission (FCC) is offering PCS licenses through a competitive bidding
process (the "FCC Auction"). Winning bidders are subject to FCC approval and
continuing FCC regulations. Management can provide no assurance that the
Company will obtain PCS licenses in its target markets (see Note 7). In
addition, management can provide no assurance that the Company will be able to
successfully finance and build out the wireless communications infrastructure
needed to provide service, generate cash sufficient to service anticipated
debt requirements, successfully market its product, or operate at a profit.
Unaudited Update (Assumes grant of the FCC licenses, which, as of the date of
this filing have not been granted).
The Company submitted winning bids totaling $1,059,658,000 on licenses
covering 14 Basic Trading Areas in the FCC Auction which ended May 6, 1996
(see Note 10). On , 199 , the FCC conditionally granted the licenses to
the Company after dismissing an informal objection that had been filed. Final
license grant is expected on , 1997, however, there can be no assurance
that the grant of the licenses will not continue to be appealed.
In connection with the close of the auction, the Company paid $52,983,000 as
an up front payment on the licenses. In addition, subsequent to the grant of
the licenses, the Company received proceeds of $50 million as a loan from
Hyundai Electronics America (see Note 9) and made another up front payment of
$52,983,000. The Company expects to execute a note and security agreement with
the United States Treasury Department for the remaining $953,692,000 due on
the licenses (the "Government Debt"). The Government Debt bears interest at
6.5% per annum with quarterly interest payments of interest only due for the
first six years of the license term and quarterly payments of principal and
interest due over the remaining four years of the license term.
On December 16, 1996, the Company announced it had signed a commitment
letter with Lucent Technologies, Inc. ("Lucent") to supply infrastructure
equipment to the Company and build the Company's PCS network. In connection
therewith, Lucent has committed to provide up to $300 million of senior
secured financing for the purchase of infrastructure and certain related
network buildout costs (see Note 11).
The Company recently reorganized forming subsidiaries to hold each of the 14
licenses and forming various additional subsidiaries which will be the
Company's primary operating companies.
2. CAPITALIZATION:
Preferred Stock
On July 25, 1995, the Company effected a reverse stock split of 1 to 10 for
Series A Preferred Stock and 1 to 4 for Series B Preferred Stock. The
financial statements and accompanying notes thereto give retroactive effect to
the reverse stock split as though it had occurred at the beginning of all
periods presented.
F-7
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On July 18, 1994, 102,500 shares of Series A Preferred Stock were issued at
$6.67 per share for $500,250 in cash and $183,425 in subscriptions receivable
(see Note 3) from certain officers and employees, less issuance costs of
$3,573. On September 30, 1994, 205,000 shares of Series B Preferred Stock were
issued at $6.67 per share for $1,000,200 in cash and $366,740 in subscriptions
receivable (see Note 3) from certain officers and employees, less issuance
costs of $7,157.
On June 2, 1995, 37,500 shares of Series A Preferred Stock were issued at
$6.67 per share for $250,125 in cash and 75,000 shares of Series B Preferred
Stock were issued at $6.67 per share for $500,100 in cash.
On December 1, 1995, in connection with a recapitalization (see below), the
Company repurchased 25,000 shares of Series A Preferred Stock for $7.32 and
50,000 shares of Series B Preferred Stock for $7.22 from an officer of the
Company. The officer used the proceeds of such repurchase to repay
subscription notes receivable. Also, on December 1, 1995, all outstanding
preferred stock was converted to Class B Common Stock. As of December 31,
1995, no shares of preferred stock were authorized or outstanding.
Common Stock
As of December 31, 1994, the Company had authorized 20,000,000 shares of
$0.0001 par value common stock. On July 18, 1994, 1,030,000 shares of common
stock were issued at $0.04 per share for $41,200 in cash. On June 2, 1995,
75,000 shares of common stock were issued at $0.04 per share for $3,000 in
cash. On December 1, 1995, in connection with a recapitalization (see below),
the Company repurchased 780,000 shares of common stock from an officer at
$0.04 per share for $31,200.
On December 1, 1995, in connection with a recapitalization (see below), all
outstanding common stock was converted to Class B Common Stock. At December
31, 1995, the Company has authorized 50,000,000 shares of $0.0001 par value
common stock, of which 50 shares are designated as Class A Common Stock,
10,000,000 shares are designated Class B Common Stock and 39,999,950 shares
are designated as Class C Common Stock. The Company has reserved 1,957,390
shares of Class B Common Stock for issuance under the Company's stock option
plan (see Note 6).
Recapitalization--On December 1, 1995, the Company effected a
recapitalization (the "Recapitalization") in order to enable it to raise
additional equity financing yet remain in compliance with certain FCC
ownership restrictions applicable to the Company. Pursuant to the
Recapitalization, 115,000 shares of then outstanding Series A Preferred Stock
were converted to 280,050 shares of Class B Common Stock, 230,000 shares of
then outstanding Series B Preferred Stock were converted to 559,920 shares of
Class B Common Stock, and 325,000 shares of outstanding common stock were
converted to 4,750 shares of Class B Common Stock. In order to effect the
Recapitalization, the Company issued warrants to purchase 575,000 shares of
Class C Common Stock at $10.00 per share to an existing investor.
In December 1995, the Company issued an aggregate of 210,000 shares of Class
B Common Stock and warrants to purchase 105,000 shares of Class B Common Stock
(the "Class B Warrants") for an aggregate of $1,050,000 in cash, less issuance
costs of $59,903. The warrants to purchase Class B Common Stock are
exercisable at a price of $5.00 per share. Also, in December 1995, the Company
issued an aggregate of 5,563,330 shares of Class C Common Stock and warrants
to purchase 2,297,220 shares of Class C Common Stock (the "Class C Warrants")
for an aggregate of $55,633,300 consisting of $52,823,925 in cash and
$2,809,375 in subscriptions receivable (see Note 3), less issuance costs of
$3,436,961. The Class C Warrants are exercisable at a price of $10.00 per
share. On December 1, 1995, the Company sold warrants to purchase 400,000
shares and 200,000 shares of Class C Common Stock, exercisable at prices of
$.001 and $10.00 per share, respectively, for
F-8
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
an aggregate of $4,000,000, less issuance costs of $246,102. Also on December
1, 1995, the Company issued to a consultant warrants to purchase 50,000 shares
of Class C Common Stock, exercisable at a price of $10.00 per share in
exchange for consultation and assistance on the Recapitalization.
Redemption--If, at any time, ownership of shares of Class C Common Stock by
a holder would cause the Company to violate any FCC ownership requirements or
restrictions, the Company may, at the option of the Board of Directors, redeem
a number of shares of Class C Common Stock sufficient to eliminate such
violation.
Conversion Rights--Each share of Class A and B Common Stock shall
automatically be converted into one share of Class C Common Stock upon the
tenth anniversary of the date of grant of licenses to the Company by the FCC
or such earlier date as may be determined by the Board of Directors. The Board
of Directors may approve the conversion of shares of Class B Common Stock into
shares of Class C Common Stock at any time following the consummation of an
initial public offering of the Company's capital stock.
Voting Rights--The holders of Class A Common Stock, as a class, shall have
the right to (i) vote 50.1% of the Company's voting interests on all matters
and (ii) elect four (of seven) members of the Board of Directors. The holders
of Class B Common Stock, as a class, shall have no voting rights. The holders
of Class C Common Stock, as a class, shall have the right to (i) vote 49.9% of
the Company's voting interests on all matters and (ii) elect that remaining
number of members of the Board of Directors (collectively, three of seven) as
are from time-to-time set forth in the Company's bylaws.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation
The accompanying financial statements include the accounts of General
Wireless, Inc. and its majority owned subsidiaries. All significant
intercompany balances and transactions are eliminated.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company includes as cash and cash
equivalents (i) cash on hand, (ii) cash in bank accounts, (iii) investments in
money market funds, and (iv) highly liquid investments in debt securities with
original maturities of three months or less.
Office Equipment
Office equipment is stated at cost and depreciated using the straight-line
method over an estimated useful life of three years. Maintenance and repair
costs are charged to expense as incurred. Office equipment consisted of the
following at December 31, 1994 and 1995 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Office equipment, at cost......................... $21 $ 33
Less--Accumulated depreciation.................... (2) (10)
--- ----
Office equipment, net........................... $19 $ 23
=== ====
</TABLE>
PCS License Deposits
PCS license deposits include deposits made in connection with the FCC
Auction. After license grant, such deposits will be included as a cost of the
PCS licenses.
F-9
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Subscriptions Receivable
Subscriptions receivable represent promissory notes from certain officers of
the Company in connection with the officers' purchases of the Company's
capital stock. The Company's capital stock issued in connection with such
promissory notes is reported as issued and outstanding in the accompanying
financial statements in the amount of the related promissory note plus accrued
interest. The promissory notes and related accrued interest receivable are
classified as subscriptions receivable and included as a reduction of
stockholders' equity in the accompanying financial statements.
Subscriptions receivable consisted of the following at December 31, 1994 and
1995 (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Promissory Notes from officers of the Company bear-
ing interest at 7% per annum, compounded annually;
principal and accrued interest due July 18, 1999,
with accelerated payment required under certain
conditions; 4,765 and 52,408 shares of stock of an-
other corporation are pledged to secure certain of
these notes at December 31, 1995 and 1994, respec-
tively............................................. $184 $ 18
Promissory Notes from officers of the Company bear-
ing interest at 7.05% per annum, compounded annual-
ly; principal and accrued interest due September
30, 1999, with accelerated payment required under
certain conditions; 9,526 and 104,784 shares of
stock of another corporation are pledged to secure
certain of these notes at December 31, 1995 and
1994, respectively................................. 367 36
Promissory Note from officer of the Company bearing
interest at 6.36% per annum, compounded annually;
principal and accrued interest due November 30,
2007; 906,250 shares of stock of another corpora-
tion are pledged to secure this note............... -- 2,809
Accrued interest receivable related to these promis-
sory notes......................................... 12 16
---- ------
Total subscriptions receivable.................... $563 $2,879
==== ======
</TABLE>
Fair Value of Financial Instruments
Pending use of cash balances for development activities, the Company enters
into various short-term financial instruments. The carrying values of the
Company's short-term financial instruments, including cash and short-term
investments, approximate their fair value.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results may differ from those estimates.
Net Loss Per Share
Net loss per share is based upon the weighted average number of shares
outstanding. Weighted average number of shares outstanding includes common
shares and common share equivalents and gives effect to the Recapitalization
(see Note 2) as if such Recapitalization had occurred at inception (June 24,
1994). Additionally, as required by the Securities and Exchange Commission
rules, all warrants, options, and shares issued during the year immediately
preceding the initial public offering are assumed to be outstanding for all
periods presented.
F-10
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121),
which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill. This statement becomes
effective for the Company in fiscal year 1996. The Company has evaluated the
rules set forth in this pronouncement and does not believe that adoption of
SFAS No. 121 will have a material effect on its financial position or results
of operations.
In November 1995, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation: (SFAS No. 123). This statement becomes effective for the Company
in fiscal year 1996. This statement requires companies to provide additional
disclosures related to employee stock-based compensation plans, or allows
companies to change the accounting for compensation expense associated with
its stock-based compensation. The Company expects to maintain its current
accounting for stock-based compensation and include the additional disclosures
required by SFAS No. 123.
Interim Financial Presentation
The accompanying unaudited financial statements have been prepared by the
Company in accordance with GAAP for interim financial information and
substantially in the form prescribed by the Securities and Exchange
Commission. Accordingly, they do not include all of the financial information
and footnotes required by GAAP for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1996, are not
indicative of the results that may be expected for the year ending December
31, 1996.
4. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company has entered into various operating lease agreements for office
space and equipment. Future minimum lease obligations related to the Company's
operating leases are not material at December 31, 1995. Total rent expense for
the period from inception (June 24, 1994) to December 31, 1994, and for the
year ended December 31, 1995, was approximately $16,305 and $35,332,
respectively.
Effective December 1995, the Company entered into agreements with Mitsui
Comtek and Mitsui & Co. (U.S.A.), Inc. (together "Mitsui") pursuant to which
(i) Mitsui would act as a procurement consultant to the Company for five
years, receiving fees based on the extent of Mitsui's involvement in the
negotiation or financing of certain equipment purchases plus an annual
retainer fee of $350,000 and (ii) a representative of Mitsui would serve as a
purchasing consultant within the Company for five years, receiving an annual
fee of $150,000.
5. INCOME TAXES:
The Company has certain net deferred tax assets related primarily to net
losses incurred during the development stage. The Company has recorded a
valuation allowance equal to the net deferred tax asset at December 31, 1994
and 1995, due to the uncertainty of future operating results. The valuation
allowance will be reduced at such time as management believes it is more
likely than not that the related net deferred tax assets will be realized. Any
reductions in the valuation allowance will reduce future income tax
provisions.
F-11
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's significant deferred tax assets and liabilities and the
changes in those assets and liabilities, were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 CHANGE 1995
------------ ------ ------------
<S> <C> <C> <C>
Start-up costs capitalized for tax
purposes............................. $ 146 $ 106 $ 252
Valuation allowance................... (146) (106) (252)
----- ----- -----
$ -- $ -- $ --
===== ===== =====
</TABLE>
Under existing tax law, all expenses incurred by a company prior to the
company earning any revenues, are capitalizable for tax purposes. Accordingly,
for tax purposes, the Company had taxable income of $17,649 and $45,811 for
the years ended December 31, 1994 and 1995, respectively, which represents
interest income earned on the Company's cash and cash equivalents, and results
in income tax expense of $2,647 and $7,000, respectively.
6. STOCK OPTION PLAN:
The Company has a stock option plan (the "Plan") under which it grants
options to purchase Class B Common Stock. As of December 31, 1995, the maximum
number of shares issuable under the Plan may not exceed 1,957,390 shares. The
Plan is administered by the Board of Directors. Vesting periods and terms for
stock option grants are determined by the plan administrator. No option
granted shall have a term in excess of ten years. All options outstanding as
of December 31, 1995, were vested. As of December 31, 1995, 1,957,390 shares
of Class B Common Stock are reserved for the Plan (see Note 2). The stock
option activity was as follows:
<TABLE>
<CAPTION>
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Options outstanding at December 31, 1994......... -- --
Options granted................................ 1,316,780 $5.00
---------
Options outstanding at December 31, 1995......... 1,316,780 $5.00
=========
</TABLE>
7. UNCERTAINTIES REGARDING FUTURE OPERATIONS:
The Company's success will be affected by, among other things, the problems,
expenses, difficulties, complications, and delays encountered in connection
with the formation of any new business, the introduction of a new range of
service offerings on a commercial basis, the need for additional equity and
debt financing, and the competitive environment in which the Company intends
to operate.
To address these risks, the Company must, among other things, be granted PCS
licenses in the FCC Auction (see Notes 1 and 10), obtain substantial
additional capital to support the construction and initial operation of its
PCS networks and the relocation of incumbent microwave licensees to clear
spectrum for its PCS networks (see Notes 11 and 12), establish technical
feasibility and acceptance of its products and services, develop a market for
its PCS services and exploit that market, respond to competitive and
technological developments, and continue to attract, retain, and motivate
qualified personnel. Although management believes that the Company will be
able to successfully mitigate these risks, management can provide no assurance
that the Company will be able to do so or that the Company will ever operate
profitably.
Expenses are expected to exceed revenues in each location in which the
Company offers service until a sufficient customer base is established. It is
anticipated that this will take a number of years, and positive cash flows
from operations are not expected in the near future. Although management
believes that the Company will
F-12
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
generate cash flows in excess of its start-up costs and the cost of its PCS
licenses, management can provide no assurance that the Company will be able to
do so.
PCS licensees are subject to an FCC-mandated minimum build-out schedule
which will generate a significant need for additional capital resources for
several years after the FCC auctions. The Company will be required to offer
service to at least one-third of the population within five years and at least
two-thirds of the population within ten years. The Company plans to build out
its system to cover over 80% of the population of most major market service
areas within five years, which exceeds the FCC-mandated minimum build-out
schedule. To provide service within the required time frame, the Company must
secure adequate and reliable sources of supply and the requisite financing to
provide the funding necessary to build the infrastructure needed to provide
services. Although management believes that sufficient sources of capital will
be available to the Company to complete its build-out plans, management can
provide no assurance that such sources of capital will be available (see Notes
11 and 12).
8. RELATED-PARTY:
The President and Chief Executive Officer of the Company is a stockholder
and member of the Board of Directors of the company from which GWI subleased
its office space. The Company paid $10,763 and $22,157 during 1994 and 1995,
respectively, pursuant to this lease.
9. HYUNDAI AGREEMENTS:
On March 15, 1996, the Company and Hyundai Electronics America ("Hyundai")
entered into a loan agreement (the "Loan Agreement") pursuant to which Hyundai
agreed to loan $50 million to the Company upon the grant of PCS Licenses
covering a population of at least 10 million subject to approval of the Korean
government. The loan will be used to make the second five percent up front
payment to the FCC. Under the Loan Agreement, Hyundai is entitled to designate
one person to the Company's board of directors, so long as at least $10
million of the loan amount is outstanding. The Loan Agreement and any
promissory note to be issued thereunder contain certain restrictive covenants
which will restrict the Company's ability to issue debt senior to the
promissory note, make dividends, or create liens. The note term is one year,
with a fixed interest rate of 6.5% during the term of the note, increasing to
nine percent for any unpaid portion after the maturity date. The Company may
elect, with Hyundai's approval, to make payment in the form of Class C
Warrants with fair market value (as determined by investment bankers) equal to
the prepayment or maturity amount.
In addition, on March 15, 1996, the Company and Hyundai entered into a Stock
Purchase Agreement under which Hyundai agreed to purchase and the Company
agreed to sell, subject to FCC restrictions and limitations, up to 5 million
units of the Company's securities, each unit consisting of one share of Class
C Common Stock and a warrant to purchase 0.05 shares of Class C Common Stock
("Hyundai Units"), at a price of $10.00 per unit. The total number of Hyundai
Units saleable under the Stock Purchase Agreement will be determined at the
time of closing of the Stock and Note Offerings (see Note 12), but will not be
less than three million Hyundai Units (subject to the FCC Compliance Rules).
The Company has also entered into an Equipment Purchase Agreement which will
become effective upon the closing of the Loan Agreement and the Stock Purchase
Agreement, respectively. The Equipment Purchase Agreement has a term of 10
years from the date of effectiveness. Under the Equipment Purchase Agreement,
the Company agreed to purchase not less than 50% of its infrastructure
equipment requirements in product categories where Hyundai and its parent,
Hyundai Electronic Industries Co. Ltd. offer products that meet the Company's
specifications and are compatible with equipment supplied by the Company's
primary vendor (see Note 11). In
F-13
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
addition, the Company agreed to purchase not less than 50% of its handset
requirements sold through the Company's direct sales channels in handset
categories where Hyundai and its Parent offer products that meet the Company's
specifications. In addition, the Company also entered into an Employee
Training Agreement which will become effective upon the closing of the Loan
Agreement and the Stock Purchase Agreement, respectively. Under the Employee
Training Agreement, the Company agreed to provide certain training services to
employees of Hyundai and its Parent for a period of two years.
10. SUBSEQUENT EVENTS:
On May 6, 1996, the FCC Auction concluded with the Company submitting
winning bids of approximately $1,059,658,000. License grants for which winning
bids were submitted are subject to an approval process. Should such approval
be granted, the Company will be required to construct a system in each of its
markets that offers coverage to at least one-third of the population within
five years and at least two-thirds of the population within ten years. As a
result of being the winning bidder, the Company's PCS License Deposits were
retained by the FCC to cover a five percent up front payment on the licenses.
Approximately $999,000, representing deposit amounts in excess of the required
five percent up front payment, was returned to the Company by the FCC. The
Company will be required to make a second five percent up front payment five
business days subsequent to the date of license grant. Management believes
that the cash on hand, combined with the proceeds from the Loan Agreement (See
Note 9), will be sufficient to cover the second five percent down payment due.
The remaining 90% of the purchase price will be financed by the U.S.
government for a 10-year period at a fixed rate of interest equal to the yield
on a 10-year U.S. Treasury Note at the date of license grant (the "Government
Debt"). Under the terms of the Government Debt, the Company will be required
to make installment payments of interest only for the first six years of the
license and payments of interest and principal amortized over the remaining
four years of the license term. The Company will record the debt at its
estimated fair value using a market rate of interest.
Grant of the licenses by the FCC will subject the Company to certain FCC
ownership restrictions. Should the Company fail to qualify under such
ownership restrictions, the PCS license may be subject to FCC revocation
provisions. Management believes that the Company currently complies and will
continue to comply with such restrictions. All licenses granted will expire
ten years from the date of grant; however, FCC rules provide for renewal
provisions.
On May 20, 1996, the Company issued an aggregate of 529,060 shares of Class
C Common Stock and warrants to purchase 264,530 shares of Class C Common Stock
for an aggregate of $5,290,600 consisting of $5,000,000 in cash and $290,600
in subscriptions receivable, less issuance costs of $253,000. The Class C
Warrants are exercisable at a price of $10.00 per share.
11. SUBSEQUENT EVENT-VENDOR FINANCING:
The Company has received a commitment letter from Lucent Technologies, Inc.
("Lucent") to provide up to $300 million of senior secured financing for the
purchase of infrastructure and certain related network buildout costs (the
"Lucent Financing"). The Lucent Financing provides for an initial $200 million
credit facility ("Tranche A") and a subsequent $100 million credit facility
("Tranche B") commencing January 1, 1998. The Lucent Financing will be secured
by a perfected first priority lien on substantially all the assets of GWI PCS,
Inc. and its subsidiaries, including, to the extent legally available and
junior to the interest of the United States government, the PCS licenses
granted to the Company. The Company can borrow under the Lucent Financing
through December 31, 1999, and must repay the outstanding principal in equal
quarterly installments beginning March 31, 2001 through December 31, 2004. The
Lucent Financing commitment is contingent upon, among
F-14
<PAGE>
GENERAL WIRELESS, INC. AND SUBSIDIARY
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
other things, execution of an appropriate agreement for the Lucent Financing,
completion of specified minimum levels of private or public securities
offerings by the Company, and certain minimum buildout and subscriber base
requirements. Loans under the Lucent Financing will bear interest at a
variable rate equal to either a) LIBOR plus an applicable margin or b) a base
rate (defined as the higher of the prime rate or the federal funds rate plus
0.5%) plus an applicable margin.
The Lucent Financing requires the Company to pay certain commitment,
arrangement, and administrative agent fees to Lucent. As part of its fees,
Lucent will receive warrants to purchase Class C Common Stock or such other
equity securities that satisfy the specified minimum financing requirements of
the Lucent Financing, at an exercise price equal to the price of the
applicable offering. The total number of shares subject to purchase under the
warrants will be the equivalent of $6 million divided by the exercise price of
the warrants. The Lucent Financing will contain a number of significant
covenants that limit the ability of the Company to incur additional
indebtedness beyond specified amounts, create liens unless as specified, make
guarantees, merge or consolidate with another entity, sell or otherwise
dispose of assets, and declare dividends, among other things. In addition, the
Lucent Financing is expected to require the Company to maintain certain
specified financial and operating covenants.
12. SUBSEQUENT EVENT-OFFERINGS AND STOCK SPLIT:
The Company is currently in the process of an initial public offering of its
Class C Common Stock (the "Stock Offering") and a public offering of senior
discount notes together with warrants to purchase shares of Class C Common
Stock (the "Unit Offering"). The Company plans to use the proceeds of these
offerings to finance capital expenditures, to finance debt service on the
Government Debt and any other debt incurred, to fund operating losses and
working capital requirements, and other general corporate purposes.
Immediately prior to the effectiveness of the Stock Offering, the Company
will effect a 10 for 1 stock split. The historical consolidated financial
statements have been adjusted to give retroactive effect to such split.
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OF-
FERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICI-
TATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
The Company.............................................................. 24
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
Dilution................................................................. 26
Capitalization........................................................... 27
Selected Consolidated Financial Data..................................... 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29
The Wireless Communications Industry..................................... 33
Business................................................................. 35
Legislation and Government Regulation.................................... 45
Management............................................................... 55
Certain Transactions..................................................... 62
Principal Stockholders................................................... 67
Description of Capital Stock............................................. 72
Description of Certain Indebtedness...................................... 76
Shares Eligible for Future Sale.......................................... 79
Underwriting............................................................. 81
Legal Matters............................................................ 81
Experts.................................................................. 82
Additional Information................................................... 82
Glossary................................................................. 83
Index to Financial Statements............................................ F-1
</TABLE>
----------------
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GENERAL WIRELESS, INC.
SHARES OF
CLASS C COMMON STOCK
----------------
PROSPECTUS
----------------
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
SALOMON BROTHERS INC
J.P. MORGAN & CO.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Class C Common Stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee............................................. $65,432
Nasdaq Listing Fee............................................... *
NASD fee......................................................... *
Printing and engraving........................................... *
Legal fees and expenses of the Company........................... *
Accounting fees and expenses..................................... *
Blue sky fees and expenses....................................... *
Transfer agent fees.............................................. *
Miscellaneous.................................................... *
-------
Total.......................................................... $
=======
</TABLE>
- --------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, as amended ("Delaware
Law"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding,
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Section 145 further provides that a corporation similarly may
indemnify any such person serving in any such capacity who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor, against expenses actually and reasonably incurred in connection
with the defense or settlement of such action or suit if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Delaware Court of Chancery or such other court in which such
action or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 102(b)(7) of Delaware Law permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of Delaware Law (relating to unlawful payment of dividends and unlawful stock
purchase and redemption) or (iv) for any transaction from which the director
derived an improper personal benefit.
II-1
<PAGE>
The Registrant's Restated Certificate of Incorporation provides that the
Registrant's directors shall not be liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that exculpation from liabilities is not permitted under
Delaware Law as in effect at the time such liability is determined. The
Registrant has entered into indemnification agreements with all of its
officers and directors, as permitted by Delaware Law. Reference is also made
to Section 6 of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since inception, the Registrant has issued and sold the following
securities (as adjusted to reflect the stock conversions and exchanges
effected to date, as well as the proposed 10-for-1 split to be effected prior
to the effectiveness of this Registration Statement) but does not reflect the
conversion of Class B Common Stock into Class C Common Stock:
1. On July 18, 1994, September 30, 1994 and June 2, 1995, the Registrant
issued and sold an aggregate of 1,038,710 shares of Class B Common Stock
at a price of $2.74 per share to its founding members consisting of
Messrs. Roger Linquist, Malcolm Lorang, entities affiliated with Accel
Partners and Battery Ventures III, L.P. (193,990 of which were
repurchased by the Company in December 1995). In addition, on December
1, 1995, entities affiliated with Accel Partners received warrants to
purchase 574,990 shares of Class C Common Stock at an exercise price of
$10.00 per share in connection with the exchange of securities effected
in November 1995.
2. On December 1, 1995, December 28, 1995 and May 20, 1996, the Registrant
issued and sold to several private placement investors the following:
(a) 210,000 shares of Class B Common Stock and warrants to purchase
105,000 shares of Class B Common Stock with an exercise price of
$5.00 per share for an aggregate price of $1,050,000 ($10.00 for
each unit consisting of two shares of Class B Common Stock and a
warrant to purchase one share of Class B Common Stock);
(b) 5,023,520 shares of Class C Common Stock and warrants to purchase
2,511,760 shares of Class C Common Stock with an exercise price of
$10.00 per share for an aggregate purchase price of $50,235,200
($20.00 for each unit consisting of two shares of Class C Common
Stock and warrant to purchase one share of Class C Common Stock);
(c) 1,000,000 shares of Class C Common Stock and warrants to purchase
50,000 shares of Class C Common Stock with an exercise price of
$10.00 per share for an aggregate price of $10,000,000 ($20.00 for
each unit consisting of two shares of Class C Common Stock and a
warrant to purchase 0.1 shares of Class C Common Stock);
(d) Warrants to purchase 200,000 shares of Class C Common Stock at an
exercise price of $10.00 per share and warrants to purchase 400,000
shares of Class C Common Stock at an exercise price of $0.001 per
share for an aggregate price of $3,999,600 ($19.998 for each unit
consisting of one warrant to purchase one share with an exercise
price of $10.00 per share and one warrant to purchase two shares
with an exercise price of $0.001 per share);
In addition, on February 20, 1996, the Registrant issued 68,870 shares of
Class C Common Stock to its placement agent in connection with the placements
effected in December 1995, pursuant to the terms of the Registrant's
Engagement Letter with the agent. See Exhibit 10.2.
3. On December 1, 1995, the Company issued warrants to purchase 50,000
shares of Class C Common Stock with an exercise price of $10.00 per
share to an advisor to the Company for advisory services rendered.
II-2
<PAGE>
4. On March 15, 1996, the Registrant and Hyundai entered into a Stock
Purchase Agreement (Exhibit 10.8) under which the Registrant is
obligated to purchase and Hyundai is obligated to purchase up to
5,000,000 units at a price of $10 per unit, each unit consisting of one
share of Class C Common Stock and one warrant to purchase 0.05 shares of
Class C Common Stock with an exercise price of $10 per share. This
transaction is conditioned upon and subject to (a) governmental approval
(including approval by the Republic of Korea and the Federal Trade
Commission), (b) the Registrant obtaining certain number of PCS licenses
and (c) restrictions under the rules and regulations promulgated by the
Federal Communications Commission and under telecommunications laws, in
particular, regarding the amount of foreign investment in the
Registrant.
5. The Registrant has granted stock options to purchase 2,041,930 shares of
Class B Common Stock with an exercise price of $5.00 per share to
employees, directors and consultants under its 1995 Stock Option Plan.
The issuances described in Item 15(a)(1) were deemed exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
under the Securities Act. The issuances of the securities described in item
15(a)(2) were deemed to be exempt from registration under the Act in reliance
on Section 4(2) of the Act as transactions by an issuer not involving any
public offering. In addition, the recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1** Form of Underwriting Agreement (preliminary form).
3.1* Certificate of Incorporation of the Registrant, as amended to date.
3.2* Bylaws of the Registrant, as amended.
3.3** Amended and Restated Certificate of Incorporation of the Registrant, to be
filed prior to the effectiveness of the Stock Offering.
3.4** Amended and Restated Bylaws of the Registrant, to become effective upon the
effectiveness of the Stock Offering.
4.1* Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2** Specimen Class C Common Stock certificate.
4.3* Registration Rights Agreement dated December 1, 1995, among the Registrant and
the investors named therein, as amended.
4.4* Stockholders Agreement dated December 1, 1995, among the Registrant and the
stockholders named therein, as amended.
4.5* Form of Subscription Agreements entered into between the Registrant and its
existing Class B and Class C Common Stock investors.
4.6* Form of Class B Common Stock Warrant.
4.7* Form of Class C Common Stock Warrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Form of Indemnification Agreement entered into between the Registrant and its
directors and officers.
10.2* Engagement Letter dated December 9, 1994, Agency Agreement, dated November 20,
1995, Placement Certificate, dated December 1, 1995, by and between the
Registrant and Bear, Stearns & Co. Inc.
10.3* Procurement Agreement, effective December 1, 1995, among the Registrant, Mitsui
Comtek Corp. and Mitsui & Co. (U.S.A.), Inc.
10.4* Loan Agreement, dated March 15, 1996, among the Registrant and Hyundai
Electronics America ("Hyundai"), including form of promissory note.
10.5* Stock Purchase Agreement, dated March 15, 1996, among the Registrant and
Hyundai.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.6+ Equipment Purchase Agreement, dated March 15, 1996, among the Registrant and
Hyundai Electronics Industries Co., Ltd. ("HEI").
10.7* Employee Training Agreement, dated March 15, 1996, among the Registrant and
HEI.
10.8+** General Agreement for Purchase of Personal Communications Services Systems
between the Registrant and Lucent Technologies, Inc. dated August 30, 1996.
10.9+** Commitment Letter from Lucent Technologies, Inc. to the Company dated December
5, 1995.
11.1** Computation of Earnings/(Loss) Per Share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants (see page II-7).
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1* Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be supplied by amendment.
+ Certain portions of this Exhibit, for which confidential treatment has been
requested, have been omitted and filed separately with the Securities and
Exchange Commission.
(B) FINANCIAL STATEMENT SCHEDULES -- All required information is set forth
in the consolidated financial statements included in the Prospectus
constituting part of this Registration Statement.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware Corporations Law, the Certificate of
Incorporation or the Bylaws of the Registrant, Indemnification Agreements
entered into between the Registrant and its officers and directors, the
Underwriting Agreement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF DALLAS, STATE OF TEXAS, ON THIS 23RD DAY OF DECEMBER, 1996.
General Wireless, Inc.
By: /s/ Roger D. Linquist
----------------------------------
Roger D. Linquist
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
/s/ Roger D. Linquist President and Chief
- ------------------------------------- Executive Officer December 23,
(ROGER D. LINQUIST) (Principal 1996
Executive Officer),
Chairman of the
Board of Directors
and Secretary
/s/ Dennis Spickler Vice President of December 23,
- ------------------------------------- Finance and Chief 1996
Financial Officer
(DENNIS SPICKLER) (Principal
Financial and
Accounting Officer)
* Director
- ------------------------------------- December 23,
(ROBERT G. BARRETT) 1996
II-5
<PAGE>
SIGNATURE TITLE DATE
* Director
- ------------------------------------- December 23,
(RALPH M. BARUCH) 1996
* Director
- ------------------------------------- December 23,
(FREDERIC C. HAMILTON) 1996
* Director
- ------------------------------------- December 23,
(JOSEPH T. MCCULLEN, JR.) 1996
* Director
- ------------------------------------- December 23,
(ARTHUR PATTERSON) 1996
* Director
- ------------------------------------- December 23,
(JOHN SCULLEY) 1996
* Director
- ------------------------------------- December 23,
(TOSHIHIRO SOEJIMA) 1996
/s/ Roger D. Linquist
*By__________________________________
(ROGER D. LINQUIST)
ATTORNEY-IN-FACT
II-6
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTS
As independent public accounts, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this Amendment
No. 2 to Form S-1 Registration Statement No. 333-07161.
Arthur Andersen LLP
Dallas, Texas
December 20, 1996
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
<C> <C> <S>
1.1** Form of Underwriting Agreement (preliminary form).
3.1* Certificate of Incorporation of the Registrant, as amended to date.
3.2* Bylaws of the Registrant, as amended.
3.3** Amended and Restated Certificate of Incorporation of the Registrant,
to be filed
prior to the effectiveness of the Stock Offering.
3.4** Amended and Restated Bylaws of the Registrant, to become effective
upon the effectiveness of the Stock Offering.
4.1* Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2** Specimen Class C Common Stock certificate.
4.3* Registration Rights Agreement dated December 1, 1995, among the
Registrant and
the investors named therein, as amended.
4.4* Stockholders Agreement dated December 1, 1995, among the Registrant
and the
stockholders named therein, as amended.
4.5* Form of Subscription Agreements entered into between the Registrant
and its
existing Class B and Class C Common Stock investors.
4.6* Form of Class B Common Stock Warrant.
4.7* Form of Class C Common Stock Warrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Form of Indemnification Agreement entered into between the Registrant
and its
directors and officers.
10.2* Engagement Letter dated December 9, 1994, Agency Agreement, dated
November 20, 1995, Placement Certificate, dated December 1, 1995, by
and
between the Registrant and Bear, Stearns & Co. Inc.
10.3* Procurement Agreement, effective December 1, 1995, among the
Registrant, Mitsui
Comtek Corp. and Mitsui & Co. (U.S.A.), Inc.
10.4* Loan Agreement, dated March 15, 1996, among the Registrant and
Hyundai
Electronics America ("Hyundai"), including form of promissory note.
10.5* Stock Purchase Agreement, dated March 15, 1996, among the Registrant
and
Hyundai.
10.6+ Equipment Purchase Agreement, dated March 15, 1996, among the
Registrant and
Hyundai Electronics Industries Co., Ltd. ("HEI").
10.7* Employee Training Agreement, dated March 15, 1996, among the
Registrant and
HEI.
10.8+** General Agreement for Purchase of Personal Communications Services
Systems
between the Registrant and Lucent Technologies, Inc. dated August
30, 1996.
10.9+** Commitment Letter from Lucent Technologies, Inc. to the Company dated
December 5, 1995.
11.1** Computation of Earnings/(Loss) Per Share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP, Independent Public Accountants (see
page II-7).
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1* Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
*Previously filed.
**To be supplied by amendment.
+ Certain portions of this Exhibit, for which confidential treatment has been
requested, have been omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
---- ---------------
<S> <C>
GWI PCS, Inc. .................................................. Delaware
GWI PCS California/Florida, Inc. ............................... Delaware
GWI PCS Chico, Inc. ............................................ Delaware
GWI PCS Georgia, Inc. .......................................... Delaware
GWI PCS1, Inc. ................................................. Delaware
GWI PCS2, Inc. ................................................. Delaware
GWI PCS3, Inc. ................................................. Delaware
GWI PCS4, Inc. ................................................. Delaware
GWI PCS5, Inc. ................................................. Delaware
GWI PCS6, Inc. ................................................. Delaware
GWI PCS7, Inc. ................................................. Delaware
GWI PCS8, Inc. ................................................. Delaware
GWI PCS9, Inc. ................................................. Delaware
GWI PCS10, Inc. ................................................ Delaware
GWI PCS11, Inc. ................................................ Delaware
GWI PCS12, Inc. ................................................ Delaware
GWI PCS13, Inc. ................................................ Delaware
GWI PCS14, Inc. ................................................ Delaware
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 2,688 6,569
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,688 6,603
<PP&E> 33 72
<DEPRECIATION> 10 24
<TOTAL-ASSETS> 56,693 59,634
<CURRENT-LIABILITIES> 1,716 2,055
<BONDS> 0 0
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 54,976 57,578
<TOTAL-LIABILITY-AND-EQUITY> 56,693 59,634
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 791 1,342
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (737) (1,190)
<INCOME-TAX> 7 35
<INCOME-CONTINUING> (744) (1,225)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (744) (1,225)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
